Is the Business Plan really Dead:- Several articles published in recent years have asked this question: “Is the business plan dead? “ Claude Ananou, professor in charge of HEC Montreal’s “Successful Business Startup” course, challenges in various interviews the interest of the business plan at the initial reflection stage of the business creation project. However, he does not question overall the interest of the business plan.
The Business Plan is not Adapted to the Stage of Reflection
At the initial thinking stage, the entrepreneur’s priority is to precisely define the need that is not or poorly satisfied and validate his intuition on how to answer it, his fundamental questions are about the “What” and not yet on the “how”. The personality of the creator, his career, and his intuitions take precedence at this stage to inspire confidence. He multiplies the field contacts to confirm his intuitions. The company does not yet have a structured organization or action plan, the income model is usually not yet finalized. The creator raises funds from friends or family; there is no question of investors or lenders. At this point, the business plan is not yet in place.
However, from the moment the idea turns into a project, that the creator plans to invest, to recruit, investors and lenders will require some visibility, they will not bring funds without justification of the need for funding or prospects return on investment or repayment capacity. They will want to evaluate the credibility of the turnover forecasts, the concrete and convincing nature of the operational action plans, will want to make sure that the risks have been correctly apprehended, The ease of access to data through the Internet and social networks (business plan 2.0) does not change the nature of the information to be included in the business plan.
The Business Plan is not a Fixed tool
Some liken the business plan to the statist planning approach as practiced, particularly by the former Soviet Union. The objectives of planning were an intangible goal that had to be respected at all costs, even if it meant making products that nobody wanted. Nothing is further from reality than this caricatural vision:
- Some groups require project promoters to systematically propose in their business plan one or more alternatives to carry out their project: rate of realization of the investments, comparisons of the alternatives: to make or to make do, choice of production, logistics, etc. These alternatives demonstrate the agility of the business owner. This one presents the advantages and disadvantages of the different alternatives and takes advantage for one of them. He prepares to argue his choices during the oral presentation. The business plan also describes how the company plans to organize itself in different revenue assumptions: high, medium and low.
- The forecasts in the business plan will obviously not be realized in their entirety! However, it makes it possible to define a forecasting method, once this method is established and the field information sources defined, the encrypted data will be much more easily updated.
- The development of forecasts leads to the construction of the financial model of the project, usually on a spreadsheet. This model lends itself to the simulation of different hypotheses (sensitivity analysis, scenarios), provided that the parameters of the project are sufficiently chained together.
- The business plan is not only a tool for project selection but also for steering. It does not only define the operational action plans in the launch phase but also throughout the life of the project:
- If this level of activity is reached at N + 3, a new investment tranche is realized;
- If this level is not reached, the cessation of exploitation is envisaged.
The business plan is reviewed at regular intervals, the achievements replace the forecasts, the forecasts are updated, which makes it possible to envisage future action plans.
Ultimately, the study of alternatives to carry out the project, the sensitivity analysis, and the definition of different scenarios is part of an “agile” approach allowing the entrepreneur to tame uncertainty: he thinks in advance how he will adapt to different market conditions.
A Wide Variety of Business Plans
No, the business plan is not dead, companies are increasingly relying their important decisions on the conclusions of a business plan. The diagram below illustrates the different types of business plans.
The Medium-term Strategic Plan (MT)
The management committee of the company meets to update its vision of the market: what are the main trends observable in the market 3-5 years? It reviews the positioning of the future company and deduces its main strategic and operational objectives over this period. These are then distributed with more or less detail throughout the company. The strategic plan at MT is often less detailed than a business plan in terms of operational action plans, the turnover figures; it aims above all to define major orientations with key figures.
- The Project Business Plan
The various project promoters formalize the latter to submit for the approval of the investment selection committee, commercial or non-commercial projects within the framework of a limited investment budget. This is usually to convince on the following 3 big questions:
- Is the project consistent with the company’s strategy, contributing to the achievement of the major strategic objectives communicated by management (strategic alignment)?
- Are the action plans well-defined, timed and coherent?
- Is the project economically viable given credible investment assumptions, expenses and revenues? In the project business plan, the mode of financing is most often not mentioned, except for extremely high amount, only economic profitability.
This is undoubtedly the most common case of developing business plans. More and more, the selection procedure is followed by a business plan monitoring procedure that makes this document a real project management tool. The business plan describes in advance the main operational action plans defined according to the development assumptions.
- The Financial Business Plan
It covers the entire company and aims to implement the financing and / or the valuation of the company. The central document of the financial part of the business plan is the financing plan at MLT. It tracks funding requirements year by year and is used by the CFO to implement financing, assess repayment capacity and pay dividends. The financing plan is followed by the balance sheet and ratios to assess compliance with financial equilibrium and investor profitability.
Any valuation report includes a valuation based on the company’s future cash flow (DCF). In order to value the company according to this method, the investment (FTI) and operating cash flows (FTE) are taken into account. This is the only method applicable for a company at the creation stage or having strong development prospects for which the heritage methods or comparable are not usable. The valuation by the future flows is inseparable from the business plan because it describes the assumptions of investment, of expenses, of income making it possible to value them.
- The Business Plan
It deals with a commercial contract that generates multi-year cash flows in which the supplier commits first to invest on behalf of his client. Thus, an automotive supplier to whom his client asks to develop a new part begins with incurring development costs, making a prototype, investing in a production line,
The supplier includes in his financial model the assumptions of investments, operating expenses, units sold. Before the negotiation, he evaluates the desired selling price from his internal rate of return (IRR of the case); he can use for this the spreadsheet tool “target value”
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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