Category Archives: Planning Fundamentals

The 6 Most Expensive Words in Business

Advice, Business Mistakes, Growing a Business, Planning Fundamentals,

I saw this on Twitter yesterday, posted by Meghan Biro:

Remember that the six most expensive words in business are: “We’ve always done it that way.”–Catherine DeVrye

She makes a good point. In my 30+ years in business I’ve seen way too much of “we’ve always done it that way” and I’d like to think (maybe I’m kidding myself) I’ve hated that phrase since the very first time (in 1971) that I encountered it. In accounting and bookkeeping, marketing, product development, it’s widespread. That’s no reason to do anything.

And there’s also an important corollary: just because something didn’t work three years ago is no reason to not try it again.  

Always is almost always a suspect word. Things change.

How Does Innovation Fit into a Business Plan?

Back to Fundamentals, Business Planning, Planning Fundamentals

This is the third of four answers to questions I got in email last week from an MBA student asking my opinion as part of his research. The question is the title: how does innovation fit into a business plan? 

Innovation changes a business plan pretty much as a reflection of how it changes a business. It adds risk, uncertainty, and interest too.

Funny thing about risk: we usually think of it as a negative, but in this case it isn't. Risk has two sides to it: up and down.

  • The upside risk in innovation is of course the benefits to a business when innovation leads to a more desirable offering: better product, suitable for a larger market, differentiated from competition, easier to build, and so forth. We get that immediately. It's faster, cheaper, better; higher resolution, longer lasting, lighter, and so forth. 
  • The downside risk is there too. Live by innovation, die by innovation. The business that depends on innovation usually positions itself on innovation and loses big time when somebody else comes up with the next new bigger, faster, and better. 

Uncertainty comes along with innovation because, by definition, what's innovative is new; and new means it might not work, might have a fatal flaw, might not be accepted by the market, might never be finished. New also means it could take off very fast — more uncertainty — or not at all. It's uncertainty about when the product (or service) is available, will it work, will enough people like it, are there competitors out there in the bushes where you can't see them yet.

And interest comes with innovation too. Market makers are interested. Opinion leaders are interested. Competitors are interested. And investors are interested. To the investor, innovation means defensibility and market advantage.

So how does all of this fit into a business plan? It's all over the plan. It's in the forecasts, the schedules, the marketing plans, the financial strategy. It's part of the business' DNA.

It starts with strategy, the heart of a business plan. Innovation is part of your company's identity, we would hope one of its strengths, and certainly a key element in business offering. It directly affects the market, both in the higher degree of guessing required (educated guessing, we hope) and in how it affects target market and message. And it affects strategy focus, too, because it turns a company towards it like plants growing towards the sun.

From there it flows easily into the flesh and bones of the plan, all of the concrete, specific, and measurable details about who does what, when, and how much it costs, and how much it brings in as revenue.

Conclusion: it's an oblique question, in a way. Something like asking how courage fits in a novel, or color in a painting. How does direction fit into navigation?

5 Points on Business Planning and Imminent Change

Business Planning, Planning Fundamentals

How do you develop a business plan when change in the industry is imminent?

This is the second of four questions I got last week from an MBA student doing research. The first became my post yesterday on what makes a good business plan.

1. Change is always imminent.

The question is questionable. Homework: read The Black Swan by Nassim Nicholas Taleb.  If you know that change in the industry is imminent, you're way ahead of the game. Business planning is about managing change.

Still, to be fair, we get what he means. There's some well-known and obvious fork in the road coming up and in this case everybody knows it. Usually this is related to public regulation, such as the upcoming the federal deadline for digital television. Sometimes it's planned events like an election. And I think we can assume uncertainty of the outcome, for example, back in 2005, if you were planning a business in Bulgaria, you knew that joining the common market was likely, but not certain.

Then what do you do? Two plans? Two scenarios?

2. Good business planning manages change.

I've written a lot about business plans managing change. It's the main theme of my book The Plan-as-You-Go Business Plan, which is also posted in full at planasyougo.com.  I might point out particularly the sections Why Plan as You Go and Plan Review Schedule and  Paradox: Consistency vs. the Brick Wall.

