Turning your Idea into a Business: Creating an Effective Business Plan
By Michelle Collins | November 30, 2002
In our previous two columns on how you can take your idea to market we have talked about how you can discover if you have the right personality to be an entrepreneur and the purpose of market research. This time we take a look at another important part of the journey, your business plan.
Nuts and Bolts
To create an effective plan, you want to start off with an attention-grabbing opener, something that excites the reader and makes them continue.
“We get lots of people asking for money, we don't read through every page of a business plan, they have to get our interest at the start with the executive summary or something. If a business plan arrives in the mail it's got to have something pretty compelling in the first couple of pages,” says Peter Day, president of Technology Invesments Management Fund in London, ON.
Next up is your market analysis. Anyone who reads your plan will want to know who your customer is. Without them, there is no business says Day. Hopefully, you've done some market research before building your prototype. If you haven't, you need to take a step back and look at this important area.
Hiring the right sales and marketing people
One of the ways that you can grab a potential investor's attention is with a strong management team. Along with yourself as the creator of the product you need to have the backing of a team of visionaries who can drive the business in the right direction. If you have someone on your team with an impressive list of credentials you'll want to highlight these in the opening of the plan.
The sales and marketing team are also crucial. While you may have all of the technical expertise needed to physically put the product together you may not have the sales savvy needed to generate interest and excitement around it.
If you can afford it, Day recommends hiring a sales staff who only sell your products. It will take time for these people to learn the ins and outs of your invention before they can generate sales, but these are the people who can keep the day-to-day operations going. You don't have to hire a dozen people, start off small with one or two individuals and hire more as the business increases.
Another cheaper alternative is to look for distributors who make a commission on how many of your goods they sell. However, these people could be working for other companies and your budding invention may not have their complete attention.
Cashflow projections: beware of the hockey stick
Another important consideration is the financial and cashflow forecasts. It can be easy for new inventors and business owners to think that their product will go through a slow phase as the product catches on and then enjoy ever increasing sales from there. Chances are, the reality will look a little different.
Remember when the fax machine hit the market in the early 90's? A select few jumped at the opportunity to have this new technology installed in their office. Then all they had to do was wait for everyone else to catch up so that they could actually use it.You have to be prepared to wait for your product to catch on. In the beginning it will likely be very expensive to produce it, and not every potential customer will be able to afford it. As more people become aware and interested in your invention, so too will competitors who may be able to produce the same product faster and cheaper.These factors, along with the necessary expenses of running and growing a business, will probably cause your projections to take on a much more gradual incline.
“In our experience with this fund the problems all relate to sales and marketing,” says Day. “Typically the companies have developed good or exceptional products, and if they have problems that's normal. Usually they can get it right with a little bit of time. The problems and biggest challenge is getting your product to market.”
Don't get so excited over making sales that you ignore your accounting records. You'll be in a better position to apply for and get financing if you can keep these numbers in order. “If you've got the right information, if there's a trend developing hopefully you'll see it early enough to react. If you can go to the banks with your financial statements showing a historical performance and projection that's reasonable and you need the financing for working capital you have a much better chance of getting it if you're there in an orderly basis.”
One of the ways that you can try to get realistic figures is to cut your expectations in half. So, if you think you're going to make a $1 million in revenue the first year, design the plan as if you have $500,000. As Day points out this is what usually happens when launching a business, it takes twice as long and costs twice as much.
If you like you could even design two plans. One where you make those top sales figures and meet all these financial expectations, and another backup plan where you meet half or a third of them. “Just take smaller steps, especially if your access to capital is limited,” says Day.
Eye on the competition
Day points out that another important component of the business plan is how you plan to stay ahead of the competition. Investors will be looking for what Day describes as a sustainable competitive advantage. This advantage could include patents or employees with specialized expertise. Whatever it may be, make sure to use it as one of your key selling points.
“If someone can come out and copy exactly what you're doing without any difficulty whatsoever, the odds are that there'll be somebody out there with more money and better access to people than you have. They'll be the ones who really prosper.”
Taking a detour
Are you the right person to carry this idea forward into a business? If you decide to sell your idea you need to be just as prepared as if you were going to build a company. Your investors or buyers will want to know how you plan on protecting the idea from competitors and others you have pitched to. You're not only selling the idea, but yourself as well. Investors have to believe in you.
Be prepared to answer questions about why an investor or buyer should purchase your idea if you're not going to. It's also important to err on the side of caution when it comes to protecting your idea when offering it to the highest bidder. An interested buyer may end up a fierce competitor.
Other parts in this series:
Part 1 - Getting an idea and getting started.
Part 2 - Market research, prototypes and product evaluations.
Part 3 - Creating an effective business plan for your new product.
Part 4 - Before the product launch...
Part 5 - Protect your product with a patent.