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Failing to plan is planning to fail: Why you need a business plan

Your business plan is a vital part of structuring the early development of your business, and will act as a dashboard to manage your starship Enterprise once she’s operational. Remember you are planning to make the jump to light speed at some point, so plot a sensible course. Here's how to go about strategic planning, and a template for crafting a winning business plan.

Your business plan is a vital part of structuring the early development of your business, and will act as a dashboard to manage your starship Enterprise once she’s operational. Remember you are planning to make the jump to light speed at some point, so plot a sensible course. Here's how to go about strategic planning, and a template for crafting a winning business plan.

The process of commercialising your ideas is all about getting things out of your head and out in the open where other people can play with them and pay for them. The creation of your business plan is one of the core ways that this happens and—sorry, bureaucracy bashers—it’s pretty much compulsory.

Writing a good business plan is also a great way to show that you’re serious. Hayes Knight’s chartered accountants help craft innovation business plans, and see good and bad examples. “I know that banks have been requesting business plans and getting back a two- or three-sentence email—that’s common in about 60 percent of cases,” says business improvement director Aaron Wallace. “I know of firms turning over $300 million who still don’t have a written business plan. It’s all in their heads. But these days you won’t get any funding without one.

“We can’t write your business plan for you, because you’ve got to own it and be passionate about it to take it forward. But we can flesh out your thinking to make sure you haven’t got your blinkers on.”

Your business plan should form the basis for all your other documents, and nearly all the actions you take. There may be times when it’s all you have. As soon as possible, it should include some numbers you can stack up and back up. “You will need to do at least three years of financial modelling, including cash flows on a monthly basis,” says Wallace. “It’s all very well showing that you can make money over the year, but what if you run out of cash in month three?”

To get investment money flowing, show where the income will come from, and how fast. To get loans, show that you can pay the money back, service the debt—and get out if you need to. Getting numbers down will also help you allocate resources effectively. This in turn helps shape your basic business structure. For example, what do the numbers look like if you set up your own shops to sell your new product, or run completely online? What about if you license it to other distributors, or just develop it in the lab and sell it on?

Richard Ede, managing partner at BNZ Partners, confirms that banks want to see paperwork before they lend. “The main thing people do wrong is leave everything until the very last minute,” he says. “You’d be amazed at how often that happens, even in really big lends. If you have seen your lawyers and your accountant, and have the figures ready, you’re far more likely to get a better outcome.”

Ideally, your business plan should have three-year, five-year and tenyear milestones. At ten years, it’s your vision, because the world could have changed. And if you’re still around by then, well done, but why haven’t you moved on to something else by now?

Business planning for beginners

How to get everyone singing from your hymn sheet

  1. Have just one plan. It’s tempting in the early phases to tell everyone what they want to hear in the hope of getting that important intro, the investment you need or just some priceless encouragement. But expressing a singularity of purpose is crucial to gaining the trust of others. You can sell your business plan in many different ways, but your core story must remain rigorously consistent, or nobody will believe it.
  2. Be realistic. Innovation should push back many boundaries, but not the bounds of reality. A robust plans has rocksolid information as its foundation. You are like an army headed for unknown, possibly enemy territory: do your recon. Establish a flow of top quality intelligence on your economy, your industry, your sector, your competitors and, most importantly, your potential customers. Sign up to feeds from the relevant websites, attend the right conferences and meet the folks involved at every opportunity. Analyse the information, inhabit it, infest it.
  3. Take off the rose-tinted spectacles. Your business plan doesn’t have to paint a picture of effortless plenty. A good plan should include detailed acknowledgements of key challenges and how you’ll meet them. This is good discipline for you and provides guidance for staff and partners. Also, if potential investors know of a risk and it looks like you haven’t accounted for it, they’ll put their chequebooks away. Sensible investors know innovation is a risky business; they want you to demonstrate that you know it, too.
  4. Challenge your business plan. It’s written on computer, not carved into marble. Don’t be afraid to put your business plan in the ring with all the experts you encounter, and improve it when you can.
  5. Keep it current. Like a CV, your business plan should be constantly honed. Things change. There is a military saying, ‘No plan survives first contact with the enemy’. When British prime minister Harold Macmillan was asked by a young journalist after a long dinner what can most easily blow a government off course, he answered: “Events, dear boy. Events.”
  6. Keep using your business plan. Use it to track, monitor and evaluate progress. You should plan to grow your business by improving: · The number of customers · The frequency with which they buy from you · The value of each transaction · Your efficiency.

