Business Plan
posted by BusinessPlanner at
6/25/2010
1 Comments
Friday, June 25, 2010
Wednesday, July 11, 2007
New Business Plan Blog
Well I have finally decided to manage one business planning blog only. Please go to http://bplans.typepad.com/uk/ for business plan blog content (with a U.K. twist).
posted by BusinessPlanner at
7/11/2007
1 Comments
Tuesday, April 24, 2007
Writing a Winning Business Plan Pitch
After a business plan has been written, the next stage often involves pitching the plan to prospective investors. This very fact means that the plan authors and management team should be one and the same and that ‘outsourcing’ the business plan writing process should not be considered. It is not just the content of the business plan that is being scrutinised. The capabilities of the management team are also on show and hence their ability to deliver a presentation in a clear, concise and convincing manner are vital to the overall objective - that of convincing an investor to invest in the business. These prospective investors are not investing in a physical document but in an idea and in those proposing to deliver the idea.
The following is a list of tips to maximise your chances of success when pitching to investors.
1. Know your audience
All presenters are taught about the importance of knowing their audience and engaging with them on a personal level where possible. The Internet has enabled us to research more effectively than we were able to in previous years, so it is important to use this resource to our advantage. Investors have a range of asset classes to choose from as they decide on the composition of their investment portfolio. Hence it is necessary to understand the backgrounds of the prospective investors and their motivations prior to presenting. Once you have done extensive research on the investors it is then possible to tailor the pitch accordingly.
2. Tell a Story
One of the most effective ways to pitch is to place the investment opportunity in the context of a story. Ideally, the story will focus on a problem encountered and the fact that the new idea being pitched solves this particular problem. If the investors can relate to the problem, they are more likely to invest in your business. After that they will be assessing how many people are affected by ‘the problem’ and whether the proposed idea satisfactorily resolves the problem. Finally, if they believe that the idea can solve the problem profitably and it is defensible (via patents, trade marks, etc.) it is likely they will be interested in investing.
3. Prepare to win
Pitching to an investor is not a last-minute afterthought – it is the culmination of weeks, if not months, of planning. All too often, entrepreneurs do not plan accordingly and then find that the preparation of their business pitch suffers. Preparation for the pitch should commence as soon as the business plan process commences. For many investors, the executive summary of the business plan is what opens the door for a presentation, and the full business plan may only be read after a successful presentation has been delivered.
4. Pay strict attention to the detail
Your typical investor will have a good eye for detail and hence the plan and its pitch need to be mutually reinforcing and containing no inherent contradictions. From the outset, there should be one owner of the process who can oversee all preparations and is ultimately responsible for the content. This is particularly important if a number of disparate contributors have worked on the plan and where the pitch consists of numerous participants.
5. Avoid death by PowerPoint®
While the average plan is produced in Microsoft® Word and Excel, PowerPoint tends to be the tool of choice for presentations. While it undoubtedly has advantages in terms of aesthetics, it can be misused when utilised at the pitch stage. The number of slides should be kept to the bare minimum, the content must be rigorously analysed to ensure relevance and clarity and time must be managed carefully. It is recommended each investor receives a slide deck, which contains more detail than the presentation itself (with Appendices used extensively). Finally, it is important to manage the subsequent Q&A process carefully as this is the stage where the investor gets to request information about details that they require to convince them that the proposal is indeed worthy of their investment.
6. Get the numbers right
Investors tend to be very focused on numbers, so all facts must be accurate. The numbers should be realistic and defensible and at least one of those pitching the plan needs to be prepared for in-depth questions relating to the projected financials. While it is easy to couch ‘the opportunity’ in technical terms, future growth projections, supporting demographic trends, etc., investors will focus on hard evidence. So if you have been trading, they’ll want to know turnover/sales figures, break-even points, gross and net margins (profits), and so on. These are indisputable facts and evidence that enable them to accurately assess the risk. If performance has been poor, the presenter will need to articulate clearly why this has been the case and also elaborate on why investment will solve the performance gap. If on the other hand you have not been trading, the risk increases considerably and there is likely to be a significant focus on supporting evidence to justify demand predictions. Remember that investors have options – it is a competition, so you need to sell your idea as the best option for their investment.
7. Practise the Presentation
It is clear that many entrepreneurs have not practised their pitches before impartial observers prior to pitching. This dry run should be arranged well in advance of the presentation date with a panel of critics who have a carte blanche to critique the plan and pitch. One attractive alternative to this is to submit an entry to the growing number of business plan competitions. These contests afford entrants a low-cost opportunity to “stress test” their plans in a very realistic role play. Such competitions test a wide range of skills that are often neglected in the day-to-day tasks of entrepreneurs, who are focused on bringing their idea to fruition. By producing a credible business plan and presenting your case persuasively, you will significantly enhance your ability to secure funding.
8. Excite them
Entrepreneurs pitch to investors to sell them an idea. There must be something unique about the idea, and it must be pitched with conviction, so as to grab the attention of investors who deal with hundreds of business plans every month. This was summed up by former Dragons’ Den investor Simon Woodroffe in a BBC2 show, when he said,
“You gotta make me feel like I’m going to miss out”.
Why would the investor be better off investing in your business rather than leaving money in a bank account, shares or investing in another business? If you are seeking investment in your business, it is important to clearly describe the investment opportunity - and also to sell it.
9. Learn the lessons
Do not get too downhearted if a pitch is unsuccessful. The investors are likely to give clear reasons for their lack of interest, and this feedback must be considered carefully as it may shape improvements in subsequent pitches. The presenter should segment the various feedback points into groups – is the issue or concern with the idea, the equity share on offer, the management team, etc. Most entrepreneurs need to pitch to a number of investors before securing an investment. If you can line up a number of pitches, remember not to organise the most attractive investor up front as there are likely to be significant improvements in the pitch after it has undergone a number of presentations.
10. Remember the purpose of the pitch
Finally, while the emphasis may well be on an idea, it is important to remember that the pitch has a very specific purpose. This must not get lost in all the details. If the purpose is to secure funding, the presenter needs to ask questions after the presentation to ensure the audience has gained sufficient information with which to make a decision. If an offer is made, the presenter must have a full grasp on whether it meets his requirements, and options if not. So as to maintain credibility, the presenter needs to consider all the various eventualities before undertaking the pitch so that the pitch does not go flat at the end when the issues of substance need to be agreed.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro®. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on business plans visit www.paloalto.co.uk and www.bplans.co.uk
The following is a list of tips to maximise your chances of success when pitching to investors.
1. Know your audience
All presenters are taught about the importance of knowing their audience and engaging with them on a personal level where possible. The Internet has enabled us to research more effectively than we were able to in previous years, so it is important to use this resource to our advantage. Investors have a range of asset classes to choose from as they decide on the composition of their investment portfolio. Hence it is necessary to understand the backgrounds of the prospective investors and their motivations prior to presenting. Once you have done extensive research on the investors it is then possible to tailor the pitch accordingly.
2. Tell a Story
One of the most effective ways to pitch is to place the investment opportunity in the context of a story. Ideally, the story will focus on a problem encountered and the fact that the new idea being pitched solves this particular problem. If the investors can relate to the problem, they are more likely to invest in your business. After that they will be assessing how many people are affected by ‘the problem’ and whether the proposed idea satisfactorily resolves the problem. Finally, if they believe that the idea can solve the problem profitably and it is defensible (via patents, trade marks, etc.) it is likely they will be interested in investing.
3. Prepare to win
Pitching to an investor is not a last-minute afterthought – it is the culmination of weeks, if not months, of planning. All too often, entrepreneurs do not plan accordingly and then find that the preparation of their business pitch suffers. Preparation for the pitch should commence as soon as the business plan process commences. For many investors, the executive summary of the business plan is what opens the door for a presentation, and the full business plan may only be read after a successful presentation has been delivered.
4. Pay strict attention to the detail
Your typical investor will have a good eye for detail and hence the plan and its pitch need to be mutually reinforcing and containing no inherent contradictions. From the outset, there should be one owner of the process who can oversee all preparations and is ultimately responsible for the content. This is particularly important if a number of disparate contributors have worked on the plan and where the pitch consists of numerous participants.
5. Avoid death by PowerPoint®
While the average plan is produced in Microsoft® Word and Excel, PowerPoint tends to be the tool of choice for presentations. While it undoubtedly has advantages in terms of aesthetics, it can be misused when utilised at the pitch stage. The number of slides should be kept to the bare minimum, the content must be rigorously analysed to ensure relevance and clarity and time must be managed carefully. It is recommended each investor receives a slide deck, which contains more detail than the presentation itself (with Appendices used extensively). Finally, it is important to manage the subsequent Q&A process carefully as this is the stage where the investor gets to request information about details that they require to convince them that the proposal is indeed worthy of their investment.
6. Get the numbers right
Investors tend to be very focused on numbers, so all facts must be accurate. The numbers should be realistic and defensible and at least one of those pitching the plan needs to be prepared for in-depth questions relating to the projected financials. While it is easy to couch ‘the opportunity’ in technical terms, future growth projections, supporting demographic trends, etc., investors will focus on hard evidence. So if you have been trading, they’ll want to know turnover/sales figures, break-even points, gross and net margins (profits), and so on. These are indisputable facts and evidence that enable them to accurately assess the risk. If performance has been poor, the presenter will need to articulate clearly why this has been the case and also elaborate on why investment will solve the performance gap. If on the other hand you have not been trading, the risk increases considerably and there is likely to be a significant focus on supporting evidence to justify demand predictions. Remember that investors have options – it is a competition, so you need to sell your idea as the best option for their investment.
7. Practise the Presentation
It is clear that many entrepreneurs have not practised their pitches before impartial observers prior to pitching. This dry run should be arranged well in advance of the presentation date with a panel of critics who have a carte blanche to critique the plan and pitch. One attractive alternative to this is to submit an entry to the growing number of business plan competitions. These contests afford entrants a low-cost opportunity to “stress test” their plans in a very realistic role play. Such competitions test a wide range of skills that are often neglected in the day-to-day tasks of entrepreneurs, who are focused on bringing their idea to fruition. By producing a credible business plan and presenting your case persuasively, you will significantly enhance your ability to secure funding.
8. Excite them
Entrepreneurs pitch to investors to sell them an idea. There must be something unique about the idea, and it must be pitched with conviction, so as to grab the attention of investors who deal with hundreds of business plans every month. This was summed up by former Dragons’ Den investor Simon Woodroffe in a BBC2 show, when he said,
“You gotta make me feel like I’m going to miss out”.
Why would the investor be better off investing in your business rather than leaving money in a bank account, shares or investing in another business? If you are seeking investment in your business, it is important to clearly describe the investment opportunity - and also to sell it.
9. Learn the lessons
Do not get too downhearted if a pitch is unsuccessful. The investors are likely to give clear reasons for their lack of interest, and this feedback must be considered carefully as it may shape improvements in subsequent pitches. The presenter should segment the various feedback points into groups – is the issue or concern with the idea, the equity share on offer, the management team, etc. Most entrepreneurs need to pitch to a number of investors before securing an investment. If you can line up a number of pitches, remember not to organise the most attractive investor up front as there are likely to be significant improvements in the pitch after it has undergone a number of presentations.
10. Remember the purpose of the pitch
Finally, while the emphasis may well be on an idea, it is important to remember that the pitch has a very specific purpose. This must not get lost in all the details. If the purpose is to secure funding, the presenter needs to ask questions after the presentation to ensure the audience has gained sufficient information with which to make a decision. If an offer is made, the presenter must have a full grasp on whether it meets his requirements, and options if not. So as to maintain credibility, the presenter needs to consider all the various eventualities before undertaking the pitch so that the pitch does not go flat at the end when the issues of substance need to be agreed.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro®. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on business plans visit www.paloalto.co.uk and www.bplans.co.uk
posted by BusinessPlanner at
4/24/2007
2 Comments
Thursday, April 05, 2007
How to Write an Effective Marketing Plan
How to Write an Effective Marketing Plan
A marketing plan is a core component of a business plan. It relates specifically to the marketing of a particular product or service and it describes:
o An overall marketing objective
o A broad marketing strategy
o The tactical detail related to specific marketing activities
o The various costs associated with these activities
o Those tasked with delivering these activities by name
The starting point for any marketing plan is an analysis of the strategic context, as a typical objective for most plans is promoting a good or service as effectively as possible. An assessment of the company, its environment and its customers helps to ensure that the author of the plan obtains a holistic view of the wider context. In turn this helps them to focus their energies and resources accordingly. This is particularly important given that most marketing managers will be subject to that all-too-familiar constraint—limited resources (invariably financial). In effect, a marketing plan is produced to ensure that limited resources are allocated to activities that are likely to bring the maximum return.
An assessment of the context will include analysis of both internal and external factors. There are a number of frameworks and tools designed to assist you with this:
o A SWOT analysis forces you to consider internal Strengths and Weaknesses alongside external Opportunities and Threats.
o Porter’s Five Forces is a framework designed to assist you in considering the broader competitive and environmental context.
It is also vital that you have a thorough understanding of your customers; look to whether segments exist within your broad customer group that can be profitably served utilizing specific and targeted marketing activities.
Following an analysis of broader conditions, a marketing strategy can then be put in place. This strategy needs to include financials so that all activities can be assessed in the context of their cost as a portion of the overall marketing budget. Regardless of the product or service, the objectives tend to be similar for most managers; create awareness, stimulate interest in the offering, and ultimately (profitably) convert this awareness into sales. All these factors are intertwined and, hence, the importance of effective market planning.
Using a local restaurant as an example, their marketing activities are going to be predominantly concentrated within a two to three mile radius of their restaurant, as this area is where the vast majority of their customers are likely to come from. Tactically, there is no point in such a restaurant advertising on TV (even locally) as the cost would be prohibitive in the context of their business model. They are limited in terms of capacity (number of seats) and their average cost per head so that, even if they created huge awareness and interest via TV advertising, the resultant revenues would still be unlikely to cover the cost of the specific marketing activity. On the other hand, stuffing leaflets through local letterboxes is extremely targeted and comes at low relative cost, which explains the sheer volume of fast-food flyers most of us get on a daily basis.
The reader of the plan should clearly be able to relate to the marketing initiatives in terms of the message, the target audience and the means to accessing this audience. A good marketing plan will detail specifics, i.e., a number of marketing activities, their respective costs, and the expected return on investment. Measuring return on marketing has historically been one of the greatest challenges the industry has faced. The advent of PPC (pay-per-click) advertising via the Internet has finally resulted in managers being able to track sales resulting from specific campaigns and adverts. However, this is just one means of advertising, and calculating effective ROI (return on investment) figures for other forms, such as billboards and TV, remains as elusive as ever.
In summary, a marketing plan should enable marketing managers to document their assessment of the opportunity in terms of effective allocation of limited resources. While most managers would love the luxury of a seven-figure marketing budget to spend on every conceivable advertising medium, the reality is that most need to market effectively on a pittance. A marketing plan assesses the most efficient means to attract potential customers and ultimately convert them to sales. Without a plan, a business is essentially rudderless and marketing activities are more likely to be reactive and, hence, considerably less effective.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd, creators of Marketing Plan Pro®. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on marketing plans visit www.paloalto.co.uk
A marketing plan is a core component of a business plan. It relates specifically to the marketing of a particular product or service and it describes:
o An overall marketing objective
o A broad marketing strategy
o The tactical detail related to specific marketing activities
o The various costs associated with these activities
o Those tasked with delivering these activities by name
The starting point for any marketing plan is an analysis of the strategic context, as a typical objective for most plans is promoting a good or service as effectively as possible. An assessment of the company, its environment and its customers helps to ensure that the author of the plan obtains a holistic view of the wider context. In turn this helps them to focus their energies and resources accordingly. This is particularly important given that most marketing managers will be subject to that all-too-familiar constraint—limited resources (invariably financial). In effect, a marketing plan is produced to ensure that limited resources are allocated to activities that are likely to bring the maximum return.
An assessment of the context will include analysis of both internal and external factors. There are a number of frameworks and tools designed to assist you with this:
o A SWOT analysis forces you to consider internal Strengths and Weaknesses alongside external Opportunities and Threats.
o Porter’s Five Forces is a framework designed to assist you in considering the broader competitive and environmental context.
It is also vital that you have a thorough understanding of your customers; look to whether segments exist within your broad customer group that can be profitably served utilizing specific and targeted marketing activities.
Following an analysis of broader conditions, a marketing strategy can then be put in place. This strategy needs to include financials so that all activities can be assessed in the context of their cost as a portion of the overall marketing budget. Regardless of the product or service, the objectives tend to be similar for most managers; create awareness, stimulate interest in the offering, and ultimately (profitably) convert this awareness into sales. All these factors are intertwined and, hence, the importance of effective market planning.
Using a local restaurant as an example, their marketing activities are going to be predominantly concentrated within a two to three mile radius of their restaurant, as this area is where the vast majority of their customers are likely to come from. Tactically, there is no point in such a restaurant advertising on TV (even locally) as the cost would be prohibitive in the context of their business model. They are limited in terms of capacity (number of seats) and their average cost per head so that, even if they created huge awareness and interest via TV advertising, the resultant revenues would still be unlikely to cover the cost of the specific marketing activity. On the other hand, stuffing leaflets through local letterboxes is extremely targeted and comes at low relative cost, which explains the sheer volume of fast-food flyers most of us get on a daily basis.
