When should you start a Business Plan?
So… you are starting your new Business or planning to, and you have heard a million times about the importance of a good Business Plan.
You have no idea about what to do or where to start.
Should you start right now? Even before starting defining your product? Would a “classic” Business Plan be your best option?
As soon as you decide which Business you want to start, you should develop an incipient Business plan in order to clarify how profitable could it be, and under which circumstances.
You shouldn’t start any Business without being sure about its potential profitability, and the best way to ensure it is writing down some numbers.
* In the “Business Plan Basics” page, we explain the Basic factors you should master in order to develop a proper Business Plan, while in this page, we’ll focus on how an entrepreneur should begin from scratch, so once you have finished this page, we encourage you to visit it.
How starting a Business Plan
Ok. You decided to start writing down that numbers, but know nothing about developing Business Plans.
Now we’ll explain how can you start assessing almost any Business by following these 3 simple steps.
- 1. Estimate your potential Sales.
- 2. Estimate the Costs and Investment you would need.
- 3. Calculate your potential Benefit.
Of course, these steps can be much more extended.
But for an initial study, explaining the Amortization, Deferred taxes or ROIs would be a worthless effort.
According to our experience, by doing simple and well-supported Estimations you can assess 90% of the Businesses.
- Remember: we have been working on Venture Capital Investments for years. We have assessed hundreds of projects.
The first and more important point is being willing to do some numbers; not just expecting having good results.
1. Estimate your potential Sales
It doesn’t consist of writing down a “wish list” with astonishing numbers that rarely take place.
When estimating your potential Sales you must be cold and support any number you write down.
In order to do it properly, we suggest taking into account:
- Market growth.
- Similar companies sales’ growth.
- Similar products or services you offer sales’ growth.
You can find information about different markets’ growth in Internet easily (Forbes, Statista…).
Generally speaking, you should never estimate your Business’s projected growth to be higher than the market average growth unless you honestly think you can offer something much better than your competitors, at significantly lower price (it happens very rarely).
So, although you are convinced about how good is your product, be prudent about your potential sales.
It is always better being conservative when estimating sales’ projections and having a good surprise later if they happen to be better, than being too optimistic, receiving later a terrible “Christmas present”.
Similar companies sales' growth.
Within the market you are targeting, focus on the companies doing almost exactly the same activity you would like to develop.
If you think you’ll be the only one, check it again: Nowadays, there is a company for everything. It is almost impossible to start a completely new company, what is good news since you’ll be able to learn from past failures and successes.
Study those companies:
- How they started.
- How much time did it take to success.
- Which is their growth.
Then, assume having the same growth than they had for the period of time it took them to be in a leading position (this would be the best-case scenario possible).
Similar products' growth
Similarly to what we suggested in the previous point, now you have to focus on the products you are offering.
Sometimes, very different companies share certain services or products, so not necessarily the companies you studied before should be considered here.
This analysis will show you which products may be the best, in order to guarantee a solid or high growth.
Imagine you offer 3 different products and two of them present average sales’ growth of 2% while the third one has an incredible 10% annual growth in all the companies offering it.
You should rely more on this product rather than the other two if looking for a 5% sustained annual sales’ increase.
A proper analysis of these 3 factors will give you an idea about what is a reasonable sales estimation for your Business projections, being supported with real data.
Now, we’ll move to analyze the Costs and Investments needed for guaranteeing the sales you expected.
2. Costs and Investments needed
Calculating or estimating the costs seems not as attractive as the sales, but trust us: it is where the real profitability is.
Selling thousands of dollars per month is extremely easy: you just have to buy the raw material, manufacture the product, and sell it for a lower price than your competitors.
The difficult part is having profitability out of it.
This is why we insist on the importance of Cost calculation so much. Because we have seen dozens of companies selling millions of dollars, that were almost broken: They were focusing just on selling as much as possible, ignoring how expensive it was when producing it.
For a first Cost calculation approach we suggest:
- Establishing the Inevitable Costs.
