Why you should spend time creating a believable business plan?
Business plans may have a bad reputation recently but it is good to go through a business plan like exercise before you start a business
TL:DR; Hint: it’s for yourself. These days people tend to think that business plans are rubbish and a waste of time. Maybe traditional 50-200 pages long plans are rubbish because things change quickly and the plan is old before you even finish it. Yet spending time thinking through your planned endeavor, listing down costs you expect to pay, what drives them and how you expect them to change over time, what skillsets you will need to learn, hire, or how will you make money. That has value on its own and this exercise which you can do with pen and paper or a an excel table can save you time and money. And you don’t need 200 pages for that.
If you want to start a business or are running one, chances are you want to, or need to, create a business plan for yourself or for your investors. You actually have to produce one if you wanna have investors, but it is a good idea to make one even for yourself. Even more so when purchasing components or equipment is involved in your plan.
It’s not by accident that every VC and PE investor will scrutinize and judge you more on the quality of your costs side understanding than on the size of your revenue dreams. Especially because in the short term, your costs are the only part you can manage.
I let you know a secret - most of the time investors will have a better understanding of trends, industry, and revenue side potential than you do. But you are the only one with the expertise and drive to create this new business or service and all that uniqueness sits on the cost side of the balance sheet.
So again, WHY it is good to have a (business) plan?
- you will see if your assumptions about your future business actually translate into a real feasible business;
- people will ask for it.
Let me just drum up the word feasible…what do I mean by feasible? I mean any business which is cash flow positive so you can support yourself, hopefully, a team and it also allows you to invest into the future and improve.
If your business is not cash flow positive you will end up racing to the bottom by trying to get more money from your clients without investing in the quality of your product. Or you will hope to get money from VCs without being able to show traction and a growing client base (because they want quality products). You won’t be able to afford a team (or the team you deserve) and you will end up over-worked, frustrated and in the worst case, you will go bankrupt. No worries, you will rise again, but why go there if you can see the danger from far away.
Most of the time, by now, people are thinking: “How does a plan help? It’s not real anyway. Something I come up with in my PJs." Well, the whole process of planning is what counts. Not just the numbers which it comes to at the end. Many people make the mistake of thinking that the most important part is a great-looking table with marvelous numbers which you get at the end. No, it’s not. At least not for you.
For you, the most important part is the process of thinking about your business and its drivers on the income side and its drivers on the cost side. The process of imagining how you create your product or service, what or whom you need for it to be great, is what shows you areas that need special attention. Just imagine it and write down everything which comes to mind. You will sort it later.
And let me be absolutely clear about two things - #1 - You have to do it yourself, you can’t outsource this. You can talk with people who know, sure. You can get advice, but the process is yours to go through. - #2 - Your cost side is way more important than your revenue assumptions. Again, many people confuse the importance of these two.
Why is a detailed understanding of your costs more important than revenues for both you and outside investors? Well, it’s because it shows that you actually understand what you will need to be able to produce the results you claim will bring in the revenues.
Your cost side is typically the only thing you can really manage in the short term which is important if you are running short of cash. And if you don’t know what you will need to produce the product or service then you really don’t know what you can manage. And you are not able to say if this is good business or not. Then all your nice revenue numbers make little sense. This is by the way the biggest killer of the usefulness of business planning. People do the plan without understanding their cost structure, hence they don’t believe the plan and consider it a useless exercise.
But this is the point of the exercise - to find out what you don’t know before you start spending money and time on it. And before you start bringing other people in.
I mean it is ok if you don’t know how to get to the final product right at the beginning. Many great businesses start like that. But you need to know in which direction you want to start searching and experimenting and what costs it will create. This is an uphill battle in hill-chart planning as Basecamp guys say it (you can check it out here). We are back to understanding what you will need for that. How much time, how much cash, and your assumptions about that. Then of course you don’t have to spend too much time on your revenue side since you don’t know.
If you want a simple guide on how to go through the process of creating a useful costs side plan for your business, just stay tuned. It’s coming soon.
If you enjoyed this one sing-up for next one or as always just get in touch via contacts.