Importance of Writing a Good business plan

with Financial Projections

Part A

The business plan along with the financial plan is seemingly an indispensable tool for gaining

access to external financial support. It is no surprise the business plan has gained so much

support in recent years. The business plan helps in clarifying the business idea, the propensity of

the market capital requirements and financial projections thereby providing investors with the

information necessary for making judgments regarding the financial viability of the start-up

(Gately and Cunningham, 2014). One might be tempted to believe that, a business plan is just a

document that is necessary for satisfying the demands of financiers. This is true to some extent

because the production of business plans is greatly influenced by providers of capital such as

banks, venture capitalists and other investors (McCarthy and Leavy, 2000). Financiers need

business plans because of its ability to provide information about the seriousness of the

entrepreneur, his/her regard for investors and competence. Entrepreneurs are therefore required

to prepare a business plan irrespective of their concerns over its link with future results (Gately

and Cunningham, 2014).

Even though entrepreneurs are generally coerced into writing business plans by external

investors, “business plans can serve a number of internal uses. Business plans serve as reference

points and blueprints for ongoing operations. business plans enable the entrepreneur to

understand the level of competition, decide on the markets it want to compete in and paint a

clearer picture of the business concept (George and Book, 2009; Sahlman, 1997). Business plans

force the entrepreneur to develop a “planning mindset” and instill discipline into the thinking and

goal formulation process of entrepreneurs (Kaplan and Warren, 2007).

In addition, the preparation of a precise business plan forces the entrepreneur to conduct a

systematic evaluation of the objectives and goals of the company, its business climate,

alternative causes of action and assets (Kraus et al., 2006; Chwolka and Raith, 2012). The

business plan is an instrument or mechanism for supporting or triggering planning of a strategic

nature. According to Honig (2004) the business plan is “a written document that describes the

current state and the presupposed future of an organisation”.

Moreover, Hormozi et al. (2002: 755) states that “if you don’t know where you are going, any

path will get you there”. This statement strongly suggests that the lack of a business plan can

lead the entrepreneur through a very difficult path. The lack of a plan can be very dangerous

because it can make the entrepreneur to commit significant resources to an unprofitable venture.

The lack of a plan means that the entrepreneur has not taken time to formulate goals and develop

strategies to achieve those goals. Goals and objectives as well as the formulation of strategies can

only be developed effectively if the entrepreneur has a precise business plan in place. Therefore

while a business plan might appear as a document to satisfy the needs of providers of capital, it is

also an important document that can guide the entrepreneur throughout the course of the

business. A business plan is particularly important for start-up businesses because it can be

employed to arrange objectives and goals into an organized format. Hormonzi et al. (2002: 755)

suggests that a business plan is “operating a company on paper”. He goes on to suggest that

business plans are employed by firms to enhance internal procedures as well as providing a

description/marketing of the venture to external financiers (Hormonzi et al., 2002). The

entrepreneur can employ the goals developed during the planning phase as benchmarks for

measuring the extent to which success has been achieved. The entrepreneur can then revise

projections as events unfold. A business plan defines the business and provides an elaboration of
the strategies that the start-up will employ in the current market (Hormonzi et al., 2002). Even

though most entrepreneurs might be apprehensive over the preparation of a business plan, the

advantages associated with a well-structured business plan are unlimited (Arkebauer, 1995).

According to O’Connor, analysing how the business operates on paper first helps in the

identification of risks and development of risk management strategies to deal with real world

consequences. A well structured business plan helps in the communication of the goals of the

organisation throughout the organisation as well as ensuring that the business remains focused on

its goals and objectives (Hormonzi et al., 2002). Following the implementation of the strategies

suggested in the plan, the entrepreneur can employ the plan as a reference point for determining

the degree to which objectives have been attained and areas that require enhancement (Hormozi

et al., 2002). The business plan is a not limited to a start-up instrument. It is rather a working

document that can be employed for the continuous re-evaluation of progress and clarification of

future goals and objectives. Even though, a well thought out business plan does not necessarily

warrant success, it can go an extra mile to diminish the risk of failure (Hormonzi et al., 2002).

