Wednesday, November 10, 2010

Quick and Easy Business Plan

Recently, I met with a young man who is excited to start his own business.  Like many people who have a passion for doing good and not just making money, he has a pretty good idea. This drive can start young when you open your first lemonade stand to quench the thirst of the passersby on a hot, humid day. Like many entrepenuers, he has the tolerance for risk. However, he wasn't sure of any particulars about the chances of success. I talked him through the 3 C's (or four depending on how you think about the last category). I've learned that successful people may take risks, but they're calculated risks. Therefore, before opening the new "lemonade stand", let's make some calculations.

Customers: No business will succeed without customers, and enough of them. What is the demand for the product or service? What is the typical payment schedule, and what is their ability to pay (i.e. are they struggling with their own cash flow issues)? (This answer will flow into the Cash Flow/Costs.) How much business is done through relationships, and how likely are customers going to accept a new unproven business? Customers have a lot of inertia based on their current spending habits. To get them to break their habit, you need to have a compelling reason for change. Will it be price, delivery, quality, technology or service? How do you learn about contracts, bids or other needs for the product/service?

Competitors: Likewise, what will be your competitive advantage in terms of price, delivery, quality, technology or service (like accessibility)? How will you overcome the connections the market has with your competition? What will be the likely responses your competition will have to your entry, and your attempts to shake up customer expectations? Will they copy, create a workaround/end-run on your offer or will they escalate the battle on the value dimension? How easily can you partner or supplement their business so as to not appear as competition but raise the overall market demand? (Like the proverbial story of the single lawyer in town going bankrupt, but there's plenty of business when a 2nd lawyer moves in.)

Cash Flow & Costs: Write out a story of how your business is going to look and feel, day by day. Start with "Day One" and then "Day Two" and so on. Make sure to include payments you have to make. Determine when income is going to occur after delivery of the product or service. What investment needs to be made: cash, equipment, services, other start-up expenses & fees? Watch out for hidden expenses (e.g. registering your business with your state is often a low fee but then they might require the printing of legal notice which can cost 4x as much). What will be the profit on each "part" of the product or service sold? How many sales have to happen to break-even for monthly expenses? How soon can costs be reduced? How long can you lose money, because costs are initially high, before the cash runs out?

I know people who have drafted a cash flow report for their new business, cut the income in half to be conservative, and were still too optimistic in hindsight. They hadn't thought through the timing of the sales, payments, capital requirements, and the inertia of the customers to stay with their current suppliers.

This is pretty quick and easy, down-and-dirty, pro forma business plan writing. It may not be sufficient for venture capitalists or bankers. However, it does force you to answer some basic but key questions about your business idea. Answer them before you sell your car, home and baseball card collection to finance your new "lemonade stand".

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