Another Friday video today, this time with thanks to the bplans editing team, me in 88 seconds on why you need a business plan.
For years I’ve lived with my own “root canal theory of business planning.” Do the Google search for that phrase and you’ll see that my previous writing about this comes up first. Like root canals, business plans were something people dreaded, but needed. Happily, things have changed.
For today: lean business planning
Unlike a root canal, modern-day business planning should not be painful, is not something you do all at once, and ought not to be a cure for anything like a toothache. Instead, it should be fun and interesting, and a regular process. It’s preventative, not curative. I call it lean business planning. The plan stays alive. It’s not painful to do, you like doing it because you’re running your own business and the planning part of it is fascinating. It’s your future, your life, and controlling your destiny.
When experts advise against doing a business plan, they refer to that obsolete full formal business plan that likens the business plan to the root canal. They don’t advise against setting goals, priorities, milestones, metrics, and projected cash flow.
It was just after having that first root canal that long ago that I developed the root canal theory of business planning. I’d had a horrible toothache back then, a sleepless night, and by the time I got to the dentist chair the next morning I really, really wanted that root canal. I wanted the pain to end.
Back then — late 1980s — I thought about how people only did business plans when they absolutely had to, for investment or business loans; and about how when they did have to, they wanted that business plan fast, and they wanted it badly. But it seemed like nobody who didn’t have the urgent need wanted to do a business plan. Our fulfillment house noted that our business plan software orders had the highest ratio of overnight shipping of all their clients.
Do your lean business plan. Set strategy, tactics, milestones, and metrics. Then review it often and revise as necessary.
Really, once you understand lean business planning, if you still dread planning, then maybe you should keep your day job.
(Photo credit: cc license by radiant guy, on Flickr.)
The most common mistake in startup business plans is having the profits way too high. There’s no sense whatsoever to priding oneself in projected profits, as in profits you predict your business will have in the future. That’s like having replicas of future Olympic gold medals made and putting them into a trophy case. And in most business settings, it just lowers your credibility. I read 100 or so startup business plans every year, and I’ve getting tired of it. I’ve discovered a new 50-50 rule of profitability in business plans, as in, 50% of the plans I’m looking at project 50% or higher profits on sales.
Pick one: high growth or high startup profits
In real business, there is inherent conflict between high growth and high profits. That is the collective result of lots of small decisions owners make as they choose to spend marketing money or not. Every dollar you keep in profits is a dollar you didn’t spend to generate growth.
It’s not just coincidence that the history of high-growth online business successes started with losses. Facebook founder Mark Zuckerberg resisted charging membership fees in the early years, when Facebook was losing money but staying free to users. Sure, later, through advertising, Facebook found a way to make money – but first it had to grow its user base to gain the critical mass that made advertising a practical source of revenue. And Facebook is still free to users. Twitter is still free, struggling to figure out how to make more money, but not even for a second considering charging a fee for participation. LinkedIn is still free, and was free and losing money for years. Revenues came later, after the user base was established.
And even with more traditional businesses on main street, startups are rarely profitable. There are always expenses before launch, and those cut into profits. And few businesses manage to generate revenue to cover costs from the very beginning. Most have a deficit phase as they gain traction and grow.
And as they do establish themselves, they still have to decide, dollar for dollar, whether they spend available money on marketing, or save it and keep it as profits.
Find realistic levels of startup profits
Real businesses make five or 10 percent profits on sales, at best. The NYU business school keeps an updated web page that lists profitability by industry, with an overall average of 6.4%
Occasionally a very successful startup will come up with something so new that it can, for a while, chalk up very high profit margins. That’s extremely rare. Out here in the real world, though, nobody really makes much more than 5-8-10% or so profits on sales. The real startups might make 15% or even 20%.
Projecting 40%, 50%, and even 60% profitability on sales doesn’t tell me you have a great business; it tells me you haven’t done all of your homework. You’re underestimating cost of sales, expenses, or both.
I find this particularly galling in business plans with some social implications, related to health care, or education. I’ve seen many startups planning to sell something offering huge medical benefits to people suffering from serious medical problems, projecting profits of 100 percent or more. Do you agree with me that this is wrong? Nobody chooses to buy these things. Can’t they charge a fair price, that allows a fair profit?
