Category Archives: Management

20 Reasons to Write a Business Plan

all businesses need a business planQuestion: What are some of the main arguments for writing a business plan?

Here are 20 good reasons to write a business plan. Please note, however, that a business plan is not necessarily a traditional formal business plan. It ought to be a lean business plan that gets reviewed and revised often. It ought not to be static, used once, and then forgotten.

These apply to all businesses, startup or not:

Key elements of a lean business plan

  1. Manage the money. Plan and manage cash flow. Will you need working capital to finance inventory purchase, or waiting for business customers to pay? To service debt, or buy assets? To finance the deficit spending that generates growth? Are sales enough to cover costs and expenses? That’s planning.
  2. Break larger uncertainties into meaningful parts. Go from big vague objectives to specific numbers, lists, and tables. It’s compatible with the way most humans think. A plan makes it easier to estimate and visualize needs, possibilities, and so forth
  3. Set strategy. Strategy is focus. It’s what you concentrate on, and why. It’s who is in your market, and who isn’t; and why and why not. It’s what you sell, to whom. You need to set it and then refer back to it, frequently, as things change. You can’t revise something you don’t have.
  4. Set tactics to align with strategy. Tactics like pricing, messaging, distribution, marketing, promotion have to work and they have to align with strategy. You can’t manage a high-end strategy with low-end pricing.
  5. Set major milestones. Concretely, what is supposed to happen, when? who is responsible? Humans work better towards specific milestones than they do moving in general directions. New product launch, website, new versions, new hires. Put it into milestones.
  6. Establish meaningful metrics. Of course that includes money in sales, spending, and capital needed. But useful metrics might also include traffic, conversion rates, cost of customer acquisition, lifetime customer value, or calls, emails, ads, trips, updates, hires, even likes, follows, and retweet. Good planning includes methods to track.

Dealing with business decisions

  1. Set specific objectives for managers. People work better with specific objectives, especially when the come within a process that includes tracking and following up. The business plan is the perfect tool for making this happen. Don’t settle for having it in your head. Organize and plan better, and communicate the priorities better.
  2. Share your strategy selectively. Let other people involved with your business know what you’re trying to do. Share portions of your plan with key team leaders, partners, spouse, bankers, allies. Don’t you want them to know.
  3. Deal with displacement. You have to choose, in business; particularly in small business; because of displacement “Whatever you do is something else you don’t do.” Displacement lives at the heart of all small-business strategy.
  4. Decisions on space and locations. Rent is a new obligation, usually a fixed cost. Do your growth prospects and plans justify taking on this increased fixed cost? Shouldn’t that be in your business plan?
  5. Hire new people or not. Who to hire, why, and how many. Each new hire is another new obligation (a fixed cost) that increases your risk. How will new people help your business grow and prosper? What exactly are they supposed to be doing? The rationale for hiring should be in your business plan.
  6. Make asset decisions and asset purchase or lease. Use your business plan to help decide what’s going to happen in the long term, which should be an important input to the classic make vs. buy. How long will this important purchase last in your plan?

More on sharing information

  1. Onboarding for new hires. Make selected portions of your business plan part of your new employee training.
  2. Manage business alliances. Use your plan to set targets for new alliances, and selected portions of your plan to communicate with those alliances.
  3. Lawyers, accountants, consultants. Share selected highlights or your plans with your attorneys and accountants, and, if this is relevant to you, consultants.
  4. When you want to sell your business. Usually the business plan is a very important part of selling the business. Help buyers understand what you have, what it’s worth and why they want it.
  5. Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues. Valuation is the term for establishing how much your business is worth. Usually that takes a business plan, as well as a professional with experience. The plan tells the valuation expert what your business is doing, when, why and how much that will cost and how much it will produce.

The standard arguments that apply more to startups

  1. Create a new business. Use a plan to establish the right steps to starting a new business, including what you need to do, what resources will be required, and what you expect to happen.
  2. Estimate starting costs. Aside from the general in the point above, there’s the specific estimates that list assets you need to have, and expenses you need to incur, in order to start a new business.
  3. Seek investment for a business, whether it’s a startup or not. Investors need to see a business plan before they decide whether or not to invest. They’ll expect the plan to cover all the main points.
  4. Back up a business loan application. Like investors, lenders want to see the plan and will expect the plan to cover the main points.
  5. Vital for your business pitch and summaries. You can’t really do a good business pitch without knowing already the key parameters you estimate in your business plan, for headcount, starting costs, and of course milestones and key strategy and tactics.

