ET15- Write a Business Plan? Pros and Cons
Should You Write One? Yes and No, With An Explanation
In this episode of Questions and Rants I run through the reasons old school style 30-40 page business plans are going away but why there are still certain things you should think about figuring out before you write your plan.
The exercise is not so much about the writing but there is a lot of value in the planning portion. Skipping this has more serious consequences fir any business, not just those hoping to raise money.
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Female Voice: Do I need to write a business plan?
Matt: Do you need to write a business plan? That is the question where – if I just was forced to write an answer right now, a one word answer, yes or no, I would say no. Now, you hear a lot and talk about business plans and how to write them and what goes into them and there’s a lot of talking in business school about them. When I got an MBA, we had a whole class on business plans. I was actually in the business plan competition in my MBA Program. I won for the school. I did not win for the inter-school competition.
I actually started when I – the very first job I had on my own as an entrepreneur or business I had, I guess I should say, was writing business plans. That was back in 2001. There were still a lot of companies running around trying to raise venture capital. Writing is one of those things that freaks a lot of people out and they don’t feel like they have the skills to do it. And so, because my last job before becoming an entrepreneur was largely based on writing business plans for consulting company, the obvious move for me when that company fell apart was to go out on my own and offer my services as a business writer and I could charge less than they would have had to pay the consulting company and I could still make, for me, was a good income.
There was plenty of demand at least in the early days when there was still money available to be raised and one of the requirements for raising money was having the business plan. But the reality is for the vast majority of businesses that are not going to be raising money from outside investors; a business plan is not something that you have to do. As a result, most entrepreneurs skip it which is not entirely a good idea either. So, the short answer is for most businesses you probably don’t need to write a business plan or defining a business plan as one of those big 30 or 40 page documents with a lot of pie graphs and charts in it and a lot of wordy long paragraphs talking about SWAT Analysis and lots of market research and footnotes and all that kind of stuff that goes into it that takes 40 or 50 hours to write and is constantly revised and never seems to get read by anybody except the poor guy writing it and maybe the person who is the CEO and maybe sometimes that’s the same person.
Nobody else much gets passed the executive summary and even that now, a lot of people are doing that as a slide décor or a PowerPoint presentation. The days as a long winded multi-thousand word written business plan I think they are probably numbered. Now, that said, if you’re going into a business even if you’re not planning to raise money, there are definitely some things that you would’ve otherwise had to put in a business plan that is probably still worth spending some time thinking about.
The real value of writing a business plan was not all those words on the paper that nobody ever read. The real value in writing the business plan was being forced to sit down and think through the answers to the questions that are involved in writing the different sections of the business plan. That’s primarily talking about what product or service your business is gonna offer, who your customers are gonna be, who your competition is, how much its gonna cost to get out there, what risks and opportunities you’re facing, and all those kind of questions that really any business owner should be asking themselves not just people who are relying on investor money. Just because you’re gonna be burning your own money, it doesn’t mean you want to spend it foolishly.
What I would recommend if you are a business that’s going to be funded out of your pocket is to nevertheless take some time and I’m not talking about tens of hours even I’m talking about a couple of hours and you probably know the answer to what your business is going to be probably. Although, if you heard the term pivoting, many business think they’re gonna start out as one thing and ultimately switch to something else and sometimes either a 3rd or 4th iteration before they really figure out what they’re going to be when they grow up.
But, for a lot of businesses, it’s pretty straight forward in what they’re gonna be when they start, what they still are 10 to 15 years later. If you’re starting a house painting business or a law firm as an entrepreneur or an app for a phone, it’s probably that business that you started is gonna be the same business as it is for as long business lasts. The real questions that you want to stop and ask yourself are “Who are the customers for this business?” because you can have a great idea and you can imagine that a million people would want it but until you really stop and figure out who your customers are gonna be, you haven’t done the homework that you need to do in order to have a successful launch or as successful as possible to guarantee when you’re talking about doing a startup business which always has some inherent risks generally.
