07 Sep Are Business Plans Still Relevant? Part Two
In June I published the blog Are Business Plans Still Relevant?, and to my surprise, it garnered thoughtful feedback from some of my readers. In the blog, I claimed that business plans aren’t necessary to start and grow a business, and even cited a case of a local couple who started their venture without more than a few thousand dollars in savings and a strong work ethic. I could name a dozen more examples where someone started a business without a written plan. I should also mention that these businesses are still operating today.
One of my readers in particular, Bob Keyser—a friend and international lawyer with decades of experience—sent me a long list of examples where businesses failed because they hadn’t planned appropriately. The real-life scenarios he shared are relevant, both for those of you who are considering starting a business and for those of you who have recently started a business without a business plan (including market research, a marketing plan, financial projections, etc.). Here are three examples from Bob.
A client without a business plan opened a pizza joint within a block of another established pizza parlor. The retail pizza market soon became saturated and could not support two pizza places offering cut-rate prices. The competition between the two businesses ended up forcing both of them into bankruptcy. In the end, the new owner could not even give away the new pizza business for the debt owed, and was stuck on a long-term lease. The lesson here? Do your market research! Evaluate the demand for your product, assess the competitive landscape, and understand how you will fit into it.
A business owner without a business plan opened a cigar bar and discovered after the fact that not many people like to sit around and smoke expensive cigars, at least not enough to make it a profitable venture. After paying huge overhead, the business lasted less than one year and lost money big time. Again, the lesson here is to do your market research, understand your demographics, and determine what people will realistically pay for.
A new business owner without a business plan started off great, getting lots of big, high dollar contracts. Unfortunately, slow-paying customers weren’t taken into account. Invoices had to be factored at +/-90% to pay payroll, which cut dramatically into gross profits, and eventually the business spiraled downward in a cash-flow crunch. By law, employees must be paid within set dates, no matter what, and employees don’t work if they are not paid. The outcome? The business closed within a year. A business plan with an outline of the typical customer’s payment cycle and cash flow projections would have shed light on this problem ahead of time.
At the end of the day, you’ve got to do your due diligence before embarking on a new business venture. A written business plan is an organized, shareable, editable way to do that. Sure, you can start a business without a plan, but you’re likely to avoid costs, mistakes, delays, and misunderstandings (and possibly even bankruptcy, like in the scenario above!) if you plan correctly.
Thanks for the stories, Bob.