The reader of the plan should clearly be able to relate to the marketing initiatives in terms of the message, the target audience and the means to accessing this audience. A good marketing plan will detail specifics, i.e., a number of marketing activities, their respective costs, and the expected return on investment. Measuring return on marketing has historically been one of the greatest challenges the industry has faced. The advent of PPC (pay-per-click) advertising via the Internet has finally resulted in managers being able to track sales resulting from specific campaigns and adverts. However, this is just one means of advertising, and calculating effective ROI (return on investment) figures for other forms, such as billboards and TV, remains as elusive as ever.
In summary, a marketing plan should enable marketing managers to document their assessment of the opportunity in terms of effective allocation of limited resources. While most managers would love the luxury of a seven-figure marketing budget to spend on every conceivable advertising medium, the reality is that most need to market effectively on a pittance. A marketing plan assesses the most efficient means to attract potential customers and ultimately convert them to sales. Without a plan, a business is essentially rudderless and marketing activities are more likely to be reactive and, hence, considerably less effective.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd, creators of Marketing Plan Pro®. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on marketing plans visit www.paloalto.co.uk
posted by BusinessPlanner at
4/05/2007
0 Comments
Friday, February 16, 2007
Why do I need a business plan ?
Do you run a business but believe that a business plan is just for starting up? Or are you one of those people who believe they just don’t have the time to plan? Well, I have news for you. Business planning is not just for start-ups; it is an essential element of running any successful business, particularly given the growing uncertainty we face and the unyielding shifts in consumer behaviour.
If you think time is the problem, think again and make time to plan. One of the key benefits of planning is that it helps you understand what you need to prioritise.
A business plan is not just a document. It is a holistic analysis of your company, the environment it operates in, and a route map to achieving success based on the resources available. Unfortunately, the image most of us have is of a 30-page bound document. The focus is on the output when the real value in a business plan is the business-planning process itself.
The following list represents some of the key benefits of planning:
1. To plan for an uncertain future
Business planning is vital to help you manage your business more effectively. By committing your thoughts to a plan, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can also detail alternative future scenarios, set specific objectives and goals, and list the resources required to achieve these goals. In short, it can help ensure that you are prepared for all sorts of eventualities.
2. To help grow your business
In an ideal world, all businesses would be self-financing in exploiting business opportunities. In reality, few are afforded this luxury, and hence, will be required to secure external investment. The production of a credible business plan is one of the primary requirements for any entrepreneur seeking investment to grow.
3. To commit to a particular course of action
A business plan can help a company assess future opportunities, choose one, and then commit to a particular course of action. By committing to one opportunity, all other options are effectively marginalised and the company is aligned to focus on key deliverables.
4. To manage cash flow
Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple—many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due).
5. To value a business
Given that valuing firms is notoriously difficult and subjective, a well-written plan will clearly highlight the opportunity for any prospective investors, explain the value of the business, and increase the likelihood of a successful exit by the current owner.
6. To ensure all areas are covered
When you start a new business, the temptation is to spend time on the idea and then react to events as they come up rather than focusing on what is important. The very creation of a business plan ensures that you cover all the various bases you need to when taking an idea from conception through to launch.
As you’ll have garnered from the above, business planning is an essential activity, regardless of the stage of business you’re at. The very process of producing a business plan enables management to give due consideration to the various factors that mesh together to create the opportunity they are seeking to explore, as well as the resources required and the key drivers needed for success.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. For further information on business planning visit Bplans and Palo Alto Software
If you think time is the problem, think again and make time to plan. One of the key benefits of planning is that it helps you understand what you need to prioritise.
A business plan is not just a document. It is a holistic analysis of your company, the environment it operates in, and a route map to achieving success based on the resources available. Unfortunately, the image most of us have is of a 30-page bound document. The focus is on the output when the real value in a business plan is the business-planning process itself.
The following list represents some of the key benefits of planning:
1. To plan for an uncertain future
Business planning is vital to help you manage your business more effectively. By committing your thoughts to a plan, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can also detail alternative future scenarios, set specific objectives and goals, and list the resources required to achieve these goals. In short, it can help ensure that you are prepared for all sorts of eventualities.
2. To help grow your business
In an ideal world, all businesses would be self-financing in exploiting business opportunities. In reality, few are afforded this luxury, and hence, will be required to secure external investment. The production of a credible business plan is one of the primary requirements for any entrepreneur seeking investment to grow.
3. To commit to a particular course of action
A business plan can help a company assess future opportunities, choose one, and then commit to a particular course of action. By committing to one opportunity, all other options are effectively marginalised and the company is aligned to focus on key deliverables.
4. To manage cash flow
Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple—many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due).
5. To value a business
Given that valuing firms is notoriously difficult and subjective, a well-written plan will clearly highlight the opportunity for any prospective investors, explain the value of the business, and increase the likelihood of a successful exit by the current owner.
6. To ensure all areas are covered
When you start a new business, the temptation is to spend time on the idea and then react to events as they come up rather than focusing on what is important. The very creation of a business plan ensures that you cover all the various bases you need to when taking an idea from conception through to launch.
As you’ll have garnered from the above, business planning is an essential activity, regardless of the stage of business you’re at. The very process of producing a business plan enables management to give due consideration to the various factors that mesh together to create the opportunity they are seeking to explore, as well as the resources required and the key drivers needed for success.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. For further information on business planning visit Bplans and Palo Alto Software
posted by BusinessPlanner at
2/16/2007
1 Comments
Friday, January 12, 2007
What the top priority for Entrepreneurs should be!
Now that the New Year has dawned, the top priority for any entrepreneur should be the creation of a business plan. Ideas that exist in entrepreneurs’ heads tend to stay exactly where they are, unless they are documented in a formal business plan. By committing ones thoughts into a formal document it is easier to share the concept, obtain feedback on it and to enhance your individual awareness of gaps etc
The importance of writing a business plan is widely appreciated; however, the benefits of writing one are not always understood. In a nutshell, a business plan helps you organise your thoughts in a concise and logical order and ensures that the reader can gain a thorough understanding of the business idea and the challenges faced. Here are 5 reasons every entrepreneur should have a business plan.
1. To Map the Future
A business plan is not just required to secure funding at the start-up phase, but is a vital aid to help you manage your business more effectively. By committing your thoughts to paper, you can understand your business better and can also chart specific courses of action that need to be taken to improve your business.
2. To Support Growth and Secure Funding
Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by cash in the business alone, and hence the business must seek external funding.
3. To Develop and Communicate a Course of Action
A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively marginalized and the company is aligned to focus on key activities.
4. To Help Manage Cash flow
Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple--many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). While the break-even point--where total revenue equals total costs--is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important and good cash flow management takes over in importance.
5. To Support a Strategic Exit
Finally, at some point, the owners of the firm will decide it is time to exit. Considering the likely exit strategy in advance can help inform and direct present day decisions. The aim is to liquidate the investment, so the owner/current investors have the option of cashing out when they want.
While the distractions of any entrepreneur are numerous, it is important to remember that what needs to be done needs to get prioritised. The temptation is to do the easy things or be responsive to those who shout the loudest/ most frequently. However, as history has shown repeatedly, those that have plans in place are better prepared to face the uncertainties that the future may bring – than those who are merely reacting to events as they happen around them.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on business planning visit www.bplans.co.uk and www.paloalto.co.uk
The importance of writing a business plan is widely appreciated; however, the benefits of writing one are not always understood. In a nutshell, a business plan helps you organise your thoughts in a concise and logical order and ensures that the reader can gain a thorough understanding of the business idea and the challenges faced. Here are 5 reasons every entrepreneur should have a business plan.
1. To Map the Future
A business plan is not just required to secure funding at the start-up phase, but is a vital aid to help you manage your business more effectively. By committing your thoughts to paper, you can understand your business better and can also chart specific courses of action that need to be taken to improve your business.
2. To Support Growth and Secure Funding
Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by cash in the business alone, and hence the business must seek external funding.
3. To Develop and Communicate a Course of Action
A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively marginalized and the company is aligned to focus on key activities.
4. To Help Manage Cash flow
Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple--many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). While the break-even point--where total revenue equals total costs--is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important and good cash flow management takes over in importance.
5. To Support a Strategic Exit
Finally, at some point, the owners of the firm will decide it is time to exit. Considering the likely exit strategy in advance can help inform and direct present day decisions. The aim is to liquidate the investment, so the owner/current investors have the option of cashing out when they want.
While the distractions of any entrepreneur are numerous, it is important to remember that what needs to be done needs to get prioritised. The temptation is to do the easy things or be responsive to those who shout the loudest/ most frequently. However, as history has shown repeatedly, those that have plans in place are better prepared to face the uncertainties that the future may bring – than those who are merely reacting to events as they happen around them.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on business planning visit www.bplans.co.uk and www.paloalto.co.uk
posted by BusinessPlanner at
1/12/2007
1 Comments
Monday, October 16, 2006
Top 10 Products and Services to Get you Started
Starting a business is an incredibly exciting time for any entrepreneur; however it can also be stressful with so much to do in so little time. The start-up phase is also characterized by significant expenditures against a backdrop of uncertain income. However, there are a number of products and services that can help you maximize your chances of success while also saving you considerable time and money. This article aims to introduce you to some of the less obvious ones that are available via the Internet. These products and services can help you set your business on the right path from Day One. While these recommendations will not be appropriate for all, those who need to bootstrap and build their business the hard way will benefit the most.
1. Create a Website
Regardless of whether you intend to sell online or not, all new start-up businesses should secure a domain name and create a website as soon as they can. Thankfully, the cost of getting a site set up has fallen significantly over time and there are now a host of different packages and providers to choose from.
Where: Uni-Trader from www.unitechnology.co.uk
Cost: RRP from only £99.99
2. Download a Profile of Your Industry
The factsheets, reports and guides from Scavenger are essential reading material for anyone starting up a business in the UK. The Business Opportunity Profiles are downloadable reports on specific UK industries. With over 800 reports in total, the range includes everything from ‘Children’s Day Nursery’ profiles to ‘Coffee Shop’ profiles to a profile on ‘Wedding Planners’.
Where: www.scavenger.net
Cost: Individual reports cost around £5.
3. Set up Your Company Accounts
One of the big challenges start-up companies face is managing cash flow. Insolvency is one of the main causes of failure for entrepreneurs in the UK. However, with some careful and appropriate financial planning, cash crunches can be avoided. While this in itself is an important reason for buying a bookkeeping package, there are countless other reasons ranging from the ability to manage invoices through to managing payroll. The two main recommended introductory packages are QuickBooks® Simple Start from Intuit® and Sage® Instant Accounts. View online demos before you purchase.
Where: www.sage.co.uk and www.quickbooks.co.uk
Cost: From £43.97 at www.amazon.co.uk
4. Download Business Planning Software
When you start up it is important to write a business plan to ensure you adequately plan the future of your business. The very process of creating a plan is beneficial, not least because it forces you to take a holistic view of your company. Business Plan Pro® is the best-selling business-planning software available. It is easy to use, saves time, and has over 500 sample plans to get you started. It is also available via download so you can get instant access to it and hence pay no postage and packing.
Where: Business Plan Pro 2007 is available from www.paloalto.co.uk
Cost: RRP is only £99.99 for the Standard version and £159.99 for the Premier.
5. Save Costs on Your Phone
Using applications such as Skype together with a headset, it is now possible to make telephone calls from your computer at a very low cost. There is no need to commit to a monthly phone contract with line rental. Instead you can just pay as you go. You can also obtain a Skype number so people can call you back. However it is recommended that all start-up businesses do have at least one fixed line number they can be contacted on. Finally, you should also consider getting a portable number that is easy to transfer if you move offices.
Where: www.skype.co.uk
Cost: Free
6. Protect Your Computer
Once you connect to the Internet, it is important to ensure you have adequate protection in the form of anti-virus software. Many computers these days come with anti-virus software installed already. If not, you should consider downloading Ad-Aware from Lavasoft and AVG anti-virus from GRISOFT. These products are either free or reasonably priced, and are very effective. Finally, it is also recommended that you backup your data to an external hard drive such as those manufactured by Maxtor.
Where: www.lavasoft.com , www.grisoft.com and www.maxtor.com
Cost: Free (Maxtor cost dependent on GB size)
7. Explore Google
Google is famous for being the world’s favourite search engine. Additionally, there are a growing number of online applications owned or developed by Google that are ideal aids when setting up a new business. Google AdWords are the little adverts you see alongside search returns when you search in Google. These are a great way to attract customers at a low cost. Google Desktop enables you to search all the files and folders on your computer so you can track down any stored information at the click of a button. Both are very useful applications in helping you to market your business and to manage your internal data.
Where: www.google.co.uk
Cost: Free (AdWord prices vary)
8. Open an Instant Messaging Account
Along with email, Instant Messaging has proven to be one of the most used online applications for Internet users. By opening a messaging account, you are adding an extra communication tool to your portfolio and it ensures you can communicate effectively with colleagues and customers. If you want to offer an IM service to your customers, you can add applications such as LivePerson to your website.
Where: www.yahoo.co.uk , www.msn.co.uk , www.liveperson
Cost: Free for IM, LivePerson comes at a cost per seat.
9. Open an Account with an Online Fax Company
Harnessing the power of the Internet means you do not have to invest in hardware, such as a fax machine, that you may use infrequently. Instead, you can open an account with an online fax service so you can send and receive faxes directly from your computer.
Where: www.j2.com
Cost: From £8.50 per month and 12p a fax
10. Try Online Word Processing
Everyone is familiar with Microsoft Office®. However, if you need MS Office but can’t afford it, then there are a number of alternatives to consider. Star Office™ from Sun Microsystems is available for a fraction of the cost of MS Office but is just as powerful. Google Docs & Spreadsheets is a web-based word processing and spreadsheet programme that keeps documents current and lets the people you choose update files from their own computers. Finally Zoho Virtual Office provides an integrated online suite of collaboration tools including Email, Calendars, Documents, Tasks, Notes, Contacts and Groups.
Where: www.sun.com , www.zoho.com , www.google.com
Cost: Free or reasonably priced.
Summary and Conclusion
Starting up a business is never easy given the wide range of ‘things’ that need to get done and the costs that have to be paid out before you start. However, the Internet has helped bring down the cost of starting up and has also made it easier to set up, thereby providing the entrepreneur with access to a wide range of different products, services and market research from the comfort of their desks.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on starting up in general and business planning in particular visit www.bplans.co.uk and www.paloalto.co.uk
1. Create a Website
Regardless of whether you intend to sell online or not, all new start-up businesses should secure a domain name and create a website as soon as they can. Thankfully, the cost of getting a site set up has fallen significantly over time and there are now a host of different packages and providers to choose from.
Where: Uni-Trader from www.unitechnology.co.uk
Cost: RRP from only £99.99
2. Download a Profile of Your Industry
The factsheets, reports and guides from Scavenger are essential reading material for anyone starting up a business in the UK. The Business Opportunity Profiles are downloadable reports on specific UK industries. With over 800 reports in total, the range includes everything from ‘Children’s Day Nursery’ profiles to ‘Coffee Shop’ profiles to a profile on ‘Wedding Planners’.
Where: www.scavenger.net
Cost: Individual reports cost around £5.
3. Set up Your Company Accounts
One of the big challenges start-up companies face is managing cash flow. Insolvency is one of the main causes of failure for entrepreneurs in the UK. However, with some careful and appropriate financial planning, cash crunches can be avoided. While this in itself is an important reason for buying a bookkeeping package, there are countless other reasons ranging from the ability to manage invoices through to managing payroll. The two main recommended introductory packages are QuickBooks® Simple Start from Intuit® and Sage® Instant Accounts. View online demos before you purchase.
Where: www.sage.co.uk and www.quickbooks.co.uk
Cost: From £43.97 at www.amazon.co.uk
4. Download Business Planning Software
When you start up it is important to write a business plan to ensure you adequately plan the future of your business. The very process of creating a plan is beneficial, not least because it forces you to take a holistic view of your company. Business Plan Pro® is the best-selling business-planning software available. It is easy to use, saves time, and has over 500 sample plans to get you started. It is also available via download so you can get instant access to it and hence pay no postage and packing.
Where: Business Plan Pro 2007 is available from www.paloalto.co.uk
Cost: RRP is only £99.99 for the Standard version and £159.99 for the Premier.
5. Save Costs on Your Phone
Using applications such as Skype together with a headset, it is now possible to make telephone calls from your computer at a very low cost. There is no need to commit to a monthly phone contract with line rental. Instead you can just pay as you go. You can also obtain a Skype number so people can call you back. However it is recommended that all start-up businesses do have at least one fixed line number they can be contacted on. Finally, you should also consider getting a portable number that is easy to transfer if you move offices.
Where: www.skype.co.uk
Cost: Free
6. Protect Your Computer
Once you connect to the Internet, it is important to ensure you have adequate protection in the form of anti-virus software. Many computers these days come with anti-virus software installed already. If not, you should consider downloading Ad-Aware from Lavasoft and AVG anti-virus from GRISOFT. These products are either free or reasonably priced, and are very effective. Finally, it is also recommended that you backup your data to an external hard drive such as those manufactured by Maxtor.
