When starting a company, every entrepreneur should develop at least a simple version of a business plan. It often makes sense to start rather basic and then elaborate as you prepare to approach bankers or investors.
Remember that business idea you had that ended up in oblivion? Or that other idea that after a few months or years you found out someone else had the organization, resources and commitment to make it through to the market? Well, both those ideas might have had a chance with a proper business plan.
A business plan does not have to be over-detailed, or fairly simplistic. Advisers, venture capitalists, entrepreneurs and private investors alike agree that it must be a reasonable roadmap to achieve product or service launch and to keep the company going in the first stages of its development. You don’t have to add a lot of numbers or cashflows statements to that paper, but rather you would need to have a simple orientation plan to where you want to go and how it is going to be achieved, considering the potential market and the competition.
It is not rare that the exercise of putting some milestones and points organized in a piece of paper will give entrepreneurs a clearer idea and new insights into their own roadmap to market.
There are nine basic questions that one has to answer and should include in the most basic to the most sophisticated business plans. They are:
What makes your company and product or service different from all the rest of the market? Who will benefit from your offer? What are the problem you are solving for your clients? What are the leveraging and tradeoffs you want to give your clients, under which circumstances and implications? What are you set to change with your invention and work?
2. Capital Needs:
How much capital you need to start your company? Remember, the first months are the most difficult for a newborn company. Always include more in your forecast of needed capital than your real number. That may create a hedge for your cashflow issues in the first months if the company takes more time than expected to reach break-even.
It is not a common practice, but business owners and entrepreneurs should have a reserve of the first 6 to 12 months in their account, so they can cope with adversity. Cashflow problems are what most kill businesses, especially in the B2B segment, where most of the time you get to sell with credit to clients that represent a good percentage of your revenue. If any of those clients will delay payment or default, it is better to be prepared.
The Return On Investment is the indicator pointing out the amount of time needed to cover the initially invested funds. After the break-even point happens, the company will begin to create value every month.
3. Products and Services Portfolio:
This is an interesting exercise. In order to define your products and services portfolio, you need to understand the needs and wants of your potential clients. Once you have identified them, think about the motivation your client would have to buy and use your offered product.
A company’s value proposition is what distinguishes it from its competitors. The value proposition provides value through various elements such as performance, customization, design, status, cost reduction, risk reduction, convenience, usability and so on.
The basic question here is: what is the problem my company solves and what is the opportunity it opens to my client / user?
Once you answer that question, you are ready to outline your list of products and services. Focus on a small list of offers where your team, know how and timing will make the difference rather than an extensive list of options.
4. Target Market:
Who are the people or businesses that will buy your product or service? Where do they live? How many companies and people with the profile you need are there in the market to buy your offer? Are you limiting your reach geographically, demographically or in any way?
The deeper you know about the market you want to disrupt, the better. Spend as much time as needed doing your research, ask experts, read financial and industry papers and news, so you can have the best possible base to decide.
5. Revenues, expenses, losses, profits:
A basic forecast of your cashflow can be a powerful tool. Not only to be adjusted should your performance not be so good as projected, but also for providing a roadmap to your shareholders, co-founders and employees. It must show your business will be economically viable.
All expenses out (rent, electricity, payroll, taxes, supplies, etc.) how much will remain in the end of the month? What is your net profit margin?
This is probably the most important item, as you should always strive to be in control of those numbers and increase your profit margin without compromising the quality of your offer, the harmony of your founding team and the motivational aspects of your product development and employees’ work.
6. Your Team:
Not only the profile, function and key positions of your employees should appear here, but also the activities, functions and attributions of each co-founder and director. This is so simple but the more detail you have in those descriptions, the clearer it is for everybody where one should jump in a situation and where another one should step back and focus in their own activity or sector. It avoids misunderstandings and needless discussions.
Other two important questions are:
- Do I need someone with experience in this market to lead my company – and can I afford this person’s compensation or is it better to hire a few industrious and committed people instead of a rising market star?
- How many employees does my company need to carry its mission, achieve its numbers and deliver its promises?
Where are your main competitors? Who are they? How much they charge for a similar product or service? What is their differentiation strategy?
Here a valuable lesson is: when in a commoditized market, exceed in customer service; when in a niche market, exceed in product development to keep ahead in that niche. This way, in most cases, you can avoid degrading price wars and preserve your company from dumping tactics from the competitors.
One of the most important items. If you fail to price correctly your product, you are almost killing all your efforts. Have your operational costs, profit margin and needed ROI in consideration when pricing your offers, but also include a factor directly proportional to the benefit that your product brings to the client. If your product helps people save electricity for example, it is easier to charge on the savings produced, then invoicing your clients with a fix number.
9. Marketing and Sales Channels:
One or two sheets of your Business Plan should encompass your marketing plan in your sales channels strategy. How are you going to spread your message and make your company known? Are you going to bet on online publicity, printed advertisement or word-of-mouth?
The sales channels strategy is somehow neglected in 90% of the Business Plans that I have come across. Most of business owners do not realize the importance of choosing the right sales channels for their offers. The difference of choosing among distributors, representatives and resellers can affect your numbers and operation to an extent that you might only find out when the business is already in trouble. Usually a mix of sales channels is the best solution and dependent on the nature of your projections and specific market.
Being able to enumerate, describe and answer those main points can serve your company as a compass for the days ahead, bringing your team together in moments of crisis and giving opportunity for items review every now and then.
If you are thinking about presenting your business idea to investors or going to venture capitalists and obtain funds for your operation in an investment round, you need to have some track record and show them very precisely your market data, growth over the last months or years and what is your competitive advantage as a company.