Author: Rolfe Larson

Posted on

What Makes a Business Plan a Business Plan?

Business team working on a business plan

Recently someone asked for a simple definition. As it turns out, business plans mean different things to different people. I tend to think of them as presenting the vision or goals for a business, along with a road map for achieving those goals. It can be sketched on a napkin, written on a few pages, or compiled into a huge stack of paper.

Here’s Wikipedia’s definition:

A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals.

The business goals may be defined for for-profit or for non-profit organizations. For-profit business plans typically focus on financial goals, such as profit or creation of wealth. Non-profit and government agency business plans tend to focus on organizational mission which is the basis for their governmental status or their non-profit, tax-exempt status, respectively—although non-profits may also focus on optimizing revenue. In non-profit organizations, creative tensions may develop in the effort to balance mission with “margin” (or revenue).

Here’s what I would add. First, business plans need to demonstrate a solid understanding of customers and markets, which are all too often under-emphasized. Second, a plan is not complete until it indicates who will be responsible for running the business (its leadership), and why they are suited to achieve success. Third, it should have credible financial projections that can be tested independently. Finally, a business plan needs to indicate its most likely risks, and present well thought-out strategies for overcoming them.

OK, it’s hard to do all that on the back of a napkin. But however you define a business plan, be sure your plan indicates clearly where you are going and how you’ll get there.

——————

For more resources, see our Library topic Business Planning.

Posted on

Running On Empty

A businessman holding money while working in his office

Way too many social enterprises are way too undercapitalized. They don’t have the cash on hand to make rational spending decisions on staffing, inventory, professional expertise, marketing, and so on, to grow their venture. Their tendency is not only to go cheap, but to go without for things they desperately need to turn their social enterprise idea into successful reality.

This is not unique to the social enterprise world. Many failures in the business world come as a result of cash flow problems. Numerous companies go under because they run out of money, even while they’re profitable on paper. They can’t pay their bills, so their suppliers or creditors or staff walk out on them, and it’s all over.

And I would say that most social enterprises are cash poor, running on fumes, never realizing their full potential due to insufficient cash flow.

What to do about it? Well, to come back to an important point, write a solid business plan. Or update the one you’ve got. Carefully prepare monthly cash flow projections for at least your first full year in business. Track payables (when you have to pay for stuff) and receivables (when you get paid). Most likely there’ll be some months when you won’t have enough cash to pay your bills. Develop strategies such as a line of credit or an angel investor to get over those bumps in the road. And keep your fixed costs as low as possible.

Starting and operating a social enterprise is difficult enough. Don’t start your venture until you’re confident you won’t be running on empty. In cars and in business, you need gas or you won’t go anywhere.

Posted on

All You Need is … Luck

Woman hoping she's lucky

Over the years, I’ve reviewed books and articles about business planning, and written some myself, but I can’t remember one of them that said much about luck. Sure, risk – which is really bad luck – comes up often. Watch out for things like slow sales growth, unexpected competitors, new regulations, price drops, expensive labor costs, and so on. Prepare suitable contingency plans. And then, if a business goes under, one of the usual suspects that always shows up is, well, we were just plain unlucky.

Yet I can’t recall ever hearing a successful business owner say: Gosh, we were just plain lucky. Somehow the stars were aligned, the market took off on its own, our competitors were asleep at the switch. Sure, we executed well, but without all that luck on our side, we’d have sunk before we left the harbor. Nope — mostly they talk about the things they did well.

In contrast, I think luck is a significant unsung partner for most successful startups. Not the only factor, but a big one, one that does not get the credit it deserves.

So are there things you can do to have better luck? First, position your business plan to take quick advantage of good fortune when it comes your way. Stay closely tuned to the marketplace, with multiple informal and formal sources of information. In business, who you know does matter, not just what you know. But you have to keep in touch with them or it doesn’t matter. Secondly, as with life, a positive attitude enables you to see opportunities — which are really a form of luck — more readily. I believe a positive attitude actually also helps attract better luck. There are no guarantees in business, but in my experience the optimists (with enough pragmatism to keep them honest) succeed more often than the pessimists.

So be hard-nosed but also be optimistic about your business. Good luck!

——————

For more resources, see our Library topic Business Planning.

Posted on

Separating Social from Business Costs

A pushcart and a white paperbag

The best information on this topic comes from a recent discussion at the npEnterprise Forum, the 7000-subscriber official listserv partner of the Social Enterprise Alliance.