 

10 Most Common High Tech Business Plan Fails

I was asked about high-tech business plan fails on Quora recently. So this isn’t about lean plans for all business owners, but just the business plans submitted for angel investment and business plan competitions. I read about 100 of those business plans per year. So here’s my list of high-tech business plan fails:

  1. Naive profits. Drives me crazy. First of all, startups are rarely profitable. Secondly, get a clue – if the industry average is 8% profits to sales, you aren’t going to make 43%. You’re not showing that your business will perform way better than most; you’re showing you don’t know the business. Thirdly, why would I value your plan based on numbers that aren’t credible. It makes your plan worse, not better.
  2. Self-assigned superlatives. Disruptive, game changing, etc. Skip the fashionable check-the-list buzzwords. The more you claim it, the less credible you are. Stick to the content and leave the adjectives out.
  3. Not having projections. You don’t get to say projections are useless. Readers won’t believe them on the surface, for sure. But savvy plan readers want to look at your projections not because they will believe the top or bottom lines, but to see how well you understand the drivers and the workings of the business. Do you know what drives sales? Do you understand direct costs? Are your expenses realistic.
  4. Amazing headcount. I often see plans that would run enterprise-level businesses with startup-level head counts. I’ve seen plans in which 20 people supposedly run $20-million-annual-sales businesses. (Yes, this is a variation on #1 above; and relates to #3)
  5. No marketing expenses. Another variation on #1 and #3. The projections show huge profits and tiny marketing expenses. Fat chance. Marketing expenses are what make profits and growth incompatible.
  6. IRR and NPV. Nobody cares what your calculator or spreadsheet function tells you is the results of multiplying one far-out unrealistic assumption by another and another. These analyses are useful for teaching the time value of money and for some sophisticated financial analyses. Not for business planning.
  7. No competition. A sure-fire sign of lack of research, depth, and understanding of the way competition actually works.
  8. Cash machines. I’m surprised how often this happens. Plans that are supposed to be related to angel investment project cash immediately and more cash every day, and even accumulate huge cash balances. First of course that’s completely unrealistic. Second, why would yo share ownership of that cash machine with investors?
  9. Good business, bad investment. This is quite common, and I often encourage and admire these. Businesses that don’t need investment do show up now and then. Hats off and congratulations. But that doesn’t make a good investment for outsiders who need you to need more cash and eventually to exit to liquidity.
  10. Vague puffery in team backgrounds. Way too often people talk about relevant experience in generalities. For example, “a startup veteran” or “had a successful startup exit.” Tell me what companies and when. When the vitals are left out everybody suspects exaggeration. I sometimes insist on details and discover there was really nothing there. The startup was a poster campaign on a college campus. The exit was dissolving the business and selling the computer it owned.

Why Do We Need Financial Forecasts?

Business owners and managers do financial forecasting to enhance  management. Anticipate essential flows of money to manage them better. Forecasting is a necessary first step towards managing plan vs. actual results, which means course corrections. It’s like steering a business.

A Quick Example

Consider this simple illustration:

financial forecasting variance
You can’t identify changes in flow if you don’t have a forecast to refer back to as you review and revises according to changes.

Real management is a matter of minding the details while working towards the right long-term directions. Step by step. Forecasting is part of the management process. When sales are different from planned, you look at the connected spending, and adjust. Change the resource allocation when things are going well or poorly. Identify problems with execution, and opportunities that result from the unexpected.

You should note also that the value of the forecast isn’t a matter of accurately predicting the future. We’re human. We don’t do that well. Instead, it’s a matter of identifying the connections between sales and spending, and managing the ongoing interaction involved. In the example above, bike unit sales were less than planned, but the dollar sales were higher.  Is that good news or bad? It’s not necessarily either one, right? And it is also quite possibly highlighting a market trend that management should be aware of.

A LivePlan Example

Another example, from LivePlan: Monthly sales are below the plan, but above the previous year. Accessories and clothing are better than the previous year, but bicycles sales are below the previous year. Is that a trend to manage? The numbers don’t say, but the people should know. The numbers are there to begin the discussion.

Flies Buzzed. And I Like Short Sentences

“Flies buzzed.” The best opening sentence I ever wrote. Also the best lead paragraph I ever wrote. And 42 years ago.

