Are Business Plans Necessary for Success?
Are business plans necessary for success? Conventional wisdom about business plans holds that they are indispensable. Business literature, however, tells an ambiguous and conflicted story: while there is some support for the importance of planning, other findings indicate they may not be necessary.
In fact, not all experts agree that a business plan is necessary before embarking on a business venture. In 2007, a team of researchers led by William D. Bygrave, a professor emeritus at Babson College, published a study in Venture Capital challenging the idea that entrepreneurs need business plans before starting their businesses.
Bygrave and his colleagues studied2 116 different small businesses founded by alumni of Babson College. Of these, 64 ventures were started with formal business plans, while the other 52 were not.
The researchers did find that small businesses founded with business plans were able to raise quite a bit more money in their first 12 months of operations than those without. They also had greater revenue.
However, none of these differences were found to be statistically significant. The researchers noted that there were other differences between the entrepreneurs who used a business plan and those who did not. Controlling for these other variables, the firms founded with a business plan did no better than those founded without.
Are Business Plans Necessary?
They also investigated whether the firms with business plans actually followed them, and if so what difference it made on their success. The results indicated that following a business plan had no effect on a company’s success.
Research findings3 published in 2012 in the Journal of Small Business Management lend support to the above conclusions. In a study of 623 nascent entrepreneurs over a six-year period, the researchers found no evidence to indicate that either making a business plan or changing it later had any impact on the firms’ performance.
But the case against business plans is anything but a done deal. Not all experts agree with Bygrave and his colleagues.
A 2001 study4 by Stephen C. Perry, then an Associate Professor of Business at Gardner-Webb University, investigated the role of planning in the success of small businesses by comparing firms that had failed with similar firms that had not.
Perry selected his failed firms at random, and then paired each one with a similar firm that was still going strong. He ended up with 152 of these matched pairs of failed and successful small businesses.
The results indicated that American small businesses engage in very little planning. Ninety-two of the failed firms and 98 of the non-failed firms had engaged in no planning at all.
On the other hand, only 13 of the failed firms had engaged in the highest level of planning, with forecasts for sales, staffing, cash requirements and capital expenditure, and an analysis of the competition. Thirty-five of the non-failed firms had engaged in this level of planning.
Although Perry’s results clearly show low levels of planning, they also show that on average, firms which have not failed do more planning than those who have failed.
The Case for a Business Plan
Other researchers have made a stronger case for answering the question, Are Business Plans Necessary? A 2006 study by Jianwen Liao of Northeastern Illinois University and William Gartner of Clemson University found strong support5 for the importance of planning.
The researchers looked at over 800 firms over the course of three years. They found that those entrepreneurs with a business plan were 2.6 times more likely to stay in business than those who had not.
In theory, other factors could account for the differences found by Gartner and Liao: entrepreneurs who had completed business plans might be over represented in riskier environments.
However, the researchers took great pains to control such confounding factors, and found none of them were statistically significant. In other words, their findings are real evidence that there is a connection between making a sound business plan and realizing business success.
There are sound reasons for making a business plan. A good business plan outlines objectives, strategy, priorities, and action points, all of which can be shared with business partners or spouses.
As a rule, business plans are also necessary to attract investors, who want to see relevant financial information and industry analysis. For all of these reasons and more, planning makes good sense.