Your business plan is the foundation of your start-up, not because it’s a fixed guide that you will follow step-by-step as you build your business, but because creating it helps you to think through every aspect of your company before you launch. This means that the process of creating your business plan is really important.
That said, if you apply for finance, investment or even if you’re interested in applying for an incubator program, you will need to present your business plan, so it’s worth working through the entire document carefully and systematically, capturing all the relevant details that funders, partners and programs will look for.
Here are the five steps you need to follow as you build and refine your business plan.
Step 1
Research, research, research
Every business starts out as an idea. Taking that idea from concept to a fully-fledged business requires research – a lot of research.
You need to research:
- Your target audience and potential customers
- Competitors in your market
- Other solutions that will compete for your customer’s spend
- Whether your solution solves a pain point or need
- What the market is willing to pay for your solution
- The latest or upcoming trends that could disrupt your business (for example, investing in an Atkins diet franchise just before popular sentiment turned against it)
- Whether you are jumping onto a trend that will soon pass
- If you are entering an over-traded and over-saturated market because everyone is jumping on the trend
There is no quick or simple way to conduct the level of research we’re talking about. You need to get Googling and then hit the streets. Speak to your prospective customers as well as your competitors. Draw an any information you can access. You don’t want to spend years researching and never actually launch, but the more you know about your market, the better your solution will be.
Mistakes to avoid
Don’t only speak to friends and family. You want the unvarnished truth, so spread your wings and connect with as many people as possible.
Don’t only look for positive responses. You want to hear what’s wrong with your idea, your price point, your delivery and so on – this gives you the opportunity to fix it before you’ve invested too much time, energy and money in the wrong direction.
Don’t get discouraged. Know that for every ten phone calls you make, you’ll probably only connect with one person, so don’t be discouraged. It’s a numbers game, so keep at it.
Key questions to consider:
- Who is your target audience?
- Where can you find them?
- What challenges do they face?
- What will they pay for a solution?
- Who are the players in your sector?
- Who could move into your sector?
- If your idea is so smart, why hasn’t it been done before?
Step 2
Test your financials
Once you are satisfied with your business idea and your research has confirmed that you have a market, with a need, that is willing to pay for your solution, you need to test your financials.
This predominantly involves creating a budget so that you can see if your revenue will be greater than your costs, and whether the business will therefore make a profit (which is the goal of every sustainable business.)
Just as in the research portion of your planning, it’s important to test every assumption you’ve made regarding your financials, from how much it will cost to produce and deliver your product or service, to what price you can charge for it.
Your budget and projected revenue need to help you determine three key figures:
- Your burn rate
- The runway you need to financially support your start-up
- When you will break even
Your burn rate is how quickly you will use money. More you’ve invested in and the higher your costs, the faster your burn rate will be. Ideally, you want a slow burn rate, which means you need to keep a tight control on costs.
Your runway is how much money you have before you run out of cash. Using your burn rate, this should be a reasonably simple timeframe to determine.
When you will break even is when the business starts generating enough income to cover costs. The general rule of thumb is that it takes around two years for a start-up to break even, but this is very dependant on your business model and overheads.
If your runway is much shorter than your projected break even time frame, you need to relook your business model and revenue model.
Mistakes to avoid
Don’t rely on outside funding. Around the world, it’s estimated that 98% of businesses are bootstrapped. This means they are self-funded, either through the entrepreneur’s savings or through customers (ie sales). The truth is that funders want to see some form of traction and track record, which means even if you do land funding (or even bank finance), you will most likely have needed to bootstrap your business first.
Don’t burn through your runway too quickly. As a start-up, being as thrifty as possible is your friend. Don’t rack up any unnecessary expenses, and outsource what you can. This will mean you’re only carrying the expense when it’s needed (and hopefully a client is paying for it).
Don’t assume revenues that you can’t justify. As an entrepreneur, it’s good to be confident, but when it comes to start-up revenues, it pays to be prudent. Don’t bank on funds until they’re, well, in the bank.
Key questions to consider:
- What are your costs?
- What are ego expenses (that you can do without), versus operational expenses that you need in order for the business to run?
- Can you charge enough to break even and then make a profit?
- Is your target market willing to pay your price point?
Step 3
Validate your concept
Steve Blank, a Silicon Valley entrepreneur and the founder of what is now known as the lean start-up movement, famously said that no business plan survives first contact with a customer.
What he meant is that all the planning in the world goes out the window when a real person is interacting with your business and using your product or service for the first time. Until this point all you had was a hypothesis. Now you have the human element.
While there is no way to avoid this, there is a way to use it to your advantage, which is the foundation of the lean start-up movement: you need to get into market as quickly as possible with a minimum viable product (MVP) which is just good enough to function. This will allow you to test customer reactions, how they use your solution and where there are problems.