So, who are the customers gonna be? In the case, let’s say, it’s gonna be a house painting business. You could conceivably say “well, everybody is a customer.” But realistically, you know you probably only gonna want to drive within a certain radius from whatever you’re gonna locate the business. And out of those people, probably rentors are not gonna be willing to pay to have the house their living in painted because they don’t own the place. And then, you probably configure certain sections of towns where you gonna go a lot less business than other sections of town whether just isn’t the money, it is not economically feasible for them to do a lot of home improvement projects. Either they’re gonna do it themselves, or it’s just not gonna get done or they’re gonna pay the lowest possible bidder and that’s not the position that you want for your business.
Within the radius you’re willing to drive, there’s only certain neighborhoods where you are most likely able to find best customers. Now that you’ve narrowed it down that much, you might have a much better idea of who your customers are gonna be and then you’re gonna think about “Am I gonna do exterior painting and interior painting or just focus on one specific thing?” just focus on exterior or just focus on interior and what else you can do to kind of differentiate or narrow the focus of who your customers are gonna be.
The more specifically you know who your customers are gonna be, the less you can spend on marketing because you only have to spend to market to exactly the people who are gonna be a good fit for your business. There’s no point in blanketing the entire area with postcards or flyers or whatever if only a third of the people in the actual driving distance in the area you defined are gonna be good customers. You want to get it down in to the ZIP code or even sub ZIP code for your target mailing and then you might even decide to drive through the neighborhood and see how many houses are painted recently.
If the answer is hardly any, you may cut that section out. If the answer is quite a few, then you know now you’re in a neighborhood where people are willing to pay for the service you’re planning to offer and that’s probably a good market to target. Doing that research on who your customers are and narrowing it down until you have literally the best situation to be in is specifically have the name of the person that you want to be your customer or the names of the people that you want to be your customers because then you can address them directly.
“Bob, I can see that it’s been 5 years since your house has been painted. It’s starting to look like you could use it again. I’m in a house painting business. This is what we do. This is what we charge. This is what we can offer you. How would you like to get your house painted by us?” you can’t get a better pitch than that if you can directly address the actual customer that you want for your business.
The opposite of that is trying to sell it to the whole world, to offer it to anybody anonymously and randomly. In that case, some people might be a fit. But most people won’t and yet you’re addressing the entire world. So, take the time. You don’t have to write a business plan but take the time to figure out who your customers are as specifically as you can so you can address them as targeted as you can and has the lowest spend on marketing with the greatest return on your investment. By the same token, the better you know your customers; the better you’re gonna know what it is they want. Are they driven by price? Are they driven by speed or delivery? Are they driven by your band? Are they driven by certain other frustrations that they have, that they can’t seem to fill from other services or other offerings that are available in the market.
The better you know what they are looking for, the better you what they want to buy, more easily you can tailor your offering to their exact needs and that makes it a perfect fit when somebody says “hey! That’s exactly what I was I looking for.” Of course, they are more inclined to buy. If they say “Well, that is sort of it but not exactly.” Well, now they got hesitation. And if for whatever reason you’re not at all that they want, well obviously you’re gonna have a very tough time making any sales.
So, don’t have to write a business plan but really spend some time to know your customers. Here’s the other part of that. In a business plan, normally, you go through and evaluate all your competition. An entrepreneur sometimes – especially new entrepreneur – get thrown by this. For one thing, they don’t recognize that having competition is a good thing. If you get into a business where you cannot identify a single other provider of your product or service that is remotely similar to what you want, that’s not a great opportunity. Generally, that’s a red flag. It means there isn’t a market for what you’re trying to sell. Either you got something but now you’re gonna have to spend money and time educating people about what it is because they have no point of reference. They have nothing to compare it to. They weren’t shopping or looking for what you’re offering.