Image of newspaper clipping
This is not the “flies buzzed” story. I can’t find that one. But this is a story I wrote about that hurricane.

I don’t even have the piece. It was lost in the 42-year shuffle. But it started with “Flies buzzed” and went on to describe the third day after a brutal hurricane with flooding that killed tens of thousands. At the time I was night editor for Northern Latin America for United Press International (UPI).

The name of the hurricane spoiled the story when I tried to tell it to my kids as teenagers. Hurricane Fifi. Damn, that sounds silly. My kids giggled. But you can look it up in Wikipedia. Honduras, September of 1974. Oh, and when you look it up, you’ll discover that history recorded it as 5,000 to 10,000 people dead. I reported an estimated 30,000 dead. I had a valid source for that – a colonel in the Honduran military, Eduardo Sandino. It’s an easy name to remember because he increased his death toll estimate every time I checked in with him. And every time he did, with the obvious ulterior motive: “We need helicopters,” he said, every time we talked. “Tell them we need helicopters.”

Three reasons to mention that here today.

First, writing. Good writing communicates. What does “flies buzzed” tell you? Exactly.

Second, journalism. I was a single reporter in country for United Press International, competing with a team of seven people for AP. I won the story. I spoke fluent Spanish and found the official sources. They understood what they could get, for their country, by increasing the estimated death toll.

Third, more journalism. I believed the estimates Col. Sandino gave me. Every day for the better part of a week, I hitchhiked on private planes from the airport in Tegucigalpa to the airport in San Pedro Sula that was closest to the mudslides that caused most of the damage. A dam broke above the village of Choloma. I worked hard to get real information, validated by officials who went on record with name and position. And the information I published, it turns out, years later, was wrong. The death toll had been exaggerated. But the journalistic ethic was intact. We are all subjective. We strive for objective truth, as the goal. Sometimes we fail.

Does that tell you something worth understanding about Journalism?

Do You Believe the Legendary Startup Failure Statistics. I Don’t.

This recent piece on startup failure statistics caught me eye on Twitter first, and I followed the links to discover Startups: Conventional Wisdom Says 90% Fail. Data Says Otherwise. | Fortune.com. Here’s a direct quote from author Erin Griffith:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: ‘Nine out of 10 startups fail.’ The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

I was happy to see this because I’ve agreed, including here and here on this blog and also here in the bplans.com articles, that failure statistics are bogus. Overblown. Exaggerated. And taken for granted.

What drives the startup failure statistics myth

I’m not so sure about Erin’s explanation of why that occurs. She says, in the paragraph explaining the one above:

Yet the denizens of Startup Land continue to cite the 90% figure because it serves a purpose. It comforts failed startup founders who burned through their investors’ money, laid off staff, and shut down their companies. It supports the startup world’s celebration of failure. “Sure, you failed, but that’s the norm,” the thinking goes. “The odds were against you.”

I don’t buy Erin’s explanation there. She’s too kind. I think the 90% myth is driven by bogus would-be experts who clutter the web and even business publications spouting worn-out startup clichés to bolster their alleged expertise. I think it’s a side effect of our everybody-is-a-publisher society. People can get attention with certainty untempered by experience. I did a rant on that subject here, not that long ago: Bogus experts give bad startup advice.

An important clarification

Although it doesn’t quite support my point, I can’t leave the subject without pointing out that the data we’re looking at there is not for all startups. It’s just about venture-backed startups, which are the cream of the crop. Of course they do better than the average startup. They are the ones that get through the investment filter process.

And this also shows that so much of what we value in information depends on the definitions. What’s a startup? To me it’s a new business of any kind. To many other experts, the term startup applies only to high-growth new businesses suitable for outside investment. So we have to look, with any of these studies, on what they are really studying. All businesses, or just high-end tech businesses?

And then, before we leave the subject, there’s the obvious thought that not all businesses, startups, small business, or whatever, are equal. When you start your own business, if you do, your odds are not the same odds as everybody else who starts a business. Your odds depend on what you’re trying to do, how well you do it, how well you plan and manage, and what resources you bring with you.

Last thought: I can guarantee you that your odds of failure go way down when you run your business with good planning process. Start with a lean plan and review and revise it regularly.

 

 

Forget Business Networking. It’s a Hoax

Forget business networking. “Networking” as a business activity is a hoax. Business relationships that you build as business assets are meaningless. As soon as you use this vocabulary, it’s self serving, superficial, and ineffective. The people being used as assets know it, and are not fooled by it. So “Business Networking” doesn’t work.

