Create a Business Plan by Answering 4 Simple Questions
This post is a part of the Money Blog Network Group Writing Project focusing on advice for new entrepreneurs.
There are a lot of would be entrepreneurs out there with a great idea, but are afflicted with Business Plan Paralysis. Instead of shipping product, they're "working" on their plan, doing more "research", or "thinking about it".
I think the current literature on entrepreneurship overcomplicates things. Read the guides at Entrepreneur.com or bplans.com, and you run into 50 page documents with charts, spreadsheets, and financial projections accounting for every dime. And if these sources are to be believed, your business plan must also have serious sounding sections like Executive Summary, Competitive Analysis, and Financial Projections.
No wonder would be entrepreneurs stall at this step.
The good news is that you don't need that kind of plan right now.
Right now, all you need is an internal working plan to get you going. And to get that working plan, all you need to do is answer these four simple questions.
- What is your product or service?
- Who are your customers?
- When will things get done?
- When are bills due and when do you get paid?
1. What is your product or service?
What are customers going to give you money for?
Every company exists to create new value. That's what customers are paying for. What do you do to earn your income?
A few examples:
- The service provider (barber, accountant, dry cleaner) creates value by providing a service you're willing to pay for.
- A retailer (hardware store, car dealership, eBay seller, etc) creates value by connecting consumers and product manufacturers. Retailers buy inventory in bulk, split it up, showcase it, market it, teach customers how to use it, deal with returns, etc. For that work, they charge a markup on the product.
- A blogger (or other website publisher) creates value by providing information and a forum for people to discuss stuff. If the content and community is great, there's a lot of value (lots of readers and page views). The more readers, the more the publisher can charge for advertising.
So back to the fundamental question. What do you do? What's the value your business is creating?
Equivalent sections in a fancy plan: Executive Summary, About Our Product/Service, Company Description
2. Who are your customers?
2a. Who's going to give you money? Who are you marketing to?
Write down all the potential customer profiles you think you will have. Your customers may come from multiple sources or have different needs.
For example, if you're opening a local brick & mortar store, you might have walk-in customers, regulars, and online customers.
For content publishers, you're serving your readers (every page view or feed subscription is a "sale"), but you're also serving advertisers or affiliated vendors (the people who actually give you money).
Marketing and selling to each type/group will require different strategies and tactics. The first step though, is to identify these groups.
2b. How many potential customers are there?
There's no point selling a product if there are only a handful of people interested. How big is the group of people who might potentially buy from you?
You can look at your competitors to get an idea of the market size.
eBay sellers can look at the number of feedback received in the last 1, 3, and 6 months. Bloggers (content publishers) can look at the number of page views and/or feed subscribers of other sites in their niche.
If you need more extensive data, you can find a lot of information via Google. There are a lot of surveys and research papers available for free. You can also find teaser releases from research companies looking to sell you more in-depth analysis.
2c. Who are your competitors?
Imagine you're one of the customer types you described in answer 2b. Other than your new business, where else could these customers go to get the product/service?
Equivalent sections in a fancy plan: Market Analysis, Target Market, Primary (and Secondary) Markets, Marketing Strategy, Marketing Plan, Competitive Analysis/Advantage, Market Size
3. When will things get done?
Given the specific customers you describe above, how do you plan on reaching them? Will you buy ads, encourage referrals from existing customers, create a website?
This is when we get to the nitty-gritty. Write down concrete action steps and scheduled milestones.
3a. What does your company look like in 1, 3, and 5 years?
Answer this quickly. It's okay to "dream" a bit here. Three to five years is a long time away, and the point of this article is to get you past planning mode and into execution mode. So dream a little bit. Once you're actually executing, you'll have a better (more realistic) idea of what to aim for in 3 to 5 years.
3b. In the next 3, 6, 12 months, what are specific milestones you want to accomplish?
Be as specific as possible, without getting bogged down in too much detail. Otherwise, you'll be stuck in the dreaming mode for another 6 months instead of being in startup mode.
