by: Geoff Ficke

Prospective clients often present my marketing and product development consulting firm completed Business Plans as they attempt to elicit interest in their projects. Invariably the assumptions that their sales, income and profit projections describe are unrealistic. I am then asked how to best assemble believable, supportable numbers that will excite, not scare off investors, venture capital or partners.

A Business Plan is simply a document that describes a commercial opportunity and quantifies, qualifies and narrates details of the offering. The exercise of writing a Business Plan sounds fairly mundane and easily accomplished. It is not. I have rarely read a Business Plan submitted by a novice that was worth spending more than a minute or two contemplating.

The Harvard Business Review in a recent article mentioned use of the “4 P’s” for Potential when projecting budgets, sales and profits. This is a simple, easily understood template for aspiring entrepreneurs to consider utilizing. The “4 P’s” of Potential are Population, Penetration, Placement and Purchase Frequency. The “4 P’s of Marketing that are essential to customizing a brand and marketing strategy are; Product, Price, Placement, and Promotion.

The “4 P’s” of Potential, if accurately researched, detailed and confirmed are invaluable in supplying investors with assumptive numbers that will withstand intense scrutiny.

Consider:

Population

What is the real size of the actual population that would be interested in potentially buying your product? If you were marketing a snack cracker, it could be the whole population of a country. Most of us eat snack crackers at some time.
If you have a Pet Product, specifically a dog snack treat, the market is confined to the 77.5 million dog owners in the United States. If it is a cat snack food the market reach is a bit larger, approximately 94 Million licensed cat owners.

Placement

Now that you know the size of the consumer population base that can potentially purchase your product how do you surmise market Placement? Let’s assume that you want to introduce a cosmetic product and it will be moderately priced (Price = one of the “4 P’s” of Marketing). Your research indicates that there are approximately 75, 000 stores in the United States that carry competitive mid-priced brands such as Oil of Olay skin care, Maybelline and Cover Girl cosmetics or Revlon perfumes. As a small beauty product brand or start-up you will not achieve deep Placement in early stages of existence, certainly not big box distribution until the brand shows sales traction on a local or regional level. If you gain Placement in 1.5% of the discovered universe of 75,000 outlets in Year 1, you would achieve distribution in 1,125-doors. As the brand develops in year 2, Placement can be expected to easily grow to 2.5% or 1,875-doors, year 3, etc.

Penetration

How much of the Population will you penetrate with purchase of your product?
There are 17 million licensed hunters in the United States. If your exciting new camouflage, stealth hunting boot was able to gain 1% Penetration of this class in the first full year of sales, you would sell 170,000 units.

Purchase Frequency

A consumable product (food, drink, vitamin, cosmetic, household cleaner, etc.) has a much more frequent usage and repurchase rate than a dog leash, a hunting boot or other hard goods. Another term for Purchase Frequency that is often used is Sales Turnover. A Gourmet Meat Marinade might turn inventory levels three times in a year in a specialty store. A popular priced, higher volume marinade might turnover 10 times in a national supermarket outlet. Purchase Frequency is determined by utility of the product, daily or occasional use, price, packaging size and geography. A sun care product will turn over monthly in warm weather markets, only seasonally in colder weather climes.

Here is a simple formula that can be used to divine the Potential Size of a market for a product using the “4 P’s” during Year 1 of distribution:

Placement = 2% of 100,000 stores = 2000 placements

Population of Women Age 35 to 60 for an Anti-aging Skin Care Treatment
USA only = 55,000, 000

Penetration of potential buying Population
.001% of 55,000,000 = 55,000

Purchase Frequency = 3 Sales Turns per each full year of sales

Assuming a regimen (example only) of $40 X 55,000 consumers X 3 Repurchases and the above indicates that achievement of these 4 P’s of Potential would generate $6.6 million in sales.

This does not reflect new product extensions, international distribution or other variables. If the “4 P’s” of Potential are fully, deeply and diligently vetted, this number, while still an assumption is much more realistic and believable to the most difficult audience on earth: the cynical investor. This is the best to qualify, quantify and narrate the assumptions that are the cornerstone of any Business Plan.

by: Geoff Ficke

Most of the entrepreneurs we interview in our consulting business have a very unrealistic conception of what excites and disappoints investors. The dream of many inexperienced inventors seeking to fund their opportunity is to build a substantial infrastructure. Their business plan identifies the need for factory space, equipment, staff, and many other fixed costs.

Investors want to see a plan that maximizes return on investment. High fixed costs are the enemy of a great profit margin. When business turns down, and it always does at some point, fixed cost assets become liabilities and must be continually fed, even as income declines.

