The plan-as-you-go business plan is not your formal, traditional business plan. You don't fill in a checklist or cover all the bases as defined by some recipe somewhere. It's about planning and running a business in the real world, this millennium, whether you are going to show some big plan document to somebody else or not. This chapter covers the attitude adjustment involved in this new approach to planning. The following table outlines the main sections of this chapter.
|Start Anywhere. Get going.
||Start with concepts, start with numbers, start with whatever suits you. It doesn't matter. Do something today that you can use tomorrow.
|Form Follows Function
||Your plan is not necessarily a document. It's what's going to happen. Think it, speak it, write it out simply in bullets, or use pictures. No extra struggle. Use what you need.
|Let It Evolve Organically, as You Need It To
||Do what you can use now, then use it, and then you can grow it over time as you need to. When a business plan event happens and you need to show it to somebody outside your company, then you add to it and make it more formal.
||It's not just a plan, it's your business. You should use the planning process to manage better, achieve your goals, work proactively instead of reactively.
|Mixing Numbers and Words:
||Use only what you need. Keep it simple.
|Inside Out from the Heart
||A good plan is like an artichoke, with the core strategy in the middle and the rest of the plan -- what's going to happen, when, how, and so on -- surrounding it.
|Separate Supporting Information from the Plan
||One of the big wins with the plan-as-you-go business plan is that if you aren't going to use the complete market analysis, industry analysis, and the rest of the supporting information, you don't formally develop them.
|Planning Not Accounting
||Although your business plan projections look a lot like accounting statements, they aren’t. Where accounting goes into minute detail, planning needs summary andaggregation. They are educated guesses, not tax reports. You should approach them with flexibility and an understanding of how much uncertainty is involved.
|It Has to Be Your Plan
||You don't need just a business plan, written by anybody. You need to know your own plan, inside and out, with all the details. The core should be your own thinking. Use consultants wisely or not at all.
|Control Your Destiny
||One of the most important wins you get from good planning is controlling your own destiny in business. You set your future goals and steps to achieve them. While people think you have to have a plan to show somebody else, you want a plan as a tool to manage your own business future.
Think of your business plan as a matter of blocks, like interrelated pieces. You don’t have to have the whole block structure done before you take any next steps. Start your blocks where you like. Some common blocks are the mantra, the sales forecast, the mission statement, the keys to success, maybe a break-even analysis, or a SWOT, or how about the heart of your plan, as in the whole discussion of who needs your product or service and why and what it is? A sales forecast is a block, and so is an employee or personnel plan, as in laying out month by month how many people will be working in your company, and how much each of them will be paid.
The key here is that you don’t get bogged down on having a finished business plan before you do anything else. You're planning as you go. You've heard the stories of people who spent months developing their plan, but never get started. So instead of that, think of the blocks. Choose where you want to start. Get going.
Start Wherever You Like
The blocks idea also saves you from the tyranny of sequence. You don’t have to start at the beginning and work through to the end. You can jump in and start wherever you want.
- Mission statement, maybe? Define for yourself what your company will do for its customers, for its employees, and for its owners. Mission statements are a bit last century, perhaps doomed forever to Dilbert-related derision, but that’s still where some people start.
- Maybe you’re a numbers person. That’s OK don’t apologize -- business planning needs that, too. I was a literature major in college but I still like to start my business planning with a sales forecast. Then I’ll do some conceptual work, then go back to costs and expenses, classic budgeting work, then back to basics.
- Business plans have hearts, like artichokes do. In both, their hearts are their core, the best part. I thought of this analogy when somebody I know and respect suggested that the heart of a business plan is the marketing plan, meaning its identity, positioning, differentiation, the sense of what business you’re in and why people buy from you. That’s a great place to start.
- Some plans start with a product or prototype product. Maybe your first block is a bill of materials for manufacturing the new thing. That’s OK too; that’s a block, you can jump in there.
- There are lots more blocks. The mantra. The vision. A market analysis. A market forecast. Personnel strategy. Financial strategy. Some people like to build an equity plan first, focusing on how many shares exist, how many the founders get, and how many the investors get.
Don’t Worry About Finishing
A good business plan is never done. It’s the launch of a planning process, and you want to understand from the very beginning that if you ever think your plan is done, your business is probably finished. You’ll have to review and revise regularly to keep your business going. Assumptions will change, your forecasts will be wrong, and the art of management will be figuring out when to revise the plan to accommodate changing reality, and when to stick to the parts of the plan that will work if you hold your course. That’s paradox, of course, and that’s why we (owners and managers) do it instead of computers.
Business ideas are interesting, exciting stuff to build a business by, but they are worth nothing (in general) until somebody builds a company around them.
Opportunities are the best of the ideas. An idea is just that. An opportunity is an idea you can implement. You have the resources, and know-how to do it. There is a market. You can make money on it, and the investment will be worth it.
Good business planning filters the opportunities from the ideas. Apply the planning process to the idea to make it an opportunity. Determine the market strength, what exactly is needed, how long it will take, how much money it will take, what people are required. Lay it out into steps.
Not all ideas can survive the rigor of planning. Some fall by the wayside, ending up as interesting ideas that aren't really opportunities.
Some of the factors that count:
- Risk vs. return. Is what it takes to pursue this idea worth the likely return? This is not scientific. It depends a lot on your business' attitude about risk, and what other opportunities are available.
- Realism. How realistic are the forecasts? Give them a good look. Are you pushing the forecast to make things work.
- Resources. What will really be required? Think of people, know-how, skills, compensation, implied risk (paying people to build this company up). What are the start-up costs, including expenses required and assets required?
- Market potential. The heart of your sales forecast is the market potential. How much do people want or need the business offering?
- Business potential. How much money can the business make? How will this impact the business? How big is this opportunity, overall?
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 backward and forward and inside out, or it won't work.
