I grow tired of hearing the opinion that business plans are not a necessary component of starting a business. In Mike Michalowicz’s blog post Business Plans are OUT! Here’s the New Way… he expounds on the virtues of the "Three Sheet Strategy" in lieu of a business plan.
In a nut shell the "Three Sheets" are:
- A Prosperity Pan - which is like a mission statement and vision statement wrapped into one.
- Quarterly Plan - A summary of what needs to be done in the next 90 days to work toward achieving your "prosperity plan".
- Daily Goals - a typical dashboard approach to ongoing metrics.
While I agree that the "Three Sheet Strategy" can be a useful addition to a business plan for "strategic" purposes, it in no way can replace a business plan.
The picture painted by Mr. Michalowicz suggests that all business plans a) take too much time to research, b) lay out strategies that are never implemented and c) provide financial projections that are wildly optimistic.
While, the above scenario is true for some entrepreneurs who have a very broad based business model…it is not true for small businesses who pursue a focused business strategy.
A focus business strategy allows you to form reasonable expectations because you have a niche in a market place (product market or geographic market). For example it is easier to form research, plan and form reasonable projections for a restaurant or liquor store that serves a local market than for a software company serving the world.
Chasing a nationwide market, i.e. trying to become the next Google, necessitates broad demographic information. In other words, EVERYONE is your potential customer. And because everyone is your customer you are forced to come up with asinine assumptions about capturing X% of a certain market…which leads to wildly optimistic projections.
However, when planning for small business competing in a local or regional market, at the very least you need to create a short form business plan. Let me explain by describing why each section of the business plan is needed:
- Business Description (What your are doing) - The purpose of this section is the same as his "Prosperity Plan". Setting the mission of the business, describing the products and services and explaining your competitive advantage.
- Market Opportunity (Who you are doing it for) - Granted completing market research takes time and the data is limited, but understanding your market space (target market size, trends, competition) will help you set reasonable expectations for your sales projections.
- Marketing Plan (How you will let them know) - Now that you have identified your target market you have to reach them using the most efficient methods.
- Operations Plan (How you will get it done) - The operations plan helps you form reasonable assumptions for startup costs and ongoing expenses. location, building, equipment, inventory and personnel all have related initial costs and ongoing expenses related to them.
- Management Plan (What expertise do you have) - While a team is needed for entrepreneurial firms, and it is suggested for small businesses, most startups are limited to their founders and maybe some family members.
For a small business with a focused strategy completing these sections may take some work but they are certainly doable. And, if done correctly, will result in solid financial projections that mirror the market’s true potential.
This is not to say they will be exact…business planning and projecting is not an exact science. The point is to determine if you business will be profitable within a reasonable range of sales. These projections will help you determine what will happen if sales are 80% of projection, 50% of projection or if expenses are 200% of projection (called a scenario analysis). In other words, it will help you determine the appropriate amount of working capital to have on hand day one to get through the "what if…" scenarios.
The honest truth is most people are scared of what they don’t understand. And, for most entrepreneurs, business planning (or planning in general) is not something that comes naturally to them. So they blow it off as not necessary, stupid or an exercise in futility.
Finally, it is uncommon for a bank or investor to fund a company, startup or otherwise, with out a solid business plan. If you brought in a "Three Sheet Strategy" to a bank or angel investor I guarantee they will ask for a complete business plan with at least a years worth of comprehensive financial projections.
Yes, you probably should have something similar to the "Three Sheet Strategy" for implementing your plan, and…No, business planning is not the "be all end all" of small business success. But, writing a business plan is nothing to be afraid of as long as you are armed with the tools and resources to help you get it done.
Yours will be a better business for it in the end.