Guest post by Bill Grodnik CEO of Davinci Virtual Office Spaces and Solutions.

Dare to be different– Starting out, it’s vital to choose to operate a business where you already know something about the industry, or you have experience having worked in the field. Nobody wants to invest in a business where you’re reinventing the wheel, so use the knowledge to innovate something different in your field before you forge ahead.

Bootstrap like there’s no tomorrow- With no debt and no investors, you’re free to take your company in whatever direction you see fit. Rule #1 for the small business owner should be to self-fund for as long as is humanly possible – then look to external sources for funding. With the emergence of Internet business, you can cut down on costs and operate your business from the Internet.

Be more attractive– The #1 most attractive trait? It’s not being a blond or driving a Maserati – it is being profitable! If you’re not there yet, have a clear, well-thought-out plan in place that shows your company’s path to profitability. This will enable you to at least negotiate some of the terms of third party investments.

Show your growth– For most businesses, funding in the early stages of a company’s launch is incredibly difficult. As the business owner, your #1 priority should be growing your business, in terms of customers and infrastructure. The best way to do this is to focus all of your energies on your core function and outsource what you can – the cloud offers ample opportunity to save time, effort and money. Even early stage companies that show solid growth will be attractive to investors.

The impetus behind increments– The first step is to decide how much money you need. And no, “a lot” doesn’t count! When you’re talking to potential to investors, they’re going to ask you the size of the increments you’ll be offering. (i.e. $1 million raised in $100,000 increments.) Pick the largest increment size you think you can get investors to match. You can always split and quarter your increments, but some investors will take “one” no matter the size, and the fewer investors you have, the more control you’ll have over your own business.

VCs can be costly– My best advice is to avoid VC funding in your company’s early stages. When there is little you can offer them in terms of value, many VCs will “offer” to take a controlling stake in your business in exchange for the funds you seek. If you take them up on their offer, you will likely end up with a group of “bosses” that tell you what to do with your business to ensure a quick return on their investment. Once you’ve built a team and an infrastructure, and you’re profitable – that is the right time to go after VC funding.

Consider other options- Many times there are alternatives to VC funding including local angel groups, private investors and – surprise! – friends and family. In fact, the easiest money to raise is from friends and family – friends will follow other friends and, if you’re willing to let your family invest in your business, most will consider the investment sound. Try to evaluate what your venture realistically needs to succeed and first look for funding and strategic support close around you – you may be surprised at the interest and advise you’ll find!

Learn more about Davinci Virtual by visiting http://www.davincivirtual.com/

<< Building Quality Financial Projections – Start-up Sales Projections Part 2 >>

When projecting sales for a startup business there are generally two ways come up with what we have called “a reasonable range of sales.”  The first is the Breakdown method where you take a large potential market and break it down into a smaller target market and finally determine a percent of market capture.  The second is a Buildup method where you calculate breakeven point for your company and then determine the buildup of sales over time to achieve profitability.

Let’s use a hypothetical maternity clothing store in Fargo, ND as an example.  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 Breakdown Method

The more local and the more specific the target market the more reliable the Breakdown method becomes.  The example of a maternity clothing store is perfect because it is a niche market but also statistics are readily available for the demographic set.  When you research data is that already available from another source we call that “Secondary Market Research”.   When you conduct your own survey or gather your own data we call that “Primary Market Research”.

To figure the Total Market and Target Market for maternity clothing we use secondary market research data.  The total market for maternity clothing is of course women, which account for about half of the 150,000 people in the Fargo / Moorhead MSA.  But specifically, pregnant women is the target market, therefore if we look at the number of babies born in Fargo at the two major hospitals in the area we can find that each year approximately 9,500 babies are born.

But this alone is not enough information to do a sales projection.  The second step is to make an assumption about “Market Capture” and finally conduct primary market research on the average dollars spent on maternity clothing during pregnancy.  To determine market capture you have to weigh the 4 P’s (product, place, pricing, people) against the competition to come up with an estimated market capture.  For example if we are a high end maternity clothing store in a community with lots competition we can expect to have  a lower percent of market capture but we also have a higher price per item of clothing.  On the other hand if we are going to start a second hand clothing store in a community with limited competition we can expect a higher market capture but lower margins.  At this point we have only one part of the equation solved – Target Market X Market Capture = # of Customers.

The final part of the puzzle is to determine the average annual spending on maternity clothing.  One way to determine this is to survey friends and family who have recently had a baby and ask how much they spent on average.  I had a student of one of my Entrepreneurship classes conduct this very survey and found that the average spent on the first pregnancy for clothing was $500 and about $300 on the second child.  Now again, we can’t expect to capture all of these dollars because some of it will go to the competition therefore you have to make another assumption about how many of these dollars your company will capture.  For the purposes of this example we assumed $200 of the total budget.  Therefore the second half of the equation is  – # of Customers X Capture of Annual Purchases = Sales Projection.

So to lay out the example:

Target Market X Market Capture = # of Customers
9,500       X             20%           =        1,900

# of Customers X Capture of Annual Purchases = Sales Projection
1,900                X                          $200                     =          $380,000

Let’s be clear… NOBODY should believe that this business will do exactly $380,000 in sales.  That is not the purpose of this exercise.  Nor should you believe that within the first year that it is a reasonable sales projection.  This number, $380,000, represents a basis for determining a Reasonable Range of Sales for this startup company.  It is a target to be achieved once the business has met its full potential for the current business model in its current market.

With this information we need to determine what will happen to the business is we only achieve 90% of the projection, or 85% or 50%.  We also need to estimate approximately how long it will take to get to that sales goal.  Will your company still be in business if it takes 18 months instead of 12 or 24 months instead of 18 months.

The number one reason why half or more of all startup businesses fail is because they RUN OUT OF MONEY!  But I believe the reason why they run out of money is because they think they are going to get to break even before they actually do…they over estimate their sales and the speed at which they will achieve them.

Take the graphic above for example.  Given the breakeven point and the sale projection this entrepreneur is expecting to burn the amount of cash where the sales are below break even.  Say that length of time is 12 months.  But what happens if the length of time to get to break even is even 50% longer (18 months instead of 12) as in the graphic below.

The amount of cash burned is almost twice as much because in the beginning months you burn more cash until you get to break even.  The “VOLUME” of the area below breakeven must be considered…the relationship is NOT one to one.  This is the single biggest reason why sales projections are so important.  You have to project different scenarios (best case, expected case, worst cast, super awful case) and prepare for the worst.  It’s the only way your startup business will survive.  And guess what…?  The assumptions for your projections come from your business plan so you can’t achieve quality sales projections without  a quality business plan.  If you put garbage in, you will get garbage out.

Part two will focus on the Buildup method for projecting sales which works best when you have a national market or a non-niche product.

<< 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.