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Fatal Flaws in Your Business Plan

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A business plan is the blueprint, or road map, that guides aspiring entrepreneurs as they build their business venture. Business plan writing is about getting the details right as you keep in mind the big picture.  I’ve taught business plan writing since 2008.  I was invited by the program manager of an SBA-affiliated women’s business development  organization to teach a 20 week course that met once a week for three hours and students wrote their plan week by week.

A couple of years later,  I developed a six hour workshop that does not ask students to write their plan but rather, I present material that shows them the information that will be included in a good business plan: a marketing plan (including customer identification, branding and pricing), financial projections, operations processes and other elements.  We talk about how to do research and how the information discovered will help them build a successful business and if desired, attract investors as well.

When envisioning a potential business concept or writing a business plan, it is possible that unrealistic expectations or flawed thinking could influence the process.  Sometimes, one is just so excited about the great business idea that has surfaced that the adrenaline “rush” distorts clear thinking, such as the ability to see potential stumbling blocks that would require precautions to avoid.  Below are a few scenarios that entrepreneurs-in-the-making should beware.

Unrealistic expectations about the need and value of your products or services

While it is sometimes true that starting a business with yourself as the profile that represents the target customer is a smart idea, since you understand the value and availability of that product or service,  you may misinterpret the size of the market and the traction that can be achieved beyond a select group of true believers.

Insufficient information about target customers

Whether or not the target customer is modeled on you, research must be done to verify the number of potential customers who have the money and motive to do business with you,  regardless if this is a B2B or B2C enterprise in the making. You must identify the need for your products or services—what problem will you solve, what solution will you provide?

Furthermore, you must understand the buying process—who is the usual decision maker (the COO or the head of maintence?),  how will purchases be made and what is the tolerable price range? Lastly, from whom are your potential customers obtaining these products and services now? You must also identify and investigate competitors.

Vague about how to access customers

Especially in the B2B sector, access to customers is everything.  Some fields really are a closed shop. You may know who the ideal customers are,  know and describe well how your products and services fit their needs and know how to price and deliver them.  But if potential customers do not have the confidence to do business with you because you have not received an endorsement from a source that they trust, you will starve.

Overestimating cash flow

Usually, a business does not achieve desirable gross sales, and hence will not show a net profit, in its first year of operations.  Businesses that require high start-up costs especially will require a longer ramping-up period. The business plan must acknowledge the potential for negative cash flow and demonstrate how fixed and variable expenses will be met during that period.  One must know how inventory will be financed,  how payroll will be met and how the store or office rent will be paid.

When writing a business plan,  conservative financial projections are strongly advised.  Acquisition of paying customers may take longer than you expect and the size of their purchases may initially be small and infrequent.  Moreover, it is entirely possible for a venture to be profitable on paper and still suffer from cash-flow problems, because customers do not pay their bills on time.

Underestimating start-up costs

Developing a reasonable estimate of how much it will cost to get the venture up and running is essential.  If certain permits must be in hand, if certain tools or equipment are must-haves, then you must know the costs of securing all of the above.  If you’ll need to hire employees,  it’s essential that you have a good idea of the staffing needs up front (you can always hire more as customers increase).

“Magical thinking” business model

The business model is the design for how your venture will become profitable.  Well thought-out interactions between marketing, financial and operational processes will promote and sustain profitability and you must map out how these will occur. The business model describes the core fundamental actions of the venture.

The value proposition of your products or services will be described.  The resources that your enterprise will have to promote and defend the value proposition— the intellectual property that you’ve developed,  or patent rights, key relationships, or capital—will be accounted for.  Sales distribution channels will be detailed.

Getting to Plan B, a 2009 book by Randy Komisar and John Mullins, describes key business model components and advises business plan writers to segment the business model chapter into sub-headings such as:

  • The revenue model,  which describes what you’ll sell, the marketing plan and how you expect to generate revenue.
  • The operating model, which will detail where you’ll do business and how the day-to-day will function.
  • The  working capital model, meaning your cash-flow requirements.  Cash-flow means that you’ll know when money will be in hand to meet expenses like rent and payroll. It is subtly distinct from revenue.  The business can generate adequate revenue and still suffer from intermittent cash-flow problems.