3. Good business planning always identifies assumptions.

Every business plan should clearly identify important assumptions. In the plan-as-you-go book I wrote:

Identifying assumptions is extremely important for the planning process and the plan-as-you-go business plan. Planning is about managing change, and in today’s world, change happens very fast. Assumptions solve the paradox between managing consistency over time, and not banging your head against a brick wall.

Every business plan needs regular scheduled review of actual results compared to plan, and the review should start with the assumptions. When assumptions change, plans should be reviewed and revised accordingly.

4. Two plans? Three plans?

I'm not a big fan of the multi-headed business plan. You've seen them or heard of them — the most common is the one with two or three scenarios, like pessimistic, optimistic, and most likely. Or the two-headed plan implied in this question.

There are no hard and fast rules on this. It's a matter of opinion, not best practices. Lots of people like the discipline of the multiple scenarios, but I don't. Business planning is about results, which is a matter of the decisions and accountability and management it causes. The Byzantine complexity of the hydra business plan doesn't lend itself to getting results.

Instead, I suggest you note the critical assumption and which way you expect it to go, and make your plans. You should have regular review meetings to follow up, so as the moment of truth draws closer, you review your assumptions and your plans, and revise as necessary.

However, there are two valid sides to this argument. Ff you're human, you're thinking about contingencies. What will you do if it goes the wrong way? Do you develop a fleshed-out plan for the contingency?

In the end, the scenarios question depends on the actual case. How big the imminent event, and how different the two alternative scenarios?  I can imagine cases where you might flesh out the alternative plan as part of the plan. If so, be careful about it; don't waste too much time imagining two different worlds. Stick to the key points.

5. Planning is always better than not planning

Let's finish this answer with this reminder: there is no level of uncertainty that makes planning a negative. Planning, if you do it right, with the normal planning process of review and correction, helps you manage uncertainty.

8 Factors that Make a Good Business Plan

Business Planning, Planning Fundamentals

This is the first of four answers to interesting questions. Yesterday I got an email from an MBA student asking me four questions. It’s part of his research. I balked at first, because I think I’ve answered these questions before, on this blog, or on my other blogs, or at www.bplans.com, or planasyougo.com. Then I realized that answering these questions is blogworthy. So here is the first of four:

What makes a good business plan?

Here’s the hard part, right at the beginning: the value of a business plan is measured in money. That’s hard for me at least, maybe not for you, but for me. As a genuine ex-hippy baby boomer entrepreneur, I like touchy-feely do-gooder measurement systems. But that’s not the real case. Like just about everything else in business, the value is money. Money in the bank.

The actual calculation is pretty hypothetical. You take the money in the bank with the business plan and subtract money in the bank without the business plan, and that’s the value. One of the two is just a guess. But there it is, a cold hard (although hypothetical) number.

With that in mind, here are some of the qualities of a good business plan, in order of importance:

1. It fits the business need

We simply can’t look at business plans as generic. You have to start with whether or not the plan achieved its business purpose. Some plans exist to get investment. Some are supposed to support loan applications. Those are specialty uses, that apply to some business situations, while almost all businesses ought to develop management-oriented business plans that exist to help run the company, not to be presented to outsiders.

Obviously form follows function. The business plan used internally to manage the company doesn’t have to polish and present the company to outsiders, so it probably lives on a network, not on paper. But the plan as part of high-end startup looking for VC or angel investment does in fact have to present the business to outsiders. These are very different plans. Some of them have sales objectives, selling an idea, and a team, and a market, to investors. Some have a support objective, reassuring a lender about risk, usually with assets. My favorite business plans are about managing: starting and growing a company. A plan that might be great at selling the company might be bad at supporting a loan application, or for managing a company.

So point one, what makes a good business plan, is that it fits the business need. Does it achieve the business objective?

At this point it’s hard to avoid going into branches. I’m going to resist the temptation to write about what people look for in investment-related plans, and then the plan for lenders, or the operational plan. There are a lot of branches on that tree. Factors like readability and ease of navigation and covering all the main points depend a lot on whether those qualities affect achieving the plan’s business objective.

So it’s entirely possible to have an excellent business plan that’s never been printed, that isn’t edited, that contains only cryptic bullet points that only the internal management team understands.

And it’s also possible to have a well written, thoroughly researched, and beautifully presented business plan that’s useless.

