Strengthening Business Potential and Other Random Thoughts About Money
Getting into Business in a big way with a Plan
Over the years, the staff at Chapman Spira and Carson has perused countless business plans. We have come to realize that there are certain critical elements that are strategically imperative if the entrepreneur wants his plan acted upon by a funding source. While for most of us, funding is the ultimate purpose of exercise but we are also convinced that a well thought-out plan has benefits far exceeding the receipt of financing alone. More often than not, in the plan’s formative stages, the author enters into it’s design with missionary like zeal. He is so convinced of the fact that his concept will reshape the world in which we live as well as most of the known of the universe, so professional guidance is is not required. The current thinking seems to be that disruptive technologies literally have a life of their own. In other words, they have become bigger than logic itself.
These mental mastication’s result in a faux product that becomes an illogically constructed three legged monolith, defining no clear pathway to marketing, financing, distribution, manufacturing, logistics or management competence. The resultant hodge-podge expresses little and convinces no one. Authors that only have their visions to guide them never are able to see the forest for the trees. Sadly, substantial thought has gone into the end result with little attempt to create a logical path to get there. Business plans must be living and breathing appendages of their maker, logically constructed to maximize its impact. However, without out touching all of the bases, even though the concept has the potential of being a home run, hitter will fail to touch all of the bases and get tagged out.
Conclusions are derived from the building blocks contained within a well-structured plan but the end result is not foreseeable until all of these bricks are in place. Moreover, the majority of pseudo visionaries believe that they can see the essence of the concept and it’s conclusion before they lay pen to paper. Sadly, that is never the case and only through the discipline of putting the pieces painfully in place can we achieve a viable product which will grow as we nurture it with all of its composite parts. Not to belabor the point relative to how important the business plan is, we offer a quote from smallbusinesstown who defined the issue rather completely. “A business plan is primarily an organizing tool used to simplify and clarify business goals and strategies, which might otherwise appear complex and intimidating. However, a business plan is also a sales tool. If it cannot convince at least one other person of the value of your business idea, then either your idea is not worth pursing, or your plan needs major rewriting.”
The folks at MIT spent a bit of time telling us how to lay out the plan to have it become most effective and they produced the following criteria for business plans…
Business Plans . . .
- must be arranged appropriately, with an executive summary, a table of contents, and its chapters in the right order.
- must be the right length and have the right appearance – not too long and not too short, not too fancy and not too plain.
- Must give a sense of what the founders and the company expect to accomplish three to seven years into the future.
- Must explain in quantitative and qualitative terms the benefit to the user of the company’s products or services.
- Must present hard evidence of the marketability of the products or services.
- Must justify financially the means chosen to sell the products or services.
- Must explain and justify the level of product development which has been achieved and describe in appropriate detail the manufacturing process and associated costs.
- Must portray the partners as a team of experienced managers with complementary business skills.
- Must suggest as high an overall “rating” as possible of the venture’s product development and team sophistication.
- Must contain believable financial projections, with the key data explained and documented.
- Must show how investors can cash out in three to seven years, with appropriate capital appreciation.
- Must be presented to the most potentially receptive financiers possible to avoid wasting precious time as company funds dwindle.
- Must be easily and concisely explainable in a well-orchestrated oral presentation.
The Small Business Administration (SBA) has a great site that is actually a “how to” for everything an entrepreneur needs to get started. They also have literally a fill in the blanks, business plan construction kit. This user friendly site is to be found at http://www.sba.gov/library/pubs/mp-32.txt. Over the years this site has become an awesome repository for critical information and sources. Now that you are equipped with the right tools lets move along and examine the facts.
Interestingly enough, we believe that all of the points listed above are critical but the particular one that stands out is what we call the “exit program”. This is the most important single feature to a lender or investor. It must show how investors can cash out in three to seven years, with appropriate capital appreciation. Investments in startups or underfinanced entities have substantial risk attached to them and if the investor cannot become comfortable that he is not only going to be paid back but make a reasonable return on his investment, he will drop you faster than greased pig. Business is not a beauty contest and more often than not, entrepreneurs underestimate the intellect of the lender. If there are any facts that should be included but are not, it will be interpreted that the entrepreneur is hiding something foreboding. If facts are distorted, the lender will know it and due to either of these foul-ups, I have been reading business plans for decades and I can spot a hyped or dishonest statement faster than you can blink an eye. If you asked how, I could only reply that it is an intangible talent evolved from dealing with either carelessly put together documents or crooks over numerous years.
