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Is your business plan realistic? Or is is just satisfying the accountants? Or is there a deeper cultural issue in how some are taught to write business plans?

The curious case of the fudged business plan

My son came home from his sixth form studies last week and told me that he had been invited in to see and act as the questioning audience to a series of business studies AS level presentations. The business studies students were practising presenting their business cases to some other students, who were not doing the business studies course.

He was aghast and highly critical. In one case there was a loan of £13,000 from a bank to fund a business starting in a small office. The loan was used to fund income for the staff and other revenue items, rather than going into assets like furnishing the office. Where was the security? Moreover, the business case presented contained no figures for interest on the loan. In another case, a student was running a business that somehow would gather £100 worth of income a day from selling novelties and accessories alongside the main ice cream business.

Now, my son, in typical teenage manner, was simply disgusted by the lack of simple business acumen. How could they make such simple and glaring business case mistakes such as not including interest from a loan, funding revenue from capital and dramatically over-estimating the amount of sales that might accrue from a sideline?

The bigger issue: You can’t write a business plan that says the business does not work

But I wondered if this was really the issue. You see these business studies students were being asked to present a business case. That implied that it was a viable business case. In other words, it was a business model that worked and made money.

It raises a really important question: if they were to present a case that clearly showed the business was not viable, would that be an acceptable answer? Or to put it another way, is demonstrating that the business is not viable, as valued as making an apparently viable business case?

My point is that it is the quality of the thinking behind the case that is important, not whether the case seems to be viable. So, as you may have seen in many organisations, the figures were massaged to get an acceptable answer. These students were meeting their tutor’s expectations of a viable business case, not a realistic one.

If you think this is an extreme case, talk to any Venture Capitalist (VC). I recall one telling me that he had had a business case presented to him only that week. In it, the company grew from none to 20% of revenue coming from overseas. They had no overseas marketing spend, no experience and no overseas sales force, agents or distributors. Apart from that it was fine.

I call this sort of explanation, strategy by hope and magic.

The deeper malaise that goes into business plans

But there are two deeper malaises here.

The first is trying to satisfy the accountants (or in this case the tutors) with a business case that clearly does not work, but has the right answer at the end. By setting an expectation that they must produce both a business case (or not) and one that is viable and profitable, they are painting their students into a corner, driven by expectations rather than business reality. It is as acceptable to demonstrate that this business or investment is not viable as it is to make up numbers that suggest it is viable. That is a triumph of hope over reality. It is suggesting that 3X6 = 32.

Secondly, it is even worse if the students then try and implement these plans only to find out that they are completely unrealistic AFTER they have started spending some money. The purpose of planning and business cases is not to make the business case. The business case is the result. The purpose is to examine the business case and test its viability. Have we considered all the aspects? What footfall would we need to generate £100 of side revenue? What rate of loan and what security would be required? If we went to an angel investor instead, would the terms be different?

It is the thinking process that is more important. As Napoleon once said, “I care nothing for plans. It is the planning that is important.”

What was the lesson these students actually learnt?

And that is what these students should be learning. Damn, if they were going to sit in front of each other, they would ask questions that are designed to check the thinking behind the plans. What assumptions have you made? Does it work? Is it tested? Is the market there? How do you know? What evidence do you have? Do you have the skills?

I only hope that these business studies students learnt the deeper lesson from these sessions. It is not about being shown up and missing pieces of the case. It is much more about running the business in your head as if you are running that business and seeing what is needed to make that happen.

One, and ONLY ONE, dimension of this is the finances. All the other aspects, like where will you sit, how will you reach these customers, do you have the knowledge, will it actually work, are just as important. Any VC will tell you this. Anyone who has watched Dragon’s Den (where business ideas are pitched with no warning in front of potential investors), will see people ripped apart for not having thought through their propositions.

A business plan should be allowed to say, “This is not a viable business!”

So, be willing to say, “This is not viable!”. Believe it or not, not every business idea is a money maker. You only have to look at the vast number of insolvencies and business closures to realise that. As long as that result has been done with a thorough analysis, and the options have been considered, that might be the best and correct answer.

VCs and investors do it every day. It is their job to reject business cases. It is ours to also reject such cases if they are not viable.

Have you seen this sort of behaviour? Let me know what you have seen and how you tackle it