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6 Questions A Business Plan Must Answer

If your product’s unique aspects aren’t defensible against a competitor’s copy, it’s time to fold your tent and go home or you can read this helpful article!

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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.

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.

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.

 

This article cited from 6 Questions Your Business Plan Must Answer

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Financial Modeling for Startup, Part 3: The Income Statement and Custom Detail Tabs

In the previous two posts in this Financial Modeling for Startup series, we examined why building a financial model for your startup is important and how to practically get started with your assumptions tab. Today, we’ll continue by diving into the income statement and supporting tabs used to calculate your projected revenue and expenses. The final part of this series will go over cash flow, the balance sheet and keeping the model updated.

But first, in case you aren’t yet convinced that it’s worth your time to build a financial model for your business, here’s a quick video we put together showing how a model can be used to gain insight about what assumptions drive forecasted cash most significantly:

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Financial Modeling for Startups, Part 2: Assumptions

In the previous post of Financial Modeling for Startups, its described what financial modeling is and why it is important for startup founders to build their own models from scratch. Now, we’ll begin by diving into how to practically start building a financial model. In coming weeks, we will also be covering the income statement as well as cash flow, balance sheet and keeping the model updated.

Good financial models are built from the bottom up. They have assumptions that flow into backup sheets that flow into monthly statements that flow into annual summaries. You literally start with the smallest component and start building up.

What is an Assumptions Tab?

The assumptions tab should be the first tab within your spreadsheet and contain variables that will be referenced from other tabs. Rather than manually enter data into your income statement, you’ll roll up variables across your assumption and detail tabs. The ONLY place you should ever type a number is into an assumption cell. Every other cell is a calculation based on the assumptions!

The types of assumptions you’ll want to define are unique for your business type. Most commonly they are related to expected revenue from each product/service you sell, expected costs, initial investment dollars in the bank, etc…

Where to Get Your Data?

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Financial Modeling for Startups

We are calling all startup founders!

A startup financial model is important in raising funding, building startup financial projections or planning the future of your business. To have a startup financial model, you can learn and read other people’s financial model. Well, that’s one thing. But how about create one that professionally designed for your startup? This article will guide the Startups business for building their own financial model from scratch and ultimately communicate clearly to a great deal of investors.

What is a Financial Model?

In short, a financial model is an abstract mathematical representation of how a company works (and more importantly, how it will work going forward). The model has inputs and outputs. The inputs are the assumptions that drive the model, things like what drives your customer acquisition cost, what your churn rates are, how much you pay people, etc. The outputs are a set of projections that show how the company will perform if the assumptions are true. One model can produce multiple sets of projections given different assumptions.

Based on a set of assumptions, a financial model is used to make smart decisions (e.g. how many sales people to hire and what to pay them). The model includes financial projections that are tied mathematically to the assumptions, which allows operators to “play with the variables” in order to understand how certain decisions might affect the future health of their company.

Why Should Founders Care about Building a Financial Model?

Troy Henikoff (Techstars Chicago Managing Director) has an important story to share on this topic:

“When fundraising for SurePayroll, we had some very high level financials in the pitch deck. Inevitably, VC’s would ask where the numbers came from. I would tell them that we had a very detailed financial model that drove it, I was setting the bait…

They would ask to be sent a copy of the model and I would refuse. I would only share it by first sitting down with them and an associate and reviewing the model in person and after that 90 minute session, I would leave them a copy of the model to play with further.

They would insist that they could figure it out without the meeting, but I ALWAYS held my ground. I wanted the meeting not just to save them time and frustration learning a new model, but more importantly to get more face time with them in a situation where I was going to shine.

I knew the model inside and out since I built it; I could answer any question about any cell and look like a genius. In the end, I did eight of these meetings and EVERY ONE of the firms that did the 90 minute meeting with me on the financial model either made an investment in the company or made an offer to invest in the company. Every single one.”

Why is it Important for Founders to Build a Financial Model from Scratch?

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