BY DOUG AND POLLY WHITE Special Envoys
QUESTION: Some friends have told me that I should have a business plan for the small business that I plan to launch in the near future. What do you think?
ANSWER: You will definitely need a plan for your business. You may or may not need a formal business plan.
Each company must answer three questions. They are:
1. Why should a potential customer buy your product or service over a competitor’s?
2. Is there a market segment that values what differentiates your offering and is it large enough to support your business?
3. How will you reach this segment with your marketing message?
Every business, regardless of size, must answer these three questions, implicitly or explicitly. However, once you’ve worked out these very basic issues, whether you need a formal business plan comes down to cash flow. If your business will have significant negative cash flow before you start generating cash, or if you need your business to generate cash from day one (for example, to pay bills), a formal business may be in order.
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Consider examples at each end of the spectrum. You have an idea for a fantastic new product. You want to start a business to bring the product to market. However, you will need to make a significant investment in product development. Then you’ll need to buy equipment, rent space, and hire people to craft it. There will be a lot of cash out before there is revenue. You are looking for investors to help you make your dream a reality. You are going to need a formal business plan.
On the other end of the spectrum, let’s say you want to start a business with no fixed costs. No initial investment is required. You will have positive cash flow from day one. Also, let’s say you weren’t relying on the income from this new business to pay your monthly bills.
An example might be a residential cleaning business. You will use the client’s equipment and supplies. Two potential clients have already contacted you to clean their house. You know that a large number of workers in your area use household help, so there is a good market. Your prices are competitive and you always do a better job than the franchise cleaners. Therefore, you expect your business to grow through word of mouth.
You certainly have a plan for your business. You’ve answered the three questions every business needs to answer. However, we do not encourage you to hire a consultant to help you develop a formal business plan with revenue, expense, and cash flow projections. Instead, test and learn. Fail fast and fail cheaply. Learn from your mistake and move on.
Most companies fall between these two extremes described above. The key to whether or not you want to invest the time and effort to develop a formal business plan is your cash flow situation. If you are seeking outside financing or are going to dig a deep hole before becoming cash flow positive, invest time in developing a formal business plan. If you have positive cash flow from day one, answer the three questions above and get on with your business.
Doug and Polly White own a significant stake in Gather, a company that designs, builds and operates collaborative workspaces. Polly focuses on human resources, people management and human systems. Doug’s areas of expertise are business strategy, operations and finance.