I learned this the hard way, sitting in venture capital offices at 300 Sand Hill Drive, Menlo Park, California , 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 venture capitalists would ask critical questions and all heads would turn to me. I would answer. I knew the plan, backward, forward, 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. 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 rerun the financial model. The team of three didn't include a financial person to learn and manage the model, so it was always me doing the tweaking, which meant I was the only one who knew the plan. I'd rerun 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 look at. 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.
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 business owners, not the consultant.
If you have the luxury of a budget to pay an outside expert, consultant, or business plan writer, then maybe you should use one. 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, backward and forward, and inside out.
Adapted with permission from Planning Startups Stories. All rights reserved
Your plan-as-you-go business plan is no more than what you need to run your business. In the beginning, it might be as simple as an elevator speech, as explained in Chapter 5. Be able to talk through those key points: the customer story, what makes you unique, how you're focusing and on what you're focusing, and, if it comes to that, your close -- what you want from whoever is listening.
Or it might be a simple sales forecast, and perhaps, a burn rate in the very beginning because you know what you're doing -- maybe you've been doing it for years already and you don't need to verbalize it right at this moment -- and you'll set those figures down and start tracking them.
Planning comes in many forms. Think of it as analogous to motion in athletics. In so many different sports, the winners practice economy of motion, repeated muscle memory. Another way to look at it: in design and mechanics, the fewer moving parts, the better. If you have to squint conceptually to see the key points, squint down on the elements you'll be able to track and then revisit.
It's not about the text, or the form of the thing, until that becomes related to the function. When you're doing a business plan as part of a graduate business school class, then yes, it has to be complete and look good and read well; editing and format matter. When you're doing a plan for an investment group that is going to pass it around among the partners, then it matters. But you don't want to get bogged down in format when it's just you and your spouse and you simply want to think through what's required.
So the plan is a collection of concepts in the middle, surrounded by specifics that have to be done. Around the core you put a collection of metrics to be measured and tracked (lots of them are sales, expenses, and the like, but not all), task assignments and responsibilities for different people, dates and deadlines, budgets, and so on. That's your plan.
From that core plan, you spin off various outputs. You take the highest highlights of the plan and 60 seconds or so to explain it in an elevator speech. That's one output. Or you write it all out carefully, and add supporting information about the market and the industry and the backgrounds of the management team, and it's a plan document. Or you create a 20-minute 10-slide summary with PowerPoint or Keynote slides, and that's a pitch presentation for potential investors. Or you create a cover letter or cover e-mail, about a page or so, along with a 5- to 10-page written summary, and that's a summary memo. Or you do none of these, you simply keep that plan as a collection of bullet points, of picture financial projections, and a list of things to be done by whom and when and for how much money, and share it with your team. In that last case you don't ever edit or polish it, or sweat the page headers and page footers or font size. You just use it to manage your company,
Notice that none of these outputs stands as something you do instead of the plan. And none of these outputs is really the plan. The plan exists at the core, and you create the outputs as needed.
With all of these various iterations and outputs, always keep assumptions on top, where you can see them for every review meeting. Minding the changing assumptions is one of the significant advantages of the plan-as-you-go approach over the more traditional methods.
I ran a business for years during which the plan was shared only between me and my wife, mostly, enhanced by sales forecasts and burn rate. During those formative years there was no need for anything else. When it was time for an elevator speech, either one of us could do it. When there was need for a written business plan -- it came up first when we first set up the merchant account to be able to accept credit cards, in 1988 -- then we settled down for a while and wrote it out as it was, conceptually, at that time. We always knew what we wanted to do, but we also knew our key assumptions, and we tracked them as they changed, and revised the plan. A lot of that was verbal, between two people.
As the business grew, the verbal plan with the forecast stopped working. Things became more complicated. Employees needed to know about the plan and join in its formation and then its implementation. So we moved it into bullet points on the computer, and tied those to forecasts, and began tracking in a group, in more detail.
We then began to do annual plans more formally, writing out chapters, and conducting review meetings every month. With each annual plan we'd go out and take a new fresh look at the market. We had people doing nothing but marketing, and they developed segmentations and forecasts and supporting information. It was part of their job.
Are you recognizing yourself somewhere along this line?
Eventually we wanted to bring in outside investment. That was during the dotcom boom when valuations were very high, so we thought it would be a good time to lock in the value with some cash out. We produced very formal plans every three months during that period.
The speech isn't instead of the plan, and the pitch isn't instead of the plan, but that doesn't mean you plan or don't plan if nobody outside your company is going to read about it. Your plan should always be there as the source of these outputs, so you're ready to produce them when you need to.
In Chapter Four of his book Blink, Malcolm Gladwell describes how Paul Van Riper, a retired Marine commander, drove the U.S. military to fits in a war exercise called "Millennium Challenge." It's a brilliant argument for the plan-as-you-go idea compared with the traditional plan method.
The Millennium Challenge was an exercise designed to test the military's ability to deal with a simulated war in the Middle East. It pitted a very large team (Blue Team) equipped with a very detailed battle plan, a lot of computer models and simulations, against a very small team (Red Team) led by Van Riper, experienced and self confident and good at making quick decisions.
"Blue Team had their databases and matrixes and methodologies for systematically understanding the intentions of the enemy. Red Team was commanded by a man who looked at a long-haired, unkempt, seat-of-the-pants commodities trader yelling and pushing and making a thousand instant decisions an hour and saw in him a soul mate."
As you've already guessed, Blue Team is the might of the military, and Red Team is essentially one smart guy who starts with a plan and revises it constantly as the battle ensues.
When the game was actually played, Van Riper surprised the Blue Team quickly with a move not in its plans, and as they reacted to that, he surprised them again, and quickly caused considerable unexpected damage to a much larger force. It was all simulated and hypothetical, but the result was that the quick-to-react team with flexible planning beat the pants off the very detailed plan team that couldn't react to changes.
