The Secrets of Business Planning

SOBP

An interview with Tim Berry, a world expert on business planning

Plans are the DNA of business, containing all the base information needed to form a strategic framework for the growth, direction and shape of an enterprise.

Whether you are launching a new business, growing an existing enterprise, or even creating a venture within an existing corporation- chances are the first step in your journey will be the business plan.  In fact, for those wishing to raise money (whether it be seed capital, or venture finance) the plan is certainly a pre-requisite. Often than not business strive on efficiency and therefore they need a software application such as, event driven web applications.

Studies have shown that “except in a small number of cases, business planning appeared to be positively correlated with business success…” and that  “while analysis cannot say that completing a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business pan is also more likely to run a successful business” (Ding & Hursey, 2010)

Much has been written on the business plan, and for many- it seems an almost insurmountable hurdle to write (what they anticipate will be) a thesis length piece on ever minutiae of their idea.  The reality however, is far simpler…

To learn more about the secrets of the business plan, I spoke to Tim Berry.  He is co-founder of Eugene Social,  founder and Chairman of Palo Alto Software, founder of bplans.com, and a co-founder of Borland International.  Tim has dedicated his life to business planning.

Pamela Slim, author of best-selling Escape From Cubicle Nation, calls Tim the Obi-wan Kenobe of business planning.  Guy Kawasaki made him his business plan expert in How to Write a Business Plan. Jim Blasingame, the best-known small business radio talk show host, calls him The Father of Business Planning. Tim is also the official business planning coach at Entrepreneur.com.

He is author of books and software including LivePlan and  Business Plan Pro, published by Palo Alto Software, and The Plan-As-You-Go Business Plan, published by Entrepreneur Press. he has a Stanford MBA degree and degrees with honors from the University of Oregon and the University of Notre Dame. He taught starting a business at the University of Oregon for 11 years.

His website is at timberry.com and his main blog is Planning Startups Stories; he also posts on several other blogs including Huffington Post, Amex OPEN Forum, and Industry Word at sba.gov. He is an active investor member of the Willamette Angel Conference.

Q: How would you define the concept of a business plan?

[Tim Berry] A business plan describes ‘what‘ is going to happen- with metrics, responsibilities and as much reasoning and background information as is necessary to guide management towards the future.

Q: What are the key components of a good business plan?

[Tim Berry] I think there are five.

First is the review schedule.  Every plan should start with the understanding that everyone involved- even if just one person- will dedicate an hour or two every month to looking at plan versus actual analysis.   You have to know ahead of time that this will happen, it trains people to realise that this is about management and not just about ‘some document.

Secondly- milestones…  You need specific things that can be tracked and measured.  This could be the launch, a new product-line, a new version, a new location.

Thirdly-strategy.  To me this is summarised, economical and in context.  It could even be bullet points.  Strategies are very easy to conceive, but hard to execute consistently over time as there are so many distractions.  Strategies must focus on three elements.  Firstly ‘identity‘ – how are you different and special… the S & W of the SWOT… many people hate the term ‘core competence’ in this regard, but I like it.   Second is target market… what are you not focussing on, who isn’t in your target market.  Thirdly is matching the business offering to the target market and strategy.

Fourth is the basic numbers. In reality, all forecasts are wrong- all business plans are wrong- but they’re very useful for management.  It’s not just a one-time picture, it’s an on-going story.  You’re looking for lines not dots about how a company proceeds.

Fifth is cash-flow.  Your basic numbers probably include cash-flow, but this is so important I feel it ought to be kept as an individual point.

Those five points are not a document…. these are things on your computer…. you may have one component in PowerPoint, one in Excel etc.  It’s form follows function.  The plan is the lists, milestones and responsibilities- not the document that describes them.

Q: How has business planning changed over the last decade or more?

[Tim Berry] I feel there has been huge change, and technology is the driver.  The human species is different now to thirty years ago, we have an electronic extension to our DNA that gives so many distractions, so much multi-tasking, and so little time to focus on a single thought for any extended period of time.  Business planning reflects our reality- it’s now quicker… people go in and come out of plans faster… The goal and purpose of plans 30 years ago was enormously descriptive, with research built into the format.  It was used as a management  tool for a large company or a key component of raising money and getting loans.

