When it comes to business planning, companies often think that they are pigeonholed into one of two options: either follow the traditional route and create a static, one-time business plan that theynever change or revisit, or adopt Silicon Valley's "lean startup" approach, a model that works really well for early-stage, investor-funded, high tech startups.
The Lean Startup Model has gained traction because many people want to emulate Silicon Valley startups, and think that what works for those new startups should work for them. But the reality is that the Lean Startup Model does not preach no planning. Instead, it is about iterating quickly in the early stages of your startup in order to make sure there is a product/market fit, and that it is a great solution to a real problem.
But once you figure out these issues through the Lean Startup Model, you still will need to create a real forecast and budget, build a projected cash flow, and lay out the milestones you need to achieve in order to implement your strategy. And when you go through the process of doing all those things, guess what? You have actually just created a business plan (albeit a lean one)! What you have NOT created is an old-school, linear document. No one needs a 50-page plan, and the fact is a 50-page plan is really hard to follow, implement, review, and revise. What you need to focus on, whether you are a startup, ready to move on from the Lean Startup Model, or an existing small business just looking to grow and run more effectively, every company should engage in Lean Planning.
What Is Lean Planning?
The Lean Startup Method, popularized by Silicon Valley startup firms, was created as a response to historically lengthy and cumbersome business plan methodologies. By focusing on iterating, and creating minimal viable products (MVPs) to test with real customers, and then rapidly launching new technologies, tech startups could quickly learn whether their products resonate with target audiences and relaunch products based on market responses.
But for entrepreneurs outside of Silicon Valley, the lean startup methodology isn't always very effective. Why? Because not all companies can quickly iterate and create an online application or service to test out with customers. How do you create an MVP when you are launching a restaurant? Or what if you are trying to grow your family landscape business? These types of companies simply don't have the structure or the kind of product that lends itself to MVP's and the Lean Startup methodology. But these small businesses still need to set goals, and create a simple yet complete plan to keep them on track, and to help them understand the cash implications of starting and growing a business.
Lean Planning preserves the essential planning elements found in traditional business plans, while providing the agility and flexibility that is essential to the lean startup approach. Key components of a Lean Plan include:
- Executive Summary or Pitch--an overview of your company story with charts and images
- Financial Plan--expense budget, sales forecast, cash flow forecast, balance sheet and other critical financial planning documents
- Action Plan--schedule of milestones and accountability for the completion of important tasks or activities
- Performance Tracking--comparison of actual financial outcomes to forecasted metrics
Lean planning addresses fundamental financial and business dimensions that every startup needs to consider. However, these components are only part of the lean planning approach--the other part involves the process itself.
How the Lean Planning Process Works
Unlike traditional business plans, lean plans are fluid and designed to be constantly adapted to the demands of the marketplace. The process revolves around financial indicators and typically follows a three-step approach.
1. Forecasting: Forecasting establishes the key metrics that drive the lean planning process. During this initial stage, you need to carefully consider the cost of goods sold, gross margin, marketing costs, and other variables that impact your company's success. After accurately identifying these variables, you can begin to set forecasting targets for key business and financial metrics. Forecasting also helps you understand the most critical part of your business's financial health: cash. You need to understand the drivers behind keeping cash in the bank, and make sure that you have enough runway to let you grow your business--whether through investors, a credit line, or a basic loan. Sixty percent of all small businesses that fail in America were profitable, but ran out of cash.
2. Monthly Reviews: Monthly review meetings allow you to gauge and analyze discrepancies between planned outcomes and actual business results. The most important aspect of this stage of the process is determining why your plans and forecasts were off. In some cases, your forecasts may have been based on incorrect assumptions, while in others you may discover that external factors influenced business results. Over a period of several months, trends will emerge to guide your next steps.
3. Quarterly Adjustments: Stealing a page from the Silicon Valley playbook, every three or four months you make small adjustments to address the discrepancies between your plan and actual business outcomes. Leveraging insights gleaned from monthly reviews, you can quickly implement changes to your products, services, or business model.
Lean planning offers a structured plan that ensures solid cash flow and financials, while providing you with the information you need to quickly adapt your business to actual results--giving your startup the flexibility and nimbleness it needs to grow in today's highly competitive marketplace.