Reacting Forward (4): The Business Plan
The world potential market for copying machines is 5,000 at most.” – IBM told the eventual founders of Xerox in 1959
Precursor
This precursor was written after the content below. I thought I did a good job, making a dull subject light. Then, Jess, the editor and illustrator, went through it.
Normally, she’s animated about the content in ‘Success with Balance.’ Finding it useful, illuminating, even inspiring. Today, she walked into the room where I was working, laptop in hand, shoulders slumped, eyes wide like she had just been involved in a car wreck.
This is the problem with the subject of business planning, also, probably why so many entrepreneurs skip it all together. It’s fucking boring…dry toast…or as Jess said, “I felt like I held my breath for two hours.”
I get it. I live it.
Even after shortening the run-on sentences. Even after formatting my terrible syntax and correcting typos. Even after adding lighthearted illustrations – she still looked like a deer in the headlights.
Unfortunately, this subject does that to you.
In every business there’s a section we’d rather ignore. A chef trying to avoid washing dirty pans. An artist not wanting to cleaning their paint brushes. Jess informed me that either of these two activities seemed like fun adventures compared to learning about business planning.
BUT…the entrepreneurs that create business plans the right way are many times more likely to succeed than those who skip through this.
Do you want success or not?
Suck it up. Hold your breath and dive in.
Jess has helped as much as she could. She says, ‘You’re welcome.’
Is a Business Plan Necessary?
When surveyed, only 40 percent of founders from companies on the Inc. 500 had bothered to write a formal business plan prior to starting. Over half of those admitted their business had strayed significantly from the original plan in their heads… that they never set to paper… and that justified their approach. (Okay, many of you feel you’ve read enough and want to skip this part. Not so fast.)
How many businesses started with the same mindset and didn’t make Inc 500? How many didn’t make 500K a year? Millions and millions.
Conversely, a SBA study of firms found that 85 percent of companies were still in business after three years—IF they developed a business plan.
They may not have made inc 500 but only 500 do. I never made inc 500, and also, I did alright. I created business plans for all my companies… but I did them my way.
And the phrase ‘my way,’ is key. The SBA statistic is often used on websites to convince entrepreneurs to pay for some “expert outsider” to write a business plan on behalf of the company. In my opinion, that is a huge mistake and a waste of money. Business plans produced by third parties have no impact on survival. Business plans have to be ‘my way.’
Never pay a third party to write a business plan.
It’s the experience and knowledge an entrepreneur gains though completing a comprehensive business plan process that makes the difference between knowing customers and misjudging them, in other words success or failure in identifying and satisfying customer needs is proportional to success or failure of your company.
Don’t skip this. Don’t fall asleep. Get a shot of caffeine and strap in.
The best piece of business advice I ever received was, “Trevor, you don’t know what business you are in until you get into the business. Just start.” On one hand, it’s fine to just start and figure things out. On the other hand, I find potential customers, clients, and vendors teach me the most about what sort of business to have and how to run it. When I started my first business I already knew a lot about them. I get the advice. It means get enough information to get goping and them get going. It does not mean write a MBA thesis first.
Sadly, that’s how this topic is often taught in business school. Schools teach structure, format, syntax. I mean, get away from your desk and talk to stakeholders, figure out their needs, then figure out the fix. Winning business plans are created in much the same way winning ideas come about.
Finding something to fix is the winning idea. Figuring out how to fix it is the plan.
Perhaps an example would help:
When I thought about starting my first company, one of the entrepreneurs I enjoyed studying was Sir Richard Branson. Being dyslexic, he avoided writing business plans in his business life. The media portray him as a fun loving guy. I don’t know if that’s true or not because, who can believe anything the media says? Having sampled his brands, however, I certainly get the impression that the element of fun runs through the core of his companies. The reason, he spends a large amount of time speaking directly with his stakeholders. He has fun and understands that they prefer fun over stress. So, he creates fun brands to address his customers needs.
Although, he is not writing a business plan per-se, he is constantly in a business-planning process by getting away from his desk and meeting stakeholders. This is more unusual than you think. I have worked for companies in which the executive teams think talking to customers is beneath them. I have been handed drafts of marketing plans from a manager that never once left the office except to drive home.
