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A good business plan is the foundation of every new idea

Having a true "blue" (introvert and analytical) personality type, I often feel envy towards charismatic (often extravert) entrepreneurs and more specifically the ease with which they can setup new businesses and coordinate different activities.
At the same time, it amazes me how many of those successful entrepreneurs have poor skills in financial management and have no clue how to build even a basic business plan.
Maybe this is also the reason of their success, as they manage mainly from their gut-feeling and act before analyzing everything.
Obviously this tactic has its limits, as when attracting investors or when scaling, some kind of business plan will be required as a common guideline to work towards.

Having worked years as a consultant and working now as an Innovation and Product manager, I can honestly say I have seen my fair share of (financial) business plans.
Obviously you can make a financial business plan as simple or as complex as you want. However given that such a plan is based on a lot of assumptions (for quantifying the unknowns and the future) and needs to be easily explainable (e.g. to colleagues, investors…​) and maintainable (a business plan should not be a static document), my suggestion is not to over complexify it. Better to foresee some contingency on the figures than to try estimating all possible (secondary) revenues and costs.
Nonetheless a business plan of a new business, project or new product/service should contain some minimum elements, i.e. every business plan consists of 2 parts:

  • First there is the projection (over the new X years) of the expected costs. This consists of the one-time (investments) costs (like e.g. the implementation of the software) and the recurring costs (like the hardware cost, the maintenance cost, the support cost…​). When looking at these costs, it is interesting to have a list of the typical cost categories (like marketing, sales, helpdesk, hardware, …​) you might have. This can give a guideline not to forget any fundamental costs, as people tend to underestimate all the costs that come with a new business/product.

  • Second there are the benefits, which typically comes down to the (increase in) profit generated by the initiative. Often those are split in qualitative and quantitative benefits. Qualitative benefits (like increased brand recognition, improved customer service, improved data quality…​) ultimately result also in higher revenues, but as they often have dependencies on other factors and do not have a direct impact on the revenues, it is almost impossible to quantify them and therefore they are just listed (and described).
    The quantitative benefits can be split in 3 categories, i.e. increase of revenues (e.g. more sales, higher price…​), decrease of costs(e.g. by lowering the number of FTEs via automation) and decrease of risks. These risks can also be quantified by multiplying the probability of the risk occurring with the cost when a risk produces itself and then calculating the delta resulting from the initiative.

Once you have described all your costs and benefits over time, you can calculate the return on investment. Different techniques exist here, all or not taking into account the cost of capital, e.g. the ROI (on 3y, on 5y…​), the IRR or the payback period. These KPIs allow to compare multiple initiatives in a uniform way and select the most profitable one.

This sounds very simple, but making a good business plan feels sometimes more like an art than science, but there are some guidelines and key lessons to take into account:

  • Understand well what the basic process is to generate profit, i.e. if we make it very simple, you first start with generating leads via marketing campaigns. The better the campaign the more leads you get. Afterwards those leads need to be converted into actual customers by good salespeople, a fluent onboarding process, a good follow-up…​ Once a customer is onboarded, you need to generate profit out of this customer. Typically this will depend on the number of transactions the customer does, the average value per transaction and the margin on each transaction. All those factors can be improved, via targeted campaigns, correct price setting, up- and cross-selling, decreasing cost via automation…​ A good business plan should reflect on every step of this process and how the initiative will positively or negatively impact each step.

  • Not every profitable idea should be executed, i.e. even if a business case is very positive, it is important to reflect whether it fits your company values and strategy. Otherwise the short-term gain achieved by the idea will likely have a serious negative impact on the long-term. Furthermore your capacity to execute is limited, meaning you will need to pick the right project to execute (i.e. a plan with a good ROI, but also with a strategic fit and in domain where you have sufficient knowledge and credibility in).

  • In a business plan, it is not only important to make your own business case, but also the one of your customers. Obviously if a customer is buying something from you, he will also make a trade-off (business case) of his costs vs. benefits. If this business case is not sufficiently positive for him, it is unlikely sales will happen and/or continue to flourish in the long-term.

  • Take the effort to document your business plan well and to make it flexible (often via a good Excel file, with easy adaptable parameters). It is unlikely your business plan will be accepted from the first time, so the effort you put in initially to structure your plan well, will allow you to make quick adaptations after feedback, meaning this initial time will be largely regained afterwards. Furthermore a business plan should not be a static document and should over time be revisited regularly, meaning that even when your initiative is launched, you should still regularly work on (and adapt) this business plan.

  • Do not lose yourself in the numbers. When you start creating a business plan, often you tend to lose yourself in a mathematical, theoretical exercise, where the different numbers have become abstract concepts. As such, after you have created your business plan, it is important to verify if every figure is realistic. E.g. you could say that you will sell to 1% of the Belgian population. This assumption in itself seems feasible, but when you then reflect on the derived figure that these are 110.000 customers to sell to, it will probably not seem so straight forward anymore. Often the absolute values derived from a percentage will give you different insights than just the percentage.
    It is therefore a good idea to clearly show all intermediate results separately in your business plan. These intermediate results (if they have a meaning) can often give new insights about the feasibility of your business plan.

  • Document your assumptions: your business plan tries to predict the future, something nobody really can. As such it is important to write down your assumptions, so you can regularly review them to see if they are still valid. If an assumption is no longer valid, it means you need to update your business plan. If for some reason, due to the changing assumption, the business plan is no longer positive, you should stop, independent of how much investment has already been done. This might seem very contra-intuitive but spent costs in the past should have no impact on your current business plan and business decisions.

  • Do not calculate yourself rich. In the book of Jurgen Ingels ("50 lessen voor een ondernemer"), he mentions he always applies as an investor following rules on each business plan: revenues are always generated slower and are always less, i.e. as a rule of thumb he uses that revenues are generated 2 quarters later than planned and are 25% less than estimated. And the costs are always higher, so he adds 30% to the estimated costs.
    This anecdote shows that every entrepreneur is by nature too optimistic, which logically rises from their strong belief in their business idea.

  • Do not calculate business plans for more than 5 years. In a continuously changing world, the next year is already difficult to predict, let alone 5 years. Everything after 5 years is purely hypothetical. Often business plans are made for a period longer than 5 years to make the case more positive, i.e. obviously an ROI on 10 years will be better than the one of 5 years. However if you need such long-time horizons for making your business plan sufficiently positive, there is likely something fundamentally wrong with the business initiative.

  • The rest of the world is also moving¨. If you have a brilliant new idea today and go to market with it, it is unlikely there will not be competitors in a few years. The same is also true for less innovative initiatives, i.e. the market will always react to an initiative you take. This means you might have to foresee stagnating revenues after e.g. 3 years when the competition has caught up on that initiative.

  • Do not ignore the cash flows. Even if you have a positive business case, you still need to validate if you have sufficient cash (liquidity) at any moment in time. Often business ideas require a lot of upfront investment, which means you need cash to pay for those costs, in anticipation of the future revenues. Obviously, you need to ensure you can cross that time path without going bankrupt, as otherwise you will never reap the fruits of your investments.

These are of course just a few lessons, but I hope it might give some inspiration.
Would however love to hear your insights, lessons learned and best practices in building your business plans. If you have interesting elements to add, feel free to share them. Maybe those can lead to a sequel of this blog article.

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Joris Lochy

Joris Lochy

Product Manager @ Monizze | Co-founder @ Capilever

Monizze | Capilever

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05 Apr 2017

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Brussels

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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