Start your business plan with a quick assessment. Even for an ongoing business, take the time to step away from the business and look at the basics. Do your business numbers make sense? One of my business school professors used to refer to this process as finding out “is there a there there?”
For a first look, consider your objectives, mission statement, market analysis and keys to success.
Objectives are business goals. Set your market share objectives, sales objectives, and profit objectives. Companies need to set objectives and plan to achieve them.
Make sure your objectives are concrete and measurable. Be specific, such as achieving a given level of sales or profits, a percentage of gross margin, a growth rate, or a market share. Don’t use generalities like “being the best” or “growing rapidly” as your objectives.
For example, “being the best” or “maximize customer satisfaction” cannot really be measured. Much better objectives would set measurable goals, such as holding gross margin to 25 percent as a minimum, or selling more than $3 million, or achieving six percent profit on sales and 10 percent return on equity.
If less tangible goals are critical to a plan, find a way to measure them. For example, if image and awareness are vital, then plan for statistically valid surveys to measure the improvements in image and awareness. You can also set goals for market share, and purchase research to measure the actual share. Or, if you want to focus on customer satisfaction, plan for a survey to quantify satisfaction or specify numerical objectives regarding returns or complaints.
Use the mission statement to define your business concept. A company mission statement should define underlying goals (such as making a profit) and objectives in broad strategic terms, including what market is served and what benefits are offered.
What Business Are You In
Ask yourself what business you are in, and don’t narrow yourself down. One of the classic business examples is the railroads, which lost a chance to expand in the twentieth century because they misdefined themselves. They thought they were in the business of running trains on tracks. They didn’t understand they were in the business of transporting goods and people. When trucks and buses and highways grew, the railroads were left behind.
My company, Palo Alto Software, is not in the business of software development. It is in the business of helping people do their own business plans, by providing business know-how through software and documentation. The broader definition helps us understand what we’re up to.
Leading experts in developing customer satisfaction look to a mission statement to define customer satisfaction goals. Developing customer care programs depends on spreading the idea and importance within a company. That should normally start with a statement included in your mission statement.
Some mission statements also define internal goals such as maintaining a creative work environment and building respect for diversity. Experts in employee relations look immediately to a mission statement for a definition of a company’s stand on some of these fundamental issues.
Experts developed the value-based marketing framework to help companies understand their business better. This framework starts with a business value proposition, which states what benefits a business offers, to whom, and at what relative price level. For example:
- This automobile manufacturer offers reliable, safe automobiles for families at a relative price premium.
- This fast food restaurant offers quick and consistent lunches at a low price.
Keys to Success
Focusing on what I call “keys to success” is a good idea for getting a better view of the priorities in your business. Just about any business imaginable is going to depend a lot on three or four most important factors. For example, in a retail business, the classic joke is that “location, location, and location” are the keys to success. In truth, that might be, for example, location, convenient parking, and low prices. A computer store’s keys to success might be knowledgeable salespeople, major brands, and newspaper advertising.
Focus is very important, and the keys to success framework helps you develop focus. There is what I call a law of inverse focus. I can’t prove it with detailed research but I’ve seen many times that, beyond three or four key items, the more items on a priority list, the less chance of implementation. Thinking about keys to success is a great way to focus on the main elements that make your business work.
Next comes a simple Break-even Analysis table as shown in Illustration 1.
Illustration 1: Break-even Analysis
The Break-even Analysis table calculates a break-even point based on fixed costs, variable costs per unit of sales, and revenue per unit of sales.
Make the following three simple assumptions:
- Average per-unit sales price (per-unit revenue):
The price that you charge per unit. Take into account sales discounts and special offers. For non-unit based businesses, make the per-unit revenue $1 and enter your costs as a percent of a dollar.
- Average per-unit cost:
The incremental cost of each unit of sale. If you are using a Units-Based Sales Forecast table (for manufacturing and mixed business types), you can project unit costs from the Sales Forecast table. If you are using the basic Sales Forecast table for retail, service and distribution businesses, use a percentage estimate. For example, a retail store running a 50% margin would have a per-unit cost of .5, and a per-unit revenue of 1.
- Monthly fixed costs:
Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, you may want to use your regular running fixed costs, including payroll and normal expenses. This will give you a better insight on financial realities.
Illustration 2 shows a Break-even chart. As sales increase, the profit line passes through the zero or break-even line at the break-even point.
Illustration 2 shows that the company needs to sell approximately 1,200 units in order to cross the break-even line. This is a classic business chart that helps you consider your bottom-line financial realities. Can you sell enough to make your break-even volume?
Of course the break-even analysis depends on assumptions made for average per-unit revenue, average per-unit cost, and fixed costs. These are rarely exact assumptions.
You don’t need to do major market research for this initial market analysis. You may want to, and even need to, do real research later on (nowadays that is almost all Internet research). For now, however, you want to get a good educated guess about how many potential customers you might have.
What you want at this point is a reality check. You’ve already developed a quick break-even analysis that ties your initial business numbers to your required sales. So now you’re going to look at how many customers you might have, so you can think about the importance of breaking even.
Develop a basic Market Analysis table. This table gives you a simple list of market segments. Illustration 3 shows a Market Analysis table.
This analysis table lets you show the estimated total customer base and your projected growth rate for each group.
Each segment is a group of customers. Define the groups according to what needs you supply, demographic characteristics, buying habits, preferences, or whatever other classification system works for your plan. Fill in the total potential customers estimated and the annual growth rate expected for each segment.
You can also use a Market Analysis chart as a visual guide to your market segments.
This simple pie chart shows the potential market as the plan starts. The different segments of the pie show the relative sizes of different target market groups.
Pause for Reflection
At this point, you’ve defined your business, your financial break-even point, and your total potential market. How does your business look from this viewpoint? Does it make sense? Can you make the sales you need to break even? Is the market big enough? Are your projections realistic? Can you bring together the keys to success?
Especially for potential start-up companies, a moment of reflection is critical. Many people dream of starting a business, but that dream turns into a nightmare if the new business isn’t successful.
If you think you can make your break-even numbers work, and you believe you have enough customers to make it, then go on to develop the plan. If not, either do more research and revise the idea, or give up and try something else.