Always present decision-makers with the most streamlined operations plan possible. Do not confuse grandiose staffing and equipment wants with actual needs. In today’s business climate, almost every possible service can be rented, leased, farmed out or performed by contract manufacture. A 25,000 square foot factory that is not running at 100% capacity is an under-performing fixed cost asset, especially if a private label manufacturer will provide the service at a competitive price. The cost to rent, power, insure maintain and staff the facility is ongoing and will be a drain on the bottom-line.

Investors want to see a lean operation with no fat or excess. They will always be open to adding costs as growth and sales traction begin to kick in. Initially, the entrepreneur needs to display that he or she will be a prudent shepherd of the investment required to startup the enterprise. Here are a few areas where fixed costs can be avoided and potential investors greatly impressed.

Facilities
An opportunity killer is a funding request that includes money to buy a facility, office or plant. No startup can accurately pinpoint the growth (or failure) rate of a brand new business. Investors will want to see a plan reflecting realistic goals and space requirements. This almost always means renting facilities until need demands a purchase of facilities.

Manufacturing
There are almost no good reasons for a startup to manufacture their own product. Possibly, if there is a very valuable trade secret involved, but not often even in that case. All contract manufacturing should include a Non-Disclosure Agreement (NDA) as part of negotiations. Contract manufacturing is available and utilized in almost every industry today. Estee Lauder manufactures almost none of the many cosmetic or fragrance products they market. Liz Claiborne and Calvin Klein make none of their apparel. Ikea sells only furniture made in third world facilities.

All of these companies, and many more, realized long ago that manufacturing was better left to factories located where labor, raw materials and government rules were not stifling. These companies concentrate their assets on research and development, design, sales and marketing. So should every entrepreneur seeking to succeed in obtaining investment.

Sale
Every entrepreneur should be able to aggressively market and sell their product. However, no single person, or small partnership, can be in front of every customer that will potentially be interested in purchasing the product on offer. The investor will want to know that there is a sales strategy that offers an excellent chance for success.

In the area of sales, there are industry specific sales representatives: manufacturer’s representatives and agencies available to sell an interesting, market ready product, on commission, within their industry. Commissions are typically standardized within each industry. The gift industry is 15%. Food products are 3% and up, depending on the volume a product can reasonably be projected to achieve. Industrial products are 2% to 5%. Historic profit margins dictate commission rates.

When using sales agents, the entrepreneur should manage the sales force as if they were salaried employees. Weekly calls to review goals, promotions and upcoming meetings. Write letters and e-mails pointing out other agent’s successful achievements. I have used commission sales agents for many years, and recommend them to most of my clients.

I make as many key- account sales calls as possible with my sales agents. If it is my product, I want to control big presentations, even though I will pay a commission on the sale I have principally generated. I attend as many sales meetings as possible. The more I can meet, learn and know about my sales teams activities the better I will be able to motivate, train and energize them.

When commission sales agents do not sell a product they are not paid. This obviously minimizes fixed costs. However, you will want to pay the largest amount of commission as possible. Healthy commission checks mean a very healthy sales base.

As a very young National Sales Manager for Vidal Sassoon Hair Care Products I was confronted with a problem. Our sales had exploded. Growth was so rapid and market acceptance of the Vidal Sassoon brand so overwhelming that our commission payments likewise accelerated to the point that my top management became upset when commissions exceeded their own salaries. “Don’t those guys work for us, why do they make more than the owners”, they asked?

I faced a difficult situation. I offered two options: cut commissions or fire the commission agents and hire a company employed sales force. I reckoned that if I could get sales coverage for 8% cost of sales (including salaries, benefits, travel, etc.), it would make sense to make the transition. Cutting the commission rate would displease the agents and I did not want to risk losing the excellent momentum we had developed.

Very surreptitiously and quietly I interviewed and hired a team of key regional sales managers and we quickly executed a plan of conversion that top management had signed off on. Vidal Sassoon was at the point in their business development that a company owned direct sales force was needed and justified. However, it was a concern as we were greatly increasing our fixed overhead.

Entrepreneurs should focus maniacally on sales growth. Sales are Job #1 in every company, especially a new venture! Be very careful in constructing sales coverage that will support the growth you project while not choking cash flow with a very high selling cost.

Marketing
Hopefully the entrepreneur, or a member of the management team, has marketing experience. If not, the answer is often to hire a consultant. An experienced consultant will save time, money and mistakes. Be sure that the consultant being considered has current industry specific experience, strong references and a transparent history of success.