From Esther Kim:

“Our basic rule of thumb is that:
* it’s a social cost if it’s incurred to accomplish a social mission;
* it’s a business cost if it’s incurred by a similar for-profit business in the same industry;
* if all social costs are taken out, the remaining cost structure should be comparable to a for-profit business in the same industry.

“Many social enterprises approach this differently, making benchmarking difficult. The third point above is especially helpful in this case – because if you’ve allocated your social costs correctly, you actually DO have a place to benchmark: that is, a comparable for-profit business. Many for-profit businesses publish benchmarks of costs and cost drivers across specific industries/functions (worker efficiency, $/sq ft, etc). Even if they aren’t published per se, consulting an industry expert is a great way to get ballpark estimates.”

And then a response from Don Palmer:

“Very logical, however, it is not always so black and white. Example: We operate a catering social enterprise with a work force composed of disabled workers. Training costs and food wastage is higher than for the majority of the industry (we have a yet not been able to identify the industry standard for either), however we know our costs are higher than our competitors, therefore in our view the difference between our cost and the industry standard would also have to considered a social cost.”

Posted on

Articulate The Value Your Business Will Deliver

Computer screen displaying a motivational quote

For this blog, I’m simply going to quote from an excellent comment recently posted to my social enterprise blog Risky Business by Jeffrey Wallk:

“Clear articulation of value. This is not the value proposition (here’s what we do / offer). This explains in very simple terms exactly how your product / service will help someone get a job done. Services are just harder to sell than a product because they are intangible therefore you need to go the extra step in getting your customer to understand how the service will solve one or more problems they are facing. You have to create an instant “visual” in their mind.”

“Example: Suppose you are providing crisis management services for local communities. Your value prop would be “we offer crisis management services”. But, your clear articulation of value is “We address the processes and reduce the costs (time, money, & effort) for crisis management so community leaders can address the needs of their community.”

Thanks, Jeffrey!

——————

For more resources, see our Library topic Business Planning.

Posted on

Certainly Not Business As Usual

Two men standing near a golf club whilst having a conversation

To quote Monty Python: And now, for something completely different…

In a sense, they could be talking about social enterprise. For many folks, this represents a whole new way of looking at the world, requiring new skills and new perspectives.

Experienced nonprofit people are facing the marketplace of competition and risk taking in ways they never imagined would be part of their careers. Funders become fickle, price-sensitive customers, constituents become potential customers, and partners flip their shingles and become unexpected competitors. Meanwhile the forprofit people who are committed to social change are seeking ways to manage and measure social impact as they face the unyielding need to become profitable or disappear. And some of their investors ask them not what the public can do for them, but what they can do for the public.

Sometimes it seem like you have to put on those strange 3-D glasses to see what’s really going on here.

What’s really going on here is a climactic shift in how we do the business of doing good. Government money is drying up, and at the state level, will largely disappear soon. The old boundaries between the sectors are eroding away, leaving only those species (or organizations or causes or entrepreneurs) that can adapt to these new conditions. As for the others, well, evolution is not too kind to those who don’t adapt. They end up in museums.

Here are some suggestions on how to evolve. Learn the business of business, even if your business is to save the world. Learn the lingo, take the tours, wade through the water. Take some business classes, consider getting an MBA. Find a mentor who gets business but also gets social change. Find and work for the most entrepreneurial organization in your field of interest.

Above all, recognize that earning requires learning, and one part of that learning is realizing that for social enterprise, it’s anything but business as usual.

Posted on

Financial Projections & Other Business Planning Fantasies

Person doing financial review with graphs and charts

Every business plan has them, and they belong in the fiction section of the library. Like romance novels, you can usually see what’s coming: we’ll lose some money in the first year, approach break even in the second year, and then (gasp) become profitable in year three. And the business lives happily ever after, achieving greater profitability with each passing year.

Unfortunately, things don’t turn out that way. Most businesses take longer to reach profitability, and many never do. Sometimes things get better, then get worse, and then sometimes (with much effort, further investment and some luck), get better again.

While financial projections should not be confused with reality (after all, they are guesses), it is possible to come up with some reasonably credible numbers. Here’s how:

  • Do your homework. Build your case through solid research, not visualizing reality or plugging in the standard “profitable by year three” formula. Gather industry data, talk to experts in the field, study annual reports, read the trade press. Figure out your market segments. Do this research yourself or hire a consultant.
  • Make it simple. Start with the key metrics for your business. Number of paying customers and average purchase. Hourly production rates. Cost to acquire a customer. Profit margins. Also, keep your financial projections to two pages; too much information is bad for fiction and nonfiction.
  • Support your numbers. Justify your key numbers with notes indicating where they came from or how they were calculated, so someone could independently verify them.
  • Adjust your thinking. If the numbers don’t work out, revise your business model, not the numbers. Consider the possibility that your great idea might not be such a great idea.

