Starting a new business or launching a new product or service is a risky undertaking. Anyone that has given it some thought is well aware of the typically high failure rates of new business ventures.
Adequate planning is often considered a means to increasing the likelihood of success, however common business planning methods may harm rather than help.
Mature established businesses can use historical information as a basis for their plans and projects. However start-ups generally do not have the benefit of that informed starting point. Instead, planning for start-ups involves making a range of untested assumptions and guesstimates including:
- The take up rate of your product or service
- The price you can charge
- Distribution channels and time to market
- Cost of production
- Access to capital
However, if incorrect assumptions are left untested, they can end up being the cause of business failure. In the process, scarce investment dollars may be quickly wasted. Once that cash is gone, financiers and investors may be reluctant to provide additional funding.
A better and lower risk approach for start-ups is to adopt a ‘discovery’ driven planning method, which involves the following key steps:
1. The first step is to create a “reverse income statement”
The business needs to make money and provide the owner with the right financial reward to make the effort worthwhile. Start with the profit required to provide the return on investment you expect and then calculate your revenues required to produce that profit.
2. Map out your operations and each associated cost
Identify all the steps to produce, sell and deliver your product or service and the costs you’ll incur. As part of this process you should identify your sustainable competitive advantage.
Is it delivery times, superior service, technical excellence, pricing point or some other differentiator that distinguishes you from your competitors? How will you capitalise on and invest in using it to your best advantage and what is the cost of doing so?
Once you’ve identified all the costs of business, subtract them from revenue and check you will achieve the desired profit. If not the business may not be worth the risk.
3. Identify the assumptions in your financial and operational modelling and test them
List down all your assumptions behind your reverse income statement and operational model, rank them in importance and then test them at milestones.
This is where developing your networks is important. Potential suppliers, financiers, investors, customers, other business owners and mentors can be a wealth of information and provide insights and feedback.
Surround yourself with people who have similar or relevant experience and can fill any knowledge gaps you have. You can publically obtain or purchase information about industry performance standards.
Use this information to find out whether your areas of assumption match the present industry experience and how it’s expected to evolve in the near future. If an assumption doesn’t stack up, adjust your planned approach and amend your cost and profit calculations accordingly.
4. Consider how to launch your business
The fanfare of a new business and brand launch can be exciting. A better approach may be to soft launch the business.
This can be done on a smaller scale, with a proportion of your start-up capital allocated on testing the actual realities of business. This may be achieved by trialling your service as a value add offered to a complimentary service provider’s client base, or subcontracting the manufacturing of product samples by customers before launching into large scale manufacturing yourself.
It’s essential that you implement systems to gather initial feedback, incorporate it into your financial and operational modelling and make adjustments as required.
Testing and refinement during these initial stages has several advantages. You’re more easily able to make changes while you’re nimble and not yet tied to major commitments.
Changes will incur lower costs to implement. You’re also better able to manage the costs and risks associated with establishing the business venture and can create the optimal conditions to achieve your desired outcomes. It also assists to reduce the risk of fundamental assumptions in your planning and provide actual data to inform decision-making.
However, if the reality of business doesn’t match your expectations, be prepared to make hard decisions. This includes assessing whether the business is a viable one worth pursuing.
Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business planning and advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises.
Note: The concept of Discovery-Driven Planning was presented by Rita Gunther McGrath and Ian C. MacMillan in their article Discover Driven Planning published in the Harvard Business Review July – August 1995.