Category Archives: Business

Plan for Startups Your Business

Business advisors, experienced entrepreneurs, bankers, and investors generally agree that you should develop a business plan before you start a business. A plan can help you move forward, make decisions, and make your business successful. However, not all business plans are the same, not every business needs the same level of detail. You might develop a fairly simple business plan first as you start a small business, and that might be enough for you. You can also start simple and then elaborate as you prepare to approach bankers or investors.

For a simple example, imagine a woman making jewelry at home and selling it at a local flea market on the weekend. A business plan could give her a chance to step back from the normal flow and look at ways to develop and improve the business. The planning process should help her understand her business. It should help her define what she wants from the business, understand what her customers want, and decide how to optimize her business on her own terms. She might benefit from developing a simple sales and expense forecast, maybe even a profit and loss, so she can plan how to use and develop her resources. She might not need to create detailed cash flow, balance sheet, and business ratios. A simple plan may be just what she needs to get going.

This first stage of a plan, that we call the Concept Kick-Start, focuses only on a few starter elements. The Mission Statement, Keys to Success, Market Analysis, and Break-Even Analysisgive you a critical head start toward understanding your business.

However, not all start ups are that simple. Many of them need product development, packaging, retail fittings and signage, office equipment, websites, and sometimes months or even years of payroll before the sales start. Unless you’re wealthy enough to finance these expenditures on your own, then you’ll need to deal with bank loans or investors or both; and for that you’ll need a more extensive business plan. Startup company or not, the plan has to meet expectations.

One suggestion for getting started is to develop your plan in stages that meet your real business needs. A few key text topics might be enough to discuss the plan with potential partners and team members, as a first phase. You may well want to add a basic sales and expense forecast, leading to profit and loss, as next phase. Adding business numbers helps you predict business flow and match spending to income.

Ultimately, the choice of plan isn’t based as much on the stage of business as it is on the type of business, financing requirements, and business objective. Here are some important indicators of the level of plan you’ll need, even as a startup:

  • Some of the simpler businesses keep a plan in the head of the owner, but every business has a plan. Even a one-person business can benefit from creating a plan document with ideas written down, because the process of producing a plan is useful and valuable.
  • As soon as a second person is involved, the need for planning multiplies. The plan is critical for communicating values, goals, strategies, and detailed implementation.
  • As soon as anybody outside the company is involved, then you have to provide more information. When a plan is for internal use only, you may not need to describe company history and product features, for example. Stick to the topics that add value, that make you think, that help support decisions. When you involve people outside the company, then you need to provide more background information as part of the plan.
  • For discussion purposes, text is enough to get a plan started. Try describing your mission, objective, keys to success, target market, competitive advantage, and basic strategies. How well does this cover your business idea?
  • Can you live without a sales and expense forecast? Sometimes the one-person business keeps numbers in its (the owner’s) head. However, it’s much easier to use some tools that can put the numbers in front of you, and add and subtract them automatically. That’s where a plan helps.
  • Do you really know your market? A good market analysis can help you see opportunities that might not otherwise be obvious. Understand why people buy from you. What are the needs being served? How many people are out there, as potential customers?
  • Do you manage significant amounts of inventory? That makes your cash management more complicated, and usually requires a more sophisticated plan. You need to buy inventory before you sell it.
  • Do you sell on credit? If you are a business selling to businesses, then you probably do have to sell on credit, and that normally means you have to manage money owed to you by your customers, called accounts receivable. Making the sale is no longer the same thing as getting the money. That usually requires a more sophisticated plan.
  • Do you do your taxes on a cash basis, or accrual basis? If you don’t know, and you are a very small (one person, maybe 2-3 people) business, then you’re likely to be on a cash basis. That makes your planning easier. However, most businesses big enough to work with an accountant and have separate tax statements use accrual accounting because they want to deduct expenses as they are incurred, even if they aren’t fully paid for. By the time you are using accrual accounting, you’ll probably need more sophisticated cash flow tools, and a more extensive business plan.

