10 Startup Tips
Chapter 8: Turning Ideas into Business Plans
You only live once, but if you do it right, once is enough. ― Mae West
If you don’t know where you’re going,
there’s no point in getting there.
(Lewis Carroll, author of Alice in Wonderland)
Your first task is to write a business plan.
There are hundreds of books,
training courses, software,
websites and guides on business planning.
Before going through this process,
however,
let’s apply three basic rules.
The three rules of a business plan
1. Writing for whom?
The most important reader of your business plan is you.
This is your unique opportunity
to think through the full spectrum of business issues
and re-examine your current assumptions.
So you don’t have to follow a pattern.
What matters is your plan.
If you are a business owner,
you must write a business plan.
The second most important reader is the potential funder
of the business plan.
At this stage,
your plan becomes a tool for raising capital.
Therefore, a different business plan will be needed to match.
2. Don’t get too caught up in details
“The more I think about the business idea,
the scarier it becomes.” – Angela
If you spend too much time on a business plan,
you will get bogged down in unimportant details.
I once saw a coffee shop business plan
that included the cost of each spoon.
Going into such detail is influenced
by the mentality of wanting to turn business into a predictable science,
while not understanding the fact
that business is an unlikely endeavor of our own.
In fact, when you find yourself starting to sort your headings
with different colors,
that’s when you need to avoid them in your plan!
Remember the quote of Texas billionaire Ross Perot:
“When I see a snake,
I kill it right away.
I don’t need to form a committee on snakes.”
3. Stay up to date with the plan
As Von Clausewitz, a Prussian general, put it:
The place is full of business copies
No plan can survive the first encounter with the enemy
[or in this case, the customer].
By the time you start writing a plan,
it’s already outdated.
The most successful businesses are those
that are constantly adapting to changing customers and markets.
It’s important that you don’t make a plan
and then throw it in the bottom drawer or in the “trash bin”.
See tips on how to plan in Chapter 23.
What does the funder look for in your business plan?
Most people create a business plan to raise capital.
I used to sit on the funding board,
talking to a lot of bank managers.
So it helps if you can keep in mind the thought processes of your funders
as you sit across from them:
Do you think you have what it takes to do this
(usually decided in the first 120 seconds
when you walk in the door)?
Does that master business plan interest me (4 minutes)?
Can you confirm that
I will get my money back (about 40 minutes left)?
Now that the clock starts running,
let’s see how you do:
You: Whether you want to raise £5, £5,000
or £500,000 the following is always true:
The funder is always watching your back.
No matter what your idea,
the sponsor will immediately predict your ability to work.
So how do you prove this?
It seems pretty unfair,
but first impressions matter.
An experienced interviewer at a top company says
she always makes a decision on a candidate about 40 seconds
after he or she walks into the room.
Then pay attention to simple things like:
dress neatly,
look people in the eye,
smile and shake hands.
This makes a difference.
Describe in detail any relevant experiences in your plan.
It could be professional experience,
or better yet,
examples of businesses you already run or your own initiatives.
(You held a fashion show at school, didn’t you? Mention it.)
Provide an analysis of your strengths and weaknesses.
Don’t turn yourself into a superman
– what funders want to see is an honest assessment of your strengths
and what you do to overcome your weaknesses.
The most important thing is your enterprising spirit,
or your staying power.
Success depends on your ability to paddle through tough times.
Try to give examples of your motivation and determination.
The funder will also want to know
if you’ve thought it through.
Prepare answers to their series of “what if…” questions.
Does the plan excite me:
This is where you will draw people into your compelling idea.
The trick is to keep it simple:
outline the general concept and summarize the main ideas.
The plan should point to the location
your competition and this is the strongest argument for
why your idea is different.
It’s hard to get someone to sponsor a window cleaning business anymore,
but what’s the difference?
Are you a former mountaineer
and the only person in Leeds
who specializes in cleaning the doors of high-rise office buildings?
Now, I got excited.
And all you have to do is…
Reaffirmation:
It’s time to make sure your numbers are measurable.
Financial forecast
If you look at any business plan book,
you will be frustrated by the financial problems to deal with:
the balance sheet,
the income statement,
the discounted cash flow1 of three years, payback…
Let’s focus on the basics first.
