In my previous blog I discussed the importance of ‘knowing your numbers’ – the key business metric of knowing how much you need to sell of something and at what price to NOT LOSE money. Of course in reality you wish to make money (lots of it hopefully) and this almost always results in the need to spend money upfront in order to make more money afterwards. For this, you need a business plan.
There are so many How To Guides on writing a business plan that I won’t go into the details here. Rather, I will focus this post on a few tips to assist you when preparing your business plan.
Do it Yourself
As entrepreneurs we are itching to dive into the lab and perfect our mousetrap, or get out on the street and talk to customers. But you need to have a deep understanding of what all the costs are and how much money you will need – not just now – but for the foreseeable future to ensure your business can prosper. There’s plenty of ‘advisors’ out there who will prepare a business plan for you, but you really must avoid this. However painful it might be for you to sit in front of a PC, if you don’t understand what went into your plan then you don’t really understand how you are going to make money from your business.
Understand the Dependencies
Most folks tend to lean on Microsoft Excel for the production of their business plan. And I have no issue with that but there is an issue with Excel that one has to watch out for or be an extremely sophisticated XL wizard. When you put all your costs and all your revenues into your model be careful to link them as much as you can. For example, you may have assumed that you will acquire four customers from each Marketing Conference that you sponsor.
If you then find that you are only acquiring two customers you need to rethink your approach to Marketing Conferences and change the business plan accordingly. Most people get that. But did you also modify all your costs to reflect the slowdown in customer acquisition? Maybe you assigned some part of executing the plan to a colleague who is innocently plodding along acquiring all these staff/supplies/premises as per the requirements in the business plan. Sounds trivial? Believe me, you will never stop having to adjust and re-adjust your plan and the successful entrepreneur is the one that a) intuitively understands the inter-dependencies and b) has the strength to swallow their pride and modify the plan in the face of adversity.
This brings me to the final point in this blog – which I have coined Shah’s Law – because I’m not aware of anyone else coming up with a similar heuristic before. So you are proudly looking at your shiny new business plan with all your costs and revenues and it all adds up neatly and shows lovely profits at some point in the future, right? At this point you need to apply Shah’s Law which states: “Your sales forecast is over-optimistic by a factor of 4 divided by the number of start-ups in your experience including this one”.
For example, if this is your first venture, and you estimate you will be selling 2000 units a month by the end of six months, then Shah’s Law predicts that you will be selling that number by the end of 24 months. But if this is your second venture then you’ll probably be hitting that number by month 12 and if you are on your fourth business – happy days – you are probably staring at a business plan that is actually quite accurate!
Why Shah’s Law? Well, two factors feed into this; firstly sales forecasting is a delicate skill that can only be honed through experience (school of hard knocks) and secondly, as you conduct more ventures your business credentials – reputation, risk, contact network – all improve which in turn contributes to reducing the sales cycle in subsequent ventures.
So, go back and take a knife to that hockey stick forecast, but don’t despair, if you’ve got your inter-dependencies connected then your costs will go down too!
The cash shortfall in your business plan is then the amount of money that you need to get your business funded. We’ll look at how to fund this in the next blog instalment.