2. It’s realistic. It can be implemented.

The second measure of good or bad in a business plan is realism. You don’t get points for ideas that can’t be implemented. For example, a brilliantly written, beautifully formatted, and excellently researched business plan for a product that can’t be built is not a good business plan. The plan that requires millions of dollars of investment but doesn’t have a management team that can get that investment is not a good plan. A plan that ignores a fatal flaw is not a good plan.

3. It’s specific. You can track results against plan.

Every business plan ought to include tasks, deadlines, dates, forecasts, budgets, and metrics. It’s measurable.

Ask yourself, as you evaluate a business plan: how will we know later if we followed the plan? How will we track actual results and compare them against the plan? How will we know if we are on plan or not?

While blue-sky strategy is great (or might be, maybe), good planning depends more on what, when, who, and how much.

4. It clearly defines responsibilities for implementation

You have to be able to identify a single person will be responsible for every significant task and function. A task that doesn’t have an owner isn’t likely to be implemented. You can go through a business plan and look to see whether or not you can recognize a specific person responsible for implementation at every point.

5. It clearly identifies assumptions

This is very important because business plans are always wrong. They’re done by humans, who are guessing the future, and humans guess wrong. So business plans must clearly show assumptions up front because changed assumptions ought to lead to revised plans. You identify assumptions and keep them visible during the following planning process.

6.  It’s communicated to the people who have to run it

At this point we leave the discussion of the plan itself, as if it were a stand-alone entity, and get into how the plan is managed. The first five points here are about the plan. You can deal with them as the plan develops. This and the following two are about the management of the plan.

I know that’s kind of tough, because it means that a plan that isn’t managed isn’t a good plan. But I can live with that.

So a good plan is communicated. Up above, where I suggest that the qualities of writing and editing are not essential for all plans, and I reference cryptic bullet points that only the team understands: I stick with that here. If only the team understands them it, it can still be a good plan; but it has to be communicated to that team.

We’re judging the plan by the business improvements it causes; in some sense, by the implementation it causes. So people in charge have to know and understand the plan. Plans in drawers, or locked on a single computer, only work when it’s a one-person organization and nobody else has to know the plan.

7.  It gets people committed

Here too it’s about the process surrounding the plan, more than the plan itself. The plan has to have the specifics in point 3 and responsibilities as in point 4, but the management has to take them to the team and get the team committed.

For the one-person business that’s easier, but still important.

Definition of commitment: in a bacon and egg breakfast, the chicken is involved, and the pig is committed.

8. It’s kept alive by follow up and planning process

Sadly, you can have all seven of the above points, and if you drop the ball — the plan in the drawer syndrome — then the plan still isn’t a good plan. It has to bring the planning process with it, meaning regular review and course correction.

No business plan is good if it’s static and inflexible. Planning isn’t about predicting the future once a year and then following that predicted future no matter what. Planning is steering and management. It takes a process of regular review and course correction.

Empathy as a Key to Business Success

Back to Fundamentals, Planning Fundamentals

Note: this is a slight modification of a column I wrote for the Eugene Register-Guard.

My mother used to say: "put yourself in the other person's shoes." She gave a lot of good advice. Nowadays we call this idea empathy, but it's the same thing.

Empathy? That doesn’t sound like business, does it? Sounds more like psychology, and what we used to call “touchy-feely” when I was in business school. And when we called it that, it wasn’t praise.

Lately, however, empathy keeps inserting its touchy-feely self into the middle of business discussions. I’m starting to see how empathy links directly to marketing, sales, product development, management, and, ultimately, business success.

No, I don’t think it’s a flashback to the late 1960s. I think it’s an idea whose time has – no, wait a minute, it’s an idea that was always there, just with different labels.

Wikipedia defines empathy as “The capacity to recognize or understand another's state of mind or emotion.” It adds: “It is often characterized as the ability to ‘put oneself into another's shoes’, or to in some way experience the outlook or emotions of another being within oneself.’”

Empathy Drives Strategy

Consider this example: recently a woman asked me how she might generate money from a website listing service providers, without depending on selling sponsorships or selling ads. I can’t say that I came up with a good answer, but I can say that the best hope of an answer is by putting herself in the place of the browser, first; and the listed provider, second; and figuring out how it feels to be in their shoes. What do they want? What will they pay for? What brings them to that site in the first place?

