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Startup 1.3. Business Plan

Shoestring Venture: The Startup Bible (1st Edition)Forget everything you’ve ever heard about business plans. That they’re only for big businesses. That they’re only for attracting investors or banks. That they’re only for start-ups rather than established, ongoing concerns.

Think of a business plan this way: a business plan takes your ideas and inspiration for a business, whether the business is brand new or getting long in the tooth, and provides a roadmap to success. Better yet, it’s a roadmap to achieving your business’s goals (see Section 1.1 above). A business plan is a blueprint for the decisions you’re going to make in the critical start-up process and beyond. Whenever you question how you should proceed, go back to the business plan and see how you’ve charted your course.

Should you skip the business plan and all the time, money, and effort that go into it? Sure, it’s okay, if you’re not in business or not planning to go into business. Looking for a job? Forget the business plan. Selling some of your junk on eBay? I’d pass on the business plan. But if you’re planning on making some serious money month after month in your business, then skipping the business plan makes it just that much harder for you to succeed.

Why? A business plan forces you to answer some very critical questions before you get in too deep:

  1. Is this business a good idea? A business plan forces you to determine if your business is viable or not before you commit time and resources to it.
  2. Can I afford this? Your business plan gives you no choice but to crunch the numbers and realistically figure out how much your business and its operations will cost you—and how much you can reasonably make. It demands that you look very closely at where the cash is going to come from and where it’s going to go . . . and more cash has to come in than goes out.
  3. How do I make this business succeed? A business plan demands that you think out a timetable and structure all your activities to realize success.
  4. What can go wrong? A well-written and well-thought out business plan assesses the risks and everything else that can go wrong and plans for these risks and unexpected events before they’re a problem. How many great businesses failed simply because their owners didn’t have a Plan B in place?

Put simply, you want to do a business plan because it forces you to face reality. And you can never make your dreams into reality until you face reality.

Tim Berry, a business plan expert and president of Palo Alto Software (see 1.3.1 below), the creators of Business Plan Pro, and the author of “ Hurdle: The Book on Business Planning,” has this to say about the importance of a business plan in an interview with Marilyn Zelinsky Syarto of Home Office Magazine:

Q. Why does a business need a business plan?

A. Business owners think that writing a business plan is a form of punishment, and that it’s only necessary when you need financing, so they don’t think they need one. Any business should want a business plan; because it influences and focuses the path your company will take. It helps manage cash flow, too.

Q. How long does it take to write a business plan?

A. I recently helped a colleague write a plan, and it took fifty-four minutes. But, he knew his business inside and out, and he didn’t need to do much research. You should see something take shape in two to four hours of work if you use a software program but it should take you one to two days to write a full business plan.

Q. Aren’t most business plans as long as books?

A. That’s a major misconception about business plans. You probably need to do a business plan that’s not longer than ten to fifteen pages total.

So a business plan doesn’t require the length of a Russian novel or the skills of a top-notch MBA education. You don’t need to tramp over to your local book mega-store and walk out with hundreds of bucks of books. There are plenty of resources online that can help you evaluate what you need in a business plan and get you through the process. You will find a variety of approaches to the business plan and a variety of key questions that business plan experts feel every business plan should answer.

Above everything else, the critical component in a shoestring venture business plan is money and where you’re planning to get it.

If you’re planning to attract investors, your number one goal is getting equity and debt investments. The number one path to that goal is business valuation. That is, your business plan must credibly and persuasively in all its parts and pieces argue a certain value to the company. Investors, including debt investors, are going to make their investment relative to that value. It behooves you, then, to master the art of start-up business valuation. Why? Because most equity investors are better at business valuation than you are and they’re looking for the biggest chunk of your company they can get at the lowest price. Almost 100% of pre-financing start-ups fail because they foobar the business valuation part—in my experience, they almost always over-value the business, that is to say, they get greedy. To put it simply, a business plan for a start-up seeking investors is a business value plan.

