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How to create a business plan?

 

Creating a business plan for your company is not only necessary to get the funding you want (Enterprise Estonia, PRIA, banks), but above all it is something you yourself will need- to think properly through your idea of starting a new business.
Business plan is therefore a very practical document, which aims to work through the different parts of a business idea before you actually begin to act on it. As a result of this prudence you can avoid making obvious mistakes or truly find a business idea that works.

Start with simple feasibility plan on your napkin

Every business aims to make a profit. I recommend making some quick and easy calculations, you can even use your napkin if you are in a cafe right now for the paper you need- lets think it through, does your idea really has the potential of being profitable?
You can start with figuring out all your possible sales profits and all your expenses you would have to make to achieve them. If your profit is bigger than your loss, then it might be good idea to start working further on your plan.

Business idea written down on a napkin (source k-for-kayt.blogspot.com)

Just in case, I would like to give out a little warning: typical start-up companies have this habit of overestimating their sales by double and underestimating their costs in the same proportions. To avoid having a rude wake-up call later, you should probably show your calculations to someone who already has experience in the same business field. You should not be scared of being laughed at or that someone is going to steal your idea. Of course it is better to talk about your business idea with people you already know or trust, but sometimes a fresh view from someone who is already acting in the business sector you are trying to enter, is incomparably valuable. It might be that you’re calculations turn out to be faulty, but considering all things, it just helps you get better at them.

It’s a work well done if you can manage putting down on paper all your direct costs (i.e materials, wages for employees, equipment) and overall costs (communication costs, office rent, administrative expenses and taxes). If you have no idea what price you should ask for your product, it’s a good idea to find the current commercial value of your product by looking through the price-list of your competitors.

The monetary value you are looking for, should be enough to pay all your expenses and give you a reasonable profit you are hoping to get.

So this working and playing around with figures might seem exhausting at first, but without it starting your business will be as wise as thinking about participating in Tartu marathon without any preparation or proper equipment. Having faith in your product is good but does not cut it in long term.

Also common mistake and a slippery slope to take, is deciding to sell your product or service cheaper than the average price going right now on the market. This decision usually goes hand in hand with not taking into account, if this activity is sustainable. Little rule of thumb to follow: if you cannot hire other people in your stead to provide the service, then the price for the service is too low. The worst case scenario is that you have too many orders to fulfill, and you have no money to hire someone to help you with them.

Who is your client?

As your business idea grows in your head, the common thought process seems to be that probably everyone will want my excellent product or service. It is alright to believe this, but only at first- you should be able to think this through and figure out more specifically who will be the ones interested and who are the people you can really sell to. You should segment your clients and it is important to go even as far as putting faces and names to your clients, so you can really understand and feel them as persons and write, direct offers, web page content and blog posts to them.

Can you describe your client? (source: Koffer)

Why so? This should help you to fulfill the needs of exact segments much more easily, instead of trying to please everyone, which is much much harder thing to do. Also it gives you the proper idea of which channels you should use for marketing and what is the message you want to send out that draws in those clients.

No-one wants to feel just part of a crowd. We all want to be and feel special. It is a job well done if off the top of your head you can say that your client is upper middle-class woman, aged 30+, who reads magazines like Diivan and Eramu. Or she is a designer who works at home and uses iPhone a lot. This way you can find the right marketing tools and you don’t have to put in over the top effort to catch your fish out of this huge ocean of people with a net that most of the time doesn’t catch you anything.

Free or low cost market research

Market research sounds as something of a hassle and something that a rookie in business might not be able to handle right away. So is that really true? It might have been this way ten years ago, but nowadays anyone can carry out free market research. How is that possible? Well, all your clients and competitors are right here on internet, all you have to do is find them.

