Category Archives: Planning Fundamentals

This is not a test. This is a real problem.

Business Planning, Marketing, Planning Fundamentals

I just finished answering one of the Ask the Expert questions I do for bplans.com. Here is the question:

"I have [details omitted] that cut consumer’s [omitted] bills by up to 25%. But trying to sell them one-on-one is slow going. Local ads have done nothing. Contacting media, local officials has little response. Limited funds prevents an ad blitz. Just starting up. What can I do?"

And here is my answer:

"You’re asking the right question but to the wrong people. Ask the buyers, or would-be buyers. Get on the phone, get into meetings, go door-to-door if you have to. Do you have something nobody wants, or not enough people want? That’s what the early indicators are saying.

"You can’t just guess, you need to find out, and there’s no easy way. It doesn’t take a degree or years of experience, it takes shoe leather, a phone, and looking the right people right in the eye and asking. Keep asking until you’re ready to bet your business on the answer. And with each person you ask who doesn’t know, ask them who they can think of who does know. "

The question here illustrates a very common  misunderstanding about business planning and business research. It’s particularly bad in the real world of entrepreneurship and small business, where people don’t have middle managers and research budgets to hide behind. People treat this problem as if it were a test, with the right answers stored in a teacher’s drawer somewhere. It isn’t. It’s about doing the work yourself. You have to find out. The answer isn’t in a database.

Sometimes I get people thinking that they aren’t suppose to do this themselves, like it’s too specialized, or maybe they don’t have the training. You don’t prescribe your own medicines and so, you don’t try to find out why people buy from you. In truth it’s just a matter of talking to people. Be polite, be honest, and be persistent.  I went through this same fear and doubt when I quit business journalism and went to business school and focused on business planning. A lot of what I did after the MBA was the same stuff I did before the MBA — asking questions and analyzing answers — just billed at a higher rate.

This particular case is more about market research and marketing planning than straight business planning, but it’s the same thing. The core and foundation of a business plan is the questions this person is asking. People think you can buy market research but that’s rarely a good match for a small business problem. Business planning is essentially something you do yourself.

In many ways a lot of what’s involved in business planning is like physical exercise. It’s really no good for you if you don’t do it yourself.

— Tim

My Worst-Ever Business Plan Engagement

Business Mistakes, Business Planning, Business Stories, Planning Fundamentals

It’s not for nothing that I always say a business plan has to be your plan and nobody else’s. It can’t be your consultant’s plan. You must know it backwards and forwards and inside out, or it won’t work. look of dismay

I learned this the hard way, sitting in venture capital offices at 300 Sand Hill Drive, the business plan consultant on the tail end of the new venture team. I had done the plan, built the financial model, written the text, shepherded the document through the painful coil binding and the whole thing, but I wasn’t part of the team. I didn’t want to be. I was still at grad school, getting my MBA, and my part of this venture was writing the plan, period. I needed the money to pay tuition.

In meeting after meeting, at key moments, the VCs would ask critical questions and all heads turned to me. I would answer.  I knew the plan, backwards, forwards, and inside out; but I was the only one who did. It was my plan.

It was a good founders team. It included three Silicon Valley veterans, a marketing guy, a technical guy, and a deal maker guy.  They had about 40 years of computer company experience between them. They had a good idea and, much more important, a market window, differentiation, and experience to make it happen.

The three of them never really got into the plan. It was a hurdle they paid me to jump for them. Every meeting generated new changes, so I would go back to the basement computer at the business school, and re-run the financial model. The team of three didn’t include a financial person to learn and manage the model, so it was always me, tweaking. Which meant I was the only one who knew the plan. I’d re-run my financial model, edit the text, and publish a new version of the plan. They read paragraphs here and there, glanced at the numbers, but they stayed with the strategy, and left the details to me.

Details that, in fact, they didn’t read. They trusted my faithful recording of their ideas, and my financial modeling. They assumed, I guessed at the time, that these were functions that could always be delegated to somebody with special skills, while they generated high-level strategy.

They did not get financed. I was disappointed. When you develop the plan and revise it dozens of times and support it and defend it through the long series of meetings with supposedly interested investors, you want it to take flight.

And time after time, when questions came, I was the only one with answers. It was my plan, not their plan.

All these years later, memory of that disappointment is still fresh. I did learn my lesson, though, and I changed my strategy as a business plan consultant. From then on I made sure that any plan I worked on belonged — and I’m talking about intellectual ownership here, conceptual ownership — to the real plan owners, not the consultant. And that made it my worst-ever business plan.

If you have the luxury of a budget to pay an outside expert, consultant, or business plan writer, then maybe you should use them. This might be a good use of division of labor, and perhaps you can lever off somebody else’s experience and expertise. However, that will not work for you unless you always remember that it has to be your plan, not the consultant’s plan. Know everything in it, backwards and forwards, and inside out.

