When Joanna Elkayam was laid off from a job selling bonds at Fidelity Investments in 2011, she had been working on a business plan for months. She wanted to open a spa with her husband, Avi, who already owned a successful hair salon.
“I got my MBA from Boston University in 2008 and followed all the rules for writing that plan,” Elkayam said. “I even used my old textbooks. I wanted to get it right, especially because we needed to get a loan from our credit union, which had just started a loan program for startups.”
The 150-page plan had enormous detail, she said, down to a description of the kinds of employees she wanted to hire and a code of conduct for them to follow.
When the space next door to her husband’s hair salon became available, Elkayam jumped on it. She left a copy of the business plan with a loan officer at the credit union and was interviewing employees when she learned the building where her spa was to be located had been sold. The tenants, including her husband’s salon, were being given 30 days to leave.
“I was crushed,” she said. “I felt like all those hours and hours of planning and writing had been a complete waste of time. I put the plan on a shelf in my home office and forgot about it.”
Business plans have historically been a necessity for most entrepreneurs, especially those seeking financing, but the definition of a business plan has changed in recent years. Today, it can mean anything from the traditional novella-like document Elkayam wrote, with market analysis and financial projections, to a one-page Venn diagram showing where markets overlap.
And an increasing number of entrepreneurs have concluded that business plans take too long to write and become outdated too quickly. They skip the plan, which they consider an old economy relic, and go straight to market with a product or service, modifying their strategy in real time.
Rhonda Abrams, founder and chief executive of Silicon Valley-based PlanningShop, a publisher of content focused on entrepreneurship and small businesses, said the landscape had changed because “business moves faster now than it did 10 years ago.”
“You may not need a business plan if you’re six Stanford engineers in Silicon Valley who have an app that’s got a million followers, because you’re going to be acquired so you can be hired,” said Abrams, author of “Successful Business Plan: Secrets & Strategies.” “But if you’re starting a cafe in Des Moines or a graphic design business in Phoenix, you really want to plan. It doesn’t have to be a big document, but you get to make your mistakes on paper, rather than in real life.”
That worked for Paul Entin, who wrote a plan to assess the viability of Epr, a business he founded in 2001 to provide specialized marketing services to industrial companies. He wanted to limit the number of clients the company would engage, because he wanted to provide a high level of service. Creating the plan, he said, forced him to think about basic business issues like revenue, pricing and target market and to calculate the number of clients he would need to make money.
He concluded that the business would need between three and six client companies and that he would approach only businesses in growing industries where he had experience and liked working. He created a website for the business and ordered high-quality, printed marketing materials that required a minimum run of 500 – far more than he needed.
“I still have 400 left today,” Entin said, “but it was effective in demonstrating professionalism and instilling confidence in people who otherwise didn’t know me or my young company.” Today, he said, the company generates about $750,000 in revenue and bears a strong resemblance to the business he planned more than 10 years ago.
About a year after Elkayam gave up on her idea to open a spa, she happened to spot her forgotten business plan in the trash on a day when her husband was cleaning out the office. They were in the process of formulating products for a beauty brand they wanted to introduce, featuring naturally derived, vegan and preservative-free products.
For this venture, they had chosen to skip the business plan.
“I felt like all the work I did before had been wasted,” Elkayam said. “Those five-year projections? They never happened. And I was bitter about it.”
But then she reread her old plan - and found it tremendously helpful.
“I was able to glean a lot of ideas and strategies from it for promoting a new brand,” she said.
Even the new business name, Refresh Skin Therapy, was based on language in the old plan, and the logo came from it, too, as did information about email contact platforms, loyalty programs, customer-management strategies and social media promotions.
In December 2013 the Elkayams started selling their new line of products online. A year later, they still have no business plan nor any financial projections. They operate with a $30,000 credit line through the online financing company Kabbage, and while they would not disclose their revenue, Elkayam said they were not losing money.
Business plans are not just for startups. They can be critical for businesses of all sizes and at all stages, Abrams said, because they help owners set goals and respond to changing conditions.
“I always emphasize that it’s the planning that’s most important, not the plan,” she said. “The process of developing an annual plan should establish priorities for the coming year and become the basis for action.”
Abrams recommends that businesses conduct an internal review of what worked in the previous year and what did not, what the goals were and how well the business met them. “It’s important to eliminate things that aren’t profitable or are shrinking your margins,” she said.
In addition, most small businesses need a business plan to get a bank loan. A Small Business Administration spokesman said a business plan was critical. But even when one is not required, banks say they are highly recommended. (Wells Fargo provides a guide to preparing one, as does the SBA.)
Private investors often require a plan as well, but there has been movement away from that. Rather than a written plan, investors and strategic partners often opt for a short video or PowerPoint presentation highlighting the main facts.
“But they are still going to ask where you got your numbers and assumptions,” Abrams said, “so you need to know the answers even if you don’t have a formal business plan at the time.”