Fulfillment
I never recommend for a new venture to handle their own logistics (warehousing, pick and pack, shipping, billing, etc.) Dealing with shipping, handling, conditions and the terms necessary to satisfy retailers is daunting. Big box stores such as Kroger, Lowes and Wal-Mart have exceedingly complicated inventory control systems. Special, very expensive software is needed to communicate and expedite receipt of goods.

On average, I can have my inventory warehoused, packed and shipped for about 4% of my selling price (depending on volume). If business is seasonal or slows down I do not have to pay high fixed costs, just a percent of the shipments total invoice amount. If business is booming, my contract fulfillment warehouse ramps up hiring. A good contract warehouse offers a complete menu of services that I can pick and choose from as needed. Their systems will be sophisticated enough to handle the most demanding purchaser of my product.

The first time reader of a business plan typically has a strong reaction, positive or negative, to the overall document. A negative result usually occurs when the Executive Summary contains references to high fixed costs. A positive verdict is more probable when the entrepreneur indicates in every way possible that they are solely interested in maximizing profit and return on investment, not building a colossal infrastructure that will bleed the enterprise dry if all does not proceed perfectly and assumptions are not realized.

by: Geoff Ficke

There is an old adage in the funding community: “Investing $1,000,000 to fail is expensive, investing $5,000,000 to succeed is cheap. Investors will respond to funding needs based on real world assumptions. They will be very cautious when assessing a venture’s real funding requirements.

Think of investment capital as fertilizer. If a farmer applies too little he harvests a poor crop or worse. Too much fertilizer and the harvest will likewise be disappointing. Experienced, successful farmers know their fields, their climate, crop planting patterns and their equipment. They will apply every pound of fertilizer needed to maximize their harvest. Investors handle their capital in exactly the same way.

I review many business plan submissions each year. It is amazing how many entrepreneurs can not identify, quantify or justify the investment requirements they describe in their business plans. This is an absolute eliminator in terms of creating investor enthusiasm for funding a project. This is one of the largest reasons so many plans never receive a thorough reading.

Often, the entrepreneur woefully understates the obvious funding level a new enterprise will require. The justification, stated or not, is usually that they are attempting to keep the needed investment number very low in order to create interest. They do not understand that there is no too high or too low investment number if the need for capital can be demonstrated, qualified and narrated. Investors want a crystal clear look at the use of funds and how they will earn an appropriate return on their invested funds.

Seeking a number in excess of the amount needed to successfully launch a startup is equally disastrous. Investors are not seeking to build a Taj Mahal before the first dollar of revenue is generated. Here are a few tips for building expense assumptions that will withstand withering investor scrutiny.

Salaries
Investors do not want entrepreneurs to starve. They also do not want to fund the lease on a BMW 745. Salaries should be based on sustenance requirements. Most investors I have worked with want their management teams to make enough salary to pay their bills and not place untoward strain on personal finance and marriages. Comfortable is fine, but they will not fund luxuries. Be very realistic.

Staffing
I often see plans with a list of proposed employees that resembles the list of animals on Noah’s Arc. Keep this area very lean. Use outside contractors, consultants, and part-timers to fill every post possible. Employees add high fixed costs to the budget. Salaries, benefits, training and equipment can be too heavy a burden for startup projects to absorb. Another no/no is a squad of vice-presidents. These are red flags that scream excess and will all but eliminate any possibility of receiving funding for a new business opportunity.

Facilities
Plan on renting needed office space on a short-term basis. If growth happens as planned it is always easy to find bigger premises. You do not want to obtain a larger space than initially needed to run the business in the most efficient manner. You will be using too much of your precious capital for an underutilized asset.

This may seem obvious, but you should read the business plans I do. Many entrepreneurs try to replicate the surroundings they enjoyed when they were corporate employees. Recently, I reviewed a cash flow projection that included an office expense for a daily delivery of flowers, and this was not a floral business. Investors are totally put off by expenditures such as this. Unless the office environment will be crucial to closing sales and making deals keep the space as Spartan as possible.

Do not load up the staff with numerous family members unless they perform an absolutely essential function. Just because cousin Myrtle has been laid off for several years, the focus of your startup is not to give her employment, unless you can defend her abilities and unique skills. Your judgement will be questioned unless you can sell Myrtle’s benefits.

The cash flows you project in your business plan will be in the red (burning cash) for a number of months. Your ability to secure investment money will be largely effected by showing how quickly the burn rate stops and the business starts throwing off cash. This is a point that you must be able to defend aggressively. Investors will be very dubious about your cash flow projections, and thus the level of investment you really need, not what you may think you need. The better job you do of vetting assumptions and supporting them with historical industry specific data, the more likely you are to win investors and their money for commitment to your project.

