So you want to start a business. You’ve heard that you should have a business plan. You’ve got a vague idea that you should get started on that sometime. That vague idea has been sitting in the corner getting grumpy as you’ve neglected it. And now the idea is a mean looking little monster with big pointy teeth. The best way to get that sucker is to take a step by step approach that breaks down this big “MAKE A BUSINESS PLAN” task into a bunch of smaller pieces.
Before we jump into the nitty gritty of how to write this plan, let’s define what we are looking for in the end. The audience for the business plan is you. The value of the plan is primarily to focus the efforts of the entrepreneur. As an added bonus, it is a tool to attract investment. Generally a plan includes:
- Simple definition of a problem and the businesses unique solution (the elevator pitch)
- Definition of the client base for the business
- Analysis of the completion and the business’ differentiation
- Management team of the business
- Brief marketing plan
- Brief sales plan
- Spreadsheet with the financial projections for the next few years
- Clear description of all assumptions made in the financial projection
Step 1: What’s the point?
Answer this question for yourself: What type of business do I want this to be and in what timeframe. A few examples might be:
- I’d like this business to generate $5,000 a month after 5 years with about 20 hours a week of ongoing effort
- I’d like to start a business and build it over 15 years to support myself and 5-10 employees
- I’d like to create a high risk, high reward startup venture with venture backing and sell it for a bajillion dollars.
Generally those first 2 businesses are referred to as lifestyle businesses. They start and then continue for a long period under the same ownership. The third is a typical venture business. Generally these are characterized by a drive towards “exit.” There are lots of other types as well; yours might not fall into these categories.
Step 2: What’s the business?
Write down a few quick sentences about each of the following:
- Define the problem. Describe the solution
- Describe the demographic of the client base.
- Who is the competition? Competition is: “the place where my clients are currently spending money.” Competition is not: “The businesses that are most similar to mine”
- How am I different from the competition?
Take some time to brainstorm about all of this stuff and how the business is going to serve the needs of clients. Be creative.
Now, take a hard look at your ideas and ruthlessly cut them all out except the one key shining idea that defines this business. The essence of strategy is choosing what not to do.
Step 3: Describe a single client experience.
This is known as the “unit case”. It is the experience of typical client once the business is up and going. Think about how the client found out about the business. What were they thinking as they considered purchasing. How did they purchase? What was their method of payment? What communication did they receive from the business? When and how were the services and products delivered? How did the transaction or relationship end? Can the client repeat the purchase? Can they refer other potential clients?
Resist the temptation to think about 100 clients right away. Stick with just this one person. A lot of stuff naturally falls out of the answers to these questions: a marketing plan, a sales plan, the assumptions behind the financial model.
Step 4: Build a unit model
Take all the answers to the questions above and build out a financial model for the single client. The real key to this exercise is getting a list of all your assumptions. These assumptions are dollar amounts and you need to start thinking in terms of the cost and revenue associated with different activities around a client.
The spreadsheet has three sections: assumptions, revenue and expenses. The assumptions section should be completely separate and easily editable. The revenue and expense sections should primarily be formulas that reference the assumptions section. This gets the analytical side of the model down on paper, and lets you do a gut check: does this business make money for a single client? If not, don't try to make it up with volume! At the end of the model, you must be able to list each of these assumptions:
- The cost of acquiring one client
- The lifetime revenue value of the client
- The cost of materials, goods and time required to service the client
- The collection timeframe for the client paying for services
- The amount of time it takes to recoup the cost of a client in revenue
- A dollar value associated with management’s time, or a salary for the management team.
- The referral rate of a happy client
- The repeat purchase rate and timeframe of a happy client
Step 5: Take a breath. Walk away.
Before going any further, take a week and leave the thing alone. Take some time to reflect on the plan, but don’t edit it. Take your dog for a walk. Enjoy time with friends. Talk about the plan, but don’t edit it. This process is creative, and therefore takes time. The end goal is a well considered plan, not just a paper document.
Step 6: Build a 50,000 foot view
Now that you understand the unit model, build a full scale model. Take the assumptions you had before, scale it to the number of clients over time that meet your goals. This is largely a spreadsheet exercise where you are balancing three things: the amount of initial working capital, the time resources of the founding team, and the assumptions in the unit model.
You’ll find that small changes to certain assumptions have huge impacts on the overall revenue and cost dollars. Don’t worry, this is typical. The value of this part of the process is that you become accustomed to adjusting the financial model of the plan as base assumptions change. Since the assumptions never survive their first encounter with real clients, this is a very important skill to develop.
You’ll have a final salary number for the management team. Or you’ll have a dollar profit after 5 years. Barring that, you’ll have some important metric that sums up the point of the whole thing. Check that number against your expectations. Is it right on? No? Consider changing aspects of your strategy that might result in different economics.
Step 7: Expose the plan to scrutiny
Shop the plan around to different people who can look at it critically and constructively. This constructive criticism is essential data for improving your business. Evolve the plan considering this data in your decisions. Use the data in your decisions, but don’t let it dominate your strategy.
Keep in mind that a good plan generates lots of resistance. An engaged adviser will poke holes in assumptions, argue against strategy, and suggest additional revenue models. A poor plan will exhibit blank stares and lots of compliments. Be gracious in receiving all of this stuff. It doesn’t help to argue with somebody to you are blue in the face, but instead drive towards getting the essential reasons behind criticism(or lack thereof).
Step 8: Rinse and Repeat
This business plan is a living document. Make sure to refer to it every few months. You may find that your strategy has diverged significantly from the original plan. Has this happened intentionally? If not, is the divergence a good thing anyway? What impact do the changes have on the economics of the model?
A Final Note
A lot of folks will give you advice. Some of it will be solicited, most of it won't. As the business plan matures, this advice will be less novel than it was at first. You don't necessarily need to act on every piece of advice you get. But you do need to listen graciously. In the final analysis, you'll know your business plan is solid when you get lots of engagement and criticism, but you confidently know that your ideas are accurate and why your detractors are incorrect.
Thanks to Cindy Kuzma for help editing this essay.