Here’s a cure for that “Oh, a business plan is too big and too tall and I don’t want to do it” syndrome:

1. Do a sales forecast. Do just that. For the next 12 months, break your sales into major categories, and think about units, price per unit, sales, cost per unit and costs. Here’s an example:

2. Commit to reviewing results every month. Set up a schedule, timing, attendance–and maybe even the lunch menu for that meeting next month.

Not so hard, right? Nothing which takes that much time. But, with any luck, just starting the process of projecting your sales and then tracking the difference–and there will be a difference, of course–gets you started with planning.

The next thing you know, you’ll be thinking about why the difference, what’s working, what isn’t, how to improve things … next steps and all that.

Want more on how to do a sales forecast? I’ve got more:

• Forecast your sales … step by step, with examples.

Here’s a question I was asked this morning:

My company operates in a highly competitive environment in a
specialized category. To gain more power in this category, we are
looking to raise more money. If you could create a list of Top 10
Things that represent value for investors, what would those be?

I’d like to answer with a top 10 list, but hey, when you think of it, there are two things that represent value for investors:

1. Money now.
2. Much, much more money later.

Investors write a check now because they believe that money invested will multiply. They want as much return as they think they can get, on as little investment as they think they can get away with. And don’t blame them for it; that’s their job. That’s what investment means.

Those people who write checks for startups and entrepreneurs have options. They can buy houses, cars, jets, stocks, bonds or gold bars.

You’d think that’s obvious. But I deal with this all the time, and I’m amazed at how many people confuse having a good, healthy business with making money for investors. Lots of good, healthy businesses never make money for investors. One of the worst things that can happen to investors’ money is getting trapped into a holding in a healthy, happy company that’s never going to generate any liquidity for investors.

But of course you want me to stop pontificating and list some things that will make investors believe they’re going to make much, much more money later. So here’s the rest of the top 10 list, which, by the way, ends up with nine items in total, because I’m not going to slavishly think up a tenth:

3. Credible exit strategy.
4. Sales growth. Proven, actual growth in the very recent past. Actual realized 50 percent per year growth for the past two years is 10 or 20 or 200 times more interesting than a sales forecast showing growth to come in the future.
5. Potential sales growth. Future sales growth. Like they say, “It could happen.” Why future if not present and recent past? Investors will ask. Sometimes you can come up with a reason, something you’ve done, a new product, new technology, a relationship just won.
6. Believable potential appreciation. Things that will make your company’s valuation grow. Of course that’s almost redundant, because sales growth drives valuation. But if you have a lot of Internet traffic, a special position, new technology or some other angle, that’s useful. Why will your company be worth more later? Is there a secret sauce? Is it defensible?
7. Profitability. Funny how profitability isn’t as important as growth, but it isn’t. Growth builds valuation.
8. Management team. People with a track record and, in the best of cases, people who have some traction with other investors, who can build your business’ valuation.
9. Battle scars. The “the sadder but wiser ” factor. Last week I heard David Johnson, a venture capital fund formation expert, say: “Past failure is not a problem. It’s good to know what that feels like.”

So here’s a question I got in e-mail the other day:

I am an engineer and I’ve designed a machine and got it patented. I am struggling between selling my patent or starting my own business. I am trying to balance out all the pros and cons of a product-based business. I had really great offers for my patent, but I think more money can be made if I manufacture the machine and sell it myself. What do you think? What are the pros and cons of a product-based business?

And here’s my answer:

By the way, have you actually tried to sell rights to that patent? Make an informed decision. Something like a patent is worth what a buyer will pay for it. Most patents, the vast majority of patents, have no buyers.

And then there’s the problem of the buyer who offers a royalty for a license, then does nothing with the patent. You make no money.

And, on the other hand, there’s also the chance that you try to build a business and fail. Lose your shirt. Lose your house.

Which do you prefer, a bird in the hand or a successful business that you build yourself in the bush?

This was a question in my e-mail this morning:

How much should I charge for an advertisement placed on my website, if requested? I know it’s a vague question but are there guidelines? If someone wanted me to advertise their store - maybe say, a logo. How much should I charge? Or say an ad with only words? Would it be comparable to an ad placed in a newspaper or magazine?

That’s a question that resonates. Last week I was in a discussion with students who were asking pretty much the same thing. Looking from the outside in, how does web advertising work?