Essentially however, no money will change hands. as such, all of the elements to convince the investor that he will be successful, will be for naught. Moreover, he will want to believe that you put the same sort of effort into your analysis as he did in earning the money he is conveying to you. Success in starting you own business is risky at best but there are not many guideposts to help you out. David Birch who studied business small business data after a great deal of analysis came up with the following numbers showing the average enterprises odd of staying in business by year.
• First year: 85%
• Second: 70%
• Third: 62%
• Fourth: 55%
• Fifth: 50%
• Sixth: 47%
• Seventh: 44%
• Eighth: 41%
• Ninth: 38%
• Tenth: 35%
Clearly, once you have been around for a number of years, the odds that you will survive increase substantially but then again, that is not telling you anything you didn’t know. The particular statistics are rather interesting. From our own experience the first and years seem a tad off the mark but if they are correct it would seem to indicate an serious amount of throwing good money after bad. In other words,, the business owner did not want to admit that his idea was not workable and either started borrowing from his friends and relatives to survive or went into retirement savings to show the world he was correct and his potential customers were misguided or insane. This is a strategy for bankruptcy. Failing is definitely a nasty blow to the ego and many of us cannot accept the fact that we didn’t make it. Obviously this is a rather poor strategy and has about the same logic as playing Russian Roulette with a loaded revolver.
But do the above statistics give a complete story? Hardly; when we examine the demography of a business during its first year of operation we can take a look into the bowels of this animal and see why it acts in this unusual way. Wells Fargo Bank does an analysis of this situation and came up with the following statistics. At the end of the first year, 39% of the startups are profitable, 30% of them break even (whatever that means) and 30% lose money. Thus interpolating the two year figures from the Birch chart we can see that only 50% of the people that opened businesses that were failing from the beginning admitted that they had made a mistake in their first year. And why might we ask do we only have a total of 99% when we analyze the numbers? Simply put; sickness or the sale of the business either at a profit or loss accounts for the mysteriously missing percentages. However, this number is statistically far to small to give it much additional consideration, first year businesses are not a a rule stable enough to have proved anything from an economic point of view but sickness is something that obviously can’t be predicted.
Know what you are getting into!
However, it is clear that going into any business is certainly far from a walk in the park. If you must open something it probably would be best to take a statistically evaluated calculated risk. Our point is that in spite of your engineering degree it may make more sense relative to economics to open a drive-thru restaurant. However the most important concept to keep in mind is the fact that while something may work as an experimental model, it may not be able to be produced at a reasonable cost when turning out numerous copies. Historically the hi-tech field while offering tremendous rewards is also littered with bodies from logistical failures.
The old saw about the Devil seems to be apropos in this instance. It seems that this software entrepreneur died and he arrived at the pearly gates where he met St. Peter. St Peter gave him the latitude of deciding whether he wanted to go to heaven or hell. The hotshot software designer thought the matter over carefully and being a cautious person asked St. Peter if he could examine both places before he made his decision. St. Peter happened to be in a good mood that day and escorted him through heaven where he saw people with mournful expressions floating around playing harps. The executive was not impressed and was then taken for a view of hell \where he saw a wild party in full swing with everyone having a great time at a wild party. Naturally he informed St. Peter that hell was where he wanted to spend eternity. Granting his wish, St. Peter escorted him back to hell. This time however, the executive was met with the smell of scorched flesh and saw tormented people slaving in terrible conditions. He rounded on St Peter and demanded to know why the difference. “Ah,” said St. Peter with a hint of a smile, “what you saw previously was the beta version.”
The Wells Fargo Statistics seem to have even more validity than was readily apparent at first blush if all of the factors are considered. Dun and Bradstreet points out that relative to businesses with fewer than 20 employees some businesses obviously do better than others.
