Many entrepreneurs I know, are proud about their gut feel.  Many of them have become successful in their chosen industry even as they continue to spurn formal business management practices, like having a proper budget. Many even proudly wear their  illiteracy like a badge of honor.  ‘We’ll solve it when it happens’ is a normal strategy, and they think that a business plan or budget are too restricting.

In the face of such role models, many business administration students are noticeably unappreciative of the various management science courses that they learn in school.

Yet while admittedly it was easier to succeed in business 30 years ago, it is now getting more and more competitive, and I am one who believes that you need everything in your favor to win.  If you notice, it is harder and harder to spot school dropouts in the new generation of successful business leaders, and if they indeed are dropouts, they hug the news not because they are a rule, but because they are an exception.  Today, just in order to keep your head above water, you need to include augmenting gut feel with data driven decisions, and adopt formal financial tools like business intelligence analytic software or formal business plan when evaluating expansion programs or new ventures.

Understanding and knowing how to create a business plan is one of the necessary musts, in my opinion, that needs to be in the entrepreneur’s war chest.  Over the last few years, I have talked and worked with many people who tried to form companies with nothing more than just a vague idea of what their products can do, or a vague idea where they can get funding, or basically nobody in the company who has any business management expertise

Sometimes, their estimates or ‘hearing’ of the potential product or service is way off target, but sometimes, it may have been viable, but they simply run out of cash.  Let me illustrate with an example of one of my students where I am teaching an MBA program.

This student has been saying since the start of the course his great idea of putting up an upscale fast food eatery in a part of a city which he felt was underserved.  He believed heartily that he had a novel concept, and that it would ‘click’. I asked him to make a formal business plan on it.

The business plan that came out was quite risky.  He had a million pesos in savings, but he believed he could get another loan for 2 million.  To get the good location he aspired for, and to lower initial startup costs, he was going to lease a piece of land wherein he would build his restaurant.

The restaurant concept looked great in the midst of a busy thoroughfare, but as you go over the business plan, you start to notice certain things.

First, after building the restaurant on a rented lot, and equipping the restaurant, he had only enough money to fund 2 months of working capital.  He was very confident that business was going to be doing well, and that it would be enough cash.  BUT, and for entrepreneurs,  the BUT is important…

What if the restaurant did not ramp up as fast as he has projected?  There was a very big chance that he would run out of money.  And carrying already a loan that was twice his capital, there was not much chance that he could get further credit. 

What would happen if he runs out of cash, and then he could not borrow?  Not only would he endanger an otherwise good business, but that may meant he would have to forfeit the building that he had constructed over a leased lot if he could not move the business forward and pay the rent on time.

It is great to start a business, and most of the time we wax optimistic on the  prospects. But while we continue to look at the bright side, it is always well to plan ahead when things don’t go well.  And one of the things you always want to prepare is to make sure that you don’t run out of cash!  Many a good business had to stop operations, not because  they were not viable, but they run out of money to fund short term obligations.

The student is now reevaluating his plans now.  Thank God  I made the business plan first, he said.   Better plan it now, than when you are harassed by your creditors.

I started to write for SME Insights,  a national bi-monthly Small and Medium enterprise magazine last July 2006.  These are the series of articles I wrote for them which I am putting on here.