To me that’s grass roots empathy, and it’s also right at the heart of business strategy. It applies equally to new businesses and growing existing businesses. You figure out what works by walking in that other person’s shoes.

Empathy Drives Marketing

I like to think that marketing starts with understanding what people want from you. For example, it’s not just restaurant or food service: some people want fast and cheap drive-through hamburgers, others want arugula and ahi tuna served at a quiet table. Some people want one thing on a Saturday morning with a car full of kids going to soccer games, and an entirely different thing on a Friday night when they’ve left the kids with a babysitter. That’s where empathy comes into play in marketing. You have to step into the customers shoes. Understand what they want. The menu, the pricing, the service … they all have to match what the customer wants and feels. That’s empathy.

Empathy Drives Sales

And the above reminds me of another thing I’ve learned in 30 years in business: the really good salespeople listen, understand what the customer wants, and either give it to her or send her somewhere else where they think they can get it. That’s empathy again; understanding the customer’s needs. It’s not rocket science.

Empathy Drives Product Development

The best kind of product development starts with understanding a need, then goes from there to filling that need. I’ve seen that in good software, websites, automobiles … and you can go back to that restaurant example, and think about how empathy helps the one restaurant get the kids their hamburgers and fries fast, while it also helps the other restaurant give the parents a pleasant break at a different time.

Which Means, Empathy Drives Success

So there you have it: not quite the standard business school fare, but I’m thinking it’s one of those common-sense concepts that hold up on the long term. You want success in business? Learn how it feels to walk in other people’s shoes.

Updating a Classic: Great Minds, and All That

Business Planning, Planning Fundamentals

Noah Parsons linked me over to Updating a Classic: Writing a Great Business Plan, on the Harvard Business School Working Knowledge site. Sean Silverthorne interviews William Sahlman, author of How to Write a Great Business Plan, "one of the most downloaded articles on Harvard Business Publishing since you wrote it in 1997."  (And give me credit for linking to it here, that’s hard to do when I’ve written so much on the same subject, (as in the more recent Plan As You Go work … but then Harvard publishes his, not mine.)

I really like this: Sahlman was asked why that piece hit a nerve. He answered:

I tried to explain that a business plan can’t be a tightly crafted prediction of the future but rather a depiction of how events might unfold and a road map for change. I emphasized the notion that successful entrepreneurs constantly seek the right mixture of people, opportunity, context, and deal. They anticipate what can go wrong, what can go right, and they try to balance risk and reward.

And this, on what he would change:

Were I rewriting the article today, I might emphasize the importance of controlling your destiny by being conservative about access to capital. Many great ventures in the Internet era (pre-1999) ended up failing because they assumed they would have continued access to cheap capital. Many of those businesses failed, though the underlying idea was sensible. Similarly, we have seen a period when capital markets got ugly, which has a negative effect on all ventures, sensible and nonsensical.

Well said. Think about bootstrapping. Control your destiny. Especially these days.

Finally, there’s also a sidebar accompanying the article in which Sahlman writes about (rather than talks about) what he would change:

  • A business plan can’t be a tightly crafted prediction of the future but rather a depiction of how events might unfold and a road map for change. 
  • The people making the forecasts are more important than the numbers themselves. 
  • What matters is having all the required ingredients (or a road map for getting them), not the exact form of communication. 
  • The best money comes from customers, not external investors.

That last point is golden: "the best money comes from customers, not external investors." I’m going to use it a lot.

And the whole piece reminds me, like it or not, that my plan-as-you-go business planning approach, while it is a new way of looking at it, and I hope a useful way of restating the fundamentals, is still more a return to fundamentals than anything else. The current economic crisis requires a new look and some new labels, but planning is still planning.

Jing: Cool Tool, and Here’s a Sample

Personal Productivity, Planning Fundamentals

Jing’s an interesting example of keeping it simple. Do one thing well, no frills necessary. John Jantsch of Duct Tape Marketing tipped me off (thanks John) with a recent post. I picked it up quickly and did the quick mini slide talk here in about five minutes.

(If for any reason you don’t see the video below, please click here to get the original file.)

