May 4, 2020
So you want to build a business out of your great idea? Gary Campbell, Key Account Director at the University of the Highlands and Islands, outlines the steps you need to take to create a proper business plan.
It can be a really exciting or eureka moment when you make that new technical or scientific discovery, or dream up a new product or service idea, which you think may be something that you can commercialise and take to the world. Once you’ve scoped how you think it’ll work, you must stop at this point.
Why stop? – Well, here are the reasons why:
If this has come from university research, you may have a long way to go in terms of further proof of concept or further research. Make sure that you understand the steps you need to undertake and also whether there is interim funding needed. In addition, make sure you’re not infringing on anyone else’s ideas. However, if you’re at the stage of having in your hands something you think can be delivered to a customer then you’re at the same stage as someone who has worked on a new idea themselves outside academia. You must stop again though – this is because the default position at this stage in any business idea should be asking the question “Why has no-one done this already?”. The answer will be found by doing the following:
You might think this is a world beating idea, but does anyone else? This doesn’t mean asking your friends, family or colleagues but undertaking real market research. If you don’t know how to do it, get someone else to do this for you. It may cost money but it could save you a fortune in time or money in the future. An overwhelming reason for new business failure is a lack of initial market research which can be boiled down to: can I legitimately make my product for a price that enough people will pay me enough money for so that I can make a profit and then build a business going forward? All of this is important and will be answered by market research. For example, is someone somewhere doing this already? If I try to sell my product, will it be at a price point that people will buy? Can I get the materials/technology to make it (many suppliers have exclusivity arrangements for example so you might not even be able to source your raw materials). Can I make enough to supply demand? Will enough people buy it?
The last one is a real killer, especially when combined with making it profitable – there are numerous really great product and service ideas but the market simply isn’t big enough, hence to supply it at a profit so the price per unit becomes unaffordable to the few customers who might buy it anyway.
If you pass this stage and it’s all looking good, then the next step is people.
Do you and your team have the wherewithal and willing to do this? Both are equally important – you need staff/a team/subcontractors that are suitably qualified and can bring all the expertise needed to make this happen as a business. You might be the technical specialist but who’s going to make it, who will sell it and who’s going to do the accounts? So you have to identify a team that will deliver your idea. It may be that this will come as part of any investment but after proper market research, this is the next most critical step. But the second part, willingness, is equally important. Building a business, especially one that you intend to scale up, is almost always an all consuming and in many ways thankless task. You and your team must be prepared for this, especially if external investors become involved. You’re likely to miss family events, see little of your children if you have them and you can say goodbye to any hobbies you have at the moment. It is completely different to being an employee and remember, it might not even work. If this isn’t for you, then there can be other options – for example you may be able to sell or licence your idea which could let you move on and dream up the next idea. However, if you still think this is the one for you and you’ve got the right folk on board, let’s look at how you’re going to fund this.
You’ll need money. If you’re lucky enough to be able to fund this yourself, good luck but the principles of investment are actually the same – just think of it as investing in another business and put the same tests on your own business as you would any other investment.
To go forward though, you have to work out how much you need and how long for. This is where you do a set of financial projections – again, if you don’t know how to do this, get someone else to help. The information backing up the projections will come from your market research if you’ve done it properly. Other costs (rent, electricity, travel etc) will all have to be worked out. Make sure, however, that you are aware of and have input into all of these and don’t abdicate all the responsibility to an accountant because, remember, it’s your business, not theirs and, like any professional help you enlist on this journey, their primary aim is to earn fees out of your efforts, not build your business for you.
The projections you will now do comprise three things. A Profit and Loss Account (P&L), a Cashflow Forecast and finally, a Balance Sheet. You must do this for a number of years into the future and each year should initially be broken down into monthly amounts or columns. The number of years you do it for will vary but the first thing to do is the P&L forecasts as these will show you how long it’ll take to make your business profitable. This is because pretty much no start-ups are profitable on day one, hence the need for money to bankroll them, but it’s essential that you work out how long it’ll be before you are in profit. It may be that you’ll never make any money based on your current thoughts which means looping right back to your market research to see whether, for example, you can put the price up to a point that someday, you’ll be in profit.
Once you’ve worked out how long it’ll be before you’re in profit (and this could be five years plus or longer in the future), the next step is a Cashflow Forecast. Based on the P&L figures, and adding in any capital expenditure on equipment needed etc, this will work out how much cash you need to make this venture succeed, but equally importantly, when you need it. In tandem with the P&L, which will over time show your idea becoming profitable and starting to contribute money back it to the business, it will also show a thing called your maximum funding requirement – in other words, you’ll get a picture of the cash in and out of your business going forward on a monthly basis and from this, when you’ll need a leg up to stop going into the red (and potentially bust).
The creation of a balance sheet for each year is important because in accountancy terms, by balancing it shows that your projections add up and over time, it also shows any wealth and value that is accruing to the owners, including what any potential investors could make from it.
These projections are what you need to do to take to investors or lenders to get the cash you need to get going but what they will want to see them all included in is a business plan.
The good news is that by doing the steps above, you’ve effectively written out the basis of your business plan. The plan is what it says on the tin – it’s your view on what you’re going to do, who’s going to do it, how much it will cost and how much it will make you all in profits. This allows people who don’t have your intimate insight into your plans to make an informed decision as to whether they will back you in your venture.
Using all the information you’ve gathered, although there are many variations on what one should look like, a basic business plan can be pulled together with the following sections:
- Executive Summary
- Product idea
- Summary ask
To complete this, start at the bottom and make your way up the list. All the heavy details – technical aspects of your product or service, detailed market research, full CVs of the team leading the business and the detailed financial projections should each be in separate appendices. From this, a summary of the ‘findings’ of each appendix should be distilled down to each of the main section headings but very importantly, written in a way that a lay person can understand. It’s almost like writing a business novel – you want to tell a compelling story of how your business is going to be a massive success (and remember, it is actually fiction, ‘cos it ain’t happened yet…). As part of this, if you’re planning a university spinout, there’s no need to do any referencing like you would in an academic paper – remember, your audience is business and lay people and you’re just telling them a story of future success. The next to final step is to do the summary ask. This is because as well as outlining in summary how much money you need and when you need it, you might also want some extra expertise on the team or you may want access to someone else’s intellectual property – it doesn’t matter what you’re asking for, the plan should back up why someone else should give you it.
The final step is the Executive Summary, which in essence boils each section in the plan to a paragraph each. Ideally, an Executive Summary should be no more that a page long and should be like the information on the back of the paperback novel – enough to make the reader want to know more and read on. Any pitching or pitch videos you are asked to do going forward should be based on your Exec Summary and similarly, if you’re ever asked for a thing called an Investment Deck, this is a slight expansion of the Executive Summary drawn out over some PowerPoint slides.
If you get this far, you’re on your way and then it’s approaching potential funders. That’s a whole different ball game that is best discussed elsewhere. If, however, you think doing all of the above is just too much hassle, then building a business isn’t for you and all you’ve wasted is ten minutes of your time reading this. May I wish you all the best and good luck no matter which way you decide to go.