6 Questions Your Business Plan Must Answer
The other night we were talking with a group of young people when one person said that she wasn’t able to start a business because she couldn’t qualify for a loan. As you can imagine, several of us chimed in that we didn’t have funding either when we started our businesses.
Related: How To Write A Business Plan
Of course some businesses require funding, and we understand that. Capital-intensive industries, for instance, require a large up-front investment to get off the ground. However, if you have an entrepreneurial spirit, a modicum of talent and a lot of drive, you can start a business without funding.
To back this up, we conducted a quick search and found dozens of articles with low or no-cost business ideas. We particularly liked one from Small Business Trends that lists 25 businesses that you can start for less than $100.
That said, some business ventures fall somewhere in the middle. They need some funding. And, to be truthful, we ourselves needed to live on savings for several months until we built up a clientele in our consulting businesses that supported our lifestyle. If you plan to rack-up credit card debt or tap your 401(k) to fund your own dreams, you should fully understand what you are getting into. And a robust business plan is an important element. There are many free templates available. Find one you like and use it.
Below are several questions your business plan must address. We caution you to be brutally honest. If your idea isn’t going to fly, it’s best to come to grips with this reality now rather than after you've invested your life savings in the venture. The questions you should answer are:
1. What differentiates your product?
We assume that your product fulfills a want, need or desire. If it doesn’t, rethink your plans. Sometimes the market doesn’t know it needs your product --and that’s fine. Henry Ford famously said, “If I had asked them what they wanted, they’d have told me faster horses.”
The first step is to identify the need your product will fulfill. Then determine whether or not this need is currently being met and if so, how and by whom? The first question we always ask clients is, “Why should a prospective customer buy your product rather than a competitor's?” If you can’t answer this question clearly, concisely and definitively, go back to the drawing board.
Related: Starting a Business: The Idea Phase
2. Is there a large enough segment of the market that will value this difference?
Identify the segment of the market that values whatever it is that differentiates your product. Estimate the size of the market segment. Now, reduce the size of this segment by the percentage of people who won’t be willing to pay what you will have to charge to make your business profitable. Can you still reasonably project enough volume to make your business economically viable?
3. Is the thing that differentiates your product defensible?
If your idea is a good one, you had better know how you will keep a large competitor with deep pockets from copying it and running you out of the market. There are many examples of well-healed copycats overtaking people with good ideas. You need a plan to protect yourself from this. Perhaps you can protect your intellectual property through a patent. Perhaps your idea, for one reason or another, is difficult to copy. What entry barriers are there to keep the competition from moving in?
4. How will you reach the target customer segment with your marketing message cost effectively?
Whoever said, “If you build a better mousetrap, the world will beat a path to your door,” was simply wrong. If the world doesn’t know you have a better mousetrap, no one will come knocking. Make sure you are clear regarding how you will reach your target customer segment with your marketing message. You need to have a clear plan for cost effectively acquiring customers. A marketing cost per acquired customer of $50 is no good if you make only $40 on each new customer.
5. How can you prove the viability of your idea quickly and inexpensively?
If you are afraid that you will need a big investment to launch your product, find a way to challenge that assumption. There may be ways to prove the viability of your concept without making the full investment. Ideas include outsourcing manufacturing or making version 1.0 by hand rather than buying expensive equipment.
Another? Launch in a limited geography. For instance, we have been working with a company that is developing an app for the property-management industry. We started by working with several local property management companies to prove the concept and work through some challenges. Now, we are rolling out to other geographies.
Chances are good that the initial version of your product will fail -- most do. Our advice is to fail fast and fail cheap. Launch as inexpensively as possible. Learn from the market’s reaction. Make the necessary changes. As happened with the app company, prove that your concept will be successful before you invest in a full roll-out. You may even need to sell the initial units for less than they cost to make. We sold that app to the first users for a greatly reduced charge.
6. What will your cash flow look like?
Make sure that you build a thorough financial model that supports your decision to move forward. We encourage very conservative assumptions. New products often take much longer and cost much more to launch than you would think. Unless you have a lot of experience launching new products, the estimates you consider accurate will almost certainly be aggressive. If the economics of your product don't look good with very conservative assumptions, you may want to rethink things.
Launching a new venture can be exciting and rewarding. It can also be fraught with risk. Honestly answering these six questions will help you make decisions that are more informed.