First, you’re gonna spend a lot of time that they need whatever it is that you’ve got. The other reason that could be a red flag if you can’t find anything similar to what you’ve got is that its already been tried. People put it out there and it hasn’t worked and that’s why you can’t find any similar competitors for what you are trying to offer. Maybe your idea is just too unique, too small to support a business or it’s not just something that even though it seems like a good idea, is feasible for some reasons or for several reasons that you aren’t aware of because you haven’t done enough homework or research on the issue but it’s out there and it’s a business killer. If you’re going into something where you cannot find a single likely competitor, that’s a big red flag.
Most likely though, most businesses, there is competition. In that case, what you want to do is identify is what there is about the competition that you can do better. Most of the time in most small businesses, the answer to that is easy. Its service. There’s a lot of house painters out there but a lot of times when you call them, they don’t call you back. They don’t call you back the next day or the day after that or they schedule to do a quote or they don’t show up for the quote or they reschedule. If you’re lucky, they call and reschedule. Or they show up late. Or they come and you ask them about painting the outside and they want to give you the hard-shell on doing the inside. Or you don’t like their price or you don’t like their attitude.
They don’t come across as competent. There’s a lot of ways you can win in service. And in otherwise what seems like a fairly commodity business without going for the lowest price. First of all, lowest price isn’t as attractive as everybody thinks. A lot of people are suspicious of the lowest prices. They are smart enough. They’ve been burned a few times buying the cheapest possible thing and now they are not impressed by somebody who just comes in and wants to talk about lowest price. Providing a good value is always beneficial but that doesn’t mean lowest price. That means lowest generally overall cost or best deal but not necessarily the lowest price. Figure out who the competition is. Figure out where they are deficient.
If it’s their service, if it’s the time it takes them, if it’s the way they deliver the product, if its most people complained that they didn’t get what they paid for or they were expecting something else, find out what those problems are and figure out if there’s a way you can crack your business around addressing those problems. With our business, our bookkeeping business, one of the biggest complaints that people have is that bookkeepers come and work for a while and they seem to drop off the face of the earth.
That’s because most of them are one person businesses. They don’t have enough client work to really pay the bills so when the job comes along, they take it and they leave their clients hanging. Or because they are one person business, when they go on vacation or they have taken time off to take care of sick relative or sick kid or whatever else, all the client work stops or sometimes all a sudden a big client will come along, too good to pass out, they take on the big client. And as a result, they’ll have a handful of other clients who now become a lower priority and suddenly they are not getting their stuff done anymore.
We overcame that. I overcame that in my bookkeeping business by planning at the very start to grow as quickly as I could and be able to bring on staff and have a system in place no matter what client it is and who’s working in the office, we could get a particular client’s work done. So if the person who normally works on it is out sick or on vacation or what have you, everything has been documented, the processes for that client, what they need, what we need to ask them, all that kind of stuff has been documented and so somebody else can simultaneously take over and still deliver great quality work in the same time frame that the client is expecting that we have promised to do it in. there’s no delay. There’s no drop off. There’s no “Sorry. We didn’t get your stuff last month done because we were busy or on vacation.”
Clients really appreciate that likewise we have great service and we always try to get to people the same day or if they call late in the afternoon then maybe the next morning. But less than 24 hours generally. In our industry, the standards more like a weaker tool, sometimes the people – after calling 2 or 3 times to get an answer – the follow up is poor. By having great service and being consistent with our delivery, right there we’d be 95% of our competition. Just doing those 2 things. When you are thinking about your business again, you don’t have to sit down and write out all the in a business plan but you do want to line them out who am I gonna be competing with? What are their strengths? What are their businesses?
How am I gonna make my business superior? Because the main question that you want to answer, and again that used to be answered in a long business plan, but now, as long as you know the answer and you’ve built it, you’ve kinda baked it to the essence of your business, the question is Why would any customer who’s considering something you’re offering or in the category that you’re offering in, why would they choose you over any of their other options? You should be able to easily and quickly articulate why that should happen.
