Is a Business Plan Any Use?

>>Steve Macaulay: Are business plans of any use? Now at one time that was considered an
heretical question; something that you absolutely needed if you were to run a successful business.
However, in more recent times there have been people that have pointed to very successful
businesses, that have been successful without a plan. So let’s have a look then, with
the help of Professor Andrew Burke.
Now, Andrew, you have got a lot of experience in this area, you have done some research
into business planning and you have seen a lot of business plans in your time. So let’s
ask this first question; are they any use?
>>Andrew Burke: Well that is a very good question, Steve, because as you rightly point out, a
lot of people observe high performing ventures that don’t have a business plan. In the
joint research that we have done with Stuart Fraser and Francis Green of Warwick Business
School we have found that indeed a lot of high performing ventures don’t write business
plans. But what we do find is that if ventures do write a business plan, whether high performing
or low potential, that their growth potential is increased by around about 30%. So it is
quite a big effect.
>>Steve Macaulay: So is it something to do with the qualitative nature of a business
plan? Andrew Burke Yes; well this is one thing we can see from almost twenty years of looking
at practice is that it is not whether you have a business plan, it is very much what
type of business plan you have. And there is a false debate out there, and the false
debate is that there are two approaches; a very rigid sort of plan, where people can
predict the future with great accuracy, they write the plan and guess what the venture
actually achieves this plan, versus another approach which is to just go out there and
start to trade, see where it takes you and adapt the business as it goes along.
In fact, the best business plans take both approaches together. What they typically do
is they go out and they try and sell, they take that information, that becomes part of
the research underlying the market prediction and ultimately the plan is not so much about
trying to predict the future with accuracy, it is a plan about how to be adaptable, how
to sustain the business and how to develop it towards exploiting the target market opportunity
that the firm has identified.
>>Steve Macaulay: So, give me some practical areas then that you would say if you can find
a good business plan it needs to contain these things.
>>Andrew Burke: I think if there is one aspect of a business plan that whether it is an investor,
or somebody who is interested in earning some sweat equity in the company will look at,
it is that the link between the qualitative story in the business plan – the text or
the wording in terms of what that is describing – and the financials. And what you typically
find in Andrew Burke a weak business plan is that these are two different worlds. In
other words, the assumptions underlying the financials don’t link up with the actual
qualitative description. And unfortunately when you see that, that reads an indication
that whoever is putting that business plan together really doesn’t fully understand
the financial ramifications.
What it also typically indicates is that the link or really the assumptions underlying
the revenue projections and underlying the costs – if you ask yourself well, who is
going to be a bit vague on understanding the revenues and the costs? And the answer is
somebody who is not really out there engaging in a practical, real world sense in those
because in terms of the revenue, what ideally you want is the individual to have talked
to customers to try and sell to some of their target market, and therefore be confident
of the volume of sales that they are likely to get. Certainly in the near term – and
as the venture grows, to have knowledge of some companies that are similar to this one
so that they know that similar firms have achieved these. Likewise with prices.
And of course, back with the costs, is that they really should know their business and
if they know their business then they will be able to justify the assumptions on the
costs.
>>Steve Macaulay: So if we were to look at any other characteristics of what makes the
difference that actually achieves this 30% difference, what would it be?
>>Andrew Burke I think the key thing is if when you look at successful ventures is that
they are extremely agile; they are able to let their strategy evolve, often they go into
a market to sell one thing and then suddenly discover that there is a new market demand
in a different market segment and they are able to change direction.
And what this implies is that good planning builds agility and that means that you don’t
throw all your finances at the first iteration of your business plan; you hold some back
for the unexpected, you stage your business – you phase your business – you de-risk
it. And a really good example of the importance of doing this is that if you look at most
business plans they have at least five years of financial projections and yet we know that
in the real world most businesses have failed before they reach their fifth year. So navigating
to that fifth year is incredibly important. If you have a business plan that just projects
one scenario it undermines the confidence of somebody else looking at the business plan
in terms of financing it because it demonstrates a naivety, because in many respects that is
not how businesses evolve.
>>Steve Macaulay: So in summary then, Andrew, if we were to look at should we go for a business
plan or not, what would your answer be?
>>Andrew Burke: I am tempted to say that the answer to that is yes, but I think the key
message here is that it is not yes or no; the key message here is in terms of what type
of business plan you have.
So in some ventures, yes, you may want to write up a fully fledged business plan from
executive summary right through to financial projections. In others, you actually might
want to have the business plan emerge. So the first thing you might want to do is simply
to go out there and try and sell the product or service. If you find that there is a negative
reaction, you might decide to do something else and you might never complete that business
plan. But I think the essence here is how you approach your planning.
>>Steve Macaulay: So, it is not what you do, but it is how you do it.
>>Andrew Burke: Absolutely.
>>Steve Macaulay: Thank you.