"Had Millennium Challenge been a real war instead of just an exercise, 20,000 American servicemen and women would have been killed before their own army had even fired a shot."
That was pretty hard for the military to explain. They analyzed it a lot.
"There were numerous explanations from the analysts at JFCOM (Joint Forces Command Center) about exactly what happened that day in July. Some would say that it was an artifact of the particular way war games are run. Others would say that in real life, the ships would never have been as vulnerable as they were in the game. But none of the explanations change the fact that Blue Team suffered a catastrophic failure. The rogue commander did what rogue commanders do. He fought back, yet somehow this fact caught Blue Team by surprise."
Implicitly, the problem was the big team full of computers and data trusted a static plan, while the other team didn't.
Red Team's powers of rapid cognition were intact -- and Blue Team's were not.
So relate that to the planning we want: planning that responds to rapidly changing reality. Not just "Duh, I can't plan, I don't know the future," and not just "Why plan? Why bother" and not "We have to follow the plan," but planning as you go.
You see in lots of places (including later in this book, in Chapter 5) recommended outlines for business plans. With the plan-as-you-go plan, in contrast to the more weighty and ominous outlines, you're probably going to start simple. For example, see the outline here:
You could jump right now to Chapter 3 to see what I mean by the core strategy, or to Chapter 4 for details about the action plan and financial plan. If you don't jump, then just take my word for it: these can be very simple pieces. I do recommend that you write them down or record them somehow, but keep it simple. Bullet points are probably enough, maybe some pictures for slides, and even just an elevator speech.
As your business planning evolves, you'll add pieces to fit the needs. Eventually, when you have a business plan event, you may find it useful to fill in a lot of information intended mainly for outsiders, such as the market analysis, industry analysis, detailed financial analysis, and descriptions of the company, the management team, and so on. But don't think you don't have a plan just because you start simply, with what you really need.
It's amazing how long business experts, teachers, coaches, and advisors have swallowed and even spread the idea that a business plan is some sort of standard document, a predictable standard task with a generally accepted set of parameters to define it.
It just isn't so. Like so many other things in business, the business planning should be appropriate to the needs of the business.
Just about every business needs to build and understand its heart, that core element of strategy that's about what you're doing for whom, and who you are and what you want to do.
Beyond that, every business ought to be able to set down some tracks it can then follow and manage, watching progress towards goals. The sales forecast is the most obvious set of tracks. Milestones, like who does what, when, and for how much, are almost always useful. And don't forget the burn rate.
This isn't necessarily written down carefully into a formal text. It might be just bullet points, or even pictures; it might even be something you say in a 60-second elevator speech.
And as your company grows, you can grow your plan and your planning. Grow it like an artichoke grows, with leaves -- more details, more specifics, more description -- surrounding the heart.
Or, if you're starting your company with a plan for investment or business loans, or if your company is already there and already plans and you want to grow it, then you might go all the way to the more complete formal plan.
What's important is that you do the planning you need, to run your business better. Not the one-size-fits-all plan, but the just-big-enough plan to give you better planning and management without wasting any time or effort on documentation you won't use.
Planning should become management and better business, long-term progress towards goals, prioritizing, and focus; but you have to do it. It's up to you to make your planning work. It's not really about the plan, per se; it's about the discipline to use the plan to run the business.
If you think I am pushing too hard on this, fee free to jump into the planning at any time by skipping ahead to another chapter.
The plan-as-you-go business plan normally grows organically; it evolves as your business evolves. With monthly review schedules and performance tracking, your planning, unlike the classic plan document, stays alive and present -- on top of your mind where you consider it regularly.
For that to work, you have to keep assumptions at the forefront. You have to develop accountability by setting goals, usually with metrics, and then following up on performance with people.
Keep the plan visible, to all team members, using the review meetings if nothing else. Ideally, key points, numbers, metrics, and assumptions are somewhere that team members can see them.
People become involved with the plan and committed to the plan. You can't really have people believing in the planning goals if they don't participate. Goals have to be credible and realistic. People who are charged with implementing the plan need to be involved in developing and managing the plan.
What we have here is a problem somewhat like healthy diet and regular exercise. Pretty much everybody agrees that those are good things, but not everybody actually eats well and exercises regularly. So too with good planning process. Knowing what to do doesn't mean you'll do it.
Hint: Set the review schedule ahead of time and invite the team members. Show the metrics. Suggest some key agenda points that you garner from the milestones. People need to believe in accountability for accountability to work.
I talk about this more in Chapter 6, Planning Process.
"Not enough time for a plan," business people say. "I can't plan. I'm too busy getting things done."
The busier you are, the more you need to plan. Too many businesses make business plans only when they have to. Unless a bank or investors want to look at a business plan, there isn't likely to be a plan written. If you are always putting out fires, you should build fire breaks or a sprinkler system. You can lose the whole forest for too much attention to the individual trees.
Lots of people think of themselves as either word (or concept) people or numbers people. In business planning, however, it's hard to separate the two. Even the words and concepts people need numbers -- the sales forecast, the expense budget, other metrics -- to make their planning real. And the numbers people need to move away from the numbers for long enough to think through the core strategy: how their company is different, what their customers want from them, and how to deliver it.
The problems come when people get bogged down. Some people fear writing; they think of the empty page, spelling errors, grammar errors, bad days in school. Some people fear math. They think of arithmetic errors, red marks on papers, not being qualified.
And the magic solution is just keeping it simple.
- As for words and concepts, particularly at the beginning, think of the core as that elevator speech, maybe a few bullet points, but not a term paper or well-written prose. It doesn't matter. Nobody but you is reading it. You can dress it up later when you actually need to show it to an outsider.
