The 4 Pillars of a Great Business Plan

I came across a link on Twitter the other day to a great article on writing an effective business plan.

80% of updates on Twitter are rubbish but every now and then you get a gold nugget like this which perhaps justifies being on Twitter in the first place. 

The article and was first published in the Harvard Business Review in the late 90s (yes that is last century) but the content of the article is still relevant in today’s fast-paced digital world.

The author was William A. Sahlman. Will is the "Head Proff" of Business Administration at Harvard so he is a man worth listening to. 

A sentence in the very first paragraph from Will’s article about writing a good business plan struck me:

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Indeed, judging by all the hoopla surrounding business plans, you would think that the only things standing between a would-be entrepreneur and spectacular success are glossy five-color charts, a bundle of meticulous-looking spreadsheets, and a decade of month-by-month financial projections. 

Will goes on to say that nothing could be further from the truth and in his experience with hundreds of entrepreneurial start-ups:

Business plans rank no higher than 2—on a scale from 1 to 10—as a predictor of a new venture’s success. And sometimes, in fact, the more elaborately crafted the document, the more likely the venture is to, well, flop, for lack of a more euphemistic word.

I couldn’t agree more and have actually written about this subject in a previous article. I also get clients asking me all the time if we prepare our documents using InDesign. The answer? No.

We have a preference for substance over style—provided your document doesn’t look like a complete dog’s breakfast in the first place. 

If style and formatting isn’t the problem when it comes to crafting a good business plan, then what is the problem with business plans? 

According to Will, the answer is relatively straightforward:

Most waste too much ink on numbers and devote too little to the information that really matters to intelligent investors. As every seasoned investor knows, financial projections for a new company—especially detailed, month-by-month projections that stretch out for more than a year—are an act of imagination. 

That doesn’t mean your business plan shouldn’t include any numbers at all. It just means that it shouldn’t be the major focus of your business plan:

Numbers deserve a couple of pages in any business plan but somewhere near the back of the document. Not the front.

Instead of focusing on the numbers, Will teaches his MBA students to structure their business plan around the following ingredients:

1. People - i.e. the men and women starting and running the venture, as well as the outside parties providing key services or important resources for your venture, such as its lawyers, accountants, and suppliers.
2. Opportunity - this is a profile of the business itself—what it will sell and to whom? Can the business grow and how fast? What are its economics, who and what stand in the way of success?
3. Context - this is the big picture—the regulatory environment, interest rates, demographic trends, inflation, and the like—basically, factors that fluctuate but cannot be controlled by the entrepreneur.
4. Risk and Reward - this is an assessment of everything that can go wrong and right, supported by a discussion of how the entrepreneurial team can respond.
   
   

Will goes on to elaborate in great depth the meaning of each principle so click here if you want to read the full article. The key point to note is that each principle is dependent on the other.

Will concludes the article by making it clear that business plans are a necessity but definitely not the "be all and end all" when it comes to securing investment:

There is little doubt that crafting a business plan so that it thoroughly and candidly addresses the ingredients of success—people, opportunity, context, and the risk/reward picture—is vitally important. In the absence of a crystal ball, in fact, a business plan built of the right information and analysis can only be called indispensable.

In short, great businesses have the four parts of Will’s framework completely covered. If only reality was so complicit.