I started to write an answer and then stopped. Wait a minute. That’s got to be already there, on the web. So I did a quick search and came up with “How Web Advertising Works” on Howstuffworks.com. It’s a great resource; like so many others, I’m aware of it, but I don’t use it enough.

I had an excellent Friday and Saturday last week at the Rice University 2008 Business Plan Competition, a reminder for me that some scientists and some ideas make great new businesses. I have to say that because I so often state that the idea is an overvalued component of a new business (compared to the implementation), and that wasn’t the case with some of these. More on that some other time.

As part of that competition, in a judges’ meeting before it started, Rice Alliance for Technology and Entrepreneurship managing director Brad Burke shared the following list of questions to ask about a new venture:

1. Is there a real need? What problem is being solved?
2. Is the market big? Will customers pay for this?
3. Is there sustainable, significant differentiation?
4. Is there IP (patents)? Exclusive license?
5. Are members of the team committed to launch this business?
6. Strong management team? Are gaps understood?
7. Are the timelines, milestones, capital needs and financials realistic? Is there an exit in five to seven years?

The context Friday morning was judges looking at business plans, but I asked Burke for permission to share this because it’s a good list for anybody to use.

And while I seem to be on the theme of business plan competitions–I posted about one here Friday; there are a lot of them in April, and I’ll be judging at the University of Oregon this week and the University of Texas at the end of the month. I posted about the Forbes $100,000 business plan contest for existing companies over at Business in General. Forbes is accepting applications now through the end of May.

There is still time to enter … looks very interesting to me!

I’ve been working a lot on the plan-as-you-go business plan book lately. I just turned in a final draft. That doesn’t do a lot for my blogging, but some of what goes into that book is directly related to getting your startup up and running.

One of the core concepts is that you start simple with your business plan and then grow it as needed.

Reminder: it’s not a document, it’s a plan. We are not talking about preparing a text here. We’re talking about the plan as knowing what’s going to happen.

So what are the fundamental key points? Here’s an idea so you can get started.

• The heart of the plan. It might be just thoughts, spoken, written in bullet points or pictures tagging concepts. Most successful businesses start with their identity, what they do for whom and focus on key points. That’s a great beginning and, hey, maybe that’s all you need to get started.
• What’s going to happen? What happens next? One of my favorite next steps is the review schedule, then the list of assumptions and then a milestones table showing, literally and in detail, what’s going to happen. It has dates, deadlines, responsibility assignments, related expense budgets for each activity and, where possible, a resulting sales forecast for each activity. It’s not a big document; it’s a list.
• Basic business numbers. As soon as possible, do a sales forecast. Then an expense budget. And for startups, list your startup expenses and startup assets. Yes, you should be aware of cash flow, but if you start tracking these basic numbers, and reviewing and correcting, you’re on your way.

The complete formal business plan, as a document, has more than just the above. That’s OK, though, because in the meantime this is enough to get you going and have you enjoying the benefits of business planning–without making the plan, or not having a plan, a reason not to move forward.

You don’t want to start a new business in an existing industry without having a pretty good idea how things work in that industry. I realize this feels like a catch 22, as in how can you have experience in these things before you start, but I’m saying it’s hard to start without experience.

There are ways. I suggested one way in “The Telephone Tree in Reverse” and another in “It Doesn’t Hurt to Ask.” Both of those posts are about phoning people, finding people and just asking.

At the very least, you should have a sense of what the competition’s like, how many people are out there and what the standard financials are like.

There is plenty of information available–too much, in fact. Your hardest task is sifting through it all. There are websites for business analysis, financial statistics, demographics, trade associations and so on. The main web searchers are your best friend. There are also some of the old-fashioned reference works, just in case you really need them. Remember, though, that websites are always changing. Your most effective tools are good search techniques.

Multiple vendors offer standard financial profiles of thousands of different industries. So at the very least, you ought to know what the standard composite company in some industry close to yours does as a gross margin (sales less cost of sales divided by sales, usually stated as a percent. A 34 percent gross margin means you’re spending 66 cents of every dollar on cost of goods, or direct costs of some sort) and profit before interest and taxes, as a percent of sales.