In short, your MVP will either validate – or invalidate – your concept before you have invested all of your life savings into your idea.
There are other benefits to validating your idea in this way:
- You can fail fast and early. Very few – if any – businesses remain exactly as they started out. The sooner you find the flaws in your idea, the sooner you can correct them and move on.
- You can beat your competitors to market. Instead of spending 18 months perfecting your idea (and then having it not survive its first encounter with a real customer anyway), you are in the market learning from real people, based on their real experiences. 18 months later you might be on version 5, but your customers know who you are and you’re solidly down the path of perfecting your solution.
- You can tweak and adjust based on real user feedback. There is nothing more valuable than a customer’s feedback. This information will help you iterate until you have a solution people will pay for.
Mistakes to avoid
Don’t wait too long. We’re all tempted to take a perfect version to market, but as Reid Hoffman, the founder of LinkedIn says, if you aren’t embarrassed by your first version, you took it to market too late. It’s okay for your MVP to be rough around the edges. You want to invest your time and funds in making it better based on real market feedback. The alternative is that once you receive market feedback and you can’t sell your solution, you’ve spent so long perfecting it that you’ve run out of money.
Don’t keep your focus group too small. The more feedback you get the better, so try and get as big a use case as possible. And again, don’t only ask friends and family to weigh in. They love you too much to give you the hard, unvarnished truth.
Don’t be scared of negative comments. These are a gift during your MVP stage. The more negative feedback you receive now, the more you can tweak and adjust before your hard launch, and the more successful you’ll ultimately be. There is nothing worse than no being able to sell your solution, but no-one will tell you why they won’t buy or what’s wrong with your value proposition.
Key questions to consider:
- Do you have an MVP?
- Is it in the market?
- Is your focus group large enough?
- Are you embracing the feedback you’re receiving (even when it’s not positive)?
Step 4
Refine as required
We say refine as required because there’s a fine line between tweaking or even pivoting your business or solution because the market feedback you’re receiving is clear, and flip-flopping around so much that you lose all direction or focus.
The point of your MVP is to test your assumptions in the market. We’ve encouraged you to embrace all feedback – bad and good.
We’ve also outlined the fact that you want (and need) this human engagement to refine your solution.
However, no solution can be everything to everybody. There will always be some people who won’t buy your solution.
You need to determine as quickly as possible who those people are so that you aren’t endlessly refining your offering for someone who is never going to buy anyway.
This is why a broad focus group is so important. It will help you spot trends versus one or two outliers whose opinions won’t help you refine your solution for your ideal target market anyway.
Mistakes to avoid
Don’t get dizzy. When you’re developing your business plan, market research is critical, but you need to be able to determine the useful feedback from people who either aren’t the right target market, wouldn’t purchase your solution anyway, or aren’t giving you sound feedback. Trying to be everything to everyone will just back you dizzy.
Start small. The rule of thumb is to solve a problem for ten people before you try to attract a market of ten thousand people. This doesn’t mean you should only speak to ten people, but it does mean that you should be focused and niche first. Get a very specific target market right first, and then build on it later. Refine for them, not every person on the planet.
Key questions to consider:
- Does the tweak or refinement make sense?
- Will the costs involved justify the extra sales or price point you can ask?
- Do you have a large percentage of users asking for the same change or commenting on the same issue?
Step 5
Build a business plan for funders
Investors and funding institutions, such as banks, will want to see your business plan. There are a number of reasons for this. First, they want to understand exactly what your business model and revenue model is. They want to make sure you have a total addressable market (TAM), which means people who will buy your product or service.
They will also want to see your financials, and your cash flow versus your budget and financial plan.
They want to get a sense of who your team is, and that you know how you will make money and why your customers will buy from you.
Mistakes to avoid
Have a business plan, but don’t rely too heavily on the document. Think about it like this: You are the business plan. How you and your team execute your business plan will mean the difference between success or failure. Business owners who don’t know what’s in their business plan, and who can’t answer key questions without looking at their huge document are indicating that they don’t know their financials or their own value proposition. This is an immediate red flag for investors.
Don’t skip through your financials. Ultimately, a bank or lender wants to see that you can repay the loan. An investor wants to see that they can make a large return on their investment. In both cases, how you make money, your projected income and profits and how you’re keeping you costs low are all essential figures – so make sure you know them, without needing to check on them.
Don’t get someone else to build your business plan for you. Outsourcing your business plan simply means you won’t know what’s in it because you didn’t do the work or research yourself. A financier or investor will quickly pick up on this, and your chances of securing funds will go from low to zero.
Key questions to consider:
- What are the key numbers in your business?
- What is your total addressable market (TAM)? Be conservative and niche – the more specific you are, the more realistic your numbers will be?
- What is your profit margin?
- How will you service the loan?
- How will you make your investors their return on investment?