Your business model keeps you organized and your priorities realistic. Matters such as quality control,  collecting accounts receivable,  inventory management and identifying strategic partners mean much more than your number of Facebook followers, for example. Best of luck to you as you work to launch your new business!

Thanks for reading,

Kim

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Business Model = Profit Engine

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Hatching an idea for a business involves much more than inspiration.  Your entrepreneurial idea must also include a strategy for making the idea profitable. That strategy is known as the business model. The function of a business is to provide products and/or services that help clients solve their business or consumer needs.  In addition, your business must work for you  and generate a reliable and abundant revenue stream from which you derive your annual income.

Before we go any further, let’s clarify the meanings of business model  and business plan.  Your business plan  is a document in which you describe the mission of your business; the target customers; the marketplace and competitive environment in which it will operate; its marketing, financial and operations plans; and the legal structure it will be given.

Your business model  will detail how the venture will attain and sustain profitability. The cornerstone of a good business model is a competitive analysis, which will help you verify target markets (customer groups) and establish your expected value-added in the presence of enterprises that offer similar products and services.

The primary element of your competitive analysis is customer knowledge, something that regulars to these posts know that I encourage frequently.  Information-gathering is a vital and ongoing business function.  James King, Director of the New York (state) Small Business Development Center, notes that “…customer purchasing patterns change rather rapidly and if you’re not ahead of your customers, you’re not making sales.”  Along with your selection of products and services to provide and customer acquisition strategies, operational aspects — that is, the process of how your products or services will be delivered — must meet the often fluid expectations of customers and will therefore figure into your venture’s business model.

Once you’ve developed a proposed business model, find a trusted potential customer or business owner or colleague and ask for a review.  Discovering and closing immediately obvious gaps is something you’ll want to do before your business is up and running.

King recommends that aspiring entrepreneurs “Sit down with someone who doesn’t have a vested interest and ask that person to poke holes in your model. If they do a good job, you’re going to be better prepared for any eventuality. The more risk you can eliminate, the higher the probability that you’re going to be successful.”

One is advised to revisit the business plan and business model every couple of years, or at least when changes in your industry, local business environment or technology have the potential to impact your sales revenue or how your do business. This practice will also give you the benefit of reviewing your projections as regards expected vs. actual target customers and allow you to refine planning for growth and expansion, as you create strategies for sustainable business success.

Thanks for reading,

Kim

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The WHY of Business Planning

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Full disclosure, I’ve taught business plan writing in both a short-form 6 hour workshop and a long-form 18 week class, where each session was 3 hours. Previous to that, I was skeptical of formal business plans. I was under the impression that all business plans had to be 40+ pages in length and that every element of the standard template had to be populated. Now I know better.

In my defense, if you were launching a business that would have a physical location, would hire employees, manufacture products and most of all, require that you ask a bank for money then yes, absolutely, I would have encouraged you to write a business plan. But for those who would operate as a Freelancer who do maybe PR or graphic design, then my feeling was (and still is), that your business planning must center on figuring out how you’ll get clients. A comprehensive marketing plan is the document of choice and that would include a sales and pricing strategy as well.

Business owners have been known to build successful ventures without writing down a single word. Their businesses are typically small and self-financed, maybe with some additional backing from friends and family. Particularly if the operator has already run a business, even one that failed, it is possible to learn valuable lessons to apply to a new venture. Business plans are time-consuming to write. Some will say, just learn by doing. Why not create business strategies on an as-needed basis and test them in combat?

A study of 11,046 companies published in 2010 found that planning resulted in improved business performance of existing companies even more than that of start-ups. It was hypothesized that leaders of existing businesses knew their customers and the business environment more thoroughly than those at start-up companies. Leaders of existing ventures had more information, so there were fewer faulty assumptions born of inexperience.

