I often hear the following sentiments from entrepreneurs: "Why should I write a business plan'¦things never happen the way they're predicted. I don't want to waste time planning...I want to be doing. I'm not a numbers person...I've got a good product and the numbers will work themselves out." While these statements are common and some entrepreneurs are successful without planning, you should not underestimate the importance of developing what I like to call your "story." Your story is what goes down on paper in a business plan, what is presented to banks and investors, and what you should personally use to assess and strengthen your business.
Two separate-but-linked pieces make up your story: a narrative piece, which summarizes why the opportunity exists and how your business intends to fill that opportunity, and an economic piece, which summarizes how the narrative translates into profits and cash flow. Depending on the business you intend to start, a large or small amount of analysis will be required to complete each piece. However, no matter what type of business you plan to start, when your story is complete it will be an important part of the risk management process and a key to effectively understanding your business and its critical success factors.
The Narrative Piece
The narrative story is made up of the market analysis and functional plan for the business. The market analysis details who the customer is, why they have a problem, what other firms are doing to address that problem, what trends exist in the market, and how all of this presents an opportunity. There needs to be real research on the customer, with consideration of aspects such as customer buying habits and perception of value. If there truly is a problem in the market, the story should also cover why competitors are not trying to solve it and how they are likely to respond if you enter the market. The story is not complete if it simply brushes off the competition by saying that no one does it exactly the way you plan to, as customers will always compare your value proposition with other available options.
The functional plans cover what your business is going to do in terms of providing a product or service. This details what your product or service is, why it is different than the competition, and why this difference is important to customers. The last part is essential: It is not good enough for a product or service to be different; it has to be different in a way that customers care about. Engineers and inventors often fall victim to this by attempting to build a more functional version of a product that customers are already satisfied with--while the engineer sees an opportunity to add new features, the market may not be willing to pay for them.
The Economic Piece
The economic portion of the story is derived from the narrative and sums up how assumptions about customers in terms of value perception, adoption rates, preferred distribution channels, and other aspects translate into a financial picture. It discusses what start-up costs are necessary for capital investment and working capital to begin operations, and where this funding will come from. It also addresses how long the business will take to reach break-even, what the prospects for profitability beyond breakeven will be, and whether these returns are commensurate with the initial funding requirements. Once you have developed the economic story, you can begin to evaluate how parts of the narrative story drive revenue and costs and determine your critical factors for success. You can also begin to evaluate how cash will flow into and out of the business and potential methods for improvement.
Both of these pieces need to make sense for the overall story to make sense. One very common mistake I see among entrepreneurs starting businesses is a lack of attention to the economic part of the story, without which it is difficult to adequately understand the business or the opportunity. As an example, a local entrepreneur came to us with a narrative picture of her business that seemed to make sense, but without an understanding of the economics involved. She had been looking for bank financing to get started, but after putting this piece together she decided that the potential returns on her business did not justify its pursuit.
As a final thought, your story should also have an ending. Just like blueprints to a building are needed to begin construction, you need to know what you want your business to look like when it is complete in order to begin working on the foundation to get there. So, put some thought into your story--it will be an effective means for opportunity assessment, strategy development, and communication, and is worth spending some time on to develop.
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