a carefully written business plan can reduce the chance of

The Importance of a Business Plan: A Roadmap to Success

Jean R Gunter
3.2k Comments

Introduction

Starting and running a successful business requires careful planning and strategic thinking. A well-defined business plan plays a pivotal role in providing entrepreneurs with a clear vision and direction for their venture. It serves as a comprehensive document that outlines the goals, strategies, and financial projections of a business, guiding entrepreneurs in navigating the complexities of the business landscape. Let's explore the various aspects of a business plan and understand its importance in achieving entrepreneurial success.

Defining a Business Plan

A business plan is a formal document that outlines the goals, strategies, and financial projections of a business. It acts as a roadmap, guiding entrepreneurs in making informed decisions and managing their operations effectively. A well-written business plan typically includes an executive summary, company description, market analysis, organizational structure, product or service offerings, marketing and sales strategies, operational plans, and financial projections.

Clarifying Business Goals and Objectives

A crucial aspect of a business plan is clarifying the goals and objectives of the business. By defining clear and measurable goals, entrepreneurs can establish a sense of direction and purpose for their venture. These goals may include revenue targets, market share objectives, customer acquisition goals, or product development milestones. A well-defined business plan helps entrepreneurs align their actions with their long-term objectives, increasing the chances of success.

Identifying Target Market and Competition

A comprehensive market analysis is an integral part of a business plan. It involves identifying the target market and understanding customer needs, preferences, and purchasing behaviors. By conducting thorough market research, entrepreneurs gain valuable insights into the competitive landscape, customer demographics, market trends, and industry dynamics. This information helps them position their products or services effectively and develop strategies to gain a competitive advantage.

Developing Effective Strategies and Tactics

A well-defined business plan enables entrepreneurs to develop effective strategies and tactics to achieve their business goals. Based on the market analysis, entrepreneurs can identify the most viable target segments and tailor their marketing and sales efforts accordingly. The business plan outlines the marketing channels, pricing strategies, promotional activities, and customer acquisition tactics that will be employed to reach the target audience. It also helps entrepreneurs develop operational plans, including supply chain management, production processes, and resource allocation strategies.

Creating a Financial Roadmap

Financial projections are a vital component of a business plan. They provide a detailed outlook on the financial performance of the business, including revenue forecasts, expense projections, profit margins, and cash flow analysis. Financial projections help entrepreneurs assess the feasibility and profitability of their business idea, identify potential funding requirements, and set realistic financial targets. By creating a financial roadmap, entrepreneurs can plan their financial strategies, monitor their progress, and make necessary adjustments to achieve their financial goals.

Guiding Decision-Making and Resource Allocation

A well-defined business plan serves as a guide for decision-making and resource allocation. It provides entrepreneurs with a framework to assess the viability of various opportunities and make informed choices. When faced with critical decisions, entrepreneurs can refer to their business plan to evaluate the alignment of the opportunity with their overall goals and strategies. Additionally, a business plan helps entrepreneurs allocate resources effectively by identifying the key areas that require investment and prioritizing initiatives based on their potential impact on the business's success.

Attracting Investors and Securing Funding

Investors and lenders often require a comprehensive business plan before considering funding a business. A well-crafted business plan demonstrates the entrepreneur's commitment, expertise, and vision, making the venture more attractive to potential investors. It provides detailed financial projections, market analysis, competitive positioning, and growth strategies that instill confidence in investors. By presenting a compelling business plan, entrepreneurs increase their chances of securing funding, whether through loans, venture capital, or angel investments.

Adapting to Changing Business Environment

The business landscape is dynamic, and entrepreneurs need to adapt to changes in the market, industry trends, and customer preferences. A well-defined business plan acts as a flexible tool that can be revised and updated to reflect the evolving business environment. It enables entrepreneurs to monitor their progress, evaluate the effectiveness of their strategies, and make necessary adjustments to stay competitive. Regularly reviewing and updating the business plan ensures that entrepreneurs stay aligned with their goals and seize emerging opportunities.

