As the saying goes: “If you don’t know where you are going, you’ll most likely end up somewhere else.”
In the first part of these series, I discussed how “staying small” could be detrimental to your business. Our main takeaway was to think BIGGER and beat larger competitors.
On the second part of these series, I’ll discuss the importance of developing a business plan. This is to ensure your business remains open and creates value.
No Business Plan
Solution: It’s Simple, 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. But blind passion can drive an entrepreneur to invest in an idea without a business plan. This plan helps you understand how to operate your business over the long-term.
According to Dun & Bradstreet, 33% of new businesses fail within the first six months. Around 50% of new businesses will fail within their first two years, and 75% will fail within the first three years of operation. Most of the time, new businesses fail because they run out of cash. By having a business plan, you can target customers and allocate resources. This will get you better positioned to generate sustainable cash flows.
The first step to starting a business plan is outlining your business model. Professor Clay Christensen, from the Harvard Business School, says there are key elements to every business model.
Four Key Elements of Every Business Model
Key Element 1: Value Proposition
What value does your product or service offer to your customer? How will your product or service help your customer do something efficient? By answering these questions, an entrepreneur will determine who the target customer is. It will also determine what is the best product or service to provide this customer. Not having good answers to these questions lead you to:
- creating a product your target customer doesn’t want, and
- inadequate marketing to your target customer.
Key Element 2: Resources
Two of the most vital resources for new businesses are: cash and people. Cash is KING for new businesses, especially within the first 12 months. Many start-ups have negative cash flow (they use more cash than they earn each month). This is because they have to invest in resources, like marketing, to build their customer base.
People are also crucial resources for any business. Your workforce will help you execute your plan. Provide them with the right tools and incentives. They will help you innovate and remain competitive in dynamic marketplaces.
Many small businesses fail in getting and managing essential resources. So they fail to deliver on their value proposition.
Key Element 3: Processes
Business owners appreciate the value of resources such as cash. But establishing strong operating processes to manage their resources, is often overseen.
Let’s take for example fast food restaurant chains. Their annual turnover rate (the percentage of employees that get fired or leave) is over 100%. McDonald’s, for example, 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… They have a process. In this case, they have a prepared human resource department. This department recruits and trains employees in a fast pace environment. Also, they ensure that experienced personnel are always on staff.
Key Element 4: Profit Formula
This is a fancy way of saying: “Show me the money!”
Many small businesses tend to lose sight of the bottom line (business sales minus costs and expenses). This is as important as the sales of your business. It 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.
Did you find this helpful? I look forward to your opinion and comments!