Having a true “blue” type personality (introverted and analytical), I often feel envy towards charismatic entrepreneurs (often extroverts) and especially the ease with which they can create new businesses and coordinate different activities.
At the same time, I am amazed at how many of these successful entrepreneurs have low skills in Financial direction and have no idea how to build even a basic business plan.
This may also be the reason for their success, as they mostly cope with their instincts and act before analyzing everything.
Obviously, this tactic has its limits, as when attracting investors or when scaling up some sort of business plan will be needed as a common guideline to work towards.
After working for years as a consultant and now working as an innovation and product manager, I can honestly say that I have seen my fair share of (financial) business plans.
Obviously, you can make a financial business plan as simple or as complex as you want. However, since such a plan relies on many hypotheses (to quantify the unknowns and the future) and must be easily explainable (for example to colleagues, investors …) and maintainable (a business plan shouldn’t be a static document), my suggestion is not to make it too complex. Better to anticipate contingencies on the numbers than to try to estimate all possible (secondary) income and costs.
Nevertheless, a business plan for a new company, a project or a new product / service must contain some minimum elements, that is to say that each business plan consists of 2 parts:
First there is the projection (over the X new years) of the expected costs. These are one-off (investment) costs (such as the implementation of the software) and recurrent costs (such as the cost of equipment, the cost of maintenance, the cost of support, etc.). When looking at these costs, it is useful to have a list of typical cost categories (like marketing, sales, helpdesk, materials,…) that you might have. This can give a guideline for not forgetting about fundamental costs as people tend to underestimate all costs associated with a new business / new product.
Second, there are the advantages, which usually boils down to (increasing) the profits generated by the initiative. These are often divided into qualitative and quantitative advantages. The qualitative benefits (like increased brand recognition, improved customer service, better data quality…) ultimately translate into higher revenues as well, but as they often depend on other factors and don’t have no direct impact on income, it is almost impossible to quantify them and therefore they are simply listed (and described).
Quantitative benefits can be divided into 3 categories, namely increased income (for example more sales, higher price …), cost reduction(for example by reducing the number of FTEs via automation) and risk reduction. These risks can also be quantified by multiplying the probability that the risk occurs by the cost when a risk occurs and then calculating the resulting delta from the initiative.
Once you have described all of your costs and benefits overtime, you can calculate the return on investment. Different techniques exist here, all taking into account or not the cost of capital, for example the return on investment (at 3 years old, at 5 years old …), the SORTING or the recovery period. These KPIs make it possible to compare several initiatives in a uniform way and to select the most profitable.
It sounds very simple, but sometimes making a good business plan sounds more like an art than a science, but there are a few guidelines and key lessons to consider:
Understand what is the basic process to generate profit, that is to say if we keep it very simple, you first start by generating leads through marketing campaigns. The better the campaign, the more leads you get. Then, these prospects must be converted into real customers by good salespeople, a smooth onboarding process, good follow-up… Once a customer is onboard, you must generate profits on that customer. This will usually depend on the number of trades made by the client, the average value per trade, and the margin on each trade. All of these factors can be improved, through targeted campaigns, correct pricing, up-selling and cross-selling, lowering costs through automation… A good business plan should think through every step of this process and how how the initiative will have a positive or negative impact on each. stage.
Not all profitable ideas have to be executedThat is, even if a business case is very positive, it is important to determine whether it aligns with your company’s values and strategy. Otherwise, the short-term gain the idea achieves will likely have a serious negative impact in the long term. In addition, your execution capacity is limited, which means that you will have to choose the right project to execute (i.e. a plan with a good return on investment, but also with a strategic adjustment and in an area where you have sufficient knowledge and credibility).
In a business plan, it is not only important to make your own business case, but also that of your customers. Obviously, if a customer buys something from you, they’ll also be making a trade-off (business case) of its costs versus benefits. If that business case isn’t positive enough for him, sales are unlikely to happen and / or continue to thrive in the long term.
Make the effort to properly document your business plan and make it flexible (often via a good Excel file, with easily adaptable parameters). Your business plan is unlikely to be accepted the first time around, so the initial effort you put into structuring your plan well will allow you to make quick adaptations after feedback, which means that initial time will be overwhelming. largely recovered thereafter. In addition, a business plan does not have to be a static document and must over time be reviewed regularly, which means that even when your initiative is launched, you still have to work (and adapt) regularly on this business plan. .
Don’t get lost in the numbers. When you start to create a business plan, you often tend to get lost in a mathematical and theoretical exercise, where the different numbers have become abstract concepts. As such, after creating your business plan, it is important to check whether each number is realistic. For example, you could say that you will sell to 1% of the Belgian population. That in itself seems feasible, but when you then think about the derived figure that it’s 110,000 customers to sell, it probably won’t seem that simple anymore. Often times, absolute values derived from a percentage will give you information that is different from a simple percentage.
It is therefore a good idea to clearly show all intermediate results separately in your business plan. These intermediate results (if they make sense) can often shed new light on the feasibility of your business plan.
Document your assumptions: your business plan tries to predict the future, which nobody really can. As such, it’s important to write down your assumptions, so that you can review them regularly to see if they are still valid. If an assumption is no longer valid, it means you need to update your business plan. If for some reason, due to the changing assumption, the business plan is no longer positive, you should stop regardless of the investment already made. It might sound very counterintuitive, but the costs spent in the past shouldn’t have any impact on your current business plan and business decisions.
Don’t think you’re rich. In Jurgen Ingels’ book (“50 lessen voor een ondernemer”), he mentions that he always applies as an investor the following rules on every business plan: income is always generated more slowly and is always less, that is, as a rule of thumb it uses that revenue is generated 2 quarters later than expected and is 25% lower than estimated. And the costs are always higher, so it adds 30% to the estimated costs.
This anecdote shows that every entrepreneur is by nature too optimistic, which logically follows from his strong belief in his business idea.
Do not calculate business plans for more than 5 years. In a constantly changing world, next year is already difficult to predict, let alone 5 years. Everything after 5 years is purely hypothetical. Often business plans are made over a period of more than 5 years to make the file more positive, ie obviously an ROI over 10 years will be better than that of 5 years. However, if you need long term horizons to make your business plan positive enough, there is probably something fundamentally wrong with the business initiative.
The rest of the world is also on the move.. If you have a brilliant new idea today and take it to market, it is unlikely that there will be no competition in a few years. The same goes for less innovative initiatives, i.e. the market will always react to an initiative that you take. This means that you may need to forecast stagnant income after, say, 3 years when the competition has caught up with this initiative.
Don’t ignore cash flow. Even if you have a positive business case, you still need to validate whether you have enough cash (cash flow) at all times. Business ideas often require a large initial investment, which means you need cash to pay these costs, in anticipation of future income. Obviously, you have to make sure that you can cross this path without going bankrupt, otherwise you will never reap the rewards of your investments.
These are of course just a few lessons, but I hope this can inspire you.
However, I would like to hear your ideas, lessons learned and best practices in developing your business plans. If you have anything of interest to add, feel free to share them. Perhaps these can lead to a continuation of this blog post.