Revenue
This is the total amount that you earn.
Basically, revenue depends on two factors:
price and quantity sold.
Pricing:
Pricing should not be determined solely on the basis
of production costs.
The price is what the customer is willing to pay
and as you can see with things like the mocha-cappuccino the cost is negligible.
Price is a matter of the market.
See Chapter 14 for more information.
However, you must calculate the breakeven price
– the lowest price you can sell to cover your costs.
We will return to this issue later.
Quantity sold:
It is determined by two factors:
the size of the market
and the amount of output per day you can make and sell.
To determine the market size,
you need to do some market research.
This needs to be considered in detail,
because if you get it wrong,
your business will be seriously affected.
How to forecast sales
Study the market like a drinker
who uses a lamppost to lean on,
not to light the way.
Accurate market research is a very complex business.
The boom and bust of the dot.com era was largely
due to market research
and they continue to be conducted today.
I call it:
Waynestock Syndrome:
In the comedy “Wayne’s World 2,”
Wayne and Garth plan a rock show called Waynestock.
They kept worrying about how many people would come
until Jim Morrison appeared in Wayne’s dream and said,
“Don’t worry and the audience will come.”
To apply the Waynestock method to your business,
do the following:
You are selling Amazon fighting fish.
You do some research on the Internet
to find out the size of the target market,
for example,
the total number of homes with ponds in the Manchester area,
the number of people in the UK who bought goldfish last year.
Let’s make a modest assumption,
say 1% of this market will be yours in the first year, then 5%,
10% in the following years.
So your first year revenue will be 300,000 pounds.
Not a bad result!
… Ah, that’s it.
You see nothing suspicious
because the starting numbers are very modest.
But the problem is,
you have absolutely no proof that one person will buy your fish,
let alone 10,000 people.
This is the problem when you make assumptions.
If you assume you make an ass of you and me.
(If you think you’re making fools of you and me.2
(In “The Silence of the Lambs”)
The only reliable way to make a forecast
(and the only way to make a funder believe it) is based on experience.
Realistic Sales Forecasts:
In an ideal world,
you would have to try to sell a few products
before creating a business plan.
By analyzing sales based on questions
(How long does it take for products to reach customers?
Are they suitable for a distinct group of customers such as “retirees
with hobbies”?
buy products just because they’re your friends?),
you can expand on your forecast reality.
Or alternatively, you could work for a boss in the field.
Their numbers can give you some indication.
Again, make sure you don’t miss any of the basics
– for example, it took your boss six years
to build a good customer base,
or the largest customer base on turning out to be relatives.
You can find a wise counselor who has been in your situation,
has done what you are doing,
and can tell you what to do (see Chapter 23).
Find out what your competitors are doing.
You can use a variety of techniques,
but by far the most effective is to call them and ask directly.
You will be surprised how many things they tell you.
People often brag about themselves
and won’t see a humble little person like you as a competitor.
Again, ask questions to check their credentials.
Are they deliberately underestimating you to get in your way?
Will the majority of their sales come from a customer
they won’t tell you about?
You may have to try to double-check the authenticity
of these stories from employees or their competitors.
Old friend
can conduct your own research.
But so the results will not be quite as accurate as you think.
Before I made my first yearbook,
I did research into what students wanted to see,
what the price was right for,
and whether they wanted to buy it.
However, I’ve discovered that telling someone you’ll pay £10
for a yearbook is a far cry from paying £10 for entertainment.
I also found clients who are actually parents of students
and they pay twice as much.
Be mindful of studying the subject of friends.
If someone (especially a friend) asked you what you think of their lovely ceramic angels,
would you (a) flatly say they are trash
and advise them not to waste their time,
or (b) smile sweetly,
nod,
and then gently turn away?
Entrepreneurship Tip:
Funders love “letters of intent”
Let’s say you have a stack of letters confirming:
“David, I will definitely order 10 Amazon fighting fish when they come in”
(but the funder will recognize immediately
if it is a pile of letters with the same handwriting)
Expense
After you have calculated the revenue,
you need to calculate the costs.
There are two types of costs:
• Direct costs
• Indirect costs
1. Direct costs
This is the cost of producing a product.
This cost comes from two factors:
Raw material cost:
The cost of the input “raw materials” of each product.