A business plan that does not show cash burn slowing, then stopping and then turning to cash flow positive during the first 12 months of operations will likely not be funded. Investors want to see quick sales traction. A plan that does not show growth quickly enough will increase capital risk and sour investors.

Whether you require $1,000,000 or $21,000,000 the business plan should be written to justify the needed funding level being sought. Too low, or too high, and seasoned investors will walk away. Think like a farmer fertilizing his fields during spring planting. He has so much land and needs to make every square foot produce the greatest possible crop yield. The farmer does not waste seeds, fertilizer, water, labor or fuel. He makes sure that the crop is tended with all due diligence and given everything needed to reward his efforts. Farming is hard work.

So is finding and securing investment commitments. There are thousands of projects on the street every day seeking investment capital, partners or license. The number of projects greatly exceeds the supply of available resources. Do not injure your opportunity by loading up your offering with excess, fat and dreams. Your pay out comes after you achieve success, and the investor has begun to see a return on their investment.

by: Geoff Ficke

One of the most difficult tasks a new prospective entrepreneur faces is the construction of a Sales Model. Many books devoted to instruction for writing a business plan devote little or no attention to this vital exercise. The knowledge needed to assemble a quantified, qualified and clearly narrated Sales Model is essential to convey the scope and validity of an opportunity.

by: Geoff Ficke

There are hundreds of thousands of business plans floating around and attempting to find a funding home. I receive hundreds of business plans annually myself, and can definitely state that 99% of these documents are laughable as presentations of an exciting investment opportunity. I am not referring to the value of the product being described, rather the presentation that purports to describe an exciting investment situation.

by: Geoff Ficke

Let’s face it, nobody confuses writing or reading a Business Plan with a Bruce Willis action movie or a Tom Clancy novel. A Business Plan is a serious presentation that details an economic opportunity being offered for funding, licensing or sales consideration. Detail, research, financials and harvest options, key elements of any plan, can be dry, less than electric stuff. However, Business Plans that achieve success invariably are written with an air of urgency, excitement and color that separates them from the usual, boring template-based submissions.

I write business plans, teach business school students to write plans and read plan submissions daily in my consulting business. The plans that have success potential are different, beginning with the first paragraph of the Executive Summary. A great product or service opportunity, mated to a boring, non-creative document, is dead on arrival. And, this is a shame, because many potentially valuable commercial opportunities are lost, not discovered, abandoned, when funding or license options close.

A powerful Executive Summary is the key to getting any document fully read. Investors, venture capital, angel investors or potential partners are typically inundated with new offering submissions. There is simply not enough time to read, cover to cover every plan. In many firms a relatively low-level reader is tasked with reading and choosing which opportunities are passed on for full consideration. A dull presentation of an exciting product will not make the cut.

Make your plan submission stand out with an exciting, brisk, well- constructed Executive Summary. The old adage: “you only get one chance to make a great first impression”, is never more true than when presenting a business proposition. There is always more opportunity in the marketplace than capital or placement possibilities, too much supply and limited demand. Give your product every possible chance for success by presenting the item as an exciting, needed advance, not being addressed in a growth category.

Here are some basic tips to consider when creating the document you will present as a blueprint for your new opportunity.

• Paint a word picture in the Executive Summary. Visualize the story you must synopsize in this crucial section. Tell briefly, the unique features and benefits of the project. Explain and quantify the size of the opportunity. Explain the research conducted to support assumptions. Outline management and specific qualifications of the team. State, and be able to support later in financials, investment monies needed and use of funds. Finally, detail very briefly Return on Investment and Harvest goals. All of this must be accomplished in only two full pages.

• There are many outlines or templates acceptable to format the plan. There is no one, single, absolute format for a successful plan. An original product, with a beautifully crafted plan will succeed in any number of style formats.

• Keep the actual Business Plan short. Do not confuse a lot of pages with success. It is much more important to be on-point, quick paced, creative than lengthy in the narrative. Financials need to be very well constructed and narrated, line by line. I try to never go over 20 to 24 pages.

• Extensive Exhibits, placed behind the actual Business Plan, are always excellent tools. If the document is well received by the reader, and by the investor, a full set of Exhibits will reinforce the strength of your opportunity and confirm that this is a product to be seriously considered.

• If you are seeking to raise capital to self-market your product or service you will need a successful, very experienced management team in hand, or available, and able to fully commit to the project. No investor will consider any new opportunity that purports to have a carpenter (by experience) serve as Chief Financial Officer. We see this all the time and it is a non-starter.

