What is a business plan?

Business-PlansThe other day, somebody asked me:

What is a business plan?

I think they were asking more than the obvious …

… I think they were really asking: “what makes a good business plan? what are the things I should include/ leave out?”

In any event, my answer was – and remains:

“A business plan is …”

A waste of time.

*Keep reading and I’ll tell you the only three times when you must write a business plan*

A very well-known guru once said of planning:

Four things can happen when you plan:

1. You plan and things turn out in your favor

2. You plan and things do not turn out in your favor

3. You do not plan plan and things turn out in your favor, anyway

4. You do not plan and things do not turn out in your favor

Of these, only 1. and 4. are as you expect …

… the rub is that the guru said that all 4 outcomes are equally likely.

In other words, there is no direct link with planning and outcome.

Mike Michalowicz, author of The Pumpkin Plan: A Simple Strategy to Grow A Remarkable Business In Any Field, agrees:

Financial projections for a new company are ludicrous. If we could project financials accurately for a public company for even one day, we’d be billionaires. How can we think we can project reliable financials for a company that doesn’t even exist?

Having worked (actually funded) close to 30 startup businesses to date, I wholeheartedly agree!

In fact …

I have never written a business plan for any of my businesses.

But, I have used financial projections and written executive summaries for three specific purposes:

1. To impress people

I have used a short, one page ‘executive summary’ (like this one) to impress other people i.e. as a ‘sales tool’ for clients, bankers, and investors.

But, make no mistake, these are largely works of faction (fiction dressed as fact) i.e. to be used purely as marketing documents: proposals, marketing and sales presentations, and the like. Do not mistake them with documents actually intended to convince yourself of your business’ future success. For that purpose, I use the following two types of plans …

[AJC: The executive summary that I have shared with you has a place close to my heart: it was my first attempt at a purely online business as a founder/investor. We built the site, but never launched it. It was wonderful, overly ambitiously wonderful … the web equivalent of Howard Hughes’ Spruce Goose]

2. To check if my business is an opportunity worth pursuing

This type looks like the financial part of a business plan, but it’s not a plan, it’s actually a sanity-check:

I did this kind of financial plan (the kind that Mike says is “ludicrous” … and, I would usually agree) only once and you should do the same:

In 1998, I found my Life’s Purpose, and it sucked …

… for me, it meant lots of traveling and time not earning an income (basically, it meant very early retirement). It sucked because now that I knew what I really wanted to do with my Life, I could no longer just sit around and wait for it – and, my business – to ‘just happen’.

So, to passively fund the true cost of my new-found life (an expensive one!), I knew that I simply had to come up with $5 million dollars in just 5 years!

[AJC: for new readers, this is how I came up with the title of this blog, because I actually ended up making $7 million, but it took 7 years]

Now, there was just one small problem: in 1998, I was over $30,000 in debt!

So, I quickly realized that the only hope that I had of going from negative $30,000 to positive $5 million in 5 years was if I could make my business worth that much, quickly.

Working backwards, I asked around (i.e. my accountant and my friends who had their own businesses) to see what my business would need to ‘look like’ in order to be worth $5m to somebody else? The general consensus was that, as a private company if sold to a private seller, it would be worth around three to five times it’s annual taxable profit.

That means my business would need to generate $1m to $1.5 million in profit each year within 5 years …

… with only one small problem: it was currently losing money!

So, in comes the ‘business plan’:

All I wanted to know was: “was it even possible for my business to generate $1m to $1.5 million in profit each year?”

So I drew out a basic business plan (actually, financial forecast) with outrageously large sales growth (and, commensurate growth in expenses) to see: “at what annual sales volume (less reasonable expenses) will it be possible for my business to generate $1m to $1.5 million in profit each year?”

Once I found that revenue (i.e. sales or turnover) number, it was then relatively easy – again, with the help of a spreadsheet – to work out exactly how many customers that I would need, based on some guesses around the size and frequency of their average purchases and so on …

[AJC: now, I’m not even good with numbers and spreadsheets, but I didn’t even need my accountant to help me do any of this; but, if you need the help of yours, go ahead … it’s what they are there for!]

