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How to Start a Business Without a Business Plan
A business plan provides a set of documents that enables someone else to evaluate your business. But do you really need that?
If you are seeking a loan or investment you might. But even if you need a loan, most small businesses are started on loans that the founder obtains based on their own assets or credit and not on their business plan. Most investments are made by people who determine that your business meets their profile (size, industry, scalability, maturity, etc.). They don't want to read a business plan and research you to find out if you meet that profile. They want you to tell them the things that matter to them, and nothing else. So listen to them and respond accordingly.
If you don't need a loan or investment, and can get into business by yourself, you probably don't need to write about it first.
Business plan advocates say that there is value in the process of writing a business plan, even if you never show it to anyone else. This may be true, but it's a lot of effort to go through when what you really need are the answers to a couple of key questions. Whether you write the answers down or carry them in your head isn't terribly important. But it is critically important that you think them through before you find yourself in the middle of things.
Key Questions
- Where are you going to find your customers?
- Why will your customers want to do business with you?
- What are your terms (pricing, contracting, etc.) for doing business with your customers?
- How will you manage your cash flow?
In that order.
Where Are You Going To Find Your Customers?
Your success or failure in a business will primarily depend on your ability to find new customers. The hardest part is identifying a potential customer. Once you've got them, you can interact with them and learn what it will take to convince them to do business with you. But first you have to find them.
To discover new customers, a gas station may rely solely on people seeing its sign and pulling in. But you're probably going to have to be more creative. You need something other than a sign on a busy street to get introduced to new customers. In fact, most gas stations don't rely exclusively on their sign and street presence to find new customers.
If you are going to have a brochure, how will it make its way into the hands of potential customers? Direct mail? Hand delivery? Trade shows? If you are going to have a web site, how are people going to find it? If you are going to get introduced through personal networking, how many people do you know and how many more can you meet? Two things will determine the number of customers you end up with: the total number of introductions (brochures distributed, people you meet, people who visit your web site, etc.), and the percentage that convert to becoming actual customers.
Being "in business" or being capable of doing something won't make these introductions and conversions happen. Talented and capable people fail at businesses all the time because they simply didn't land enough customers. Knowing how you are going to accomplish this should be your most important goal.
Why Will Your Customers Want To Do Business With You?
Once you have identified a potential customer, you need to close the deal with them. That is when you need to know why they should want to do business with you. Whether you simply talk to them, hand them a brochure, send them a letter, or submit a proposal, you need to persuade them to do business with you. Your pitch, brochure, letter, or proposal should be designed to do that.
Persuading a customer to do business with you is a combination of convincing them through rational logic, appealing to their less logical desires, and removing the barriers that might impede them doing business with you. This means you need to have good copy and answer their questions. Unanswered questions and fear are the biggest barriers in the customer's mind that you need to overcome.
Before you launch your business, you should know how you are going to convince the people you meet (or give your brochure to, who visit your website, etc.) that they should do business with you. Ideally, you should test and refine your technique.
What are your terms (pricing, contracting, etc.) for doing business with your customers?
The real question here is "what is your business model?" or "how are you going to make money?" Before you ever talk to a customer, you need to know:
- What are you going to offer?
- What are you going to charge for it?
- What discounts will you offer?
- What will be included with the sale?
- What will you charge extra for?
- When, where, and how will you allow returns?
- What will the contractual terms be?
- How will you manage the customer relationship?
- What kind of follow-on sales will you attempt?
The amount that you charge your customers, multiplied by the number of them, will largely determine your total revenue.
How Will You Manage Your Cash Flow?
It is actually possible to have an abundance of profitable customers and go out of business because you did not manage your cash flow and ran short before you could collect. This usually happens when you have to spend money to produce your offering and deliver it to the customer. A surge of orders means a surge of expense prior to collecting. If you get paid through invoicing and have 30 day terms, then even if customers pay on time (don't count on it) you have at least a 30 day lag to cover (and it could be more depending on how long it takes you to produce and deliver your offering). If you get paid in cash at the time of the sale, the above may not apply to you, but you still need to manage your cash flow to ensure that it covers your expenses and you don't fall short.
Knowing how you will manage your cash flow means that you have to estimate your revenues (see above) as well as your expenses. This in turn enables you to estimate your profits. This is a classic business plan exercise, and where the most guesswork takes place. None of your projections will match reality once you start. However, knowing what drives your revenues and expenses will help you avoid being successful but going out of business anyway.
Conclusion
If you can answer the questions above with confidence, and don't need to convince anyone to give you a loan or investment, you are ready to launch your business. The place where you need to put effort now is in testing and refining to improve the quality of your estimates, the performance of your business, and your own confidence before taking the risk.
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