PRE-START-UP PREPARATIONS: WHY THE BUSINESS PLAN ISN’T ALWAYS WRITTEN Edward D. Bewayo, Montclair State University
ABSTRACT Probably the best way to prepare for a business start-up is to formulate a business plan. However, only a small fraction of entrepreneurs start out with business plans. This paper summarizes the findings of a study covering 355 small business owners in New Jersey who were interviewed by senior undergraduate students on the activities they undertook in preparation for new business launches. Fifty percent of the 355 business owners interviewed claimed to have prepared business plans for their start-ups. This particularly high percentage is explained in the paper. The study found that preparing business plans correlated with the usage of external financing and that bank loans mostly went to business owners with business plans. However, a large majority of the business owners who had prepared business plans had found their business plans to be useful more as guidelines for operating their businesses than as tools for raising business funds. The most important reasons for not preparing business plans were not having to use bank financing and being highly experienced in the entrepreneurs’ lines of business. Fifty percent of business owners with industry/business experience didn’t prepare business plans, and frequently saw their experience to be a substitute for business plans. However, the other half of business owners with business experience did prepare business plans. The interviewed business owners, even when they didn’t prepare business plans, undertook a variety of market-related non-documented activities, especially investigating the competition. These non-documented pre-start-up activities are often referred to as intuitive planning. INTRODUCTION Herman Holtz (1994) pointed out “that everyone talks about the need for a business plan but most people starting … small businesses …do nothing about it.” There doesn’t appear to be any person who has systematically determined the percentage of entrepreneurs who start out with business plans. Available estimates have tended to relate to strategic plans for ongoing small businesses. See, for example, Rue and Ibrahim (1998; Karger, 1996; Mazzarol, 2001; Sexton & Van Auken, 1985). As far as new small businesses go, Siropolis (1997) guess-estimated that only about 5% of them start out with business plans.There are many reasons why most start-up entrepreneurs do not write business plans. One common reason is the view that business plans are The Entrepreneurial Executive, Volume 15, 2010
intended only for raising business funds, implying therefore that if an entrepreneur doesn’t need external financing, there is no need to prepare a business plan. Although existing literature doesn’t seem to support the view that business plans are written exclusively for raising business funds, there is some support for the view that the single most important reason for writing business plans is to attract external financing (Kaplan & Warren, 2007). However, according to Zimmerer & Scarborough (1996) and Ford, Bornstein & Pruitt (2007), the first and foremost purpose of business plans is to provide guidelines for successfully managing a business. Raising capital is a secondary purpose. Another common reason why most entrepreneurs do not write business plans is what David Bangs (1993) called the “Man of Action Problem”, the preference for doing things instead of thinking about them or even writing about them. This view about business plans reflects the ”Just Do It” philosophy, made popular by entertainer-turned entrepreneur, Wally “Famous” Amos (1999). He argued that formal business plans take too much time and require too much skill. Moreover, the analysis that goes into business plans may predict negative outcomes. Such outcomes could prevent the would-be entrepreneur from actually becoming one. Mazzarol (2001) has distinguished between formal business plans and...