• Have passion for your product or opportunity. Passion overcomes and trumps a lot of shortcomings. Do not be a dreamer with passion, however. Passion needs to come from the knowledge that you have not taken shortcuts, have really and extensively researched and identified the market and your product’s place in this competitive maelstrom. Knowledge leads to confidence and this will lead to a passionate belief that success will be achieved.

Successful Business Plans open doors. A fill-in-the-blank template is a waste of postage. An exciting Business Plan fully details an exciting offering for full, serious commercial consideration. Anything less, any document containing obvious shortcuts, will not get past a junior reader’s quick scan. Give your product every chance to succeed. Craft a Titanic (the movie), not Titanic (the ship).

by: Geoff Ficke

For many entrepreneurs the creation of a business plan is the biggest hurdle in the development process of their fledgling enterprise. There is a mystery, almost a dread in many people when discussion of a business plan requirement is first broached. They conceptualize a boring, dry, painful experience and many would like to avoid this step if at all possible.

What is a Business Plan?

A business plan is a document that qualifies, quantifies and narrates a commercial opportunity. It is that simple to state, more difficult to execute, but anyone can customize a business plan that gets results. The plan must have an exciting Executive Summary. Like the opening scenes of a movie, or the first chapter of a book, the writer must set a hook.

Typically, active investors, angels, venture capital groups and investment bankers are deluged with business plans. Screeners typically read the document before passing along to decision-makers within the firm. However, very few move a business plan along the decision making food chain precisely because the Executive Summary lacks excitement, punch or sets a high level of anticipation about what is inside the document.

Having written hundreds of business plans for clients I can attest that creating a plan that works is, well, work. No two plans are alike. The plan must be customized, well researched, structured and direct. I receive more than 500 business plan submissions annually in my consulting firm. Less than 1% have commercial potential as written. Many describe products, services, retail or new business development ideas that otherwise might be exciting. However, the plan does not convey that potential.

One of the worst things to evolve from the arrival of the internet is the ability to download a business plan template and write the document by filling in the blanks. The template itself is not problematic, I use a self-developed template when I customize plans. The problem is that many entrepreneurs do not have the writing skills, the research in hand, know the keys that turn on investors and thus, take shortcuts. Filling in the blanks without sweating the details and doing comprehensive research results in a document that will not be read and an opportunity that will never launch.

Rule number one in the development of any commercial opportunity: shortcuts equal failure!

I am a self-taught business plan writer. If I can do it, anyone can. In reality, however, most people just want to expose their opportunity to investors, licensees or potential partners. They don’t have writing skills, do not know the types of research necessary to support the plans sales model, need help in creating the marketing strategy, and will never be able to narrate financials.

Where can they go to create and exciting business plan document.

The following are resources readily available in most communities. Many are free.

Many colleges, community colleges and universities have developed small business incubators. They attract additional state funding, as small business growth and development are keys to job creation and an increased tax base. Take advantage of this community asset. Students, graduate students and professors are often available to direct your efforts. Ten years ago there were only a handful such programs. Today, over 1000 schools have some version of an entrepreneurial program.

Many states, regional and local governments offer business development programs. They have retired business people and mentors on hand to support, guide and train prospective entrepreneurs and guide business plan creation. There is no charge for utilizing this service, after all, your tax dollar supports these programs.

SCORE, the Service Core of Retired Executives is a Federal Government sponsored initiative. Thousands of retired, experienced business people make themselves available to evaluate commercial opportunities and direct the development and launch of those deemed to have potential. They are often intimately involved in creating business plans.

The Ewing Kauffman Foundation in Kansas City, MO is devoted solely to the development of entrepreneurial development. Mr. Kauffman started, nurtured and developed Marion Labs from a tiny drug local company into a multinational, multi-billion dollar powerhouse. He also owned the Kansas City Royals baseball team. His devotion to developing and promoting the entrepreneurial base of the United States resulted in creation of the foundation that bears his name.

Seek out a consultant. Typically consultants charge a fee, just like lawyers, accountants or plumbers. The advantage of an experienced consultant is that they write business plans for a living, will be strong writers, able to properly direct or perform research, narrate financials and differentiate a commercial opportunity by creating an exciting word picture. Always seek references and talk to several before deciding on a consultant.

Why Do I Need a Business Plan?

You might not. You might not need a deeply customized business plan if you are seeking to license or sell an invention, a patent or a prototype product. In this situation, the potential licensee would take your work product and develop a plan that fits their internal organizational needs.