Empirical evidence on how the business plan determines business success is mixed. There is no

clear picture of the degree to which start-up businesses are influenced by the presence of a

business plan. However, a few studies show that a business plan contributes to performance. For

example, Orser et al. (2000) argues that a business plan is highly associated with performance

and that a business plan enhances firm growth. A meta-analysis of the contribution of “business

planning to performance suggests that business planning contributes positively to performance

and that the relationship is mitigated by the cultural setting and newness (Brinckmann et al.,

2010).
Delmar and Shane (2003) in an examination of Swedish entrepreneurs provide evidence that a

business plan is important because it contributes to a reduction in the likelihood of failure and

hastens the product development and venture organisation process. Delmar and Shane further

contend that a business plan may be more effective during the start-up phase than during the

maintenance of an existing business. In an examination of 396 entrepreneurs, Honig and

Karlsson (2004) provide evidence that business plans did not enhance performance. Furthermore,

Karlsson and Honig (2009) observe that entrepreneurs who prepared business plans never made

updates or reference to the plans after preparing them. Despite the argument by Honig and

Karlsson (2004); and Karlsson and Honing (2009) Shane and Delmar (2004) provide three

convincing reasons why it is necessary to plan during the start-up phase of a venture. Firstly, a

business plan makes “decision-making” easier by analyzing premises and spotting information

gaps without significant resource commitment. Secondly, planning enables the entrepreneur to

establish a timeline of resource requirements. Thirdly, the establishment of a business plan

enables the entrepreneur to formulate strategies that will foster the achievement of goals as well

as ensuring that the entrepreneur remains focused on those goals. The business plan therefore

serves as a control between budgeted performance and actual performance.

“Financial projections” is an essential element of the business plan. Financial projects are

necessary because the management of resources is essential for success of start-up ventures.

Potentially successful start-ups are often unsuccessful due to inadequate “financial

management”. The incorporation of financial projections in the business plan of start-up ventures

because it determines the extent to which the start-up will be able to generate profit and remain

financially viable. Financial projections help in providing key figures such as anticipated

revenues, expenses, profit sales growth and return on investment (Arkebauer, 1995). Financial
projections generally comprise of the financial statements of the business including the “profit

and loss account”, the “statement of financial position”, “cash flow statement”, “investment

appraisal”, “break-even analysis” and “sensitivity analysis”.

The “income statement” illustrates how level of sales revenue that the business anticipates to

generate based on assumptions regarding the market size (Penman, 2012). It also provides

estimates of the anticipated expenses derived based on assumptions of costs. It helps the business

and potential investors to determine whether the business will be profitable under current

assumptions. The income statement can help the entrepreneur revise revenue and cost estimates

to ensure that the venture is profitable. The “balance sheet” shows the assets and liabilities of the

business. It provides insights into the level of financial leverage that the firm wants to maintain.

The cash flow statement shows the sources and uses of cash. It serves as a measure of the

liquidity of the business. “Break-even analysis” helps the firm to determine the quantity that

must be sold before profit can be made (Arnold, 2008). Sensitivity analysis helps the firm to

determine how changing the assumptions that underlie the figures affect key variables (Arnold,

2008). For example, changing the assumptions regarding the size of the market can have a

significant impact on sales revenue and profitability. Varying cost assumptions can also affect

expenses. In a nutshell, financial projections enable the firm to have a snapshot of the financial

viability of the business and can be used as a tool for making adjustments to assumptions and

predictions before the commitment of resources. The financial statements can also help external

financiers decide on whether the business is viable. Well-articulated financial projections can

therefore enable the firm to raise capital for its new venture.
Part B

Based on the arguments developed in Part A, a number of recommendations can be offered to

entrepreneurs on how to proceed with their business plans. Entrepreneurs need to understand the

business environment properly. An understanding of the business environment will enable them

to understand where there are gaps in the market and as such develop products that help in

bridging those gaps. Such an understanding will enable them to measure the market size and

make adequate sales projections. Considering the case of the entrepreneur who said he was just

making the numbers up, it should be noted that just making the numbers up can harm the

business in the long-run. Even if the numbers enable the entrepreneur to attract much needed

finances, it can be very devastating if the numbers do not reflect the reality on the ground. It is

obvious that business plans often contain forward looking statements which might deviate

significantly from actual results if actual events turnout to differ significantly from expectations.

