Fred Dunayer: Welcome to the SCORE Small Business success podcast Been There, Done That. To get free mentoring services as well as to see the wide variety of resources available for small businesses, visit our website www.score.org or call 1-800-634-0245 and now here’s your host Dennis Zink.
Dennis Zink: Episode number 19 Business Plans. Fred Dunayer joins me today in our studio as co-host, SCORE mentor and our audio engineer. Good morning Fred?
Fred Dunayer: Good morning Dennis.
Dennis Zink: Our guests today are, Dennis Hernreich and Bob Theis Theis. Welcome to Been There, Done That.
D Hernreich: Good morning Dennis I have been looking forward to doing this.
Bob Theis: Good morning Dennis.
Dennis Zink: Bob Theis is the former CEO and chairman of J.R Clancy, which is a company incorporated in Syracuse, New York. The 129 year old international company is the leading designer, manufacturer and installer of theatrical rigging new equipment, everything you use backstage. Bob bought the company in 1982 after sales marketing and financial positions with RCA and Sony Corporations. He very successfully turned around the company from $2 million a year in sales to over $32 million, before selling it three years ago. Bob holds a Bachelor of Science in finance from Villanova and an MBA in marketing from the Wharton School at the University of Pennsylvania. Bob Theis is also a SCORE certified mentor.
Dennis Hernreich has been serving public and private companies primarily in the role of CFO and COO for over 35 years. Having a long history in executive management, Dennis has been involved with acquisitions totaling over $500 million in equity and debt financing totaling over a billion dollars. Dennis is also a SCORE mentor. His Suncoast CFO Solutions provides small to medium size businesses financial expertise on a part time basis at a fraction of the cost of a full time CFO. Dennis, what is a business plan?
D Hernreich: Well, that’s what we are here to talk to this morning Dennis, and by the time we’re finished with this podcast we’ll get through all of that because it’s a long answer but in short, a business plan is an essential roadmap for your business success.
Dennis Zink: Okay I like that answer. Why should someone have a business plan?
D Hernreich: Again there are several reasons for that, probably the very best reason is that going through the process of constructing a business plan allows you to think through your business. It reduces the upfront investment of any time or money by compressing the trial and error process of starting a new business or growing an existing business. It also will inspire your employees and investors, it will provide you with a critical benchmark from which to measure your future progress and it’s an essential document for securing financing.
Dennis Zink: What stage do you think it’s necessary to have a business plan? At the start of phase or once you have been around a while?
D Hernreich: The earliest the best. It’s essential to have a business plan for virtually any reason a startup, if an existing business does not have a business plan it should start to construct one.
Dennis Zink: You often hear the term strategic plan, what’s the difference between a strategic plan and a business plan?
Bob Theis: Dennis, the strategic plan is a lot larger universe of what a company should be doing. A lot of times it encompasses the vision, the mission and the values of a company. A business plan in my thinking will contain elements of the strategic plan.
Fred Dunayer: Both the strategic plan and a business plan are fundamental as you guys suggest but do you consider them living documents as opposed to kind of a startup situation or once in a while type deal?
D Hernreich: A business plan and a strategic plan both are living documents that need to be revisited, revised as the business itself evolves. It’s not a static document and it’s not intended to be used in that way.
Dennis Zink: What period of time should a business plan cover? Should it be one year, five years, three years what?
D Hernreich: Business plan is intended to cover a business cycle horizon which not only includes one year but it could include as much as four to five years. It’s a document that helps you, helps document your vision of getting from point A to a point B whether that’s in two years or whether that’s in five years.
Dennis Zink: It’s difficult to even know what’s going to happen tomorrow let alone a year I can see but when you get out there three, four, five years is just really pie in the sky numbers?
D Hernreich: A business plan helps to document and visualize the vision of the business entrepreneur and as I said it’s a living document so you are constantly revising that business plan as you go along.
Fred Dunayer: I would suggest that maybe that horizon varies depending on the type of business it is, if you’re making cell phones you are in a whole different time horizon than you are if you are making something more static that it’s a continuous product that doesn’t change.
D Hernreich: I think that’s a great point Fred Dunayer.
Bob Theis: Fred, I would agree with you but from a practical standpoint I think it’s imperative that any company revisit their business plan yearly and go through the formal process of putting together the business plan. I have found that the process is a lot of times worth more than the actual plan itself because you get a lot of people on the same page, you bring in your team you discuss what you want to do, you talk about your action plans, whose going to do what and so forth. Dennis, I wanted to go back to what Dennis H was saying earlier on, it is very, very critical that all businesses have a business plan.
