As the saying goes: “If you don’t know where you are going, you’ll probably end up somewhere else.” Continuing the articles series “Where Small Businesses Get It Wrong”, the following article touches on the importance of developing a business plan to ensure your business remains open and creates value.
Where: No Business Plan.
Solution: Develop a Business Plan.
Entrepreneurs tend to be risk takers and visionaries. One of their key strengths lies in their ability to work through uncertainty to develop an idea. Unfortunately, blind passion can drive an entrepreneur to invest resources into an idea without developing a plan to operate the business over the long-term. According to Dun & Bradstreet and INC. magazine, 33% of new businesses fail within the first six months, 50% of new businesses fail within their first two years of operation and 75% fail within the first three years. Most of the time, new businesses fail because they run out of cash. By having a business plan, an entrepreneur is better positioned to generate sustainable cash flows by properly targeting customers and allocating resources.
The first step to starting a business plan is clearly outlining your business model. According to Harvard Business School professor, Clay Christensen, there are four key elements to every business model:
Value Proposition: What value does your product or service offer to your customer? How will your product or service help your customer do something more effectively or cheaper? By answering these questions, an entrepreneur will determine who the target customer is and what is the best product or service to provide this customer. Common pitfalls derived from not having good answers to these questions are: i) creating a product your target customer doesn’t want, and ii) not properly marketing to your target customer.
Resources: Two of the most vital resources for new businesses are: i) cash and ii) people. Cash is KING for new businesses, especially within the first 12 months as many start-ups have negative cash flow (i.e. use more cash than they earn each month) as they invest in marketing, technology, people and other resources to build their customer base. People are also crucial resources for any business. Not only will your workforce help you execute your plan but, if prepared and incentivized properly, they will help you innovate and remain competitive in dynamic marketplaces. Many small businesses fail to procure and manage the optimal resources necessary to deliver on their value proposition.
Processes: Although business owners appreciate the value of resources such as cash, they often oversee the importance of establishing strong operating processes to properly manage their resources. For instance, the annual turnover rate (i.e. the percentage of employees that get fired or leave) for fast-food restaurants is over 100%. Restaurants like McDonald’s demand their employees to process an order in less than 2 minutes! How do they do it if their entire workforce changes each year? You guessed it… The process. Rest assured they have a best in class human resource department that can quickly recruit and train employees to ensure experienced personnel are always on staff.
Profit Formula: this is a fancy way of saying: “Show me the money!” Many small businesses tend to lose sight that the bottom line (i.e. business sales less costs and expenses) is as important as the sales of your business. It’s doesn’t matter if you have over $1 million in revenue if you can’t manage your costs and expenses to earn a profit. The only way you can maximize your wealth and invest in your business is by earning a profit.
I hope you found this helpful. I look forward to reviewing and responding to your comments.