Interview: Andrew Burke
Effective Business Planning
Steve Macaulay
Today we are going to look at the subject of business planning and
we are going to consider three important areas. The first one is do
they add value? And secondly, should everyone be doing a
business plan, if they do indeed add value? And then lastly, what
are the practicalities of putting together a successful business plan?
Are there some dos and don’ts? Are there things that if you are to
make a success of business planning that you need to consider?
Now, we are fortunate in having in the studio somebody with a
wealth of experience in this area and that is Professor Andrew
Burke. Now, Andrew, let’s pick this first key one – do business
plans add value? Lots of people say to me there are some
successful businesses that have nowhere near a business plan.
Andrew Burke
Well that is absolutely true and in fact that is the basis for the big
controversy as to whether business plans add value or not. We
have done some research with Stuart Fraser and Francis Green of
Warwick University and what we have basically found is that
typically the best ventures don’t select or don’t choose to write
business plans. What this can mean at a statistical level, it can
mean that business planning can look like a bad thing. But if you
control for this selection effect, what you find is that business plans
actually add a lot of value to the businesses that choose to write
them, including high quality ventures and these effects are quite
dramatic. What we find is that growth in the venture is increased
by a factor of around 30% as a result of writing business plans.
Steve Macaulay
So if that is the case then, should everybody have a business plan
even if statistically at the margins there might be some that don’t
need them?
Andrew Burke
Well, business planning doesn’t come free – it is a time consuming
exercise and I think any business has to weigh up the value that is
generated from spending time writing a business plan versus an
alternative. An alternative might be to just simply go out and try
and sell the product to a number of firms and see what response
you get back. The information you might get back from that
exercise might be far more valuable than writing a business plan.
Steve Macaulay
So let’s look at what makes a successful business plan because I
guess one of the things that is coming out of your research and
experience are some key characteristics?
Andrew Burke
Andrew Burke
Well based on our experience, the key thing is not necessarily just
having a business plan, it is really what type of business plan that
you actually have.
If we take the fact that most businesses fail within five years of
start up and yet virtually every business plan has at least five years
of financial projections then it tells you that a surviving or high
performing business must be unique. And I think one of the key
things therefore in relation to a business, is that a business plan
must identify that fact and must deliver its knock-out punch right
from the start. If it doesn’t do that in the executive summary then
it is likely not even to get read.
Another key point in relation to business plans is really what the
reader can glean about the lead entrepreneurs. A major put off in
a business plan is where it becomes apparent that the business
plan is being written by somebody who has remained behind a
computer for the entire exercise. So what people like to see is that
instead of just having industry reports and analysis in terms of
identifying markets, what they like to see is that the entrepreneur
has actually gone out and talked to customers, has perhaps tried to
sell their product or service, and based on that they have derived
information that can give them an indication of what their sales
are.
So statements to the effect that we only need 2% of the market
without any benchmarking or without any feedback from
customers is normally a major put off.
One of the other things that particularly investors will focus on is
whether there is a connect between the verbal part of the business
plan and the financial part. If there is no connect between the two
it usually tells you that there was an area of fantasy in at least one
of those parts – usually in the financials. People often think that in
terms of the financials, that readers would like to see lots of
analysis and financial acrobatics and so on. What people really
focus in on are not the formulae, but actually the assumptions
going into the formulae.
So what they are really looking for is, are these revenues accurate?
So in relation to that, are these prices justifiable? In terms of the
volume of sales, are these realistic? Are there other businesses
like this one that have delivered similar sales? Are the costs
accurate? And again, it comes back to that aspect of whether the
person has got beyond sitting behind a computer terminal. So, in
terms of the cost, do they know the industry? Have they gone out
there and talked to people and got a really good handle in terms of
what it is going to cost in terms of delivering this product or service
and back again in relation to the revenues? Have they talked to
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Andrew Burke
customers? Have they actually got orders already in place or ready
to go?
Steve Macaulay
So if you looked at a successful business plan, it would have these
key characteristics; if you were to summarise – we started off by
saying do business plans add value and your answer would be very
much, yes, but … and that is the key thing, it needs to have certain
key characteristics. So if you were to summarise what they are,
what would they be?
Andrew Burke
Well I think the key thing here is – and this goes back to the
research – it depends what you are writing the business plan for
and what the context of your business is. So undoubtedly if you
are trying to raise finance then it is a complete no brainer; you
absolutely need a business plan and given that you are going to be
pitching it to people who are quite expert in looking at business
plans, it needs to be an extremely good business plan in order to
achieve its value.
On the other hand, you might be launching a product or service in a
very uncertain market where even after doing lots of analysis and
so on, the uncertainty still remains and really the only real way to
go out and test the viability is to actually go out and try and sell it –
sell the product or service. And in that situation you might be
better off spending a week or two doing that rather than a week or
two putting together a paper plan.
Steve Macaulay
Andrew, some very practical points there. Thank you very much.
Andrew Burke
Thank you.
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