Secondly, Schultz et al. (1987) point out that a business plan can be a retrospective tool, against which a businessperson can assess a company’s actual performance over time. For example, the financial part of a business plan can be used as the basis for an operating budget, and can be monitored carefully to see how closely the business is sticking to that budget.
In this point of view, the plan should be used as the basis for a new plan. After some time has elapsed, the business plan should be re-examined to see if the company has accomplished its business goals and if necessary needs redirection.
To write or not to write a business plan / The relationship between Pre-start-up Formal Business Plans and Post-start-up Performance
The opinions on the topic whether a business plan is a useful document or whether it is more a waste of time are not unanimous throughout the literature. Despite a lot of researches that have been conducted within this field, the findings from studies that examined whether there is a relationship between the pre-start-up formal business plan and the post-start-up efficiency of the company are not consistent throughout the literature. The word efficiency in this particular circumstance means that it has not been proved that the Business Plan will help a new venture in succeeding.
Some studies claim that they found no relationship between a formal written BP and performance. For example: “Does formal business planning enhance the performance of new ventures?” (Lumpkin et al. 1998) This study examined the relation between planning and performance among 94 firms of which 54 new entrants. Results suggest that new startup companies who use formal written business plans fail to outperform those who don’t.
Of course there are a lot more factors outside writing a business plan playing a role in the future success of the firm. Initially raised capital, experience of the entrepreneurs, used business model, the age of the venture, are just a few to be named. Recent studies conducted by Lange et al. (2007) took all these factors into account and examined whether pre-start up business planning affects the subsequent post-start-up performance of the new enterprise.
Their dataset contained 116 Babson College alums graduated between 1985 and 2003 that started a new business since graduating. From the results of the study it appeared that there is no difference in performance between new ventures that started with a written business plan and those who chose not to write one.
Of course one could argue that the studied dataset has a few limitations. First of all the dataset only comprises ventures started by Babson College which is somewhat limited and will compromise the external validity. It will be difficult to generalize the findings of this study to the rest of the start-up ventures in business world. However, there are benefits at this bounded dataset: the respondents have similar educations. This will limit and take into account the influence from the independent variable, education. On the other hand the taken sample frame is randomized and longitudinal which will benefit the internal validity. This means that the research design allows to formulate a correct answer to the proposed hypothesis.
From their findings Lange et al.(2007) suggest that “unless a would-be entrepreneur needs to raise substantial start-up capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business.” Instead, the authors suggest that “entrepreneurs should make financial projections, especially cash flow.”
It means that they should look at expected sales revenue and operating costs including material, labor and capital assets and open their business. That advice implies that they should do business planning but not write formal plans before starting their businesses. Then, if their business grows and needs external funding, they will be able to write a business plan that is more persuasive.
In contrast to the studies from Lumpkin et al. and Lange et al. , some studies have shown that planning does go together with the success and growth of new ventures. Ford et al. (2003) conducted a study of 800 randomly selected American nascent companies and found a significant positive correlation between the degree of business planning formality and financial results in year 1 and 2.
Liang and Gartner (2005) found, they found that the chances for survival of ventures in an uncertain financial and competitive environment was more likely when they engaged in planning in the early stage of the start-up activities. And that ventures were more likely to continue their activities if they started to plan late in the stage of start-up activities in a certain financial and competitive environment.
For now, we will leave the discussion aside whether causality exists between writing a BP and the success of the venture and move on to asking ourselves why so many entrepreneurs bother to write the business plan.
Many business people or entrepreneurs defend that the time that is needed to produce a formal written BP, would be better spent on pushing the new venture forward instead of writing a plan that no one will read. (Allen 2006)
This might be true if we take into consideration that the venture capitalist or the firms that provide finance to businesses receive piles and piles of business plans and have no time to read them all. In fact, very few entrepreneurs have access to formal venture capital at the moment they launch their businesses. Bygrave and Hunt (2004), for example, estimate that in the US, fewer than one in ten thousand new ventures has the privilege to receive their financial funds of a venture capitalist. This is very rare, especially for the USA which has more than two-thirds of the total venture capital in the entire world. This means that receiving capital from VC’s is by far the rarest form of funding.
So why then go so many entrepreneurs through the process of writing business plans if the main objective of their plan is to secure funding from a venture capitalist and they know that they will almost always come up empty handed? One of the reasons may be that other sources of financial funding such as banks, business angels, equity investors require written business plans too.
Another explanation could be that they write the plan for internal reasons. Although writing a business plan is a very laborious task and it takes typically several weeks to finish it could avoid costly, perhaps disastrous, mistakes later thanks to the planning process that helps the entrepreneur think through things thoroughly. (business plan guide 4 start ups)
Furthermore, it is a fact that if you want your BP to be noticed by investors, the chance is greater if you get a personal introduction, instead of approaching them on your own (Barringer, 2008).
This is definitely the case for all businesses in China. If you want to look for capital, or even if you just want to do business, you will need ‘Guanxi’. Guanxi literally means “relationships”. Since Confucius set-out the basic relationship rules 2000 years ago this has become the basis for conducting succesfull business in China. The reality is that the majority of Chinese people won’t trust and will not do business with people that are not part of their Guanxi. If you win the confidence of a chinese business relation, he will be part of your Guaxi network and will be happy to do business or introduce you to other acquintances or information sources, thus expanding your Guanxi network. Seligman (2005) points out that it has been generally known for centuries that businesses in China with a widely developed Guanxi network are more succesful than those with a limited or no network.
We conclude that is not about having a good or a bad business plan per se to secure finance but more about knowing the right people. This is why startup businesses have the disadvantage over established firms because they may not have such contacts.
Anyway, a lot of authors recommend to do write the business plan because for the internal and external value that lies within the plan. Abrams and Barrow (2005) state that “a good business plan for a sound business concept not only helps achieving the business goals, it also lets you save time and money by focusing on your business activities, giving you more control over your finances, marketing, and daily operations, and helps you raise the capital you need”. Or as Kleiner (2004), a legendary venture capitalist states: “Even if you have all the money you need, you still need a business plan. A plan shows how you’ll run a business. Without a plan, you don’t know where you’re going, and you can’t measure your progress.”