Business plan nightmares
The business plan is crucial for every business, particularly start-ups.
Indeed, the heightened uncertainty recently voiced by small businesses over issues such as the carbon tax and sluggish consumer spending has put an even greater focus on the need for a robust plan.
The plan should cover such areas as market analysis, company description, organisation and management, strategic analysis, marketing and sales management, service or product line, the amount of funding needed to start or expand the business, and financials.
Business plans need to be updated at least every three months.
Plans are important for obtaining bank finance, attracting investors, arranging strategic alliances, completing mergers and acquisitions, attracting key employees and obtaining big jobs and contracts.
When it all goes wrong
But, for many entrepreneurs, business plans can become a living nightmare. Some plans are botched and badly thought out, while many small companies don’t undertake one for lack of time.
It’s easy to see why. Faced with the choice of serving a paying customer or writing a great plan, the start-up goes for the money. But it needs to be done.
Business consultant John Downes from Acorro says the business plan is a living document.
“I call it the conscience of the business because on a monthly basis you’re comparing what is expected to happen against what actually happened,’’ Downes says.
“It doesn’t necessarily mean your plan was right or wrong. It does give you cause to say if the sales aren’t coming along as quickly as I expected. What impact will that have on my cashflow? And how quickly am I going to go out business?”
“When does the cash run out, does it run out before the cash inflows come in to meet that need? And what do I need to do to generate cash faster or reduce my costs?”
“The beauty of the business planning process is not necessarily about being accurate, but it’s about going through the mental process of trying to tick all the boxes on whether your business model actually works.”
“So the rigour of the process is absolutely vital for reviewing as to whether or not you actually have a business model or just a dream.”
Planning start-up discipline
The process, he says, is crucial for start-ups.
“They need to go through a rigorous process of guesstimating how much money they’re going to make because that’s the dream bit. But they also need to figure out what kinds of clients and what kinds of services they’re going to buy; what sort of frequency they will buy them; and who is actually going to sell them those services and how the business service will be delivered,” he says.
“Have we got enough resources to turn over those widgets or provide those services? It forces the business owner to unpack what sounds like a great idea into how exactly this thing is going to work.”
Peter Christo, who set up melbournecoffereview.com, an interesting site that reviews coffee establishments around Melbourne, points out that business plans for start-ups are wrong as soon as the business is up and running.
That said; you can’t set up a business without one.
His company is a case in point. When the business plan for melbournecoffeereview.com was done in 2007, it was wrapped around the idea of creating a data base of cafes with premium listings.
“The business plan was around that and all the financials were around that with our expectations around cashflow, projections in sales and that sort of stuff,” Christo says.
“But within six months, we had decided we would publish our top 100 cafes and we suddenly became a publisher with advertising sales and publishing costs.”
“And our eye got taken off the ball because suddenly we were a publisher but we were under-resourced.”
“And then before the book even hit the store, we were an iPhone developer because we developed the application that tapped into our data base.”
He now concedes that the original business model was not sustainable. But circumstances changed, and the company had to be flexible enough to shift its focus, taking the original idea and adapting it.
Despite that, he says getting the original business plan down was important.
“There is no possible way that anyone can foresee anything three months after the boots hit the ground. There is no possible way the business plan will reflect the reality going forward,’’ he says.
“It’s a good exercise to go through because it verifies the intellectual integrity, it verifies the team work, it verifies the ability to conceive business models and put together business cases because you have to sell this stuff.”
He says that despite the limitations of business plans, no start-up should be without one.
“The minute the boots hit the ground and things start happening, something will always happen that was outside the scope of the business plan,’’ he says.
“The benefit of the business plan is not the document itself. It’s the process and the thinking you have to go through. That’s why it is folly to get someone to do the business plan for you; that’s a waste of time and money.”
“The best thing you can do is undertake your own business plan but the minute you print it out and bind it, the reality will take shape.”
He says the business plan for a start-up is totally different to that required for an established business.
“A lot of the stuff you would find out in a normal business plan you won’t find in that. In a lot of cases, it’s about experimenting with the market, experimenting with business models, having enough cash reserves and cashflow to be able to accommodate a dead end,’’ he says.
“It’s very much a different business model.”
“The reality is that 99.9% of new start-ups will morph several times before they actually latch and are successful.”
“Whether it’s a widget, or a business service or a technology, it will change a significant amount of times before it takes. The business plan is always going to be one step behind.”
“The business plan as a concept is a lovely thing to have but in 99% of cases they end up gathering dust on the shelf.”
“The better business plans are done in a workshop type environment. They have a 30 day or 60 day life cycle when it comes to start ups.”
Silvio Salom, a director of Adacel Technologies, says that the business plan for start-ups is just a road map but sometimes the journey will take you to places you don’t expect.