- For the numbers, start with just a few basics. Do a sales forecast. Do an expense budget. Be mindful of the cash flow traps, watch your cash balance, but don't think you need a full financial forecast from day one. Just create some estimates you can track and review and manage by comparing plan vs. actual. If, and only if, you're a startup, do your starting costs, too.
You may have a business plan event, in which case you'll probably want to do the full explanations with supporting information, covering the bigger market picture, team background, company history, and a complete financial forecast including sales, personnel, profit and loss statement, balance sheet, cash flow, even the business ratios, and probably a break-even analysis. You may also include what you're going to do with the money you're seeking, how much of your company you're trading for investment, and so on.
And for the words and concepts people, you already have somebody running the numbers of your company. You have to have that to survive administration and taxes. If you're just starting, then you can usually find somebody who understands basic business numbers so you can add those skills to your team. Remember, it doesn't have to be just you; you can build a team with co-founders or partners or contractors or employees. Somebody will have to run the numbers once you get going.
For you numbers people, I think I know you pretty well even though I was a lit major in college and wrote for a living for years. I discovered numbers in business later, when I got the MBA. You are probably keeping those concepts in your head -- things like positioning, differentiation, strategy, and focus -- because you think them through the numbers. Don't sweat the format or the mistakes or the sentence structure; just tell your story. And start with the numbers; that works just as well.
Remember, with the plan-as-you-go business plan, the idea is to start anywhere and get going. Build it as you need it.
That having been said, I want to share a words-and-numbers together story. This is from my book Hurdle: the Book on Business Planning:
In 1974, I switched from general journalism, writing for United Press International from Mexico City, to business journalism, writing for Business International and McGraw-Hill World News. With the switch, I found myself covering business and economics instead of general news, writing for (among others) Business Week and Business Latin America. Because I thought it would be nice to have some idea what I was writing about, I went to the local graduate school at night for courses in general economics, accounting, finance, and marketing.
As I learned about macroeconomics, and how to read financial statements, I discovered that the truth in business is almost always a combination of words and numbers, and can't be explained separately. For example, when a Central American government announced a new federal budget that it said was going to both develop growth and reduce inflation, the numbers said that was a contradiction. You can't do both; you can do one or the other. You could only see that by dealing with both words and numbers.
I went on from there, in that book, to plow through the whole numbers thing as if everybody had a full business plan event to worry about, and therefore a full complete formal plan to do. This was too much, in retrospect. You can track and manage most businesses with the core plan numbers in the sales forecast and expense budget.
A business plan is like that, too. You can't describe a plan without both text and tables, both words and numbers. The single most important analysis in a business plan is a cash flow plan, because cash is the most critical element in business. With the way the numbers work, however, you can't do a cash flow plan without looking at the income statement and balance sheet as well.
You really can't do the income statement without looking at sales, cost of sales, personnel expenses and other expenses, so you need those too. And you'd have trouble doing a sales forecast without understanding your market, so a market analysis is recommended.
And then you have the break-even as part of the initial assessment, and tables for business ratios, general assumptions, and other numbers. Step by step, the business plan becomes a collection of tables and charts around the text.
Although cash is critical, people think in terms of profits instead of cash. We all do. When you and your friends imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which results in profits.
Unfortunately, we don't spend the profits in a business. We spend cash. Profitable companies go broke because they had all their money tied up in assets and couldn't pay their expenses. Working capital is critical to business health. Unfortunately, we don't see the cash implications as clearly as we should, which is one of the best reasons for proper business planning. We have to manage cash, as well as profits.
This is all important, when you're doing the formal plan for outsiders. With the initial plan-as-you-go plan, some of that can wait until later.
We're going to address all of it in this book, by the way, but some of it waits for the business plan event, so you do it when you really need it, as your business and plan grow.
One of the most important new ideas in the plan-as-you-go business plan is that the plan doesn't necessarily include the supporting information that everybody assumes is part of the traditional formal business plan. I mean the market analysis, industry analysis, company history, management team backgrounds, and other information you expect in a complete business plan.
Your plan is about what's going to happen, what you are going to do. It's about business strategy, specific milestones, dates, deadlines, and forecasts of sales and expenses and so forth.
So what about market analysis? Think about the business purpose. Do you need the market analysis to help determine your strategy? Then do it. Are you ready to go with that strategy regardless? Then don't sweat the market analysis.
Supporting information may or may not be included. You don't have to do a rigorous market analysis as part of your plan if you know exactly what you're offering, and to whom.
This is ultimately your responsibility. You don't gather all the supporting information just because somebody said it was supposed to be there. You do it if you're going to actually use it to make decisions.
This is a big win for the plan-as-you-go business plan over the standard traditional business plan. It helps preserve the idea of planning for the people who know what they're doing in the market, who already know their industry and their customers and their strategy and how and why it works, but don't plan because they think, wrongly, that doing a plan means proving something to somebody else. If you already know and you're satisfied with it, then skip the proof.
You build a good plan like an artichoke, inside out from the heart. That doesn't mean you necessarily start with the heart and go in rapid succession -- I am serious about starting anywhere -- but it might. Maybe you did your sales forecast first, but eventually your plan will revolve around its heart.
Of course the heart is not necessarily a written document, not necessarily rehearsed, not necessarily a recorded.
At this point, however, we have to address those of you who have a business plan event that you need to prepare for. You need a full formal complete plan for school, for an investor, for a bank, for a boss, as a consultant, or whatever. Then you might have to do the whole thing at once, and not enjoy the luxury of letting it grow organically. Don't worry, though: you can still benefit from the idea of the core and the blocks.
The artichoke analogy applies when you build the supporting parts of the plan -- or blocks, if you want to call them that -- around the heart. For example:
- A really cool way to make sure your planning is useful is to set up the review schedule now, in the beginning. Set up recurring meetings, for example, on the third Thursday of each month. Put these meetings on the calendar. Invite the team members. Surprise people; don't wait until the plan is done -- set up the review schedule first.
