Guy Kawasaki discusses business plans with Tim Berry
Originally published: 09.01.07 by Guy Kawasaki
Your plan should be alive.
I work in the surreal world of Silicon Valley, where venture capitalists fund companies based on PowerPoint pitches and executive summaries. My friend Tim Berry rightfully points out that business plans still serve an important role in “the rest of the world.” He’s right, and he should know because he’s the president of Palo Alto Software, the principal creator of Business Plan Pro, and the author of a blog called Planning, Startups, Stories. The U.S. Association of Small Business & Entrepreneurship recently named him Corporate Entrepreneur of the Year for 2007. I talked to him recently about business plans.
1. Who even reads business plans anymore?
How about, “Who should read a business plan”? It’s not about whether venture capitalists read plans; it’s about planning to make your business better. So here’s who should read a plan:
• First, you the owner, manager, author of the plan — and you’d better be the owner of the plan, too — not some consultant. The plan is by you and for you, and if tracking it, reviewing it, managing and executing it aren’t important to you, then you don’t understood planning. Planning isn’t about the document; it’s about controlling your destiny, running your business better, setting goals and tracking progress, and keeping your eyes on the horizon while not tripping over potholes in front of you. If you’re not going to read it regularly, then don’t ask anybody else to.
• Second, team members, boards of directors, and collaborators. A business plan is a way to coordinate, communicate, and collaborate with accountability and tracking. It should get all the key people on the same page. Nobody can execute a plan they don’t know about.
• Third, relevant outsiders. Banks, investors, boards of advisers, key consultants, and even occasionally— but only with caution — vendors or prospective new high-level employees.
2. What are the most important qualities of a plan?
• First, a plan should set priorities with the understanding that you can’t do everything. After all the buzzwords and analysis, strategy is focus. What can you do better than anyone else? What’s your core competence?
• Second, specifics. What’s going to happen, when, how much is it going to cost, and who’s responsible for it?
• Third, cash flow. Growth spurts in a company are good things, meaning more sales, and presumably more profits, but unplanned growth can suddenly suck up liquidity and, in the worst cases, kill the company. Growth without prior planning can be as fun as a hard kick in the stomach.
Here’s a story to illustrate the concept of growth versus cash flow: Willamette River runs through Eugene, Ore., where I live. More people drown in the slow deep portions of the river than in the rapids because people think they’re OK when it’s slow. Cash flow is like that. You think it’s OK when you’re growing and profitable. Profits are good, but cash and profits aren’t always timed together.
3. In what order should you do the summary, pitch, and projections?
That’s a chicken-or-egg question, and the answer depends on who you are, how you think, and how you work. I go through periods of months — and in at least one episode years — in which I think in broad bullet-point terms first, then fill in details, and then I’ll swing over and start thinking in numbers and projections first, then filling in the concepts. I’ve watched people for a lot of years, and it’s a style question.
What’s most important with this order of execution is to understand that it will never be sequential. In whichever order you do it, you will always be doubling back. I’ve done it in every conceivable order, but I’ve never done a plan from step one to step N. Fleshing out the second step will almost always bring up reasons to revise what you did in the first step, and the third step will make you rethink the first two.
4. What about the theory that you should develop a pitch instead of a plan?
A good presentation is a great way to communicate the core of a plan, but it doesn’t substitute for a plan. A pitch without a plan is like a movie trailer without a movie. The plan and the pitch should work together. Which comes first is, again, a matter of personal style, but it’s crazy to have a pitch without a plan, or, if you’re looking for investors, a plan without a pitch.
5. What’s the optimal process for writing a business plan?
Grab whatever part gets your attention first, and get going. Understand that it’s not sequential. It’s iterative, and a good plan is never done. Some people do the numbers, then the concepts. Most people do concepts first, but it doesn’t matter. Planning isn’t a waiting room where you sit until you’re done. Build it in parts, mix and match, choose items from a menu. If you like, do a sales forecast, and see where that leads you.
