What is a business plan and why do I need one?

I often find myself discussing business planning and the need for a Business Plan when I meet with entrepreneurs.  It is inevitable that someone asks me why he or she needs one.  They “know” what they want to do.  Why write it down?  

This is a very good question that as an early entrepreneur I contemplated myself.  It takes a lot of time to create a plan and it isn’t always clear as to what goes into one.  When I started my first company, Team ITG, I went through the process of creating a formal plan.  It had a 5-year pro forma financial forecast, marketing plan, services roadmap, detailed expenses, etc.  My management team and I worked months to create it.  Surprisingly what we discovered after the fact was that we were completely wrong!  We started out as an IT Infrastructure business (ITG=Infrastructure Technology Group) and evolved into a Management Consulting organization providing CIO and CTO services (ITG evolved to meaning Information Technology Group).  

Did we fail?  No!  We built the Company into one of the largest Management Consulting businesses in the area.  So what happened?  Simply put, we redefined the plan as the business matured.  As we gained experience, met with customers, learned more about the market we evolved our business model.  Failure was not an option for us and we were flexible to change, but even as we evolved many of the sections of the Business Plan we created helped us make better decisions as we evolved. 

Being a new entrepreneur's we went through the process the hard way.  We wasted months developing a plan without spending time truly understanding our market or customers.  What we found when we tried to enter into a straight-up IT implementation business we quickly found we were a small fish in a very large pond of well-established firms. 

Being a small fish in a big pond became very clear to us when we were literally on a sales call at a Japanese fish market negotiating fees to implement a QuickBooks POS system  over a counter of dead fish on ice!

However, when we took our knowhow to the market and sold experience as a product it transformed the business. Anyone can plug in a server, but not many can architect working solutions to seamlessly integrate a hodgepodge of technical platforms.  We discovered ourselves by going out and meeting potential customers and being open to evolve our ideas.  Every customer we met loved our experience, but they often had contracts with IT body suppliers that could easily beat our fee structure. 

We eventually landed on a business model that to this day is in big demand, but it would have saved us a ton of time, money and hardship if we had researched the market first.  

A modern approach to business planning

We have access to the world from the comfort of our homes now days.  Leveraging the worldwide web is one of the best ways to market research and test an idea.  The first step in creating a plan is to Brainstorm.  Although you may know what you want to do it is important to go through the Brainstorming step.   Create a word cloud of ideas for the product or service you want to create.  Start with your working idea in the center of the board and let lose.  This process should take several days or weeks.  

The second step is to research the potential market for your ideas via the web.  It would make no sense to build a product in-house if one already exists.  For example, why would a Company build their own accounting system when there are applications from QuickBooks to VERITAS out there?  Same holds true when developing  a viable Business Plan.  Why enter a business that may already be well served in the market?  A plan to create a Sales Force application likely would not be successful when well-loved products like Salesforce.com are out there.  Starting a search engine probably won’t challenge Google or Bing.  

That being said, it doesn't mean you can't develop a product that works in harmony with an existing industry leader.  In many cases a healthy partnership can be an excellent way to accelerate sales and tap into an existing customer base.  For example, both Salesforce.com and Google have open API's.  Salesforce.com has an entire platform build to help entrepreneurs called AppExchange.  Creating products that work with AppExchange can get your idea to a marketplace quickly.  Apple has the App Store and Google has Google Play.  There are endless opportunities to leverage the scale of a large business to your benefit. 

Prototyping
After developing a product or idea it is important to validate it through web research by creating a prototype.  Build a working wireframe, create a 3D model or do whatever necessary to create something people can see, experience and use.  Then test the product with the market.  Leverage twitter, Facebook, LinkedIn, Pinterest, etc. and solicit feedback.  This can be taken further by leveraging crowdsourcing services that can get thousands of people interacting with your prototype for a nominal fee. 

At Orbitz we prototyped new ideas by bringing in customers living in and around Chicago and video taped their interactions.  We gave them $100 travel vouchers to compensate them for their time.  In back-end we had developers actually controlling the software based on whatever the customer did.  Our early prototyping was rudimentary and manual, but this process led to the development of our products that people to this day love. We discovered that out of 10 ideas we only 3 or 4 of them would end up being built. 

Creating the Plan

Only after the process of bedding an idea should a Business Plan be created.  At this point you will have the data and market research needed to substantiate the theory.  Do people like your product?  Will it work?  How much are people willing to pay for it?  Is there a clear plan to expand the product line as the company evolves?  

A Business Plan shouldn’t be complicated.  Creating a 5-year pro forma forecast is never going to be accurate.  Start out focusing on one quarter. What will it take to build? Can you leverage third-party businesses to help build it?  Do you need servers, developers, office space, computers, etc?  Then shift focus to the most important item…Revenues.  Will the product or service make money or save money for customers?  If there isn’t an ROI or a clear need for something it will not sell.  Businesses exist to be profitable – if there isn’t a clear profit model stop and move to another idea.  