- After you've figured out your market strategy, target market, focused offering, core competence, and so on, then you need to think through the logical tactics and specific activities to take that idea to market. What is the message? Where do you deliver it, to whom, through what medium? How much will that cost? You can do that with a strategy pyramid, or not; a milestones table is really practical.
- A lot of core benefits of planning link to the milestones table. Metrics, for example, are presumably built into that table. Tracking and accountability also relate to that table, so it's a pretty important block.
- You really need to take your business strategy and work it into a concrete and specific sales forecast. Hard as forecasting might be, it's harder to run a business without it. And the sales forecast is when you start tracking. Plan vs. actual numbers will help you adjust your plan, and from that improve your management.
- You need an expense budget. That's another piece you can track, so you set up your goals and keep an eye on your progress. And while you're at it, include costs as well as expenses and you'll have a better hold on your business.
And with that, I want to pause. Take a breath. Notice that at this point you've got a strategy and three key metrics to track: milestones, sales, and spending. You're on your way. Your planning has started. You even have a review schedule.
All of these things are like the leaves of the artichoke. They surround the heart. They aren't the only things you can do, though; they are just suggestions. Here are some additional suggestions:
- I like the SWOT analysis. It brings the teams together.
- Lots of people like to do the mission statement, or the mantra, or objectives. I like keys to success too.
- You have to be sensitive to your business, and your business' needs. Maybe distribution channels are important, so you set some milestones. Maybe product design, prototyping, or packaging is important, so you set some milestones.
- The more you have a group involved, the more it helps to create a document on the computer. A set of bullet points, or maybe some prose, gets the ideas down so people can refer back to them.
And now another pause. Let's reflect on progress and process. A lot of this thinking things through, necessary for good business and good management, ends up in the milestones table.
- Is this plan going to be a document? I hope you see clearly now that it depends on needs. If you're going to show this document to somebody else, and you expect her to read it, then you might have to start writing things down and organizing things like outlines and structures. The milestones table won't explain itself.
- And even if it's just for your team members, although you will spend less time on sweating the output details, you still probably want to record key points into (Business Plan Pro software comes to mind, but it's not required) so people can refer to them.
- Form follows function. More on that later.
So this might be the evolution of a normal plan, for a normal company, startup or not. You do this plan not because somebody says you have to, but because you want to, because you're interested in creating a business or growing a business. You care about your business. You think about it a lot. Call it planning.
And then, in some cases, comes the business plan event. Or you're one of those who started this planning task with the full business plan event starting you in the face. No worry -- in that case you add the dressing you need like the supporting information, detailed financial forecast, and descriptions of the management team, and you have the formal plan document.
A plan is worth the decisions it causes. If you already know your market, don't waste time or money doing market research.
Don't do it just because somebody said it was part of a business plan. But are you sure? Is it worth a fresh look? You decide.
The supporting information isn't part of your plan; it's just supporting information. Do you have to prove the concept? Will outsiders be reading your plan, and evaluating it? Does the market research prove something that must be proven? Then include it.
Information in business is worth the decisions it causes. You measure this by taking a guess at what your bank balance would have been without the information and comparing it to what it is because you had the information. Subtract the hypothetical balance without the information from the balance with the information, and that's the value.
|with the information:
|without the information:
|Value of the information
That's a hard equation to deal with sometimes, and of course it's based on hypothetical values; but it's still an important concept to understand. Your business plan shouldn't include anything your business won't use. Either it's going to use the market analysis or it needs to present it as proof of market for outsiders -- or you just don't perform the analysis.
One of the most common errors in business planning is confusing planning with accounting.
They are two different dimensions. Accounting goes from today backwards into time in ever-increasing detail. Planning, on the other hand, goes forward into the future in ever-increasing summary and aggregation.
Understanding this difference helps you work with and understand the educated guessing you need to do to make projections -- specifically, the sales forecast, expense forecast, and eventually the profit and loss, cash flow, and the rest of the financial forecast -- into your business planning.
Accounting has to be correct, to the last detail. You use it to pay taxes. Forecasts in a business plan aren't correct, by definition (see your business plan is always wrong).
I like to use the 1994 movie Stargate starring James Spader and Kurt Russell, to illustrate the difference between planning and accounting.
In the movie, some fictitious freak of nature had opens up a strange, luminous gate between two dimensions. On one side of it was the world as we know it. On the other side, a strange, alien world, like nothing we’d ever seen. I like the idea because it reminds me of the difference dimensions that are planning and accounting.
If that strikes you as theoretical or conceptual, perhaps a bit impractical, think again. This is important. It can save you needless headache and stress. It helps keep you in the right dimension, understanding that the financial projections in your business plan are not meant to be built in excruciating detail.
A Simple Example
Take the balance sheet here, a sample taken from Wikipedia. The so-called balance sheet is a standard financial report, listing the assets and liabilities and capital of a business at the end of some specific day, month, year, or whatever. Assets are good -- things you own like cash and land, or money owed to you like accounts receivable. Liabilities are debts, money you owe, which is why you see things that are “payable” –- meaning you’re going to have to pay them –- as liabilities. Capital is what’s left over. It’s called a balance sheet because it’s magic, the magic of double-entry bookkeeping: the assets are always exactly equal to the liabilities and the capital.
Is this an accounting report or a projection in a business plan? You can’t tell. It looks exactly the same, either way. However, in truth, they are different dimensions.
Accounting Collects Records of Transactions
Accounting goes backward from today into the past in ever increasing detail.
If it’s accounting, then every number shown in a balance sheet is actually a summary report of a database full of transactions. The cash balance is like your checkbook balance; it’s the result of adding up all the deposits and subtracting all the checks. What they call accounts receivable is the sum of all the amounts of money owed to you by all your different customers, a report of hundreds, maybe thousands of different transactions. You make a sale, leave an invoice, wait to get paid, then finally get paid, record the transaction, debit cash and credit accounts receivable, and so on, through a collection of specific transactions. The $52,000 reported as land value might be what you paid for land, but it might also be the resolution of dozens of land transactions, selling some, buying others, and that’s the balance.