Where: www.lavasoft.com , www.grisoft.com and www.maxtor.com
Cost: Free (Maxtor cost dependent on GB size)
7. Explore Google
Google is famous for being the world’s favourite search engine. Additionally, there are a growing number of online applications owned or developed by Google that are ideal aids when setting up a new business. Google AdWords are the little adverts you see alongside search returns when you search in Google. These are a great way to attract customers at a low cost. Google Desktop enables you to search all the files and folders on your computer so you can track down any stored information at the click of a button. Both are very useful applications in helping you to market your business and to manage your internal data.
Where: www.google.co.uk
Cost: Free (AdWord prices vary)
8. Open an Instant Messaging Account
Along with email, Instant Messaging has proven to be one of the most used online applications for Internet users. By opening a messaging account, you are adding an extra communication tool to your portfolio and it ensures you can communicate effectively with colleagues and customers. If you want to offer an IM service to your customers, you can add applications such as LivePerson to your website.
Where: www.yahoo.co.uk , www.msn.co.uk , www.liveperson
Cost: Free for IM, LivePerson comes at a cost per seat.
9. Open an Account with an Online Fax Company
Harnessing the power of the Internet means you do not have to invest in hardware, such as a fax machine, that you may use infrequently. Instead, you can open an account with an online fax service so you can send and receive faxes directly from your computer.
Where: www.j2.com
Cost: From £8.50 per month and 12p a fax
10. Try Online Word Processing
Everyone is familiar with Microsoft Office®. However, if you need MS Office but can’t afford it, then there are a number of alternatives to consider. Star Office™ from Sun Microsystems is available for a fraction of the cost of MS Office but is just as powerful. Google Docs & Spreadsheets is a web-based word processing and spreadsheet programme that keeps documents current and lets the people you choose update files from their own computers. Finally Zoho Virtual Office provides an integrated online suite of collaboration tools including Email, Calendars, Documents, Tasks, Notes, Contacts and Groups.
Where: www.sun.com , www.zoho.com , www.google.com
Cost: Free or reasonably priced.
Summary and Conclusion
Starting up a business is never easy given the wide range of ‘things’ that need to get done and the costs that have to be paid out before you start. However, the Internet has helped bring down the cost of starting up and has also made it easier to set up, thereby providing the entrepreneur with access to a wide range of different products, services and market research from the comfort of their desks.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on starting up in general and business planning in particular visit www.bplans.co.uk and www.paloalto.co.uk
posted by BusinessPlanner at
10/16/2006
0 Comments
Thursday, September 07, 2006
Top 10 Business Plan Mistakes to Avoid
Top 10 Business Plan Mistakes to Avoid
Introduction
The importance of business planning is widely documented; however, guidance as to what constitutes good business planning is less clearly defined. This article aims to redress that imbalance by describing 10 of the most common mistakes that occur in business plans.
While the business-planning process is in itself a very worthwhile pursuit, most business plans are produced for a specific purpose. The plan is used as a means to convey an idea with a view to achieving a specific goal, e.g. securing funding. Hence the plan needs to be tailored with the audience in mind, and good knowledge of their requirements will help shape a winning plan. For example, the requirements a Venture Capitalist will have in assessing a plan seeking to secure a million-pound investment will differ considerably from those of a local bank manager who needs a plan to support a small-loan application. While the former will be primarily looking for capital growth, the latter will be more concerned with security. Regardless of the specific purpose of the plan, these following business plan lessons will apply.
1. Incredible Financial Projections
One of the key areas business plan readers will focus on will be 'the numbers'. Specifically, they will concentrate on the projected Income Statement or Profit & Loss. The fact that numbers are projected does not mean that those figures can be included without due rigour or process. They need to be credible, defensible and consistent. Of course forecasting is not an exact science, and the use of proxies can help the author ensure that the figures included are plausible and consistent with the story being told in the other areas of the business plan. The figures must also show an ability of the company to generate free cash flows so that the business can be run profitably while satisfactorily servicing their debts at the same time.
All costs should be recorded including salaries to owner managers who run the company. It is not credible to generate P&L projections where expenses such as salaries are omitted to demonstrate managerial commitment or to artificially reduce losses, etc. By the same token, no investor will be prepared to fund a business where the projected salary payments are excessive. While dealing with finances is not everyone's strong point, there has to be someone on the management team who is cognizant with the maths. A business plan will need to include everything from break-even projections to proposed return on investments to cash flow forecasts, and one of the key players will have to converse on these subjects in a convincing manner. They will also need to justify the numbers.
2. Lack of a Viable Opportunity
A business plan needs to not only describe an opportunity, it must also detail how the opportunity can be exploited profitably and demonstrate the company’s ability to deliver what is required. In recent years there has been a significant increase in plans that are inaccessible to the average reader because they are couched in technical jargon and unfamiliar terms. If the reader of the plan cannot fully grasp who the prospective customer is, how that customer will be targeted, and the prospective benefits from the proposed solution, the reader will not invest. In an increasingly time-pressed world, people crave simplicity. Many business plan recipients will only scrutinize the Executive Summary and the financials, using these as the decision points as to whether to read further or not. Hence it is of paramount importance that both the executive summary and the wider plan describes the opportunity in readily understood terms, such as:
o What is the issue or pain point?
o What is the proposed solution?
o What are the benefits of the solution?
o Why are these benefits compelling?
o Who will benefit the most from these?
Once these are detailed, there will be greater transparency regarding the viability, or otherwise, of the proposed opportunity in terms of the company's ability to profitably serve the target market.
3. No Clear Route to Market
All opportunities are only prospective ones without evidence that the target market can be accessed profitably. Many entrepreneurs are inherently product focused, concentrating their energies on 'the idea' to the exclusion of many other important elements such as how they intend to access their customer base. The growth in popularity of the Internet has certainly helped niche producers find geographically dispersed customers, making many more ideas commercially viable. However, it does not come without its challenges, as creating awareness online is both costly and intensely competitive. The business plan must include a comprehensive and credible analysis of how the company intends to secure access to their target market in a cost-effective manner. The low cost and barriers to entry for websites have resulted in the creation of hundreds of thousands of sites. Ensuring that a site stands out from the crowd is easier said than done. Knowledge of who the customer is and how they buy is very important, but identifying them and accessing them on an individual basis is much more challenging and costly.
4. Overestimation of Revenues
Another key element of the plan will relate to the size and value of the opportunity. Does the business plan describe a small local business-to-business opportunity with limited scalability/ return or is it a concept with widespread or even potentially global consumer appeal? While the description of the market opportunity will undoubtedly be couched in positive terms, an obvious danger relates to the innate optimism of entrepreneurs and their tendency to exaggerate every business opportunity. Hence the general interpretation of sales forecasts is that they will be optimistic but not excessively optimistic. Admittedly what constitutes 'excessive' is subjective, but the numbers will need to be justified and if it emerges that the figures are mere fantasy, the author will lose all credibility and it will significantly undermine any confidence the potential investor might have in the plan.
It is important to guard against this by use of proxies and conservatism when it comes to sales projections. Placing some rigor around the process of deriving credible revenue figures also serves the entrepreneur well by enhancing their awareness of some of the key drivers for revenue growth in their business. It will also help them to produce a more plausible business plan and will ensure that the author is confidently able to answer questions regarding the market opportunity – questions that will top the list of any prospective investor or bank manager. Statements like "the Market is worth £10 billion and growing and we are focusing on capturing just 1% of it" set off alarm bells in the minds of prospective investors.
A more appropriate method is to calculate the number of customers the business intends to capture and their average revenues. These two inputs are easier to calculate and also to justify in a wider discussion. For example, a restaurant can easily use comparables from other restaurants as reference points to calculate average spend per person. Hence the focus turns to predicting the number of covers likely per week which can then be scaled up to obtain projected monthly revenue figures.
5. Lack of Appreciation of the Importance of Good Cash Flow Management
A critical subtlety of any new business is the ability of the entrepreneur to understand the differences between cash and profits and to accept the fact that insolvency is probably the most significant threat to a business. Many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due).
Good cash flow management is vital when businesses pursue investment opportunities where there are significant cash flows out, in advance of the cash flows coming in. The start-up phase of a business is an obvious time when cash flow is under stress with uncertain income streams sitting alongside a raft of certain and often overdue bills. This tension is exacerbated if there are delays to the income streams, e.g. if a restaurant fails to open on time.
Once up and running a company can bank the income immediately if they are a 'cash-only' business; however, if they sell on credit, they receive the cash in the future and hence may need to pay some of their own expenses before that income hits their account. This will put a further strain on the company's solvency. A well structured business plan needs to reflect reality with likely losses in the first months of trading being expected and with financing provisions, e.g. overdraft limits, being put in place in advance of the predictable cash squeeze. A contingency figure should also be added as it is important to leave breathing space for the unexpected costs and overspends that always occur when least expected.
6. No Clear Objective
What is the main purpose of the plan? If it is to seek investment in the business, it is important to clearly describe the investment opportunity. As mentioned previously there is a tendency amongst entrepreneurs to focus myopically on 'the product' or 'the idea'. This is where they expend most energy but alas that is only one part of the process. While the plan describes the concept in detail, it must also address the purpose of the plan. If it is to secure investment, one needs to recognize that investing is the investor's area of expertise and they will be seeking an appropriate risk/ return for their investment. Their primary interest will quickly shift from the product once they 'get it' and 'like it' to assessing the ability of the company (including management) to generate free cash flows to enable the business to grow while also returning cash to them. They will also seek to understand:
o Why they would be better off investing in this business rather than leaving money in other asset classes?
o When will they recoup their initial investment?
o What is their expected return on investment?
o Is the investment merely cash or do they need to bring additional things to the table?
Once the primary objective of the plan is clear, the author will be able to ensure that the key requirements of the reader are met.
7. No Evidence of Real Demand
Another main area of interest when planning (linked to Point 4) is justifying the sales forecast or demand levels for the product or service. There are two main elements to forecasting – the use of facts and the use of subjective assessment/ judgment. However, no matter how unique a concept is, if the market is defined widely enough, it is likely that figures from alternative offerings (facts) can be used to help assess likely demand levels (judgment). The aim of sales forecasting is to come up with some revenue figures that can be considered to be credible in the wider context. While earlier we countenanced against excessively optimistic estimates, here we are delving deeper to ensure there is, in fact, real demand for the offering. Prospective investors will not want to invest at the very start where the risk is highest. Is there poof of concept in the guise of sales or firm orders? Have some sales occurred already? If not, why not?
Unless there is verifiable demand for the idea, the risks grow out of all proportion, particularly if the initial start-up or investment costs are high. Is it possible to test the idea in real time, either by identifying comparables in other geographic areas or analyzing Google search logs or selling via eBay? Again the business plan has to convincingly address the issue of demand rather than concentrate in isolation on 'the idea'. For some investors, firm orders or evidence of sales will be the level of proof required and allusions to proxies or comparables will not be sufficient. Conversely if there are already strong sales volumes of the product and the company is facing financing or resource constraints which have forced them to seek investment, then the power shifts from the investor to the plan author.
8. Business Plan Inconsistencies
A business plan needs to be consistent throughout as all the various strands are brought together into one single entity – the plan. If there are multiple authors of the plan the risks increase that certain inconsistencies will emerge. Similarly any presenters of the plan must be fully cognizant of all facts and stay ‘on script’ so as to ensure that a cohesive story is being told. The numbers must also be consistent with the broader content so that there are no contradictions between them.
9. Playing Down the Competition
There is always competition. Yet the number of times the phrase "there are no main competitors" appears in plans is considerable. No matter how unique the proposition, there will also be some other business competing for the same scarce resource, i.e., people’s money. While competitors may not always be obvious in product terms, competitors emerge upon assessment of the key needs the product fulfills. By broadening the definition of the market, substitute products emerge as ultimately all products and services serve to satiate a defined set of needs, be they physical or emotional. If competitors can not be identified then the search has simply not been diligent enough. Finally it is also important to consider the threat of entry. What will the competitive landscape look like in a few years? Are there significant barriers to entry, or is it likely that a successful entry will be followed by better-placed competitors with greater resources, etc. What will emerge as the bases for competition and will the company be well placed to compete on these bases?
10. Rushing the Output
The plan needs to be right the first time and the content needs to be accurate, clear and also without spelling or grammatical mistakes. More often than not business plans need to be completed by a certain date and hence the final stages can be rushed. Consequently, in many instances the final output does not do justice to the plan. Attention to detail at the end is vital, so it is important to ensure the following:
o The plan is printed on good quality paper and bound where appropriate.
o Tables and Charts have been edited to ensure they are formatted correctly.
o Content of the plan has been edited down to a digestible size (Addendum can be provided on request).
o Someone removed from the process has independently proofed the plan.
o If a presentation is part of the process, it should reflect the Executive Summary.
Summary and Conclusion
In summary, business plans generally have a purpose of communicating a course of action so as to garner support for the plan. Support inevitably means resources with the primary aim of the plan often being to secure financial investment. With this comes a certain obligation on the business plan author to ensure that the plan is prepared in as thorough a manner as is possible. By ensuring the above lessons are adhered to, the chances of the plan objectives being met increase substantially.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. For further information on business planning visit www.bplans.co.uk and www.paloalto.co.uk
Introduction
The importance of business planning is widely documented; however, guidance as to what constitutes good business planning is less clearly defined. This article aims to redress that imbalance by describing 10 of the most common mistakes that occur in business plans.
While the business-planning process is in itself a very worthwhile pursuit, most business plans are produced for a specific purpose. The plan is used as a means to convey an idea with a view to achieving a specific goal, e.g. securing funding. Hence the plan needs to be tailored with the audience in mind, and good knowledge of their requirements will help shape a winning plan. For example, the requirements a Venture Capitalist will have in assessing a plan seeking to secure a million-pound investment will differ considerably from those of a local bank manager who needs a plan to support a small-loan application. While the former will be primarily looking for capital growth, the latter will be more concerned with security. Regardless of the specific purpose of the plan, these following business plan lessons will apply.
1. Incredible Financial Projections
One of the key areas business plan readers will focus on will be 'the numbers'. Specifically, they will concentrate on the projected Income Statement or Profit & Loss. The fact that numbers are projected does not mean that those figures can be included without due rigour or process. They need to be credible, defensible and consistent. Of course forecasting is not an exact science, and the use of proxies can help the author ensure that the figures included are plausible and consistent with the story being told in the other areas of the business plan. The figures must also show an ability of the company to generate free cash flows so that the business can be run profitably while satisfactorily servicing their debts at the same time.
All costs should be recorded including salaries to owner managers who run the company. It is not credible to generate P&L projections where expenses such as salaries are omitted to demonstrate managerial commitment or to artificially reduce losses, etc. By the same token, no investor will be prepared to fund a business where the projected salary payments are excessive. While dealing with finances is not everyone's strong point, there has to be someone on the management team who is cognizant with the maths. A business plan will need to include everything from break-even projections to proposed return on investments to cash flow forecasts, and one of the key players will have to converse on these subjects in a convincing manner. They will also need to justify the numbers.
2. Lack of a Viable Opportunity
A business plan needs to not only describe an opportunity, it must also detail how the opportunity can be exploited profitably and demonstrate the company’s ability to deliver what is required. In recent years there has been a significant increase in plans that are inaccessible to the average reader because they are couched in technical jargon and unfamiliar terms. If the reader of the plan cannot fully grasp who the prospective customer is, how that customer will be targeted, and the prospective benefits from the proposed solution, the reader will not invest. In an increasingly time-pressed world, people crave simplicity. Many business plan recipients will only scrutinize the Executive Summary and the financials, using these as the decision points as to whether to read further or not. Hence it is of paramount importance that both the executive summary and the wider plan describes the opportunity in readily understood terms, such as:
o What is the issue or pain point?
o What is the proposed solution?
o What are the benefits of the solution?
o Why are these benefits compelling?
o Who will benefit the most from these?
Once these are detailed, there will be greater transparency regarding the viability, or otherwise, of the proposed opportunity in terms of the company's ability to profitably serve the target market.
3. No Clear Route to Market
All opportunities are only prospective ones without evidence that the target market can be accessed profitably. Many entrepreneurs are inherently product focused, concentrating their energies on 'the idea' to the exclusion of many other important elements such as how they intend to access their customer base. The growth in popularity of the Internet has certainly helped niche producers find geographically dispersed customers, making many more ideas commercially viable. However, it does not come without its challenges, as creating awareness online is both costly and intensely competitive. The business plan must include a comprehensive and credible analysis of how the company intends to secure access to their target market in a cost-effective manner. The low cost and barriers to entry for websites have resulted in the creation of hundreds of thousands of sites. Ensuring that a site stands out from the crowd is easier said than done. Knowledge of who the customer is and how they buy is very important, but identifying them and accessing them on an individual basis is much more challenging and costly.
4. Overestimation of Revenues
Another key element of the plan will relate to the size and value of the opportunity. Does the business plan describe a small local business-to-business opportunity with limited scalability/ return or is it a concept with widespread or even potentially global consumer appeal? While the description of the market opportunity will undoubtedly be couched in positive terms, an obvious danger relates to the innate optimism of entrepreneurs and their tendency to exaggerate every business opportunity. Hence the general interpretation of sales forecasts is that they will be optimistic but not excessively optimistic. Admittedly what constitutes 'excessive' is subjective, but the numbers will need to be justified and if it emerges that the figures are mere fantasy, the author will lose all credibility and it will significantly undermine any confidence the potential investor might have in the plan.