The Essential ‘Why They Buy’

Business Planning, Marketing, Planning Fundamentals

Close your eyes. Step away from the daily routine. Answer these questions. Why does anybody buy what you’re selling? What do they get out of it? Do you fill a need? Do you offer identifiable benefits?

Some 30 years ago Harvard marketing professor Theodore Levitt said “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” iStock_000000331264Small

One thing I’ve learned from 20-some years in business plan software is that people want the plan, not the software.

It seems obvious but we quickly forget. You think about features, not benefits.

For example, think about affordable luxuries like the latte at Starbucks, the lobster dinner, the fancy mustard. Starbucks sells a lot more than a cup of coffee, and Gray Poupon mustard is a lot more than just mustard.  iStock_000000370316Small

Look at hamburgers. McDonald’s and Burger King sell fast and easy and reliable. On Saturdays they’re full of parents with kids between soccer games. It’s not a hamburger, it’s a quick solution to a lunch problem. Then there are the gourmet hamburgers. You can pay 4-5 times what the cheapest hamburgers cost. That’s another affordable luxury.

With high-tech products we’re lured into thinking of features, details, bells and whistles. This is okay for a lot of the market. Some of the market, however, doesn’t buy for features but rather status or prestige or peace of mind or some other intangible. iStock_000001206970Small

This kind of thinking is essential for better planning. It helps you build your strategic positioning. Some people buy for price, some for location, some for ease of use, fast delivery, or because their annoying neighbor said they should.

Why do people buy expensive beautifully-packaged sweet-smelling bath soaps? Most of the time they don’t, but imagine it’s February 14. You plan better when you really dig into the buyers’ real motivation.

Whether you’re planning for a start-up or to grow an existing business, start with buyer motivation. Why do they buy from you? What do you do better, or at least different, from your competition? How can you build that difference into strategy?

— Tim

Ideas vs. Opportunities

Planning Fundamentals

Ideas are a dime a dozen. Opportunities are much more important. An opportunity is an idea that’s passed the test of planning. It has potential. You can implement it. An opportunity has some of the following elements:

  • Industry and market potential: look at market structure, industry structure, growth rate, margins, costs, etc.
  • Economics: capital requirements, fixed costs, cash flow, return on investment, risk.
  • Competitive advantage: degree of control, barriers to entry, availability of sufficient resources.
  • Management team: people who know the industry, the market, the operations, the logistics, the road to market. filter_istock_small

The business planning process is about filtering the opportunities — a precious few, requiring focus, and planning — from the ideas.

Whether you’re working on a new start-up business or growing an existing business, you need to encourage lots of ideas and then use your planning to filter them down into the real opportunities.

Remember displacement … recognize that you can’t do everything. You want your plan to help you focus in on the best opportunities among your longer list of ideas.

There is no external meter of good and bad opportunities. What you’re looking for is the right mix between business potential and your ability to reach that potential, given your position, core competence, strengths, weaknesses, and resources.

— Tim

Business Plans are Always Wrong

Business Planning, Planning Fundamentals

Seth Godin includes venture competitions in his Pundits are (nearly) always wrong post yesterday.

I say take that a step further: business plans are always wrong. I have to say I like how well this ties into his post on Starbucks from a couple days earlier.

That’s because we’re human. Business plans predict the future. We humans suck at predicting the future. Istock_000000549056small_2

Paradox: nonetheless, planning is vital. Planning means starting with the plan and then tracking, reviewing progress, watching plan vs. actual results, correcting the course without losing sight of the long-term destination.

Planning is a process, like walking or steering, that involves constant corrections.

  • The plan sets a marker. Without it we can’t track how we were wrong, in what direction, and when, and with what assumptions.
  • Use this marker to manage the constant conflict between short-term problems and long-term goals. You don’t just implement a plan, no matter what. You work that plan. Use it to maintain your vision of progress towards the horizon, while dealing with the everyday problems, putting out fires.
  • So the plan may be wrong, but the planning process is vital.

The truth is that forecasting is hard. Nobody likes forecasting. But Istock_000000408066smallone thing harder than forecasting is trying to run a business without a forecast.

A business plan is normally full of holes, but you fill them, after the fact, with the management that follows. That’s what turns planning into management.

Good planning is nine parts implementation for every one part strategy.

— Tim

Digg this

Fundamental Financial Words

Business Planning, Planning Fundamentals

You don’t have to be an accountant or an MBA to do a business plan, but you will be better off with a basic understanding of some essential financial terms. Otherwise, you’re doomed to either having somebody else develop and explain your numbers, or not having your numbers correct.

