This blog post is co-written by Yngve Dahle and Mark Robinson.
“Life is what happens to you while you're busy making other plans.” Contrary to public belief, this was not said by John Lennon, but by American author and cartoonist Allen Saunders.
Regardless of its origin, this statement highlights a paradox that can easily be applied to business planning. A plan has no value if it can’t be adapted to shifting circumstances. Things very rarely go exactly according to plan. Does that mean we should give up on planning altogether? In addition, most plans are created for the wrong reasons altogether. People often create business plans to express a need for external financing or support for their business. After they are created, they are left at the bottom of a desk drawer. Why is this?
Why do business plans fail?
The business plan has gone from being the cornerstone of all business development to being heavily criticized over the last couple of years. We think this is well deserved. A traditional business plan is easily 100 pages, covers a three-year period and costs the entrepreneur a significant amount of time and money. In a traditional business plan, the table of contents may look something like the figure to the right:
One problem with this type of plan is that it makes predictions that are almost impossible to foresee. If you could predict the financial development of any publicly listed company, you would be a stock market millionaire. Why would it be easier to make a three year forecast for a startup that does not yet have products or customers?
An even bigger problem is that many entrepreneurs follow these plans uncritically, without asking questions like: Has the market changed? Did the product turn out the way we thought it would?
The “Lean Startup” movement (Steve Blank, 2005 and Eric Ries, 2001) claims that the ability to make adaptations and changes to your plan is much more important than the quality of the first version of the plan.
The problem is that business plan critics do not offer an alternative method. Even if the conventional business plan does not work, you still need some kind of plan. You would not even go to the grocery store without having a plan for your shopping. Instead, you decide what you will have for dinner, and make a list of everything you will need to buy. Some additional impulse purchases tend to find their way into the shopping trolley, which is normal. Everything does not always go according to plan, but planning is still important.
The five most important problems with a traditional business plans are:
1. The planning period is too long
The simplest way to improve the business plan is to make the planning period shorter. Instead of guessing what might happen three years from now, the focus should be on the next few months. We suggest making a plan for the next three months, and then add a new month at each months end. We call this a rolling three-month plan. Working in this way makes it a lot easier to make adjustments based on what we learn during the project.
The justification for longer plan periods is often that bankers and investors want a forecast that shows when they will get their money back. Unfortunately, these forecasts are often based on failing preconditions. The difference between ambitions and reality can create conflicts between you as an entrepreneur and your financial partners. In addition, you may have to explain why changes in business conditions make it smart to diverge from the original plan.
2. You do not write the plan for yourself
Unfortunately, most businesses do not create their plan before they need to negotiate with banks, investors or public authority support agencies. This creates two major problems: first, the business plan is usually a set of arguments for the future success of the company. The plan is simply far too optimistic and lacks necessary skepticism and risk assessment.
The other major problem is that these external business plans are useless as a tool for managing the company. Implementation of the plan is poorly described, so most companies end up without a properly functioning internal plan. Nothing in the plan translates visions and ideas into daily tasks, which makes it difficult to follow up and assess development.
We believe that you should primarily plan for internal use. However, this doesn’t mean that it isn’t important to communicate your plans to external interests. Banks, potential investors and public authorities will expect you to have a clear idea of what the future will bring. However, we believe that all of these institutions would rather have an honest and realistic description of your business - not a one-sided argument for your guaranteed success.
3. There is no common thread
Another important element in a business plan is that your company’s everyday activities should be linked to its long-term strategies. Unfortunately, very few entrepreneurs do this. Strategy documents are often drawn up by senior management, only to be left languishing in a desk drawer. Each departments sets its’ own objectives and tasks, and the financial manager makes the forecast. Often none of these planning activities are coordinated with each other.
This method not only produces poor planning documents, but leads to a loss in the planning process itself. “Plans are nothing; planning is everything” claimed Dwight D. Eisenhower during the planning of the D-Day invasion. Involve as many employees as possible in formulating everything from the overall vision to the daily activities in your company to create the most solid platform for reaching goals together. This is an opportunity that many businesses miss.
4. Unclear responsibilities
It is harder to manage a business where things frequently change than a more stable company. Coordinating different functions becomes more complex when the strategies, objectives and tasks change often.
In this situation, a clear division of responsibility is very important. Thus, we introduce the “Business Developer”. The Business Developer has the overall responsibility for bringing about innovation and change in the company, including managing the business plan. In a smaller company, the General Manager and/or owner of the company has this responsibility. In larger companies, it may be delegated to another person, or even to a hired consultant. In any case, it is important that the Business Developer is given a clear mandate from senior management.
5. The world is not static
The final important point is that your planning must undergo continual development. The one thing we know about growth companies is that it is difficult to predict the future; there will be both positive and negative deviations. Perhaps you will spend more time on developing your product than you thought. Or you might sell more than you had anticipated. In any case, it is important that you adapt to the new reality. We live in a time characterized by high tempo and rapid changes. You may have to respond to delays in development time by engaging a new developer or informing customers that the new version of the product will be postponed. In the worst case you will have to obtain extra financing to progress, while surprisingly good sales may allow greater investment in delivery capacity than you originally planned.
Therefore we do not recommend a static approach to business planning. When the preconditions for your plan change, you should make adjustments. If your ideas or business models are no longer viable, you need to change them. Objectives should be constantly improved, and the tasks implemented only if they still make sense after these changes. One principle of game theory (Brandenburger, 1996) says that every action you make will trigger a reaction by competitors, users or stakeholders. So by definition if you are conducting a very active innovation project you must frequently reassess and reconsider your assumptions and decisions. The more you experiment, measure and learn, the more relevant your continuously adapted plan will be.
An alternative method
The purpose of our book “Lean Business Planning” is to offer a better alternative to a conventional business plan. We suggest a holistic setup tying the business idea and business model to objectives, tasks, and a forecast predicting the financial consequences of it all. Most importantly, this new type of plan is not static. It can and should be changed continuously. More about the method will follow, for those who are interested.
We hope that this blog post may inspire you, and perhaps start a discussion. If some of the entrepreneurship terminology used is new to you, you will find it explained more extensively in the Introduction chapter of The Lean Business Planning book. Please download a free preview PDF of the book.