Category: Business Planning

In Defense of Business Planning

I just got back from the annual Global Consortium of Entrepreneurship Centers conference held this year at Rice University in Houston.

Once again this year I heard a lot of chatter about business plans.  Many who teach entrepreneurs now question the utility of teaching our student using business plans.

My take?  I think one of the biggest problems is not business plans themselves, but how people use them, when they write them, and most importantly how they develop them.

We set business plans up on a pedestal as if it is the holy grail of entrepreneurship. It is as if we are telling aspiring entrepreneurs that once they
unlock the secrets of the business plan, the world of entrepreneurial
wealth will come pouring out at them.

Are business plans all you need to know to unlock the door to success? Of course not.

Is writing a business plan a complete waste of time? Also, not true.

So why do we teach about business plans? It is because they are a
way to help organize what can be a complex and overwhelming array of
issues. It is because it forces us to integrate our marketing plans, or
operating plans and our financial plans into one, coherent story. It is
because we need to put it all down on paper to make sure that we have
thought of all of the important stuff that goes into a successful
start-up. It is because business plans have become the standard for
communicating about a business to those with money.

Will a formal business plan make you richer and more successful?
Probably not. I know many entrepreneurs who never wrote a formal
business plan for their ventures who have made a lot of money.

But they
all understood the importance of business planning. They just
never took the final step of writing it down. While the business plan
itself may not always be necessary, effective business planning always is.

Understand that the business plan is just a map. It is a map into an
unknown territory. Our actual path in our business will likely look
very different than our plan. But the plan got us thinking. It made us
think about all the details. It helped us understand how all of the
parts of a business fit together to make a whole venture. It helps
prepare us for our journey and makes us better prepared to adjust to
all of the surprises that we will face almost every day we’re in
business.

Success will not be determined by the plan. Success comes from implementation and execution. 

When Small Businesses Should Change their Product Line

This week’s question for Forbes magazine’s America’s Most Promising Companies initiative comes from Brett Nelson, Entrepreneurs Editor at Forbes:

Small companies must get creative to survive the recession—even going so far as to branch into new lines of business (assuming they have the cash to do it). But mission creep comes with serious risk. What are some tangible do’s and don’ts about expanding your product line?

Why should a small company change their product line?  For only one compelling reason — the market is taking them there. 

Entrepreneurs typically rely heavily on their
business plans when the time comes to launch their new venture. It is a
plan that they may have agonized over for weeks, months or years. They
have done their research, creating a carefully thought-out business
that justifies their financial forecasts. But then a funny thing
happens. They assumed in their business plan that the market wanted
“A.” But if they listen carefully to the customer, they often find out
that the customer really wants “B.”

I call this learning to “dance with the market.” And you should be ready to let your customers lead in this dance.

The need to listen to the market never really ends. Markets are dynamic, so you need to be ready to follow where they lead, particularly during times of rapid change and turmoil in the market as we are experiencing with the recession.

What should you be cautious about when it comes to adjusting your mission?

Don’t move so far off of what you are known for that you lose your customer base.  There may be opportunity beyond the boundaries defined by your mission, but these opportunities may end up redefining your business so much that you confuse the market.

Creating More Accurate Revenue Forecasts

This week my Tennessean column looks at the link between a strong marketing plan and more accurate revenue forecasts:

Making accurate revenue forecasts is the single most important step in developing a credible business plan.

Missing the mark on revenues can be catastrophic.

If sales fall significantly short of the forecast, a business can fail because of lack of adequate cash flow. And if sales wildly exceed forecasts, the business may not be prepared to meet customer orders in a timely manner.

Forecasting revenues can seem like an overwhelming task. Entrepreneurs often feel like they are trying to look into a crystal ball that is just too cloudy to see clearly. But rather than do the work that is necessary to improve their revenue forecasts, they take shortcuts.

They simply plug in numbers that have no real basis in fact, often simply putting in enough revenues to give them the profits they hope to achieve.

Fortunately, a well-developed marketing plan, which is the core of a business plan, can significantly improve the odds that revenue forecasts will be on target.

Keep in mind that revenues are calculated with a simple formula: price times the number of units sold. A good marketing plan will give you insight into the two basic numbers in this formula.

First, study the market

One of the questions addressed in a marketing plan is pricing. For most new businesses pricing is dictated by the competition.

Entrepreneurs need to set a price that puts their product squarely where they want to be when compared to the existing competition.

Closely matching existing prices says to the world, “We are as good as the rest.”

If the customer wants even more features or services, a premium price can be set.

The marketing plan also should help forecast the other half of the revenue formula — how many units will be sold. First, learn the size of the target market for the business.