If you really want to succeed which you obviously do, I might suggest that you go into any of the following lines of work as they have the lowest failure rate of all businesses analyzed by the State of New York. The best business of the lot is to form your very own religious organization and your are reasonably certain to be around for some time. It may be hard to locate a particular deity that has a following but perhaps Actors Equity could supply a reasonable facsimile for a small fee. Just think, if you own your very own religion, you could appoint yourself as the interpreter of truth and make money at the same time. However, owning a religion requires your full time attention which can hardly be delegated. Giovanni de’ Medici, was the son of Lorenzo the Magnificent and as such got the nomination from his dad to run the Catholic Church during the Dark Ages. He adopted the name Pope Leo X. Sadly, Leo did not take the job too seriously because he was appointed rather than elected and also had a strong taste for the “good life”. He was in reality a follower of the neo-pagan culture of his day and his pontificate has been described by many as an ongoing carnival. “His flair for bacchanalian diversions left the Church bankrupt. He worked Raphael to death, and adorned his court with all the entertainers, scholars, and poets money could buy. When he was enthroned, he remarked: “Since God has given us the papacy, let us enjoy it.” Leo had the right idea but was sitting in the wrong pew at the time. If the money you make does not make one happy then the pursuit of it is a fouls errand.
However, religion might not turn you one and if that is the case we would suggest that you follow the Labor Department’s recommendation and buy yourself a plot of land and raise vegetables. Raising vegetables is second to having your own religion in terms of longevity of your business life. You say that you don’t want to be an oracle or live on a farm, than get into the business of building offices and clinics for medical doctors, form a legal services company or run a child day care center. While these professions may not hit your target, they are the safest and surest things around.
In the alternative, one of the best gigs around today is being a great athlete but that would seem to be a gift not particularly learned behavior. Most importantly however, you don’t have to write a business plan for being successful due to extreme athletic prowess. Babe Ruth was one of the greatest athletes to play in profession sports. His greatest years were during the Great Depression during which time he was asked to take a cut in salary and held out for his previous $80,000 yearly contract. The president of the baseball team protested that this was more money than Hoover, was receiving for being the president of the United States. Ruth reply was to the point, “I know, said the Babe, “but I had a better year.” However, there are very few George Herman Ruth’s among us.
While we all would appreciate the adoring fans and the exciting life provided by the national sport, if you want to commit financial suicide according to the New York State Department of Labor, get into the plumbing, heating and air condition business before its too late or at least recommend the profession to your worst enemy. Only slightly worse are grocery stores, restaurants, trucking companies and broker dealers. Any of these businesses are liable to create what we call the musical chair money changing game. Either it magically turns money into garbage or in the alternative, passes it on to your more intelligent neighbor. Gertrude Stein stated very succinctly on this subject, “Money is always there, but the pockets change.”
Now that you have decided that your are going to grow vegetables for a living let me give you a list of what you shouldn’t do and topping that list according to Rob Holland of the Agricultural Development Center is thinking that you are really in a business when in reality you are just having a ball with an unsuccessful hobby. This is followed closely by asking friends and relatives for advice or money. These horrors are followed by not knowing what to do with the money you have or raise such as not creating a viable marketing program, having no business plan, selling your goods under their production cost or not planning for expansion. Almost 50 percent of business failures can be chalked up to , just plain incompetence followed by lack of managerial experience. These two categories take up almost 80 percent of small business failures in this country however hiring your brother-in-law to run your executive staff or your wife’s mother to handle marketing will not get you the business man of the year award.
Location – Location – Location
J. Paul Getty once said, that his formula for success: was “Rise early, work hard and strike oil.” Truer words were never spoken and this came from a man with a pay telephone in his mansion. Most businessmen believe that location is almost everything. If you set up shop in the Amazon Jungle you are not going to be visited by many customers unless you are thinking of making articles for snakes and monkeys. However, the flip side of this argument is the fact that the rent will be extremely low. For those of us that are not interested in traveling to distant shores to do our vegetable farming, in 2004 South Dakota, Nevada and Wyoming were at the top of the heap as the friendliest environments for entrepreneurship. At the bottom were the District of Columbia, which was is close to catastrophic followed by California and then Hawaii. The better states seem to be northwestern in nature and sparsely population. Apparently the government people are either cheap, small tippers or do their shopping from constituents. California and Hawaii high priced and highly taxed. Other than these observations it would seem that states try to create an environment that is business friendly when they have minimal populations and do the reverse when the opposite is true. Surprisingly enough, Florida is relatively friendly to business so if you want to be near your retirement the only thing you would have to worry about there would be hurricane season.