Don’t worry too much about finding your exact industry. The financial profiles available are based on one or both of two main classification systems, the older SIC codes and the more modern NAICS. Both of them depend on large databases and standard classifications, so your Web 2.0 business won’t be there. Nobody’s business really fits the standard profiles. Find the one that’s closest to you and be ready to think through why you’re different from all the others.

Some of the vendors of financial profiles–and this is just a quick list, by no means thoroughly researched–include Integra Information Systems, JJ Hill Research, Oxxford Information Technology, Bizstats, Bizminer and–the oldest and most respected by bankers–Risk Management Association. There are lots of others, too. Don’t forget trade associations, trade magazines and the knowledgeable journalists who write for trade magazines.

Starting a business is hard enough without having a fairly good idea of how things work. And this information is available, for the most case; you don’t have to just guess numbers out of the air.

I’m sorry, but I get irritated. It’s a stupid idea. I’m talking about the people who say “don’t bother to plan because things change too quickly.” You can’t plan because you need to be flexible. You shouldn’t plan because you won’t be able to follow it.

That’s just dumb.

My wife and daughters took a Caribbean cruise in the summer of 2004 when there were more hurricanes than ever before. When their ship left Miami, a hurricane was brewing. By the time they got to the Bahamas, the hurricane had grown stronger. Although they had a plan and a series of destinations, the hurricane was headed toward their next destination. So the captain of that ship changed the destination. He went to the Mexican Caribbean, CanCun and thereabouts, instead of the Eastern Caribbean.

Is there any way that the ship wasn’t better off for having a detailed plan as it set out, even if it had to change it? Even the simple fact of knowing whom to notify about the changes–stops that wouldn’t be made–required a plan.

In business, having a plan means that when assumptions change rapidly, you can more easily calculate the impact. This is what we thought would happen, this is what actually happened, so now we can look at the baseline of our plan and calculate the impact of proposed changes. To do the new thing instead of the planned thing, we’ll have to do this and that, but changing the plan will free up this resource–see, the plan had coordinated and calculated resources–which we can now assign to this new task. The old task has become inadvisable.

If you didn’t have a plan, you wouldn’t be in a position to note changes and mark the impact from the original destination.

And having a plan, if it’s a plan-as-you-go plan, you also have a clear view of the assumptions, which means you can quickly see how and when they’ve changed. You can track your progress toward goals and mark the barriers, unforeseen in the beginning, that have appeared.

Confusing? Yes, quite often. I just got another confused and confusing e-mail on this topic. Maybe it will help to clear it up. If nothing else, it will make me feel better. People use these different terms loosely, in some cases interchangeably. These are good things to think about, particularly when you’re thinking about your core identity, what makes your business you and things like that. Of course you don’t have to write them out, not all of them ever, not even some of them until you’re doing that formal plan for outsiders. But they can all help you settle your business identity.

Mantra

My favorite these days is the mantra. A single sentence that describes what your business does for people. I really like the way Guy Kawasaki deals with the mantra in Mantra vs. Mission on his blog, and in his Art of the Start book.

A mantra is three or four words long. Tops. Its purpose is to help employees truly understand why the organization exists.

He gives some good examples. Wendy’s should be “healthy fast food.” Nike: “Authentic athletic performance.” Target: “Democratize design.” Those are all his, however, not the various companies’. In Palo Alto Software we reviewed our planning and focused on “helping people to succeed in business.”

The Art of the Start by Guy KawasakiRead more about this book…

Mission

A mission statement should be a simple statement of how you’re going to help three groups: your customers, your employees and your owners. If you can’t tell your mission statement from any other, if nobody could guess that it’s you, then you have work to do. Do one only if you’re going to use it. Don’t do just hype, like the Dilbert Mission Statement Generator. Guy’s Mantra vs. Mission post is good on missions also.

How do you use it? Use it to define your company by its long-term goals. What business are you really in? Use it to remind everybody what the business wants to do, and make sure it covers all three groups. Not just customers. Employees and owners too.

The Vision

It’s confusing. I confused vision with mission for years. It finally made sense to me when somebody suggested a vision was a matter of projecting a dream forward in time, like a dream view of something three, five, maybe even 10 years hence, your vision of the future related to your business.

For example, a hotel development, auto repair shop or a web business might easily have a vision for how things will look a few years hence.