It is important to guard against this by use of proxies and conservatism when it comes to sales projections. Placing some rigor around the process of deriving credible revenue figures also serves the entrepreneur well by enhancing their awareness of some of the key drivers for revenue growth in their business. It will also help them to produce a more plausible business plan and will ensure that the author is confidently able to answer questions regarding the market opportunity – questions that will top the list of any prospective investor or bank manager. Statements like "the Market is worth £10 billion and growing and we are focusing on capturing just 1% of it" set off alarm bells in the minds of prospective investors.
A more appropriate method is to calculate the number of customers the business intends to capture and their average revenues. These two inputs are easier to calculate and also to justify in a wider discussion. For example, a restaurant can easily use comparables from other restaurants as reference points to calculate average spend per person. Hence the focus turns to predicting the number of covers likely per week which can then be scaled up to obtain projected monthly revenue figures.
5. Lack of Appreciation of the Importance of Good Cash Flow Management
A critical subtlety of any new business is the ability of the entrepreneur to understand the differences between cash and profits and to accept the fact that insolvency is probably the most significant threat to a business. Many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due).
Good cash flow management is vital when businesses pursue investment opportunities where there are significant cash flows out, in advance of the cash flows coming in. The start-up phase of a business is an obvious time when cash flow is under stress with uncertain income streams sitting alongside a raft of certain and often overdue bills. This tension is exacerbated if there are delays to the income streams, e.g. if a restaurant fails to open on time.
Once up and running a company can bank the income immediately if they are a 'cash-only' business; however, if they sell on credit, they receive the cash in the future and hence may need to pay some of their own expenses before that income hits their account. This will put a further strain on the company's solvency. A well structured business plan needs to reflect reality with likely losses in the first months of trading being expected and with financing provisions, e.g. overdraft limits, being put in place in advance of the predictable cash squeeze. A contingency figure should also be added as it is important to leave breathing space for the unexpected costs and overspends that always occur when least expected.
6. No Clear Objective
What is the main purpose of the plan? If it is to seek investment in the business, it is important to clearly describe the investment opportunity. As mentioned previously there is a tendency amongst entrepreneurs to focus myopically on 'the product' or 'the idea'. This is where they expend most energy but alas that is only one part of the process. While the plan describes the concept in detail, it must also address the purpose of the plan. If it is to secure investment, one needs to recognize that investing is the investor's area of expertise and they will be seeking an appropriate risk/ return for their investment. Their primary interest will quickly shift from the product once they 'get it' and 'like it' to assessing the ability of the company (including management) to generate free cash flows to enable the business to grow while also returning cash to them. They will also seek to understand:
o Why they would be better off investing in this business rather than leaving money in other asset classes?
o When will they recoup their initial investment?
o What is their expected return on investment?
o Is the investment merely cash or do they need to bring additional things to the table?
Once the primary objective of the plan is clear, the author will be able to ensure that the key requirements of the reader are met.
7. No Evidence of Real Demand
Another main area of interest when planning (linked to Point 4) is justifying the sales forecast or demand levels for the product or service. There are two main elements to forecasting – the use of facts and the use of subjective assessment/ judgment. However, no matter how unique a concept is, if the market is defined widely enough, it is likely that figures from alternative offerings (facts) can be used to help assess likely demand levels (judgment). The aim of sales forecasting is to come up with some revenue figures that can be considered to be credible in the wider context. While earlier we countenanced against excessively optimistic estimates, here we are delving deeper to ensure there is, in fact, real demand for the offering. Prospective investors will not want to invest at the very start where the risk is highest. Is there poof of concept in the guise of sales or firm orders? Have some sales occurred already? If not, why not?
Unless there is verifiable demand for the idea, the risks grow out of all proportion, particularly if the initial start-up or investment costs are high. Is it possible to test the idea in real time, either by identifying comparables in other geographic areas or analyzing Google search logs or selling via eBay? Again the business plan has to convincingly address the issue of demand rather than concentrate in isolation on 'the idea'. For some investors, firm orders or evidence of sales will be the level of proof required and allusions to proxies or comparables will not be sufficient. Conversely if there are already strong sales volumes of the product and the company is facing financing or resource constraints which have forced them to seek investment, then the power shifts from the investor to the plan author.
8. Business Plan Inconsistencies
A business plan needs to be consistent throughout as all the various strands are brought together into one single entity – the plan. If there are multiple authors of the plan the risks increase that certain inconsistencies will emerge. Similarly any presenters of the plan must be fully cognizant of all facts and stay ‘on script’ so as to ensure that a cohesive story is being told. The numbers must also be consistent with the broader content so that there are no contradictions between them.
9. Playing Down the Competition
There is always competition. Yet the number of times the phrase "there are no main competitors" appears in plans is considerable. No matter how unique the proposition, there will also be some other business competing for the same scarce resource, i.e., people’s money. While competitors may not always be obvious in product terms, competitors emerge upon assessment of the key needs the product fulfills. By broadening the definition of the market, substitute products emerge as ultimately all products and services serve to satiate a defined set of needs, be they physical or emotional. If competitors can not be identified then the search has simply not been diligent enough. Finally it is also important to consider the threat of entry. What will the competitive landscape look like in a few years? Are there significant barriers to entry, or is it likely that a successful entry will be followed by better-placed competitors with greater resources, etc. What will emerge as the bases for competition and will the company be well placed to compete on these bases?
10. Rushing the Output
The plan needs to be right the first time and the content needs to be accurate, clear and also without spelling or grammatical mistakes. More often than not business plans need to be completed by a certain date and hence the final stages can be rushed. Consequently, in many instances the final output does not do justice to the plan. Attention to detail at the end is vital, so it is important to ensure the following:
o The plan is printed on good quality paper and bound where appropriate.
o Tables and Charts have been edited to ensure they are formatted correctly.
o Content of the plan has been edited down to a digestible size (Addendum can be provided on request).
o Someone removed from the process has independently proofed the plan.
o If a presentation is part of the process, it should reflect the Executive Summary.
Summary and Conclusion
In summary, business plans generally have a purpose of communicating a course of action so as to garner support for the plan. Support inevitably means resources with the primary aim of the plan often being to secure financial investment. With this comes a certain obligation on the business plan author to ensure that the plan is prepared in as thorough a manner as is possible. By ensuring the above lessons are adhered to, the chances of the plan objectives being met increase substantially.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2007. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. For further information on business planning visit www.bplans.co.uk and www.paloalto.co.uk
posted by BusinessPlanner at
9/07/2006
3 Comments
Thursday, June 01, 2006
Who wants to be an entrepreneur?
1. Introduction
In a world increasingly affected by globalisation, increased competitiveness and maturing products, the need for creativity and entrepreneurship has never been greater. Luckily, the attractions of becoming an entrepreneur have never been greater either, especially since a shift from a predominantly manufacturing- to a service-based economy has lowered the cost and barriers to entry for entrepreneurs. The British government has moved entrepreneurship (and support for it) to the top of their domestic agenda. Meanwhile, entrepreneurship has become a hot topic, with conferences, exhibitions, and even TV shows, such as “Risking it All” and “The Dragons’ Den” evidencing the popularity. But while the environmental conditions may be attractive, entrepreneurs still need a workable idea that is commercially viable. This article endeavours to assist wannabe entrepreneurs (wantrepreneurs) in coming up with ‘the plan’ so as to enable them to finally take the plunge into the world of entrepreneurship.
2. The Environment
Before deciding on ‘the idea’ it is worth assessing the landscape thoroughly so as to consider the broader context and the impact that trends or changes may have on it, i.e. whether it is future-proof, etc. There are three main trends to look at – global trends, national trends and local trends.
Keeping up to date with global developments via The Economist or the BBC will certainly give you a good base to start from. However, to gain a more in-depth understanding of global changes from a business opportunity perspective, websites such as Trendwatching (www.trendwatching.com) and Springwise (www.springwise.com) are very useful. In an increasingly homogeneous global economy, it is obvious that what works well in one market can easily transplant into other ones with the minimum of localisation. Between them, these sites give a more in-depth insight into some of the latest emergent business ideas and can be considered in tandem with macro trends affecting us all, like environmental challenges, the increasing cost of oil, volatile currencies, etc.
On a national level, there are a number of trends that we are all familiar with in the UK: increased ubiquity of broadband access, the fact that as a population we are aging, increased expected life spans, growth in the number of single-person households, and so on. The key with all of these trends is to focus on the opportunities associated with these demographic shifts and trends. For example, it is safe to predict that an aging population will increase the demand for certain goods and services, such as home-help services, medication, nursing, and glasses, and that the growth in single-person households will increase the demand for convenience food products and more economical white goods such as smaller fridges and washer/ dryer all in one’s.
On a local level, there are also numerous resources we can use in assessing the local environment and, in particular, the likely demand for our goods or services. Websites such as ACORN (www.caci.co.uk/acorn) and UpMyStreet (www.upmystreet.com) provide extensive free demographic data about areas based on UK postcodes. These enable you to build up profiles of the local population and are ideal when you are looking to set up a shop or service to serve the local community specifically. Of course when it comes to local opportunities, these need to be assessed in conjunction with plenty of ‘on-the-ground’ research: walking in and around the area targeted for the new enterprise.
3. The Options
The Big Idea
Whilst the majority of new businesses are replicas of existing businesses, some entrepreneurs will strive to create something completely unique. One of the most powerful things the Internet enables us to do is to search for solutions to problems more efficiently than ever before. Goods and services are designed to fulfill the needs of people. In other words, goods and services solve people’s problems; and while your proposed solution may be unique, it is likely the problem is not. Hence, an Internet search focusing on the problem your solution is trying to address is likely to highlight substitutes and competitors, which may all help to shape the nascent idea.
Using the Internet, you can often assess the potential demand for your service by gauging the number of people who search for a term related to the problem that your good or service satisfies. For example, our company, Palo Alto Software, produces business-planning software. One way people find us online is by searching for help for their problem: their need to write a “business plan”. Using the Key Word Assistant on Overture, we can find out how many times “business plan” and other related terms were searched for in the previous month.
This data can help us assess whether “business planning” is a significantly more popular term than “business plan”? If so, we might consider renaming our product “Business Planning Pro” instead of “Business Plan Pro”.
On another level, the phrase “dog grooming London” had only 81 searches in April 2006, according to the Overture search, so the U.S. affection for this service clearly hasn’t reached UK shores yet. Half of the searches were for dog grooming courses, so any thoughts of opening a new dog grooming shop in London would need some more clear-cut evidence of demand, given the preliminary findings of this rough and ready search. By analysing the search terms for your idea with these tools, you can assess potential market demand, get ideas for appropriate names for your good or service, and use the findings as one reference point in your analysis.
If the intention is to set up a local service, then familiarity with the local area will be as powerful a resource as any Internet search method. The lesson here is also that ‘entrepreneurs’ don’t necessarily have to be inventors, merely people who can spot opportunities to do something better or more cheaply than others, or provide a local version of a business run elsewhere. Having decided upon the good or service to be provided, a wantrapreneur must research the opportunity to ensure familiarity with some of the key issues. You can search for sample plans from similar ideas on www.bplans.co.uk or look at Business Opportunity Profiles from Cobweb at www.scavenger.net to help you understand your specific business. Savvy entrepreneurs will back up online research with face-to-face conversations with potential customers and other business owners. Finally, an extensive search of Google is recommended to ensure that your market research is as up to date as possible.
The ‘Bricks to Clicks’ Model
You can also do an analysis of incumbents in the various markets of your potential interest to see if there are inefficiencies or unnecessary costs in the process of getting the goods to the consumers. It is pretty obvious that the Internet has enabled a more efficient means to showcase product wares to a much larger audience (and also a more geographically dispersed one). It is also clear that more traditional retailers with high street stores carry a much higher cost burden. Providing you can configure your business accordingly, there are opportunities here to undercut the traditional behemoths. An online store can take the place of the high street store in many instances and offer the same good or service at a much more competitive price level. Glasses Direct (www.glassesdirect.com) is one such example, where the young British entrepreneur James Murray Wells decided to set up his own online optician as a direct response to the prohibitive cost he believed he paid for glasses while he was a student. Without the overheads of the likes of Specsavers, Glasses Direct is able to undercut the standard retail prices by significant margins while still being very profitable.
The growing rental market for DVDs, spearheaded by the likes of Amazon and ScreenSelect, is similarly targeting the long-standing high street players such as Blockbuster. They both recognise that ultimately, the consumer just wants to be able to choose a DVD and play it, and this can be facilitated without a costly store infrastructure. If you think something is bad value and you do some research regarding the industry structure, competition, distribution, product components and so on, you may stumble across a brand new idea for improving the overall offering by replacing the most costly elements, such as the overhead on a high street store.
Finally, a popular way to dip your toes into entrepreneurship is to set up an eBay shop. eBay even has a facility called ‘eBay pulse’ http://pulse.ebay.co.uk/ which can help you to assess the potential demand for any product by enabling you to see what the hot products selling on eBay are. No prizes for guessing that PlayStations, DVDs and iPods are amongst the most popular.
The Branch Out Strategy
While setting up in business always contains elements of risk, there are ways to reduce the levels of inherent risk. The most obvious one is to branch out into an area in which you have previously worked. For example, a Manchester-based nursery school teacher deciding to open her own nursery in Cheshire is a considerably less risky proposition than if she moved overseas to France to open up a boulangerie. Indeed, branching out is how many people start up. After spending a number of years in a particular industry or firm as an apprentice, they decide to go it alone. This is undoubtedly a sensible strategy, particularly as you are a subject matter expert who understands the market and you may have an existing base of clients who will follow you to your new company.
The Acquisition
Another option to consider is acquiring an existing business. The key here is to have a clear idea of the sorts of industries and geographic locations in which you want to work before you start. Sites such as those run by BusinessesforSale.com (http://uk.businessesforsale.com ) have a database of 1,000s of businesses that are for sale and that may be of interest. While not a low-cost method of going it alone, there are advantages in that the business will already be trading and there will be a record of how it is performing and whether there is room for improvement. One of the critical elements in this option is setting a value for the business. Valuations for a particular business can vary wildly and there is no generally agreed method for valuing a business objectively, although there are several standard calculations which are often used in conjunction. The key challenges are assessing the current cash-generation capability of the business, and realistically assessing its future capabilities. In short, acquiring a business is best left to the more sophisticated entrepreneur who has a team in situ looking for undervalued businesses with strong growth potential.
The Franchise
According to the British Franchise Association (http://www.thebfa.org/whatis.asp ), “Business format franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.”
Franchising is an increasingly popular route to going it alone. As with the acquisition option, franchising requires that you have capital to invest and are looking to introduce an existing ‘winning formula’ into your own area. There are a number of franchise websites and magazines, such as whichfranchise.com (www.whichfranchise.com) which contain further details regarding the benefits of franchising. Again, once you have decided that franchising is something you want to pursue, you’ll need to decide in what industry you want to franchise. Past personal experiences and franchise coverage in your area should play a role in the decision.
The Add On
By observing successful products and growing trends it is also possible to piggyback on the successes of others at very low cost. As the saying goes, “success breeds success”. For example, when I searched for “iPod” on eBay (May 2006) I found in excess of 50,000 ‘solutions’. While the iPod has been a phenomenon in its own right, it has also resulted in major successes for the likes of Belkin, which creates cables, cases and chargers for the iPod, Bose, which produces speakers, and Griffin Technology, which produces iPod accessories such as the iTrip, an FM transmitter. In other words, one new product can create a whole raft of opportunities in ancillary products and services. Is there a new product that you can exploit with a complementary device that makes the whole experience of using the core product a better one?
Although the above examples may relate to larger companies, there are also thousands of smaller eBay-based companies benefiting from identifying the success of one item and offering all optional complements to enhance the user’s experience. Indeed, even eBay itself has been the target for one such company, iSold It (www.isolditonline.co.uk ). iSold It is a nationwide chain of eBay drop-off stores that makes it easy for anyone to sell their wares on eBay. The lesson is simple. Once something becomes successful, it is likely to spawn a myriad of resulting opportunities. The key is to identify them before anyone else does.
4. The Plan
Having decided upon the business you want to pursue, the next challenge is to create a business plan to exploit the opportunity you have identified. Creating the business plan is a very important part of the process as it forces you to consider the opportunity in a holistic manner. You need to give some thought to everything from sourcing raw materials, to competitor analysis, to pricing, to distribution. If you are replicating an existing business, the scale of research required is not as rigorous, as there will be some existing players which you can study. If completely pioneering an idea, your task will be more difficult, but the rewards will be potentially greater. Regardless, a plan will force you to do a thorough analysis of a range of issues and commit them to paper. There are extensive resources available at www.bplans.co.uk to aid you in the business planning process.
5. The Implementation
Finally, once the plan has been drafted, you must put it into action. Perhaps it will be used to secure funds, or communicate an idea more widely. Either way, to bring the idea to fruition, the plan must be turned into concrete actions. Create a small team with clearly defined roles, and undertake the less attractive components of starting up, such as legal obligations, red tape, etc. Again, help is at hand with websites such as www.startups.co.uk , www.bytestart.co.uk and start-up books from the likes of Pearson.