Remember that while starting a new business always involves imagination, you’ll better set yourself up for success if your financial projections are realistic, rather than romantic fiction.

——————

For more resources, see our Library topic Business Planning.

Posted on

Do “Just Enough” Feasibility Testing

Team members having a business conversation

Is your great idea actually a great idea? Feasibility testing is how you find out.

Start with your goals. Sure, everybody wants to make a million dollars. But how will you define success? Finish this sentence: I will consider this business successful if after three years, at a minimum, it ______. List just two or three things. Be specific on what your current money goals relate to: sales, margins, profitability, growth rate, market share, or something else? Also list whatever non-money goals you have for this business.

Next, describe the proposed business. Write down its products or services (benefits not just features), target customers, marketing strategies and sales channels, labor and supply channels and costs, pricing, key competitors, breakeven point, and, most importantly, management requirements.

Don’t have all that information? No problem. It’s time to do your feasibility research. Talk to anyone who could help you and read everything you can find about it. Find ways to talk to actual customers, and study your primary competitors online and, if possible, in person. Buy something from them. Remember the competition is anything your target customers would see as an alternative to your product or service.

Do this yourself or hire a consultant with venture feasibility expertise. Be clear that you’re looking for an objective assessment, not confirmation that your great idea really is a great idea.

Keep coming back to your goals, revising them if needed. Do “just enough” feasibility testing to provide the comfort level you need to be reasonably confident the business will meet your goals (or won’t). Finally, write down what you learned, even if it’s only two pages worth, and crank out some projections built on your research. Run the whole thing past half a dozen people with business experience. Ask them for frank and honest feedback. Revise and do more research as needed. Good luck!

——————

For more resources, see our Library topic Business Planning.

Posted on

Risky Business

Risk: man arranging wooden cubes on a table

There’s just no way to avoid it. You might fail with your social enterprise. Lose your shirt. Wish you’d never started it. There’s no safety net for social enterprise, and there never will be.

The U.S. Census Bureau reports that half of business startups with employees are gone five years later. Social enterprises probably do a bit better than that. So perhaps your odds are a bit better than 50-50. But it’s still risky business.

Yet all is not lost. There are things you can do to reduce risk. Write a business plan. Need help? Review the Free Management Library and blog on business planning. (Full disclosure: I’m the author.) The blog is currently running a series about feasibility testing, a central part of good business planning. That means lower risk.

Also, don’t forget the “enterprise” part of social enterprise. Many nascent social enterprisers behave as if awareness of their social impact will translate into sales and profitability. While in certain circumstances people will purchase, and even pay extra, for something that creates a desirable social impact (think Girl Scout cookies), most of the time they won’t. Or if they will, it’s only if the product meets or exceeds their expectations. Fair trade coffee sells if it tastes great, but if it doesn’t, no matter how much the other stuff exploits indigenous Latin American farmers, it sits on the shelf. That particular social premium ends at their taste buds.

Finally, failing isn’t as bad as it’s cracked out to be. Most successful entrepreneurs hit their stride after failing a few times. But each time they learned important lessons. So my final tip for this risky business is to decide that you’re OK with failure. Stuff happens.

Posted on

Mission Impact: The One Bottom Line

A group of business men and women working on mission of the company

For centuries there was only one bottom line: profitability. Then people and companies interested in making the world a better place, not just making money, decided social impact should have equal billing. Fair enough. A bit later, environmental impact demanded a place at the table, so now we have three bottom lines. And from that the vibrant corporate social responsibility (CSR) movement emerged that in many ways has changed the way Wall Street, and even Main Street, does its business, or at least talks about the business it does.

The social enterprise movement has also generally incorporated that three bottom line perspective. Consider the definition we’re using here: “harnessing the power of the marketplace to solve critical social or environment problems.”

But I would argue that there really is only one bottom line that matters for a social enterprise. That’s the social impact as it relates to the mission of that organization. Sure, the venture has to be financially successful, even sustainable to use the current buzzword (for which I’m still searching for a meaningful definition; do you have one?), but without mission impact, there isn’t anything there. Or, to put it differently, as we point out to the nonprofits we work with, only go down this path to expand your organization’s mission impact. For social enterprise, making money is just a means to that higher end.

So while we’ll spend a fair amount of time talking about strategies for generating that revenue, which at times can be all-consuming, we’ll need to keep our eyes on the prize. For social enterprises, mission matters. Ultimately it’s the only thing that does.