Optimised Your Business Model

A business model is a description of how your business intends to operate and make money. At the most basic level, it involves a producer making something and selling it directly to customers at a profit (but this simple model has propagated into numerous diverse models in recent years).

The development of a business model is essentially a strategic perspective rather than an operational assessment, and focuses on how you capture value i.e. it includes a description of the value proposition. Deciding upon a business model becomes particularly important as a concept when it is not a simple ‘make and sell direct‘ model and you are looking to create value through a non linear route.

The Business Model – An Introduction

In days of old, business was arguably a lot simpler; you produced something and sold it for a profit, building up a good reputation over time so as to ensure ongoing patronage. Before the industrial revolution most sales were essentially local, and you had a much greater steer on competition, demand levels and pricing. You probably sold your products directly to consumers as the butcher, baker or candlestick maker.

Fast forward 200 years and business has changed considerably. A lot more creativity is needed to get noticed in a time-pressed world (not to mention in making a sale). You are probably facing global competitors, and in many instances a widely dispersed audience who are increasingly difficult to reach in a cost effective manner. As a result, numerous alternative strategies have emerged to get your product to market, safely into the hands of the consumer and business model innovation has become increasingly popular.

In many respects the emergence of business model innovation started with Gillette and razor blades. They worked out that if they sold the razor at low cost, consumers would happily pay for the blades. Given the resultant switching costs and customer inertia, the result was often a lifetime of patronage (despite the fact the initial transaction was a loss-making one for the producer). In essence, by providing something at below the market price (the razor); you can create a market for a secondary product (the blade) upon which you make ongoing profits. A second characteristic of the model was that the mark-up on the secondary products were often disproportionate relative to their cost so were highly profitable for the manufacturer. Anyone who has had to buy replacement ink cartridges will bear witness to this!

Plan Layout or Business Plan

The first point to make with regard to a business plan layout (also known as a business plan outline) is that there is no one typical layout. Business plans are unique and the layout will be dependent on a number of factors, not least the purpose of the business plan, but also whether the plan relates to a new start up or an existing business. In Business Plan Pro, for instance, we ask a number of targeted questions as the planning process starts which then serve to shape the subsequent business plan layout.

Although the layout itself can vary, every business plan needs a number of crucial components.

It needs to start with an executive summary (typically written at the end of the process) so as to whet the appetite of the reader (often a prospective investor).

It then needs to follow a particular structure which will include details about the opportunity, those tasked with delivering the idea, and the financing required to bring the idea to market.

Within Business Plan Pro, you get a recognised business plan layout which can be fully customized so that you can tailor it to meet your own individual requirements.

A second common theme is for people to abbreviate phrases so we get biz plan, bizz plan, biz plan pro or even bizplan. Perhaps I’m a little old fashioned, but again I find these abbreviations lazy, annoying and by extension I feel they reflect poorly on the author.

A business plan is a formal document, whereas a text or an email are typically less formal and I feel therein lies the crux of the issue. We undertake these activities daily and brevity is accepted in these exchanges as an acceptable trade off for grammatical and spelling accuracy. A business plan however is not only used as a means to describe an opportunity but is also used to assess the competence of the author. I am sure I am not alone in the view that no matter how good a bussiness plan is, I will have serious doubts about the person entrusted with delivering the business plan if the document contains basic spelling mistakes.

Small Business Performance

In other words, if you do not have a plan for where you want your business to get to, performance measurement does not matter much!

Management dashboard

Small businesses come in various guises and hence it is difficult to generalise when it comes to individual performance management. Metrics (also called Key Performance Indicators or KPI’s) can range from Software as a Service (SaaS) businesses focusing on Lifetime Value (LTV) and churn rates, to hotels measuring occupancy levels and average room yields. However the old adage holds, ‘What gets measured gets managed’, so it is important to have some metrics in place. A good starting point would be to try and understand what are the typical metrics that define success in your particular industry. After that, it’s a case of adding some additional metrics to the mix to ensure that all bases are covered. The following represent a list of some of the more common elements that can make up a “management dashboard” which combine to help you manage performance. Of course, some may argue that profitability should be the main bellwether as to the performance of a small business. While there is merit in this view, it is better to use a combination of metrics which all support the primary goal of trading profitably while growing year on year. This way you have early warning systems in place, as an assessment of profitability based on financial statements can take some time given the reporting time lag.