Another study found that while many businesses can succeed without significant planning, leaders who plan, run businesses that grow 30%  faster and are overall more profitable than those that don’t. The link between business planning and growth was reinforced by yet another study that found that 71% of fast-growing companies, that is, companies that showed a 90% + growth is sales over a 12 month period, were led by a team that planned. Creating marketing and sales strategies, setting sales goals and creating budgets made the difference.  So did defining client needs and the company’s value proposition.

As you may have guessed, a business is less likely to fail if there is a plan in place. A study of 223 companies demonstrated that business planning could not guarantee business success, but rather decreased the occurrence of business failure.

Realize that plans are not etched in stone, but are intended to be guidelines that should be adjusted as necessary.  Identify key metrics and track your company performance to learn if your assumptions stand up to your business environment. If client needs are changing, then observation of your metrics will cause you to respond and pivot and keep your products and services relevant in the marketplace.

A credible start-up business plan, or existing business strategic (long-term) or operating ( one year) plan, need not be long and elaborate. Keeping it lean and focusing on client needs, defining your value proposition and business model, spelling out goals and the strategies that will get you there and identifying metrics that demonstrate either success or the need for adjustments will do your business a world of good.

Start-up entrepreneurs were reported to be 152% more likely to actually start their businesses when they took the time to develop a credible business plan. If you want to make your dream come true, research and write down how you intend to do it.

Determine precisely how you will obtain customers. An operations component will make you consider carefully how you will obtain, produce and deliver the products or services you plan to sell. Devise a marketing and sales strategy before you approach prospects, so that you will know what to say to those who would become customers. Finally, acknowledge the amount of money that will be required to open the doors and keep them open as you build your business by developing a realistic financial plan for your enterprise.

Thanks for reading,

Kim

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Business Planning for Nonprofit Organizations

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A successful nonprofit organization requires not only a vision and mission that resonate,  but also a good business model and well thought out operational,  marketing and financial plans.  There must be a sufficient number of constituents in need of programs and services that the organization would provide.  Planning to ensure growth and sustainability into the future must be carried out.

Over the last 5 years or so,  foundations that make major grants to nonprofit organizations have begun to require that aspiring recipients submit a business plan in the application materials.  Apparently,  a proliferation of grant requests has prompted many deep-pocket foundations to demand evidence of viability and responsible leadership and management in nonprofits they agree to fund.

The goal of nonprofit organization leaders is to ensure that all programs and services offered by the organization reflect its mission and are expertly delivered.  The organization must attract a desirable number of constituents,  be fully staffed and operate at optimum capacity.  Good relationships with donors must exist and sources of reliable funding must be in place.  The leadership team should have reason to be optimistic about the organization’s ongoing viability and relevance within target constituent groups.  A business plan (and strategic plan) will see to it that nonprofits put those building blocks in place.

Business plans differ from strategic plans in that the focus is on finance.  A start-up nonprofit organization in search of initial funding,  or an existing nonprofit that has plans to expand or upgrade programs,  services,  capital equipment or office facilities will find that developing a business plan will better demonstrate the organization’s viability to potential major donors and strengthen the case for financial support.

When preparing to write the business plan,  the leadership team will take a big-picture 360-degree view of all aspects of the organization,   including the social and economic environment in which it operates,   target constituents groups,  the business model as it relates to the mission,  the financial health of the organization,  specifics of the proposed expansion or upgrades,  the funding request and details of how funds received will be utilized.  The business planning process will also encourage leaders to:

  • Connect the dots between the mission and programs and services delivered
  • Acknowledge operational efficiencies and strengths
  • Establish performance metrics for programs and services offered
  • Clarify the profile of the constituents and identify emerging needs for services and programs
  • Update and refine marketing and communication strategies and channels
  • Identify short and long-term funding needs and identify where funds will be designated

In small organizations,  the Board of Directors,  along with the Executive Director,  will write the business plan.  In larger organizations,  the Development Director,  Operations Director,  Finance Director and other senior staff share the responsibility.