Any customer of the many Virgin® brand services can feel that sense of joy in their work. In their staff, I saw joy when solving problems for the customer. When I flew to Europe or Asia on commercial airlines I would be glad just to get to my destination. When I flew Virgin Atlantic, however, I was actually sorry when the journey ended. The difference? With most major airlines everyone is doing a job. With Virgin Atlantic, everyone is in the entertainment business. Branson’s sense of fun pervades every detail, even though he has very little to do with the airline anymore.
Sadly, after all the buy out’s by Alaska and Delta, I fear the brand of fun may fade away. I for one will be sorry.
How Branson got into the airline business is a story of fixing on the spot. Sir Richard Branson never intended to start an airline. But 30 years ago, when American Airlines decided to cancel his flight to the British Virgin Islands, where “a beautiful woman” was waiting for him, he became incensed.
“I went to the back of the airport, hired a plane, borrowed a blackboard and wrote ‘Virgin Air, $39 single flight,” he recalls. “I walked around all the stranded people and filled up the plane. As we landed, a passenger said to me: ‘Virgin Airways isn’t too bad – smarten up the service and you could be in business’.” Branson got mad about something, worked out a fix, and it eventually became a famous, profitable airline. There was no business plan at first, and certainly no real desire or intention to start an airline. His motivation was the love of a woman who he feared would feel jilted. Branson ended up marrying the beautiful woman, Joan.
In an interview with Entrepreneur.com in 2011 he stated, “When my friends and I started the first Virgin business 40 years ago, we had no master plan – especially not one for a group of companies that by 2011 would number more than 400 businesses around the world and employ 50,000 people. Had we tried to plan for such a future, we would certainly have messed it up.
In 1970, my friends and I weren’t planning to do anything other than make some money and have a good time. We loved listening to music, so we tried to sell records to other kids who wanted a fun place to hang out while deciding which ones to buy. We had no marketing plan or budget – our goals were simply to make enough money to pay the rent and our suppliers, and to have some cash left over at the end of the month. Our launch was really no different from that of most small companies, since few entrepreneurs start thinking about their business’s culture and future until it is already well established.”
My main point using Sir Richard Branson as an anecdote is, I meet too many entrepreneurs who are obsessed with their business plan and also afraid to leave their desk to meet with stakeholders. They spend months, even years, trying to get the ‘document’ so finessed that it could win MBA awards. I am not saying a business plan has no place. In fact, I think a business plan is essential, but the purpose and format of the plan have to be understood.
The critical starting point is not a mission, vision, values statement or a bunch of MBA speak (I have a MBA). It’s to find something to fix and immediately set about fixing it…before someone else does. Establishing that there is in fact a market need and your attempt at fixing it has potential.
Who can say if it has potential? Stakeholders.
Some will agree, some will modify, some will reject. Use your intuition as a guide and away you go.
When to Create a Business Plan
First, a business plan should never be created ahead of starting the actual business. Rather, it is done alongside getting to know the business, market and customer profiles as you start. Think of yourself as a robot, collecting and analyzing data even as you set up your business and start selling your product. That way the business plan becomes a way of life, not a one off thing designed to convince investors.
Once you figure it out, a properly prepared business plan can catapult you to success. It becomes a bible you dip into regularly for data and advice, and not a book that sits on a shelf gathering dust.
Not producing a business plan of any kind is like trying to build a shelving unit without any instructions.
I’ve tried that.
It turned out wonky.
We need instructions.
Let me disclose here that I have performed the business plan process for each of my companies. For two of them I went through the process twice more during their growth stages. In each case I produced a lengthy document that could serve as my bible should vendors or investors ask me any questions. and also a source to create standard operating procedures. These are all necessary so you may as well get them done early on.
No one, however, ever asked me for a copy of the complete plans. This supports my premise that the purpose and benefits of the business plan process are primarily for you the entrepreneur. Keep this at the forefront of your mind. The business plan may benefit others but it is ultimately for you.