It could be from the very, very startup or think that you can are going to start up phase to companies which are multimillion dollar companies need a business plan and each of the business plans are going to be little bit different, some are going to be just very, very basic. Some are going to be a one page, some are going to be a different length, some could be 20 pages long. It also depends upon what you want the business plan for. If you are an investor, if you are seeking capital you’re going to have a lot longer more complex business plan than if you are self-funded.
Dennis Zink: What should be in the business plan, what’s the foundation?
D Hernreich: The foundation of the business plan is the company’s business model which helps to describe the essential ways in which it’s going to generate revenues as well as how it’s going to construct or provide the infrastructure for which to generate those revenues.
Dennis Zink: Could you elaborate on that by giving us an example of some of the components of a business model or a business plan?
D Hernreich: Certainly Dennis. The business model, the most important element of the business model, is the first component, is the customer phasing of the business which describes most importantly, its value proposition to the customer. What is the uniqueness of your business? The customer segments that you are going to be targeting? Also, how you’re going to relate to your customer, we call customer relationships, as well as the customer channels and revenue streams or what customers will pay for the value proposition that you are creating.
The other component of the business model describes how the company will deliver the value proposition to the intended customer segments and the channels under the designed relationships. That is the key activities of the company, the resources needed and any key outside partners as well as summarizing the resulting cost structure.
Dennis Zink: Is it complicated to do something like that?
D Hernreich: It’s only as complicated as the business itself.
Dennis Zink: What are some of the misconceptions that people have about doing a business plan or business model?
D Hernreich: The two key misconceptions for any business and business owner is one, thinking you don’t need a business plan. As Bob said every business should have a living business plan. Secondly, again thinking you only need a business plan to raise money, that’s just one of the reasons from which to have a business plan.
Dennis Zink: What if you don’t do a business model?
D Hernreich: If you don’t do a business model, the risk of not succeeding is heightened since the business owner and it’s managers have not thought through the mechanics and the details of how its business is going to be successful.
D Hernreich If you complete a business model will you be successful? Does that guarantee anything?
Dennis Zink: Only on paper, the next critical step to complete the business plan, and execution will greatly raise the chances for success.
Bob Theis: Dennis, to that as well I think one of the critical components of a business plan has to be the action items to come out of it and whether it’s by department or by person it’s very critical and the action items have to have a start and a deadline as well. Speaking toward what Dennis was saying, the execution is the whole thing.
Fred Dunayer: I would suggest that the execution is an iterative process, especially at the beginning of a business’s life when there’s a lot of things that are being tested. I’m sure there’s a tremendous number of assumptions that are made in the development of a business model and business plan and the company tests those things and the process of executing that plan and goes back and revises that plan on a pretty continuing basis at least at the beginning stages of that business.
Dennis Zink: What are the sections that should be included in the business plan and I often heard that the executive summary should be done last?
D Hernreich: Actually executive summary should be placed first but perhaps it is constructed last but it should go at the front of the business plan. In any case, after completing the business model from which you thought through the basic high level elements of how your business is going to be a successful with the definition of its value proposition is, the components of that business plan now become, besides the executive summary, a company description, so that someone picking up the business plan can understand what your business is all about.
The market analysis, most importantly what is your target market? What’s the size of your market and how you are going to market to that market? What’s your market share goals are? What piece of the pie is your business model intended to capture? The competitive analysis, what others are doing what you are trying to do and what makes you distinctive and unique from what competitors are doing? Any perhaps regulatory considerations that the business needs to deal with.
What’s the organization look like of your business and the management of how you are going to operate the business and as I said as well as your marketing and sales strategy of how you are going to capture that market share goal that you’ve set and lastly but not least, is your financial projections over the horizon of your business plan.
Dennis Zink: Bob you have developed what you call a zero draft of a written business plan for startups, can you explain that?
Bob Theis: Sure. Dennis, as I mentioned earlier there are many different types of business plans and it’s based upon the size of your company what your objectives are but I find that as a SCORE mentor, the thing that is really lacking is the initiative to just write it down on paper. Let me just kind of take a step back. I’ve found that the process of physically writing it on paper helps to clarify, helps to focus a person’s thoughts so you can talk about it, you can think about it, unless you physically write it on paper, it’s not going to be effective, in my opinion.
