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Strength And Weakness Of Business Planning From Various Perspectives

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Strength And Weakness Of Business Planning From Various Perspectives

ENTREPRENEURS PERSPECTIVE

There are numerous instances where it has been said that an entrepreneur needs a business plan compulsorily which has also turned out to be not so true in many cases. Regardless of what a commoner would say, lets see how it is from an entrepreneurs perspective. According to a study, most successful entrepreneurs have a few traits in common like flexibility with uncertainty, being focused and skill to execute, right delegation and detailed orientation (Khosla, A., & Gupta, P. 2017). An entrepreneur knows his way and has things planned on its path but is always ready for the uncertain. Entrepreneurs in this day and age are able to run their start-ups much more successfully than many MNCs are able to. There are multiple companies getting inspired by the way new age entrepreneurs run their business and are trying to implement their ways into it. On multiple accounts it has been seen how entrepreneurs have outperformed the industry and their own expectations and had to deviate from the plan to make a new one (regardless of the fact they had a rigid plan in place but were flexible enough). Lets take Elon Musk for example, SpaceX which is one of his space research and mission companies carried out more than 6 failed launch attempts after making a successful one. The same was seen with Tesla which is also a company operated by Elon Musk. It is rightly said by him When something is important enough, you do it even if the odds are not in your favour (Timeline, 2019). The reason for mentioning the above example is despite of an entrepreneur like him who is usually with plans to run companies involving space missions there were uncertainties on the way, the company found alternatives and ways out of it to eventually succeed. Industry leaders like NASA and automobile industry leaders like Volkswagen and group have taken notice of Elons company making remarkable achievements despite of not having even half of their funds comparatively.

As an entrepreneur a person not only sees why a plan is important but remains flexible enough to amend it if required. An entrepreneur would look for all perspectives in a business plan.

The strengths to look for: He would look for things that include the roadmap of where a company would be in coming years including its market potential. Entrepreneurs are often said to be less planned regarding the future of their company and are known to make sudden decisions. There is obviously a reason why entrepreneurship is booming even in countries like UK. More than 6,60,000 companies were established in UK along in 2016 (Ft.com, 2019). Ways of an entrepreneur are being adopted and they are not abrupt but only flexible and adjustable. In a business plan an entrepreneur would like to see back up schemes and things to fall back on to turn their market threats into opportunities and exploit them to full potential. Apart from that an entrepreneur would be open to ideas of loan if it is a start-up as they would have already looked at plans and its possibility of working out despite of the odds. Other thing that would be important for an entrepreneur would be the product and its marketing strategy. A roadmap for the chain of events wont be enough if it does not include the ideas for the product development as well a its marketing strategies. There have been times when entrepreneurs were successful in promoting a product with minor potential but only through marketing for example the Febreze from P&G which is a room spray launched around 1990s but faced failure in the market until they had an interview with a woman who mentioned how using Febreze was like a reward to her after cleaning the room which eventually gave the idea to the company to place it differently to people and in a matter of a few months of marketing videos showing using their product is like a reward on cleaning the sales shot up (Duhigg, 2019).

The weakness: There have been multiple times where the whole concept of a business plan has been argued but there is no denying doing anything with a plan is better than no plan at all. In case of a business plan, an entrepreneur might be abrupt (situationally) but tends to have a plan on the table ready. The weakness of a business plan as an entrepreneur would lie within the rigidity of the plan. Multiple other aspects like the finances are often under or overestimated in business plans created by lean start-ups. Other costs like customer acquisition cost as well as service costs are not forecasted very well in business plans (Kuratko and Hoskinson, 2017). Lets take Sean Hackney (founder of Roaring Lion energy drink) as an example, he had a business plan to sell but no plan to start a business. When he started his business with his partners, he did not forecast the financials for expansion nor for the marketing budget (Henricks, 2019). Now upon being asked he stated that he would make a plan with better forecasts and much more detailed alternatives and marketing plans. As an entrepreneur you would not want your product to fail and a business plan makes a person stick to its roadmap and rigidity which basically leads to him not taking alternative steps. With no alternative in mind and with a rigid structure the product and the company may not succeed as well it was expected to and, in some cases, turns out to be a disaster.