Moreover, small firms with fewer than 500 employees account for 99.7 percent of all employers and 97 percent of all exporting businesses. Business ownership rose 111 percent in the last 17-years while this country’s population on increased 34 percent. When looking at the cost of doing business it would be wise to locate in states without personal income tax, capital gains tax, corporate income tax or individual alternative minimum taxes. Low property taxes, negligible sales, gross receipts and excise taxes would be an advantage. Nominal unemployment or unemployment taxes, reasonably priced health car, electricity and workers compensation costs are vital. Gas taxes, high crime and a state minimum wage are not particularly helpful to business.
The one statistic that seems to be the most relevant in where you should locate seems to be the states with the lowest personal income tax rates. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have any at all. Oregon, California, District of Columbia, Vermont and Rhode Island to the list at over 9.0 percent. Interestingly enough, while Vermont and Rhode Island have a sky high personal income tax, neighboring New Hampshire has none. Oregon also is stratospheric in their tax rates while Washington gives their natives a free ride. It would seem that the bottom line here, is good government and a lack of pork barrels. Generally the same states are at the top of the pack in not charging capital gains taxes as those that didn’t have personal income taxes and rounding the bottom of the barrel were a list of the usual suspects.
So I guess that we are agreed that the best that we could get into would be that of growing Brussel Sprouts in the South Dakota. Of course now we would have to check the price of farm land and the climate to make sure that these sprouts will sprout. However, while we can save a little here and a little there, maybe the best place to locate in is where you are most comfortable. As Ernest Haskins once said, “Save a little money each month and at the end of the year you’ll be surprised at how little you have.”
However, all of the brilliantly conceived plans and inventions are not really where it is at. There is something inside successful peoples guts that determines their actions. What sets these people apart can not be defined in a book. However, Henry Ford had little patience for those who would tell him what creates success. He was discussing education with a young man who found himself frustrated by what he felt to be Ford’s narrow view of schooling. The fellow begged to differ. “These are different times — it is the modern age –” Ford interrupted to snap, “Young man, I invented the modern age.” and to some extent he did.
The Good Life
Being born with a silver spoon in your mouth is the easiest way we know of to succeed. This choice however, is rather iffy due to the fact that even with all of the scientific advances of the day we are still not able to pick our parents. An interesting sidebar on this was the story of one the most wealthy men in the 19th century, Sir Nathan Meyer Rothschild of the London branch of the renowned banking family. He was alighting from his carriage one evening and as was his custom gave a new driver what he thought to be a more than adequate tip. However, the hansom driver was not whelmed by the amount and stated to Rothschild, “Your lordship’s son always give me a good deal more than this,”. I daresay he does,” retorted Lord Rothschild, but then, you see, he has got a rich father: I haven’t.”
However, if you can’t have a rich father, you can use what we call alternative VII. That is, making sure that you are in the right place at the right time. The social world operates on the theory that their members are a tad better than everyone else and to be brutally honest about it, they are not even very sure of their own friends. As jerky as these people tend to be, these are really the movers and shakers that make the world go round. Getting into their circle can short circuit a more troublesome aspect of business, you know, the one where you actually earn money instead of hitting the lottery, being a great athlete or being born into it. I live in New York in the borough of Manhattan and find some of these folks literally oppressive but they are almost hysterical their dogged pursuit of what the gossip columns define as the good life and will accept whatever challenges are out there in order to be in the next in-place before their friends. We are talking the newest great restaurant, the top vacation spot, the best school to send their toddlers or the longest limousine.
