After the decision to start a business has been made the next step is goal setting.
Making money is not a goal. Making buggy whips out of cowhide that satisfies the customer’s wishes for a long lasting and effective device to encourage a faster and more responsive horse, for example, would be an example of a good starting point.
The more specific the plan the better, if the material is relevant. Excessive wordiness just to provide good “throw weight” to the document is OK for presentations to a professor or a banker or anyone else who is concerned more with form that function but what the manager needs is the essentials, clearly presented, in a living document.
Plans, and especially those that include a detailed financial budget, are usually outdated from the minute they are put to print. So why do it? Because goal setting is the end in and of itself. Without a goal (Driving to San Francisco? How do you plan to get there?) the enterprise is destined to wander aimlessly about with no real benchmark to judge progress (or lack thereof) or to recognize both the need to change and the way in which change in one area affects other aspects of the operation.
One of the problems with newly minted entrepreneurs is that they not only believe in their product but they fall in love with it and, as anyone who has ever been in love knows, being in love is not a rational process. Yet rationalizations for continuing with a bad (in love with) idea are rife. If only I could spend a little more time making it perfect, if I could only have more money to make it perfect, if only the marketing guy could find the right way to explain why the FEATURES of my product are better, if the price were lower, if the price were higher, if the product was green instead of blue, and so on are only a few examples of reasons to throw good money after bad on a true-love concept that will never come to fruition.
Once the business plan (goals) has been established it is important to follow the plan or have a good, stated reason to change. If the first priority of the plan is to design a business card (in this case, probably the least productive use of anyone’s time) then designing the business card must be worked out before ANYTHING else is attempted. It is always better to do what is necessary for success than to do what is fun but does not contribute to the stated goal. Like any good karaoke singer with new music, it is essential to keep an eye on the bouncing ball and constantly pay attention to the notes and the score.
Plans are also essential for keeping everyone in the organization “on the same page.”
Using the same driving trip analogy, when several vehicles are going to the same place it is probably best to follow the same route, more or less. If the CEO keeps changing direction without forethought and without focusing on the final destination, then everyone will become frustrated from the wasted time and energy spent in retracing roads already traveled. Quality employees, who are frustrated, quit. A CEO who cannot plan should hire someone who can and make certain the new hire understands the need and use of this all-important process.
Presuming that a decision has been made as to what business to be in, the next consideration is the potential for profit.
Formulating a financial plan will help determine the resources in terms of labor, equipment, cash and materiel sufficient to begin and continue the enterprise. It is often said that many businesses fail because of a lack of funding. Not true! Businesses always fail because the management was incompetent and unable to plan for the resources needed for success. A business that runs out of cash did not have enough available to start with and was run by a management team that simply misunderstood the dynamics of the resources that lead to sufficient working capital.
Many romantics quit their day job prematurely with a gleam in their eye but with insufficient cash to make it until their product is sold in sufficient quantities to turn a profit. Their love of the “idea” outweighed the reality of paying attention to the basic rule of survival: Have enough money!
New businesses as well as existing ventures must make certain that positive cash flow is always available before abandoning reliable sources. Even huge and well-established companies that ignore cash flow can fail from the arrogance of believing the company “to big to fail” while smaller, conservatively managed competitors continue to prosper in both good and bad times. Nothing makes this case better than the failure of the major investment and commercial banks in 2008 that ignored the basic rules that applied to their businesses for decades leaving them with insufficient cash flow to avoid insolvency.
There are a plethora of books around on budgeting but a simple “back-of-the-envelope” worksheet can probably give an indication of the probability of success of most new ventures. If, for example, the business involves bringing an exciting t-shirt to market,
Taking a quick look at the number of units sold necessary to pay for overhead and profit can sometimes be enough to see the futility of such a business and eliminate the painfully drawn-out process of creating an elaborate budget. In this example, and without any other income stream, a shirt sold for $25.00 with a cost of goods sold of $20.00 must generate 10,000 sales units in order to cover $40,000.00 in overhead and $10,000.00 in profit. This is generally not an acceptable return for the effort expended in selling 10,000 units for most business people even if all 10,000 are sold to the same customer (although it might just be what some would find satisfactory for reasons know only to themselves.)
The absolute or relative net profit is important to know only as it relates to the general goal of the person guiding the activity. If $10,000.00 in net is enough, then so be it. If the goal is to make a sustainable living, then there is probably another project worth investigating that has more potential. A net of $10,000.00 for this endeavor may not be enough but at least some idea of the potential profit from selling t- shirts can be made in a rather quick and dirty look that may save the time, trouble and aggravation of launching off without a plan only to find that the basic premise of the business could never be realized.
The lack of a detailed and comprehensive business plan will often be a prescription for failure or, at the very least, will inhibit profit potential.
The lack of regular and consistent follow up to the plan will reduce potential profit. The failure to adhere to the priorities included in the “living document” plan will doom the project to an untimely death. That is not to say that deviations from the original plan are counterproductive. The business that starts out making buggy whips but changes to making saddles when it becomes obvious that buggy whip income will not cover the overhead is able to adapt to changed circumstances in a planned and organized way. There are geniuses (and I know a few) who make it on sheer genius (and even these people could make even more with the right approach) but almost everyone else who wishes to “wing it” and not follow a plan should abandon the dream of running a business and join the “wannabes” in Vegas.