If, on the other hand, you intend to “bootstrap” your venture by financing your business through the revenues the business generates, then the number one concern of your business plan is cash flow. You get to skip worrying about business valuation, but you’re definitely not off the hook. Your job in the business plan is to figure out as realistically as possible where the revenues are going to come from, when they’re going to come, and how much cash you can expect. Here’s a simple truth: nearly 100% of business failures are due to more cash going out than comes in. It’s not about profits; unprofitable business stay in business every day. It’s the folks that bleed cash that are swept into the dustbin of history. Everything in the business plan, every part and every piece, needs to set a credible blueprint for getting more cash coming into your start-up than goes out. To put it simply, a business plan for a bootstrap start-up is always a cash flow plan.

The resources provided below provide excellent discussions of the “parts” of a business plan, but you should know them like the back of your hand before you try to make one. Why? Think of your business plan as an argument. It will convincingly or unconvincingly argue that your business, whether just an idea or an ongoing concern, is viable. It answers the question, “should I invest in this business?” If you’re looking for equity investors, you’re arguing that the business will within a few years achieve a value that will multiply the investor’s original stake. If you’re looking for loans, you have to prove that your business can generate cash flow to maintain the debt over the life of the loan. If you’re looking to bootstrap your business, you have to convince yourself that you can put food on the table and a roof over your head and, having achieved that in short order, can over time put piles of cash into your bank account.

Each “part” of a business plan answers distinct questions. There are really no set rules. You can follow the standard architecture of a “classic” business plan or depart creatively from it, provided it’s suitable. For instance, I have written dozens of “standard” business plans; but I have also written dozens of business plans for non-standard businesses, such as independent film projects, concert tours, and television series. These have required different questions to be answered and creative ways to answer them.

Your business plan can and will come in several different forms:

CRUNCH THOSE NUMBERS!

The single biggest mistake I see on business plans are numbers that don’t work. Often they’re simply incredible, as in “not believable.” More often, they’re believable, but they’re not incredible, as in “these numbers are nothing to write home about.” Not only must the financials be believable, they must return financial ratios (see 2.4) that make the investment worthwhile. So even though your business plan will not include financial ratios, you must, must, must crunch the numbers on your prospective financials to gauge the actual financial picture of your projected revenues, costs, and profits. I guarantee you that anyone looking at your business plan, such as a prospective equity investor or bank, will crunch those numbers and use those ratios to make a decision.

  1. The written business plan - This is the “standard,” detailed, nicely formatted business plan with all the classic “parts” you’ll learn about from the resources below, such as your mission statement, executive summary, goals, competition, marketing and sales plan, and financials. If you spend time with folks like Palo Alto Software, this is the business plan they focus on. The written business plan usually but not always is intended for external stakeholders, such as equity investors, banks, or other lenders.
  2. The presentation – This is a much shorter summary of your business plan in an oral and slide show presentation no more than fifteen minutes long (usually all the time someone will give you). The oral presentation strives to pique the interest of potential investors and inspire them to ask more detailed questions and, hopefully, request and read the written presentation. Since you only have a few minutes sometimes as little as 5 minutes—you’re limited to a summary and maybe a few key numbers.
  3. The one-minute pitch – Also called the “elevator speech,” the pitch is a one or two minute summary of what your business is about. It’s what you would tell a potential investor or partner about your business if you met them on the street or at a party; the pitch aims to excite their interest and move them to the next step, say, a presentation. Believe it or not, the pitch needs about the same amount of work as the business plan and is the hardest thing to get right. However, it has the potential to land you the biggest fish as far as investors are concerned.
  4. Internal plans – As a professional consultant, internal plans are, to my mind, where the rubber meets the road. These include more detailed business plans that include operational and management details. They also include marketing plans, strategic analyses (such as a “ Five Forces” or a SWOT analysis, i.e., “Strengths-Weaknesses-Opportunities-Threats,” see 8.1.2 for resources), detailed competitor profiles, and any issue trees that are used for ongoing planning (see below).
  5. Marketing plan – While I include marketing plans as part of your internal planning and it is, after all, not really a business plan, it’s important enough to merit its own separate discussion. While often done in the product development phase (see Chapter 4), you should plan on taking a preliminary crack at your marketing plan at the very beginning; in fact, even as you’re writing the business plan. Marketing plans follow more formal rules than a business plan; it’s the discipline of that formality that guards you from error. In preparing a marketing plan, you have to identify customers, formulate a positioning statement, work out your messaging, analyze your competition, imagine competitive response, perform a SWOT analysis, and a pile of other tasks. Done correctly, a marketing plan more than anything else tells you if your business is going to fly in the marketplace.
  6. Issue trees – Again, issue trees are part of your internal plans, but I believe that an issue tree should be the first thing you do and should serve as the basis of your business and marketing plans. In fact, if you hired the biggest guns in the consulting world, like McKinsey or Bain (for something around four hundred bucks an hour) to do your business plan, they would start with an issue tree. That’s how the big folks, like Microsoft, McDonalds, or Wal*Mart, write business plans. An issue tree basically asks every question you need to answer in order to plan a business. However, they are not simply a list of questions, but a hierarchy of questions. You start with your main question, say, “Should I invest in this business?” and work your way down to more detailed questions. I do issue trees every time I do a business plan. Don’t leave home without one.

