Sunday, July 19, 2015

Don’t Write The Business Plan, Do It!

This article first appeared in the 11 June 2015 edition of Finweek.

For the right reasons, many funders require entrepreneurs to write a detailed, congruent and bankable business plan. The plan ought to articulate the product, its market and how the entrepreneur will go to market and generate consistent positive cash flows to repay the borrowed funds and create value. This logic works well, except for one problem: a business plan is exactly that: a plan.

Nobody, not even the most passionate entrepreneur, can guarantee that what the plan says will in fact be. It would be useful if both the entrepreneur and the funder had more certainty that the idea in the business plan stood a greater-than-normal chance to gain traction with customers and succeed. If only there was a way the plan could be proven before the entrepreneur invests the countless sleepless nights and the funder commits millions of rands.

Most people start by writing a business plan, or even worse, get a consultant to write it for them. They then take the business plan to a funder, who lends funds on the strength of the plan. Eventually, armed with a plan and some funds, they go out and start the business.
Seems logical? I don’t think so. Why risk all that time, effort and money on something that may turn out to be a bad business idea and a waste of lenders’ funds?

Why not follow the same process, but in reverse.

Instead of starting by writing the business plan, why not start by doing the business plan and write it later?

In his book The Google Way author and management consultant Bernard Girard, who had been analysing the company since its founding in 1998, writes, “had the leaders of Google followed the rules and undergone the typical venture capital rite of passage, they would have written a business plan that laid out a detailed financial model showing how they would make money and how long to would take to make a profit for their initial investors. They did nothing of the sort. Instead, they started by creating user demand and only then did consider how to generate income”.

In doing the business plan, you will learn, very early in the game, the key challenges in sourcing raw materials for your product, your key suppliers, what affects their pricing, the external factors, including foreign exchange rates, interest rates, and commodity prices as well as ways and means to manage their volatility.

On the demand side, once you start selling, you will know and experience first-hand whether customers are prepared to pay for your product.

After a few iterations of manufacturing, promoting and selling your product, you will be in a much better position to pen down a plan for your business. You will be more enlightened to the risks, the competition, customer preferences and also the right price point. You will know intimately what customers value in your product, why they will choose your product over your competitors. Essentially, you will write your SWOT analysis from first-hand experience not from googling your competitors like many do.

Most importantly, you will have the confidence that your business idea actually works and you can prove it.

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