The business plan for your nonprofit will compel the leadership team to acknowledge and address critical questions that face the organization and demonstrate to potential major donors that plans are underway to overcome challenges,  exploit opportunities,  improve constituent services and more fully express the organization’s vision and mission.

For more information on business plan writing tailored to nonprofit organizations,  please tune in to Writing Wednesdays on Wednesday December 4 at 3:00 PM EST  (2:00 PM Central, 1:00 PM Mountain, 12:00 PM Pacific)  http://www.writingtomakeadifference.com/archives/4007

Thanks for reading,

Kim

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Presenting a Webinar

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Last Wednesday I presented my first (and perhaps only) webinar.   To prove to myself and the world that I’m capable of presenting a webinar made it a worthwhile experience,  although I suspect that there will be no tangible benefit derived.  I was not paid to present (same old story, hey?).  So far,  the only follow-up has been a guy who wrote to me looking for free advice (of course!).

Nonprofit Webinars offers free one hour presentations each week and the selection is very good.  My topic was  “A Business Plan for Your Nonprofit”.  If you’re interested,  please visit   http://nonprofitwebinars.com   and you will be able to access my presentation,  plus several others.  Maybe you can explore the possibility of presenting a webinar yourself?

Putting together the presentation text was not a huge chore,  since I teach business plan writing on a regular basis.  The challenge was editing down a 6 hour workshop to less than one hour (to allow for a Q & A session) and adapting the focus to a nonprofit,  rather than for-profit, venture.

The part I hated was creating the Power Points.  I am no graphic artist and I resent that audiences expect as much graphics works as they do content.  My feeling is that a webinar is like radio.  Content is king and graphic art is the chorus.  The mere thought of producing graphic art work caused me severe stress.  But I had to do the deed.

I found out how to get free online images and registered myself at Morguefile  http://morguefile.com ,  which has hundreds of very decent high-resolution photos available for download to your desktop.  A respectable number of them were applicable to my topic.  I chose photos that were interesting and somewhat ironic or amusing,  yet still related to my topic.

High resolution photos present a problem,  though,  because too many photos cause your file to be too “heavy” to send as an attachment.  Thank goodness a friend who is proficient in producing customized Power Points shrank some of the images and combined with text on some slides and wrote text on top of other photos.  She also used the Power Point animation feature,  which I know exists,  yet was totally unable to figure out.  As I said,  graphics work is not my forte.

On webinar day,  there were technical issues to surmount.  Go-to-Webinar refused to download in Internet Explorer,  but thank goodness I also have Firefox.  Second,  one is supposed to speak into a land line with a headset.  I had neither,  but my iPhone 4 gave good sound quality,  according to the moderator,  and it was better without the headset.

I rehearsed,  but I could have done more  (my schedule went crazy).  I got a little nervous and talked somewhat too fast.  I synched the slides,  the text and my voice over rather well.  I did my best to sound more conversational and less preachy because a webinar is radio,  with visuals.

I developed simple poll questions to help me know who in the audience had done business planning and strategic planning previously and I took questions at around the 15 minute mark and again at around 30 minutes.  I preferred to address a few questions as I went along,  rather than holding all until the Q & A.  The moderator handles all questions and the presenter gives the answers.  I got some very good questions and I felt good about my answers.  I conveyed my expertise,  which was the objective.

Toward the end of Q & A,  my phone connection cut off and I had to dial back in,  which was frustrating.  I handled it like a trooper and traded some relaxed banter with the moderator.

So what grade would I give myself? A solid B.  If by some miracle I do this again,  I’ll make myself rehearse more.  Other than that,  I’m happy with my performance.  If only I could get a client out of it!