Some of these types of costs can be very obvious and obvious,
but include the implicit ones.
If you are making pottery,
not only the cost of clay,
but also the cost of elements such as electricity
and gas used to heat the product.
Time Cost: The biggest mistake people make
when starting a business that leads to failure:
Always pay your time properly.
I will take an example.
You want to sell your product for £5.
The raw material cost is about 60 cents,
but it takes you 2 hours to produce,
pack and ship each product.
You are not interested in it
because you are very excited and eager.
Orders came pouring in.
Soon you have to work up to 60 hours a week but still can’t make it.
Then you can hire people,
but their salary is at least £6/hour (the set minimum wage).
Even if you reduce production time to 1 hour,
you still lose £1.6 per hour if this person works for you.
Entrepreneurial Secrets for Service Businesses:
How Much Can You Sell?
If you’re running a service business,
you’re selling your own time.
As an active entrepreneur,
you will probably consider the hours of the day as your working time.
This is the mistake.
You need to factor in travel time between jobs,
seasonal fluctuations,
holidays, missed client appointments,
time spent on revenue and accounting.
If you’re taking on the duties of other employees,
you have to include that time as well.
It sounds obvious, but a lot of people fall into this trap.
Let’s add to the product price:
Actual time required for each product.
This includes input purchase time,
production time,
packaging and shipping time,
time to invoice for each product,
and time to checkout.
Come up with an exact salary you would pay someone to do your job.
If your job requires technical skills or even persuasion,
you may not be able to find a replacement for £6 an hour.
2. Indirect costs
Controlling the cost of producing each product,
you also have to account for indirect costs no matter how hard you work.
This cost includes rent, phone, Internet, loan, etc.
As the name implies,
these costs will always be incurred
no matter how many sales you make.
There will be days,
weeks or months of the year when business slows down.
But the indirect costs are always there.
So here’s a solid reason for you to:
Keep indirect costs as low as possible.
Read Chapter 9 for advice on how to do this.
The most important indirect cost is you.
Don’t do what I did when I first started:
I forgot to factor my salary into expenses and take it from profits.
The risk here is that often there will be no profit and if there is,
there will be a desire to take all the profits to buy a brand new TV.
First, calculate the minimum budget you need to sustain life.
It shouldn’t be based on a life of frugality.
You can calculate based on how you have spent the last three months.
Then, treat this as a payment on a bank note.
You only increase your spending
when you know you can last for at least four months.
If you want a bigger incentive,
reward yourself for any work that brings you a profit.
Break-even point
Once you know how much you can sell,
you need to calculate how much you have to sell to cover your expenses.
indirect costs.
Like the break-even price,
there should also be a sales break-even.
Since some of your expenses are indirect
(the money you need to live on),
there should be a minimum number of products you must sell in a year
to pay for the indirect costs.
When you calculate plans,
make sure this is at least enough to cover indirect costs.
List of business plans
Now that you’ve thought about the reasons
and objects to include in your plan,
you’re ready to draft your own.
Below is a simple directory,
or you can get a similar sample from a bank
or other business organization.
But remember,
it should be your blueprint, not someone else’s.
Method: The website www.fromacorns.com has links
to several sample bank business plans.
What should your plans need?
Brief summary thought:
• Which market and why your idea is unique.
• Profit estimation.
• Long term outlook.
• How much capital is needed.
You and your team:
• What are some outstanding personal achievements at work?
• Who will help you.
• Honest assessments of your strengths
and weaknesses and what you would do to balance them.
Product or service:
• Brief description of products and services.
• Your target market (current size and projected growth).
Make the main points here
and provide a detailed supporting assessment in the appendix.
• Detailed analysis of a specific market segment
for which your product
or service will be suitable.
• Competitors: who are the top competitors
and how will you compete with them?
• What special features of the product/service will help you sell?
• Analyze your strengths,
weaknesses,
opportunities and threats.
Sales and Marketing
• Product price and why you decide to do so.
• Location: where will you sell your product.
• Who will sell?
• Promotion plan
Work:
• Supplier
• Necessary equipment
Finance:
• Forecasts and evidence for your claims
• Forecast monthly cash flow for the first year
and quarterly for the second year
• Profit and loss forecast
• Accounting balance sheet.