Start from writing out some of the keywords that are connected with your service or product. For example if you want to open a hair salon, then those keywords or even phrases could be hairdresser, hairdresser salon, hairdresser for men, hairdresser for women, dying your hair, hair extensions and so on. These are the words or phrases that are being used on search engines like Google to find information about you (and your competitors) on internet, and you can use them for your benefit. Find out which of those words are used more than others and also, what companies pop up when those words are entered in search engines. Open Google Adwords Keyword Tool and enter all those keywords into the system. In return you will get information about how often are those words used (the more, the merrier) and what kind of competition waits for you when you are going to try and aspire to enter that marketing battle field (the more a word is used by searchers, the tougher the competition is, but it shows that there is money to be made in that business area as well).

Use those keywords and phrases to look up who is your competition and what kind of information they have on their homepages. If keywords you have entered in search engines like Google or Yahoo give you zero results, then it is quite possible it is bad business idea or in some cases you just have found a niche you can use for your business idea, that no-one else has thought of yet. This niche or catchphrase you can use to market your own webpage, should you be so lucky that no-one else has not thought about it before. When you are using Google to do all this research, bear in mind it is better to use local version if your business is oriented for the local market (for example in Norway use google.no).

To be more thorough, you can even research forums that are related in topics to your business field and find out what or who they are recommending there. From there you can also find out the main problems that are connected with the service/product.

In Estonia as a principle you can turn to EMOR, and hire them to conduct even larger surveys and through market research- but usually a new small business seldom can afford such expenditure. Sometimes it is more cost effective filtering Statistics Estonia and Krediidiinfo data bases and buying the service from them.

If you have the list of your competitors in hand, chart their good and bad qualities (according to products, services or by companies in general). You should compile a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis as well on your competitors. It can be a good idea to put your company and your competitors on a scale that uses the comparison of quality and price.

But how do you find out what exactly are your clients needs and requirements? Talking to them and having meetings with them usually can give you the information you need most with highest accuracy and usually completely without cost as well.

Interviews

Before starting moving in any direction with your business idea, it is wise to make a few dozen interviews with your potential clients beforehand. What do they think and would they buy your product? If you ask nicely, you will usually get answers that can help you.
Start off with creating a hypothesis, who are your clients, what kind of problems they face and what is the solution you are offering to them. After that, test your hypothesis by talking to real people who you believe could be your future clients and see what they think of it.

I recommend doing these interviews before spending any real money on your business idea- even before creating any formal company, because your company is just a means for bringing your ideas to life. It is likely that you will have to make changes to your product, prices or even reassess your target group. After doing the interviews, put together the top three of problems your clients talked about and try to figure out, just how are you able to resolve them.

Interviews should be at least 20 minutes long, although my experience is that, they can drag out to be twice or thrice as long- main thing is, that the process is something that the ones being interviewed consider to be pleasant. You should carry out these interviews until the answers you get start being repetitive. It is a big job to handle, but absolutely worth the effort. Try to put down the main points of your interview beforehand as best as you can and the result will be your award.

Also a bonus for you: those people who you are interviewing can give out loads of good ideas and let you to filter out the unimportant or hindering factors, in future they can also be your first paying customers.

Drawing the breakeven point

Breakeven point is the iridescent oasis that you can see forming in distance, where the monthly income is equal to or greater than the costs.

As we talked before, it is quite difficult imagining and predicting your future costs or even more so, giving accurate predictions on revenue. But you have to try doing it, and as the process is happening you should continuously make changes to your predictions while keeping an eye on trends in business.

Earning back your investments is essentially financially making up for everything you have financially put into your business before breakeven point. The yellow area on the chart shows the investments you have had to make to start the business and the green area is where you are earning back those investments. Thus you have this almost a bow-tie shaped chart, where breakeven is located in the middle of it.

It is quite simple chart to make, so even a schoolboy should handle creating it, but for some reason this is not something that is commonly taught in schools.

So how long is it going to take to break even with your business venture? How long is it going to take, until you have gained back all your investments and your company can give you back the money you have put into it (including loans)?