That’s a conversation when you have it with a customer, you should be able to quickly and easily explain why you got a superior offering. Anybody outside of your business who just asked you “Hey! What do you do? What makes you guys different? You should be able to explain it. If you can’t explain it or there’s nothing that stands out or there’s nothing you have to offer that’s different than they can get from anywhere else, you haven’t done a very good job of planning your business and there’s no real guarantee that your business is gonna be successful because there’s no particular reason for somebody to choose you over anyone else.
If your only answer is “Well, we are couple of bucks cheaper.” Or “Were the closest option in town for whatever that is or for people to drive to or whatever.” You’re not gonna last for a long time because as soon as someone else comes along with better value or they match your price or they move in to your same area, you got nothing. You really want to stop and think about “what are we gonna do that’s gonna make us first in customers mind or when they’re comparing their options, they’re gonna pick us.
What’s what special thing or things that were gonna offer that’s gonna make us different?” that’s the main question that you’re getting to. You want to understand your customers. You want to understand your competition. You want to understand and craft a solid business offering. All are the things that would’ve normally been written down on a business plan. I’m saying don’t bother with long written winded business plan but do take the time to answer these questions and figure it out. Along with these goes a little bit of financial planning and budgeting.
Again, you don’t have to get fancy. You don’t have to do a whole balance sheet and profit loss for 3 years in projections but you do have to figure out how much is it gonna cost you to get to the point where you start making sales? How much is it gonna cost you to maintain your business in a regular basis in terms of how many sales have to come in to pay for your costs or at least to breakeven and how much do you have to set aside to get to that point? The better you know the answers to the questions we already gone over, the easier it’s gonna be to estimate your cost and make sure you have enough or else figure out a way to scale back to do it in a way that you’re gonna be able to achieve. I used to do a lot of consulting to restaurant owners.
A lot of people would call and say “I want to open the restaurant.” And we go over the fact that a restaurant to start can cost on a low end 30 or 40 thousand dollars if you got lucky or you have an existing space or you’re in a cheap place and you got a certain menu or whatever all the way up to several hundred thousand or more up. You can spend a million or more to open a restaurant. That’s out of reach for most people but that doesn’t mean you can’t start. There’s lot of other options.
You could literally start at a farmer’s market. Take what would be your signature dish for the restaurant and figure out how to do it in a way that you can deliver on a farmer’s market and take it there and see how it goes. If you got amazing receptions and people are begging you for a recipe and ask you when you’re gonna be able to open a restaurant, you know you’re on a right track. If you thought, grandma’s secret meatball recipe was gonna be a huge killer and you take it to the farmers market and you’re not doing any better than the other 5 other places at the farmers market. Nobody is out excited about it.
Nobody is asking you when you’re gonna open a restaurant. Well, you might have just saved yourself a whole ton of money. So, it’s not whether or not you can start the exact business that you are planning, if the funding does not allow for it, you can still get started with something and you can still do most of the basic figuring out that you would do with the full scale business but in the popular circle now it’s called launching with minimum viable product. In other words, the least expensive, least complicated version of the business you have in mind.
You put it out there as quickly and as inexpensively as you can while still offering a decent product and see what the reception is. Then, tweak it and build it and change it as you go until it’s dialed up to exactly what you wanted. In that way, you can get something launched with less with maybe you though t you would have to spend if you went on the full blown version right out of the gate. A lot of times, a full blown version right out of the gate isn’t gonna be what the business end up being anyway and by spending all your money upfront, you don’t have a second chance to fix it and change as you go.
Anyway, long story short is, you can skip the business plan in most cases. But, don’t skip the business planning. The business planning doesn’t have to take hours or weeks and months but it is something you should sit down and think through and investigate and make sure that at the end of the day you figure it out why customers would pick you out of all their other options for whatever business you’re getting into. If you have a good compelling reason why you gotta do that, then you are most of the way there of having a successful business. At that point, you just got to go ahead and launch.
Thanks for listening.