Do You Need a Business Plan? Here's What the Research Says

Planning can help companies grow faster

One study (1) published in 2010 took an evidence-based approach to settle the debate: it was a meta-analysis that pooled the results of 46 separate studies covering 11,046 companies and found that, on balance, planning improved business performance. Interestingly, this same study found that the benefit was shaped by the newness of the firm—planning had a significantly stronger effect on performance for established small firms than for brand-new ones.

But, this study still doesn’t answer the question it raises:

Why would planning help a business that has a few years of history more than one that is just starting up?

The answer most likely lies in the fact that existing businesses know a bit more about their customers and what their needs are than a new startup does. For an existing business, planning involves fewer guesses or assumptions that need to be proven, so the strategies they develop are based on more information.

Another study (2)—an analysis of 622 new ventures in England—looked at whether writing a business plan causes better performance, or whether the kind of person who writes a plan was just going to grow faster anyway. After statistically separating the plan's real impact from that "selection effect," the researchers found that the act of writing a business plan, on its own, lifted a venture's average annual employment growth by 33.4 percentage points a year. (For context, 56 percent of the entrepreneurs in the study had written a formal plan before launching.)

To reinforce the connection between planning and fast growth, yet another study (3) surveyed 65 fast-growth family firms—a group whose sales were growing at an average rate of 92 percent—and found that they tend to plan. Seventy-one percent had formal written plans, and half of those plans looked three years out or more. They create budgets, set sales goals, and document their marketing and sales strategies. These companies don't always call their plans "business plans" but instead often refer to things like strategic plans, growth plans, and operational plans. Regardless of the name, it's all forward-looking planning.

Action: Carve out some time to set goals and build a plan for your business. More importantly, re-visit your plan as you grow and revise it as you learn more about your business and your customers.

Business planning is not an activity you undertake only when you’re getting your business up and running. It should be something you return to, time and time again, to revise and improve upon based on new knowledge.

Being prepared matters when you’re seeking funding

Over and over again, you hear venture capitalists talk about how much the team matters in a funding decision. Beyond just the team, you also hear them talk about passion—how much the entrepreneur believes in the idea.

But, it turns out that there is something that trumps passion when VCs make their decisions. In one study (5), researchers ran both a controlled experiment and a field study of real venture-capital funding decisions and found that an entrepreneur's preparedness—not their passion—was what positively influenced the decision to fund.

This doesn’t mean that VCs will ask for a business plan. In fact, they probably won’t ask for one.

What it means is that entrepreneurs need to have done some planning, in some form, so that they can be prepared to talk intelligently about their idea, their target market, their sales and marketing strategies, and so on.

So, the formal 40-page business plan document may not be useful when you’re pitching VCs. But, you’d better have done some planning, so that you can communicate verbally or through a pitch deck what would normally have been found in that written document.

And, not only will business planning help you be more prepared, it will actually improve your chances of getting funded. A study at the University of Oregon (6) analyzed a survey of 2,877 business owners and found that those who completed a business plan were nearly twice as likely to grow their business or secure capital as those who didn't write a plan.

Action: Know your business inside and out. Document your strategy with a plan and worry less about what the plan looks like. It's the content that matters, not the presentation.

When you start planning is important—the earlier the better

So, if business planning increases your likelihood of success, and in fact helps you grow faster, when should you start working on a business plan?

Research that tracked 223 new ventures over their first 30 months (7) shows that entrepreneurs who started the business planning process early were better at what the scientists call "establishing legitimacy." That's a fancy way of saying that these entrepreneurs used business planning to start the process of talking with potential customers, working with business partners, starting to look for funding, and gathering other information they needed to start their business. In the study, undertaking these legitimacy-building activities reduced the likelihood that the venture would disband.

Not only that, looking at those same ventures, a companion study found that starting the planning process before starting marketing efforts and before talking to customers reduced the likelihood that a business would fail (8).

That said, planning should never take the place of talking to customers. An ongoing planning process—one in which the plan is constantly revised as new information is gathered—requires that you talk to your potential customers so that you can learn more about what they need, what they are willing to pay, and how you can best reach them.

Action: Start the planning process early. Even if all you do is build out a simple elevator pitch to try your idea on for size, it will help you begin the conversation with potential customers and kick-start your business.

Planning makes you more likely to start your business

If you’re like me, and like most entrepreneurs, you like to dream up new business ideas. You constantly think of new ways to improve existing businesses and solve new problems.

But, most of those dreams never become a reality. They live on as ideas in your head while other entrepreneurs see the same opportunity and find a way to make it happen.

