On the recommendation of a client I am reading “Never Get A Real Job” by Scott Gerber.  Chapter 5 is entitled “Business Plans Suck” and the author starts with an anecdote about how his startup’s initially concise 10 page mission and strategy morphed into a nearly 100 page monstrosity.  Citing advice from banks and consultants purporting the need for a “traditional” business plan, they ended up with “nonsensical financial forecasts, complicated statistics and intricate details about mundane marketing tactics.”

Further (and I am summarizing here):

• Only 10% of the plan was focused on what they currently could do.
• They worried too much about grammar and formatting and not enough about strategy.
• They included suggestions from everyone who read the plan, and a lot of people read it.
• They spent weeks making it look pretty (color, binding, etc.).
• They never tested the market
• The projections were overly optimistic.

OK, so maybe the chapter should have been called “We Suck At Writing Business Plans” instead of Business Plans Suck.

Lets address these one at a time:

• I agree a 10 page focused strategic plan is better than a 100 page bloated plan full of fluff.

• I don’t believe there is such a thing as a “traditional” business plan.  As I have explained in detail in my article Five Considerations Before Writing Your Plan there is no one correct way to write a business plan.

• Focus the plan on what you can achieve.  Looking out 5 or 10 years into the future is foolish and even one to three year is “shaking the magic eight ball.”  That said if your plan is for raising financing include the plans for products and service that the new funding would allow.  I have always been a big fan of thinking of your business in phases.  Phase I might be tackling the local market with one product or service.  Phase II might be expanding geographically or adding new products and services.  But stick to writing for one phase at a time.

• As a side note here – Business Plans Help Raise Capital!  Go to an investor without a plan…they will tell you to come back with a plan.  Ask a bank for a loan…they won’t take your application without a plan.  Does every plan get funded?  Hell NO!  But does most every company funded have a business plan.  Most likely YES!

• Not everyone should read your plan.  People with industry experience, finance experience, investor experience and business mentors are a good place to start.  But follow your gut on whether to include their advice or not.

• It does not need to look pretty!  Should it be easy to read (scanable), understand and tie together nicely with the financial data?  Yes!  But pretty is not going to score you any points.  These days you don’t even have to print or bind it…just email the document after you get an Non-Disclosure Agreement.

• Successful New Businesses always test the market.  Before you invest in even writing an executive summary buy a couple of the product you intend to sell and try to make a profit.  If you have a service (as Guy Kawasaki says) “Just Get Going!”  But remember once you have testing the market you still need a plan.

• The projections were overly optimistic.  That’s because your market research was probably garbage!  Pages of industry data from Hoovers have little relevance to startup financial projections.  Projection can be based on local market data if you have a small business that serves a community or based on a break even point buildup method if you have an entrepreneurial venture that serves people online, an entire country or the world.  Neither of which involves the statement “If I could only get .01% of the people on the internet to give me a dollar I would be rich.”  Silly assumptions equal silly financial projections.

Do Business Plans Suck?  Sometimes, but they don’t always have to.  Our free business plan software has six sections that will amount to 10-15 pages when completed and hardly has an ounce of fat.  If done correctly, you will have a useful tool that isn’t a paperweight that gets stuffed in a drawer.

By the way… I LOVE THIS BOOK.  It’s a fun read full of useful advice.  Following the above mentioned section Mr Gerber gives a ton of great advice on how to write a proper business/strategic plan, one page plan and even a “Pre-Execution One-Paragraph Plan.”  It doesn’t get any easier than a one paragraph plan…and the sentiment is in the right place to get you started, but eventually, the so-called “traditional” plan will rear its ugly head once again.

<< Start-up Sales Projections Part 1 – Start-up Sales Projections Part 3 >>

Well the summer break is officially over and school is back in session.  Welcome back!

In Part 1 we discussed developing “a reasonable range of sales” using the breakdown method which takes a market and estimates the sales based on market capture.  For some types of businesses where the potential market is too large (Nationwide/Worldwide) or is not granular enough we can use the “Buildup Method.”  The Buildup method takes your variable costs (merchandise/inventory/cost of sales), your fixed costs (rent, utilities, payroll, etc) and your average selling price per unit and figures the break even point. Once you know your break even point then it is just a matter of setting sales goals to achieve profitability.

Let’s use the same hypothetical maternity clothing store in Fargo, ND as an example.  Again the numbers in this example are not 100% real but they are pretty close and should give you a good idea of how to use this method.

The Buildup Method

The basic formula for break even point in terms of units sold is:

BEP = Fixed Costs / (Selling Price Per Unit – Cost of Goods Sold Per Unit)

Where:

Fixed Costs = Total Operating Expenses Per Month or Year

Selling Price = Average Selling Price Per Unit

Cost of Goods = Average Cost of Goods Per Unit

*Don’t forget Order of Operations – Solve the ( ) first then divide!

So, in the example above if the average price of maternity shirts, underwear and pants is $22.50 and the average COGS is $12.50 that means that the contribution margin is $10.00 per item sold.  The annual operating expenses (not including inventory of course) is $75,000 so $75,000/$10 = 7500 units or articles of clothing sold.

That means that this clothing store will have to sell 625 items a month or 144 items a week or about 20 items a day.  Alternatively we can multiply those numbers by $22.50 to determine the annual, monthly or daily sales goal to achieve break even point.  Past the point of break even every dollar of sales contributes  $0.44 to the bottom line of this business.

Because the annual break even point of this company is $170,000 the entrepreneur starting this company will have to analyze the break even point against the potential market for this type of business (determined in part 1 as $380,000 a year) is large enough to take on the risk of starting this business.  If they believe that their reasonable range of sales of $380,000 plus or minus 10%, 20% or 30% is correct then they would probably proceed with starting the business.  However if the data for the market showed a total market of only $200,000 and Break Even is $170,000 this would probably not be a good opportunity at all.

Remember, projecting sales for a start-up is not about being right…it’s about what happens if you are wrong.  Every aspiring entrepreneur should complete a scenario analysis raising and lowering sales and expenses to create a best, worst and expected scenario.  Your success in the long run and ability to stay in business is dependent on it!