Goals

Usually they’re for the mission statement, but it doesn’t matter what form. Make sure you review your goals every so often. What do you want from your business? Think about it. It’s not all that obvious. You might think it’s about growth and profits and success, but then how do you measure success? That’s not a simple question.

• Many businesses are about lifestyle. Having time to spend with children. Independence. Doing what you want to do. Making money from things you’d do for free. Your paintings. Your novel. Coaching people in soccer or backpacking. These things matter.
• Many businesses are about business. You want to make as much money as possible. You want to be the richest person at the next class reunion.

I think of goals as broad and conceptual. Goals are important, but not necessarily measurable in any specific, objective way. Objectives are measurable business goals.

Objectives

Objectives are business goals. Set your market share objectives, sales objectives and profit objectives. Companies need to set objectives and plan to achieve them.

Make sure your objectives are concrete and measurable. Be specific, such as achieving a given level of sales or profits, a percentage of gross margin, a growth rate or a market share. Don’t use generalities like “being the best” or “growing rapidly.”

For example, “being the best” or “maximizing customer satisfaction” are not serious business plan objectives because they cannot really be measured. Much better objectives would set measurable goals, such as holding gross margin to 25 percent as a minimum, selling more than $3 million or achieving 6 percent profit on sales and 10 percent return on equity.

If less tangible goals are critical to a plan, find a way to measure them. For example, if image and awareness are vital, then plan for statistically valid surveys to measure the improvements in image and awareness. You can also set goals for market share and purchase research to measure the actual share. Or if you want to focus on customer satisfaction, plan for a survey to quantify satisfaction or specify numerical objectives regarding returns or complaints.

Danger: Don’t confuse not having a business plan event with not needing or wanting a business plan.

The business plan event forces you to present a plan. It might be that you’re seeking outside investment, applying for business financing from a bank or other lender, taking a business class that requires a business plan or entering a venture contest that requires a business plan.

It’s because of these business plan events that people confuse the idea of needing a business plan with wanting business planning. Suddenly experts can make themselves feel good by advising people not to do the formal business plan because they don’t have a business plan event. It sounds like they are saying don’t plan, when what they mean is more like don’t bother to do the big ponderous formal plan document.

This potential confusion is dangerous. Don’t deprive yourself of planning just because you don’t have to present a formal plan to outsiders. Plan your business regardless. That’s why I’m suggesting that you plan as you go.

One of the big conceptual foundations of strategy is what I like to call your business identity.

This is what makes your business different from all others: what you want, what you do well, how you do things and what makes you unique.

What You Want

It starts with what you (as the owner of the business) want for your company. Define success for yourself. It isn’t always a matter of market share, sales growth, profitability and return on investment, although those concepts are always nice. In many cases it’s about living well, or living better. Having more time with the kids. Coaching soccer. And sometimes it’s about being right. Showing that something can be done. A lot of times it’s about doing what you want and making money at it. It helps to think this through. You can’t get to your destination if you aren’t sure where you’re going.

There are several levels of goals in business planning. Use one or more of them to define your identity:

1. The mantra: This is a simple sentence or phrase describing what you do. Guy Kawasaki has a nice treatment of mantra in his book The Art of The Start, and he’s made an excerpt of that available for download.
2. The mission statement: Too bad it’s usually just empty hype. A good mission statement actually defines what your company wants to do for its customers, for its employees and for its owners. That can be useful.
3. Business objectives: These are specific, concrete, measurable goals, like sales levels, growth rates, units, profit percentage, gross margin percentages, customers served and so on. If it isn’t measurable, then it shouldn’t be there.
4. The vision: This is a dream for the future. Project yourself forward into time, say three or five years, and describe what you want to see for your company.

What You Are

Then there is that sense of looking in the mirror, as a company, recognizing what your company really is. This includes:

1. Core competencies: What are you really good at? What do you do better than anybody else?
2. Keys to success: They are different for every company. It doesn’t really go by industry, either; one company’s key to success is better parking, another’s is better food, another’s is better service. Or lowering costs. Or more repeat business. Or better marketing.
3. Strengths and weaknesses: The top part of a good SWOT analysis, the nature of your company. Be honest. First identify strengths and weaknesses, and later you can build strategy based on them: Work toward the strengths and away from the weaknesses.