<< Business Plan Templates - Startup Sales Projection Part 1 >>

Probably one of the most uncomfortable things a first time entrepreneur has to attempt is their first set of financial projections.  Frequently I hear the following:

• “Well…I don’t know how many people will buy from me!”
• “I just took a WAG (wild ass guess).”
• “This is so stupid…why am I doing this!”
• “How the hell am I suppose to know?!?”

To all of them my answer is “YOU are the expert in the business you are starting and You have to set some expectations for the banks and/or investors.”

As you may have heard, “Financial projections are part art and part science”.

So what does that mean?

It means that you won’t know really how to do them until you have done them.  Sure there are some things you can estimate based on your knowledge and experience with a particular type of business, but the rest has to come from research. And, that research, is part of the overall business plan.  In other words, the “part art” is the educated guess or the assumptions you base your projections on, which inturn is based on your expectations.  Your expectations are based on the research you completed in the written section of your business plan, that is the “part science”.

Regarding the comments above, the last one: “How am I suppose to know?!?” is peticularaly troubling. As mentioned before, you are suppose to be the expert.  But also, you should have done the research to set your expectations based on a reasonable set of (documented) assumptions.  Banks and investors will expect you to know your stuff upside down and backwards.  If you bring in a boiler plate business plan with canned financial projections, or ones written primarily by another person with numbers that you can’t explain, you won’t be getting any money any time soon.

After all that I hear:  “Well, all of that’s nice, but I still don’t know technically how to complete my financial projections.”  So here is the process:

1. Make sure you have a solid financial projection program to begin with. It can be a standalone program or excel templates but make sure the three statements (Income Statement, Balance Sheets, and Cash Flows) are interconnected.
   
2. A well researched and written business plan is a must. Every section of the business plan holds key data related to the financial statements.
   
3. Build a Beginning Balance Sheet or Sources and Use of Funds. Your Operations Plan should have laid out the assets you need to purchase to get started (Building / Equipment / Furniture & Fixtures / Inventory).  Get firm quotes from several sources on each.  Then document your funding based on sound business banking criteria including proper equity injection.  Finally, your balance sheet should “balance” – i.e. sources of funds=uses of funds (otherwise they wouldn’t call it a balance sheet!).
   
4. Build your sales / revenue projections. The data in the Market Potential section of your business plan or independent Marketing Plan will help you bracket your expectations for sales but in general, Sales projections are determined two ways: Driven from market data:  Target market size is determined in units or dollar volume and you estimate the amount of that market you can capture…bracketed by competitive factors (number, advantages, price) and industry factors (growth, decline, obsolescence). Driven from budgets:  When pursuing a broad market strategy it is better to determine break even point then estimate a sales goal to reach break even and eventually profitability.
   
5. Build your expense projection. Again, the information you compiled in your operations plan and other parts of your business plan will help you determine appropriate business overhead expenses. For example your location/building will determine your lease, utility, maintenance, insurance and property taxes.  Your inventory section will help you determine cost of goods sold and cash flow terms such as accounts payable.  The marketing section will help you budget your advertising and promotion expense.  And, your personnel section will help you forecast your salaries and wages, payroll taxes and benefits.

There is no great mystery to building financial projections.  With the right forecasting software, it can be fairly simple to do.  And now that we have demystified the “art and science” of it, you have the tools you need to get started and confidently plan the launch of your new business idea.

On a final note, you don’t have to go it alone.  There are business consultants located at Small Business Development Centers all across the country.  These counselors are usually well versed in business planning and helping your produce solid financial projections for your business.  So look them up and get started today! 

<< How To Write a Business Plan – Building Quality Financial Projections >>

Just because you need a business plan doesn’t mean you need to write a 100 page tome.  Depending on the type of business you are starting and the purpose for writing the plan there are four different types of business plans you could write.  Click on the picture below to view templates for each of the different types.