A well-defined business plan serves as a roadmap to success for entrepreneurs and business owners. It provides clarity, direction, and a comprehensive understanding of the business's objectives, strategies, and financial projections. With a solid business plan in place, entrepreneurs can make informed decisions, allocate resources effectively, attract investors, and adapt to the ever-changing business landscape. By understanding the importance of a business plan and investing time and effort into its development, entrepreneurs can increase their chances of achieving their goals and building successful ventures.

1. What should be included in a business plan? A comprehensive business plan typically includes an executive summary, company description, market analysis, organizational structure, product or service offerings, marketing and sales strategies, operational plans, and financial projections.

2. How can a business plan help in securing funding? A well-crafted business plan provides potential investors or lenders with a detailed understanding of the business's viability, market potential, growth strategies, and financial projections. It instills confidence in investors and increases the chances of securing funding.

3. How often should a business plan be reviewed and updated? A business plan should be regularly reviewed and updated to reflect changes in the market, industry trends, and business performance. It is advisable to review the business plan annually or whenever significant changes or new opportunities arise.

4. Can a business plan help in decision-making? Yes, a business plan serves as a guide for decision-making by providing entrepreneurs with a framework to evaluate opportunities, assess their alignment with business goals, and allocate resources effectively.

5. How does a business plan assist in adapting to the changing business environment? By regularly reviewing and updating the business plan, entrepreneurs can monitor their progress, evaluate the effectiveness of their strategies, and make necessary adjustments to stay competitive and capitalize on emerging opportunities.

a carefully written business plan can reduce the chance of

Power of choice is untrammelled and when nothing prevents our being able to do what we like best, every pleasure is to be welcomed and every pain avoided. But in certain circumstances and owing to the claims of duty or the obligations of business it will frequently occur that pleasures have to be repudiated and annoyances accepted. The wise man therefore always holds in these matters to this principle of selection.

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There are many variations of passages the majority have suffered in some injected humour or randomised words which don't look even slightly believable.

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Do You Need a Business Plan? Scientific Research Says Yes

Male entrepreneur sitting in an office in front of computer. Reviewing a research study covering the impact of small business success due to planning.

Noah Parsons

13 min. read

Updated August 1, 2024

Download Now: Free Business Plan Template →

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.

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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 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 that 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.

When you start planning is important—the earlier the better

So, if business planning increases your likelihood of success, and in fact helps you grow faster, when should you start working on a business plan?

Research shows (7) that entrepreneurs who started the business planning process early were better at what the scientists call “establishing legitimacy.” That’s a fancy way of saying that these entrepreneurs used business planning to start the process of talking with potential customers, working with business partners, starting to look for funding, and gathering other information they needed to start their business.

Entrepreneurs that did a good job of using their business plan to “establish legitimacy” early were more likely to succeed and their businesses tended to last longer.

Not only that, starting the planning process before starting marketing efforts and before talking to customers reduces the likelihood that a business will fail ( 8).

That said, planning should never take the place of talking to customers. An ongoing planning process—one in which the plan is constantly revised as new information is gathered—requires that you talk to your potential customers so that you can learn more about what they need, what they are willing to pay, and how you can best reach them.

Action: Start the planning process early. Even if all you do is build out a simple elevator pitch to try your idea on for size, it will help you begin the conversation with potential customers and kick-start your business.

Planning makes you more likely to start your business

If you’re like me, and like most entrepreneurs, you like to dream up new business ideas. You constantly think of new ways to improve existing businesses and solve new problems.

But, most of those dreams never become a reality. They live on as ideas in your head while other entrepreneurs see the same opportunity and find a way to make it happen.

It turns out that there’s a way to turn more of your ideas into a viable business. A study published in Small Business Economics found that entrepreneurs that take the time to create a plan for their business idea are 152 percent more likely to start their business ( 9). Not only that, those entrepreneurs with a plan are 129 percent more likely to push forward with their business beyond the initial startup phase and grow it. These findings are confirmed by another study that found that entrepreneurs with a plan are 260 percent more likely to start their businesses (10).

Interestingly, these same entrepreneurs who build plans are 271 percent more likely to close down a business . This seems counterintuitive to the stats above, but when you think about it a bit more, it makes a lot of sense.

Entrepreneurs with plans are tracking their performance on a regular basis. They know when things aren’t going to plan—when sales aren’t meeting projections and when marketing strategies are failing. They know when it’s time to walk away and try a different idea instead of riding the business into the ground, which could have disastrous results.

