Reasons for Writing a Business Plan

Reasons for Writing a Business Plan              
                    We show the two primary reasons to write a business plan . First, writing a business plan forces a firm’s founders to systematically think through each aspect of their new venture.5 This is not a trivial effort—it usually takes several days or weeks to complete a well-developed business plan—and the founders will usually meet regularly to work on the plan during this period. An example of how much work is sometimes involved, and how a well-planned new business unfolds, is provided by Gwen Whiting and Lindsey Wieber, the cofounders of The Laundress, a company that sells specially formulated laundry detergents and other fabric care products. Whiting and Wieber met at Cornell University while studying fabrics, and after graduating the pair decided to start a business together. The following vignette comes from an interview they gave to Ladies Who Launch, a Web site that highlights the accomplishments of female entrepreneurs:
                    Gwen: Lindsey and I went to college and studied textiles at Cornell together and always wanted to be in business together. We knew it was going to happen. We always talked about ideas. We were talking about this concept, and it was the right time for us. The first thing we did was the business plan and then a cash flow analysis. We wanted to do as much research as possible before developing the products.
                    Lindsey: We spent Memorial Day weekend (2003) doing our business plan. We spent the Fourth of July weekend doing our cash flow. After we had our ideas on paper, we went back to Cornell, met with a professor there, and had a crash course in chemistry. She worked with us on the formulation of the products.
                    Gwen: I found a manufacturer on Columbus Day. Every piece of free time we had, we dedicated to the business. We weren’t at the beach with our friends anymore.6
                    The payoff for this level of dedication and hard work, which involved the preparation of a formal business plan, is that Whiting and Wieber now have a successful business.
                   Consistent with Whiting and Wieber’s experience, writing a business plan forces a firm’s founders to intently study every aspect of their business, a process that’s hard to replicate in any other way. Imagine the following. Two friends are thinking about opening a seafood restaurant. They spend the next two months meeting four nights a week to hash out every detail of the business. They study the restaurant industry, identify their target market, develop a marketing plan, settle on a hiring schedule, identify the type of people they want to employ, plan their facility, determine what their startup expenses will be, and put together five years of pro forma (projected) financial statements. After 32 meetings and several drafts, they produce a 30-page business plan that explains every aspect of their business. Regardless of how conscientious the founders of a business are, it’s difficult to discipline oneself to cover this level of detail absent writing a business plan. As stated earlier, writing a business plan forces a business’s founders to systematically think through every aspect of their business and develop a concrete blueprint to follow.
                    The second reason to write a business plan is to create a selling document for a company. It provides a mechanism for a young company to present itself to potential investors, suppliers, business partners, key job candidates, and others.7 Imagine that you have enough money to invest in one new business. You chat informally with several entrepreneurs at a conference for start-ups and decide that there are two new ventures that you would like to know more about. You contact the first entrepreneur and ask for a copy of his business plan. The entrepreneur hesitates a bit and says that he hasn’t prepared a formal business plan but would love to get together with you to discuss his ideas. You contact the second entrepreneur and make the same request. This time, the entrepreneur says that she would be glad to forward you a copy of a 30-page business plan, along with a 10-slide PowerPoint presentation that provides an overview of the plan. An hour or two later, the PowerPoint presentation is in your e-mail in-box with a note that the business plan will arrive the next morning. You look through the slides, which are crisp and to the point and do an excellent job of outlining the strengths of the business opportunity. The next day, the business plan arrives just as promised and is equally impressive.
                    Which entrepreneur has convinced you to invest in his or her business? All other things being equal, the answer is obvious—the second entrepreneur. The fact that the second entrepreneur has a business plan not only provides you with detailed information about the venture but also suggests that the entrepreneur has thought through each element of the business and is committed enough to the new venture to invest the time and energy necessary to prepare the plan. Having a business plan also gives an investor something to react to. Very few, if any, investors will free up time to “listen” to your idea for a new business, at least initially. Investors prefer to vet or evaluate business ideas by looking through business plans (or the executive summaries of business plans) initially before they are willing to invest more of their time and effort.8