1. The One Page Plan – Popularized by Jim Horan’s book of the same name, this business planning model is intended mainly as a strategic planning tool the one page plan gives entrepreneurs a 10,000 foot view of their opportunity.  It focuses mainly on the mission, vision and objectives of the company at the expense of the marketing and operations plan.  If you aren’t looking for capital then this just might be the ticket for you.
    
2. The Three Sheet Strategy – Also based on a book but this one is by Mike Michalowicz call The Toilet Paper Entrepreneur.  The three sheet strategy takes the one page plan and adds two more components (and therefore pages…smart huh?), the SMART goals page and a paper version of a financial dash board.  This model is also designed for strategy but uses a 10,000 foot view, a 90 day goaling window and a historical look back at the metrics. 
    
3. Summary Business Plan – A summary business plan is a comprehensive business plan with the operations plan ripped out.  This plan usually has a business description, market analysis and full financial projections but is designed for businesses that are don’t have overly complex operations.  A couple examples are e-commerce companies, consulting companies and service companies.   Another version of this is the Company Acquisition Proposal.  Since companies being purchased are usually in operation the operations planning can be minimized. 
    
4. The Comprehensive Business Plan – And then there is the grand daddy of them all.  There are literally hundreds of different comprehensive business plan templates but they all pretty much boil down to the following six sections: Executive Summary, Business Description, Market Opportunity, Marketing Plan, Operations Plan and Management Plan.  Tack on 3 or 5 year financial projections and you’ve got yourself a business plan.  Software such as Business Plan Pro and Ultimate Business Planner reign supreme in this area but if you want to try it out without a financial commitment you can always try out Capital Business Plan’s free online business planning software (shameless plug…I know). 

<< Why Write A Business Plan  -  Business Plan Templates >>

Now that we have established why you need a business plan we have to discuss how to write a business plan and who you are writing the plan for.  Considering who you are writing the business plan for is almost as important as understanding why you are writing the plan. Ideally the answer would be that you are writing the plan for yourself…but…most people find they are writing the plan because someone asked them to write one. 

Below is a list of unique things you need to consider when writing a business plan for one of four different groups: yourself, a lender, an investor or an economic development agency.

1. Yourself – Most entrepreneurs who find themselves in the fortunate position of not needing to borrow money should still write a business plan. The number one reason is to complete market research, plan operations and try to forecast profitability before you make a large investment and a potentially life changing decision. When writing the plan for yourself, concentrate on the sections that make up the “meat” of the plan: the Business Description, Market Potential, and the Operations Plan. Because this is a condensed version of a plan the executive summary is not necessary.  Marketing and promotion should still be explored and media purchases based on your target market / demographics.  For most start-ups the owner is the management (and staff) and therefore, you may not need to outline your own background in a management section. Understanding your strengths and weaknesses is still an important exercise. Educate yourself on the skills necessary to run your venture and find opportunities to hone your skills.
      

2. Commercial Lender – A good place to start would be to read our article Getting a Business Loan so that you understand how lenders analyze a business loan. From that we understand that cash flow is very important to lenders. Before they give you the loan they will look to see that you have done the necessary research to accurately project your sales. They will also look at your operations plan to determine if your expenses are reasonable for the type and size of business you are planning on opening. From there they determine if there is an appropriate amount of collateral to secure the loan and a sufficient investment (equity) from the owners personal funds for working capital needs. To some extent the business plan is a sales document as much as it is a feasibility study…but be careful. Too much selling and your plan will come off as having something to hide or not believable. Too little and they might feel that you are not confident enough in your own idea or the data supporting your financial projections. For commercial lenders it is all about reducing exposure and making prudent loans to well thought out and researched business ideas.
    