6. Conclusion
The path to entrepreneurship is varied, with a range of different options available to the ‘wantrepreneur’, all with different risk/return profiles. While never easy, entrepreneurship is rewarding and the Internet has reduced the risk of starting up even further. The key to a successful start-up is to prepare a robust business plan and get a solid team in place to put it into action. While the odds are stacked against all start-ups, you can improve your chances by carefully managing certain key areas. Cash flow is the life blood of any company, and all entrepreneurs must guard against the dangers of insolvency by careful forecasting and appropriate financing. A second, related area that is often the cause of failure is over-estimating demand for the new product or service. All forecasts predicting demand levels should be conservative with a capital ‘c’. That vital characteristic of all entrepreneurs, ‘excessive optimism’, needs to be reined in while revenue predictions are being discussed.
In a world increasingly affected by globalisation, increased competitiveness and maturing products, the need for creativity and entrepreneurship has never been greater. Luckily, the attractions of becoming an entrepreneur have never been greater either, especially since a shift from a predominantly manufacturing- to a service-based economy has lowered the cost and barriers to entry for entrepreneurs. The British government has moved entrepreneurship (and support for it) to the top of their domestic agenda. Meanwhile, entrepreneurship has become a hot topic, with conferences, exhibitions, and even TV shows, such as “Risking it All” and “The Dragons’ Den” evidencing the popularity. But while the environmental conditions may be attractive, entrepreneurs still need a workable idea that is commercially viable. This article endeavours to assist wannabe entrepreneurs (wantrepreneurs) in coming up with ‘the plan’ so as to enable them to finally take the plunge into the world of entrepreneurship.
2. The Environment
Before deciding on ‘the idea’ it is worth assessing the landscape thoroughly so as to consider the broader context and the impact that trends or changes may have on it, i.e. whether it is future-proof, etc. There are three main trends to look at – global trends, national trends and local trends.
Keeping up to date with global developments via The Economist or the BBC will certainly give you a good base to start from. However, to gain a more in-depth understanding of global changes from a business opportunity perspective, websites such as Trendwatching (www.trendwatching.com) and Springwise (www.springwise.com) are very useful. In an increasingly homogeneous global economy, it is obvious that what works well in one market can easily transplant into other ones with the minimum of localisation. Between them, these sites give a more in-depth insight into some of the latest emergent business ideas and can be considered in tandem with macro trends affecting us all, like environmental challenges, the increasing cost of oil, volatile currencies, etc.
On a national level, there are a number of trends that we are all familiar with in the UK: increased ubiquity of broadband access, the fact that as a population we are aging, increased expected life spans, growth in the number of single-person households, and so on. The key with all of these trends is to focus on the opportunities associated with these demographic shifts and trends. For example, it is safe to predict that an aging population will increase the demand for certain goods and services, such as home-help services, medication, nursing, and glasses, and that the growth in single-person households will increase the demand for convenience food products and more economical white goods such as smaller fridges and washer/ dryer all in one’s.
On a local level, there are also numerous resources we can use in assessing the local environment and, in particular, the likely demand for our goods or services. Websites such as ACORN (www.caci.co.uk/acorn) and UpMyStreet (www.upmystreet.com) provide extensive free demographic data about areas based on UK postcodes. These enable you to build up profiles of the local population and are ideal when you are looking to set up a shop or service to serve the local community specifically. Of course when it comes to local opportunities, these need to be assessed in conjunction with plenty of ‘on-the-ground’ research: walking in and around the area targeted for the new enterprise.
3. The Options
The Big Idea
Whilst the majority of new businesses are replicas of existing businesses, some entrepreneurs will strive to create something completely unique. One of the most powerful things the Internet enables us to do is to search for solutions to problems more efficiently than ever before. Goods and services are designed to fulfill the needs of people. In other words, goods and services solve people’s problems; and while your proposed solution may be unique, it is likely the problem is not. Hence, an Internet search focusing on the problem your solution is trying to address is likely to highlight substitutes and competitors, which may all help to shape the nascent idea.
Using the Internet, you can often assess the potential demand for your service by gauging the number of people who search for a term related to the problem that your good or service satisfies. For example, our company, Palo Alto Software, produces business-planning software. One way people find us online is by searching for help for their problem: their need to write a “business plan”. Using the Key Word Assistant on Overture, we can find out how many times “business plan” and other related terms were searched for in the previous month.
This data can help us assess whether “business planning” is a significantly more popular term than “business plan”? If so, we might consider renaming our product “Business Planning Pro” instead of “Business Plan Pro”.
On another level, the phrase “dog grooming London” had only 81 searches in April 2006, according to the Overture search, so the U.S. affection for this service clearly hasn’t reached UK shores yet. Half of the searches were for dog grooming courses, so any thoughts of opening a new dog grooming shop in London would need some more clear-cut evidence of demand, given the preliminary findings of this rough and ready search. By analysing the search terms for your idea with these tools, you can assess potential market demand, get ideas for appropriate names for your good or service, and use the findings as one reference point in your analysis.
If the intention is to set up a local service, then familiarity with the local area will be as powerful a resource as any Internet search method. The lesson here is also that ‘entrepreneurs’ don’t necessarily have to be inventors, merely people who can spot opportunities to do something better or more cheaply than others, or provide a local version of a business run elsewhere. Having decided upon the good or service to be provided, a wantrapreneur must research the opportunity to ensure familiarity with some of the key issues. You can search for sample plans from similar ideas on www.bplans.co.uk or look at Business Opportunity Profiles from Cobweb at www.scavenger.net to help you understand your specific business. Savvy entrepreneurs will back up online research with face-to-face conversations with potential customers and other business owners. Finally, an extensive search of Google is recommended to ensure that your market research is as up to date as possible.
The ‘Bricks to Clicks’ Model
You can also do an analysis of incumbents in the various markets of your potential interest to see if there are inefficiencies or unnecessary costs in the process of getting the goods to the consumers. It is pretty obvious that the Internet has enabled a more efficient means to showcase product wares to a much larger audience (and also a more geographically dispersed one). It is also clear that more traditional retailers with high street stores carry a much higher cost burden. Providing you can configure your business accordingly, there are opportunities here to undercut the traditional behemoths. An online store can take the place of the high street store in many instances and offer the same good or service at a much more competitive price level. Glasses Direct (www.glassesdirect.com) is one such example, where the young British entrepreneur James Murray Wells decided to set up his own online optician as a direct response to the prohibitive cost he believed he paid for glasses while he was a student. Without the overheads of the likes of Specsavers, Glasses Direct is able to undercut the standard retail prices by significant margins while still being very profitable.
The growing rental market for DVDs, spearheaded by the likes of Amazon and ScreenSelect, is similarly targeting the long-standing high street players such as Blockbuster. They both recognise that ultimately, the consumer just wants to be able to choose a DVD and play it, and this can be facilitated without a costly store infrastructure. If you think something is bad value and you do some research regarding the industry structure, competition, distribution, product components and so on, you may stumble across a brand new idea for improving the overall offering by replacing the most costly elements, such as the overhead on a high street store.
Finally, a popular way to dip your toes into entrepreneurship is to set up an eBay shop. eBay even has a facility called ‘eBay pulse’ http://pulse.ebay.co.uk/ which can help you to assess the potential demand for any product by enabling you to see what the hot products selling on eBay are. No prizes for guessing that PlayStations, DVDs and iPods are amongst the most popular.
The Branch Out Strategy
While setting up in business always contains elements of risk, there are ways to reduce the levels of inherent risk. The most obvious one is to branch out into an area in which you have previously worked. For example, a Manchester-based nursery school teacher deciding to open her own nursery in Cheshire is a considerably less risky proposition than if she moved overseas to France to open up a boulangerie. Indeed, branching out is how many people start up. After spending a number of years in a particular industry or firm as an apprentice, they decide to go it alone. This is undoubtedly a sensible strategy, particularly as you are a subject matter expert who understands the market and you may have an existing base of clients who will follow you to your new company.
The Acquisition
Another option to consider is acquiring an existing business. The key here is to have a clear idea of the sorts of industries and geographic locations in which you want to work before you start. Sites such as those run by BusinessesforSale.com (http://uk.businessesforsale.com ) have a database of 1,000s of businesses that are for sale and that may be of interest. While not a low-cost method of going it alone, there are advantages in that the business will already be trading and there will be a record of how it is performing and whether there is room for improvement. One of the critical elements in this option is setting a value for the business. Valuations for a particular business can vary wildly and there is no generally agreed method for valuing a business objectively, although there are several standard calculations which are often used in conjunction. The key challenges are assessing the current cash-generation capability of the business, and realistically assessing its future capabilities. In short, acquiring a business is best left to the more sophisticated entrepreneur who has a team in situ looking for undervalued businesses with strong growth potential.
The Franchise
According to the British Franchise Association (http://www.thebfa.org/whatis.asp ), “Business format franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.”
Franchising is an increasingly popular route to going it alone. As with the acquisition option, franchising requires that you have capital to invest and are looking to introduce an existing ‘winning formula’ into your own area. There are a number of franchise websites and magazines, such as whichfranchise.com (www.whichfranchise.com) which contain further details regarding the benefits of franchising. Again, once you have decided that franchising is something you want to pursue, you’ll need to decide in what industry you want to franchise. Past personal experiences and franchise coverage in your area should play a role in the decision.
The Add On
By observing successful products and growing trends it is also possible to piggyback on the successes of others at very low cost. As the saying goes, “success breeds success”. For example, when I searched for “iPod” on eBay (May 2006) I found in excess of 50,000 ‘solutions’. While the iPod has been a phenomenon in its own right, it has also resulted in major successes for the likes of Belkin, which creates cables, cases and chargers for the iPod, Bose, which produces speakers, and Griffin Technology, which produces iPod accessories such as the iTrip, an FM transmitter. In other words, one new product can create a whole raft of opportunities in ancillary products and services. Is there a new product that you can exploit with a complementary device that makes the whole experience of using the core product a better one?
Although the above examples may relate to larger companies, there are also thousands of smaller eBay-based companies benefiting from identifying the success of one item and offering all optional complements to enhance the user’s experience. Indeed, even eBay itself has been the target for one such company, iSold It (www.isolditonline.co.uk ). iSold It is a nationwide chain of eBay drop-off stores that makes it easy for anyone to sell their wares on eBay. The lesson is simple. Once something becomes successful, it is likely to spawn a myriad of resulting opportunities. The key is to identify them before anyone else does.
4. The Plan
Having decided upon the business you want to pursue, the next challenge is to create a business plan to exploit the opportunity you have identified. Creating the business plan is a very important part of the process as it forces you to consider the opportunity in a holistic manner. You need to give some thought to everything from sourcing raw materials, to competitor analysis, to pricing, to distribution. If you are replicating an existing business, the scale of research required is not as rigorous, as there will be some existing players which you can study. If completely pioneering an idea, your task will be more difficult, but the rewards will be potentially greater. Regardless, a plan will force you to do a thorough analysis of a range of issues and commit them to paper. There are extensive resources available at www.bplans.co.uk to aid you in the business planning process.
5. The Implementation
Finally, once the plan has been drafted, you must put it into action. Perhaps it will be used to secure funds, or communicate an idea more widely. Either way, to bring the idea to fruition, the plan must be turned into concrete actions. Create a small team with clearly defined roles, and undertake the less attractive components of starting up, such as legal obligations, red tape, etc. Again, help is at hand with websites such as www.startups.co.uk , www.bytestart.co.uk and start-up books from the likes of Pearson.
6. Conclusion
The path to entrepreneurship is varied, with a range of different options available to the ‘wantrepreneur’, all with different risk/return profiles. While never easy, entrepreneurship is rewarding and the Internet has reduced the risk of starting up even further. The key to a successful start-up is to prepare a robust business plan and get a solid team in place to put it into action. While the odds are stacked against all start-ups, you can improve your chances by carefully managing certain key areas. Cash flow is the life blood of any company, and all entrepreneurs must guard against the dangers of insolvency by careful forecasting and appropriate financing. A second, related area that is often the cause of failure is over-estimating demand for the new product or service. All forecasts predicting demand levels should be conservative with a capital ‘c’. That vital characteristic of all entrepreneurs, ‘excessive optimism’, needs to be reined in while revenue predictions are being discussed.
posted by BusinessPlanner at
6/01/2006
0 Comments
Monday, April 24, 2006
Top 10 Resources to help you write a winning Business Plan
Writing a business plan is one of the most important things an entrepreneur must do when starting a new business. However, writing a compelling business plan is easier said than done, particularly when time can be so precious. This article outlines the key resources available to UK entrepreneurs when preparing a business plan. Use them for assistance with the writing of the plan, as well as for understanding the implications of certain business decisions you make in the process, such as those regarding corporate structure, sources of funding, and more.
1. Business Plan Pro® UK Software[1]
Business Plan Pro is the best selling business-planning software available for several reasons. It is easy to use, saves time, and has over 500 sample plans to get you started. It also provides a structure whereby you can complete a plan in a methodical manner, while enabling you to benefit from a helping hand at every step.
Where: Business Plan Pro 2006 is available from Amazon, PC World and http://www.paloalto.co.uk/
Cost: RRP is only £99.99 for the Standard version and £159.99 for the Premier.
2. Business Plan Competitions
Numerous business-planning competitions are taking place in the UK at any given time. These competitions test a wide range of skills that are often neglected by entrepreneurs. By producing a credible business plan and presenting your case persuasively, you will significantly enhance your ability to secure funding. These competitions are an invaluable resource enabling you to road test your business plan in a safe environment before submitting the plan to potential investors.
The main advantages of submitting a business plan to a competition include:
o Tap into Increased Support for Entrepreneurs in the UK
o Obtain Critical Independent Analysis of Your Business Plan
o Gain Access to Mentors and Networking Opportunities
o Improve key Transferable Skills, e.g. Presentation Skills
o Enhance Your Understanding of What Investors Want
For further information visit www.bplans.co.uk/write_a_business_plan/article.cfm/285
Where: A list of some of the main UK business plan competitions is available here:
www.paloalto.co.uk/academic_sales/business_plan_competitions.cfm
Cost: Entry costs are usually negligible, although some competitions limit entry to students or locals.
3. Start-up Websites
There are a number of start–up websites that can help you understand what needs to be done and how. These websites normally consist of a mix of articles and relevant products and services from third-party vendors. Most also have specific business-planning sections to help you with your plan. The following three well-known UK sites can give you some further insights into the building blocks that make up a winning business plan.
Where: http://www.startups.co.uk/ , http://www.clearlybusiness.com/, http://www.bytestart.co.uk/
Cost: Free
4. Government Sites
There are also a number of government websites designed to assist people in starting a business which can also help you in writing a business plan.
· Companies House http://www.companieshouse.gov.uk
The website contains information on incorporation procedures. It also provides annual accounts of companies which can be purchased so as to enable you to assess the financials of comparable companies.
· HMRC http://www.hmrc.gov.uk/
HM Revenue and Customs has an easily accessible site where you can access information and calculators relating to employing people, paying VAT, paying Corporation Tax, and so on.
Where: As above
Cost: Free
5. Local Advisor
Despite the availability of a range of different online resources, there are occasions when professional advice is highly recommended. While there is undoubtedly a trade off (professional advice usually costs), there are some decisions that should be made only after consultation with professionals, such as choosing the legal structure of the company. While local accountants are a natural starting point, there are also a number of other bodies that can provide information and advice, and can point you in the right direction for more complex concerns.
· Business Link http://www.businesslink.gov.uk/
Business Link provides information, advice and support to help people start, maintain and grow their business. It is an excellent site with some really great sections and clear sign posting to additional resources. There is also a postcode search facility so you can track down your nearest local advisor.
· National Federation of Enterprise Agencies (NFEA) http://www.nfea.com/
The National Federation of Enterprise Agencies (NFEA) is the membership body for Local Enterprise Agencies, and other similar organisations. It forms a network of independent, not-for-profit local agencies that provide a comprehensive range of free services including a facility to search for your local agency.
Where: As above
Cost: Free
6. Funding Websites
Entrepreneurs need to consider their financing at the start-up stage and most will look to outside help to assist them in financing the start-up phase. A good understanding of the implications of the various sources of funding is important, not least with respect to the various obligations arising under each. At its most basic, the sources of funding are either debt based or equity based, and each class confers certain obligations on the recipient of the funds. If the business plan is used to secure funding it will need to clearly outline the benefits to the investor, and the terms of investment, as they’ll be seeking to assess their risks, as well as the ability of the firm to generate free cash flows. Outside of the traditional sources of finance, it is also worth exploring the following sites, which explain the merits of grant or VC funding. Obviously the conditions for securing either are fairly strict, so both sites will indicate which issues you should consider, as well as information on the availability of the funding.
· J4B http://www.j4b.co.uk/
The site allows quick and simple searches of the j4b database of business grants and loans — the most comprehensive database of its kind in the UK.
· BVCA http://www.bvca.co.uk/
This is the website for the British Venture Capital Association (BVCA) which has over 170 full members and contains a directory that enables users to search for a local member.
7. Bplans
Bplans.co.uk contains extensive business-planning resources and is also owned by Palo Alto Software, makers of Business Plan Pro 2006. There is an extensive back catalogue of articles, with new additions a regular occurrence. It also contains a number of free sample business plans, some calculators. and links to a range of appropriate resources.