Discussing the business plan process requires getting into the minutia of markets and business functions. Which means I must outline what each part of the process entails. Talking about the process can be a bit, ‘dry toast’, when the process itself is actually fun. You also get to meet some pretty cool people. So focus on that. The business plan gets you out of the office and into the world. It creates the opportunity to meet amazing people.
Now do you feel motivated?
Attracting Investors and Vendors
A second reason for going through this process is to attract investors and your preferred vendors, when you need them. Few companies have investors at the start. Few companies need many vendors at the start. When you need them, perhaps a year into building, they’ll expect to see a plan. They probably won’t read it, but they’ll expect one. They may have questions they need in writing. Cut and paste from the plan. Done.
Rewiring those Neural Pathways for Self-confidence
Finally, through this process you’ll continue to rewire your brain and build self-confidence. Acquiring deep insight into your prospective customers and the market builds psychological momentum.
Dr. Lewis Terman, inventor of the Stanford-Binet IQ test, conducted a longitudinal investigation of 1,528 gifted children with IQs at the genius level. The objective was to better understand the relationship between human intelligence and human achievement. The study became famous for the discovery that, intelligence was the lesser of several factors that determine achievement. Discipline and self-confidence were found to be more important than intelligence for achieving things.
As you do the work needed to turn your winning idea into a company, one that fixes problems and improves the world; building and supporting your self-confidence is essential. This is one goal of building a business plan, also, I want to emphasize how easy negative information and potential problems derail the process and undermine a positive attitude.
Lost the will to live yet?
Take a break and enjoy some ‘MBA speak’:
…okay, back at it!
Contrary to what many in the media say, there is never a wrong time to start a business. There is never a right time either. The circumstances will never be perfect. The economy peaks and troughs like a roller coaster and employment figures can fluctuate wildly. Loans can be easy to get one day and hard to get the next. However, half the companies that make up the Dow Jones Industrial Average were started in the midst of a recession. Don’t let pundits stop you from starting, use the business-plan process to investigate existing circumstances and strategize how to meet them.
In other words, as you develop your business plan, expect to discover unforeseen problems and opportunities you would otherwise have missed. That’s why the business-plan process is so important. It’s about gathering information, identifying obstacles, and figuring out how to overcome them before you start. This can take time, and some challenges will be more difficult to overcome than others. Some opportunities may even inspire you to adjust your original business plan. That’s okay… it’s a process.
Don’t let issues or the steady diet of negative information from the media cause a cascade of equally negative thoughts that undermine your resolve. The media thrive on paralyzing with fear so they can zap one with a dose of commercials, TV and the radio can make it seem the world is about to end and everyone is out to get everyone else.
That’s not the reality I see, however, it can be hard to remain focused on our winning idea when all we hear from the media is doom and gloom. My suggestion, if you feel your enthusiasm and self-confidence eroding, stop listening to the media.
Turn the dial, flick the switch, cancel the paper. Your RAS (Reticular Activating System) will benefit as you filter out the doomsday peddlers. Go cold turkey on the news if you have to and listen only to positive, beneficial small-business advice on blogs, podcasts, etc. Ones that provide useful tips and support a positive frame of mind.
We can’t stop negative thoughts from arising, or control them when they do, but we have 100 percent control over our reactions to our thoughts. If we hear or see something that causes fear or hurts our self-confidence, deliberately choose a more positive reaction.
The process of investigating your business, your customers, and your market is another form of reacting forward which builds self-confidence and expertise. In the end, your winning idea, as originally conceived, may not make the ideal business. Through this process you will learn what does, which will make a successful business and how to see it through.
The more data we collect, the more we understand, this in turn reduces fear and anxiety, increasing feelings of competence. We then create a sense of flow, expanding happiness and achievement in the moment as we work toward future goals. This relates to a concept called the “paradox of intention” which states: we must have goals, but our present happiness cannot depend on those goals. We must cultivate happiness now, whatever our circumstances, before attaining our goals in order to successfully achieve those goals. This is the peak state of flow, cultivated through the process of creating a business plan because self-confidence rises and that is innately linked to happiness.