It is always a good idea to ensure that the numbers are realistic because the numbers will be used

and benchmarks for evaluating the progress of the business in future. However, a business plan

can be used as an early warning tool for entrepreneurs to identify problem areas and make

necessary adjustments well in advance. It should be noted that, it might be very difficult to

reverse once significant resources have been committed to the venture. Taking into account the

case of the second entrepreneur who said he had no idea what the business will be doing in 2-3

years and that it is a function of their future success and market conditions, this paper

recommends that even if an entrepreneur is not aware of what will take place in 2-3 years, it is

still a good idea to develop plans on what the business might be doing. Generally, conducting an

in-depth analysis of the market can enable an entrepreneur to determine with a very high level of

accuracy the direction that the market might take in 2 to 3 years time and as such develop
products that will satisfy the needs of customers in 2 to 3 years. Such an entrepreneur stands a

better chance of succeeding than one who simply depends on how events will unfold. With

respect to the last entrepreneur (Anon) who argues that the numbers are based on a specific

premises and that the property might not be available once finance has been raised, this paper

recommends that when preparing a business plan, the entrepreneur should not focus on a single

course of actions. The business plan should contain “what if” analysis which help in determining

the course of action to take in case things don’t go as anticipated. For example, instead of

focusing on renting or buying a particular property, the entrepreneur should have alternative

properties in mind. At least some of the properties would still be available even if the specific

property has been taken. Therefore, while most entrepreneurs might see a business plan as a

waste of time and resources, it remains an effective planning tool that can help the organisation

develop effective strategies, attract funding and to a greater extent guarantee the success of start-

up ventures.
References

Arkebauer, J. B., 1995. Guide to Writing a High-Impact business plan, New York: McGraw-Hill.
Arnold, G., 2008. Corporate Financial Management, 4th Edition, UK: Prentice Hall.
Brinckmann, J., Gricknick, D., & Kapsa, D., 2010. Should entrepreneurs plan or just storm the
castle? A meta-analysis on contextual factors impacting the business planning performance
relationship in small firms. Journal of Business Venturing, 25:24-40
Chwolka, A., & Raith, M., 2012. The value of “business planning before start-up - A decision-
theoretical perspective. Journal of Business Venturing, 27, 385-399.
Delmar, F., & Shane, S. 2004. Legitimating first: Organizing activities and the survival of new
ventures. Journal of Business Venturing, 19, 385–410.
Delmar, F., & Shane, S., 2003. Does business planning facilitate the development of new
ventures? Strategic Management Journal, 24, 1165-1185.
Gately, C., Cunningham, J., 2014. The Contributions and Disconnections Between Writing a business
plan and The Start-up Process for Incubator Technology Entrepreneurs In Academic Entrepreneurship:
Creating an Entrepreneurial Ecosystem. Advances in Entrepreneurship, Firm Emergence and Growth, 16:
197-241.

George, G., & Bock, A., 2009. The practice of business models and its implications for
entrepreneurship research. Unpublished paper, Imperial College, London Business School,
London.
Honig, B., & Karlsson, T., 2004. Institutional forces and the written business plan. Journal of
Management, 30(1), 29-48.
Honig, B., 2004. Entrepreneurship education: Toward a model of contingency-based business
planning. Academy of Management Learning and Education, 3(3), 258-273.
Hormozi, A. M., Sutton, G. S., McMinn, R. D., Lucio, W., 2002. Business plans for new or small
businesses: paving the path to success. Management Decision, 40(8):755-763.

Kaplan, J. M., & Warren, A. C., 2007. Patterns of entrepreneurship (2nd ed.). Hoboken, NJ:
Wiley.
Karlsson, T., & Honig, B., 2009. Judging a business by its cover: An institutional perspective on
new ventures and the business plan. Journal of Business Venturing, 24(1), 27-45.
Kraus, S., Harms, R., & Schwarz, E. J., 2006. Strategic planning in smaller enterprises- New
empirical findings. Management Research News, 29(6), 334-344.
McCarthy, B., & Leavy, B., 2000. Phases in the strategy formation process: An exploratory
study of Irish SMEs. IBAR - Journal of the Irish Academy of Management, 21(2), 55.
Orser, B. J., Hogarth-Scott, S., Riding, A. L., 2000. Performance, Firm Size, and Management
Problem Solving. Journal of Small Business Management, 38(4): 42-58.
Penman, S., 2012. Financial Statement Analysis and Securities Valuation. 5th Edition.
Irwin:McGraw-Hill.
Sahlman, W. A., 1997. How to write a great business plan. Harvard Business Review, 75(4), 99-
110.