Where: http://www.bplans.co.uk/
Cost: Free
8. Scavenger by Cobweb
Scavenger reports are essential reading material for anyone starting up a business in the UK. The Business Opportunity Profiles are reports on specific industries and are updated frequently. With over 800 reports in total, the range includes everything from ‘Children’s Day Nursery’ profiles to ‘Coffee Shop’ profiles to a profile on ‘Complementary Therapy’.
Where: http://www.scavenger.net
Cost: Individual reports cost around £5.
9. Sites with Demographic Data
There are also numerous resources you can use in assessing likely demand for your goods or services. Websites such as www.caci.co.uk/acorn and http://www.upmystreet.com/ provide extensive free demographic data about areas based on UK postcode searches. These enable you to build up profiles of the local population and are ideal when you are looking to set up a shop to serve the local community specifically. If you want to consider setting up overseas, then websites such as www.cia.gov/cia/publications/factbook/ give an excellent insight into various local conditions in advance of undertaking more detailed localised research.
Where: As above
Cost: Free
10. Your Local Library
Finally, libraries can be excellent resources, helping you access information from a host of disparate sources. They can be particularly useful for researching hard-to-access data relating to markets and potential suppliers.
The Business and IP Centre at the British Library www.bl.uk/bipc/ is just one example of a new resource specifically created to support entrepreneurs in the UK. It enables users to access a range of databases including Amadeus, Economist Intelligence, Mintel, Datamonitor, One Source, LexisNexis, Dialog and the Complete Business Reference Adviser (COBRA).
Alternatively, your local library may stock one of Pearson’s excellent titles on starting a business and writing a business plan. www.pearson-books.com/bplans
Summary and Conclusion
Writing a winning business plan can take time and effort. However, utilizing the above resources should make the job a lot easier and help you to gain a thorough understanding of the fundamentals that underpin every successful business. Good luck!
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2006. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on business planning visit http://www.bplans.co.uk and http://www.paloalto.co.uk
[1] I have an admission to make at the outset – I work for Palo Alto Software, makers of Business Plan Pro. However, rather than omit this resource on the grounds of impartiality I have decided that this would be doing the reader a disservice, given it is one of the most powerful resources available—hence its inclusion.
1. Business Plan Pro® UK Software[1]
Business Plan Pro is the best selling business-planning software available for several reasons. It is easy to use, saves time, and has over 500 sample plans to get you started. It also provides a structure whereby you can complete a plan in a methodical manner, while enabling you to benefit from a helping hand at every step.
Where: Business Plan Pro 2006 is available from Amazon, PC World and http://www.paloalto.co.uk/
Cost: RRP is only £99.99 for the Standard version and £159.99 for the Premier.
2. Business Plan Competitions
Numerous business-planning competitions are taking place in the UK at any given time. These competitions test a wide range of skills that are often neglected by entrepreneurs. By producing a credible business plan and presenting your case persuasively, you will significantly enhance your ability to secure funding. These competitions are an invaluable resource enabling you to road test your business plan in a safe environment before submitting the plan to potential investors.
The main advantages of submitting a business plan to a competition include:
o Tap into Increased Support for Entrepreneurs in the UK
o Obtain Critical Independent Analysis of Your Business Plan
o Gain Access to Mentors and Networking Opportunities
o Improve key Transferable Skills, e.g. Presentation Skills
o Enhance Your Understanding of What Investors Want
For further information visit www.bplans.co.uk/write_a_business_plan/article.cfm/285
Where: A list of some of the main UK business plan competitions is available here:
www.paloalto.co.uk/academic_sales/business_plan_competitions.cfm
Cost: Entry costs are usually negligible, although some competitions limit entry to students or locals.
3. Start-up Websites
There are a number of start–up websites that can help you understand what needs to be done and how. These websites normally consist of a mix of articles and relevant products and services from third-party vendors. Most also have specific business-planning sections to help you with your plan. The following three well-known UK sites can give you some further insights into the building blocks that make up a winning business plan.
Where: http://www.startups.co.uk/ , http://www.clearlybusiness.com/, http://www.bytestart.co.uk/
Cost: Free
4. Government Sites
There are also a number of government websites designed to assist people in starting a business which can also help you in writing a business plan.
· Companies House http://www.companieshouse.gov.uk
The website contains information on incorporation procedures. It also provides annual accounts of companies which can be purchased so as to enable you to assess the financials of comparable companies.
· HMRC http://www.hmrc.gov.uk/
HM Revenue and Customs has an easily accessible site where you can access information and calculators relating to employing people, paying VAT, paying Corporation Tax, and so on.
Where: As above
Cost: Free
5. Local Advisor
Despite the availability of a range of different online resources, there are occasions when professional advice is highly recommended. While there is undoubtedly a trade off (professional advice usually costs), there are some decisions that should be made only after consultation with professionals, such as choosing the legal structure of the company. While local accountants are a natural starting point, there are also a number of other bodies that can provide information and advice, and can point you in the right direction for more complex concerns.
· Business Link http://www.businesslink.gov.uk/
Business Link provides information, advice and support to help people start, maintain and grow their business. It is an excellent site with some really great sections and clear sign posting to additional resources. There is also a postcode search facility so you can track down your nearest local advisor.
· National Federation of Enterprise Agencies (NFEA) http://www.nfea.com/
The National Federation of Enterprise Agencies (NFEA) is the membership body for Local Enterprise Agencies, and other similar organisations. It forms a network of independent, not-for-profit local agencies that provide a comprehensive range of free services including a facility to search for your local agency.
Where: As above
Cost: Free
6. Funding Websites
Entrepreneurs need to consider their financing at the start-up stage and most will look to outside help to assist them in financing the start-up phase. A good understanding of the implications of the various sources of funding is important, not least with respect to the various obligations arising under each. At its most basic, the sources of funding are either debt based or equity based, and each class confers certain obligations on the recipient of the funds. If the business plan is used to secure funding it will need to clearly outline the benefits to the investor, and the terms of investment, as they’ll be seeking to assess their risks, as well as the ability of the firm to generate free cash flows. Outside of the traditional sources of finance, it is also worth exploring the following sites, which explain the merits of grant or VC funding. Obviously the conditions for securing either are fairly strict, so both sites will indicate which issues you should consider, as well as information on the availability of the funding.
· J4B http://www.j4b.co.uk/
The site allows quick and simple searches of the j4b database of business grants and loans — the most comprehensive database of its kind in the UK.
· BVCA http://www.bvca.co.uk/
This is the website for the British Venture Capital Association (BVCA) which has over 170 full members and contains a directory that enables users to search for a local member.
7. Bplans
Bplans.co.uk contains extensive business-planning resources and is also owned by Palo Alto Software, makers of Business Plan Pro 2006. There is an extensive back catalogue of articles, with new additions a regular occurrence. It also contains a number of free sample business plans, some calculators. and links to a range of appropriate resources.
Where: http://www.bplans.co.uk/
Cost: Free
8. Scavenger by Cobweb
Scavenger reports are essential reading material for anyone starting up a business in the UK. The Business Opportunity Profiles are reports on specific industries and are updated frequently. With over 800 reports in total, the range includes everything from ‘Children’s Day Nursery’ profiles to ‘Coffee Shop’ profiles to a profile on ‘Complementary Therapy’.
Where: http://www.scavenger.net
Cost: Individual reports cost around £5.
9. Sites with Demographic Data
There are also numerous resources you can use in assessing likely demand for your goods or services. Websites such as www.caci.co.uk/acorn and http://www.upmystreet.com/ provide extensive free demographic data about areas based on UK postcode searches. These enable you to build up profiles of the local population and are ideal when you are looking to set up a shop to serve the local community specifically. If you want to consider setting up overseas, then websites such as www.cia.gov/cia/publications/factbook/ give an excellent insight into various local conditions in advance of undertaking more detailed localised research.
Where: As above
Cost: Free
10. Your Local Library
Finally, libraries can be excellent resources, helping you access information from a host of disparate sources. They can be particularly useful for researching hard-to-access data relating to markets and potential suppliers.
The Business and IP Centre at the British Library www.bl.uk/bipc/ is just one example of a new resource specifically created to support entrepreneurs in the UK. It enables users to access a range of databases including Amadeus, Economist Intelligence, Mintel, Datamonitor, One Source, LexisNexis, Dialog and the Complete Business Reference Adviser (COBRA).
Alternatively, your local library may stock one of Pearson’s excellent titles on starting a business and writing a business plan. www.pearson-books.com/bplans
Summary and Conclusion
Writing a winning business plan can take time and effort. However, utilizing the above resources should make the job a lot easier and help you to gain a thorough understanding of the fundamentals that underpin every successful business. Good luck!
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2006. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. For further information on business planning visit http://www.bplans.co.uk and http://www.paloalto.co.uk
[1] I have an admission to make at the outset – I work for Palo Alto Software, makers of Business Plan Pro. However, rather than omit this resource on the grounds of impartiality I have decided that this would be doing the reader a disservice, given it is one of the most powerful resources available—hence its inclusion.
posted by BusinessPlanner at
4/24/2006
0 Comments
Monday, April 10, 2006
Why business planning is not just for start-up's
One of the greatest misconceptions about business planning is that a business plan is useful only for start-ups. While start-up companies are indeed one significant segment of business planners, business planning is being utilized by an increasing number of companies as a means to manage growth better, to ensure new ideas have been assessed for commercial viability, and to value a business on exit.
Secondly, the importance of the business planning process is often under-emphasized relative to the primary focus on the final output, the business plan. The very process of producing a business plan enables management to take a holistic view of their organization. It helps them give due consideration to the various factors that mesh together to create the opportunity they are seeking to explore, as well as the resources required and the key drivers needed for success. This article aims to justify a more expansive remit for the business plan, by highlighting a number of key areas where its application is of considerable benefit for all companies.
1. Intrapreneurship
Companies are increasingly encouraging employees to create new growth opportunities as competition intensifies in their core (mature) business lines. Mature invariably means competitive, so the focus on growth opportunities is via innovation and creativity, especially in emergent areas. The term intrapreneurship thus refers to “inside entrepreneurs”; where intrepreneurs personify the key characteristics of an entrepreneur, but do so within the company bounds.
Intrapreneurship is not new - 3i, a venture capital/equity investment company, has been one obvious practitioner for many years - and its application of intrapreneurship has helped to spawn a number of new products. Google, a company renowned for innovation, operates a 70 percent rule, whereby employees are expected to spend 70 percent of their time on the core business, 20 percent on related projects, and 10 percent on unrelated new business opportunities. While the generation of new ideas is paramount, ensuring their commercial viability is of critical concern, and writing a business plan is one key way to assess the merits of an innovative proposal in a more rigorous fashion. The plan can thus be produced for an internal opportunity as if it were a stand-alone entity, with the author being required to detail both the opportunity and the resource implications of pursuing it.
2. Managing Performance
A business plan can also be used as a management tool to assess ‘actual results’ against ‘planned results’. Using these figures in conjunction with an assessment of year-on-year performance can ensure that managers reflect on performance not just based on the previous year’s achievements, but also in relation to the original planned figures. This enables managers to analyse deviations from plan so as to understand what figures are materially different from the planned ones and what drivers shaped the disparities. It also helps to shift the focus away from solely historic comparisons –instead the manager is tasked with planning for the year ahead and hence there is an agreed goal up front and greater transparency on a month by month basis when ‘actuals’ can be compared with ‘planned’.
Such analysis helps to enhance a manager’s understanding of the changes that have impacted recent performance. If planned results and actual results are considered on a monthly basis, this analysis may also help the manager take remedial action in a more urgent time frame.
3. Planning Strategically
The process of business planning is in itself a worthwhile pursuit as it forces the authors to remove themselves from the day-to-day tactical/responsive mode in which many managers operate. The planning process forces any manager to consider the future. In particular, they must take into account the resources at the company’s disposal and plan to maximise the return on capital, as limited by the wider context.
For many companies, a desire on the one hand to maximise the return from the existing product/service revenue stream, needs to be balanced on the other by a desire to develop new additional revenue streams. By putting a business case together for a particular course of action, a manager ensures that the proposal is financially robust (i.e., worthy of pursuit), that the goals are kept in focus and that resources are allocated accordingly. Hence, a business plan can support a company’s focus on exploiting a particular market segment, creating a new product, promoting a new use for a product, etc. Once the plan is committed to paper, it is easier to ensure that there is consensus, ownership of the plan, and a breakdown of tasks, milestones and deliverables to help achieve the goals set out in the plan.
4. Preparing for a Future Exit
At some point in the life cycle of a business, the founders/investors may decide that they want to cash out of the business. The exit strategy will typically focus on extracting the highest value possible from the sale. An up-to-date business plan detailing the opportunity for new buyers will support any valuations put on the business by its current owners.
Before a company reaches the point of sale, it is important to get everything ready by making sure that all historic accounts, cash flow statements and business plans are up-to-date. It is generally accepted that thorough preparation for a sale, well in advance of the sale date, improves internal management focus, aids performance, and ultimately serves to increase the final valuation.
Once management identifies the key drivers for a typical potential acquirer, a business plan can be put in place to focus the minds of employees and ensure that the sale value is maximized. For example, if the general bases for valuation for the industry are focused more on cash generation than profit, a company can drive short term revenues by undercutting sales prices of competitors by selling at cost + 5%. While such activity may not be sustainable in the long run, it can serve to help cash flow when a sale is being considered and prospective acquirers are reviewing performance. While some managers are not that comfortable with planning and projections, the preparation of a thorough business plan plays a vital role in extracting the maximum value from a sale.
5. Supporting a Company Valuation at Sale Time
Ascertaining the value of a company is a difficult and ultimately subjective process whereby the sellers are naturally looking to maximise their return and the buyers to minimise their outlay. The bases for valuation are numerous and tend to be the subject of much negotiation, with various multiples being considered as both parties attempt to come up with an agreed price.
The primary aim of the acquirer will usually be to assess the future income generation capability of the company. As a result, negotiations will usually include attempts to agree on an ‘earnings multiple’, a common method of valuation which focuses on the ability of the firm to generate revenue and cash. These earnings multiples can vary but are correlated with perceived risk, so they tend to go down for smaller companies, where the perceived risk is often higher. Conversely, a higher earnings multiple is likely when a company has strong historic growth figures and a robust business plan. This will usually lead to a higher price.
This analysis of earnings potential will typically be assessed in conjunction with an analysis of historic financial data that is already available, e.g. audited Income Statement/Profit and Loss. This valuation will be used to assess the likely return on investment, and the preparation of a sound business plan valuation document can save both time and money. At the very least, a business plan will identify the key drivers of growth, assess future conditions, and provide a structure to support a more accurate estimate for the value of the company.
6. Conclusion
Business planning is a vital process for any business seeking to effectively focus resources to maximise future value, be it for exit or for maximising return. Much like the value of a map is only truly appreciated when one is driving a long distance and gets lost, the benefits of a business plan may only be truly appreciated when the journey has begun, and different events conspire to alter the company’s path along that desired route.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2006. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. If you would like further information on business planning visit www.bplans.co.uk and www.paloalto.co.uk
Secondly, the importance of the business planning process is often under-emphasized relative to the primary focus on the final output, the business plan. The very process of producing a business plan enables management to take a holistic view of their organization. It helps them give due consideration to the various factors that mesh together to create the opportunity they are seeking to explore, as well as the resources required and the key drivers needed for success. This article aims to justify a more expansive remit for the business plan, by highlighting a number of key areas where its application is of considerable benefit for all companies.
1. Intrapreneurship
Companies are increasingly encouraging employees to create new growth opportunities as competition intensifies in their core (mature) business lines. Mature invariably means competitive, so the focus on growth opportunities is via innovation and creativity, especially in emergent areas. The term intrapreneurship thus refers to “inside entrepreneurs”; where intrepreneurs personify the key characteristics of an entrepreneur, but do so within the company bounds.
Intrapreneurship is not new - 3i, a venture capital/equity investment company, has been one obvious practitioner for many years - and its application of intrapreneurship has helped to spawn a number of new products. Google, a company renowned for innovation, operates a 70 percent rule, whereby employees are expected to spend 70 percent of their time on the core business, 20 percent on related projects, and 10 percent on unrelated new business opportunities. While the generation of new ideas is paramount, ensuring their commercial viability is of critical concern, and writing a business plan is one key way to assess the merits of an innovative proposal in a more rigorous fashion. The plan can thus be produced for an internal opportunity as if it were a stand-alone entity, with the author being required to detail both the opportunity and the resource implications of pursuing it.
2. Managing Performance
A business plan can also be used as a management tool to assess ‘actual results’ against ‘planned results’. Using these figures in conjunction with an assessment of year-on-year performance can ensure that managers reflect on performance not just based on the previous year’s achievements, but also in relation to the original planned figures. This enables managers to analyse deviations from plan so as to understand what figures are materially different from the planned ones and what drivers shaped the disparities. It also helps to shift the focus away from solely historic comparisons –instead the manager is tasked with planning for the year ahead and hence there is an agreed goal up front and greater transparency on a month by month basis when ‘actuals’ can be compared with ‘planned’.
Such analysis helps to enhance a manager’s understanding of the changes that have impacted recent performance. If planned results and actual results are considered on a monthly basis, this analysis may also help the manager take remedial action in a more urgent time frame.