This is one of my favorite presentation slides, and favorite planning fundamentals, the important difference between planning and accounting:

http://timsstuff.s3.amazonaws.com/Media/jing1/Planning%20not%20accounting.swf

Jing is published by TechSmith, which also makes Camtasia Studio, a $300 product that I often use for doing online slide presentations, sometimes for other things. It’s free. I downloaded, installed, set up a video capture around the slide, talked into my USB headset, saved, and posted it onto this blog.

The idea spreads itself. I got it when I saw John’s post on it, and you have it now. Click the download link that appears after you see my video, or go to the Jing Project.

10 Rules for Valuation

Business Planning, Planning Fundamentals, Venture Capital

(Note: I posted this on Up and Running yesterday. I’m crossposting it here for reader’s convenience. – Tim)

I really don’t like the word "valuation"; it sounds too much like an MBA buzzword. But I like even less the general confusion about the concept. We talk about starting businesses, we talk about running businesses, getting investment, getting financed, and we should take discussion of valuation for granted. Valuation is at the same time frequently necessary, obvious and extremely arcane. It is nothing more than what a company is worth. It becomes necessary more often than you’d realize, with buy-sell agreements and tax implications after death and divorce, plus financing and investment. It’s obvious because a business is worth what a buyer will pay for it. And then it breaks down into complex formulas and negotiations.

So here are 10 (I hope simple) rules for valuation.

  1. Valuation is what a company is worth. It’s like what a house or a car is worth–less than the seller says, more than the buyer says.
  2. A company’s ownership is almost always divided into shares. Let’s say your company has 100 shares, 51 yours and 49 your co-owner’s.Valuation
  3. Valuation equals shares outstanding times the price of one share. If the company is worth $500,000 and there are 100 shares, then each share is worth $5,000. (OK, there are exceptions, preferred shares and such, but leave the fine tuning for later.)
  4. Tax authorities say the price of a share is whatever it was at the last transaction. (There, too, there are exceptions, but let’s keep this simple.)
  5. When startups offer shares–equity–to investors, then that, too, is simple math. If you sell 20 percent of the company for $100,000, that means the company is worth $500,000.
  6. Investment deals frequently revolve around valuation. When investors question your valuation, they’re saying they want more ownership for their money, or want to invest less money for their ownership.
  7. Analysts often apply formulas. The most common formula is called "times profits" because it multiplies profits times some number. Another common formula is "times sales." Companies might be worth two times sales or 10 times profits. There’s also book value, which is assets less liabilities. And there’s the estimated sale value of assets.
  8. Privately held companies are worth less than publicly traded companies. They get discounted for the disadvantage of not being able to convert ownership to cash easily.
  9. Growing companies are worth more than stable or declining companies.
  10. As with real estate, comparable sales matter. Analysts look for recent transactions involving similar businesses.

10 Critical Cash Flow Rules

Business Planning, Planning Fundamentals

(This is cross posted from my column on Entrepreneur.Com)

Cash flow problems can kill businesses that might otherwise survive. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management. To prevent this from happening to your business, here are my 10 cash flow rules to remember.   

