For me, the answer is a definite “YES”; you really need to create a business plan before you launch your business. Let’s begin with why you should have a business plan. The answer is very simple, if you want your new business to succeed (which we all do), then going through the business planning process is what you need to do! Failure rates for new businesses in the first year are in the neighborhood of 25%. Take into account the fact that many people start a sole proprietorship and simply cease operations without notifying anyone and this failure figure could be as high as 40% in the first year! In addition, national statistics on failure rates of business say that on an average only about 43% of business start ups make it throught the third year of operation. In an article that appeared in Business Week Small Business titled “The Bottom Line on Startup Failures” (March 4, 2002) there was the following quote:
“Clearly business planning plays an integral part of success. We studied firms that had developed a business plan at the outset, and found that 85% were still in business after three years. I think that fact speaks for itself!”
Creating a business plan prior to launching your business makes it easier to get through the critical first year of operation. This first year is when businesses have the highest failure rate. This is really the first major reason why you should write a business plan.
The second major reason for writing a business plan is that by going through the process you will gain either much needed confidence that your business idea is a good one, or you will find out in the planning process that your business will not work and you shouldn’t start the business. Either way it is a very good thing. I have taught a formal three credit business plan class three to five times a year for the last ten years. In each class an interesting thing happens about the third through the fifth week (normally this is a ten week class). During this time period anywhere between 10% and 25% of the students change their business idea and start creating a plan for a different business! The first time this happened I was pretty amazed. But when it happened semester after semester it really floored me. For me, there is a direct correlation between people who change their business idea during the planning process and first year business failures! If you want to make sure your business will succeed prior to launching create a simple business plan ahead of time; the business plan process really helps guarantee success and it proves to you that you are starting the right business.
Look for part 2 of this topic in a later blog post. Remember, if you have a question you want to ask me on starting a new business, just e-mail me at firstname.lastname@example.org.