3. Planning Strategically
The process of business planning is in itself a worthwhile pursuit as it forces the authors to remove themselves from the day-to-day tactical/responsive mode in which many managers operate. The planning process forces any manager to consider the future. In particular, they must take into account the resources at the company’s disposal and plan to maximise the return on capital, as limited by the wider context.
For many companies, a desire on the one hand to maximise the return from the existing product/service revenue stream, needs to be balanced on the other by a desire to develop new additional revenue streams. By putting a business case together for a particular course of action, a manager ensures that the proposal is financially robust (i.e., worthy of pursuit), that the goals are kept in focus and that resources are allocated accordingly. Hence, a business plan can support a company’s focus on exploiting a particular market segment, creating a new product, promoting a new use for a product, etc. Once the plan is committed to paper, it is easier to ensure that there is consensus, ownership of the plan, and a breakdown of tasks, milestones and deliverables to help achieve the goals set out in the plan.
4. Preparing for a Future Exit
At some point in the life cycle of a business, the founders/investors may decide that they want to cash out of the business. The exit strategy will typically focus on extracting the highest value possible from the sale. An up-to-date business plan detailing the opportunity for new buyers will support any valuations put on the business by its current owners.
Before a company reaches the point of sale, it is important to get everything ready by making sure that all historic accounts, cash flow statements and business plans are up-to-date. It is generally accepted that thorough preparation for a sale, well in advance of the sale date, improves internal management focus, aids performance, and ultimately serves to increase the final valuation.
Once management identifies the key drivers for a typical potential acquirer, a business plan can be put in place to focus the minds of employees and ensure that the sale value is maximized. For example, if the general bases for valuation for the industry are focused more on cash generation than profit, a company can drive short term revenues by undercutting sales prices of competitors by selling at cost + 5%. While such activity may not be sustainable in the long run, it can serve to help cash flow when a sale is being considered and prospective acquirers are reviewing performance. While some managers are not that comfortable with planning and projections, the preparation of a thorough business plan plays a vital role in extracting the maximum value from a sale.
5. Supporting a Company Valuation at Sale Time
Ascertaining the value of a company is a difficult and ultimately subjective process whereby the sellers are naturally looking to maximise their return and the buyers to minimise their outlay. The bases for valuation are numerous and tend to be the subject of much negotiation, with various multiples being considered as both parties attempt to come up with an agreed price.
The primary aim of the acquirer will usually be to assess the future income generation capability of the company. As a result, negotiations will usually include attempts to agree on an ‘earnings multiple’, a common method of valuation which focuses on the ability of the firm to generate revenue and cash. These earnings multiples can vary but are correlated with perceived risk, so they tend to go down for smaller companies, where the perceived risk is often higher. Conversely, a higher earnings multiple is likely when a company has strong historic growth figures and a robust business plan. This will usually lead to a higher price.
This analysis of earnings potential will typically be assessed in conjunction with an analysis of historic financial data that is already available, e.g. audited Income Statement/Profit and Loss. This valuation will be used to assess the likely return on investment, and the preparation of a sound business plan valuation document can save both time and money. At the very least, a business plan will identify the key drivers of growth, assess future conditions, and provide a structure to support a more accurate estimate for the value of the company.
6. Conclusion
Business planning is a vital process for any business seeking to effectively focus resources to maximise future value, be it for exit or for maximising return. Much like the value of a map is only truly appreciated when one is driving a long distance and gets lost, the benefits of a business plan may only be truly appreciated when the journey has begun, and different events conspire to alter the company’s path along that desired route.
Alan Gleeson is the Managing Director of Palo Alto Software, Ltd., creators of Business Plan Pro® 2006. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. If you would like further information on business planning visit www.bplans.co.uk and www.paloalto.co.uk
posted by BusinessPlanner at
4/10/2006
0 Comments
Tuesday, January 24, 2006
Forecasting Sales
When it comes to starting a business, entrepreneurs face a number of challenges, not least the issue of whether there is actually a demand for their particular product or service. The more unique the concept, the greater the challenge in predicting future sales levels. However, as this article will show, there are a number of methods that can assist you in making better educated guesses when forecasting sales for your goods or service.
Forecasting
Since time immemorial, people have sought to predict the future. Until the emergence of the relatively modern concept of ‘risk’ and the development of probability theory in the 17th century, predictions about the future had traditionally been the preserve of soothsayers such as Nostradamus. However, with probability theory, mathematicians demonstrated that one could use past indicators to make educated guesses as to the expected outcome of a particular set of events, e.g., the roll of a die. All these years later, and despite our progress, we still lack the ability to predict the future. Nevertheless, by considering various risks and probabilities, we can aim to understand some likely future (sales) scenarios to a greater degree.
Naturally, if you run an existing business, you will have a trading history and will be able to use this data to make more informed decisions with regards to future possible outcomes. If you generate strong cash flows and have a stable cost base, you can assess available investment options with more confidence. On the other hand, if you are just about to start up, you obviously lack ‘history’, and while you can make some assessment of the initial monthly outgoings (particularly fixed costs), the real challenge is to accurately predict the likely sales revenues. Breaking revenue down into its constituents (the product price times the quantity sold) gives entrepreneurs the two key figures they need to consider to begin forecasting. Price can be determined by the entrepreneur, while quantity is the variable that is most difficult to predict (notwithstanding the correlation between price and demand).
Why is forecasting important?
Firstly, cash is the lifeblood of any business and is needed to fund working capital to enable a business to run effectively. A large number of business expenses and investments in assets need to be paid for up front, and these obviously have to be paid for out of capital. These outgoings occur against a backdrop of uncertain sales levels and often a delay in receiving cash on those sales (exacerbated if your sales are predominantly on credit). Consequently, companies need to prepare cash flow forecasts to assess what the level of the cash shortfall will be, so they can obtain financial assistance in advance, such as bank overdrafts or loans. Companies can be profitable on paper yet run the risk of falling insolvent if they do not meet their obligations as they fall due. Hence, it is necessary to understand the nuances of cash flow for your particular business from Day 1, as good cash flow management plays a large role in ensuring continued solvency.
Of additional importance, investments in businesses are based on the ability of the firm to generate free cash flows, so as to reward the investor for taking a risk. The amount of cash generated and its timing is of particular interest to investors, who face an array of investment options with various risk / return tradeoffs. Typically, investors will look to review a business plan before they invest and they will pay particular attention to the predicted sales levels and cash generation capability of the company (as detailed in the cash flow forecast). Hence, these two factors underline why accurate forecasting is of vital importance to those setting up in business.
What forces affect demand?
At the start-up stage it is difficult to assess with certainty what you believe the revenue will be for Month 1. Once you have one month of trading, then of course you can use that month’s figures to forecast likely sales levels in subsequent months. As a result, when you draw up your business plan initially, you need to assess the landscape and try to estimate a range for the predicted sales levels.
The following represents a list of some questions about the key external and internal determinants of demand. Answers to these questions will support the entrepreneur in coming up with plausible figures for Month 1/ Year 1.
The Proposition
Does the product or service fulfill an existing need? Has it been produced such that each key feature and resultant benefit is attractive to a commercially viable market segment?
Pricing
Is the product priced at a level that will attract a sufficient number of customers? Standard demand and supply rules would dictate that the lower the price, the higher the demand for a product. What price level maximizes profitability?
Macro Environmental Trends
How is the product correlated to the external environment? Does demand drop significantly when the economy is struggling? Does the product attract extraordinary taxes or tariffs, e.g., alcohol and tobacco? Will a growing environmental consciousness affect demand levels?
Competition
What is the competitive landscape like, i.e., are there barriers to entry/ attractive alternatives? What is the turnover of a close competitor and how profitable are they?
Seasonal Characteristics
Is there any seasonality or cyclicality element to the product or service?
Substitutes
Are there many attractive substitutes? What are the main bases for differentiation in the market, i.e., price, features, service, etc.?
The Market
What is the market demand for the product category (i.e., the size of the prize you are chasing)? Is it growing or is it stagnant?
Marketing
Is there a marketing plan in place? What are the key marketing activities? Is there sufficient budget to effectively target various segments?
Route to Market
Has the company secured a ‘route to market’? How will customers access the product?
Having assessed the various determinants of demand, it is now a little easier to hone in on a plausible range of sales forecasts for the months and years ahead.
How do you make a sales forecast?
Once you have considered the context, you are now in a more informed position to consider potential revenue figures. There are two main elements to forecasting – the use of facts and the use of subjective assessment / judgment. Given the uncertainty, you can aim to identify a range for the sales predictions depending on your assessment of the potential impact on sales of specific conditions, be they environmental or company-specific (or a combination of both). There are numerous determinants of demand, ranging from the performance of the overall economy to whether there is any appetite (demand) for your particular product or service. You need to consider which of these is likely to have the biggest impact on your offering. Ideally, you should be able to obtain a Profit and Loss / Income Statement (facts) for a competitor and you could use that as a reference point to assess likely demand levels for your company (judgment).
Looking for comparable indicators for a service
Not every new company has a directly comparable competitor whose accounts can be scrutinized for sales data. However, no matter how unique your concept is, if you define your market widely enough, it is likely that you can use figures from alternative offerings (facts) to help you assess likely demand levels (judgment). For example, when the Millennium Dome was being launched in London in 2000, they initially targeted 12 million visitors in Year 1. While the actual visitor figures reached an impressive 6.5 million, the huge shortfall in numbers meant that it was not even close to breaking even / financial viability and it ultimately failed as a venture. Had senior management looked closely at visitor figures for the UK’s other top paying attractions, they would have found that Alton Towers was top at 2.65 million visitors closely followed by Madam Tussaud’s and the Tower of London. These proxies would have given them a clearer sense of the range in numbers and a more conservative target within this range would have resulted in a very different proposition / investment structure from Day 1.
If you are looking to set up a local service such as a coffee shop, there are also numerous resources you can use in assessing likely demand. Websites such as www.caci.co.uk/acorn/ and www.upmystreet.com/ enable you to get extensive free demographic data about areas based on post code searches. Profiles available from http://www.scavenger.net/ offer an insight into a specific industry and its outlook. Finally, if you want to consider setting up overseas, then websites such as www.cia.gov/cia/publications/factbook/ give an excellent insight into various local conditions in advance of undertaking more localised research.
The facts from these sources need to be backed up by judgment. If, for example, you were looking to open a coffee shop on the Fulham Road, London, you would start with a list of likely costs, ranging from rent through to set-up, etc. Once you had an estimate of the costs, you would then look to work out the revenues. To do this, you could park a car outside of a particular target location for the shop and count “footfall” for the day. You could also obtain average spend per customer, estimate a percentage conversion rate from the footfall and use these figures to assess whether you believed you could break even by relying on passing trade.
You could also drive around the neighbourhood looking at competitive coffee shops and their locations. Hence, by using a number of different data points, you can now make a more informed decision on the financial viability of a proposed coffee shop in Fulham. If you want to get more scientific, you could assess how consumption of coffee is correlated with the economy (i.e., will less be consumed in a down turn) and also whether you needed to stock alternatives to boost average spend e.g. fair trade coffee /non coffee-based alternatives or food. As mentioned previously, there is no exact number – you are merely striving to produce a good educated guess, i.e., a plausible figure that is within a range for a typical company in that field.
Product Indicators
There are a number of different methods to try to assess sales levels for a new product. Firstly, by assessing the key benefits of the product, it is possible to understand the core need being fulfilled. This will then help inform you of a category of complements or substitute products it belongs to. More scientific approaches include George Day’s top down and bottom up approaches[1] which seek to assess demand from different sides. The top down approach seeks to drill down from the total population to a final market segment, whereas the bottom up approach looks to generalize from the consumption of individual customers.
Alongside these approaches are more subtle ones, for example, an assessment of demand based upon data from disparate sources such as the Internet. Here are two common tools:
“Key Word Assistant” from Overture
http://inventory.uk.overture.com/d/searchinventory/suggestion/ is one such tool. It enables you to enter a search term for your product and it returns the number of searches that were undertaken on that term in the previous month. Invariably searches are attempts to resolve problems or satisfy needs, so the results can give an indication as to likely demand levels.
“eBay Pulse”
“eBay Pulse” relies on a similar concept http://pulse.ebay.co.uk/ as it gives an insight into top sellers from the eBay market place. Again, this can help you assess demand for a particular product, determine the category it is best suited to, and even a naming convention (when assessed in conjunction with the Key Word Assistant).
How do you make a more accurate sales forecast?
Having assessed the wider environmental conditions and considered the internal decisions regarding the proposition, it is possible to make more accurate predictions for Month 1. After that, it is a case of extrapolating into the future using a growth factor and flexing for seasonality or cyclical trends. Notwithstanding the difficulties in forecasting for a start-up, the real benefits accrue after a year of successful trading. Once there is an historical record for a year of trading, it is then possible to plan with more certainty through the use of more scientific methods, such as trend analysis and comparison with variables. For example, an ice cream vendor could compare sales of ice cream with an obvious variable – weather temperature – in order to assess the correlation between the two variables. Once a sales forecast has been made, it can then be used for budgeting, allocating resources, managing cash flow, and as a basis to secure investment.
Conclusion
The aim of sales forecasting is to come up with some revenue figures that can be considered to be credible in the wider context. As illustrated above, forecasting is not an exact science but a mix of fact-based analysis and judgment. Placing some rigor around the process of deriving credible revenue figures also serves the entrepreneur by enhancing their awareness of some of the key drivers for revenue growth in their business. It will also help them to produce a more plausible business plan, and ensure that the author is confidently able to answer questions regarding the market opportunity – questions that will top the list of any prospective investor or bank manager.
[1] Day, G. (1980) "Strategic Market Analysis: Top-down and bottom-up approaches", working paper #80-105, Marketing Science Institute, Cambridge, Mass. 1980.
Forecasting
Since time immemorial, people have sought to predict the future. Until the emergence of the relatively modern concept of ‘risk’ and the development of probability theory in the 17th century, predictions about the future had traditionally been the preserve of soothsayers such as Nostradamus. However, with probability theory, mathematicians demonstrated that one could use past indicators to make educated guesses as to the expected outcome of a particular set of events, e.g., the roll of a die. All these years later, and despite our progress, we still lack the ability to predict the future. Nevertheless, by considering various risks and probabilities, we can aim to understand some likely future (sales) scenarios to a greater degree.
Naturally, if you run an existing business, you will have a trading history and will be able to use this data to make more informed decisions with regards to future possible outcomes. If you generate strong cash flows and have a stable cost base, you can assess available investment options with more confidence. On the other hand, if you are just about to start up, you obviously lack ‘history’, and while you can make some assessment of the initial monthly outgoings (particularly fixed costs), the real challenge is to accurately predict the likely sales revenues. Breaking revenue down into its constituents (the product price times the quantity sold) gives entrepreneurs the two key figures they need to consider to begin forecasting. Price can be determined by the entrepreneur, while quantity is the variable that is most difficult to predict (notwithstanding the correlation between price and demand).
Why is forecasting important?
Firstly, cash is the lifeblood of any business and is needed to fund working capital to enable a business to run effectively. A large number of business expenses and investments in assets need to be paid for up front, and these obviously have to be paid for out of capital. These outgoings occur against a backdrop of uncertain sales levels and often a delay in receiving cash on those sales (exacerbated if your sales are predominantly on credit). Consequently, companies need to prepare cash flow forecasts to assess what the level of the cash shortfall will be, so they can obtain financial assistance in advance, such as bank overdrafts or loans. Companies can be profitable on paper yet run the risk of falling insolvent if they do not meet their obligations as they fall due. Hence, it is necessary to understand the nuances of cash flow for your particular business from Day 1, as good cash flow management plays a large role in ensuring continued solvency.
Of additional importance, investments in businesses are based on the ability of the firm to generate free cash flows, so as to reward the investor for taking a risk. The amount of cash generated and its timing is of particular interest to investors, who face an array of investment options with various risk / return tradeoffs. Typically, investors will look to review a business plan before they invest and they will pay particular attention to the predicted sales levels and cash generation capability of the company (as detailed in the cash flow forecast). Hence, these two factors underline why accurate forecasting is of vital importance to those setting up in business.
What forces affect demand?
At the start-up stage it is difficult to assess with certainty what you believe the revenue will be for Month 1. Once you have one month of trading, then of course you can use that month’s figures to forecast likely sales levels in subsequent months. As a result, when you draw up your business plan initially, you need to assess the landscape and try to estimate a range for the predicted sales levels.
The following represents a list of some questions about the key external and internal determinants of demand. Answers to these questions will support the entrepreneur in coming up with plausible figures for Month 1/ Year 1.
The Proposition
Does the product or service fulfill an existing need? Has it been produced such that each key feature and resultant benefit is attractive to a commercially viable market segment?
Pricing
Is the product priced at a level that will attract a sufficient number of customers? Standard demand and supply rules would dictate that the lower the price, the higher the demand for a product. What price level maximizes profitability?
Macro Environmental Trends
How is the product correlated to the external environment? Does demand drop significantly when the economy is struggling? Does the product attract extraordinary taxes or tariffs, e.g., alcohol and tobacco? Will a growing environmental consciousness affect demand levels?
Competition
What is the competitive landscape like, i.e., are there barriers to entry/ attractive alternatives? What is the turnover of a close competitor and how profitable are they?
Seasonal Characteristics
Is there any seasonality or cyclicality element to the product or service?
Substitutes
Are there many attractive substitutes? What are the main bases for differentiation in the market, i.e., price, features, service, etc.?
