Is Formal Business Planning Necessary?

There has been much debate over the last decade regarding the need of a formal business plan when either starting or growing a business.

Much of the debate stems from the late 1990s when it seemed anyone, regardless of age, skill, or track record, could walk into a bank or private equity firm and receive millions of dollars merely based on an idea. Some of these ideas spawn multi-billion industries while others floundered; just wasting money.

Those that backed the profitable ideas continue to say that a formal business plan in not needed. Those that backed the failures state that they may have been more cautious or held more restraint had they reviewed the investment's plans before dolling out funding.

Having read and written numerous business plans, I have come to the following conclusion regarding the need of having a formal business plan or not:

Business planning can provide tons of benefits to the planner as long as the planning does not take away time and resources that can be better utilized.

Business planning, for the most part, should outline or cover the following:

• Determining if the product or service being offered has a sufficient market to support it as well as to ensure that it will be financial viable.
• Defining a market (who the customers are) and how to best target that market through specific, strategic actions and channels.
• Establishing a competitive position within an industry and/or market by determining what constitutes the business's greatest competitive strengths in light of its or other's weaknesses.
• Ensuring the business makes the most amount of money by developing effective strategies regarding the most efficient deployment of assets.
• Understanding all business and market risks as well as developing ways to mitigate those risks at present and into the future.

Now, let's say you are writing a business plan for yourself. You, the planner, wants to research and better understand the dynamics of your potential market (answer the questions above). Great. If this planning process provides needed insight into your business and how you fit within your market; better allowing your business to compete, then by all means conduct the research and begin planning. But, does this mean that a formal business plan, with an executive summary, company overview, business ownership, financial assumptions and appendixes, is really needed or will attempting to develop all of this unnecessary information (items the business owner already knows) be a complete waste of time - time that can be put to better use - like understanding your markets needs and desires?

If the planning is for the benefit of the business owner, then it should only match the business owner's needs - nothing more. Thus, these questions can be answered on the back of a napkin or similar scrape paper provided that what is written is enough information to spark the insight and memory of the reader. In other words, what needs to be formally written is only enough information to satisfy the writer - any additional time or resources used would be wasted.

On the other side, let's say that a business is seeking funding or has a large customer or supplier asking to review its business plan (the organizations that want to know they are working with or backing a well thought out business) - then the insights gleaned from the business planning process must be written in a coherent and comprehensive manner - not just for the business owner - but written for the reader.

Example, the entrepreneur may already know that the business will be organized or is already organized as a LLC in its current State, is taxed as a corporation and is owned 80% by the current owner/founder and 20% buy the owner's silent partner. This is something that does not have to be written down for the business owner's sake. But, an investor would be highly interested in these facts as the investor might not want to invest in an LLC (would prefer the company to be a c-corporation) or would want to know who else owns pieces of the company and who could potentially influence its future direction.

Therefore, when the audience is no longer the writer or researcher, then a formal business plan must be written. Further, keep in mind that any business writings, be it a business plan or marketing correspondence, must be written with the audience (the reader) in mind. A business plan for a banker may focus on and outline more about how the business will generate positive cash flow to service the requested debt while a plan written for a prospective customer may only highlight the perceived benefits the company's products have to offer and the business's competitive position within the industry. While a plan written for the business owner might only include the very basics and be written in notes and abbreviations.

As with most things in life, there is a time and place for everything. When business planning, the time is 'always' but the place (how those finding are displayed or communicated) most definitely have their place. For the business owner - not seeking investment or partnership - having a thirty page plan with graphics and charts and such may be a waste of time when a few pages of notes (that answer the pertinent questions) will suffice - allowing the entrepreneur to spend more time on the actual execution and implementation of the plan then in worrying if he has covered all the minute sections of a formal plan.

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