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.
Inspiration for Entrepreneurs
Anita Campbell shares some wonderful quotes on entrepreneurship at her blog Small Business Trends. Here is one of my favorites:
Joanna Meiseles, CEO, Snip-its Hair Salons for Kids — “When I started my business I did not know what EBITDA was. I had no business experience. I was not a hairdresser. I just was a Mom with an idea, and I knew there was a customer need for a kids’ hair salon.”
Make sure to check out the rest at Anita’s site.
Credit Crunch Not Hitting Main Street
Small business owners do not seem to be feeling the effects of the credit problems touted in the media, according to the August National Federation of Independent Business Small Business Economic Trends Report.
Regular borrowing activity was reported by 35 percent of owners surveyed, down one point from last month. The net percent of owners reporting loans harder to get in recent months rose two points to a net 7 percent, but this is still an historically low percentage. Readings as high as 12 percent were common in the early 1990s.
Only 3 percent of the owners cited the cost and availability of credit as their No. 1 business problem, far from the record 37 percent reached in 1982 and typical of readings for the past decade. Thirty-five percent reported all their credit needs met; 4 percent reported problems obtaining desired financing, typical of readings for the past few years. The net percent of owners reporting higher rates on their short-term loans was 14 percent (seasonally adjusted), two points above July, but one of the lowest readings since 2004.
Although tight credit does not seem to be slowing small businesses down, economic conditions have created
a very cautious attitude in small business owners according to this survey. Sales and profits seemed to be rather anemic. Capital and inventory spending was reported as weaker.
The one report that continues to worry me is that wage pressure still seems to be a problem for many small businesses. Those of us who remember inflation gone wild and past periods of stagflation (a recession and inflation all rolled into one big mess, as we had in the late 1970s and early 1980s) are keeping a wary eye on wage and other inflationary pressures in the economy.
New Tools for the Virtual Office
Home-based businesses and entrepreneurs creating virtual offices, which total in the millions in the US, have a new array of tools to connect with employees, colleagues and customers. From the Wall Street Journal:
Last year, Dave Novak sold $1.2 million of luxury steam-shower and bath equipment, importing wares from China and reselling systems for $2,500 to $4,000 apiece under his own brands, like American Steam and Rockstar.
And he did it from his 20-month-old son’s bedroom in Fort Wayne, Ind.
Mr. Novak, 27, runs Novak & Co. LLC from home using a MacBook Pro computer and iPhone — leveraging Internet-based tools that make the need for traditional office space increasingly obsolete for many entrepreneurs.
Google Apps offers services tailored for small business including communication tools, publishing tools, and web management.
Microsoft Office Live has three packages of services for small business that range from a basic package that is free to their premium bundle of services for $39.95 per month. (Please, all of you Mac-heads out there forgive my mention of the evil empire).
The upstart startupnation.com, the brainchild of Jeff and Rich Sloan, has a great set of tools and tips for start-ups of all types. They also link to Office Live as one of the tools at their site.
An important caution is to make sure that you won’t quickly outgrow the tools you choose. Just as many of us have learned with our accounting software, migration to another set of tools is not always easy. Try to envision your needs for the next couple of years to make sure the applications you choose still work as your business grows.
Make software planning part of your business planning. Try to envision your needs at least two to three years into the future.
Socialized Entrepreneurship Canadian Style
There are calls for Canada’s floundering system of socialized entrepreneurship to become even more meddlesome. Read my post at LockeSmith for my post on calls for this disturbing shift in public economic policy to our north.
Finding the Right Business
In this week’s column at the Tennessean, I write about finding the right business to start.
The best business opportunities come from things people already know something about. They come from work experiences, hobbies and everyday lives. Find something from your experiences that is also a need for others. If you are lucky, it may be a niche that nobody has discovered. Or there may be competition, but existing businesses are not meeting the need of customers in that how to order topamax online market. Either way, solving problems that you understand is the best path for a first business venture.
Don’t overthink ideas. Just like Dorothy in The Wizard of Oz discovering how to get back to Kansas; the answer was right in front of her all along. And so are the best business ideas.
I also highlight the importance of passion, income and lifestyle in choosing the right business to start.
“The Call of the Entrepreneur” Screening
Just a quick reminder to all of you in the Middle Tennessee region that this next Monday, September 10 at 5:00 p.m. CDT we will be hosting a screening of the new Acton Institute video “The Call of the Entrepreneur.” It will be held in the Massey Board room here on Campus (in the Massey Business Building on Wedgewood). This event is free to the public.
The Power of the Lowly Business Card
Rumors of the death of the business card have been greatly exaggerated.
At the dawn of the information boom the business card was one of the things we heard would soon go away. That has proven to be about as true as the paperless office they promised us!
Business cards are alive and well and still an integral part of business marketing and economic etiquette.
For many small business owners the business card is the only form of advertising they may have during their early start-up. Since they are still such an integral part of business relationships, it is important to carefully think through the design of your business card. So here are a few tips that should assure that your business card will have its intended impact on potential customers:
– Never cut corners. Although it is part of any bootstrapper’s arsenal of marketing tools, and a relatively inexpensive tool at that, don’t try to be cheap. Think about its design and how it represents your business. How you present yourself and how your business card looks and what it communicates about your business are the first impressions that any potential customer or client will take away from a meeting.
– Pay attention to the little things. In addition to design, the quality of paper, the color you use , and even extra touches like embossing can make a big difference. For example, I do not recommend printing your own cards. The paper will never be quite as good and the print will never look quite as professional as you can get from a printer. It is worth the extra few dollars to do it right.
– Include all critical data, but none that is useless. A business card should make it easy for the customer to contact you. If the best way is e-mail, highlight that. If it is your cell phone, put that in a clear and prominent place. If you are doing business out of your home, you may or may not need to include your address. If all business is conducted electronically and they will not be coming to your home, no need to include a mailing address.
– Include description, logo, and/or slogan. This can help make your card stand out and improve the odds it will be kept.
– Remember, it has two sides. You can use the back of the card to give them pricing information, a map to your location, a photo of the product, your logo, or to include catchy stuff such as useful trivia or clever quotes.
More on the Oregon Plan
The post I made on the Oregon Innovation Initiative created several comments questioning my critical view of this set of policies and initiatives. I decide that our new blog LockeSmith was a better venue to use to respond. If you want to follow the continuing debate on this issue, please see this post at our other blog.
Outsourcing as a Means to Bootstrap
Outsourcing has gotten a bad name in some circles. But, it doesn’t always mean shipping jobs off to China or India. Outsourcing is also a tool that can use local companies to help jump start a business by using them to help make your product or provide part of your service until you can afford to bring these things in-house.
My Tennessean column this past weekend looks at the bootstrapping power of outsourcing.
Bootstrapping operating costs through outsourcing can help owners get to break-even sooner and improve profit margins as the business grows.
Outsourcing is a strategy that can work very well for a start-up and very small businesses. Rather than bear the cost of renting space and hiring a staff, these businesses utilize the excess capacity of someone else’s business to make their product.