Liability balances, like assets, are built from bottom up in accounting by keeping track of all the transactions and summarizing the end result. Notes payable might be dozens of small trade bills sitting on a spike somewhere, or a loan from the bank, in which case it’s related to the starting loan amount less the total of all the principal payments.
I hope you get the idea: accounting is a huge collection of summarized past transactions. Focus on any number in an accounting statement and you should be able to zoom in on more detail, down to each individual transaction.
Planning Makes Reasonable Educated Guesses
Planning goes forward from today into the future in ever increasing summary and aggregation.
Now consider, if you will, that same illustration as part of a business plan, making an educated guess of what the balance will be two or three years from now. Don’t even try, not for a second, to think that you’re going to estimate cash by estimating the details of thousands of transactions and adding them up. You’re not going to estimate assets by guessing what you’re going to buy, and when (not to mention depreciation, so pretend I didn’t). You’re not going to estimate debts by guessing when you will take out each loan, exactly what you will purchase, and when. That’s impossible -- and silly. You’re going to find some way to guess your cash, your assets, and your liabilities, based on larger educated guesses tied logically into the major flows, like sales.
We’ll be working together later on how you can make reasonable estimates, but for the sake of illustration, I have some of examples to explain the difference in dimensions:
- Accounts receivable means money owed to you by customers. You make the sale but you deliver an invoice, and wait to get paid; that’s the way it goes in business-to-business sales. So you need to guess how much money will be sitting there, at important points in the future, waiting to be received. Every dollar in accounts receivable is a dollar less cash, because it was booked as sales but you don’t have the money. You don’t however, try to guess all the specific sales transactions with all the specific customers and add them all up and figure out where the total will be two or three years from now. Instead, you guess what percent of sales involve invoices and waiting, and then you guess how many days on average you have to wait, and you can do some numbers tricks to make an educated guess.
- You don’t guess what you’re going to owe by adding up all the imagined bills from some guessed-at future purchases. Instead, you estimate how much you’re currently paying out in expenses as a percentage of sales and payroll or some other measure, then estimate about a month’s worth of that as payables.
I’m not going to belabor the examples because I think that’s already enough to make the point. You have to make some logical guesses.
Why Does This Matter?
Every so often I encounter somebody trying to manage the minute details of projected interest expense to allow for several different loans with differing rates and terms as part of a business plan. Or I find somebody trying to guess assets by guessing the detailed purchase dates and values. And then there are people trying to project future accounts receivable by customer, guessing each customer’s future sales and payment patterns.
The problem, of course, is that is really hard to do. You can spend a lifetime calculating details and never get as close as you would with a good estimate.
Compare the levels of certainty: Let's say interest is normally a percent or two of total expenses, and expenses are normally something like two-thirds of sales. If your sales estimate for future years is within 5 percent either way, you're doing way better than most. How wrong can you go with a simple estimated interest rate, and how much does that affect your projections? Aren't we talking about tiny percentages of expense, in a system that has to estimate other elements that have hundreds of times more uncertainty?
I consider this a problem of what I call levels of uncertainty, which is a matter of how correct you expect to be. For example, assume it's Spring of 2008. When your accounting report says your sales were $2,893,712.07 for 2007, and you put that number into your tax reports for 2007, you expect it to be absolutely correct. You have accounting software and professional accounting help, and you enter all the records, so you assume that the number is correct. That's presumably a very low level of uncertainty. Even a $10,000 difference between what you see on the accounting report and what actually happened is very bad. On the other hand, when your 2008 business plan says you expect to sell $5 million for 2011, that's an educated guess with a relatively high level of uncertainty. While your accounting for past sales in a tax report is a disaster if it's off by $10,000, your projected $5 million sales for three years from now has so much uncertainty to it that you're probably very pleased to end up within $500,000 of that number you estimated in 2008 when you finally do get actual results for 2011.
Now take that same idea into more detail, using the example of specific interest expenses. Interest is deductible from income before you pay taxes, so if it's already 2008 then your accounting should be telling down to the last penny what you paid in interest expense in 2007. Let's just take as an example that you paid $21,093.76 in interest for 2007. There is no margin for error. The interest expense for the whole year is the sum of all the separate interest payments paid for whatever different loans were involved. On the other hand, if it's 2008 now and you're estimating what your interest expenses will be in 2011, you can't possibly expect to be exactly right. And -- most important -- you should not try to calculate interest expenses in the future like you do for the past, by knowing all the loans you have and all the different interest rates and adding them all up. That kind of detail in projections just doesn't work. A simple estimate will do.
I suggest we think about this for just a second. Does it make sense that business planning is about projecting the future so exactly that using a simple average estimated interest rate applied to your projected liabilities isn't good enough? Do you really have time to be modeling the detailed impact of multiple hypothetical interest rates on multiple hypothetical loans as part of a projection that depends on an estimated sales forecast?
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.
Good News: It Makes Things Easier
This is really good news for business planning. What it means is that you don’t have to paint a picture of your financial future by detailing every brick in every building. You can do it with a broad brush. That doesn’t make it less realistic, in fact it will usually make it more realistic, at least that’s what I’ve seen while working with thousands of people on thousands of business plans.
We’re human. We work better at imagining the future in scale than at building it brick by brick in our mind.
A Final Word of Warning
Seeing the difference between planning and accounting is particularly hard for well-trained accountants to handle. They learned to build reports from the bottom up, from the detail, and it can drive them crazy when you make estimates using percentages and algebra and plain common sense for something they’ve learned to build up from painstaking detail.