Then conduct thorough market research to figure out what customers want and how well the competition is meeting those needs.

Finally, the marketing plan should explain how the entrepreneur plans to use personal selling, publicity and advertising to reach the customers and give them the information they need to make the decision to buy.

Taken together, this information brings into focus a more realistic estimate for potential sales.

When investors and bankers read business plans, they read the marketing plan first. And as they do, they will flip back to see if the revenue forecast tells the same story in numbers that the marketing plan tells in words. If the revenue forecast and the marketing plan do not tell the same story, they will read no further.

Some Reasons We Plan

My MBA students just finished up presenting their business plans last evening.  Here are some lessons they learned about why the process of business planning is so important (beyond the obvious external reasons tied to financing):

  • Business planning helps finds the things we don’t know about the details — attracting customers, staffing, managing inventory, and so forth.
  • Business planning tests your desire, your passion and your resolve.
  • Business planning helps to determine if all potential partners understand their roles, the time and financial commitment required, and the risk.  It allows us to discover important points of disagreement or incompatibility before it is too late.
  • Business planning can show us the true potential of the business — sometimes this is a pleasant surprise and sometimes it is a real disappointment.  If approached honestly and diligently, it is a true process of discovery.
  • Business planning lays bare the holes in your business model, your team, available resources, and your implementation plans.

To Plan, Or Not to Plan

When I meet with prospective students and tell them about all of the cool features of our program, they inevitably ask me one question: “OK, but are you going to teach me how to write a business plan?”
We set business plans up on a pedestal as if it is the holy grail of entrepreneurship. Just look at BusinessWeek.com’s most recent special issue on entrepreneurship — it is all about business planning. The articles in this special edition include:

“The Right Business Plan for the Job”
“Before You Write a Business Plan ”
“Slide Show: The Best Business Plan Tools”
“Video: What the Business Plan Expert Knows ”
“How to Write a Winning Business Plan”
“Building a Better Business Plan ”
“How to Win a B-School Competition”

It is as if we are telling aspiring entrepreneurs that once they unlock the secrets of the business plan, the world of entrepreneurial wealth will come pouring out at them.
Sorry, but this is just not true.
On the other hand, there is now a debate raging as to whether we should even teach entrepreneurs about business plans. a growing number of experts now fundamentally question whether business plans even matter. It seems that some data suggests that business plans have no impact on the overall success of entrepreneurial ventures.
All of this — and I mean both sides of this debate — is missing the point.
Are business plans all you need to know to unlock the door to success? Of course not.
Is writing a business plan a complete waste of time? Also, not true.
So why do we teach about business plans? It is because they are a way to help organize what can be a complex and overwhelming array of issues. It is because it forces us to integrate our marketing plans, or operating plans and our financial plans into one, coherent story. It is because we need to put it all down on paper to make sure that we have thought of all of the important stuff that goes into a successful start-up. It is because business plans have become the standard for communicating about a business to those with money.
Will a formal business plan make you richer and more successful? Probably not. I know many entrepreneurs who never wrote a formal business plan for their ventures who have made a lot of money. But they all understood the importance of business planning. They just never took the final step of writing it down. While the business plan itself may not always be necessary, effective business planning always is.
Understand that the business plan is just a map. It is a map into an unknown territory. Our actual path in our business will likely look very different than our plan. But the plan got us thinking. It made us think about all the details. It helped us understand how all of the parts of a business fit together to make a whole venture. It helps prepare us for our journey and makes us better prepared to adjust to all of the surprises that we will face almost every day we’re in business.
Success will not be determined by the plan. Success comes from implementation.
On every golf hole I always start with a plan of how I should play the hole. Then I actually hit my shot. The wind may change direction. the ball might take an unexpectedly bad hop on the ground. Or — and this is most likely — I just don’t hit the ball the way I had planned and hoped. So the way I actually play the hole changes with the reality of each shot based on my execution and based on the uncontrollable events that are a part of any activity — be it golf or be it building a business.
But I still plan. I just know that I will have to adjust my plan each step along the way as I begin to implement it as I start and grow my business.

My How Plans Can Change

According to our original business plan, I would probably just now be exiting our health care business. But the exit ended up happening about twelve years earlier than we had thought. As carefully as we plan, the same change that creates the opportunity can lead us in unexpected twists and turns.
A great example of this can be found in the story of Chipotle told by its founder Steve Ells in a recent issue of Time.

After two years, I started to have thoughts about opening my own restaurant–a large-scale place, a “fancy” restaurant. But the economic side of the business was daunting. Knowing that many restaurants fail within a few short years of opening, I wanted some sort of backup, so that’s where the idea for Chipotle came. It wasn’t intended to be my main focus but a cash cow that would help position me to open a full-scale restaurant.

