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The myth of the mighty business plan

Entrepology: : It's like a fake licence - you still have to learn to drive

By Barrie Terblanche 

4 July, Times Live - The rent-a-business-plan industry in South Africa reminds me of the Eastern Cape traffic authorities. I once taught a young man how to drive on gravel roads in the rural parts of the province, but refused to take him onto the main roads until he got his learner's licence. One morning, after several failed attempts at writing the exam, he proudly presented a full Code 14 licence which he had bought from a crooked official for R600.

It is a bit of a stretch to call them corrupt, but the same kind of short-cut mentality besets the small-business support sector in South Africa, which helps to dish out "licences" to those who don't have the skills yet to earn them.

Millions of (mostly taxpayers') rands have been wasted on so-called consultants who write business plans on behalf of business owners hoping to get a bank loan.

It is corrupt to the extent that these "consultants" know it is all in vain; that no bank would or even should finance the business owner for whom the plan is being written, but do so anyway because some misguided government agency pays for it.

It all started with good intentions, naturally. People who genuinely wanted to help small businesses develop went out in the late '90s to ask business owners themselves what their needs were.

Of course, nearly all of them said they needed more finance, because that is always the way in which business problems manifest. A business owner who treats his clients badly, for example, will end up with too few of them and will start trying to borrow money to save his business. The same goes for bad quality control, financial mismanagement, bad staff relations, troubles between business partners, lack of focus, the inability to delegate or prioritise, the neglect of marketing or book-keeping, misreading of the market, bad pricing and any of the many thousands of things that business owners can do wrong.

Like ordinary people, business owners are not very good at self-analysis. Worse, we are constantly in marketing mode. Anyone who repeats "my service is the best in town" 20 times a day tends to believe it after a while, despite the chaos back in the office. Therefore, when a field researcher asks an owner what the biggest problem is facing his business he will certainly not identify his own failings. He'll say: "It's the banks. They won't lend me money because I'm not big enough for them."

In this way the myth was created that access to finance was the biggest impediment to small-business growth in South Africa.

The banks and other financial institutions reacted to increasing pressure from the government-led small-business development sector through a combination of lip service and some sincere efforts to explain that, first, most business finance is given on the basis of track record and collateral and, second, if a business lacks those, it had better have a business plan that convinces the financier that the business owner knows exactly what he is going to do with the money.

"Right," said the small-business development sector, "if the problem is business plans, we'll help them write business plans."

And so some of the most dreadful small-business support programmes were launched. A business owner would go to the Umsobomvu Youth Fund, for example, and come away with a voucher worth R7000 which could be redeemed at a "consultant" who would help him write a business plan that a bank would find worth financing.

These schemes turned into a feeding frenzy where "consultants" would send any business owner, however unbankable, to fetch an Umsobomvu voucher so that he could cut and paste a business plan for the would-be entrepreneur, complete with bumf such as "Vision and Mission Statement" and "Core Values". They engaged in the minimum of consultations or analysis of their client's business, didn't bother visiting premises, and sucked cash-flow projections out of nowhere.

Financiers started recognising the same text over and over in different business plans, with just the names and a few details changed. If the aim was to clog up the wastepaper baskets of South Africa's banks, Umsobomvu was a raging success.

Mercifully, the programme seems to have ground to a halt as Umsobomvu amalgamated with the Youth Commission to form the new Youth Development Agency, with a scaled-down budget.

But the misconception that a business plan is the ticket to bank finance that can be bought from a consultant is certainly not limited to subsidised government programmes. I recently listened to a business owner complaining about paying R30000 for a consultant-written business plan which was rejected by all the banks.

The truth is that all the skills needed to write a business plan are also those needed to run a business, namely, the ability to analyse a market and devise a strategy, the ability to crystallise such a strategy into a detailed cash-flow forecast, and the ability to convince not only a mere banker, but many clients, that you know exactly what you're doing. There is a tiny role for a consultant to play: tweaking the strategy, checking the figures and correcting the grammar.

Getting a consultant to do any more than that is like getting someone else to take your driver's licence test on your behalf. If our banks were to accept such fake business plans, there would be just as much carnage in the financial system as there is on our roads.

Source: Times Live. View original here