So, with the help of this ‘business plan’ (actually, the ‘financial forecast’ part of the business plan … but, it’s much the same thing), the question became a fairly simple one: ” can I find enough customers to make my business generate $1m to $1.5 million in profit each year?”

Sadly, the answer was: No.

My business would have needed each and every one of the Top 1,000 Corporations in Australia as my clients; given that I currently had 5, that was going to be a stretch [read: impossible] 🙁

So this form of business planning was for one reason and one reason only: to tell me if my business was an opportunity worth pursuing.

The answer, of course, was no … at least, not in it’s current form.

But, it pointed me to the right answer: which was to find markets that were much larger than Australia and relocate. Which we did … to Chicago … and, the rest is history.

[AJC: as it happens, I also had a financial epiphany, and realized that I should be investing – rather than spending – my businesses increasing profits, so a lot went back into the business, so that I could grow without needing to borrow or raise outside capital, but all of the remainder went into passive investments: stocks and real-estate. And, it’s these investments that took me to my first $7m in 7 years. Eventually selling my businesses was a huge dollop of cream on top!]

3. To check if the business can break-even

I do one other kind of business plan (again, I’m now just focussing on the financial forecast section … I never write the other 30 pages typical of most business plans): it’s the one that looks like a typical business forecast spreadsheet [you can download a copy of this example, here]:

break-even

This one has a yearly projection of expected revenue growth, offset by expenses.

But, there’s only one thing that I’m looking for …

… it’s the column, where the bottom-line turns from red to black (actually, from negative to positive … from a loss to a profit)!

In fact, I’ll then fiddle with the numbers in that column to get the ‘bottom line’ number as close to $0.00 as possible (without being pedantic), because what I’m really trying to get a feel for is …

the point where the business breaks-even.

[AJC: in this example, the 2008 column is closest to zero profit (showing a $107,000 loss), and just a few tweaks to the revenue and expenses quickly go that closer to $0.00, or break-even]

I do not care what Date the column says, that isn’t the point.

I do care what the numbers in that column look like:

– Does the sales number look achievable (i.e. for my business, is it more like 6 or 7 mid-size corporate customers than 1,000)?

– How many staff will I need? How big an office? Am I now going to bump into better funded competitors and have to try and steal all their customers, or is the market big enough for all of us?

– Will I need to expand interstate/internationally, franchise, and/or joint venture?

In other words, is it a business that I can comfortably take to break-even (before I run out of money)?

Why?

Well, once I know the business can break-even I know that I can then ride whatever storms come my way and take as long as I need to take to get my business to where it needs to be.

[HINT: see 2., above. Remember: even though I set my goal at $5m in 5 years, I actually took 7 years to make $5m plus a ‘bonus’ $2m]

So, don’t bother with a business plan, unless it’s for one of the three reasons that I outlined, above.

Now, tell me about your business plan successes and failures, so that mine don’t seem so lonely … 🙂

I’m looking for the next $20 idea!

million-dollar-ideaThis is a general call to the wider blogging (and reader of blogs) community:

[Hey, that’s you!]

I’m looking for the next $20 idea!

“Wait!”, you say, “Surely you mean that you’re looking for the next $1,000,000 idea?!”.

But, no (I say, barely managing to stifle a yawn), million dollar ideas are dime a dozen

… why, I have one almost every single day!

[And, I bet you do, too]

No, what I’m really looking for is the next $20 idea …

submitted by a team with $1,000,000 worth of execution.

Derek Sivers said it best:

It’s so funny when I hear people being so protective of ideas. (People who want me to sign an NDA to tell me the simplest idea.)

To me, ideas are worth nothing unless executed. They are just a multiplier. Execution is worth millions.

That’s why I don’t want to hear people’s ideas.

I’m not interested until I see their execution.

idea-execution

Derek Sivers’ chart shows that even the best idea is only worth $20 (whilst the worst ones – which means most ideas – will actually lose you money).