Knowing something about these matters, my concept has been to open an elegant restaurant in New York City and for the first month or so rent numerous unused limousines for their a vacant car rate, maybe $20 per hour and just park them in front of my new restaurant with dummies dressed in drivers uniforms propped -up against the steering wheel. I would then get about three strobe lights and flash them into the air creating a circus like atmosphere. When everyone sees what is going on, they will think that this is the new “in” place in the universe and every rich snob in the city will soon call it their own and more importantly eat their before their neighbors find out about it. However, this will only work as a business ploy for so long. Eventually the restaurant will have to deliver a combination of ambiance and good food; in New York, put-up or shut-up time is always right around the corner. You may say that this is a capital idea. If I am so smart why haven’t I done this? Well, the restaurant business is low man on the success totem pole and I am too lazy to want to be in a cash business full time. That’s like being a full time private eye, spying on your trusted employees trying to find out who stole $3 from the cash register. Besides this is about the bottom of the barrel as far as the list of successful businesses are concerned, probably as a result of employee theft. I always say, “if you can’t trust your employees, then who can you trust”?
However, I do believe in being where the action is and buying my way into the social system if it is required. I have always believed in location and throughout my life I have tried to be where the action is and have worked on LaSalle Street (Chicago’s financial center) and Wall Street for almost 100 percent of my working life. Dress well, hang out where the swells congregate, come from a good school and have a decent repertoire of funny stories that you are able to tell at the drop of a hat. Drink good wines and Scotch while holding your liquor, order your food in French without being obnoxious and know the manager intimately so that when you walk into his place of business he greets you with, “Good Evening Mr. Brown, your regular table?” While we don’t necessarily recommend excessive snobbery, the ultimate social icon was the British society figure, Beau Brummell. One of the stories that has circulated about Brummell over the years is that he found the fashionable romantic raptures about scenery rather boring. An acquaintance, knowing he had recently visited the English Lake District, asked which of the lake he had most admired. Beau Brummell summoned his valet. “Which of the lakes did I most admire?” he asked. “Windermere, sir” replied the valet. “Ah, yes, Windermere,” said Beau Brummell to the inquirer. While this level of social climbing is obtuse, abiding by present day customs in your snobbery is essential if you really want to succeed in business.
Groucho Marx made fun of society with his telegram to the exclusive Friar’s Club in Hollywood, to which he was a member: “Please accept my resignation. I don’t want to belong to any club that will accept me as a member.” Be that as it may, wasting your time with people that are drinking beer and watching wrestling matches featuring men in tights is not going to get you any connections that are meaningful unless you feel that getting the “Macho Man’s” autograph is going to be extremely meaningful down the road. While we would agree that it could appreciate in value over time, the odds are that your energy will be better spent learning how to play polo or brushing up on playing duplicate bridge. Many of the people that we perceive as regular fellows really have an innate snobbery down deep. Winston Churchill is one of those people. His private secretary was a man named Edward Marsh who accompanied him wherever he went. One day while Churchill was visiting his Manchester constituency on an election campaign. He and Marsh entered the unsavory part of town. Churchill looked at the rows and rows of squalid little houses with horror. “Fancy living in one of these streets,” he observed to Marsh, “never seeing anything beautiful, never eating anything savory — never saying anything clever!”.
Moreover, I find that really rich people who are self-made, live in fear of losing it and are extremely paranoid as a group. The story about Billy Martin’s paranoid behavior while he was managing the Yankees probably sets a new standard in psychosis. He believed that his own players were always conspiring against him and that the non-players in the locker room were spies sent to watch his every move and report them to others. One of his players finally blurted out, “Billy was the only guy who could hear someone giving him the finger.” Getting and keeping wealth requires serious paranoid tendencies. Rich and powerful people live at the very pinnacle of an imaginary pyramid that can hold only so many. If you take your eye off the ball for even a second, someone is going to try and grab your place at the top. Those who would unseat your are vicious and the Marques of Queensberry rules are only for losers. Accumulating money and power is an anything go type of warfare that is not for the faint of heart, keeping your money once your get it is a combination of surrounding yourself with loyalists, being totally paranoid about them and keeping up with economic trends down to the last piece of minutiae.
My advise to wanabee rich folks. Hangout with the swells, be elegant and believable, be seen at all the new spots in town, be known by the maitre de and have your chauffer pilot you around town in the longest stretch limo on earth. If this is too much of a drag we have a plot of land we can sell you in South Dakota that is excellent for growing turnips that we can let you have for a song.