There are again, there are many different types of business plans you can do but let’s talk from a SCORE standpoint. I found that I had to really make it pretty basic for the SCORE mentees who’ve come to us. I developed something called the zero draft written business plan for startups and you know what a first draft is, well this is a zero draft, and what you start with is a bottle of beer or a glass of wine. It helps you get in the mood, okay. There are nine questions and you answer the nine questions and you write them out and at the end of the nine then you have five action items and when you’re going to start on them.
That’s what I insist upon seeing with that before I meet with a SCORE mentee. Dennis, it is the basis for discussion you can develop from there, you can develop your one page business plan from there you can develop a longer document if you need to get financing as well but I find that you got to really make it pretty simple and that’s why I came up with the zero draft program.
Dennis Zink: I would like you to elaborate on even more because there’s only nine questions, why don’t you tell us what those are?
Bob Theis: Sure. Why are you starting this business? I have found that people start businesses for reasons like; I just got laid off, my employment insurance is running out, I want to emulate my father, I want to have a new life for me. There are a lot of reasons so it just kind of gets you into the mental mode. Then, what is your product or service? What are you specifically selling and what is the, as Dennis said, “What is the unique problem that you are trying to solve?’ What makes your product really differentiated in the market, what is that you are going to hang your hat on?
Here is the critical question, who are your competitors? If a person comes to me and says, “Well you know I don’t have any competitors” I just say, “That’s just nonsense. Everybody has a competitor one way or the other. It could be in a complementary type of a industry but you’re going to have a competitor and you have got to identify them and you got to know what they are charging as well.” Then how are you going to sell your product? How are you going to market your product? Those are two different questions.
What are you going to charge and why are you going to charge that particular amount of money? Is it a competitive reason? Are you covering your costs? Are you going for market share? Are you trying to introduce a product? Are you trying to maximize your margins? What are you going to charge? Then what are your product costs or do you really know your product costs? What are your other costs, what’s your overhead, how much salary are you going to take out?
You could do a spread sheet but again this is a zero draft and I’m just saying just jolt down on a piece of paper, it doesn’t have to be formal and then the last is how much money are you going to need to start this? Are you going to self-fund it? Are you going to borrow money from your spouse, from your in-laws, from your kids? Where are you going to get the money from and how much money you’re going to need in the future?
Fred Dunayer: Going back to one of your previous questions about competitor’s, one thing I have I noticed, and I have started some businesses in my time, as well. If there’s no direct competition, (ie: or you are coming up with a new, a new plan) you have to ask yourself why isn’t it being done already? The odds are usually that somebody would have tried and it didn’t work for one reason or another, there’s cheaper or alternative ways of handling that particular product need and I think it’s important that people realize that, if something is not being done there may very well be a good reason.
Bob Theis: Well right, I absolutely agree with you Fred. I mean I don’t have the feeling that I am that smart that I could have invented this thing and nobody else has invented it before me. It’s just has been done one way or the other, so that’s really a flag.
Dennis Zink A lot of times it’s just, it could be the execution. I know that there’s business certainly expertise or someone could make something happen where somebody else in a different market couldn’t. So you have to consider that and also getting, staying on the competition question, the best definition I ever heard was that a competitor was anyone that’s going after … excuse me going after a dollar that I am going after.
Bob Theis: Well I agree, but the thing in my opinion what is overlooked the most in a business plan is the competitive analysis.
Dennis Zink: Agreed. Tell me when you have the most five immediate action items, what are you looking for there?
Bon: Well let’s say for example I need a sales rep, where are you going to get the sales rep, okay and when are you going to start to get them? Let’s just say that you need a website, I’m going to develop this website with the help of Mr. John over here and I’m going to develop it by December first. Those are the action items, I need a PR person to develop it, I need some money, those are the types of action items. Dennis, these are really, really basic types of things and I found that you just need something to kick the people off the mark here.
Dennis Zink: The zero draft written business plan is something that can be done very quickly but getting back to the full-fledged longer business plan that includes everything that Dennis discussed earlier, how long should it take to do that, how long should you allow to do that comprehensive plan?
D Hernreich: That can vary Dennis, it depends on the commitment of the authors that are writing, this zero draft let along the business plan, and it depends on the complexity of the business itself?
Bob Theis: I agree with Dennis. It depends upon the complexity but it is an iterative process and if you happen to have several different departments then you are going to have to get people together perhaps at an offsite and you’re going to do it several different times as well. There are documents out there, there are books out there that claim that you can do it in one day, you can do it in one hour, you can do it in one week and its, they give you an outline for it as well. Some of the books Dennis, that are some of my favorites, here’s one called the Business Plan in a Day by Ronda Abrams, that’s a particular good one.