What would I like to see instead? First, find out average profitability for the industry you’re in. Put that number into your plan. Then explain why your company’s projected profitability is higher. Proprietary technology, specialty niche market, new processes? Okay, I can take that; just be aware of what the normal is, so you know what you’re up against. Please.
Standard financials are available from several vendors, for less than $100 per industry (and here I can’t resist adding that they’re bundled with LivePlan, my company’s software product. Sorry. I’m an entrepreneur. I can’t help it.) You can also get those from Oxxford Information Technology, or the Risk Management Association (RMA). And some summary profit by industry data is available for free, from sources such as the NYU page above.
Four years ago I posted A Short History of Business Plans including my experience plus data from a Google search of usage of phrases in books. The search is interesting because it transcends the web and online data by digging into books.
Usage in Books
I tried a similar search yesterday and was disappointed to discover that it hasn’t been updated past 2008, which was the same most recent date available in 2011. It turns out the Google book search I used then still runs only through 2008, as it did then. Bummer. That’s disappointing. So here’s that data:
I find it kind of cool – obviously meaningless, but still cool – how neatly that blue line parallels my personal experience with business planning. I first heard about it in the middle 1970s, started to really like it – and do a consulting business around it – in the middle 1980s, and then developed Palo Alto Software and business planning software for business plans in the middle 1990s. No wonder it seemed important to me. Look at the blue line.
However, still curious about how usage has fared since 2008, I decided to turn to web searches for a better update. So I did a a Google Trends search for “business plan” and “entrepreneurship.” The conclusion is that the searches for business plan and for entrepreneurship are stable, and seem to correlate very closely.
I’m not sure what to make of that visual correlation, and much less what to make of the appearance of both of these lines turning flat over the last four years. What do you think?
“What? No, I don’t have a business plan. I’m not a startup.”
Too bad so many small business owners think that way. A good lean business plan for small business owners ought to be a great tool for running a business. Set strategy, tactics to match, major milestones, metrics, tasks, responsibilities, and essential business numbers. Keep it lean, review and revise it every month, and you’re way better off. Whether you’re a startup or an ongoing business. Just like planning a trip makes the trip better, so too, planning a business makes the business better.
That myth of the business plan for start-ups only gets in the way far too often. If you own or run a company, you probably want to grow it. And if you want to grow a company, then you want to plan that growth. And the planning is only the beginning; you want to use the full planning process to manage growth.
Think for just a minute about how many different reasons there are for an existing company to plan (and manage) it’s growth. There’s the need first of all to control your company’s destiny, to set long-term vision and objectives and calculate steps to take to achieve vision. Without planning the company is reacting to events, following reality as it emerges. With planning, there’s the chance to pro actively lead the company towards its future.
For an existing company that wants to grow, planning process is essential. Everybody wants to control their own destiny. The planning process is the best way to review and refresh the market and marketing, to prioritize and channel growth into the optimal areas, to allocate resources, to set priorities and manage tasks. Bring a team of managers together and develop strategy that the team can implement. Work on dealing with reality, the possible instead of just the desirable, and make strategic choices. Then follow up with regular plan review that becomes, in the end, management.
This normally starts with a plan. The plan, however, is just the beginning. It takes the full cycle to make a plan into a planning process. Here’s my view of the business plan for small business owners:
Interested? Download my new book on the Lean Business Plan: Lean Business Planning with LivePlan
Somebody asked me what the key elements of a good business plan were, and I’m glad they did—it’s one of my favorite topics.
It gives me a chance to review and revise another of the lists that I’ve done off and on for years (such as the one from yesterday, on common business plan mistakes).
1. Measure a business plan by the decisions it causes.
I’ve written about this one in several places. Like everything else in business, business plans have business objectives.
Whether the purpose of the plan is better management, accountability, setting stepping stones to the future, convincing somebody to invest, or something else, does it accomplish that? Does it achieve its objective?
Realistically, it doesn’t matter whether your business plan is well-written, complete, well-formatted, creative, or intelligent. It only matters that it does the job it’s supposed to do. It’s a bad plan if it doesn’t.
2. Concrete specifics.
Dates, deadlines, major milestones, task responsibilities, sales forecasts, spending budgets, cash flow projections.
Ask yourself how executable it is. Ask yourself how you’ll know, on a regular basis, how much progress you’ve made, and whether or not you’re on track.