So as I usually do, I printed out the above and asked around the office as to what people thought. The comments varied from the darn thing being to long, my wife thought it was riddled with grammatical errors and Mihir Lakhani our esteemed expert on Business Plans said lets get serious and tell them like it really is.
Serious Business Plan Stuff by Mihir Lakhani
Importance of a Business Plan
The importance of a complete, thorough business plan cannot be overemphasized. Much depends on it, including loans, funding, credit, suppliers, management team for your operation and finances, promotion and marketing of your business. This is not to mention your own clear vision of you ability to reach the goals and objectives you have set.
Even though a business plan is absolutely vital to the success of a business, many entrepreneurs delay and avoid the completion of a formal written document. They contend that their marketplace changes too quickly for a business plan to be useful or in the alternative, they just don’t have enough time.
Why should a business go through the trouble of constructing a business plan? There are five major reasons:
- The process of putting a business plan together forces the person preparing the plan to look at the business in an objective and critical manner.
- It helps to focus ideas and serves as a feasibility study of the business’s chances for success and growth.
- The finished report serves as an operational tool to define the company’s present status and future possibilities.
- It can help you manage the business and prepare you for success.
- It is a strong communication tool for your business. It defines your purpose, your competition, your management and personnel. The process of constructing a business plan can be a strong reality check.
- The finished business plan provides the basis for your financing proposal.
Planning is very important if a business is to survive. By taking an objective look at your business you can identify areas of weakness and strength. This is a little like taking a picture of your business at one specific point in time and looking at it thoroughly. You will see the business as it really is, warts and all. Those areas that you have previously overlooked will come into a sharper focus and cry out to be addressed. This snapshot will also help remodel your focus, spot problems that you had previously overlooked and allow you to retrofit your forecasts by taking into account innovative strategies used by your competition since the last time you evaluated the industry.
What separates a winning business plan from a failure? An untapped niche.
Tell a person who wants to lose weight to avoid carbs, and you’ll get a yawn and a response like “I’ve Been there, done that, and have the weight gain and expanded pants size to prove it doesn’t work.” Tell a person who wants to lose weight that you have a healthy and proven diet program that features ice cream once a week, and you will get a plea for more information.
For example, think about Gatorade. For a quite some time, Gatorade has been known as THE Energy Drink for athletes. Depleted by a long run? Drink Gatorade to replenish your electrolytes. Physicians even recommended it to patients who were dehydrated by tummy ailments (heck, my 81-year-old mother started drinking it after a violent bout of food poisoning, when an emergency room doctor “prescribed” it). Then a astute entrepreneur become aware of an untapped need: dieters who needed an energy drink but wanted to avoid the sugar and calories of Gatorade. The result: sugar-free energy drinks.
It took nine months for two former Microsoft employees to create the model for a unique game and while developing and executing their business plan. They named the game Cranium and added enough unique bells and whistles to the project to make it, intriguing, easy to play and challenging. These seem to be the critical elements in any game –like structure. With a unique product under their arm which was well thought-out due to a carefully laid out strategy molded into their business plan, they were quickly able to find willing retailers to market their product in spit of the already saturated nature of the marketplace and the existence of far more formative advisories. .
Company founders Richard Tait and Whit Alexander were attempting to satisfy the world’s intellectual hunger with a game designed to include something for everyone, a heavy problem. However, with sales now going through the roof, and retails such as Target, Barnes &Noble, Toys R Us and Amazon who lists it as their number 1seller in the “board game market” The time and effort devoted to careful planning has paid off handsomely for Cranium where planning means everything. The concept not only works well for its customers, but it has helped Cranium through challenges to become a top contender in its class.
The business plan is only useful if you use it. Majority of the new businesses fail in the first two years. Failure is often attributed to a lack of planning. To enhance your success, use your plan! A comprehensive, well constructed business plan can prevent a business from a disaster.
For starting your business at any point of time, the most important thing you would require is financing. And getting this financing would become much easier if you have a good business plan since that will have the information to serve as a financial proposal and would then be accepted by most lenders.
The company may have an excellent product but it would be a waste if there is no proper planning involved for marketing the product. So finally the conclusion is that a business plan is the most important tool to measure the success of a business.