Tuesday, May 30, 2006

Entrepreneurship Notes: 2 What's Wrong With Business Plans?

Did you know that 94.5% of all failed businesses globally lose the plot at the business planning stage?

Well, I did not know – I invented this statement. There is neither such statistics available, nor is such a survey possible. However, I got away asking this question to many business owners and executives. Some nodded in agreement, some argued [‘I thought it would be more’], some made a note in their writing pad and some said they saw this before – in a study, but they don’t exactly remember which one.

This is what is precisely wrong with Business Plans. Having lived through the experience [see why I failed in Netprotraining.com], I know the longer you live in this make-believe world of ‘Business Planning’, the more likely you are to lose the business.

So, what should the entrepreneur do? Go ahead without a business plan? Will the bank managers or investors be impressed?

Not at all - A business plan is an extremely necessary component of the business, and will always remain so. However, it is important to be clear in one’s mind what a business plan is, and what it isn’t. Only such clarity can save the exercise of making a business plan from being counter-productive.

Well, no pretensions of expertise – I have only failures on my side so far – so I shall say three top things what a Business Plan is not. I do think this is the most important bit, as the process invariably plods one the wrong way.

1. Business Plans are not actual Profit and Loss statements of the business for years to come

At the planning stage, you can hardly get your numbers right. So, despite temptations and pressures to do so, stay away from spending too much time on this. The key is to create a BUSINESS MODEL – a structure identifying revenue streams, necessary overheads and variable costs, and identifying a level where the business will be sustainable, and where it will be profitable. The BUSINESS MODEL should do precisely what the multi-year projections tend to undermine, highlight the market forces that may alter the premises and figure out whether the business can sustain [for example, by cutting overheads] such changes.

Nothing wrong with those detailed year-by-year projections people work out – just that they tend to divert attention from the real thing and gives the plan an air of finality, a mistake to be avoided at all costs. I remember making this business model which said we must have 20 students a month to break-even, and about 25 to earn a decent return on capital, but then spent a month working on ‘whether we can reach 50 students a month’. You do that once you are in business, not before starting.

2. Business Plans are not to SELL your business, but to run your business

Admittedly, you will have to make a business plan when and if you intend to sell your business. But, that is not why business plans are made – they are essentially blue-prints for running a business.

However, as more and more business plans get made for VCs, this is often forgotten. A friend argued that this is irrelevant, as the key objective is to make the business attractive and profitable.

But, as you will see, there is an important distinction between making a business attractive and making a business look attractive. As we all know, our actions, beliefs and statements are mostly guided by our economic objective most of the time – hence, such a distinction matter. This results in providing for too little in costs, projecting too high revenue, and usually both.

3. Business Plans are not about numbers and strategies, but it is about people and their aspirations

The other thing I have learnt the hard way is that business plans are not about numbers and strategies. The markets are too dynamic for any of these to be correct and viable before the start of business. It is, indeed, more about people and what they wish to do. Any experienced VC looks for this – as I have been repeatedly told – and essentially they look at whether the founder/ entrepreneur see this business aligned with his abilities and aspirations. The business plans are more about showing your heart is into it.

With so many tools and techniques and self-help books available in the market, business plans are no longer difficult to make. But it is easy to miss the point, business plans are the business owners’ manifesto for the business – what it is, how it is run and what it will be. I have pledged to myself – the next business plan I attempt to write, I shall stay away from Excel [till the very end of the process, at least] and use the old-fashioned pen and paper instead.

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