It turns out that there's a way to turn more of your ideas into a viable business. One study found that nascent entrepreneurs who completed a business plan were 2.6 times—about 260 percent—more likely to persist in getting their venture off the ground than those who didn't (10).

A second study, published in Small Business Economics, looked at how formalized entrepreneurs' planning was, and found that the more formal the plan, the more likely founders were to stick with it: each step up in the formality of the business plan cut the odds of abandoning the start-up by 81 percent (9).

Planning helps here in two ways. It keeps you moving forward on the ideas worth pursuing—and, because you're tracking your performance on a regular basis, it also helps you see clearly when an idea isn't working, so you can change course instead of riding a doomed plan into the ground.

Action: If you really want to start a business, start committing your goals and strategy to paper. Even if it’s just a simple one-page business plan, that will help you get started faster. And, once you do start, track your performance so you know when to change direction and try something different.

You’re less likely to fail if you have a plan

Nothing can absolutely prevent your company from failing, but it turns out that having a plan can help reduce your risks.

Remember those 223 new ventures tracked over their first 30 months? That same body of research (7, 8) found that ventures whose founders completed a business plan were 57 percent less likely to disband than ventures whose founders didn't. Having a plan didn't guarantee success, unfortunately. But, those companies with a plan had far better chances of survival than those that skipped the planning process.

Having a plan and updating it regularly means that you are tracking your performance and making adjustments as you go. If things aren’t working, you know it. And, if things are going well, you know what to do more of.

Action: Build a plan, but don’t just stick it in a drawer. Track your performance as you go so you can see if you’re reaching your goals. Your plan will help you discover what’s working so you can build your business.

Your success depends on the type of planning you do

In the end, creating a business plan seems like common sense. You wouldn’t set out on a trip without a destination and a map, would you?

It’s great to see research back up these common-sense assumptions. The research also validates the idea that the value of business planning really depends on how you approach it.

It’s not a question of whether you should plan or not plan—it’s what kind of planning you do. The best planning is iterative; it’s kept alive and it adapts.

It’s not about predicting the future as if you’re a fortune teller at a carnival. Instead, it’s a tool that you use to refine and adapt your strategy as you go, continuing to understand your market as it changes and refining your business to the ever-changing needs of your customers.

I recommend starting with a one-page plan. It’s a simpler form of planning where you can start by documenting your business concept on a single page. From there, iterate, gather feedback, and adjust your plan as needed. If you need some inspiration, check out our gallery of over 550 free sample business plans and download our free business plan template.

Finally, a big “thank you” to Jeff Gish at the University of Oregon, who was immensely helpful in gathering and analyzing the research mentioned in this article.

References:

1 - Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms. Journal of Business Venturing, 25(1), 24-40. doi: 10.1016/j.jbusvent.2008.10.007

2 - Burke, A., Fraser, S., & Greene, F. J. (2010). The multiple effects of business planning on new venture performance. Journal of Management Studies, 47(3), 391-415.

3 - Upton, N., Teal, E. J., & Felan, J. T. (2001). Strategic and business planning practices of fast growth family firms. Journal of Small Business Management, 39(1), 60-72.

4 - Gruber, M. (2007). Uncovering the value of planning in new venture creation: A process and contingency perspective. Journal of Business Venturing, 22(6), 782-807. doi: 10.1016/j.jbusvent.2006.07.001

5 - Chen, X.-P., Yao, X., & Kotha, S. (2009). Entrepreneur passion and preparedness in business plan presentations: A persuasion analysis of venture capitalists' funding decisions. Academy of Management Journal, 52(1), 199-214.

6 - Ding, E., & Hursey, T. (2010). Evaluation of the effectiveness of business planning using Palo Alto's Business Plan Pro. Department of Economics. University of Oregon.

7 - Delmar, F., & Shane, S. (2004). Legitimating first: Organizing activities and the survival of new ventures. Journal of Business Venturing, 19(3), 385-410. doi: 10.1016/s0883-9026(03)00037-5

8 - Shane, S., & Delmar, F. (2004). Planning for the market: Business planning before marketing and the continuation of organizing efforts. Journal of Business Venturing, 19(6), 767-785. doi: 10.1016/j.jbusvent.2003.11.001

9 - Hechavarria, D. M., Renko, M., & Matthews, C. H. (2011). The nascent entrepreneurship hub: Goals, entrepreneurial self-efficacy and start-up outcomes. Small Business Economics, 39(3), 685-701. doi: 10.1007/s11187-011-9355-2

10 - Liao, J., & Gartner, W. B. (2006). The effects of pre-venture plan timing and perceived environmental uncertainty on the persistence of emerging firms. Small Business Economics, 27(1), 23-40. doi: 10.1007/s11187-006-0020-0