3. Cash flow.
Cash flow is the single most important concept in business. A business plan without cash flow is a marketing plan, strategic plan, summary, or something else—and those can be useful, but get your vocabulary right.
There’s a useful role for a business model, lean canvas, pitch deck and so on in some contexts, like raising investment. But those aren’t business plans.
While it is a fact that all business plans are wrong, assumptions, drivers, deadlines, milestones, and such should be realistic, not crazy.
The plan is to be executed. Impossible goals and crazy forecasts make the whole thing a waste of time.
5. Short, sweet, easy-to-read summaries of strategy and tactics.
Not all business plans need a lot of text.
Text and explanations are for outsiders, such as investors and bankers; however, a lot of companies ought to be using business planning to just run the business better. If you don’t need the extra information, leave it out.
Define strategy and tactics in short bullet point lists. And tactics, by the way, are related to the marketing plan, product plan, financial plan, and so on. Strategy without tactics is just fluff.
6. Alignment of strategy and tactics.
It’s surprising how often they don’t match.
Strategy is focus, key target markets, key product/service features, important differentiators, and so forth. Tactics are like pricing, social media, channels, financials—and the two should match.
A gourmet restaurant (strategy) should not have a drive-through option (tactics.)
7. Covers the event-specific, objective-specific bases.
A lot of components of a business plan depend on the usage.
Internal plans have no need for descriptions of company teams. Market analysis hits one level for an internal plan, but often has to be proof of market, or validation, for a plan associated with investment. Investment plans need to know something about exits; internal plans don’t.
8. Easy in, easy out.
Don’t make anybody work to find what information is where in the plan. Keep it simple.
Use bullets as much as possible, and be careful with naked bullets for people who don’t really know the background. Don’t show off.
9. As lean as possible.
Just big enough to do the job. It has to be reviewed and revised regularly to be useful. Nothing should be included that isn’t going to be used.
10. Geared for change.
A good business plan is the opposite of written in stone. It’s going to change in a few weeks.
List assumptions, because reviewing assumptions is the best way to figure out when to change the plan, and when to stick with the plan.
11. The right level of aggregation and summary.
It’s not accounting. It’s planning.
Projections look like accounting statements, but they aren’t. They are summarized. They aren’t built on elaborate financial models. They are just detailed enough to generate good information.
(This started as my answer to a Quora question: What are the key elements of a good business plan?)
I couldn’t resist.
The question was, “What’s so great about developing a business plan for a business?”
Here’s my answer:
What’s great about a business plan starts with something similar to how we feel about having a collection of flight, hotel, and rental car reservations before we take a trip.
The business plan, done right, breaks the uncertainty into manageable pieces.
- It sets the most important elements of strategy, including business offering, target market, and differentiators.
- It sets the most important tactics for execution, and matches them to strategic focus.
- It sets up and defines the important steps for the future.
- It defines the key assumptions and resulting projections for sales, direct costs, operating expenses, and cash flow.
It’s a great tool for moving forward, figuring out what’s important, managing the important flow of tasks responsibilities, and money, and then—on a regular basis—checking results with review and revision.
It’s not the plan that really matters; it’s the planning. But you can’t have planning without a plan.
And here’s where that question and answer took place, on Quora: What is so great about developing a business plan for a business?
Are you running your own business or looking to start a new business? The lean business plan is an easy way to set down your strategy, tactics, milestones, and essential business numbers. Just do it for yourself and your team, with a few streamlined bullet points for strategy and tactics; plus lists of key milestones, tasks, assumptions, and performance metrics; and essential business numbers. Then review and revise it regularly and you’ll have your progress towards goals, and accountability.
Lean Business Plan in Four Steps
Strategy is focus. A lean business plan uses a few bullet points to remind yourself and your team of your focus on a well-defined target market, and how your business offering solves the problem your business solves for that target market, and how your unique business identity makes you different. Keep it in bullets, reminders you’ll use yourself.
Strategy is useless without tactics. In a lean business plan, tactics define your choices related to pricing, channels, website, mobile app, launch dates, features, benefits, messaging, media, promotion, platforms, locations, signage, financing, recruitment, bundles, and so forth. There is no reason to define all this in detail, or defend it for outsiders. Just decide and set it down as a bullet points. These are the core thoughts of marketing plan, product plan, and financial plan — but just what you need to do it. You don’t need elaborate text. Keep what you say about your tactics simple.
