Evaluating a Business Idea

The fast and the furious

June 15, 2011

Is it better to prepare well or go with your gut instinct? Photo: iStock

Consider two entrepreneurs: the first spends months researching an idea, prepares a detailed business plan, invests heavily in the idea, and has a big product launch; the second spends far less time on research, has a loose business plan, invests less in the idea and has a smaller product launch.

Which is the better approach? It depends on the business, of course. No one would launch a capital-intensive venture without serious research. Certainly, most business schools teach students how to analyse markets and industries, prepare business plans, and follow the first approach.

But is that approach best for all start-up entrepreneurs? One I know told me the business plan “is in my head”. He meant the venture’s strategy was constantly changing and adapting every time he met a customer or saw an opportunity. A written business plan, or adherence to a concrete strategy, can be too rigid. It kills that great entrepreneurial trait: nimbleness.

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What’s your view:

• Have you wasted time and money on business plans that are quickly dated?
• Do business plans stifle creativity and nimbleness?
• Are you better off starting small and fast and letting the market tell you what’s working?
• In this era of social networking and technology, do we need to re-think how we research business idea and launch start-up ventures?

My first venture suffered from following the traditional research approach. My business partner and I spent many months researching an idea for the education market, conducting focus groups and meeting industry people. We had an almost text-book business plan, invested (thankfully not heavily) in the product, and followed a predefined strategy. It disappointed, partly because of the idea itself and also because better opportunities emerged that produced cash faster.

Aside from launching the venture weeks before the GFC, it was clear the market for our idea had changed. New technologies had developed or strengthened even in the year between the idea’s conception and product launch. The founders’ personal circumstances changed (joyously), with new babies. If I had my time over, I would have started small, cheap and fast – and let the market tell me what the product should look like. I would have focused on a few ideas, rather than one.

A few months later, I entered a venture-finance competition with an idea hatched over a weekend, no real prototype and barely any research. It won and my team pocketed $10,000, had a venture-capital firm seriously interested, and university support to develop the idea and take it to global venture-capital  competitions. An average idea suddenly had legs, and more momentum than the much stronger education idea that had taken a year to plan and launch.

Other entrepreneurs make the same mistake of over-researching ideas. They come up with what, at the time, looks a ground-breaking concept and put everything into it. Six months later they realise no amount of research could have prepared them for the realities of the market – or life. They over-estimated their odds of success and persevered with a bad idea longer than they should have, because so much financial and personal capital was invested. They failed to adapt.

I am not suggesting start-up entrepreneurs should launch ideas on a whim, or focus on several ideas and never develop any. Nor am I against the traditional approach of researching and launching one idea and putting everything into it. But the reality is, many more new ideas fail than succeed. There is a randomness to success when it comes to new ideas, which entrepreneurs should consider.

I was reminded of this while reading Tim Harford’s book, Adapt: Why Success Starts with Failure. Like most management texts, its message is aimed more at big rather than small companies. I did not find a whole lot new in the core ideas: the notion of encouraging innovation from the ground up in workforces, having a portfolio of business experiments, and protecting innovations from bureaucracy, have been presented before. And I have read other research showing the majority of business forecasters get more predictions wrong than right.

Harford’s biggest contribution is showing how people succeed through trial and error, which forces us to adapt to changing conditions. He shows why big companies and governments struggle with the trial-and-error concept – organisational structures, business-planning processes, an inability to deal with failure, and the personal risk of career setback get in the way. His book is worth reading for this alone.

Consider how this trial-and-error concept plays out in entrepreneurship. As I’ve written before, start-up entrepreneurs manage opportunities; small business owners manage resources. An entrepreneur may move between several ideas, compared to a small business owner who focuses mostly on one. There is nothing wrong with either approach; it’s just that many would-be entrepreneurs get them mixed up.

A true start-up entrepreneur might build a portfolio of opportunities; some big, some small. They allocate capital – financial and their time – accordingly. They know some ideas will fail and that real success comes from their ability to control risk and stay in the game longer. They acknowledge that the best research is ultimately what the market says when their product is live, not a static industry report, market statistic, or business trend forecast.

My point is, the world is so complex and fast-moving that it is impossible to know how a market will react to your new idea. Start-up entrepreneurs with scarce resources do not get many second chances if their big idea flops. The good entrepreneurs constantly change and develop ideas as they go.

If you are starting a venture, at least consider the second approach. It may be that months of research, high investment and an all-or-nothing approach for one venture is the way to go. You may need a carefully crafted business plan to raise capital or for other marketing purposes. All your research may pay off in spades.

But if the idea has never been tried before, a better approach may be to view it as a part of portfolio of considered opportunities, where the market shapes the idea and the entrepreneur’s real skill is the ability move quickly, control risk, and preserve capital.

