One question to ask small business owners is how much planning they did before they went into business. The answers are all over the board: some people spend considerable time developing a business plan and investigating a business opportunity, and some people just throw themselves into the fray.
The time and energy spent preparing a business plan is no indicator of ultimate success in business – which is not to say that preparing a business plan is not a worthwhile endeavor. To the contrary, it is generally an extremely valuable exercise.
The key is to understand the purpose of the exercise. A business plan is just that – a plan. It attempts to project the future. But the future is rarely as projected, and the plan must be subject to change.
A business plan serves a number of purposes. Perhaps the fundamental purpose of a business plan is a reality check. That is, before you engage in business, you need to understand how many widgets, and at what price, you need to sell in order to make the business successful. You might be surprised at the number of proposals that cannot withstand the cruelty of a mathematical analysis of their potential.
In that regard, one essential ingredient to a successful business plan is the use of assumptions. This is where the assistance of an outside advisor can be invaluable. By nature, entrepreneurs are an optimistic lot. But unrealistic optimism in financial projections can be the death knell for a fledgling enterprise.
Many business proposals cannot survive the exercise of preparing a business plan. Even those that at first blush seem to make sense, fail when the foundation for the underlying assumptions are challenged. And even a plan that seems to make economic sense premised on reasonable assumptions is still subject to the risks of the marketplace.
At the end of the day, if you are thinking about starting a business, you need to prepare a business plan. In doing so, be particularly cognizant of the assumptions you use for projected financial performance – don’t be unrealistically optimistic or pessimistic. Most importantly, understand that a plan represents only your best guess as to the future and that the plan will necessarily change as the future unfolds.