Planning Fallacy: What It Is And Why Small Businesses Should Avoid It

The term planning fallacy might seem complicated, but it’s really not. It simply refers to a situation where someone makes mistakes in their planning. But it can still have complex, far-reaching consequences for small businesses (SMBs), damaging their bottom lines and even leading to bankruptcy and closures in the long term.

Never fear — we’ve put together this comprehensive guide so you can avoid having to deal with the fallout from a planning fallacy yourself. We’ll cover what planning fallacies are, why they can have such a negative impact on SMBs, why small businesses are susceptible to them, and what owners and managers can do to sidestep them altogether. 

What is a planning fallacy?

Planning fallacy is all about underestimation and inaccuracy. People often think of the best-case scenario when they’re planning for the future rather than the more realistic, balanced scenario. So basically, in a small business context, a planning fallacy is when someone underestimates how long something will take, how much something will cost, or the risks that are associated with something.

Planning fallacy also relates to variables. For example, a small business owner might plan for the future and fail to account for important factors like peak season vs. slow season, new trends and customer preferences, and market shifts.

Let’s consider a simple example. The owner of a local ski and board equipment rental shop is putting together their financial projections for the upcoming season. However, they only use one previous season as a reference. They don’t realize that it was an unusual snowy year, which resulted in a longer ski season, and therefore their most successful season over the past ten years. Their projections are way too optimistic and they end up scrambling to make enough last-minute sales to pay their bills and give employees their final checks. They could have avoided this planning fallacy if they had consulted data from the previous ten seasons rather than just one.

Why it’s so important for SMBs to recognize and avoid planning fallacies

It’s vital for small businesses to avoid planning fallacies at all costs. And when they do pop up, they need to be quickly flagged and addressed before they have any negative consequences on the business. 

That much is true for a company of any size, but it’s particularly critical for small businesses because profit margins are so narrow. In fact, the average small business profit margin was between 7-10% in 2023. So, just one error in an SMB’s budget could quickly result in them being unprofitable and even going out of business.

The negative consequences of planning fallacies also go beyond just immediate financial issues. They also extend to:

• Poor or uninformed decision-making
• Reputational damage and strained relationships
• High employee turnover rates
• Stress and burnout for owners and managers
• Difficulty securing financing
• Less business sustainability

Why small business owners are prone to planning fallacies

There are many reasons why small business owners and managers often find themselves dealing with planning fallacies. Here are some of the most common:

• Limited resources and expertise — SMB owners and managers frequently have to learn on the job and do what they have to do to drive the business forward. While they may be experienced in their industries, they likely don’t have great human resources and compliance, accounting, or data analytics skills, for example. They also might not have the budget to pay for expensive software to help them out. These factors can easily lead to a situation where an SMB owner doesn’t have the resources to make accurate business plans and ends up struggling with costly mistakes.

• No or little documented historical data — Many small business operations are low-tech and rely on systems like pen-and-paper, spreadsheets, email, and maybe a point-of-sale (POS). While there’s nothing wrong with that, and it no doubt works well for some super-small teams, it can result in a lack of recorded sales data and misplaced documents. It’s difficult to make accurate plans for your small business when you don’t have easy access to past sales and labor information within a dedicated accounting or team management software solution, for example.

• Passion and enthusiasm — Small business owners usually get into their industry of choice because they love what they do. Running an SMB isn’t easy, so their business should really excite them and get them out of bed in the morning. While that attitude is great, when small business owners get overly ambitious and caught up in the big picture, they can quickly fall into planning fallacies. They may feel pressure to beat the competition when they’re still a fairly new business just getting their feet on the ground, keep up with industry expectations, or impress friends, family, and community members. That’s why it’s vital for SMB owners to stay enthusiastic while still being realistic and grounded in their planning process.

Strategies for small business owners to avoid planning fallacies

The good news is — with a bit of experience and the right tools — planning fallacies are easy to avoid. With that in mind, here are a few of our top tips to make realistic future plans for your small business:

• Develop accurate financial projections — Financial projections are one of the areas where small business owners most often fall victim to planning fallacies. So, it only makes sense that taking extra care to generate realistic financial projections is one of the best things you can do to avoid a planning fallacy. There are many ways to do this, but we’d recommend that you begin by creating sales and expense projections based on an average of your data from the last several years rather than just the last year or quarter.

• Conduct thorough market research — The more you know about the landscape your small business is operating in, the better and more accurately you’ll be able to plan for the future. While you may not have much of a budget for research, there are plenty of free or affordable actions you can take to learn more about your business’s context, competitors, and customers. For instance, ask customers to fill out surveys in exchange for discount codes or draw entries. Another possibility is investigating your competitors’ marketing materials and taking note of their messaging, promotions, and strategies at different times of the year.

• Seek industry guidance, advice, and mentorship — If you have established relationships with the owners of similar businesses in your community, it may be worth setting up meetings or informal coffee chats with them. You can exchange your experiences and ask them questions about their overall business strategy and how they plan for different times of the year, for example. If you’re concerned that these SMB owners may consider you a competitor and not want to share details about their inner workings with you, you can also consult the owners of similar-sized but different businesses in your area.

Homebase can help protect you from planning fallacies

Planning fallacies are no good for SMBs. They result in financial issues, tense professional relationships, employee turnover, stress and burnout, and a high likelihood of debt and even closures in the long run.

However, savvy small business owners and managers can easily protect themselves against planning fallacies. The main thing they have to do is invest time and effort into developing realistic, accurate projections for their businesses rather than getting caught in the trap of being overly optimistic or naive.

Using an SMB-friendly team management platform like Homebase is one great way to fight against planning fallacies. For example, our scheduling tool empowers owners and managers to create automatic employee timetables that take past sales data and labor targets into account, so you’re basing your operations on hard numbers rather than vague estimations. And our time clock encourages team members to work the hours they’re actually scheduled for, so you can count on your labor projections being as close to exact as possible.

All in all, Homebase is passionate about making it easier for SMB owners to run thriving businesses that will last many years into the future, and working against planning fallacy is a big part of that.