1.3.1. Palo Alto Software

http://www.paloaltosoftware.com
http://www.bplans.com
http://www.mplans.com

Palo Alto Software, based in Eugene, Oregon (as the name suggests!), are the creators and distributors of Business Plan Pro, software specifically designed for researching and writing business plans. You can purchase the software right there on the site for $100 and, in addition to the software, receive 600 sample business plans across a dizzying array of industries and businesses.

If you are not interested in purchasing the software, the site is also a rich source of information and advice—in fact, it is the most linked business plan site on the Web. Why? Because it offers sixty free sample business plans. including one, “ Concrete Fusion,” by one of the authors of this book, at http://www.bplans.com. Since Palo Alto Software also sells marketing plan software ($180), they also offer free marketing plans at http://www.mplans.com.

The site also offers a “ How to Write a Business Plan” guide that covers the process of researching and writing a business plan as well as an excellent discussion of each part of a business plan. This guide posits two issues as the most important in a business plan: cash flow and implementation details.

Tim Berry, president of Palo Alto Software, asserts that, even though every business plan is different, they should cover three “essentials”:

  1. Specific milestones, with deadline dates, spending budgets and a list of the people responsible for them. Make the responsibilities specific for specific people, and make sure every task gets assigned to a single person with a name and a face. This section must describe how these different milestones are going to be tracked and measured.
  2. Real cash flow. Your plan should show cash flow—either projected or actual or both—month by month for at least twelve months.Show where you are getting money and how much, and show what you are spending the money on. This is cash flow, not just profit and loss, and you have to understand how different cash flow is from profits. Profitable companies go under all the time, but companies with positive cash flow can pay their bills.
  3. Focus. A business plan should establish your company’s priorities. Don’t try to do everything, and don’t try to please everybody. (http://www.entrepreneur.com/startingabusiness/businessplans/businessplancoachtimberry/article76482.html)

1.3.2 SCORE: How to Develop a Business Plan
http://www.va-interactive.com/score/businessplan/businessplan.html

We discussed SCORE previously (1.1.1) as perhaps the most valuable resource available to you on the Web. The site gives you unprecedented access to real live free advice from experienced business people and executives either through email or face-to-face. There is no topic in this book in which SCORE should be anywhere except at the top of your list when looking for good advice or knowledge. That being said, you should not underestimate the value of its various workshops, and its workshop on developing a business plan is your best introduction to the topic if you’re totally new to the subject.