They now have hundreds of restuarants located all across the country. Plans do indeed change….
(Thanks to Sarah Brown for passing this along).

Managing with Assumptions

A frustrating part of business planning is the uncertainly underlying so much of what goes into a new venture plan. Estimating revenues and expenses requires us to estimate, approximate and sometimes even guess at many key aspects of our forecasts.
Although good research can go a long way to improving our accuracy, at some point we still need to make assumptions about fundamental forces that shape our revenue and expense forecasts.
A common mistake that many entrepreneurs make is to quickly treat all of these assumptions as fact. Whether it be psychological denial of the risks we are about to face or simply our unbridled optimism, we seem to quickly forget how agonizing the process of making these assumptions was when we formulated our plans.
However, this is a dangerous course. In fact, we should embrace our assumptions as they can prove to be one of the most powerful management tools we have as we start and grow our new ventures.
During the planning process the entrepreneur should make a list of assumptions. Every time an assumptions is made about revenues or expenses, it should be added to the list. Once we have a draft of a complete plan, go through all of the assumptions to determine which are fundamentally important to the success of the venture. Which of these assumptions are likely to be ones that will keep us awake at night worrying about what the future will actually hold?
Take the most important handful, certainly no more than five assumptions, and use these to develop a couple of scenarios for the plan. I recommend that you treat the initial plan you have developed as your best case scenario. Even though you have assumed it is what is likely to happen, experience shows us that most of the time we have been too rosy in our forecasts.
Take the key assumptions that you have isolated and develop an alternative set of financial statements that reflect a poorer outcome occurs for all of them. This then should become your most likely scenario that you share with outsiders.
Then assume the absolute worst case for each of these assumptions — no matter how dire it looks — and develop a third set of financials. This is your worst case. Most of the time it predicts failure. Get comfortable with the fact that this may occur. Failure is a possible outcome in almost everything we do in life, and in a new business we need to understand what this failure will look like. We will be better prepared to launch the business if we understand what is really at stake.
The power of our assumptions does not stop with the plan, however. Our key assumptions become among our most important management tools. Develop ways to measure the variables behind these assumptions and commit to measuring them on a regular basis, be it weekly or monthly. Make sure that you continue to measure and review them over time as the business grows. These measures may include pricing assumptions, order size, frequency of orders, labor costs, worker productivity, market share, or any of a long list of common assumptions we have to make in planning. Make sure you create processes for you or your staff to measure them and use them in your decision making and future planning.
With this data you will have the means to catch problems as they are occurring and you are hopefully able to take action to adjust your plans as those problems are unfolding.
The alternative is to wait until the problems show up on your income statement. But, by then it may be too late. Income statements give us a view of our history. We need to be able to see how these assumptions are taking place in real time.

Good Research is Key

Entrepreneurial success can be greatly enhanced through good research. Having strong data and other information is critical for sound business planning. Kauffman’s eVenturing has just release their latest collection of articles, this one dealing with Market Research and Competitive Analysis.
However, good research should never stop with the business plan during start-up.
Entrepreneurs should keep up to date on industry trends. Most opportunities come from change. But the very change that got you into a market can just as easily make you obsolete if you do not keep up with the continuous change that seems to be the norm for most markets today (see this post for more on this topic).
You need to be aware of your competitors and how they are trying to get your customer’s business. There is always competition (see earlier post on this here), and you need to assume they are trying to improve their business and take away your market share.
And the key to understanding trends in the industry and competitive environments comes from a clear and honest understanding about what customers want and how well you are meeting their needs. Listen to your market!
So think of the ideas and tools from this collection as not just for start-ups, but for any business in a dynamic and competitive business.

Belmont Students Finalists in Business Plan Competition

Five Belmont practicing entrepreneurs (all current students) are among the twelve finalists for the Evansville University Business Plan Competition this coming Friday. Congratulations!
Sara Loeppke, The Silver Tulip
Cameron Powell, River Rock Media Group (2007 Belmont Entrepreneur of the Year)
Elliott Donnelly, Pink Polo Entertainment
Molly Povolny, Tanks & Airplanes
Andy Tabar, Orchid Inc. (2006 Belmont Entrepreneur of the Year)

Don’t Short-cut Planning

My column this week for the Tennessean addresses the importance of following the correct process in developing a business plan:

Many aspiring entrepreneurs turn to the latest business planning software when getting ready to start their businesses, but such tools create too many shortcuts that undermine the crucial process of business planning.
To construct an effective and more accurate business plan, it helps to understand how the experts — such as investors and bankers — evaluate business plans.