Thanks for reading,

Kim

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Business Model Guideposts

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I will teach “Become Your Own Boss:  Effective Business Plan Writing” , a three part workshop (total 6 hours) held at Boston Center for Adult Education 122 Arlington Street Boston MA on three consecutive Thursdays 5:30 PM – 7:30 PM February 17 – March 3.  Register at http://bcae.org, course #420174 or use the direct link:

http://bcae.org/index.cfm?method=ClassInfo.ClassInformation_class_id=4967&int_category_id=48&int_sub_category_id=13&int_catalog_id=0

The business model defines the method by which an organization creates and delivers value through products and services offered and the way in which it persuades customers to pay for that value.  The business model encompasses the manufacture and marketplace delivery of products/services,  how best to access prospective customers,  where and how business transactions take place and customer service.  The business model is the blueprint for how the venture operates in real time and makes a profit.

The business model reflects what the business owner/management team believe about what customers value,  the way in which customers want that value delivered and what they will pay to obtain it.  The business model can also function as an analytical tool. 

 Its examination can help the business owner effectively address challenges such as client retention problems,  insufficient new business development,  or persistent customer service snafus.  It can urge the management team to find a way to lower the cost of goods sold,  add or delete services, or  rethink sales distribution channels.

How’s your business engine running these days?  Might a tune-up be in order? Here are some questions to ask yourself and guideposts to follow as you build or refresh your business model:

  • Who are the target customers?
  • How can your organization best attract,  acquire and retain the target customers?
  • What need does your product/service fulfill or what problem does it solve?
  • What perceived value does your product/service provide?
  • How can you differentiate your product/service in ways that resonate with the target customers?
  • How will you generate revenue?
  • Where will business take place,  how and when will customers pay?
  • Identify and locate customers with sufficient money and motive to do business with you,  preferably on a regular basis.
  • Verify that there will be enough paying customers to allow the business to make a profit.
  • Identify which product/service features and benefits that target customers value most highly.
  • Identify the least costly source location and manufacturing process for your products/services.
  • Use the most cost-effective product/service delivery system that customers will accept.
  • Identify product/service add-ons and upgrades that are easy and inexpensive to provide and for which customers will pay a premium to obtain.

Thanks for reading,

Kim

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Business Model Nitty-Gritty

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Business experts view the development of a strong business model as an essential component of business planning and I would agree.  The business model ranks near the top of the list of business planning responsibilities.  I teach business plan writing for an SBA affiliated organization and I’ll place the business model fourth in line,  after one gauges demand for the product/service,  defines the primary customer and evaluates the competitive landscape.

The business model is the roadmap within the roadmap that is your business plan.  It is the blueprint for the process by which a company will make and sustain a profit.  It is therefore necessary to do thorough market research and put the pieces together carefully.  If you expect to make any real money,  you had better get your business model right.  Unfortunately,  too many aspiring entrepreneurs do not roll up their sleeves and hash out the gory details that are the building blocks of a viable business model.

The business model shows you how to make your business work efficiently.  The first big question the business model asks you to examine is,  how will you and the clients connect?  Will they find you via your website?  If so,  how will they know that your website exists?  What should you do to drive them to your site and what do you want them to find and do when they get there?  The type of website that you design and your call to action are business model issues.

Or maybe you will connect with clients and prospects via referral.  Who, then, will refer to you and what will motivate that behavior?  Do you have,  or can you create,  referral relationships that will feed you a steady supply of prospective clients? 

For example,  if you are a florist,  do you have relationships with wedding and other event planners? Perhaps you worked in a busy floral shop and know a few people who will send brides and others to you.  Or do you think you can depend on networking to connect you with enough prospects to get the ball rolling on sales?  Who knows,  maybe you are that lucky.

Where business will actually be conducted is another business model issue.  Will customers visit you at your floral shop,  or will you operate as a Freelancer and go to them, toting a binder or iPad that shows examples of arrangements you can create?

For those who sell other types of products,  will you sell from a physical location,  will you place items into the  stores of others on consignment,  or will all be sold via your website?

