VenturePORT Series - The Business Plan
Many great businesses have launched without formal business plans. Those who "sell their way" into business often do it from an idea in their head and may never end up implementing any kind of strategic process. They've figured out what their customers want, how much they have to charge to make money, and what they have to do to find and keep enough customers to meet their personal goals.
Even if you intend to sell your way into business, and not seek outside money, you'll benefit from having a business plan. Those who intend to raise money from angels outside of their family circle and friends or from early-stage venture capitalists will definitely have to have a business plan. In fact, the very process of creating an effective business plan will represent one of the first challenges in your entrepreneurial effort.
While you can certainly dispense with a formal planning process and sell your way successfully into business, you had better sit down and figure out realistically what kind of sales you will generate, how much it will cost you to do that, and how much money you expect to flow in, flow out, and when. It all boils down to getting customers to pay you more than it is costing you as a whole to provide your product and service, including all of your fixed expenses such as salaries, office space, and marketing.
Let's take a look at the two major types of business plans, the Strategic Plans used to run your business, and the Business or Financial Plans used to raise money from investors.
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Strategic Plans
Large, successful businesses set up a systematic process for planning. They identify opportunities, set goals, measure objectives, and create strategies, plans, and actions. This is followed by the process of evaluating what happened, then developing a new Strategic Plan for the following year based on results, new goals, and new objectives. Many successful companies dispense with a formal planning process, and run themselves primarily on financial measures, such as sales and profits. They leave much of the strategies, plans, and actions to the people who run the various divisions or departments. This can lead to tremendous waste and inefficiency and create a competitive opportunity for an entrepreneurial company with a sharp strategic focus. Yes, you can upstage an established company by identifying an opportunity or need and creating a better way to fill it.
The Strategic Plan helps keep you focused on the strategies, plans, and actions you determine have the best chance of yielding the desired results, and to get refocused if you accidentally drift. The plan also helps you assess whether or not your strategy yielded the desired results, and what may have gone right or wrong.
There are several books available to help you develop an impressive Strategic Plan. But the simpler you keep the process, the more likely you will sustain it from year to year. By breaking down your strategic plan into the basic elements, and revisiting it on a quarterly basis or so, you can make it part of your culture without its becoming a bureaucratic nuisance.
In a big company, there can be two strategic planning processes — the corporate process involving heads of each division working together, and the departmental process, involving field management and sometimes employees in each key area of the business. The corporate, inter-departmental planning is critical to make sure the entire organization remains focused on the same goals, rather than on the interests of each of the groups, be it sales, marketing, human resources, or operations. Departmental planning is used to make sure each business unit aligns its goals, measurable objectives, strategies, plans, and actions against the overall organizational goals, rather than wander off in some other direction.
In a small company, a departmental business plan can be as simple as one process involving the owner and including input from other managers and employees. In any case, involving some employees helps foster buy-in and understanding of organizational objectives.
An age-old planning framework can make the process relatively simple. It's based on determining the following:
- Goals — What specifically are you trying to accomplish?
- Measurable objectives — How will you measure the accomplishment of those goals, in terms of sales, profits, new customers, reduced customer or employee turnover?
- Strategies — What will be the overall approach to achieving those goals and objectives?
- Plans — What specifically will be done?
- Actions — Who will do it and when?
This is usually followed by quarterly assessments in order to make annual interim adjustments, when reviewing the plan for the following year.
Should this be a written plan? It certainly helps if you want to evaluate precisely what happened, or have a frame of reference when talking over organizational results with your colleagues throughout the year.
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Business or Financial Plans
Under "Money," we already warned you how challenging the process of raising capital can be. After all, unless you have friends or family who have money and faith in you, you will probably have to convince some stranger to give you money. Don't get us wrong, it happens every day. It takes more than a great idea. It takes the ability to identify the right people and make the impression necessary to inspire confidence in you.
Beyond the ability to articulate a vision via e-mail, in voice messages, on the phone, and in person, it almost always takes a good Business Plan. Today, you can find software and templates to help you cover all the key elements of a Business Plan and produce a document with a compelling appearance. There is no question an effective Business Plan can have a direct impact on convincing somebody you and your team have the right stuff.
While the above strategic planning process is relatively simple and can often be summarized in a three- or four-page outline, Business Plans have to follow a fairly prescribed script to make sure they address all of the critical questions an investor might reasonably ask. In addition, they generally have to include financial projections presented in various ways to help investors understand the potential progression of your business, where it will make money, and what its assets will consist of. This takes you into the world of having to understand the difference between a profit and loss statement, a balance sheet, and cash flow projections. (We'll address these in the section on "Accounting.")
Even more daunting, the process obligates you to consider what your sales and profits will be in the first six months and projected out for three years or more. Early-stage venture capitalists will want to see how this business will scale — what costs and profits will look like when sales grow tenfold. This exercise also forces you to demonstrate your ability to make believable projections and have a firm grasp of the economics of your business.
You'll probably get different advice from every person you talk to about what goes into a good business plan. This is where good communication skills come in. Almost everyone will agree the Executive Summary is the grabber. It's the two- or three-page summary addressing the key issues — your idea, the opportunity, how you will fill it and with whose help, how you will make money, and how investors will benefit. It can take days of agonizing editing to come up with just those few pages. Count on a month of hard, steady work to complete a Business Plan.
The rest of the plan will include the following details:
- Products and Services — Your unique selling benefits.
- Market Opportunity — The demand: Who wants this and why?
- How You Will Make Money? — What are the economics of the business?
- The Strategic Plan — How will you make it happen?
- The Organization — The organizational chart. Who will do what?
- The Exit Strategy — How will investors likely get their money and profit? By selling the company, by going public, by selling the company back to the founders?
- The Financials — Projections of revenues, expenses, cash flow, capital expenses (investment in infrastructure or equipment), and balance sheets (showing projected assets and liabilities.) Yes, you will have to try to anticipate what those numbers will look like by month and year over a multi-year period.
The issue of your management skills or management team can make or break your presentation. Investors generally want to see that you have people capable of helping you pull it off. They will want to see evidence that you have the relationships to make the sales, the expertise to deliver your promises, and the management skills to make sure you make money. The stories of the scruffily dressed genius raising millions are true. But so are the stories of the many more well-dressed geniuses who didn't. If you're going to go through the trouble to develop a business plan and try to raise money, you'll want to find a team of people ready to join your success. Use their names and background in the Management Team section of your Business Plan.
Business planning software will help guide you through the process of creating your Business Plan, make sure you cover all of the key points, and make it look highly professional so you make a good impression. Your work will involve not only translating your concept into a highly compelling story creating confidence in your ability, but in writing it clearly so anyone, even those unacquainted with the field of your business, will understand what you are saying. It pays to find an expert business plan writer, if you have the resources. That can cost up to $15,000, unless you can do a lot of the advance writing yourself and need help only on editing.
We know of many an entrepreneur who has gone through all of the trouble to create this document and who has come up dry in terms of getting money. Even so, it's a terrific learning experience that won't be wasted. The true entrepreneur will use those lessons when they try some other way to launch the business at a later time.
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