You are starting a business. You decide to write a business plan.
But there are two important questions that you may not have considered …
WHEN is the best time to write the business plan?
Before you start? After market research?
And … how much time and effort should we put into writing a business plan?
Francis Greene and Christian Hopp set out to answer these questions in a 2018 article in the Harvard Business Review.
The study used data from the Panel Study of Entrepreneurial Dynamics II, that tracked 1,000 entrepreneurs over a six-year period from 2005-2011.
They found that:
“… on average, the most successful entrepreneurs were those that wrote their business plan between 6 and 12 months after deciding to start a business. Writing a plan in this timeframe increased the probability of venture viability success by 8%.”
The reason that this kind of delay is effective is that it gives the entrepreneur time to engage with their market in meaningful way before, or while, writing their plan:
“We found that the sweet spot for writing a plan was around the time when the entrepreneur was actually talking to customers, getting their product ready for market, and thinking through their promotional and marketing activities. Committing a plan to paper alongside these activities increases a start-up’s chance of venture viability by 27%.”
The authors found that either earlier than this or later than this would be less effective:
“Writing a plan alongside early activities like defining the market or collecting information on competitors added nothing to the chances of creating a viable new venture. Equally pointless was writing a plan when the entrepreneur had already hired workers or gotten external funding. In fact, if a plan is written while doing these activities, entrepreneurs have less chance of reaching venture viability than those that did not write a plan.”
The best approach is to spend three months on writing the plan:
“… the optimal time to spend on the plan was three months. This increased the chances of creating a viable venture by 12%. Spending any longer than this was futile, mostly because the information used to inform the plan loses its currency.”
Interestingly, writing a bad plan or too quick a plan can be worse than writing no plan at all.
“Spending just a month or two on the plan was just as bad. If the choice was between quickly writing a plan or not writing a plan, the entrepreneur was better off not writing a plan at all.”
Writing a business plan, it seems, has a “Goldilocks” zone – don’t write it too early or too late, spend enough time and effort on it but not too much, and it needs to be a good plan, with the relevant information, without being overblown:
“For a plan to be effective, it needs to detail out what the opportunity is, who the customers are, why competitors should be fearful, and how the company operates and makes money.”
The authors boil down their advice to one sentence:
“Our advice to entrepreneurs is not to write a plan too early, don’t spend too long on it, and make sure it is done alongside other activities that actually propel the venture forward.”
But is that the whole story?
Jianwen Liao and William B. Gartner further analysed the data to see if the kind of environment the entrepreneur is operating in makes a difference.
They found that if entrepreneurs were operating in uncertain “financial and competitive environments” then engaging in planning early during their start-up activity increased their chances of “persistence” – following through to start and establish the business.
By contrast, if entrepreneurs were operating in known and understood (“certain”) financial and competitive environments, then they were more likely to persist and start the business if they undertook planning later in the startup process.
So, according to this research, if you know your industry and the competitive landscape, you may be better off initially getting into action, talking to prospects, winning customers, and validating your value proposition and marketing strategy – and then writing the business plan later after you have validated your business idea.
But if you are doing something new, or operating in a highly competitive environment, or will need to convince others to finance you, then you may be better off – and be more likely to follow through and succeed – if you reduce the risk by doing an appropriate level of research and planning early in the startup process.