For some ideas, the best strategy might be not to have a strategy. Or at least planning to change business strategy every day, week or month as circumstances dictate, rather than doggedly sticking to a predefined strategy that could be out of date as soon as the venture is launched.

 http://www.smh.com.au/small-business/managing/blogs/the-venture/the-fast-and-the-furious-20110613-1g04t.html#ixzz1PZfgOXHn

Breaking down your business plan

MAX NEWNHAM

July 12, 2010 - 12:49PM

Last week I answered a question from a reader who had set up an online business and wanted help in preparing a business plan.

In my opinion there are two types of business plans for small businesses. 

• The first can cost a lot of money and in the end produces very little in the way of results. 
• The second is a lot simpler and is based around the cash flow of the business.

The first step in this planning process is to reduce the business to its smallest component parts. That does not mean taking last year’s results and increasing all of the income and expenses by a fixed percentage to reflect the effect of inflation. It does mean breaking down revenue into the different major income sources then breaking these down further to each product or service.

For example it does not make sense for a service station owner to increase his or her annual sales by 3 per cent a year. It makes a lot more sense to break the sales down into fuel, groceries, snacks and take away. Then break each of those lines down into each major product such as unleaded, premium and diesel.

The same goes for expenses. The first step in this process is to identify costs that have a direct relationship with income. These include costs of goods sold in retail or hours worked by a trade or service provider. Each of these expenses needs to be analysed to work out how much these costs increase if income increases.

Next, identify those costs that a business pays no matter how much income is earned. These are the overheads of the business and include rent, loan repayments, insurance and administration costs such as bookkeeping and accounting fees.

Each overhead expense needs to be broken down as much is practically possible. At the end of this process the business owner should have a statement that details all of the historical income and expenses and which components of the business are the most profitable. One of the most important results of this process will be the amount of income that must be produced for the business to break even.

Items of expenditure that have blown out or are not strictly necessary, such as a luxury car lease or excessive entertaining, and business lines that are not covering costs will become apparent. It is from this point that the business planning process can start.

At the heart of every good business plan is an analytical process where the business is assessed and ways found of improving it. A tried and tested way of analysing a business is to prepare a SWOT analysis of the business. This involves looking at what the Strengths and Weaknesses of the business are, the Opportunities it has to grow and what Threats it faces.

Business planning action are formulated to maximise the strengths of the business and ways found to reduce the cost and business impact of weaknesses. This could mean increasing the price of a good or service that is not profitable or dropping it altogether. It could also mean a loss leader of the business is identified that results in more profitable items being sold.

The big advantage of using the cash flow budget as the centre piece for this planning process is that the financial impact of each planning action can be modelled. This means the business owner can establish which planning options have the greatest impact and have a basis for benchmarking whether the actions taken are working. 
   Questions on small business issues can be emailed to max@taxbiz.com.au 
Tax for small business, a survival guide, by Max Newnham is available in bookstores.     

http://www.brisbanetimes.com.au/small-business/managing/breaking-down-your--business-plan-20100712-1071x.html

Compete with the big fish: insider secrets for upstarts and underdogs

DAVID WILSON
June 29, 2010 - 1:31PM



Even if you operate on the back of a broadband connection, you can still take on the big fish.
Statistics are a stark reminder of just how hard it is to keep a business afloat.

Forty-two per cent fail in the first four years, according to the Australian Bureau of Statistics. So, for a small business, competing with the big fish may seem like mission impossible.

But underdog status has its virtues. For one thing, fair go-fixated Aussies love underdogs. For another, in accordance with Hollywood scripts, upstarts do over-deliver - look no farther than the feats of New Zealand's world cup "All Whites" and Ghana's "Black Stars".

If you think that the two teams just got lucky, take a look at a selection of nitty-gritty tips on how to raise your game. Even if you run your business from a box room on the back of a broadband connection, with rigour and guile you could still make a splash, and become a "challenger brand".

So, read on, have a go. And never forget how lucky you are to be free from all those big company expenses: comfy office chairs, bonuses, pensions, plus - worst of all - salaries for staff who refuse to retire but effectively quit long ago.

How to punch above your weight: six secrets


1. Focus on focus

According to the director of new ventures incubator Pollenizer, Mick Liubinskas, to compete with big business you must tackle one area: the threat of dilution. In his view, the secret of building a business with heft is focus. A giant rival may beat you on scope, but, if you focus, it cannot match your ability to get things done.

Keep products simple. A lean and focused operation puts you in a position to thrive. According to Liubinskas, a plus of a focused approach is that you become easier to buy.

2. Come clean

Irrespective of any hopes you harbour about being bought out, resist the temptation to exaggerate your size. Be honest, says strategist Barry Maher, because Milly's Carpet Cleaning can be just as effective as a conglomerate claiming to be "agile, personal, friendly, service-oriented": classic small business traits. According to Maher, you can tackle whatever job comes up if you have a network of associates ready to act fast and flexibly address clients' needs.

Lower overheads help keep prices down.

3. Get a go-to guy

Forget about trying to generate mass publicity the way giants do.

Instead, Maher suggests, think local. Enlist the face of your firm to act as the neighbourhood go-to guy or gal for the press. Build local prominence on search engines and in social media.