Supporting documents

  1. Tax returns of principals for last three years and personal financial statement (banks have these forms)
  2. For franchised businesses, a copy of franchise contract and supporting documents provided by the franchisor
  3. Copy of lease or purchase agreement for building space
  4. Copy of licenses and other legal documents
  5. Copy of resumes of all principals
  6. Copies of letters of intent from suppliers, etcetera

Incubators create a hothouse environment to do three things:

  • focus on the things that matter
  • jettison what doesn’t
  • be vigourous and focused

The incubation process

If you have a great idea and you’re ready to push hard but you don’t necessarily have the experience to bring all the elements together, there is help available. Incubators such as the AUT Business Innovation Centre will help drive you through the process—or tell you to scrap it and go home. If you have an idea, you can go and talk to them. If they like what they hear they will give you one to three years of motivation and expert help for a ten percent stake.

We asked the centre’s chief executive, Jonathan Kirkpatrick, what he is offering and what he’s looking for.

What’s incubation about?
We’re focused on companies with export potential, technology companies with intellectual property and serious innovation. Incubation is the application of a raft of professional services and business acumen applied to the particular needs of an early-stage business. If you go to an accountant, they will look at the numbers. If you go to a lawyer, they will tend to look at it from a legal point of view. We bring together all the advice and apply it. We can also connect you with big businesses already out there.

Why would I want your help?
There is a whole load of things you need to know and you can’t know them all at once. This is a team game. Very rarely can you go it alone; you have to ask for help, whether it’s from us or somebody else. This is a long way from Dragons’ Den; this is serious business, and a serious investment in partnerships.

Can you teach me to be an innovator?
I think they are born. But you can have your instinct honed, sharpened and trained. We are looking for the basics and then we will hone these to accelerate company growth and avoid unnecessary mistakes.

This is not rocket science. There are basic rules to be observed. That doesn’t mean it is formulaic. There is always the lucky break and the unlucky failure, the good idea in the hands of the wrong person, the mediocre idea in the hands of the right person.

How much do I need to tell you?
We expect full transparency; otherwise, it would be like going to the GP and not letting them put their stethoscope up your shirt. You may need NDAs for other partners, but we don’t sign them.

I’ve been working on my idea for ages—how long should I stay at the drawing board?
You need to know when you’re flogging a dead horse. I know of companies that have become the ‘living dead’. They have enough customers to limp on, and are always on the verge of going big. It can be very difficult for them to hear that they should stop. If the idea is utter crap it is easy to get rid of, but this is more something which is not quite good enough. You may as well go and get a job if you are going to do that, but there is this emotional commitment you may need to overcome.

Are there key bits of advice you find yourself giving everyone?
We often get people with an idea, without a customer. You need to know your customer to know your industry. Never lose sight of the customer—they may change.

How many people are doing this?
Some are coming from academia, others from industry. And there are still people with too many brain cells and time working in their garages. We’re inundated, and we are oversubscribed—because we never turn down a good idea.

“Innovators are born. But you can have your instinct honed, sharpened and trained”

—Jonathan Kirkpatrick

What your business plan should look like

Here’s a basic structure to get you started. If you can’t fill in a section, do some research, or get some help. Areas left blank have a habit of filling up with weeds and rubbish. You can get more advice on how to create your own at www.business.govt.nz

The business

  1. Description of business
  2. Marketing
  3. Competition
  4. Operating procedures
  5. Personnel
  6. Business insurance

Financial Data

  1. Loan applications
  2. Capital equipment and supply list
  3. Balance sheet
  4. Break-even analysis
  5. Pro-forma income projections (profit & loss statements)
  6. Three-year summary
  7. Detail by month, first year
  8. Detail by quarters, second and third years
  9. Assumptions upon which projections were based
  10. Pro-forma cash flow

What is Stage-Gate?

The Stage-Gate process was developed by Canadian academic Dr Robert Cooper in his 1986 book, Winning at New Products. The system divides innovation into stages, providing managers with four options at each step: go, kill, hold and recycle. The stages are:

  1. Scoping
  2. Build business case
  3. Development
  4. Testing and validation
  5. Launch

Two frequently added stages are discovery (stage 0) and review (stage 6). The system combines common sense with disciplined business process, but the genius is in its simplicity.

Dr Robert Cooper is presenting a 2010 Innovation Master- Class in Auckland in March, 2010. Early bird discounts are available at www.prodex.com.au/masterclass

Ten golden rules of innovation from the AUT Innovation Centre

  1. People will always find money for painkillers. You need to be making them an offer they can’t refuse.
  2. Add value, not features. More is not always better.
  3. Ensure your product is easy to adopt.
  4. Ensure that profit is on the radar. Watch your cashflow.
  5. Know your competitor. A competitor is not necessarily a similar product, it’s the company that is chasing the same dollars as you are.
  6. Know what business you’re in and articulate your value proposition clearly.
  7. It’s a risky world: sell confidence. You need to believe in it, and make it obvious that you believe in it.
  8. Choose the right partners and manage them with care.
  9. Focus, focus, focus—target your resources consciously.
  10. Now you’re successful— change or die!