3. Investors – Understand that investors are looking for a different type of business than your typical start-up. Investors look for high risk high potential return ideas with Nationwide or Worldwide market potential. If your idea is still on paper and not currently in the marketplace most seasoned investors will pass on the investment until the business venture is on the cusp of explosive growth. The timing of an investment is crucial.  Invest too early and they could suffer the same cash burn as the business without growth in valuation.  Future rounds of investing will dilute their ownership and potential return. Too late and the deal will become too expensive (because the company is more valuable now) making it difficult to get the necessary return on their investment to make the deal.
   Utilize your executive summary as a “hot sheet” and dress it up with key financial information. Give hypothetical investment amounts and the potential return on investment (assuming you have filed the correct paperwork with your state’s securities department to make such an offering). Add graphs and charts and use the document to make it more of a sales document to peek interest. Once a potential investor is interested, give them the full plan after they have signed a non-disclosure agreement. The management section is a key area for investors. Your experience, education, and character will be scrutinized in a process called “due diligence”. Think of it as an extreme version of a background check. Most investors leave no stone unturned so be prepared to explain any potential bumps in your history.  Also, for obvious reasons the financial projections and Market Potential sections are key components for investors.  

4. Economic Developers – Economic developers are looking for three things: Job Creation, Primary Sector Sales, and Targeted Industries. Because job creation is the key, the personelle plan is going to be scrutinized. Most agencies have limits on the amount of money they can provide based on the number of jobs created (a common metric is $10,000-$30,000 per full time job). Further, your historical sales will be looked at to see if you are truly creating wealth (this is called Primary Sector which means bringing in sales dollars from out of state) and if that trend can reasonably continue. 
   Don’t forget, most economic development money does not come in the form of a grant, so to some extent they will have similar criteria as a commercial lender although economic development agencies commonly are more liberal in their underwriting if the three above criteria are met. The Business History, Market Potential and Operations Plan will be eyed closely to ensure they are making a wise investment for their community.
    

From the above four categories we can see that there are wide and varied priorities depending on who you are writing the plan for. Notice though that the Market Potential section is a key component in every one. The number on reason why businesses fail is because they failed to understand or they overestimated their potential market. The number two reason is lack of sufficient cash on hand. Clearly, if a company projected that it would have more sales than actually occurred, it makes sense that they also would have underestimated the amount of cash needed to stay in business. This author would argue that the above two reasons for business failure are one in the same.

Bonus – Five Considerations Before Your Start Writing Your Plan 

1. Realize that there is no one correct way to write a business plan.  Each business is unique and each has different characteristics that should be identified, described, and explored.  No one business plan template can serve the needs of every business out there.  If one were developed, it would be thousands of pages long and contain hundreds of sections which may be relevant to only a minority of the business ideas out there. If there is a section in the outline or software that you don’t think applies to your business idea, simply omit it from your business plan.  Be careful though, there are some sections that every business plan should not be without…it is up to you to customize the information to fit what is relevant to your project.
    
2. DO NOT worry about the length of your plan.  Again, each business plan is unique and businesses have varying levels of complexity, even for companies within the same industry.  A manufacturer of apparel will have a longer and more complex plan than a designer and distributor of apparel who will outsource production.  The point is that your specific business idea will determine the length of a plan. 
    
3. Be as clear and concise as you possibly can.  Do not use flowery language – you are not writing a novel.  There will be no awards for literary ability.  Also, stay away from industry jargon or slang terms.  Write your plan in a manner that anyone with an eighth grade reading level can understand. 
    
4. The entire document will not be read from front to back.  Your plan should be written so that the reader can get a general idea from the Executive Summary, a detailed description from the first paragraph or two of each section and technical detail from the remaining paragraphs in each section or the appendices. For example, if a person reads your executive summary and wants more detailed information on the target market they would page back to the “Market Potential” section to get more detailed information from the first couple of paragraphs.  If they want further breakdown of the target market or physical data of that market they should be able to read further beyond the first paragraph to find selected technical data on the size and growth of your potential market.
    
5. Back up assumptions with hard data and information that can be inferred from research completed in your exploration of the idea.  Do not just say you will be the best, fastest, or cheapest… explain how you will achieve more sales, better service, lower costs, etc.   This will help you when it is time to project sales and expenses while providing justification for your expectations.  It is important that you describe why a feature of your business is important and explain the benefit it will provide you or the customer.  Finally, providing assumptions will make your financing organization confident that your financial projections are based on solid data rather than just a best guess.   