Now, nobody looks to a business plan as a thesis to prove your knowledge and experience.  A business plan has to be streamlined and efficient- it’s always wrong, always obsolete- but has value in managing the change.

Q: Where do business plans fit within the investment process?

[Tim Berry] I have raised VC money, we’ve bought VC’s out and I’m now the managing member of a local angel investment group.

There’s been a change… the business plan 30 years ago was often the frontwards selling document of a transaction.  Nowadays, everything is more streamlined.  Many deals are rejected before anyone has even read plan.  From what I’ve seen though, no deal actually makes it to term-sheet and close without the plan being read very carefully.  It’s much more of a due-diligence document than introduction now.

Our angel investment group starts the year with around 40 investment possibilities.  We’ll narrow this down to 10-12 by reading only summaries.  In the summaries we look for team-experience in start-ups, interesting growth potential, scalability and defensibility.  The summaries need to show that, and the business plan effectively becomes a detailed agreement between management, entrepreneurs and investors rather than exposing the idea.

In my world, every business needs business planning. The business plan document, in that subset of businesses that have business use for showing a business plan to some outsider such as a bank or an investor is a subset of the total- but in that subset too, the summaries are important- the business plan just sets the milestones, measurable steps and so on.   The business plan is about management not exposition, it shows commitment to milestones.

Q: Are there any common mistakes you see when people are producing their business plan?

[Tim Berry] By far the most common is underestimating expenses.  This happens all the time.  Just the other day, I found someone who listed the average profitability for public companies in about 50 industries.  You saw 8%, 12% and a couple that got into the 20’s.  Real-estate was up in the 60’s… When industries do barely double-digits if their lucky, business plans ought not to be showing EBIT or EBITDA of 50-70% – that doesn’t mean people are smart, it means they haven’t understood the industry.  In rare cases as an investor you will discover opportunities where technology is so good and so new, that it may actually be the case- but that’s one in a million.

Another common mistake is proving-knowledge.  This is a waste of everyone’s time.  Investors will become confident with knowledge by looking at degrees and/or track records- but you don’t need to explain the science to an investor.  Investors want to see what you’re going to do, the milestones, the sales- not a long, windy hard to read plan.

The final one- which I am glad is coming ‘out of fashion’ now is the trend for people to feel they had to be the ‘low cost provider’ in their industry.  That the only successful plan was the one that delivered the product to market at the lowest cost.  This is not the real world- people are getting more sophisticated about the relationship of price to value, and the value proposition.

Looking at the key sections

Q: What are your key tips to making a killer executive summary?

[Tim Berry] Validation really helps…. do you have sales? a term-sheet? a letter of intent?

You only have a few seconds to grab someone’s attention- so marketability, management team, scalability and defensibility all have to show up in the summary.  This is classic journalism- the lead has to come first.  You have to get the sizzle into the summary and get people to want to know more.

Q: What are the keys to a good finance-section?

[Tim Berry] I’m conflicted with this theme because I love the numbers.  I’ve built a company that grew out of making numbers easy to do without sacrificing the basic quality of thought- accrual accounting was important, cash-flow has to reflect inventory turn, collection days and accounts receivable…..

As an investor, I want to see revenue projections that are credible from the bottom up- not top down.  I want to see that business-owners understand the flow through their channels, if it’s web-direct I want to see some sense of how they’re going to acquire the traffic and conversion rates.  I want to see maturity in the cash-flow.  Don’t do a business to business that has no accounts receivable for example.  I want to see maturity in the relationship between the numbers- I don’t want to see gross margins or profits that are 4 times industry average.   If they are different, I want to see the entrepreneurs know about differences and can explain them.

While I like an exit strategy, I hate having to read IRR or NPV or a five-year valuation.  You have compounding uncertainty at that time-frame.  You have to guess profits, sales and multiples- and each of these comes with a magnitude of uncertainty in their own right.  It’s a complete waste of time…  These sorts of calculations are good in academia or in an enterprise situation, but not in the start-up world

Saying that… as an Investor I’ll take a good plan with bad numbers over a mediocre plan with accurate numbers.  The numbers are easier to fix than a poor market or product mix.  Most investors gauge the scale and credibility of the numbers in their own head based on the story the plan tells about the problem, the need and who’s solving it. It’s also good to have a plan in place to act against fraud. I’ve left this for the finance question because planning for an act of fraud that will affect the income and outcome of your business will affect your finance. Working with an external company like FraudWatch International is vital if you want to begin to target acts of fraud, unless you have the staff with the skill set to organise software to act against fraud.