Naturally in real life your chart will not always take on bow-tie shape. If you can see that on the chart sales and costs lines run parallel through time, it can be really baffling for you. What does it mean, if those lines stay close together through this long period of time? Commonly the reason for such behavior is hidden in too small margin you have set or the reason that upping the volume on production seems to not boost the profit or efficiency. In other words, this means that earning back your investments can take a lot of time.

There are many different time standards for investments in business, but you should always aim for achieving the breakeven point at least in a couple of years time and after that earning back your investments and making some profit should not take longer than two years as well. If your initial investments are going to bring home the profit you want after ten years have gone by, then it cannot be called your everyday small business venture at that. It is more in the lines of building a nuclear station or NordStream pipeline, where long return on your investments is more expected and justified.

Breakeven point.

Abbreviation ROI (Return on Investment) is used in economics as something that measures the profitability of a business idea. Simply put, it gives you per cent to take into account, and is a way of considering profits in relation to capital invested. Here I consider this page to be of great help making this concept clearer, it has good illustrative graphs and pictures that make this logically more understandable.

So to give you an another example, when purchasing rental real estate ROI can be approximately as much as 10-20%, Start-Up ventures ROI can be anything from 0-9999…%. Profitability usually depends on specific individual business circumstances and conditions. But it’s a good start to be able to understand the concept and to sketch out the outlines, so you can fathom if its really a good idea to contribute to this new business idea of yours or if it is already giving you the warning signs, that it might not work out.

Measure everything

If you do not, then you cannot know where you are right now, or even where are you going. Actually this concept concerns most things in life. For example, if you start observing and measuring your everyday and monthly consumption of electricity, you can save money by finding alternatives like insulating your windows more thoroughly, or changing you halogen lamps for LED and so on.

Before you start consciously measuring these things and results they bring, you just have sums on your bills and paying them is inevitable obligation.

What should you measure?

A web shop should measure every month at least these things:

  • Total number of visitors
  • How many of them came through paid channels
  • Number of sales (per cent of all visitors)
  • Sales and advertising cost ratio
  • Advertising cost divided between visitors and buyers

There are so many things to measure, but as always it depends on the business what exactly is important information for you to measure.

Google has created an excellent freeware called Analytics that helps you to measure website visits. Today this is one of the most commonly used and is considered the best free tool to measure your website traffic statistics. If you have not acquainted yourself with it already, look it up and ask someone who is web savvy to put the necessary code on your webpage. It might be also good idea to learn from pros like Peep Laja.

When you have a proper overview of what is going on on your web page, the next target is setting up your goals. What are your expectations and what would you like to achieve? Increasing visitors is not always the solution you are looking for. If you want bigger sale numbers, more repeat buyers or higher visitor-buyer ratio or making why not try this too recommendations work, it might be good idea to systematically keep measuring your work and results it brings.

Measuring helps you keep an eye on all those indicators and take into account monthly and yearly tendencies.

Best way to proceed, is to mark down all your activities (for example- ran an AdWords campaign, posted something on a blog, active behavior on Twitter or Facebook and so on), after that you can see if any of them helped you achieve the results you want. Measuring makes you the winner you want to be.

Business model

Business model is a simple platform, that helps you build up your whole business venture. It consists of different blocks, that are connected and dependent on each other in many different ways. You can say that it is a simplified and visualized version of your business idea. The profitability of a business relies on the ability of making those blocks work well together.

Business plan blocks (source: businessmodelgeneration.com)

Think through all those links that bind together your business. Try figuring out which belongs to which block. Who are your partners that help you keep your business running? What is the value you are offering to you client, that unique offer you are able to make, that client wants and needs and is willing to pay for? What are the sales channels? How are you going to maintain prosperous relationships with your clients? What are your critical and strategically important activities and resources? Do try to find answers to those questions.

I can recommend an excellent book on business model segments as well and if you are interested you can see some illustrative material on the topic here.

Timm Rannu

timm@altex.ee

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