There’s also one, called the One Page Business Plan and Jim Horan does a series of these. This particular one I have here is for the creative entrepreneur. Here’s one called the One Hour Plan For Growth and that’s also by a guy named Joe Calhoun. They are all kinds of different ways you can do this but you just got to get started.
Fred Dunayer: Once you’ve done a business plan and let’s say it’s someone who is relatively new to the field that they are starting the business in, how do you validate that your plan makes sense?
D Hernreich: That’s a very good question. I think going back to the business model and doing the adequate amount of research about the business the makings of the business, how what the customer segments look like, what the competitive landscape looks like, going through the process of completing that business model and then in turn the business plan, in and of itself, will help at least first stage of validating the foundational basis for the business in the first place.
Dennis Zink: They call it a business plan for a reason as opposed to a business actual, because it’s a plan and the best laid plans they change. I think all you wanted it to be is a roadmap that will get you in the right direction and that is subject to change and then you could use as a working plan as well, to help clarify your thinking and get you from point A to point B. But it’s not an actual, it’s not going to become your actual numbers. I mean it’s great if you can get close to it, but realistically it’s just a plan. You got to start somewhere because if you try to get a ship out of harbor without a plan you’re not going to do it.
Fred Dunayer: It’s funny and I’m probably misquoting this, Dwight Eisenhower is famous for talking about plans and saying that, planning is critical, plans are useless, something along those lines. Because once the first shot is fired, everything changes.
Bob Theis: There was study done that said, with a plan, with a written business plan you’ve got a 75% chance of actually making it versus a 25% chance if you don’t. So it’s critical. As I mentioned, I am also a SCORE mentor but I’m also an angel investor and quite honestly if a person doesn’t have a thought our written document, don’t waste my time.
Dennis Zink: Who can help create a business plan? Let’s say you read the books and you have an idea what to do? How can you get some help?
D Hernreich: There are several of us here at SCORE that could help you get started doing that on a mentoring basis.
Bob Theis: That’s correct and again I think the zero draft is a technique that I use.
Dennis Zink: The number one thing that we are asked to do at SCORE, that client’s request, is to help with their business plans and that’s far and away the number one request. The second one is far down the line.
Fred Dunayer: To that end, if you’re going to get a SCORE mentor, what should you expect to take into that first meeting so that you can be most productive in the business plan process?
Bob Theis: Well usually the way that it happens here at SCORE, is we get a phone call or we get an email saying I have got this idea and stuff like that. What I will do is I will call the person and just chat with them and talk it through and then I say, “Do you have a business plan? Usually they say, “No, I do not have business plan.” So therefore, would you please before we meet, jot some things down and I send them at this point the zero draft.
Dennis Zink: I love when they say, it’s in their head. That happens a lot, it’s up here. I haven’t written it down yet but it’s in my head. One thing I would like to point out is that our podcast number 16 was on the Business Model Canvas. Which is essentially a one page iterative plan that puts all the components that Dennis mentioned on one page to show the relationships of those components and it’s just a great way to start because it gets you doing something, it gets you the action that we talked about earlier.
Fred Dunayer: Gentlemen is there anything we haven’t covered in the course of this discussion or a single or couple of thoughts that you would like our listeners to take away from this podcast?
D Hernreich: A couple for me Fred, one, it’s essential every business to do a business plan and maintain it on a periodic basis. Two, don’t forget that it’s an essential roadmap to how you are going to reach success that can be used for many different reasons most of which has to do with actually testing your business ideas, saving you time and money in the process.
Bob Theis: I agree 100% with what Dennis said. It is absolutely critical that it be written down, get it of your head, put it on paper, if it’s wrong you can revise it but let’s get it going and take the first step forward.
Dennis Zink: Well thank you for being our guests today on Been There, Done That.
Bob Theis: Thank you, thank you for having us
D Hernreich: Thank you.
Fred Dunayer: Thank you.
Fred Dunayer: You’ve been listening to the SCORE Small Business Success podcast, Been There, Done That. The opinions of the hosts and guests are theirs and do not necessarily reflect those of SCORE. If you would like to hear more podcasts, get a free mentor, view a transcript of this podcast or would like more information about the services we provide, you can call SCORE at 800-634-0245 or visit our website at www.score.org again that’s 800-634-0245 or visit the website at www.score.org.