This is a written fantasy about the future of a new business. It has to be documented if the business is ever to get the financial support that it requires. It is not just a matter of qualitative fantasising, however, of asserting that “We intend to be innovative market leaders at the forefront of Internet technology”, for example. It is also a matter of quantitative fantasising, “and we will make a loss of $1.64m in year one, and a profit of $325,000 in year two”. The launching of a business idea requires its patron to attribute precise financial numbers to the future cash flow of the business – numbers, needless to say, that rarely bear any relationship to subsequent reality.
So what is the point? There are usually two.
1 To obtain funds. Every investor and/or venture capitalist wants to read a business plan to help them assess the likely risk and reward of the project. For the infant business seeking finance, the presentation of a business
plan is a bit like an actor’s audition. There are notoriously bad ones, and a good one is no guarantee of a part. But with a bad one, you are almost sure never to see the footlights.
2 To help the business’s promoters focus on some fundamental operational issues. For example, what is the likely size of their market? Who is likely to be their main competitor? To some extent the setting of operational targets is self-fulfilling. If the venture is successful, then the targets set are the targets reached. They may not be the optimal performance of the organisation, of course, merely a satisfactory one.
Business plans are required not only by new business ventures but also by old businesses trying something new. Proposed mergers and acquisitions require a detailed plan of the future of the merged entity; a venture into a new market requires a business plan; and so too does the winding down or the turning round of an old and tired business.
In an influential article in the Harvard Business Review, William Sahlman, a professor of business administration, suggested that business plans “waste too much ink on numbers and devote too little to the information that really matters to intelligent investors”. What really matters, suggested Sahlman, are four factors that are “critical to every new venture”:
– the people;
– the opportunity;
– the context; and
– risk and reward.
A great business plan, Sahlman suggests, is one that focuses on asking the right questions about these four things. It is not easy to compose, however, because “most entrepreneurs are wild-eyed optimists”. Anyway, as he says, “The market is as fickle as it is unpredictable. Who would have guessed that plug-in room deodorisers would sell?”
Throughout much of the 20th century a business plan was widely accepted as being indispensable for new business ventures. Once upon a time Microsoft had one, and so did Cisco Systems and Dell Computer. But the enthusiasm in the 1990s for downsizing hit corporate planning departments hard. Many had made themselves easy targets by concentrating too much on the financial minutiae of future plans that might or might not be implemented rather than looking at the broader picture. The ethos of the Internet economy also discouraged planning. With change happening so fast, the argument went, why be prepared when nobody knew what to be prepared for. As normal times returned at the beginning of the 21st century, companies began again to think about planning.