A Business Plan that Works

Field Work and Candor

There are a number of good reasons for crafting a first rate business plan. At the top of any list are the requirements that the prospective entrepreneur think things through before any serious money and time are committed and the necessity of presenting something solid and persuasive to family, friends, prospective investors and others who will be expected to back the effort.

Is getting all this information and constructing a business plan hard work? You bet it is. But not nearly as hard as being entranced by common myths about starting a business and finding out about the problems later. I listed a few of these myths in my book Careerpreneurs (pp. 150-151):

· I’m smart, I can just wing it.
· I can do it on a shoestring.
· No sweat, I have a great idea.
· I’ve got nothing better to do.
· Starting a business will help my personal relationships.
· With my experience, starting a business should be easy.
· A bad economy will mean fewer competitors.
· A good economy will ensure success.
· I’m mad as hell and I’m not going to take it anymore.

The formal, written business plan should include many items: an executive summary, the description of the business and its field, the uniqueness of your product or services, identification of the target market and potential competitors, a financial assessment, an assessment of risks and more. But even a business plan that seems to cover the bases can fall short when subjected to critical scrutiny.

Some of the clearest, and sharpest advice on writing a sound business plan, and an excellent introduction to the subject, can be found in the recent Wall Street Journal article by John W. Mullins (The full citation appears at the end of this blog entry.) Anyone planning to go into business would be well advised to read his entire article before getting into the specifics of business plan construction.

The main subject of a good business plan, says Mullins, is not the entrepreneur, the accumulated knowledge and experience of the people who will be running the firm, state-of-the-art or cutting-edge technology or why the product or service is the best--even if it is. The well thought out plan “starts with a clearly defined problem—something that’s really troubling or compelling—supported by evidence.” “If the pain,” the need for the business, “isn’t real . . . [t]here’s no need for a solution.” Who is the target market (who feels the pain)? Where are the customers who need the product or service?

It takes considerable research to define a target market, but the effort is absolutely necessary. The secondary data (market size, trends and the like) must be found and analyzed and cited in the business plan. But beyond this, Mullins says, the prospective entrepreneur needs primary data from interviews or a personal survey to demonstrate the likelihood that customers will buy what the business will offer. The plan must also describe how customers will become aware of the product and the distribution system that will allow them to buy it.

The sources of the expected profits from the business should be examined carefully, Mullins says. “Does the revenue model depend on making a large number of small transactions (think Amazon.com) or a small number of large ones (automobile manufacturing). Do its profit margins depend on high gross margins to cover high product-development costs (think Microsoft), or lower margins to cover slimmer operating costs (Costco)? Is a large investment in development or other fixed assets required (a manufacturing facility, for example)? Is the working capital cycle favorable or unfavorable (do you expect to be paid in advance), or will you have to carry inventory and receivables that can tie up scarce cash (manufacturing and distribution businesses)?” As Mullins states, “Some combinations of these factors are clearly attractive. Others are obviously flawed from the start.”

The business plan should place the background, education and experience of the operating team in the context of the critical success factors typical of the industry. “A business plan that identifies its critical success factors and shows how the team’s expertise and experience are suited to addressing them,” Mullins notes, “is much more likely to attract capital—or at least a second look.”

Finally, in describing the opportunities, candor is important. “Experienced entrepreneurs know better than to assert that everything is wonderful,” Mullins warns: “The facts are that most opportunities are highly uncertain. Most new ventures fail” Mullins advises, the business plan should identify and deal candidly with the fact that while things will probably not go according to the original plan the operating team will be able to cope successfully.

See John W. Mullins, “Why Business Plans Don’t Deliver: The five most common flaws and how to fix them.” The Wall Street Journal, June 22, 2009, R3.