- Recurrent Costs you would have no matter what you did.
- Establishing the Investment you would need.
- Establishing the Manufacturing cost.
- The costs involved in developing your product.
Also, you’ll find useful and detailed Excel Sheets in the “Business Plan Templates” section that may help you with your first Business Projections.
These costs could be associated with the “Fixed costs”, but we prefer explaining them as Inevitable since lot of people planning about starting their own Businesses get confused with the distinction between Variable and Fixed costs.
These recurring Costs are those that you would have, no matter how much did you produced, being essential to the economic activity you want to develop.
- Hosting costs (if you plan to become a blogger).
- Internet costs (if you plan something Internet-based).
- Rent costs (if you plan to start a physical shop).
These costs are not affected by the amount of products you sell. You just have to pay them every month independently of your activity.
Again, from an accountancy standpoint, just saying “Investment Costs” guarantees you a place in Hell.
Strictly speaking, an Investment is something completely different from a Cost, of course, but some people get confused so, we prefer everybody to understand the concept rather than being absolutely and 100% accurate in the terminology.
These costs are similar to the Inevitable ones; you need them in order to develop your activity, but with a little difference: you just have to pay them once (or once each 5 or more years).
This difference is important since in case you need to borrow some money, you would have fewer problems when borrowing it for Investments purposes rather than for pure Inevitable Costs:
- Everybody understands that an Investment is something “expensive” but takes place once, while recurring costs (Inevitable Costs) may last forever.
Formally called Variable Costs, it shows how much are costing you manufacturing the products you offer.
For a first approach, these costs should be that easily identified when producing your products. You can regard them as your raw material cost.
If you are planning to start a small Business by yourself, or just with a friend, we don’t recommend taking into account your salaries (at initial stages).
You should do the entire calculation estimation, and once you have the final “Benefit” check if it would be enough for you to live.
This is important because it works as a filter for choosing:
- The right Business Idea.
- The right Business Approach.
- The right Product promotion.
Now we’ll explain these cost estimations explained with a little example:
e-Commerce Costs example
Imagine you’re planning an e-commerce business about buying and selling sneakers through Internet (home-based) you could approach your costs as follows:
- Monthly Internet cost.
- Hosting price per year.
- Any cost associate with the platform you employed.
- Any shelving you bought for storing the sneakers.
- Any machine you bought for marking or treating your products.
- Sneakers’ price.
- Transportation costs.
With the projections you established (at the first point) you should estimate how many Sneakers would you sell per month, and depending on that number, you could finally calculate both your monthly costs and how much money would you need as initial Investment.
3. Benefit Calculation
After properly estimating your potential sales and the cost they would imply, now you only have to make a simple “minus” operation.
You should not expect to have Benefits in the first moth, but in a medium period of time (at least a year, approximately).
In the “Entrepreneur Golden Rules” page, we explain how important is to be patient when starting a Business and how should you ensure “economic relaxation” before becoming an entrepreneur in order to just focus on improving your Business rather than being stressed about your monthly bills.
Before summarizing, there is an important rule we always use when assessing a Business for the first time we want to share with you:
If a quick-draft Business Plan gives “impressive” results, surely it is wrongly estimated, but it could be possible to experience good benefits, so keep your interest on it.
While if a quick-draft Business Plan gives terrible results, surely they will be at best-case that bad, so better run away from that project.
In order to develop your first Business plan when planning to become an entrepreneur, you should prioritize making well-supported estimations rather than getting lost in technicalities.
Those estimations when assessing a certain Business’s potential must take into account:
- Which is the overall market growth.
- How the competitors are growing in sales.
- How the products or services you offer are behaving.
The Costs and Investments necessary
- Splitting them into:
- Inevitable Costs.
- Investment Costs.
- Manufacturing Costs.
- Not expecting good results since first month.
If all the estimations and calculations are well supported, either you see interesting results while developing this “quick-draft” Business Plan or you should think about other Business niche.