The workshop is animated with a voice-over narration and is one of the most realistic presentations on what it takes to make a good business plan. It walks you through every section of a business plan: what it is, its purpose, and how to research and write it.

While many of the resources covered so far focus on questions a business plan has to answer, the folks at SCORE think a business plan should provide five key “understandings” to you, your employees, and your investors:

  1. Financials - Cash flow, profit and loss (income statement), balance sheet.
  2. Customer base – Who is your audience and how will you reach them?
  3. Competition – What advantage do you have over your competitors?
  4. Operations – What is needed to run your business?
  5. Future Plans – How will you sustain your business?

1.3.3. Startup Nation
http://www.startupnation.com/pages/start/Step3.asp

Startup Nation, by Jeff and Rich Sloan, is another resource-rich site you should become deeply familiar with in the early stages of starting your business. The site includes a ten-step description of all the jobs you need to do to get your concern up and running. The Sloans take you through three aspects of a business plan: what they call “ The Defining Dozen” questions you must answer in a business plan, the key components of a business plan, and how to write a business plan.

Since every writer on business plans has their own “key questions” that you have to answer, its useful to contrast and compare these questions across expert sites. For the Sloans, the “ Defining Dozen” questions are:

  1. What’s your business idea?
  2. How does your idea address a need?
  3. What model suits you best?
  4. What’s so different about what you offer?
  5. How big is the market and how big will you grow?
  6. What’s your role going to be?
  7. Who’s on your team?
  8. How will customers buy from you?
  9. How much money do you need and how much will you make?
  10. Where’s the startup money coming from?
  11. How will you measure success?
  12. What are your key milestones?

1.3.4. U.S. Small Business Administration
http://www.sba.gov/starting_business/planning/basic.html

The Small Business Administration, an independent federal agency that provides financial assistance to small businesses, has a Web presence rich in resources and links to outside resources. For many small business and startup topics, including business plans, you should consult the site for simple but sage advice. As with many of the other resources mentioned here, the SBA provides an excellent outline of the components of a business plan, what their purpose is, and how to write them.

The SBA believes a business plan should answer four “core questions”:

  • What service or product does your business provide and what needs does it fill?
  • Who are the potential customers for your product or service and why will they purchase it from you?
  • How will you reach your potential customers?
  • Where will you get the money to start your business?

1.3.5. Entrepreneur Magazine Online Business Plan Center
http://www.entrepreneur.com/businessplan/index.html

Entrepreneur Magazine Online should become one of your most visited sites throughout your entire process of starting, building, and managing your business. Its exhaustive resources include an incredibly rich “ Business Plan Center,” which includes an entire how-to manual that covers the basics, how to plan the business plan, the elements of a business plan, and how to get help writing your plan.

 

For Entrepreneur Magazine Online, the planning stage of a business helps you determine the potential of your business by answering two general sets of questions: financial (how are you going to pay for the business and how are you going to make money) and lifestyle (what’s the use of starting your own business if you’re going to hate it?)

The site also features in-depth articles by business coach Tim Berry andothers that will help you take your plan beyond the basics:

  • Fifteen Reasons You Need a Business Plan
  • Business Plan Essentials
  • Let Your Business Plan Tell Your Story
  • Crafting a Simple Business Plan
  • Essential Elements to Include in Your Plan
  • Common Business Plan Mistakes to Avoid
  • What Bankers Look For in a Plan
  • What Investors Look For in a Plan
  • Hiring Outside Help for Your Business Plan
  • Writing an Executive Summary
  • The Numbers in Your Business Plan
  • Know Your Competition
  • Conducting a Market Analysis for Your Business Plan
  • Determining a Plan for Setting Prices
  • Creating a Sales Forecast
  • Updating Your Business Plan
  • Existing Companies Need Planning, Too
  • Should I Take My Business Plan Online?
this business a good idea?
A business plan forces you to determine if your business is viable or not before you commit time and resources to it.
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