More important than driving them crazy, unfortunately, is that sometimes this dimensional discomfort can make the accountants so unhappy that they’ll say your estimates are wrong. In these cases, they are often misunderstanding what it means to be projecting the future in summary instead of counting the detail in the past. Forgive them -- they mean well -- but don’t let them drive you crazy either. Stick to the planning.
The original title of this piece was "Business Plans Are Made, Not Found." It comes from my childhood memories of the Wheaties ad campaign of the 1950s. The slogan was "Champions Are Made, Not Found."
The same applies to business plans. You make one, you don't find one. You develop your own.
This idea comes up a lot these days because -- I think-- of sample business plans. The spread of sample business plans is a real problem for the greater good of business planning. And unfortunately, I might be part of the problem. Gulp.
I started creating sample business plans at Palo Alto Software in 1987 with the first Business Plan Toolkit, which included the original versions of Acme Consulting and AMT, the computer reseller, which I had written for clients.
Digression: If you're curious, Google one or the other and see how widespread it is. By the way, there are a few sites that use one of these examples with permission (the SBA, for example, has permission to use AMT as a sample on its site), but there are a lot of people just copying one and calling it their own. Seems like there are hundreds of them out there. Only a very, very few have permission. Most are pirates. End of digression.
We came up with the idea of including sample plans with the business-planning product to help people understand what a business plan looks like, what it covers, and how it comes together. We included 10 real sample plans in late 1994 when we released Business Plan Pro. People liked the samples, so we included more. We polled the users and came up with 20 real plans from real businesses to include with our second version in February of 1996, and 30 sample plans for the third version, in May of 1998. People really liked sample plans as part of the product.
Then the idea spread. People started buying and selling sample plans. Our life as market leader became very complicated when a competitor bought 100-some sample plans from a book compilation and included them as Adobe PDF files with some business plan software. That company didn't tell their customers that the plans were just electronic documents, didn't work with their software, and most didn't even have financial information, but they did cause a stir in the market. We had to work like mad to get 250 real plans, all of which worked with Business Plan Pro and had financial data, to compete. We sponsored business plan competitions, and paid our customers, looking for real plans.
So the race was on. By this point we had our version 2002 (equivalent to the fifth version) of Business Plan Pro out. People started selling sample plans on the Web, most of them poorly-disguised knock-offs of our sample plans exported from Business Plan Pro and massaged slightly. We've had several legal battles with people using our work to compete against us. We're up to 500 sample business plans with Business Plan Pro now, and, frankly, I hate it.
Here's the problem: When it was two sample plans or even 10 sample plans, people generally understood that the examples were supposed to give you an idea of what a plan is. Now with hundreds of sample plans available, some people naturally think their own business plan is supposed to be one of those 500.
As an author and professional business planner, I hate this idea. People are buying and selling finished business plans as if they were term papers (also a bad idea) for college students. That trend is really spreading, and it's a mistake. Not just wrong because of plagiarism, but wrong because it doesn't work and clouds business planning.
I get the question all the time: "Do you have a plan for X?"
This brings me back to the title of this sidebar. I want to tell everybody that finding a business plan you can use is a really, really bad idea. You make a plan; you don't find one. Obviously, every business is unique. Every business plan is unique. Even if you happened to find a business plan for a business very much like yours, it would never have the same owners, the same management team, the same strategy, and probably not the same market or location either.
Sure, I recognize that a sample plan can help in several ways. You can find out how somebody else defined the units and prices in a business, what her expense projections were and for what categories, and how she described her market.
But I strongly recommend you start at zero, and write your own plan. Refer to samples for some hard points, perhaps, but start with an empty plan. If you're using Business Plan Pro, the wizard takes you through the process step by step, tells you what you need to include and why, so that you just tell your own story and do your own numbers. If you start with somebody else's plan it's going to be very hard to distinguish your own ideas from hers. You're going to end up with a hodgepodge of rehash.
I just can't believe people are buying and selling sample business plans as stand-alone documents, but they are. It's bad enough that we have samples readily available for editing and modifying within the business plan software, but then you have several websites selling finished sample plans without any software, just as Word documents or worse. Most of these are the same plans recirculated, essentially stolen, but even that isn't why they are a bad deal. It's like buying a novel as a Word file and trying to get it published -- it's a bad idea.
Adapted with permission from blog.timberry.com. All rights reserved.
"Please, can you recommend somebody to write my business plan for me? How much will it cost? How do I find somebody?"
"Where can I find (or buy) a business plan for a doggie daycare? For a resort? For a website selling environmentally-sensitive goods?"
Forget it. You can't. It won't happen. Furthermore, the whole idea of finding a business plan for your business is off-kilter. I think it's a new variation on the very bad idea of students buying term papers on the Web instead of writing them themselves; and in this case, it's even worse, because it's not just a term paper that you should have done once.
It isn't something you just do and forget. It's your business plan. Your business is unique. Buying a business plan makes about as much sense as buying a medical checkup already done and on paper, instead of going to a doctor.
Many people confuse the idea of sample business plans with somehow getting a business plan already done. That doesn't work. Sample business plans can be useful in some cases because they can help you see what other people planned to do, in the best of cases in situations similar to yours. But their market is different from yours, their strategy is different, their resources are different, and their plan won't work for your business.
Businesses aren't built by recipes.
Okay, there are some exceptions to these rules.
- Sometimes a person with knowledge and experience in the right field can help you develop your business plan, by asking you the right questions and helping you to think through your ideas.
- Sometimes when you need help creating a document from your existing plan ideas, as long as the core content of the document is yours, you can work collaboratively with somebody to actually craft the thoughts onto paper.
- Most franchise businesses are formula businesses. The better franchises do work like recipes. You follow the steps. In fact, if it doesn't work like that, you aren't getting what you're paying for as franchisee.
