Conventional business advice is that in order to have a successful business you need to write a business plan. However, did you know that the simple act of writing a business plan can often lead your business to fail? Here is why business plans cause business failures.
Most people write a business plan with the hope of getting debt financing from the bank or equity financing from investors, be it friends and family or an angel investor.
When you sit down and begin to draft your business plan, the act of writing it leads to cognitive biases. One prominent bias you will be overtaken by as you write your business plan is what experts call the optimism bias.
I remember reading a Time article that postulated that the human brain is, in fact, hard-wired for hope. The author Tali Sharot also delivered an excellent TED talk on the subject as well. The optimism bias causes a person to believe that they are at a lesser risk of experiencing a negative event compared to others.
Moreover, most humans are also subject to an overconfidence bias as I wrote in The Overconfidence Bias.
In a famous study given to teen drivers, 93% indicated that they were better than average drivers. Statistically, this is just not possible. The overconfidence bias is a well-established bias in which a person’s confidence in their judgments is reliably greater than the objective accuracy of those judgments.
Since the principle reason most people write business plans is to get funding from some source, they write their business plan in a manner that impresses a potential banker, lender or investor. They all too often paint a best-case scenario of the business’s prospects. Writing countless drafts and editing your business plan over and over, you start believing in your own bull-shit.
Believing that your business will generate lots of revenue and profits from the get-go, you make investments such as buying vs renting/leasing or hiring too soon all based on these optimistically projected incomes.
When reality finally sets in and the revenues are not there, rather than blame it on projections that were too optimistic, the owner’s overconfidence bias kicks in and they blame external factors and not on their somehow flawed plan. So, they keep surging forward at full speed undeterred by the evidence and with the mistaken belief that because they have it right, tomorrow the tide will turn and everything will be back on track. Overtime, like a house built on sand, the foundation begins to collapse and crumble under its own weight and the business ultimately fails.
Employing a consultant or finding a mentor with a fresh set of unbiased eyes may give you the reality check you need.
As we discussed in Who is your Jester an unbiased consultant or mentor can help you overcome your biases and filters and help you see the obvious. How do you put a price on not making a bad decision, wasting time or wasting money?
Now don’t get me wrong, it is not a bad thing to have an optimism bias, in fact, being optimistic creates a self-fulfilling prophecy and makes you work harder and will even make you happier. The issue is the reigning of your optimism to a point that you do not ignore the warning signs.
So, in conclusion, the act of writing a business plan and not subjecting it to a reality check can cause you to magnify your already innate optimism bias. This makes it extreme and makes you overconfident in the success of your business idea, forcing you to miss the signs that your path may be flawed. in the end, often business plans cause business failures.