My favorite process starts with what you want for the business in the long term, moves to establishing a conceptual identity:
• What are you best at, how do you want the world to distinguish your business from all others.
• Then it goes to the marketing: what message, to whom, through what media.
• Then it goes to sales forecast, costs, expenses, and last but frequently most important, cash flow.
Key concept: a good business plan is never done.
6. What are some of the common mistakes?
The worst by far is focusing on the plan instead of planning. This generates the idea that you create a plan as a document, and the related misunderstanding that the plan is for somebody else. You don’t postpone life while you’re developing a plan; you’re always developing the plan. In the meantime, get going.
Here are some other common mistakes:
• Blue-sky blurry: lots of strategic thinking without any hard facts. Planning requires specifics: dates, deadlines, responsibility assignments.
• Trying to do everything. I use the rule of displacement: Everything you do rules out something else.
• Thinking that being the lowest-price option is important. It isn’t. The price and volume thing they talk about in economics classes is for 200-year-old lumps of coal, not your business. Use price as a statement of quality. Leave the low-price strategies for Wal-mart and Costco.
• Mistaking profits for cash. Profitable companies go broke all the time. You don’t spend profits. Plan your working capital well.
7. When do you revise a plan?
You need to revise a plan regularly, like steering a car or walking, both of which are constant small-course corrections; but you also need to stick to a strategy consistently for two to three years at least to see it working.
It’s better to have a mediocre strategy consistently applied over a long term than a series of brilliant strategies contradicting each other every six months. The hard part is knowing which is which. Don’t ever stick to the plan like running into a brick wall just because some cliché says you’re supposed to. That’s just dumb. But you also need the patience to let things work. Sometimes we keep solving the same problem repeatedly because we don’t have the patience to let the first solution work before we change to the next solution. It’s paradoxical.
8. What’s the best format?
Form follows function. Planning isn’t about the document. It’s about the planning process that creates management. The vast majority of business plans are for the business themselves — not to be read by outsiders, and they should stay on a computer, and in bullet points, and financial projections because that’s how they can be used.
Unless your plan needs to go to outsiders, keep it simple and practical. I’ve been running my company with a business plan for 20 some years now. It gets revised often, discussed, and managed often. But we print it when our bank asks for it — maybe every five years or so.
However, when you do have a “business plan event,” as we call it — meaning loan application, investment opportunity, or review for board of directors or advisers — then give your readers a break. Include charts to illustrate numbers. Use easy-to-read bullets. Use 12-point fonts for people over 50. Make an easy outline to follow. Include an executive summary that could stand alone if it has to because it will. Have chapters describing the company, what it sells, the market, the plan specifics — strategy, tactics, and programs, the management team, and the financial projections. Don’t be afraid to use PDF documents. They travel well and are convenient for all concerned. And let your readers decide whether they want hard copy.
9. How can you project numbers for a new business with no history?
Aim for the educated guess. Educate the guess with back-up information laying out assumptions for how many potential buyers, what sort of penetration process through the market you’re projecting, and what experience shows in other industries. Look for indicator factors you can tie your numbers to.
Don’t sit around debating projections— start selling. Prove your sales projections with sales.
And remember: Start the planning process immediately. You’re projecting a new business only until you’ve finished the first month. You’re laying down a plan so you can track the difference between plan and actual results. Your plan will always be wrong, but you’ll be tracking where, why, and in what direction.
10. How do you know when you’re done?
A good business plan is never done. You’re going to be circling back around it for as long as you care about your business and want to manage it better. If your business plan is done, then get out of that business because it’s dead. You’re always moving toward the horizon, and you’re business plan is always there to track where you’re going, mark the steps, and help you steer.
The absolute worst business plans ever, anywhere, are those plans in a drawer somewhere. If you’re not keeping it alive, it’s not planning; it’s just a plan. It’s history. It’s of no business value
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