More important, notice how the plan-as-you-go business plan solves a lot of the stress related to finding a suitable existing business plan by focusing on doing only what you need, building it as you go, and developing it as you need it, in pieces.
So it's not a hurdle. It's not a business plan document you have to finish before you do something else. It's an ongoing process, a regular management tool. You do it because you want to run your company well, move towards the future in an orderly fashion, dealing with change without always just reacting to change, sometimes proactively leading with change.
Business planning, particularly plan-as-you-go business planning, is the best way to control your own destiny. With a good planning process, you set your long-term goals and the steps to achieve them, then track progress carefully and watch changing assumptions and make corrections as needed to move toward your long-term vision. You move as quickly as possible or as slowly as necessary.
The opposite, not planning, leaves you and your business much more likely to be victims than drivers. You're much more likely to be reacting to the latest phone call, the latest problem, than managing a plan that makes you proactive.
Think of it like navigating to a desired destination, making any necessary course corrections along the way.
You do it for yourself, for your company, whether or not there is some business plan event that requires it. Do it because you care about your company and you want to do it better. Control your destiny.
Recently I had one of those lightbulbs go off in my head. I'm referring to those times when you're reminded of something you already knew, but had forgotten. In my case today it was this: Planning your new business, the one you're thinking of starting, ought to be fun. Planning isn't about writing some ponderous homework assignment or dull business memo; it's about envisioning that business that you want to create. It should be fascinating to you. What do people want, how are you going to get it to them, how are you different, and what do you do better than anybody else?
Honestly, isn't that related to the dreaming that makes some of us want to build our own businesses? It was for me, every time, including those ventures I worked on that made it and those that failed. Dreaming about the next thing I wanted to do was always part of it. Dreaming is related to looking forward, anticipating, and (in this case) business planning.
This came up during an interview for SBTV (which was later absorbed by a bigger site, and the video lost), which was filming interviews with me on starting and managing a business and business planning. I was answering a question relating starting a business to getting out of the cubicle, when I realized that I was in danger of forgetting that business planning is part of the dreaming and part of the fun. And it is.
I think what's important is that none of us should be intimidated by business planning because of what I've called the not-so-big business plan, or the point I've made about starting anywhere you like. The business plan is a way to lay out your thoughts and think them through -- it shouldn't be some dull ponderous task you have to get through.
If thinking through the core elements of your business, or for that matter the details of your business, isn't interesting, then get a clue. If you're not really looking forward to it, maybe you don't want to start the business after all.
If you dread the planning of your next vacation, stay home. If you dread the planning of your new startup, don't start it.
Imagine that you’re going to take the trip of a lifetime. You’ve got the time, you’ve got the money, and you’re finally going to experience that dream trip.
Would you enjoy planning that trip? Would you browse the Web with relish, looking at hotel reviews, airline guides, destination websites, and whatever else you can find? Would you browse the bookstore for guidebooks and maps? Imagine yourself sitting with your travel companion in your living room stashed with books and maps and telephone and computer, planning that trip. It’s a good thought, right?
The heart of your plan is a combination of where you want to go, what you like to do, how, and with whom. The flesh and bones of your plan is a collection of concrete details: dates, flight numbers, hotel reservations, tour plans, and so on.
What would your travel plan look like? Where would you keep it? How would you share it?
You probably wouldn’t write your trip itinerary out as a formal document with a prescribed outline, table of contents, and appendices. You probably would keep it where you could get to it quickly as needed, whether that was on your phone, on your laptop, or in a collection of papers in your carry-on bag.
And you probably would work with your plan as you take the trip. For example, as you travel, things happen. Flights get cancelled or delayed. You miss connections. The article in the in-flight magazine recommends a hotel or a restaurant you wouldn’t have thought of otherwise. Hurricanes close airports. Hotels close for remodeling.
What do you do with your trip when things happen, and circumstances change? You change your plan, you revise your schedule, you plan as you go. You sit somewhere with your travel companions, and go back over guidebooks and schedules and possibilities, and revise accordingly. You don’t dump the core of your plan, but you might change the flesh-and-bones details.
You certainly wouldn’t keep going just because that original plan said so, right? You wouldn’t try to fly into the hurricane or charter a plane to substitute for the one that was cancelled. You wouldn’t sneak into the hotel that was closed for remodeling. You wouldn’t ignore that great tip you got from the in-flight magazine.
When assumptions change, you don’t just run your head into a brick wall, because that’s what your plan said; you change your plan.
You enjoy the travel plan as you build it, and you revise and correct and improve the plan as you go. Take some guidebooks and maps and a laptop along, so you can change things later. Listen to people you meet who offer new ideas. Expect to revise your plan as things happen and assumptions change.
Planning is part of the journey. It makes it better.
You might call that plan-as-you-go traveling.
It's a simple statement: all business plans are wrong, but nonetheless vital.
Paradoxical, perhaps, but still very true.
All business plans are wrong because we're human, we can't help it, we're predicting the future, and we're going to guess wrong.
But they are also vital to running a business because they help us track changes in assumptions and unexpected results in the context of the long-term goals of the company, long-term strategy, accountability, and, well, just about everything the plan-as-you-go business plan stands for.
Think of soccer or basketball. You get control of the ball near your own goal (or basket), and you want to dribble it forward to the opponent's goal. Ideally you have a plan. You're going to pass it up the side, and from there a play will develop. Or some other plan.
And things change rapidly. The opposing players surprise you by doing something different from what you expected.
You watch the play developing. You keep your eyes up to see the field (or the court), but you also focus on the ball and the details of dribbling, probably at the same time.
This is a good example of planning as you go. You watch the field and the details at the same time. You expect things to change. You expect to react to the change quickly.
So it's not that you don't have a plan, or that you don't want planning. It's that you want planning to be very fast and flexible and adaptive. The goals remain the same, but the detailed plan changes.