Q: What is the key to a strong marketing section?

[Tim Berry] I go for the stories.  I really believe that stories tell the truth.

I want to understand and believe the story of the problem and the solution.  Who has the problem? why is this solution better? how do we connect the people with the problem with the solution that we have?  Segmentation is often the real genius of a successful business- understanding who is in the market and who isn’t.  This understanding of the target user then allows the business to develop the right delivery mechanisms and signalling channels whether that be Facebook or print advertisements. I have recently discovered that companies just like OutreachPete have started touse blogger outreach to market their customers websites. Building links to other websites is becoming more and more important for your business, and gives you a better chance of getting to page one. It is extremely important when setting up any business you spend time thinking about all the different marketing routes you can go down. In a marketing plan, a common mistake is when you see B2B companies that have direct sales potential but don’t have a structure for sales-people, sales management, sales-expenses, decision-time, account management and so on.

Q: What is the key to a strong operational and management section?

[Tim Berry] I deal with this in a similar way to the science, I look for the team members.  I want to see that somebody has been operating in this industry, and understands how it works.  As an investor- most of the plans I see are for industries that I don’t know- and I know what I don’t know.  I’m no more capable of evaluating a small manufacturing enterprise than I am of a PhD science project.  I want to see that the team has someone credible who is in charge of operations.  It’s disappointing when they come from a different industry.

One thing that bothers me in the world of business planning is that advisors appear and disappear with almost callous glibness.  I’ll see a plan where they may have ‘n‘ advisors with industry experience and think, “wow, this is interesting” but I’ll ask what the relationship is.  Are they compensated? do they have stock-options? do they have skin in the game? if the answer is “no, they’re just friends… we like them, they like us, they’re just helping…” I will tend to discount it.  If the advisors have real hooks, then that brings them up.

There are so many plans that have an obvious person missing.  As an investor, I’ll forgive that if the person writing the plan has identified who’s missing.  A hole or two is fine with a start-up.

Q: Why are people so scared of business planning?

[Tim Berry] People are scared of business planning because the myth of ‘the fat business plan‘ still exists.  This is folklore.  There are institutions who are vested in this myth of business planning and that begins with the thousands of people who want to make money writing business plans.  Many banks and supposed experts re-enforce this.   People perpetuate this feeling that you cannot do anything until the business plan is done.  In my world, when the business plan is done… you’re done!  A good business is always changing its business plan.

I knew a guy once who for four years was doing nothing but business plans and his life was going to start when he got financed. In that period he had four business plans, none of which got financed.  It reminds me of the old-folks in Las Vegas who are clearly hurting, hoping to make it all back by throwing quarters in a slot machine.

In my world, you are always doing a business plan, it’s always happening.  For some people this may begin with a sales-forecast, and for others it may be a target market.  Whatever it is, the important thing is to get going! Recognise the fact that you get started, go into it for 10-20 minutes and then go back to selling, watching cash-flow and so on.  Nobody in a start-up should be doing nothing but a business plan, that is time which is totally wasted.

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We caution that business planning is an insufficient condition for venture success...” write Delmar and Shane, “The content of business plans and the implementation of these plans could have a more important role in influencing disbanding, venture organizing activity, and product development than the simple act of planning… business planning is not the most important factor in influencing disbanding, product development, or venture organizing activity.  Several factors outside the control of the firm founder, most notably the passage of time and the nature of the venture opportunity, appear to explain more variance in these outcomes than does business planning. Nevertheless… the simple act of undertaking business planning matters more for venture disbanding, product development, and venture organizing activity than any other single factor under the control of firm founders that we could identify.” (Strategic Management Journal, 2003)

Their view reveals one of the underlying truths of business planning.  Many people feel that a business plan is a guarantee of a venture’s success- but as management guru Peter F. Drucker notes, “Plans are only good intentions unless they immediately degenerate into hard work.”

It is that component- the hard work, the execution, the journey- that ultimately will make or break a business.  And the business plan acts as a road-map for that journey, giving you a sense of direction and an understanding of your context.  As the mathematician Poincaré allows me to conclude, “It is far better to foresee even without certainty than not to foresee at all.


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