VENTURE CAPITALIST (VC)

A venture capitalist is typically a person who is looking to invest capital in a firm that can achieve greater heights in exchange of equity stakes. The firms could be start-ups in which they invest for much higher returns in the near future (Investopedia, 2019). Every year thousands of entrepreneurs submit their business plan to multiple venture capitalists for funding (Petty and Gruber, 2009 as cited in Marija S imic, 2015). Empirical research indicated that out of every 100 business plans received more than half are rejected within initial 20-30 minutes of viewing as something very essential is missing (Albers, 2006 as cited in Marija S imic, 2015). With the criteria not being satisfactory, 60% are rejected in first phase, 40% are given a go ahead with more 25% being rejected and only 15% go through a deep research with only 5% being suitable for investment (Albers, 2006; Hudson and Ev- ans, 2005; Metrick and Yasuda, 2011; Norton, 1995; Visagie, 2011 as cited in Marija S imic, 2015). As a Venture Capitalist there are multiple things to look for in a business plan including management of the firm if a VC decides to invest who holds the authority? What would be the returns on the investment? Is any equity mentioned or included in the business plan? Does the VC account for majority or minor ownership? And what are future plans after the launch of the product. A VC typically plays more role than being a mere investor in a business. As a VC if an investment has to be made in big sums, they would look for returns which account for at least 40% profit (Editors, 2019). As mentioned in the previous segment how a business plan can never be 100% certain with what the business holds for the future of the owners or the investors a VC would secure his position in some or the other way. While assessing a business plan as a VC one would look at the section which talks about the market size of their product meaning who are they selling to? With the perks that comes with business planning a VC can easily have a look at the figures and compare them with facts which the larger the better. With all the metrics presented in the business plan a venture capitalist can draw conclusions or at least assumptions on how the company would perform in sales as well as in its future market valuations. With all the arguments being studied around about how an entrepreneur can start a business without a business plan, as a VC one would not like that as there are multiple conditions as stated above which needs to be declared beforehand and not after the investment is made.

The weakness of the plan may lie within the financial and market forecasts of the company which usually consists of a small sample size (if the product is tested). The figures in the business plan are hypothetical and a company may or may not achieve the figures which means as a VC one has to risk their investment in something that will be eventually uncertain unless the entrepreneur who pitched the idea of the business is good at doing and implementing what he/she states. As a VC one would like to look for forecasts that are realistic and which give an eventual and substantial for the money that he/she invests. The whole concept of investing in someones company revolves around the returns that it would give out. The rewards can be in sales figures or the coverage of the company in the market which would lead to increasing the market valuation of the company. Market valuation of the company would hold great importance for a VC as one may decide to walk out of the company as an investors by selling their equity or ownership in the company against cash in order to recover the money being invested in the company or simply for profits when a VC does not see future with the company anymore. There are times when a VC gets involved in the decision-making process or trading process of a company whenever required so in a business plan a VC would want to look at those terms and conditions in depth as well.

It can be concluded saying that a VC would look for passion and interest in an entrepreneur to take the business ahead as a VC himself/herself is an individual who would understand how a person wants to take their idea ahead but at the same he/she would look for returns against their investment and they have to be maximised and well planned with a guaranteed and marginal ROI.

A BANKS PERSPECTIVE

A bank becomes one of the default choices for loan for a start-ups business plan for entrepreneurs in a lot of cases. Starting with looking at statistics the loan rejection rate in the UK for businesses went from 27% in 2010 to 33% in 2013 and had a steep fall to 19% in 2014 with the same trend continuing which shows the banks have opened up with more schemes and confidence in new business ventures in the past 7 years; but despite of the fact that loan approvals are increasing it cant be ignored that there was a huge sum of 110 billion British Pounds outstanding on companies that took loan for sole purpose of real estate and professional service based businesses (Statista, 2019). As a bank the revenue largely depends on loaning and investment banking overall. The above figures show improvement in loan approval rate, but it should also be considered there are huge debts on the banks as well if the company goes bankrupt and does not succeeds as the plan that was presented to the bank. There are multiple factors that are looked after when a bank is willing or not willing to approve loan for a start-ups firm. As a banking authority one would look for guarantee of repayment which will be passively linked to other factors like the product, the market, the marketing of the product, management and assets held by the firm. As a bank authority one would expect to see the background of the founders and the management team of the company that is asking for investment. This is a law and a regulation that a bank has to abide by. This means regardless of a persons confidence in a business idea the loan might get rejected if sufficient data about the business founders background is not provided. Along with the fully structured plan and forecast (financial and market) the tax credit history is checked which also has to be mentioned in the business plan as well as the application provided. Recovery of the loan is kept in mind as a bank which means there might be times (situational) where a person can be asked for a guarantor or to show his/her assets which act as collateral which can be later released. No wonder it was a nightmare for a person to have a defaulted loan or bad credit history or a failed business in the past in the UK and to ask for loan above that which eventually led to rejection. There are special mentions of the forms asking for past credit and tax records for anyone applying for a business loan. As a bank another thing to be asked for would be insurance on the business. When allowing loans to small SMEs there always remains a high risk or damage on the goods or the business going bankrupt itself. If an insurance company is involved to insure the goods, the banks remain assured that the owner can at least recover the amount of the goods with the insurance and can either re-open his/her business or use that money to clear his debts with the banks. As a banker pressure of analysing a business plan more in depth compared to other types of investors remains on the bank as there are not only two parties involved but the whole functioning of the bank and its revenue system is usually dependent on investment banking from which the generated revenue (the interests) are utilised back by the bank to offer other services. The plan unlike in other cases needs to be more rigid and firm than when they are presented to other investors as multiple authorities are assigned to go through it which includes a panel of not one but multiple people.