<< Successful New Business Ideas - How To Write a Business Plan  >>

 The first thing you should do is come to grips with the fact that you need a business plan.  In a study completed by the Small Business Administration entrepreneurs who had a written plan had a significantly lower failure rate than those who started without a written plan.  But if our litmus test for characteristics is true for entrepreneurs then planning itself is counterintuitive.  If entrepreneurs are mavrics, if they are risk takers and they follow their gut then why would then plan?  And, to be honest there is a lot of wisdom to hitting the pavement and just getting going.  We have to be careful that the plan does not become the business because planning is all that gets done.  In the end we still need a plan because a well written, well researched business plan serves four main functions:

1.      Raising Capital – Most people find themselves writing a business plan to borrow or raise capital.  The simple fact is that if you had the money you may have started your business already…confident in the potential profitability of your venture.  Big mistake.  It makes very little sense not to plan even if you have the money.  Lenders, Venture Capitalists, Angel Investors and Economic Developers all want to know the same basic thing – will this make money.  Each looks for specific characteristics of a business that they are interest in, so be sure to consider who you are writing the plan for before you start writing it.  A plan written to raise Angel Capital is different than one that is going in front of a local lender. 

 2.      Strategic Plan – A good business plan also serves as a strategic plan.  A well written strategic plan identifies the mission of an organization, internal/external driving forces, and identifies Strengths, Weaknesses, Opportunities and Threats (SWOT).  While all of these may not be specifically present in the business plan, the reader should be able to identify these items from the different sections of the narrative.  We need to determine how you are going to compete in the marketplace.  What is your niche?  Who is your target market?  What does your customer value?  Then once you are in business these strategies need to be reviewed and changed as the market changes or as new information is available. 

3.      Feasibility Test – The business plan serves as a feasibility test for your business. As you complete a plan for your business it will become clear whether or not your initial assumptions about the idea hold true.  You need to justify your assumptions.  It is easy to make an idea work in your head…every entrepreneur can imagine finding the best location, creating the best marketing campaign, you can even make your business as profitable as you wish…in your head.  But, something magical happens when you put that idea down on paper in black and white and are forced to justify your assumptions in determining profitability. 

Why we business plan – a short video explaination

 Every section of your plan holds valuable information that will help frame your expectations for a reasonable range of sales, cost of sales and daily operating expenses (often called business overhead).  Your marketing plan will help you in determining a reasonable range of sales and your operations plan will help you determine both startup expenses and ongoing expenses.  Sales minus Expenses equals profitability…therefore feasibility.  Your business plan feeds information into your financial projections and backs the numbers with realistic assumptions.  The business plan and financial projections act in tandem creating a feasibility study as to weather this idea will be profitable or not.

4.      Opportunity Discovery – So, what if you complete your plan and find that it is not feasible?  Don’t give up!  Take a hard honest look at your plan and determine if there are changes that could be made to your idea to make it profitable.  Don’t get locked down thinking that things have to be a specific way. Some of your best ideas will come out of the discovery of new markets, new processes, new ways of distributing or producing and finding a niche to compete in.  

Let the writing of your business plan guide your business model as opposed to reflecting what you think your business model should be.  In addition, don’t be afraid to change your idea completely.  Many people discover that there are better opportunities elsewhere, usually within the same industry somewhere up or down the supply chain. 

Last but not least, don’t be afraid to ask for help.  Contact your local Small Business Development Center or SCORE office for assistance in writing your business plan.

<<  Know Your Entrepreneurial Strengths  - Why Write A Business Plan >>

Before we delve into what makes for a good business opportunity we must first discuss the two general approaches to starting a business.  The first type is the Technician.  By technician we don’t necessarily mean an auto mechanic (though that fits this archetype) but a person with a technical skill or are technically knowledgeable in a specific product.  The second type is the Opportunist. The opportunist derives their business idea from the market itself. 