For milestones farther out, just jot down general goals. A common sticking point for new entrepreneurs is trying to plan for every possible scenario 12 or 24 months out. That's impossible unless you can see the future. (If you can, drop me an email. I've got work for you.)
3c. What are specific next steps you need accomplish to reach the first milestone? What can you do today?
For the first milestone (within 3 months), what are tasks that need to be done? For each task, what is the next action step? Who's responsibile for doing it? When will it be done?
The more specific and actionable your answers, the more likely you'll move this project along. Write down some actionable tasks you can knock out today, this week, and this month.
Equivalent sections in a fancy plan: Implementation Strategy, Milestones and Timeline, Exit Strategy
4. When are bills due and when do you get paid?
4a. How much money will it cost to make your product or provide your service?
Write down all the things you might have to pay for while launching or running your business.
Your expenses will fall into three categories: fixed expenses, variable expenses, and capital expenses.
Fixed expenses are the things you have to pay for every month, whether you make one sale or 10,000 sales. Hosting, rent, employees are examples of fixed costs. Add up your fixed expenses, and you have the baseline cost of running your business.
Variable expenses are tied to your sales volume. If you're moving product, what is your cost per item? These are the expenses tied to sales. Performance bonuses, sales commissions, pay-per-click advertising are examples.
Captial expenses are one time purchases you need to make. Web design, books, a computer are examples. Some of these expenses will come before you even open your doors. That is your startup costs.
Using this spreadsheet (XLS), plan your startup's first year expenses and income. What month will you break even? That is, when will you make back all the time and money you'll put into the company?
It's okay to guess. No one knows the future, and educated guesses based on the best available information is all we can do.
4b. How much do you have to charge to earn a profit?
For bloggers, how much does it cost you monthly to run your blog? In addition to the hard costs (hosting), don't forget to count the time involved. How much would you like to earn each month? That number plus your expenses is your target sales volume.
(Now that you have a hard dollar amount as a target, you might need to go back to your answers in question 3 to tweak your implementation strategy.)
Equivalent sections in a fancy plan: Financial Analysis, Financial Projections, Profit/Loss Statement, Income Statement, Cashflow Projections, Startup Costs
Now that you've brainstormed these answers, you probably have a jumbled mess of notes, references, and mini-speeches written down. That's certainly not a business plan you can hand to investors, but it is a business plan that you can start executing today.
Further Reading About Business Plans:
- How To Create a Business Plan [Entrepreneur.com]
- Business Plan Basics [Wise Bread]
- 16 Ways to Get Money for Your Business [Wise Bread]
- About.com Business Plan Outline [About.com]
- Guy Kawasaki's 10/20/30 rule to PowerPoint - About presentations to venture capitalists, but the tips apply to business plans too. It's basically a list of the 10 things an invester cares about your business.
- Palo Alto Software (Business Plan Pro) articles on creating a plan
This post is a part of the Money Blog Network Group Writing Project focusing on advice for new entrepreneurs. Check out other great tips from other top personal finance bloggers:
- Get Rich Slowly: 5 Tips for Starting a Small Business
- Mighty Bargain Hunter: Are You Thinking of Quitting the Nine to Five?
- Free Money Finance: My Best Advice for New Entrepreneurs
- Five Cent Nickel: Advice for Entrepreneurs
- Consumerism Commentary: Can You Be an Entrepreneur In Your Spare Time?
- No Credit Needed: My Best Thoughts for the New Entrepreneur
- All Financial Matters: How to Encourage Your Budding Entrepreneur
- The Digerati Life: Basic Business Advice From an Accidental Entrepreneur
- Blunt Money: Of Exit Strategies and Small Businesses
- No Debt Plan: My Advice for New Entrepreneurs
- Personal Finance Analyst: So You Think You Can Sell Banana Peelers?
- Think Your Way to Wealth: 6 Key Tips for Starting a Part-Time Business