Friendship vs. Self Interest

Instead, just be a decent person. Meet people because you want to. Listen to them when they talk. Do them a favor when you can and it’s not weird or out of balance. Be a friend. Friendship can’t be done as a business task and relationships intended as assets mean nothing. Do favors for friends because they’re friends, not as a deposit in some business asset bank. And – hooray for human nature – you’ll enjoy that more, and when you need a push or some help, people you’ve done favors for will be happy to reciprocate. That’s human nature.

The business types who started talking about “networking” 40 or 50 years ago did the world a disservice. They didn’t realize that all that was really happening was friendship, or nothing. They looked at friendship from the outside in, with business on their mind but apparently not humanity. So they parsed friendship into business buzzword, misunderstood it, and named it networking. Then they decreed that it’s a business task.

Treat People as People

People aren’t assets. Relationships aren’t assets. Nobody with any sense of self is going to golum themselves up to somebody in their so-called network to ask for favors, out of the blue, without having been a friend first. If you even try, it’s obvious and it’s off-putting, so it doesn’t work. Google glad-handing.

(Note: based on my Quora answer:  What is the best way to build strong business relationships so that you can leverage those relationships …)

The Crystal Ball and Chain

One of the somewhat hidden benefits of good planning process in a business is management accountability. And one of the problems that comes up, in organizations that introduce good planning process, is what I call the “Crystal Ball and Chain” problem. I’ve run into it several times as I’ve introduced the planning process into a new company or organization.

Fear of accountability and commitment

People in the organization sometimes fear business planning. In the background, the fear is related to accountability and commitment. Usually they don’t realize it. They state their objection as:

“But how can I possibly know today what’s going to happen six months from now? Isn’t that just a waste of time? Can’t it actually be counter-productive, because it distracts us, and we spend time trying to figure out things in the future?”

I’ve heard this from some people who really did seem to be worried about accountability and commitment, and I’ve heard it from some who were stars on the team, not worried at all about their own position, but legitimately worried about the best thing for management and getting work done.

The answer is that projecting future business activities isn’t a ball and chain at all, because in the right planning process the existence of the plan helps you manage effectively.

The solution is collaboration

Here’s a concrete example: it’s September and you are developing your plan for next year, which includes an important trade show in April. You plan on that trade show and set up a budget for expenses related to that trade show. Even though it’s September, you have a pretty good idea that this will happen in April.

When January rolls around, though, it turns out that the trade show that normally takes place in April will be in June this year. Does that mean the plan was wasted time? Absolutely not! It is precisely because you have a plan running that you catch the change in January, move the expense to June, and adjust some other activities accordingly.

In this example, the plan isn’t a brick wall you run into or a ball and chain that drags you down; no, it’s a helpful tool, like a map or even a GPS device, because it helps you keep track of priorities and manage and adjust the details as they roll into view.

It’s normal for the crystal ball and chain to appear as an objection when a planning process is introduced. The solution is simply good management. The people involved in implementing the plan learn with time how regular plan review sessions help them stay on top of things, and when assumptions change, how the plan changes. Changes are discussed, nobody gets fired, and you have better management.

The underlying idea here is directly related to the paradox in a previous post: business plans are always wrong, but still vital to good management.

Top 10 Tips for Business Planning

I was asked once again for my 10 top tips on business planning. I can’t do that without noting the different uses of business plans in different situations. I ended up with more than 10 tips, but they are more specific to context.

5 Major tips for all business planning

  1. Form follows function. Like anything else in business, a business plan should be judged good or bad not in a vacuum but in its business context with its specific business objective. Most of the online discussion about business plans is focused on business plans related to seeking investment, and I’m going to make the assumption in this answer that you are asking about those. But in real life, the plan related to seeking investment is a subset, a special case. Most real business plans are about managing a business and need a lot less description and research than the business plan related to seeking investment. In most cases, a lean business plan fits the business purpose best.
  2. Projections are important not for their actual numbers as much as for their presentation of drivers, relationships between growth and spending, key spending priorities, sales aspirations, and assumptions related to cash flow. They have to be solid and integrated, but accuracy is much more a matter of transparent assumptions than accurately predicting the future.
  3. All business plans should establish strategy, tactics, milestones, tasks, assumptions, and essential numbers (projected sales, direct costs, expenses, and cash flow).
  4. All business plans should develop accountability and tracking.
  5. All business plans should be reviewed and revised at least monthly. The review should include looking for changed assumptions and analyzing plan vs actual results with management of the difference.

