Business Planning Makes You More Successful, and We’ve Got the Science to Prove It
Should you spend some time developing a plan for your business, or just dive in and start, figuring things out as you go? There has been plenty of debate on this topic, but no one has pulled together the scientific evidence to determine if planning is worthwhile—until now.
Over the past few months, with the help of my friend Jeff, from the University of Oregon, I’ve been looking at academic research on business planning—the actual science around planning and how it impacts both startups and existing businesses.
But, before we dive into the data, why do we even need to look at research on business planning? It seems like most advice on starting a business includes writing a business plan as a necessary step in the startup process. If so many people encourage you to write one, business plans must add value, right?
Well, over the past few years, there’s been a lot of controversy about the value of business plans. People look at certain companies that have been very successful but haven’t written business plans, and conclude that planning is a waste of time.
After all, taking the time to plan is a bit of a trade-off. The time you spend planning could be time spent building your company. Why not just “get going” and learn as you build your company, instead of taking the time to formulate a strategy and understand your assumptions about how your business might grow?
Well, the research shows that it’s really not a “write a plan” or “don’t write a plan” conversation. What really matters is what kind of planning you do and how much time you spend doing it.
Planning can help companies grow 30% faster
Research on business growth found that planning improved business performance.
One study1, published in 2010, aggregated research on the business growth of 11,046 companies and found that planning improved business performance. Interestingly, this same study found that planning benefited existing companies even more than it benefited startups.
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 found that companies that plan grow 30% faster than those that don’t plan. This study found that plenty of businesses can find success without planning, but that businesses with a plan grew faster and were more successful than those that didn’t plan.
To reinforce the connection between planning and fast growth, yet another study3 found that fast-growing companies—companies that had over 92% growth in sales from one year to the next—usually have business plans. In fact, 71% of fast-growing companies have plans. They create budgets, set sales goals, and document their marketing and sales strategies.
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.
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 shows7 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.
Entrepreneurs that did a good job of using their business plan to “establish legitimacy” early were more likely to succeed and their businesses tended to last longer.
Not only that, starting the planning process before starting marketing efforts and before talking to customers reduces the likelihood that a business will fail.
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.
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.
Yet another study of 223 companies found that having a plan reduced the likelihood that a business would fail. Having a plan didn’t guarantee success, unfortunately. But, those companies with a plan had better chances of success 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.
About the Author Noah Parsons is the COO of Palo Alto Software
What has your experience with business planning been like? Will you approach the planning process differently in the future? Tell us in the comments below.