Three: Concrete Specifics
A lean business plan includes milestones to make your planning real. Milestones include dates, deadlines, tasks, responsibilities, and plan your budget and goals to reach specific milestones. List your important assumptions. Set dates for review and revision, plan vs. actual analysis, at least once a month. Set performance metrics you can track. Match every key task with somebody who owns it and lives with its results.
Four: Plan for Cash Flow
A lean business plan includes a sales forecast, spending budget, and cash flow. Profits don’t guarantee cash in the bank. Allow for time to wait for clients to pay, and money to buy what you have to before you sell. The purpose of forecasting is management not accurately predicting the future. Connect the dots so sales depends on drivers of sales like traffic, conversions, leads, closes, and so forth. Match sales forecast to projected spending on sales and marketing expenses.
Review and Revise Often
Always track results and review and revise often. What’s happened with the plan? Were assumptions valid? Was it executed?
Management is tracking results and revising as needed. Leadership is knowing when to stay the course and when to pivot.
Lean startup? Yes. Borrow the concept of minimum viable product and apply it to minimum business plan. Borrow the concept of small steps and frequent reviews and apply it to planning and management.
Nothing lends credibility like milestones met. Nothing says planning better than a revised fresh plan. Be a line, not a dot.
The Lean Business Plan is to Get Stuff Done
Times have changed. Don’t do a big traditional business plan but don’t throw out planning either. Do it right. Do a lean business plan. Your business deserves it. Focus, set priorities, highlight execution and specifics, manage cash. Get what you want from your business, whether that’s high-tech growth and funding or independence and peace of mind. It’s not about a plan; it’s about optimizing your life.
For more on this, I have a whole site dedicated to it at leanplan.com.
- Don’t do a long static formal business plan. Do a lean, just-big-enough business plan. Deal with it as a constantly-renewing latest version, with a shelf life of a few weeks at most. Don’t fill it with excess supporting information.
- They won’t even look at a business plan until after they’ve understood the main points from a summary memo, and — in most cases — been through the pitch and met the people. The idea that potential investors would read a business plan as a first step, from somebody they’ve never met, without going through preliminary materials … is laughable.
Understand where the business plan fits in the process of securing investment.
- It’s not the calling card, not the sales brochure, not something you ever send to somebody who doesn’t already know you, your business, and the basic story.
- It’s likely to come up for deals that have gotten through some filters first. Investors will ask for it as part of the due diligence that starts after they understand the deal and are interested in pursuing it further.
- It explains a deal: problem, solution, product-market fit, potential market, potential growth, scalability, defensibility, traction, major milestones, management team, and essential projections of financial progress and, in cases where this applies, trackable progress in traffic, visits, downloads, users, and so forth.
- It’s the screenplay for the summary memo and the pitch. Even though investors won’t want the plan immediately, you’ll need it, when you pitch, to refer to later to answer questions like “can you grow faster with more money” or “how would it look with double the sales force?”
And you don’t have to call it a business plan. The lean startup advocates, for example, like to call it anything but a business plan, but ask them about it, and they’ll confirm you need to cover the same ground as I have in my point 3 above.
My suggestion: call it a lean business plan.
This is interesting: Stanford Business School professor Charles O’Reilly on Why Some Companies Seem to Last Forever:
What explains this longevity? Stanford Graduate School of Business Professor Charles O’Reilly calls it ‘organizational ambidexterity’: the ability of a company to manage its current business while simultaneously preparing for changing conditions. ‘You often see successful organizations failing, and it’s not obvious why they should fail,’ O’Reilly says. The reason, he says, is that a strategy that had been successful within the context of a particular time and place may suddenly be all wrong once the world changes.
So running a business right requires minding the details but also watching the horizon. Eyes down, eyes up. At the same time.
Which reminds me that dribbling is one of my favorite analogies for business planning. In soccer or basketball, dribbling means managing the hand-eye or foot-eye coordination of the immediate detail while simultaneously looking up and watching opponents and teammates and plays developing. When I was coaching kids in soccer, I’d try to help them remember to also look up and not just down at the ball. The best players did this naturally.
It’s a cycle. Plan, with metrics and milestones. Review once a month. Revise. Do it again next month. That’s the way to last forever, according to O’Reilly. It’s the right way to manage the details and the long term simultaneously.