3 ingredients of an effective business plan

Approximately 543,000 new businesses get started each month. Eight out of ten of them will fail within the first 18 months.

Faced with these numbers which show that the possibility of failure is extremely high, preparing oneself for the challenges of new business and the continuous monitoring of its progress is an absolute necessity.

The natural choice to help support any entrepreneur in the preparation process would seem to be a business plan. At least in theory…

Being flexible and adaptive

The first thing that comes into my mind when I think about business plans is that they are long and boring. They’re written in vague language and their main goal is to prove their complexity and importance instead of describing a vision and actions in a readable way. Moreover, they contain a lot of numbers that refer to the distant future which no one can predict for sure. But, very often what they lack is flexibility.

Today, managers and employees need to adapt to facts on the ground, come up with solutions to unforeseen problems and run with unexpected opportunities. They must have the ability to adapt quickly.

Software development is a perfect example of adjustment to a rapidly changing environment. For many years, the applications have been built in the “waterfall” model. In such a model, detailed plans were created for the very distant future. But very often, despite all the preparations, the final outcome was nowhere close to meeting the users’ expectations.

This approach was responsible for many failures and missed opportunities. In response to these failures, the agile movement appeared. The agile model, as opposed to the waterfall model, focuses on continuous, time-boxed iterations and frequent software releases. This allows companies to rapidly test-and-adjust any product to address a customer’s actual, and potentially evolving, needs.

The same approach can be successfully applied to the process of creating and updating business plans. The modern business plan should be simple and should be the object of frequent verification and upgrading in order to meet customer and market expectations.

Find the answer to these 3 questions

Seeing different lean approaches to the processes of developing and structuring the perfect business plans, I have learned to focus on three main aspects: the problem, the solution and the cost/revenue structure – in this order.

Problem

I believe that each business plan should start with a single question: what kind of problem am I solving and is this problem also mine? Often, it is surprisingly easy to become absolutely obsessed by our own ideas and jump right into developing solutions. Sadly, rich and complex solutions to non-existent problems are doomed from the very beginning.

But, how can you decide whether the problem exists or not? Lean Startup advocates say that the very first step is to find a niche or a problem fit. Seems pretty easy but, in reality, finding it can be as hard as finding a leprechaun’s hidden pot of gold at the end of the rainbow.

My personal suggestion is to use baby steps. At the beginning, I verify the idea by asking myself a question: do I personally have this problem? If the answer is yes, I start to look for other people with a similar problem. The number of customers I will need to have a successful business depends on the cost and revenue structure, but for now I trust my gut instincts and just keep on going. If one, intelligent person is aware of this problem, there is a slight chance that more people actually have the same issue in their lives.

Interestingly, it happens that over 70% of successful entrepreneurial enterprises are started by experts in their particular fields who have directly experienced the pain of a specific problem for which they have come up with a solution.

Not necessarily unique solution

Talking about solutions…

Recently, more and more entrepreneurship experts suggest that solutions in and of themselves are not so important. What really matters is the Unique Value Proposition. UVP defines areas in which business ventures excel, especially when compared to already existing solutions. The same experts put a lot of stress on the word: “unique”. If your product is not unique enough, it would be extremely hard for it to grow. Personally, I disagree.

Everywhere I go, I see businesses which are successful even if they operate on a market which is already flooded with similar services. How could it be possible that so many successful businesses are created around an idea as simple as creating to-do lists? How could it be possible that so many coffee shops have their own clients when so many similar places exist?

In my opinion, the things that keep these businesses alive and successful are solutions. Solutions are the foundation on which our businesses are built. Some coffee shops just make better coffee than others, some retailers have better customer service than others and some to-do lists have better user interface than others. They all excel at giving their clients excellent solutions. On the surface, these solutions are not necessarily unique, but are good enough for their customers.

On the one hand, typical old-school business plans too often promote really bad ideas in the thicket of numbers and false prognoses. On the other hand, modern business plans too often underestimate ideas that are good enough simply because they are not particularly brilliant. I think that a good business plan should neither overestimate nor underestimate solutions, but rather focus on setting clear goals and realistic action plans, empowering fast learning and baby step approaches.

Cost/revenue structure

Thinking about revenues and costs may sound obvious, but you may be surprised how many people from your neighborhood actually ruined their lives by falling into debt because: they hired too many people, rented warehouses which were way too big or bought really expensive production tools using money they didn’t have.

Traditional business plans do not prevent us from making such mistakes. On the contrary, they involve heavy analytical mechanisms to predict incomes and costs in the coming years, and allow us to feed on our own illusions. This is extremely dangerous, because the false optimism and illusion of accurate predictions cause many businesses to fail eventually.

That is why I am a big fan of more modern aproaches which use more simple structures and focus solely on the near future. Personally, I start from creating a list of all costs which exist now or can occur in the immediate future. Then, I initially decide how much money I want to charge my users. If I compare prospective costs and revenues, I will be able to clearly see how many customers I will need to either: break even or make a profit.

Then, this prediction can be easily translated into a clear goal. When I write in my plans, “I expect 50 new customers each month” it’s not just a passive prediction. It is a simple and powerful objective, which from then on drives all my actions.

What I find particularly important is to know how much money I need right now. Not in five or more years, but right now. I ask myself a question: if someone would give me $50,000 right now, would I know precisely how to spend this money? What about $100,000 or $1 million? If I can’t find an answer to such a question, I probably don’t need that amount of money right now.

I prefer to start small and make baby steps.

One more thing…

These are the three aspects of a business plan on which I focus the most. But, there are two more principles that are essential ingredients for creating a great business plan.

The first is to be realistic. Great visions can be tempting, but, in my opinion, it is far better to have a small and profitable business than an ambitious one which could suck all the time and energy from its creator.

The second is to be consistent. Modern entrepreneurs promote the idea that it is a great virtue to be prepared to fail quickly, but I think that this attitude prevents some businesses from flourishing. People are afraid that their ideas are not good enough and give up quickly. What they lack is the ability to keep a sustainable pace.

Tim Fargo once wrote that: “Good intentions might sound nice, but it’s positive actions that matter.” In business plans we need to shift from intentions to actions. We need to create not a list of predictions, but the source of objectives and actions. Moving from static business plans to dynamic ones is the best thing that we can do. Below you can see a short video showing how I did it.

Start right away your planning and create list of your business goals now: https://cayenneapps.com