We can conclude saying that as a banker, one might look at bank loans as the harder way of getting an investment, but it comes with its perks and systematic behaviour as well. There are more formalities and terms and condition while submitting a business plan to a bank than to other investors but it sometimes is also more easier if the business has potential and all risks safeguarded.

BIBLIOGRAPHY

  1. Albers, J. (2006), Do You Have an Investable Business Case? Your Story Versus What VCs Really Want to Hear, Excell Partners, Inc., New York, pp. 1-12, Available at: http://preseedworkshop.com/docu- ments/PDF-WP3-InvestableBusCase-092506F.pdf [Accessed 2 May 2019].
  2. Duhigg, C. (2019). How Companies Learn Your Secrets. [online] Nytimes.com. Available at: https://www.nytimes.com/2012/02/19/magazine/shopping-habits.html?_r=1&pagewanted=all&pagewanted=print [Accessed 2 May 2019].
  3. Editors, A. (2019). What Do Venture Capitalists Look For? | AllBusiness.com. [online] AllBusiness.com. Available at: https://www.allbusiness.com/what-do-venture-capitalists-look-for-454-1.html [Accessed 28 April 2019].
  4. Ft.com. (2019). Number of UK start-ups rises to new record | Financial Times. [online] Available at: https://www.ft.com/content/cb56d86c-88d6-11e7-afd2-74b8ecd34d3b [Accessed 2 May 2019].
  5. Henricks, M. (2019). Do You Really Need a Business Plan?. [online] Entrepreneur. Available at: https://www.entrepreneur.com/article/198618 [Accessed 1 May 2019].
  6. Khosla, A., & Gupta, P. (2017, Summer). Traits of successful entrepreneurs. Journal of Private Equity, 20(3), 12+. Retrieved from http://link.galegroup.com/apps/doc/A503262296/ITOF?u=livuni&sid=ITOF&xid=e9b91df9 [Accessed 2 May 2019].
  7. Investopedia. (2019). Venture Capitalist (VC) Definition. [online] Available at: https://www.investopedia.com/terms/v/venturecapitalist.asp [Accessed 25 April 2019].
  8. Kuratko, D. and Hoskinson, S. (2017). The great debates in entrepreneurship. Bingley, UK: Emerald Publishing Limited, pp.21-32.
  9. Lehavi, D 2017, Business Partnership Essentials : A Step-By-Step Action Plan for Succeeding in Business with a Partner, 2nd Edition, DEG Press, Boston. Available from: ProQuest Ebook Central [Accessed 2 May 2019].
  10. Marija `imi (2015) Investment Criteria Set by Venture Capitalists, Ekonomski Vjesnik, (2), p. 457. Available at: https://search-ebscohost-com.liverpool.idm.oclc.org/login.aspx?direct=true&db=edsdoj&AN=edsdoj.9eb43d14112f4a58850dee94221cc74e&site=eds-live&scope=site [Accessed 2 May 2019].
  11. OECD. n.d. Small and medium enterprises loan rejection rates in the United Kingdom (UK) from 2010 to 2016. Statista. Accessed May 12, 2019. Available from https://www-statista-com.liverpool.idm.oclc.org/statistics/461659/smes-rejections-loans-united-kingdom/ [Accessed 2 May 2019].
  12. Petty, J. S., Gruber, M. (2009), In pursuit of the real deal: A longitudinal study of VC decision making, Journal of Business Venturing. Vol. 26, No. 2, pp. 172-188.
  13. UK Finance. n.d. Total value of business loans outstanding in the United Kingdom (UK) as of July 2018, by sector (in billion GBP). Statista. Available from https://www-statista-com.liverpool.idm.oclc.org/statistics/912024/amount-outstanding-in-business-lending-in-the-united-kingdom-by-sector/ [Accessed 2 May 2019].
  14. Xiao-Ping Chen, Xin Yao and Suresh Kotha (2009) Entrepreneur Passion and Preparedness in Business Plan Presentations: A Persuasion Analysis of Venture Capitalists Funding Decisions, The Academy of Management Journal, 52(1), p. 199. Available at: https://search-ebscohost-com.liverpool.idm.oclc.org/login.aspx?direct=true&db=edsjsr&AN=edsjsr.40390282&site=eds-live&scope=site [Accessed 2 May 2019].
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