Providers of intangible services must first know how clients expect to engage in the type of transaction offered and whether you should open an office  (accounting or law),  or go to the client’s location  (PR services or business consulting).  Your business model will explain it all and tell the reader (and you) why it makes good business sense to sell in the way you’ve chosen.  As your business grows,  the business model will change accordingly,  to accomodate increased demands on resources and client expectations.

Remember also to address customer service issues,  like your return/replacement policy,  in the event that a few customers are not satisfied with a product,  or if something breaks while being shipped.  If you will sell from your website,  the shipping process will be addressed in your business model.

So the business model impacts many facets of your business plan and its fine points deserve careful consideration before you take the plunge and start spending time and money on a concept that you cannot make work.  Next week,  we’ll take a look at questions to ask yourself and some guideposts to assist you as you develop a business model for a new enterprise,  or revamp the one you’re in now.

Thanks for reading,

Kim

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The Best Business Plan for Your Business

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A well-conceived business plan does much more than merely describe what will become your business.  Your business plan must sell you first and foremost,  along with the products or services you’ll offer,  the business model you will follow,  the marketplace in which you’ll compete,  plus reasonable estimates of start-up and monthly operating expenses.  If outside funding is required,  then the plan must convince lenders or investors that you are prepared and qualified to build a significantly profitable enterprise.  A good business plan will do the following:

  • Define the business mission
  • Describe the products and services
  • Identify target customers
  • Identify and evaluate major competitors
  • Describe the business environment
  • Detail the business model
  • Describe the business strategy
  • Detail the marketing plan
  • Demonstrate how a profit will be made
  • Provide an exit strategy

Here are business plan options for three scenarios:

The Executive Summary

An Executive Summary is a condensed version of a full-dress business plan and often runs to about 5-10 pages in length.  When written well,  the Executive Summary nevertheless functions as effectively as a traditional business plan.

It is a useful tool for Freelancers who will open a consultancy and will have relatively modest start-up costs and monthly operating expenses and are savvy enough to appreciate the value of a road map to launch their venture.  It is not a business plan option for those who will approach lending institutions or investors.

The Executive Summary states the business mission,  describes the products/services,  describes the primary clients and competitors and details the business strategy,  business model,  marketing plan and relevant financial data.  To be useful,  the document must fully integrate that information and demonstrate how the business will become profitable.

The Operational Business Plan

An Operational Business Plan is produced by an existing business with several years’ performance history,  usually with a goal to either apply for business expansion capital or prepare for the sale of the company.  Operational Business Plans may also be used to upgrade and streamline how a business runs,  functioning as a guide for the management team.

The Operational Business Plan delves into great detail about production,  customers,  competitors,  the marketplace and business environment,  sales distribution channels,  management and staffing.  Historical data are available and five years of financial statements are typically included,  along with financial projections that forecast the company’s expected performance over the next three years.

The business plan to attract investors

When outside investment is sought,  it goes without saying that the potential for strong profits must be demonstrated.  The more money that is requested,  the bigger the promised profits must be and the more quickly realized.  The break-even statement,  which shows at what point in time the business will go into the black,  along with credible financial assumptions and projections,  are critical in this scenario.

If the business is an existing one,  the financial projections must appear to be attainable,  based on the five year financial history given.  Make sure that your business and personal credit scores are 700+,  or you won’t see a dime from a bank.

Venture capitalists and angel investors may be somewhat more forgiving of a less than perfect credit rating if your business concept and model are extraordinary.  Beta test the product/service and business model with target customers to verify demand for what you intend to sell and your ability to efficiently deliver the goods to the marketplace.

For VCs, the potential for big profits is king.  They are in it for the pot of gold that comes when the company goes public and stock is offered.  Angels are not totally dissimilar to VCs,  but they are drawn to an entrepreneur’s vision and passion in addition to the pay-off.  That’s why they’re called angels!

Thanks for reading,

Kim