On the other hand, great teams can make even a mediocre idea fly, and take a great idea from zero to IPO in just a few, short years.

So, this chart’s just an example, to illustrate an idea, right?

No.

According to David S Rose (a third generation serial entrepreneur/investor who has personally invested in over 80 businesses), it’s actually a remarkably accurate tool for assessing the current value of the new Internet and traditional businesses springing up all over the place …

Let’s take a couple of examples:

The Big Internet Idea

Let’s start by looking at almost any of the ‘amazing ideas’ bought by large corporates from their founders in the last few years, e.g: Yahoo has a pretty miserable track record when it comes to startup acquisitions, including Flickr, Delicious, and MyBlogLog and Google has also made a series of startup acquisitions that went nowhere.

Could it be that Google and Yahoo selected badly? Or, is it simply that a corporate cannot execute on these $20 ideas as well as their $1,000,000 founding teams?

The clue is in Google’s failed acquisition of Dodgeball … the founder left and started his next business: the hugely successful Foursquare.

So, in this case, Dennis Crowley (founder of both Dodgeball and Foursquare) came up with the $20 ideas but, in Google’s hands, execution of his first idea was worthless ($1), whilst his own execution of his second idea was clearly worth millions.

The Lifestyle Business

But, what happens if you take a pretty weak idea and give it to a good aspiring-entrepreneur?

Then you have Josh, who started a web-site drop-shipping high end camera gear from China to photographers all over the world, straight out of college.

That was a year ago, and now Josh has a great little business.

The idea may not be very good (after all, anybody can set up an online eCommerce store in about 5 minutes these days, and drop-ship stuff from the USA and China), but he has executed on his ideas when so many others simply don’t put the time and effort in, so they fail before they even begin …

…. so his $1 idea x his $100,000 execution really has given him a great ‘lifestyle’ business … earning him over $100k p.a. in just over a year.

Not bad for somebody so young; not bad for anybody who doesn’t have their eyes set on reaching the stars.

Not so, Ruslan Kogan …

Ruslan, a young Australian, was exactly like Josh, just a few years ago:

Kogan started drop-shipping TV’s and other electronic gear from China to Australia. But, what elevated his idea from an easily replicable $1 idea to a $15 ‘great idea’ was branding everything with his own name: Kogan.

But, what turned his $15 ‘great idea’ into the multi-million dollar business that it is today is amazing execution ($10,000,000): http://www.dreambuildinspirelead.com/3-lessons-from-entrepreneur-ruslan-kogan/

Yes, Ruslan’s business, today, is easily worth $150,000,000 ($15 idea x $10,000,000 execution).

See, this unique valuation tool really does work!

So, don’t be the last person in the world to realize that even the world’s most amazing ideas only $20: it’s million dollar execution that counts … if you want a $20 million business?

But, don’t come to me to fund you until you can prove it 😉

 

Sudden Money. Sudden Death.

Winning the lottery may not kill you, but 70% of the time, it spells financial suicide:

It is estimated that up to 70% of all people who suddenly receive large amounts of money will lose that money within a few years.

It doesn’t take a genius to realize that the twin culprits are:

1. Gaining a large sum of money too quickly; this can be from an inheritance, winning the lottery, selling a business, and so on.

2. Impulse spending; the more you have, it seems, the bigger the amounts that you are prepared to spend on impulse.

The problem is, if you gain your money too quickly, you don’t give yourself time on the way up, to learn the lessons of money management that need to be learned in order not to fall back down.

And, when it comes to money, the bigger they are (as in, the bigger the windfall gain), the harder they fall:

lottery

So, here’s my golden advice on dealing with ‘sudden money’ that will help you avoid going broke again …

… as soon as you get that windfall, start using this table to effectively control that spending impulse:

If you hit the jackpot and made more than a couple of million, then you just start adding zero’s to the dollar amounts in this table, to suit!

But, the ‘default table’, as presented above, is a pretty good place to start …

… and, there’s no reason why you need to wait for the windfall before you start using it 😉