The Market
What is the market demand for the product category (i.e., the size of the prize you are chasing)? Is it growing or is it stagnant?
Marketing
Is there a marketing plan in place? What are the key marketing activities? Is there sufficient budget to effectively target various segments?
Route to Market
Has the company secured a ‘route to market’? How will customers access the product?
Having assessed the various determinants of demand, it is now a little easier to hone in on a plausible range of sales forecasts for the months and years ahead.
How do you make a sales forecast?
Once you have considered the context, you are now in a more informed position to consider potential revenue figures. There are two main elements to forecasting – the use of facts and the use of subjective assessment / judgment. Given the uncertainty, you can aim to identify a range for the sales predictions depending on your assessment of the potential impact on sales of specific conditions, be they environmental or company-specific (or a combination of both). There are numerous determinants of demand, ranging from the performance of the overall economy to whether there is any appetite (demand) for your particular product or service. You need to consider which of these is likely to have the biggest impact on your offering. Ideally, you should be able to obtain a Profit and Loss / Income Statement (facts) for a competitor and you could use that as a reference point to assess likely demand levels for your company (judgment).
Looking for comparable indicators for a service
Not every new company has a directly comparable competitor whose accounts can be scrutinized for sales data. However, no matter how unique your concept is, if you define your market widely enough, it is likely that you can use figures from alternative offerings (facts) to help you assess likely demand levels (judgment). For example, when the Millennium Dome was being launched in London in 2000, they initially targeted 12 million visitors in Year 1. While the actual visitor figures reached an impressive 6.5 million, the huge shortfall in numbers meant that it was not even close to breaking even / financial viability and it ultimately failed as a venture. Had senior management looked closely at visitor figures for the UK’s other top paying attractions, they would have found that Alton Towers was top at 2.65 million visitors closely followed by Madam Tussaud’s and the Tower of London. These proxies would have given them a clearer sense of the range in numbers and a more conservative target within this range would have resulted in a very different proposition / investment structure from Day 1.
If you are looking to set up a local service such as a coffee shop, there are also numerous resources you can use in assessing likely demand. Websites such as www.caci.co.uk/acorn/ and www.upmystreet.com/ enable you to get extensive free demographic data about areas based on post code searches. Profiles available from http://www.scavenger.net/ offer an insight into a specific industry and its outlook. Finally, if you want to consider setting up overseas, then websites such as www.cia.gov/cia/publications/factbook/ give an excellent insight into various local conditions in advance of undertaking more localised research.
The facts from these sources need to be backed up by judgment. If, for example, you were looking to open a coffee shop on the Fulham Road, London, you would start with a list of likely costs, ranging from rent through to set-up, etc. Once you had an estimate of the costs, you would then look to work out the revenues. To do this, you could park a car outside of a particular target location for the shop and count “footfall” for the day. You could also obtain average spend per customer, estimate a percentage conversion rate from the footfall and use these figures to assess whether you believed you could break even by relying on passing trade.
You could also drive around the neighbourhood looking at competitive coffee shops and their locations. Hence, by using a number of different data points, you can now make a more informed decision on the financial viability of a proposed coffee shop in Fulham. If you want to get more scientific, you could assess how consumption of coffee is correlated with the economy (i.e., will less be consumed in a down turn) and also whether you needed to stock alternatives to boost average spend e.g. fair trade coffee /non coffee-based alternatives or food. As mentioned previously, there is no exact number – you are merely striving to produce a good educated guess, i.e., a plausible figure that is within a range for a typical company in that field.
Product Indicators
There are a number of different methods to try to assess sales levels for a new product. Firstly, by assessing the key benefits of the product, it is possible to understand the core need being fulfilled. This will then help inform you of a category of complements or substitute products it belongs to. More scientific approaches include George Day’s top down and bottom up approaches[1] which seek to assess demand from different sides. The top down approach seeks to drill down from the total population to a final market segment, whereas the bottom up approach looks to generalize from the consumption of individual customers.
Alongside these approaches are more subtle ones, for example, an assessment of demand based upon data from disparate sources such as the Internet. Here are two common tools:
“Key Word Assistant” from Overture
http://inventory.uk.overture.com/d/searchinventory/suggestion/ is one such tool. It enables you to enter a search term for your product and it returns the number of searches that were undertaken on that term in the previous month. Invariably searches are attempts to resolve problems or satisfy needs, so the results can give an indication as to likely demand levels.
“eBay Pulse”
“eBay Pulse” relies on a similar concept http://pulse.ebay.co.uk/ as it gives an insight into top sellers from the eBay market place. Again, this can help you assess demand for a particular product, determine the category it is best suited to, and even a naming convention (when assessed in conjunction with the Key Word Assistant).
How do you make a more accurate sales forecast?
Having assessed the wider environmental conditions and considered the internal decisions regarding the proposition, it is possible to make more accurate predictions for Month 1. After that, it is a case of extrapolating into the future using a growth factor and flexing for seasonality or cyclical trends. Notwithstanding the difficulties in forecasting for a start-up, the real benefits accrue after a year of successful trading. Once there is an historical record for a year of trading, it is then possible to plan with more certainty through the use of more scientific methods, such as trend analysis and comparison with variables. For example, an ice cream vendor could compare sales of ice cream with an obvious variable – weather temperature – in order to assess the correlation between the two variables. Once a sales forecast has been made, it can then be used for budgeting, allocating resources, managing cash flow, and as a basis to secure investment.
Conclusion
The aim of sales forecasting is to come up with some revenue figures that can be considered to be credible in the wider context. As illustrated above, forecasting is not an exact science but a mix of fact-based analysis and judgment. Placing some rigor around the process of deriving credible revenue figures also serves the entrepreneur by enhancing their awareness of some of the key drivers for revenue growth in their business. It will also help them to produce a more plausible business plan, and ensure that the author is confidently able to answer questions regarding the market opportunity – questions that will top the list of any prospective investor or bank manager.
[1] Day, G. (1980) "Strategic Market Analysis: Top-down and bottom-up approaches", working paper #80-105, Marketing Science Institute, Cambridge, Mass. 1980.
posted by BusinessPlanner at
1/24/2006
0 Comments
Tuesday, November 08, 2005
Why you should enter a business plan competition.
There has never been a better time to enter a business plan competition. However, despite a number of new competitions being launched in the UK in recent months, for many entrepreneurs, the rewards have not seemed sufficiently tempting to submit an entry. The following five sections detail the reasons you should enter a business plan competition with one notable omission – no mention of the ‘cash prize’. While the financial inducement for any competition is undoubtedly an attractive element for cash-pressed entrepreneurs, it is of secondary importance when one considers the other real benefits resulting from participating in a competition.
1. Tap into Increased Support for Entrepreneurs
The recent Enterprise Report by Enterprise Insight (2005) claimed that in the UK the entrepreneurship rate of 6.3% is (just over) half that of the USA, at 11.3%. In global terms, an article by Jonathan Huebner[1] claimed that innovation peaked in 1873 and was now declining steadily. This suggests that all may not be well with entrepreneurship in the UK. While these figures and claims may be accurate, the evidence on the ground would appear to contradict this.
The spirit of enterprise continues to thrive in the UK, as the government and companies alike strive to inculcate a growing sense of the rewards of entrepreneurship amongst the population. In 2005 the term ‘Entrepreneurship’ has been getting a complete makeover and now has more positive connotations than has traditionally been the case. In the past couple of years, entrepreneurship has been an area of increased focus as evidenced by the expansion in the numbers of conferences, exhibitions and even the popularity of TV shows, such as Risking it All and The Dragons’ Den.
In an increasingly competitive global economy, creativity, innovation, and a willingness to take calculated risks are becoming the much coveted skills for the up and coming generation of school leavers. In short, there has never been a better time to be an entrepreneur, and it is now viewed as a very progressive career choice. In recent years, a range of different parties has shown a significant increase in support for, and a real willingness to aid, the development of the next generation of entrepreneurs.
2. Obtain Critical Independent Analysis of Your Business Plan
Some entrepreneurs make the basic mistake of being excessively cautious and concerned that their idea will be ‘stolen’ by someone else. As a result, they can be reluctant to share their business plans with others. They fail to realize that it is the execution, as much as the idea, that distinguishes success from failure. In fact, an opportunity to have your business plan scrutinized by a number of probing eyes should be embraced wholeheartedly.
The insight that can be provided by judges of business plan competitions is usually of great value, as they are removed from the day-to-day activities of the business. They will offer different perspectives and are also likely to ask searching questions, provoking the plan authors to defend their plans and forcing the team to justify the various assumptions contained therein.
The judging criteria for many competitions tends to reflect reality very closely, as judges seek to assess whether there is a market for the idea and whether they would be prepared to invest in it. Overall, it is an enriching experience and ensures that the foundations of the plan are grounded in reality, and that any flaws in either the numbers or the presentation are ironed out at a point where they are not fatal to the company.
3. Gain Access to Mentors and Networking Opportunities
Business plan competitions are increasingly run with supportive classes and guest lectures by a range of relevant professionals, from IP lawyers to business planning experts. They also attract angel investors, some of whom may be interested in both investing in a fledgling company and also providing their expertise.
This is one very attractive benefit for certain inexperienced entrepreneurs who may be full of youthful optimism but lack the presence, credibility and networking capabilities of more experienced mentors. Mentors will often have experienced a range of different economic climates and will be able to use their experience to advise the new entrepreneurs accordingly. Their contact list could also prove useful; effective use of networks is undoubtedly a key factor when helping an entrepreneur to gain support.
4. Improve key Transferable Skills
New product development or business plan projects are frequently used as end-of-year projects in universities for the simple reason that they call on students to demonstrate a wide range of disparate skills and knowledge. A business plan requires the authors to collaborate effectively and to ensure that all elements of the plan work together to make a strong case for their idea. Not only does it require a compelling story, but the financials must stack up and support the viability of the plan.
There is also ample opportunity for participants to practise that notoriously neglected skill of public speaking. The requirement for participants to present their ideas verbally alongside the written report ensures that this skill is exercised accordingly. Additionally, it affords participants the opportunity to assess the effect of their presentation on the judges. These presentations are often followed by Q&A sessions which test the team further, and force them to react on the spot to challenging questions. In essence, this process reflects real life more closely than any business studies exam and improves crucial skills that are highly transferable.
5. Enhance Your Understanding of What Investors Want
One of the most critical benefits is the interaction with investors (either real or as represented by the judges). They will assess the opportunity and the people who are proposing to make this dream a reality. If they are willing to invest, in many instances they will also want a significant role in shaping the company’s future (particularly if they lack faith in the ability of management to deliver the idea). Many entrepreneurs will need to raise capital in the future. A good early understanding of the process, the implications the different forms of investment have on the business, and how the players operate, is vital.
These investors are predominantly interested in the ability of the company to generate free cash flows so as to service their debt, reward them for the risk they have taken, and ensure that there are sufficient funds to support future growth. The very interaction with investors in the competition environment will ensure that when such investment requests are for real, the new entrepreneur will not be going into the process raw and will have some sense of the various dynamics at play.
In summary, the growing number of business planning competitions afford entrants a low-cost opportunity to “stress test” their plans in a very realistic role play. These competitions test a wide range of skills that are often neglected in the daily duties of entrepreneurs, who are focused on bringing their idea to fruition. Regardless of how good that idea is, the real focus will be on the execution and bringing the idea to market. By producing a credible business plan and presenting your case persuasively, you will significantly enhance your ability to secure funding. You will also justify your role as the person charged with leading the team and any opportunity to flex these diverse skills should be grasped with both hands. Over time, the benefits from these role plays will undoubtedly contribute to the future success of the business, as will the very process of planning, which forces a thorough familiarity with the fundamentals of running a business.
For a list of business plan competitions in the UK and Ireland, please visit www.paloalto.co.uk/competitions
[1] Huebner, Jonathon (2005), A Possible Declining Trend for Worldwide Innovation, Technological Forecasting & Social Change, September 2005.
1. Tap into Increased Support for Entrepreneurs
The recent Enterprise Report by Enterprise Insight (2005) claimed that in the UK the entrepreneurship rate of 6.3% is (just over) half that of the USA, at 11.3%. In global terms, an article by Jonathan Huebner[1] claimed that innovation peaked in 1873 and was now declining steadily. This suggests that all may not be well with entrepreneurship in the UK. While these figures and claims may be accurate, the evidence on the ground would appear to contradict this.
The spirit of enterprise continues to thrive in the UK, as the government and companies alike strive to inculcate a growing sense of the rewards of entrepreneurship amongst the population. In 2005 the term ‘Entrepreneurship’ has been getting a complete makeover and now has more positive connotations than has traditionally been the case. In the past couple of years, entrepreneurship has been an area of increased focus as evidenced by the expansion in the numbers of conferences, exhibitions and even the popularity of TV shows, such as Risking it All and The Dragons’ Den.
In an increasingly competitive global economy, creativity, innovation, and a willingness to take calculated risks are becoming the much coveted skills for the up and coming generation of school leavers. In short, there has never been a better time to be an entrepreneur, and it is now viewed as a very progressive career choice. In recent years, a range of different parties has shown a significant increase in support for, and a real willingness to aid, the development of the next generation of entrepreneurs.
2. Obtain Critical Independent Analysis of Your Business Plan
Some entrepreneurs make the basic mistake of being excessively cautious and concerned that their idea will be ‘stolen’ by someone else. As a result, they can be reluctant to share their business plans with others. They fail to realize that it is the execution, as much as the idea, that distinguishes success from failure. In fact, an opportunity to have your business plan scrutinized by a number of probing eyes should be embraced wholeheartedly.
The insight that can be provided by judges of business plan competitions is usually of great value, as they are removed from the day-to-day activities of the business. They will offer different perspectives and are also likely to ask searching questions, provoking the plan authors to defend their plans and forcing the team to justify the various assumptions contained therein.
The judging criteria for many competitions tends to reflect reality very closely, as judges seek to assess whether there is a market for the idea and whether they would be prepared to invest in it. Overall, it is an enriching experience and ensures that the foundations of the plan are grounded in reality, and that any flaws in either the numbers or the presentation are ironed out at a point where they are not fatal to the company.
3. Gain Access to Mentors and Networking Opportunities
Business plan competitions are increasingly run with supportive classes and guest lectures by a range of relevant professionals, from IP lawyers to business planning experts. They also attract angel investors, some of whom may be interested in both investing in a fledgling company and also providing their expertise.
This is one very attractive benefit for certain inexperienced entrepreneurs who may be full of youthful optimism but lack the presence, credibility and networking capabilities of more experienced mentors. Mentors will often have experienced a range of different economic climates and will be able to use their experience to advise the new entrepreneurs accordingly. Their contact list could also prove useful; effective use of networks is undoubtedly a key factor when helping an entrepreneur to gain support.
4. Improve key Transferable Skills
New product development or business plan projects are frequently used as end-of-year projects in universities for the simple reason that they call on students to demonstrate a wide range of disparate skills and knowledge. A business plan requires the authors to collaborate effectively and to ensure that all elements of the plan work together to make a strong case for their idea. Not only does it require a compelling story, but the financials must stack up and support the viability of the plan.
There is also ample opportunity for participants to practise that notoriously neglected skill of public speaking. The requirement for participants to present their ideas verbally alongside the written report ensures that this skill is exercised accordingly. Additionally, it affords participants the opportunity to assess the effect of their presentation on the judges. These presentations are often followed by Q&A sessions which test the team further, and force them to react on the spot to challenging questions. In essence, this process reflects real life more closely than any business studies exam and improves crucial skills that are highly transferable.
5. Enhance Your Understanding of What Investors Want
One of the most critical benefits is the interaction with investors (either real or as represented by the judges). They will assess the opportunity and the people who are proposing to make this dream a reality. If they are willing to invest, in many instances they will also want a significant role in shaping the company’s future (particularly if they lack faith in the ability of management to deliver the idea). Many entrepreneurs will need to raise capital in the future. A good early understanding of the process, the implications the different forms of investment have on the business, and how the players operate, is vital.
These investors are predominantly interested in the ability of the company to generate free cash flows so as to service their debt, reward them for the risk they have taken, and ensure that there are sufficient funds to support future growth. The very interaction with investors in the competition environment will ensure that when such investment requests are for real, the new entrepreneur will not be going into the process raw and will have some sense of the various dynamics at play.
In summary, the growing number of business planning competitions afford entrants a low-cost opportunity to “stress test” their plans in a very realistic role play. These competitions test a wide range of skills that are often neglected in the daily duties of entrepreneurs, who are focused on bringing their idea to fruition. Regardless of how good that idea is, the real focus will be on the execution and bringing the idea to market. By producing a credible business plan and presenting your case persuasively, you will significantly enhance your ability to secure funding. You will also justify your role as the person charged with leading the team and any opportunity to flex these diverse skills should be grasped with both hands. Over time, the benefits from these role plays will undoubtedly contribute to the future success of the business, as will the very process of planning, which forces a thorough familiarity with the fundamentals of running a business.
For a list of business plan competitions in the UK and Ireland, please visit www.paloalto.co.uk/competitions
[1] Huebner, Jonathon (2005), A Possible Declining Trend for Worldwide Innovation, Technological Forecasting & Social Change, September 2005.
posted by BusinessPlanner at
11/08/2005
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