Following an unclear business plan is like driving to a cottage you've never been to before. Most of us have attempted to decipher the chicken-scratch, napkin-on-the-dashboard driving instructions to your host's "easy to find" hideaway.
"Drive until you pass the second pine tree, and take the fork in the road going to the right," your host instructs. "Then, go down the hill, bear left at the Smiths' cottage—it's the one with the window shutters—drive straight for about two kilometres until you see the entrance to our cottage, on the north side of the road, past the big swamp."
The chances of you getting lost? Likely.
Too many new entrepreneurs try to follow similarly vague instructions to reach a desired business destination. They get distracted by:
Templates. There are hundreds of business plan software programs, online templates and interactive enter-and-click tools available to entrepreneurs all employing different formats, structures and emphasis. The selection is overwhelming and may result in completing a plan template that's misaligned to their business.
For example, a free plan template supplied by a financial institution might feature a very detailed financial section, because that's what matters more to that particular organization. Their emphasis is on numbers. But an entrepreneur launching in the creative arts might do better with a plan that talks more about their product. The bank plan template is a mismatch.
Consultants. You'll find plenty of people willing to charge you $5,000 to $25,000 to prepare a business plan. I think hiring them is a mistake: entrepreneurs should write their own plan. The experience is priceless. And it makes more sense considering it's the entrepreneur who must explain the contents of the plan—something that's difficult to do when someone else did the thinking.
Purpose. A great plan knows what it is. It's confident about its purpose. Decide at the beginning what you intend your plan to accomplish. A plan is usually written to a) raise money, b) guide management or c) to obtain feedback.
Return to clarity and create a plan that's truly terrific by remembering these plan development basics.
When I read a business plan prepared by a new entrepreneur I really want to understand what the business is about. I want to understand the target market, see how market research was conducted, learn about the experience of the founders, and figure out how I can help them to advance on their mission.
So make the plan really, really easy to read. Use logic, examples and clear language.
The heart of your business plan is the financial statements, which include a projected Cash Flow Forecast, Income Statement and Balance Sheet. It's a good idea to include a Startup Budget (usually calculated as capital costs plus six months' of operating costs).
Preparing these numbers can be daunting if you are unfamiliar with financial statements. That's why it's important to work with an advisor (or, if possible, an accountant) who can walk through the figures with you and help to put everything in its proper place. Advisors are usually available within banks, government-funded enterprise centres and non-profit entrepreneur organizations. Or, approach an experienced businessperson to help you out.
One last comment on numbers: make sure they are consistent, precise and researched. For example, the amount of money you plan to spend on marketing should appear as the same number in your projected Income Statement and your Cash Flow Forecast. Like any line item, be prepared to explain how you arrived at that number—or risk your credibility.
The whole point of the business plan exercise is to force you to research your idea.
Research includes checking out all aspects of your fabulous idea:
- Talking to prospective customers to make sure they will buy, and how much they'll pay
- Investigating competitors to identify a weakness you can exploit
- Obtaining cost estimates from all suppliers
- Analyzing marketplace trends to see if there's a future for your particular business
- Assessing your financing options (loan, investor, savings, etc.) to determine which one is right for you
- Identifying sources of qualified and affordable employees
- Assessing the strengths and weaknesses of the management team
- Checking any regulatory requirements, permits and licenses required to operate
- Exploring the legal risk to the business
Put all that research into a nice, tidy, 10-page plan to guide you along the most direct route to small business success.
While it's fun to "follow your gut" and impulsively launch into a business, in my experience it leads to disaster: only half of small businesses in Canada live beyond five years.
In the best of cases "following your gut" will delay positive business results because, absent a plan, you'll spend more time in trial and error mode figuring out what works.
Like travelling to that cottage, you want to get there quickly. Cold beer awaits.
Stay tuned for Roger's advice on how to choose the right people to power your startup on July 12.
Read the rest of Roger's series on starting up a business.