Action: If you really want to start a business, start committing your goals and strategy to paper. Even if it’s just a simple one-page business plan, that will help you get started faster. And, once you do start, track your performance so you know when to change direction and try something different.

You’re less likely to fail if you have a plan

Nothing can absolutely prevent your company from failing, but it turns out that having a plan can help reduce your risks.

Yet another study of 223 companies found that having a plan reduced the likelihood that a business would fail. Having a plan didn’t guarantee success, unfortunately. But, those companies with a plan had better chances of success than those that skipped the planning process.

Having a plan and updating it regularly means that you are tracking your performance and making adjustments as you go. If things aren’t working, you know it. And, if things are going well, you know what to do more of.

Action: Build a plan, but don’t just stick it in a drawer. Track your performance as you go so you can see if you’re reaching your goals. Your plan will help you discover what’s working so you can build your business.

Your success depends on the type of planning you do

In the end, creating a business plan seems like common sense. You wouldn’t set out on a trip without a destination and a map, would you?

It’s great to see research back up these common-sense assumptions. The research also validates the idea that the value of business planning really depends on how you approach it.

It’s not a question of whether you should plan or not plan—it’s what kind of planning you do. The best planning is iterative; it’s kept alive and it adapts.

It’s not about predicting the future as if you’re a fortune teller at a carnival. Instead, it’s a tool that you use to refine and adapt your strategy as you go, continuing to understand your market as it changes and refining your business to the ever-changing needs of your customers.

I recommend starting with a one-page plan. It’s a simpler form of planning where you can start by documenting your business concept on a single page. From there, iterate, gather feedback, and adjust your plan as needed. If you need some inspiration, check out our gallery of over 550 free sample business plans and download our free business plan template .

Finally, a big “thank you” to Jeff Gish at the University of Oregon , who was immensely helpful in gathering and analyzing the research mentioned in this article.

What has your experience with business planning been like? Will you approach the planning process differently in the future? Tell me on Twitter @noahparsons.

References:

1 Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms. Journal of Business Venturing, 25(1), 24-40. doi: 10.1016/j.jbusvent.2008.10.007

2 Burke, A., Fraser, S., & Greene, F. J. (2010). The multiple effects of business planning on new venture performance. Journal of Management Studies, 47(3), 391-415.

3 Upton, N., Teal, E. J., & Felan, J. T. (2001). Strategic and business planning practices of fast growth family firms. Journal of Small Business Management, 39(1), 60-72.

4 Gruber, M. (2007). Uncovering the value of planning in new venture creation: A process and contingency perspective. Journal of Business Venturing, 22(6), 782-807. doi: 10.1016/j.jbusvent.2006.07.001

5 Chen, X.-P., Yao, X., & Kotha, S. (2009). Entrepreneur passion and preparedness in business plan presentations: A persuasion analysis of venture capitalists’ funding decisions. Academy of Management Journal, 52(1), 199-214.

6 Ding, E., & Hursey, T. (2010). Evaluation of the effectiveness of business planning using Palo Alto’s Business Plan Pro. Department of Economics. University of Oregon.

7 Delmar, F., & Shane, S. (2004). Legitimating first: Organizing activities and the survival of new ventures. Journal of Business Venturing, 19(3), 385-410. doi: 10.1016/s0883-9026(03)00037-5

8 Shane, S., & Delmar, F. (2004). Planning for the market: Business planning before marketing and the continuation of organizing efforts. Journal of Business Venturing, 19(6), 767-785. doi: 10.1016/j.jbusvent.2003.11.001

9 Hechavarria, D. M., Renko, M., & Matthews, C. H. (2011). The nascent entrepreneurship hub: Goals, entrepreneurial self-efficacy and start-up outcomes. Small Business Economics, 39(3), 685-701. doi: 10.1007/s11187-011-9355-2

10 Liao, J., & Gartner, W. B. (2006). The effects of pre-venture plan timing and perceived environmental uncertainty on the persistence of emerging firms. Small Business Economics, 27(1), 23-40. doi: 10.1007/s11187-006-0020-0

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.