It isn’t that hard, and it’s worth knowing.  If you are going to plan your business, you will want to plan your numbers.  So there are some terms to learn.  I’m not going to get into formal business or legal definitions, and I will use examples:

  • Assets: cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns are assets. Assets can usually be sold to somebody else. One definition is anything with monetary value that a business owns.
  • Liabilities: debts, notes payable, accounts payable, amounts of money owed to be paid back.
  • Capital (also called equity):  ownership, stock, investment, retained earnings.  Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital.  That means you can subtract liabilities from assets to calculate capital.
  • Sales: exchanging goods or services for money. Most people understand sales already. Technically, the sale happens when the goods or services are delivered, whether or not there is immediate payment.
  • Cost of Sales (also called Cost of Goods Sold (COGS), Direct Costs, and Unit Costs): the raw materials and assembly costs, the cost of finished goods that are then resold, the direct cost of delivering the service. This is what the bookstore paid for the book you buy, it’s the gasoline and maintenance costs of a taxi ride, it’s the cost of printing and binding and royalties when a publisher sells a book to a store for resale.
  • Expenses (usually called operating expenses): office rent, administrative and marketing and development payroll, telephone bills, Internet access, all those things a business pays for but doesn’t resell.  Tax and interest are also expenses.
  • Profits (also called Income): Sales less cost of sales less expenses. 

The Fresh Look

Business Planning, Growing a Business, Planning Fundamentals

Back in the 1970s when I was a foreign correspondent living in Mexico City, I dealt frequently with an American diplomat who provided information about Mexico’s increasing oil exports, which were a big story back then. We had lunch about once a month. He became a friend.

Then one day he told me he was being transferred to another post because he had been in Mexico too long. “What? but you’ve only been here for three years,” I said. I was disappointed for two reasons. “You’ve barely learned the good restaurants!” He explained to me that the U.S. foreign service moved people about every three years on purpose. “Otherwise we think we know everything and we stop questioning assumptions,” he said, “that’s dangerous.”

I remember that day still because I’ve seen the same phenomenon so many times in the years since, in business. We — business owners and operators — are so obviously likely to fall into the same trap. Our business landscape is constantly changing, no matter what business we’re in, but we keep forgetting the fresh look. “We tried that and it didn’t work” is a terrible answer to a suggestion when a few years have gone by.  What didn’t work in 2000 might be just what your business needs right now. But you think you don’t have to try again what didn’t work five years ago.

This is why I advocate the “fresh look” at the market at least once a year.  Existing businesses that want to grow too often skip the part of business planning that requires looking well at your market, why people buy, who competes against you, what else you might do, what your customers think about you. Think of the artist squinting to get a better view of the landscape. Step back from the business and take a new look.  Use the standard Know Your Market techniques and content, just applying it to your business, not a new opportunity.

Talking to customers — well, listening to customers, actually — is particularly important. Don’t ever assume you know what your customers think about your company. Things change. If you don’t poll your customers regularly, do it at least once a year as part of the fresh look.  As an owner, you should listen to at least a few of your customers at least once a year. It’s a good exercise.

For creativity’s sake, think about revising your market segmentation, creating a new segmentation. If for example you’ve divided by size of business, divide by region or type of business or type of decision process. If you’ve always used demographics, use psychographics.

Remember to stress benefits. Review what benefits your customers receive when they buy with your, and follow those benefits into a new view of your market. 

Question all your assumptions. What has always been true may not be true anymore. That’s what I call the fresh look.

Artist_istocksmaller The artist takes a fresh look at the scene every time paints it. How many times as this man seen the banks of the Seine? It doesn’t matter, because he takes the fresh look every time.  The business needs to take a fresh look at its market and its strategic situation at least once a year.

— Tim Berry —

Planning is not Accounting

Business Planning, Planning Fundamentals

Stargateverysmall_1 The picture here represents the legendary Stargate, a science fictional gateway between two dimensions. There was a 1994 film starring James Spader and Kurt Russell.

I often use it to illustrate the difference between planning and accounting. Planning begins today and goes forward into the future. Accounting ends today and goes backward into the past. Planning is for making decisions, setting priorities, and management. Accounting is also for information and management, of course, but there are legal obligations related to taxes. Accounting must necessarily go very deep into detail. Planning requires a balance between detail and concept, because there are times when too much detail is not productive.

The catch that causes many misunderstandings is that the statements look very similar.  Your accounting system produces an Income statement (alias Profit or Loss), a Balance Sheet, and a Cash Flow statement.  A good business plan has at least the same three statements as "pro-forma" (meaning projected) statements. The form, presentation, and order of appearance of these financial statements are almost identical, but their information content is quite different. 

Accounting should zoom into ever-increasing detail.  Planning should summarize and aggregate.

Accounting can never be wrong.  Business plans are always wrong (not that they aren’t useful — it’s like walking or steering, the value is in the correction and the management of where and why they’re wrong, but that’s a different post.)

-Tim Berry-