10 Tips on business plans for seeking investment

  1. Investors invest in businesses, not plans. The business plan is a necessary but not sufficient condition for finding outside investors. The plan describes the business and what it might become, and that’s all. A beautifully written, edited, and formatted business plan will not make a less investible business more investible. The investment decision is about the content – the team, the market, the differentiators, the scalability, traction so far, validators, growth potential – not the presentation or formatting of the plan. The best use of business plans starts with founders using plans to establish strategy, tactics, milestones, and (especially important) essential projections of sales, spending, headcount, startup costs, capital needs; it’s for the founders to know, first, what they plan to do. Later, as the investment process proceeds (if it does), the latest regularly-revised plan will serve as a companion piece to the pitch and a key document for due diligence.
  2. You need both pitch and plan. The pitch is a summary of the plan, organized according to highlights for investors, ideally a way to present your business in a structured way. The business plan is the bones of the pitch, like the screenplay, setting strategy, tactics, milestones, market, and essential numbers.
  3. The normal flow is from introduction, to pitch, to business plan in detail. It’s trendy to say investors don’t read business plans, but what actually happens is they only read business plans of the businesses they are interested in. They reject businesses from intro and pitch, without reading the business plan. The business plan is an essential component of normal due diligence. Never do a pitch without having a plan, because if investors like the pitch they will ask questions that you can’t answer without a real plan. Things like: Could you grow faster with more money? What are your headcount assumptions? How much are you spending on marketing expenses? What are you assuming for payments and collections lags?
  4. Cover the bases. No need to elaborate here. There are tons of good outlines available, plus books, blogs. Down below I have some specific resources related to my work; but not now. There is no single best outline to use, but investors will want to know about the market, potential growth, competition, differentiation (or secret sauce) strategy, tactics, key milestones, important assumptions, the management team, and financial projections including use of funds, projected sales, income, balance, and cash flow. Use your common sense to put first things first and organize it all well.
  5. A good summary is essential. Many investors will read only the summary.
  6. Keep it short. Consider doing just a lean business plan with key info and using your pitch to supplement with more summary and description. Cover the key points and move on.
  7. It’s about business, not science, not technology. Don’t show off your knowledge. Cover the business essentials including marketing, distribution, pricing, channels, etc.. Leave the science and technology for supplemental documents.
  8. Forget discounted cash flow, net presented value, IRR, etc. Investors don’t care about uncertainty compounded on uncertainty. They want to know real assumptions that matter. They’ll use their own knowledge and experience to decide about future values.
  9. Don’t hide anything. It’s not hard to find the key points that investors want you to cover. What’s most important, what order, and how much detail depends on your specifics. Make essential information easy to find. Don’t leave anything obvious out.
  10. Keep it fresh. That’s why you don’t write a long treatise. A business plan’s shelf life is about a month. Don’t think you can write it once and then live with it for months.

6 Common mistakes to avoid with plans for investors

  1. Big profits prove nothing but that you don’t know the business. The most common mistake by far is on profits. Startups that grow don’t produce profits. Investors make money on valuation increases, not profits. Real businesses rarely produce more than single-digit profits. Big profit projections are sophomoric. Take all those profits and dump them into marketing expenses and you’ll be better off.
  2. Prepare to defend hockey-stick projections with believable assumptions and back-up info on how this is realistic. Unsupported huge growth projections are a crock and everybody knows it.
  3. Being the low-cost provider is very last millennium. Markets split. The low-cost providers are the big dinosaurs with huge capital bases.
  4. Don’t give all the founders C-level titles. Settle down. Execute, grow, meet milestones, and then up the titles if you haven’t had to bring in some new people.
  5. Plan to pay your key people. To be honest, some investors like to see founders living on ramen and losing their families. Most don’t. Most investors want you to pay the key people enough to preserve their lives and work ethics, less than true market value, but enough to live on decently.
  6. Respect normal sales cycles, marketing benchmarks, and cash flow patterns for your industry. For example, if you sell to enterprise it’s going to take a lot of structure, patience, and waiting. If you’re B-to-B then you’re going to need working capital to support receivables. And if you’re industry spends 35% of revenue on marketing, then so do you. Or more, because you want to grow.