It all starts with a plan

Creating a simple business plan is vital for all small businesses regardless of whether the business is looking to raise money or not. Planning is essentially about having the foresight to plot and manage your own future, in stark contrast to reacting to accounting data with its emphasis on past performance. While business plans have many purposes, they are not often associated with performance measurement, despite the fact they are a very useful tool with which to measure performance. By committing your thoughts to a business plan you can ensure that you (or your team) know what the priorities are, what activities need to be done, who needs to do them and by when. A business plan brings a lot of transparency to the business with accountability in the form of names, actions and dates.

Cash-flow management

Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple–many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). If you are a “cash-only” business, you can bank the income immediately. However, if you sell on credit, you receive the cash in the future and hence may need to pay some of your own expenses before that income hits your account. This will put a further strain on the company’s solvency and hence a well structured business plan will help you manage funding requirements in advance.

Pro forma profit and loss

A profit and loss forecast is an integral element of any business plan alongside a pro forma sales forecast and cash flow forecast. These statements are forecast in advance (broken down by month) and represent a reference point for actual data as it emerges. By forcing you to forecast and to document all expected revenues and costs, the process helps you produce a report detailing the likely trading performance for the year ahead. If you are an established small business, this data is easier to arrive at as you can use past performance data as a reference point. While brand new businesses’ lack of trading history makes this process more difficult, it also makes it more valuable – you need some references to know whether your new business is on track. Once you commence trading and have actual real data, it is then easy to undertake some variance analysis (between the forecast data and the actual data) to assess whether or not you and your business are on track. With actual data it is possible to take remedial action before waiting for a full year of historic transactions to emerge, at which point it may be too late. For example, if sales in month one are significantly below the planned level you can make an early decision regarding what actions need to be taken as a matter of urgency (i.e. perhaps bringing costs into line, increasing marketing activities, pivoting the business, etc.)

Google Analytics

If you are running a website it is essential that you are running an analytics package in the background (Google Analytics is one of the more popular free ones). This enables you to gain a real insight into customer behaviour on your website. If you are an ecommerce site, you’ll be able to analyse details like the eCommerce Conversion Rate (ECR) and aim to improve this rate over time. Given that your revenue is essentially a factor of two elements (ECR * Number of visitors), improvements in these two will help you drive business performance improvements.

Plan is a living document

images-42As you review implementation results with the people responsible, you will often find the need to set new goals and make course corrections. Keep track of the original business plan and manage changes carefully. Although changes should be made only with good reason, don’t be afraid to update your plan and keep it alive. Business Plan Pro Premier has Planned, Actual and Variance tables, complete with linked formulas, to facilitate active cash flow analysis.

Prescription for live planning

After your plan starts, save a copy of your plan in Business Plan Pro and then type actual results into the sales forecast, profit and loss, and milestones Actual tables. Then watch what the variance views tell you.

Note when actual results indicate you need to make changes.

Stay in the Business Plan Pro Actual mode and make adjustments to future months of your Actual cash plan. After all, it is already more accurate than the original plan, because it has actual results for the months already completed.

As each month closes, type actual results over your revised plan numbers into the Actual area.

The starting sales plan
The example begins in this first illustration with the sales forecast imported from a finished business plan, developed in Business Plan Pro.

As you look at the variance for the sales forecast for the first three months, you should see several important trends:

Unit sales of systems are disappointing, well below expectations.

The average revenue for systems sales is also disappointing.

Unit sales for service are disappointing, but dollar sales are way up.

Sales are well above expectations for software and training.

