Should you spend some time developing a plan for your business, or just dive in and start, figuring things out as you go? There has been plenty of debate on this topic, but no one has pulled together the scientific evidence to determine if planning is worthwhile—until now.
With the help of my friend Jeff, from the University of Oregon, I’ve been looking at academic research on business planning—the actual science around planning and how it impacts both startups and existing businesses.
But, before we dive into the data, why do we even need to look at research on business planning? It seems like most advice on starting a business includes writing a business plan as a necessary step in the startup process. If so many people encourage you to write one, business plans must add value, right?
Well, over the past few years, there’s been a lot of controversy about the value of business plans. People look at certain companies that have been very successful but haven’t written business plans, and conclude that planning is a waste of time.
After all, taking the time to plan is a bit of a trade-off. The time you spend planning could be time spent building your company. Why not just “get going” and learn as you build your company, instead of taking the time to formulate a strategy and understand your assumptions about how your business might grow?
Well, the research shows that it’s really not a “write a plan” or “don’t write a plan” conversation. What really matters is what kind of planning you do and how much time you spend doing it.
Planning can help companies grow 30 percent faster
One study (1) published in 2010 aggregated research on the business growth of 11,046 companies and found that planning improved business performance. Interestingly, this same study found that planning benefited existing companies even more than it benefited startups.
But, this study still doesn’t answer the question it raises:
Why would planning help a business that has a few years of history more than one that is just starting up?
The answer most likely lies in the fact that existing businesses know a bit more about their customers and what their needs are than a new startup does. For an existing business, planning involves fewer guesses or assumptions that need to be proven, so the strategies they develop are based on more information.
Another study (2) found that companies that plan grow 30 percent faster than those that don’t plan. This study found that plenty of businesses can find success without planning, but that businesses with a plan grew faster and were more successful than those that didn’t plan.
To reinforce the connection between planning and fast growth, yet another study (3) found that fast-growing companies—companies that had over 92 percent growth in sales from one year to the next—usually have business plans. In fact, 71 percent of fast-growing companies have plans. They create budgets, set sales goals, and document their marketing and sales strategies. These companies don’t always call their plans “business plans” but instead often refer to things like strategic plans, growth plans, and operational plans. Regardless of the name, it’s all forward-looking planning.
Action: Carve out some time to set goals and build a plan for your business. More importantly, re-visit your plan as you grow and revise it as you learn more about your business and your customers.
Business planning is not an activity you undertake only when you’re getting your business up and running. It should be something you return to, time and time again, to revise and improve upon based on new knowledge.
The quality of the plan matters
But, it’s not as simple as it might appear. Just having a plan doesn’t guarantee faster growth. It’s the kind of plan you have and how you use it that really matters.
It turns out that startups, especially ones building highly innovative businesses, should create shorter, less detailed plans (4). That’s because these innovative startups are learning new things about their product and customers at a very fast pace and their strategies change more frequently. Simpler plans—Lean Plans that can fit on a single page—get updated more frequently and are more helpful to these companies because they can review their strategy at a glance.
Meanwhile, more established companies know a lot more about their products and customers and can craft more detailed strategies that are less likely to change as quickly. For these companies, more detailed planning is generally more helpful.
And it’s not just the size of the plan that matters. What you include in your plan is important as well.
The same study we talked about above—the one that found that businesses grow faster with a plan—also found that companies that did a good job defining their value proposition do even better than companies who have a hard time defining their customers’ needs.
These researchers also found that having a plan is less about accurately predicting the future, and more about setting regular goals, tracking your actual progress toward those goals, and making changes to your business as you learn more about your customers. Silicon Valley businesses like to call the act of changing strategic direction “pivoting.” All it really means is that you need to stay nimble, keep your eyes open, and be willing to make changes in your business as you compare your actual results to your goals and gather additional feedback from your customers.
Action: Skip the 40-page business plan and instead focus on simpler planning that defines your goals and documents your customers’ needs. Adjust your plan frequently as you learn more about your business.
Being prepared matters when you’re seeking funding
Over and over again, you hear venture capitalists talk about how much the team matters in a funding decision. Beyond just the team, you also hear them talk about passion—how much the entrepreneur believes in the idea.
But, it turns out that there is something that trumps passion when VCs make their decisions. Research shows (5) that how well an entrepreneur is prepared is much more important than how much passion they have.
This doesn’t mean that VCs will ask for a business plan. In fact, they probably won’t ask for one.
What it means is that entrepreneurs need to have done some planning, in some form, so that they can be prepared to talk intelligently about their idea, their target market, their sales and marketing strategies, and so on.
So, the formal 40-page business plan document may not be useful when you’re pitching VCs. But, you’d better have done some planning, so that you can communicate verbally or through a pitch deck what would normally have been found in that written document.
And, not only will business planning help you be more prepared, it will actually improve your chances of getting funded. A study at the University of Oregon (6) found that businesses with a plan were far more likely to get funding than those that didn’t have a plan.
Action: Know your business inside and out. Document your strategy in an internal document, but skip all the time and effort creating a well-crafted business plan document.
—
Source: https://articles.bplans.com/do-you-need-a-business-plan-scientific-research-says-yes/