4. Practise rapid reaction

However prominent you get, you must act fast. According to business coach Robert Gerrish, the ability to get on the case without bureaucratic obstruction is a key edge. Use it, Gerrish urges. Follow through. Do not let emails fester, as corporations do. "We can be responsive and we can be personal and jump on things that we feel are priorities," he says.

5. Express and experiment

Image now is about much more than clothes, Gerrish says, adding that your website must express your identity. Go for depth and integrity.

In the 'about us' section, where many businesses plonk stock shots of a spectrum of smiling models, describe your people and history. Be a "real" company instead of a big one, and innovate. Try new tools.

Gerrish highlights the presentational impact that an iPad can make.

6. Log off

Reduce your reliance on the internet. Instead of playing five or six rounds of email tennis, pick up the phone, Gerrish says. Suggest meeting for coffee, he adds, stressing the need to be touchy-feely, which banks have grasped. After focusing on online branding, banks are opening more strip shop branches, it seems. The reason: customers want old-school conversations - a good yak.


Source: theage.com.au

The importance of having a good business plan

Wednesday February 4, 2009

The importance of having a good business plan
RSM EYE - By Girish Ramachandran

THE business plan remains the cornerstone in determining whether you can attract potential funders and investors.
However, statistics show that only 5% of business plans are read beyond the executive summary. And only 10% of proposals that pass the initial screening qualify for due diligence and receive funding.
That means on average, only six in 1,000 business plans get the funding they ask for.
Different types of funders look at business plans from different perspectives.
These individuals seek out businesses with good potential and sound strategies that will provide high financial returns, coupled with an option to exit the venture.
The 3Fs (founder, friends and family), angel investors and venture capitalists observe the highest risk levels as they gain entry into the business at its seeding points.
In contrast, to manage their risks, equity investors and commercial banks are more likely to look for entry points between the growth and maturity stages of the business.
The implication for entrepreneurs is that they must customise their business plan according to whether they are seeking funding from a bank or a venture capital fund.
A good business plan provides a clear roadmap to your corporate destination.
It may be your most important communication tool to investors. It will include a marketing plan, a management plan and financial projections for five years.
The financial projections are an integral part of the plan, since nothing speaks louder to bankers than numbers.
The marketing plan provides an overview of the business, its location and your marketing strategies. The management plan basically details the credentials and experience of those in the decision-making capacity.
To sum it up, you have to be prepared. Many people are unsure of what the bank can or cannot do for you, and why. Bankers expect you to know the basics before you walk in their door. Do your homework and set realistic assumptions.
A bank that wants to start a relationship with you will read your plan to know who you are and what you plan to do. Some things they are likely to look for:

The business background
You will have more credibility if you’ve had experience in the business and field you’re entering.
Attempt to show an overview of the market and highlight your advantages of your business over its competitors.
The business plan should detail strategies for breaking into the industry and show good potential for demand and further expansion.
People are an all important factor in a business, so describe the management team with short biographies of main managers.

Your financial projections
Bankers expect to see the three main financial statements – income statement, balance sheet and cash flow – projected monthly for the first year, and annually for four years after that. The cash flow is imperative.
These financial projections give bankers a sense of your profit and cash flow if they provide you with a loan.
You need to prove that you will have more than enough cash to cover the monthly loan repayments and any overheads.
The financial projections should mirror that of reality as much as possible. This implies that if you are able to obtain actual numbers (rents, insurance, equipments quotes and prices), use the actual numbers.
Some bankers like to say if they see too many zeros, they know the numbers aren’t reliable.
Take note, if you underestimate capital or operational expenses, you may end up overspending in the future and eating into your working capital.

Realism in your financials
Granted, you can’t really forecast your income or expenses. The temptation is to use over-optimistic assumptions to show strong projections.
That may work to your disadvantage in the long run. Over-optimism on your part will definitely come face to face with plenty of doubt on the banker’s.
The trick is to use conservative assumptions but still show strong projections. This is because bankers will compare your projections to industry reports on average performance of different kinds of businesses.
If you project margins way better than those, you’d better be able to explain why or how you’re going to accomplish that.
·Local alignment in the financials
Amounts have to logically match so that the amount you ask to borrow matches the financial gaps in your plan.
For example, don’t try to show you don’t need any money, because if you didn’t, you wouldn’t be borrowing. Don’t show that you need much more money than you can afford to borrow. Your cash flow should be realistic and show how much money you need and why.

A complete plan
A good banker will also expect to see a readable plan from executive summary through to the end. It should cover what you sell, your market, your company background, and specific dates and activities.
So the business plan is a two-way test.
Although most banks will require a plan, not all of them will really process the plan. Be grateful if they do. That means they are interested in your business and want to build a long-term relationship.

Girish Ramachandran is executive director of RSM Strategic Business Advisors. He is of the opinion that failure to plan is most certainly planning to fail. Feedback to this article is welcome. Please email starbiz@thestar.com.my

http://biz.thestar.com.my/news/story.asp?file=/2009/2/4/business/3188027&sec=business