“With start-up business plans, you’re doing things that haven’t been done before and you are making assumptions, and you get into the market and those assumptions are nothing like you thought it would be,’’ Salom says.
For start-ups, he says, the plan is out of date as soon as it’s written. What’s more important is to have people on board who can adjust quickly to the unexpected.
“Basically you are making a set of assumptions and you go out and test them and you get very good feedback in the market,’’ he says.
“Then you start executing it and you find all sorts of issues. You have a bit of a plan and you find all sorts of stuff and you need to respond and adjust.”
“It’s more about the people than the business plan. It’s about having people who are able to recognise what’s happening in the market with their customers and be able to react.”
“Your business plan is a straight line and you are going to market and do all sorts of snaking along the way.”
The importance of research
As a start-up veteran, Salom has done many plans. “I’ve definitely had a few disastrous ones and very good ones,’’ he says.
He cites one he was involved in, a venture in the multimedia training space which went wrong because the business plan did not match the market, despite extensive research beforehand.
“We were one of the first in the world to bring out soft skill simulators and it was extremely well accepted in the market but we made a whole lot of assumptions in our business plan that, when we went to execute, it never happened,’’ he says.
“And the reason it didn’t happen was because no one knew how to integrate them into their courses so therefore they didn’t end up buying them.”
“We didn’t know about that and the market testing we had done was pretty positive.”
“What we didn’t understand, and I guess what the end users didn’t understand either when they were giving us the feedback, was that they had no idea how to integrate it into their training and we hadn’t realised that was a problem.”
“It took us 18 months to figure out the problem.”
Management consultant Kevin Dwyer from the Change Factory says business plans need to be monitored constantly.
He doesn’t agree that they go wrong, they just need adjusting – sometimes lots of adjusting.
“If you get a business plan in terms of dollars and sense that gets within 5% to 10% of your plan, you’ve done well,’’ Dwyer says.
“Most business plans should be able to get within 5% to 10%.”
“The key is that once you have made the plan and you’ve got some numbers that you want to achieve, which might be around profit, sales or costs or customer service, you keep on measuring against it and you have to keep adjusting to make sure you hit the plan.”
“The ones that fall apart are the ones who don’t have that discipline of measuring every month and measuring every quarter and trying to make sure they do hit plan and adjust it.”
That can take some work but there is no other way for a start-up, he says.
“If you borrow some money from the bank to start the business up, then you work like crazy to meet that plan,’’ he says.
“You will be measuring all the time and doing what you need to do to make sure you meet that plan. Otherwise you go bust as a start-up.”
“From personal experience, I have worked 80 to 90 hours a week for two years to make sure I met the plan. And you do it because that’s the only way you will meet plan.”
For start-ups that seek to operate in spaces where other businesses have been, it’s not that hard, he says. It’s a case of seeking out those business owners and getting some guidance.
For start-ups that are breaking new ground, say with new technology and processes, it’s a case of doing your research. Having a plan is not enough.
“You really do have to understand the size of the market that’s available and you really do have to understand what would cause people to buy your product or service,’’ he says.
“I have seen a number of start-ups where they had their business plan and went off on gut feel and hadn’t really researched it well and found that people didn’t want to buy. That’s just poor research and poor planning.”
A plan on its own is no good unless it is backed up by research.
“An Excel spread sheet is dead easy to put together,’’ he says. “That part of the plan’s easy.
“But it’s about working out who your market is, how you’re going to reach them, so what channels they buy from.
“Once you have all that, you’re half way. Then you have to work out how you’re going to communicate with them, how you’re going to let people know that you have the product that will solve the world’s problems for them.”
And that will mean adjusting the plan. The best business plans are reviewed regularly. The most important part is to ensure it stays flexible.
Nothing should be set in stone but, as they say, that’s part of being a start-up. The business must inevitably change and adapt if it is to survive. The plan is no different.
Top five ways to avoid a business plan disaster:
- Take the time to write one – yes, you’ve got a million other things to do when you start-up, but don’t neglect your business plan. It acts as an invaluable business road map and writing one imbeds the skills you’ll need for start-up journey.
- Do your research – not sure what level of revenue to expect or when you should hire your first member of staff? Don’t rely on your gut – it won’t impress potential investors or help you out if you have a crisis of confidence. Do solid research to back up your business plan assertions.
- Be flexible – the unexpected will happen in your business, so don’t fret if your business plan dates. It is meant to be a dynamic document, so update it and move on.
- Be accountable – does your start-up measure up to how you planned it? The only way to know is to test your business plan expectations against key criteria such as sales, expenditure and partnership deals on a monthly basis.
- Get decent advice – your accountant, lawyer, mentor or even family member can provide invaluable input into your business plan-writing process. There is also a stack of advice in StartupSmart’s own business planning section.