Adjusting the sales plan
One of the main advantages of creating a plan on a computer is how easily you can change it. Month by month, as you record your actual results, you can make changes to your plan in the future months of the actual tables, preserve the plan tables, and be able to see the plan vs. actual variance.

In this example, if the company knows by March that sales will be different than planned in April, they should estimate the revised forecast, as a correction to future results. When the actual results are available, they can then replace the revised plan numbers with actual results. The actual results area can then become a plan area for course corrections.

Compare the difference in the February and March columns in Illustration 1: Beginning Sales Plan (the original plan) above, and Illustration 4: Adjusted Sales Plan in Actual Table, (the actual results area).

Known More About Business Models

This is the second of a three-part series. Read Part I and Part III.

The following are some examples of business models that are used by various businesses. The list is by no means exhaustive and is designed to give you a feel for some of the models that exist (business models evolve constantly).

In many instances, the names can vary as they are not typically universally defined.

The Add-On model

In this instance, the core offering is priced competitively but there are numerous extras that drive the final price up so the consumer is not getting the deal they initially assumed. If you have recently tried to buy an airline ticket or car insurance, you will have spotted that the number of extras you are offered can almost reach double figures!

The Advertising model

The advertising model became popular with the growth of radio and TV where the TV stations earned revenue indirectly from people looking to promote services to the audience they attracted, rather than via consumers paying radio and TV stations for the consumption of their TV programmes.

Some Internet businesses derive revenue predominantly as a result of being able to offer advertisers access to highly targeted consumer niches (often in the absence of revenue from selling their goods or services).  So if your website is about a narrowly defined topic, it is likely to attract a highly defined niche audience who could be offered complimentary products or services with a higher probability of success than blanket mass market advertising.

However, this business model is increasingly difficult to justify if it is your main revenue stream. For a start, the landscape is extremely competitive and advertisers are spoilt for choice. Building brand awareness and translating that into site visits is a very difficult and costly challenge. Successes such as Facebook are very much the exception to the norm.

If this model is being considered for your startup, it is worth noting that nowadays most savvy investors ignore ‘vanity metrics’ such as Page Impressions/Visitor numbers and want to understand whether the underlying business proposition is profitable. Examples such as YouTube illustrate how hard it can be to monetise free content even when you have significant visitor numbers. In short, this model is in decline for most businesses.

The Affiliate model

An affiliate is simply someone who helps sell a product in return for commission. However they may never actually take ownership of the product (or even handle it). They simply get rewarded for referring customers to a retailer when they make a sale.  Again this business model has been a huge success given the ease with which the Internet facilitates it.

The Auction model

The auction model is synonymous with eBay, these days, but of course auctions have existed for hundreds and hundreds of years.  The tulip market in Amsterdam is one of the more famous examples. There are numerous different types of auction, from English, to Dutch, Vickrey, Sealed Bid, etc., and they all share certain characteristics: the price of the good is not fixed; each individual assesses the value of the good independently; final value is determined via competitive bids. This business model has become very popular in recent years as the Internet has helped to broaden its appeal.

The Bait and Hook model

This is essentially the razor blade analogy listed above, where disproportionate amounts of the value are captured on components, refills and the like. Anyone who regularly buys ink cartridges for printers will recognise this model where customer lock in and switching costs result in monopolistic pricing on the component side. The mobile phone business also grew rapidly on the back of this model as handsets were often supplied free of charge when you signed up for a contract. Nowadays with SMART phones, such is the level of demand for some that consumers have to pay hundreds of pounds for the phone and in many instances minimum contracts are 18 months.

The Direct Sales model

While direct selling was initially the primary ‘route to market’, production efficiencies coupled with improvements in transportation meant producers could reach a much bigger market and this resulted in the pre-eminence of the retail distribution model for many years.  However the emergence of the Internet as a distribution channel meant that producers could disintermediate costly resellers and sell direct to customers themselves, in effect going the full circle. The PC manufacturer Dell is a great example of a company who is very focused on the direct sales business model.