A Business-Plan is a Tool for Adaptation
In the early 1990s, a team of Italian researchers discovered individual neurons in the brains of Macaque monkeys that fired both when monkeys grabbed an object, and when monkeys watched another primate grab the same object. This led to a new field of neuroscience that proposes we humans have a group of neurons called ‘mirror neurons.’ These allow us to observe and mimic the actions and feelings of others without having to learn through the same experience. So, if someone stubs a toe on a raised paving slab, we grimace with empathy, but do not suffer the same injury when we later remember to step over the stone.
While it may seem like pseudo-science to link this to the world of the start-up entrepreneur, one of the purposes of a business-plan is very similar to that of our mirror neurons. It’s to help us avoid making the same mistakes as others who went before but failed, while helping us mirror best practices of companies that got it right and survived.
I doubt any entrepreneur guide has ever linked macaque monkeys and start-up entrepreneurs before.
The ability to adapt to changing circumstances is a matter of survival for all species. Companies are no different, especially these days with such rapid technological change. A new invention can make whole industries obsolete overnight. As an entrepreneur, your ability to adapt to constantly changing conditions in any business is proportional to the depth of knowledge you have of the market and insights you have of your customers. Depth of knowledge improves the quality of decision-making and going through a business-plan process gives you that understanding.
If you need it, take one more fun break, BBC style.
Business plans have worked for me
A producer of business plan software surveyed thousands of its users with questions about their businesses, goals, and business planning. The responses showed that those who completed business plans were twice as likely to successfully grow their businesses or obtain capital for growth as those who didn’t write a plan. 64 percent had grown their business.
The University of Oregon Department of Economics assessed the validity of the data and wrote a report under the supervision of Professor Joe Stone. Regardless of the type of company, they found writing a business plan correlated with increased success in all of the business goals included in the study. These were: obtaining a loan, getting investment capital, making a major purchase, recruiting a new team member, thinking more strategically and growing the company.
The authors concluded: “While our analysis cannot say that completing a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business plan is also more likely to run a successful business.”
I’m not an advocate of business plans for their own sake. I am, however, a big advocate of an entrepreneur going through the process of producing the business plan. The benefit is the knowledge gained by an entrepreneur through asking and answering all the questions expected of a typical business plan.
For instance, I was able to significantly raise the price of a product when I discovered that a larger company had recently increased its price of a product tenfold. After interviewing a prospective customer for a business plan review (I do them annually) who was hopping mad about the competitor’s decision, I was able to do a deserved increase. It was well below the competitor to avoid any backlash.
Another time, I interviewed a potential customer about my prototype product. She just happened to comment that she’d seen something similar at a local pharmacy. I doubted her memory and had to check it for myself. With a little detective work, I found a competitor had illegally entered the market despite the patent protection around my invention. Before that company could create too much market damage, I was able to use my strong patent position to get an injunction on their marketing. Eventually, they withdrew from the market altogether and agreed an out-of-court settlement for patent infringement (money I really needed at the time). Without the business-plan process, I might not have discovered the competitor until much later when considerable damage was done.
Homework Time:
The best business plan hack I have to share is this:
Pick a publicly traded company in the USA that is in the same industry and/or market as your winning idea. Go to the website. Click on the menu item that directs you to the investor page. Here you will find a number of reports that are required to be made available to shareholders. Download the 10K.
A 10-K is a comprehensive report filed annually by a publicly-traded company about its financial performance and is required by the U.S Securities and Exchange Commission (SEC). The report contains much more detail than a company’s annual report which is sent to its shareholders before an annual meeting to elect directors.
Some of the information a company is required to document in the 10-K includes its history, organizational structure, financial statements, earnings per share, subsidiaries, executive compensation, and any other relevant data. It usually also contains comprehensive strategy and marketing plans.
The SEC requires this report to keep investors aware of a company’s financial condition and to allow them to have enough information before they buy or sell shares in the corporation, or before investing in the firm’s corporate bonds.
You will find that it looks and reads remarkably like a business plan.
As well as providing lots of market and customer information, these 10K reports can be used as a template for your business plan.
Resources
The business plan. Does one do one or not, is discussed with startup entrepreneurs in this weekly meet up.