  1. Profits aren’t cash; they’re accounting. And accounting is a lot more creative than you think. You can’t pay bills with profits. Actually profits can lull you to sleep. If you pay your bills and your customers don’t, it’s suddenly business hell. You can make profits without making any money.    
  2. Cash flow isn’t intuitive. Don’t try to do it in your head. Making the sales doesn’t necessarily mean you have the money. Incurring the expense doesn’t necessarily mean you paid for it already. Inventory is usually bought and paid for and then stored until it becomes cost of sales.
  3. Growth sucks up cash.  It’s paradoxical. The best of times can be hiding the worst of times. One of the toughest years my company had was when we doubled sales and almost went broke. We were building things two months in advance and getting the money from sales six months late. Add growth to that and it can be like a Trojan horse, hiding a problem inside a solution. Yes, of course you want to grow; we all want to grow our businesses. But be careful because growth costs cash. It’s a matter of working capital. The faster you grow, the more financing you need.      
  4. Business-to-business sales suck up your cash. The simple view is that sales mean money, but when you’re a business selling to another business, it’s rarely that simple. You deliver the goods or services along with an invoice, and they pay the invoice later. Usually that’s months later. And businesses are good customers, so you can’t just throw them into collections because then they’ll never buy from you again. So you wait. When you sell something to a distributor that sells it to a retailer, you typically get the money four or five months later if you’re lucky.    
  5. Inventory sucks up cash. You have to buy your product or build it before you can sell it. Even if you put the product on your shelves and wait to sell it, your suppliers expect to get paid. Here’s a simple rule of thumb: Every dollar you have in inventory is a dollar you don’t have in cash.    
  6. Working capital is your best survival skill. Technically, working capital is an accounting term for what’s left over when you subtract current liabilities from current assets. Practically, it’s money in the bank that you use to pay your running costs and expenses and buy inventory while waiting to get paid by your business customers.    
  7. "Receivables" is a four-letter word. (See rule 4.) The money your customers owe you is called "accounts receivable." Here’s a shortcut to cash planning: Every dollar in accounts receivable is a dollar less cash.    
  8. Bankers hate surprises. Plan ahead. You get no extra points for spontaneity when dealing with banks. If you see a growth spurt coming, a new product opportunity or a problem with customers paying, the sooner you get to the bank armed with charts and a realistic plan, the better off you’ll be.    
  9. Watch these three vital metrics: "Collection days" is a measure of how long you wait to get paid. "Inventory turnover" is a measure of how long your inventory sits on your working capital and clogs your cash flow. "Payment days" is how long you wait to pay your vendors. Always monitor these three vital signs of cash flow. Project them 12 months ahead and compare your plan to what actually happens.    
  10. If you’re the exception rather than the rule, hooray for you. If all your customers pay you immediately when they buy from you, and you don’t buy things before you sell them, then relax. But if you sell to businesses, keep in mind that they usually don’t pay immediately.

10 Critical Cash Flow Rules

The Planning Process 10%

Business Planning, Growing a Business, Planning Fundamentals, Planning Process

Picture yourself in front of a group of 20-30 business owners. They are computer or software resellers, dealers of Progress Software, Autodesk, SolidWorks, or a personal computer manufacturer. They are mostly men in their 40s and 50s. Most of them have been in business for themselves for 10-20 years. Most of them have three or more employees, a few have 25, 50, and one or two 100.

If you ask this group how many of them regularly review their business plans and revise them as needed, roughly 10% of them will raise their hands.

You can explore the details in front of the group. The ones who regularly review their business plans will be the stronger and healthier businesses in the group. If they’ve been around for a while, they’ll be the ones with more employees and more market share. If they’re younger and newer companies, they’ll be the ones with more growth.

You want actual data, numbers, and better yet, names? Yeah, me too. I wish I’d done that but it was enough to run full-day planning seminars, each one took a lot of energy, and there just wasn’t enough bandwidth for me to be managing the seminars and populating a database at the same time.

What I will give you, though, is accumulated experience. When I run one of these seminars I can count on my 10% number enough to take the risk of setting myself up in front of the group, at the beginning of the day, with those people as leaders. Throughout the day I can call on them confidently for comments and details and anecdotes, and they’ll have the right kind of useful responses.

These people are my stars. They don’t all plan the same way, they don’t all have the same process, but they do have process. I can count on them. They get it.

Here’s a concrete example: during part of the seminar I want to illustrate the paradoxes of planning, say "business plans are always wrong." I have my two or three stars in the room and I can be sure of getting a useful response from one of them when I deal with this issue for the group. I’ll ask, "Ralph, Mabel, Mary … what do you say? Why do I say that?" And I’ll get back a response about how they’re wrong because assumptions change, which is why plans need to be kept alive and managed. Or they’ll say something like that.

I don’t like to blithely take risks when I’m in front of a group. This 10% rule, however, has worked consistently for me for years. Now, I realize having a set of numbers to display would be stronger than my anecdotal evidence, but then, so many sets of numbers are flawed anyhow, and give the wrong impression. My people in the seminar aren’t a random sample by any means, so the numbers wouldn’t be statistically valid anyhow.

So who are these people? Starting in the 1980s I did some seminars for Apple Computer dealers in Latin America, and then in the 90s in Japan and Singapore, then HP dealers in different places, then Data General, UNISYS, and more recently for dealers of Autodesk, SolidWorks, and Progress Software.

Does this same 10% apply for other industries? I can’t be sure that my anecdotal data applies; but I’ll bet it does.

— Tim