The important differentiation is that the opportunist has two distinct advantages the first being they have explored the market and are providing something that is already known to be in demand.  The second is that they “fail fast, fail cheep” in that they test the waters.  Why dump tons of money into a business model that might not even work?  Test, Test, Test!  Then when you have a product or service that works (with PAYING customers) then dump money into product and process improvements, office space, employees and other over head. 

If the number one reason why business fail is lack of capital (they run out of money!) than doesn’t it make sense to give your new business a fighting chance by ensuring you have a product that people want and are willing to pay for?  Sell your product on eBay, test market on a college classroom, go to tradeshows or open air markets, make your product in a rented commercial kitchen before you sign a five year lease and buy a bunch of equipment and inventory. 

OK…so now that you are not going to go broke before you even get started let’s talk about what makes for a killer start-up.  It’s easy…so listen close.  You can either be CHEAP or DIFFERENT.  So before you say “OK…I’ll be cheap” let me explain the problem with that strategy.  If you come into the market and cut pricing by 10% the natural reaction of your competition will be to do likewise.  So you cut another 10% and they do the same.  Pretty soon it’s a race to the bottom and guess who wins?  That’s right…they do.  Why?  Because they have deeper pockets and they will just wait until you go out of business and then raise their prices back to where they were. 

If you are going to be cheap then you have to be lowest COST not just lowest price.  If you have a technology or process that allows you to make a product or deliver a service for less than the other guy then you can be lowest price.  Wal-Mart has a motto of “Low Prices…Always” because they have buying power through economies of scale, a logistics system that rivals FedEx and brand recognition to bring in the customers.  You don’t so you probably are going to have to be different.

So in what ways can you differentiate?  If we look at the continuum above we can see that there are several steps up from low cost/low price:

• Efficiency – is really just a function of being low cost but not necessarily with the low price (in other words you provide a good value that costs you less). The benefit of living in the information age is that internet startups tend to have significantly lower overhead. Successful businesses like Owen Tripp Reputation.com have been springing up more and more over the last decade because of the ease with which efficiency can be realized.
   
• Quality/Reliability/Dependability – This is the true value play.  Think Honda Accord – good at everything but excellent at nothing.  Usually provides a standard amount of features at a fair mid market price.
   
• Exceptional Customer Service – While this is self explanatory there are some companies out there that have such a connection with their customers, employees and stakeholder they really shine in this area.  One example is www.Zappos.com.
   
• Quality as excellence – Here thoughtful design, engineering excellence and user friendly features take center stage.  Apple is the quintessential example.  Premium pricing is in play.
   
• Innovation – All the bells and whistles and the price tag to match.  Think of the technology in a Mercedes-Benz with more processing power than a super computer.

Aside from determining where you land it is important to bring up a concept proffered by Doug Hall in his book Jump Start Your Business Brain.  After analyzing over 50,000 data points related to new inventions and ideas brought to market they determined that successful products and services have the following characteristics:

1. Overt Benefit – It has to be obvious to the customer what’s in it for them.  One of my favorite examples is www.mint.com who’s tagline is “The Best Free Way To Manage Your Money”.  Straight forward and simple.  No technical specification, no feature diagrams just a clear message to the customer.
    
2. Dramatic Difference – So now that they know what’s in it for them they have to know why they should care.  Just because you say they should want or need something doesn’t make it so.  To get their attention your offering has to be wildly different.  Seth Godin refers to it as a “Purple Cow”.  It has to be remarkable.
    
3. Real Reason To Believe – Your claims need to be credible.  Every day your customer is barraged with advertising.  You can’t even go to the bathroom without seeing electronic displays in the stalls.  So now that you have their attention with #1 and #2 above you have to make sure they don’t just blow your claims off as mere puffery.  Back up your claims with real statistical differences and customer testimonials. 

 So where do you begin with all this information?  My suggestion is to first figure out what makes your new business idea different.  This is what makes you unique, dramatically different or your “secret sauce” if you will.  Then put yourself in your potential customer’s shoes and ask how does that “difference” benefit me as a user.  Then you can categorize where your company lands on the competitive advantage scale.  The more advantages you have the higher your chances for survival as a new business and success in the future.