Business planning = Goal setting

A Business Plan is basically a set of goals written down.  What are the goals for the Company?  Put them in writing starting with the Executive Summary.  Write in simple easy to understand language what you intend on doing.  Work diligently to be concise and create the "elevator speech" quick summary of why your business or product is viable.  What makes you different, special, and unique?  How will you make money?  Who are your customers?  How do you see your product or business evolving?  And how much money do you need to make it happen?  

Creating a concise one-page Executive Summary is harder than it sounds.  Anything longer very likely will never be read.  Take the time to nail it down.  Share your summary with family, friends, Facebook contacts, etc. to refine it. 

Circling back to my goals statement above, you are basically creating a SMART goal (Specific, Measureable, Attainable, Realistic and Timely) roadmap in a one-page summary.  What you are creating is something that an average (read non-technical or industry expert) person can understand.  My tester is my mother.  If she can understand it then I know I have a viable Executive Summary!  

Business Plan Sections 

After creating the executive summary then create the key sections that support the claims.  The key sections a business plan needs is detailed product(s) description(s), marketing plan and financials.  

Product Description 
At this point a Product Description should come easily.  What are you building, selling or doing?  Pictures, graphs and images are much more powerful than a ton of words on a page.  This section should be concise.  Only one or two pages per product.  

Marketing Plan
Most businesses I see fail big time when it comes to creating a realistic Marketing Plan.  Without a clear understanding of how your product or service will sell the odds that a business will fail go up exponentially.  This section should be well developed.  Who will buy your product? How will you reach them? How much will it cost to land a customer?  How did you set the price?  Is your pricing competitive with the industry?  Can the target customers afford what you are selling?  

The Marketing Plan is where you can elaborate on your crowdsourcing and social media research.  I personally believe the Marketing Plan is the most important section of a Business Plan.  If you have a clear understanding of how to sell a product or service then chances are you will be successful.  Don’t think this step is not important.  Even  well-capitalized public companies like Twitter and Groupon struggle to generate profits sufficient to sustain their business.  If we were to go back in time, I suspect that neither company had a clear understanding on how to generate sustaining revenue.  

Financial Plan
This is the section that validates that an idea is feasible.  You don’t want to create a product that will sell for $5 that costs $100 to manufacture.  Accordingly you don’t want to develop a multimillion-dollar platform that takes years to construct that may be obsolete by the time it is complete.  There are countless dotcoms out there that have invested millions building a product that no one wants to pay for.  Many of these companies are bankrupt and led to the dotcom collapse that has taken the world years to recover from.  

A financial plan should be extremely accurate for the first year and estimated for a max of three.  If you are investing your own money into the business this proves to you and your family it is a good investment.  If you are seeking third-party investors then people that manage finances every day for a living will question you at length about your numbers.  They will detect BS a mile away, but they are also realistic.  Venture capital and investment businesses are realistic.  They know that pro forma forecasts that span years are not accurate.  Don’t try to convince them that they are.  Be honest about finances and know your numbers inside out and backwards.  

Crowd Funding

Now that you have a business plan it may be time to generate capital to create the product.  When I started in business there were a few options.  Use your own money, get a loan putting your personal assets up for collateral, borrow money from family/friends or sign a large chunk of your business over to a venture capital firm.  

Now days there are many more options.  Crowd funding is one of the easiest ways to generate capital.  It is in smaller amounts from a larger population, but the end result is the same amount of money can be generated without giving up control of a business or taking unnecessary risk with personal assets.  Here are some Cloud Funding resources to explore:

GoFundMe.com: Over $1 Billion raised for personal fundraisers. Processing fee of 2.9% + $0.30 applies.

Kickstarter.com: Personal fundraising not allowed. Creative only. Processing fees of between 3-5% apply.

Indiegogo.com: 3% processing fee. $25 fee for international wire.

Teespring.com: T-shirt crowdfunding site. Fees vary based on t-shirts selected for sale.

YouCaring.com: 5% fee is suggested to campaign donors. Processing fee of 2.9% + $0.30 applies.

Crowdrise.com: Free accounts charge 5%, paid accounts are 3%. Processing fee of 2.9% + $0.30 applies.

DonorsChoose.org: Optional 15% fee to support DonorsChoose.org. Donation is 100% tax-deductible.

Kiva.org: 15% fee is suggested to campaign micro-lenders. Processing fee of 2.9% + $0.30 applies.

GiveForward.com: 5% fee is charged to campaign creators. Processing fee of 2.9% + $0.50 per transaction applies.

Best of luck with your Business Planning!  

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Read more on my blog: The Chicago CIO
About the Author:  Jim Kerr CIO, Chicago, Illinois  
Twitter:  @jamesnkerr LinkedIn Chicago CIO Jim Kerr