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Frank Farwell

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Should You Burn Your Business Plan?

Posted: 01/11/12 02:40 PM ET

Are you kidding--burn your beloved business plan? The one with all the stunning projections and detailed footnotes that you spent weeks tweaking and polishing? The one that's going to make your financial and self-employment dreams come true? The one full of rosy forecasts that makes you feel like a successful entrepreneur already?

Well, get a grip. Take a deep breath...and burn it in the fireplace, recycle it with this week's trash, or deep-six it in the back of a storage closet. You'll probably be doing yourself a favor. Let me explain why:

Most entrepreneurs tend to start with a way-too-detailed and way-too-overconfident plan, and then toss it by the wayside when hit by the daily rigors of keeping a small business start-up alive. They realize the plan has become immediately outdated, there is no time to update it, so it is conveniently set aside. Quarterly financial statements are about the best they can hope for--if there's time.

The smarter thing to do is the reverse of the above scenario: Write a one- or two-page business plan and then set out cautiously, on a small scale, to build your infant enterprise. Then, every month, start fleshing out the detail of a full-fledged business plan: monthly and annual projections of sales, costs, and profit or loss, statements of cash flows, as well as a balance sheet and statements of profit and loss, capital investment needed, and so forth. You'll end up with something quite useful, rather than a thick ream of fiction that serves no useful purpose, other than to make you look legitimate to prospective bankers and investors (who, unless they've actually started a business, may not realize it's all fiction anyway).

So if you've already started building a dreamy business plan, start over by shelving (or burning) it and then rewriting it into one page. Then start your neophyte business. As things develop, and reality shows its imperfect and unpredictable face, you can slowly enlarge your projections based on real costs and real sales data. What you'll end up with is a business plan that will continually evolve in lockstep with reality--not with assumptions that can't possibly take into account the unforeseen obstacles in the months and years ahead.

Look at it this way: When you buy a road map you are seeking the expertise of surveyors and professional map makers who have already been where you want to go. This makes your trip easier, saving you time and money. Unfortunately, your business plan can't possibly do that because you haven't been there yet, and virtually no one else has either. So at best, it is a series of educated guesses. Once you have real-life data in hand, however, you can tighten it up in a hurry.

Consider this: One day in 1983 I was a young, hungry entrepreneur and went to see a local venture capital firm in Madison, Wisconsin. One of the partners, Bob Beach, had read my business plan and called to say he wanted to talk. Excited, I scurried to his office the next day. Once I was seated he asked me a question I hadn't expected.

"See that trash can over there?" he asked.

I froze, suddenly anticipating epic embarrassment.

"Throw those projections in," he said.

My head slowly turned towards the trash can. Was this guy serious? Was my business plan that I proudly clutched in my sweaty hands really that bad?

As I turned my head back to face him, I saw the sliver of a smile on his face.

"Look," Bob said, with a little more empathy. "Sure you've got a promising product. But any idiot with a spreadsheet program can work up projections like these. There's no way you are going to grow this fast and still be profitable. Too many things can happen. Take this business plan back and shrink it into realistic numbers you know you can beat for sure. That way you won't disappoint your bank or future investors."

It was a gold-plated lesson. I didn't have to throw my booklet of projections in the trash can, and I was given a chance to rework them and make my presentation again. Bob and I eventually became friends and he served on my board of advisers. My company went on to make the INC. 500 three years in a row and was substantially profitable along the way. It was successfully sold a few years later. Much of the credit goes to the threat of that trash can and the great advice that went with it.

In the years following the sale of my company I became a private investor and occasional small business consultant. One day in the mid-1990's a young couple brought me a business plan about 100 pages thick outlining a company of their dreams: selling sporting equipment for young families with kids. The plan was impressive. The wife had an M.B.A. and J.D. degree from nearby University of Wisconsin, and her husband, a C.P.A., was a capable operations man. They could have conceived and run a great company together.

The wife was still pulling down a large salary at a regional law firm, but was anxious to walk on entrepreneurial waters. The husband still held a very respectable daytime job, but loved the outdoors and was itching to work with their product line.

I looked over the plan, looked up at them both quietly, and thought whether or not I should tell them the truth: "See that trash can over there...?"

It was close, but I uttered something more polite: "This is a really impressive business plan. In fact, it may be the best I have ever seen. However, just because you have crafted all these spreadsheets and charts, what makes you think this dream is going to come true? There will be employees to deal with, manufacturers to work with, and customers who must be cultivated. Besides, and most importantly, how do you know this stuff will selll? Trust me--a whole lot of things can go very wrong..."

They looked at me with thinly-disguised disdain. I was throwing cold water on their dream. Shame on me. They listened politely, paid me, and then excused themselves from my office "...for another appointment." I never heard from them again.

I did hear, however, that their company never got off the ground. I suppose they had to re-think the product line, or give it all up and go back to salaried jobs. Who knows.

I do know that about 95% of start-ups fail within the first 10 years, according to Small Business Administration statistics. The surviving 5 percent are one tough and resilient bunch, used to licking their wounds and getting up off the mat to fight another day, tweaking their dreams, products, marketing and operations as they go along. Little did they know in the beginning that building a business from scratch would be just like the labyrinth of life: there are unexpected dead ends that must be dealt with. That's just the way reality is.

Which brings us back to what I was saying about maybe burning your business plan. You will never know where the entrepreneurial labyrinth will take you, so save your long, detailed business plan effort for after you actually start selling your product, when sales, costs and circumstances are real, not imagined or projected. You'll save yourself a lot of time and trouble, and the numbers you input will then serve you well.

These numbers can build an increasingly valuable database of where you've been, and will help you precisely navigate where you wish to go. They'll help you achieve more, at less expense, during your next selling season, next quarter, and next year. These captured numbers will be constellations that you can reliably steer by as you sail treacherous entrepreneurs' seas. If you pay sharp attention to detail, and what the numbers are telling you, you may become one of the elite 5 percent whose start-ups survive--and maybe even prosper beyond your original dreams.

I tell the full story of business plans and the venture capitalist's trash can in Chapter 10 of my book, Chicken Lips, Wheeler-Dealer, and the Beady-Eyed M.B.A.: An Entrepreneur's Wild Adventures on the New Silk Road.

Frank Farwell is founder and past president of the WinterSilks catalog. His book, "Chicken Lips, Wheeler-Dealer, and the Beady-Eyed M.B.A.: An Entrepreneur's Wild Adventures on the New Silk Road," details his experiences as a start-up entrepreneur, and was nominated for the Financial Times/Goldman Sachs Best Business Book of the Year Award. Its Appendix lists the attributes of an ideal product; the book is available from Amazon, or frankfarwell.com.