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 2 - Coming Soon >>

Now that we have covered the Break Down and Buildup methods of projecting sales I thought it would be worthwhile to demonstrate the financial projection program included in Capital Business Plan Software.  Below is a demonstration video tutorial where I complete a financial projection based on a pizza restaurant I owned with a business partner back in 2007.  While we offer three different pro forma financial projection models – a basic, intermediate and advanced excel workbook, the video below covers the intermediate model.  

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My father has owned a hair salon for over 25 years and probably from the day he started his “shop” things have hardly changed.  Sure there have been some updates to decor and a couple of location changes, hair styles have certainly changed over two and a half decades, and so has the method of accepting payments.  However, only over the last few months has he started asking me how to go about accepting credit cards because of the demands of his new found younger clientele, which are being brought in by a templated website I built him in my spare time one weekend.

Finding the right credit card processing solution for your business can be a daunting task.  From newfangled card readers that connect to your smart phone to good old fashioned counter top Verifone VX510 how do you know what is right for you?  Here are some considerations:

• The up front cost - Sometimes the machines are free (typically on overpriced merchant accounts), sometimes they are $400-$700, sometimes you can buy used ones on eBay for $100, some just require purchasing a magnetic card reader for a labtop (which you can also find cheap on eBay).  Other solutions such as Square offer a card reader free with signup that plugs into your 3.5mm head phone jack on your phone.  Intuit Payment Solutions sells a card reader you can plug into your USB port of your laptop for about $70.
• The transaction fee - usually Visa/Mastercard is the least 1.5%-2.5% and Discover Card and AMEX is typically higher 2.5%-3.5% although lately Discover Card fees have been edging close to Visa rates to remain competitive.  These fees can be even higher when you punch in a card number manually vs. using a swipe reader because there is more fraud when the transaction happens with the “card not present”.  That is why businesses typically ask for the CCV 3-digit code on the back because it lower the swipe fee because the assumption is that the card is present.
• The swipe fee - This is usually a specific amount like $0.10 or $0.50 – you may find a company with a very low transaction rate (like 1.5%) but a very high swipe fee (like $1.00) – if your average transaction is $10 that wouldn’t be a very good deal cause the swipe fee is 10% alone.  If the average transaction is $100 or $1000 it’s a better deal.
• Other fees - Back in 2007 a business partner and I owned a pizza place and our merchant provider charged us $10 just to send us a paper statement – we could not opt out of paper statements but they charged it anyway.  In other word it’s was just another way to make money.
• How often you can batch - with a merchant account you can batch (send the payments and get a deposit) daily.  Usually you get paid in 24-48 hours.  With others (like square) you might have to wait days.

So if you look at the continuum of providers it goes from High Transaction Cost with Low Monthly Fees to High Monthly Fees to Low Transaction costs.  Here are some examples:

Paypal Website Payment Standard – no monthly fee but allows you to accept payments using a website, email, or a smart phone but the transaction costs are as high as 2.9% plus a $0.30 transaction fee.  Paypal generally can be deposited within 3 days unless a payment hold is put on your account which then requires 21 days to receive.

Square – Square offers 2.75% rates if the card is swiped or 3.5% + $0.15 fee if the card number is manually entered with no monthly payment.  Square holds payments for 21 days before you can have the balance deposited.

Intuit Online Terminal – Allows you to process credit card payments on your labtop with a magnetic card reader.  Pricing is 1.9% if swiped and 2.93% if manually keyed in plus a $0.30 “swipe fee” for both.  Payments are batched daily and deposited within 1-3 days.  The monthly fee is $12.95.

Merchant Provider – Typically used in retail stores where they have the counter top machine or an integrated magnetic card reader in their point of sale system.  Monthly fees can be as high as $50-$60 not including transaction costs or swipe fees.  Typically rates are lower and swipe fees are $0.10-$0.15 but not always so do your homework.

Hopefully this gives you some basic insight into choosing a credit card processor that is right for you and your business transactions.  Remember, in this industry there always seems to be a “gotcha” and it’s your job to vet each provider properly to ensure the solution will make your business more profitable by being able to provide a convenient payment processing solution for your customers.

A follow up to Entre-U Class #1 – Small Business America.

And a bonus video… Finding the Magic Sauce (or Secret Sauce or Sustainable Competitive Advantage if you will…)

<< 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!