Technology makes it easy for startups to think of an idea and breathe it to life. For very little money you can contact manufacturers in China or in Iowa, you can hire a team of designers from Elance and share a video on Youtube.
Although you can do all of this, smart business owners still plan and in some way map out how their business will grow. Long business plans are a thing of the past or most businesses but some plan of action is important.
Check out this Guest post by Sabrina Parsons, CEO of Palo Alto Software for more information on the “new” business plan for startups. Palo Alto Software is the leading company business plan software, founded by Tim Berry. I guess that makes Tim the Daddy of business plans?
Silicon Valley’s Lean Startup method is great for a high-tech startup aiming for Venture Capital money. But unfortunately, because “Lean Startup” is a new sexy concept, the media is trying to make it a one size fits all strategy.
Don’t get me wrong, this model has worked well for many of the Valley’s high-tech startups. Its “Minimum Viable Product” (MVP) strategy recommends developing technology quickly, and then immediately launching it to customers, gathering data, tweaking and re-launching all in a short period of time. This is an excellent way to quickly determine whether your product solution is really resonating with your target audience, without heading too far down the wrong product development path. However, this strategy alone is simply not effective for new entrepreneurs entering the non-tech business world outside of Silicon Valley.
Businesses in Main Street America are better served with a slightly modified version that focuses more on planning. The days of lengthy documents that take months to develop might be gone, but plans shouldn’t be ditched altogether as the Lean Startup methodology suggests. Today’s small businesses can use many of the ideas from the Lean Startup methodology, like the MVP strategy, while still planning ahead to ensure a stable future.
We have deemed this approach “Lean Planning” because it combines the best aspects of traditional business planning with the Silicon Valley’s Lean Startup method. So, what does a Lean Plan look like? It should have:
- An executive summary, or pitch, preferably with charts and images to tell your story quickly and efficiently
- A financial plan with an expense budget, sales forecast, profit and loss, cash flow forecast, and balance sheet
- An action plan with milestones scheduled and accountability
- Performance tracking to compare actual financial results with your planned financials and other key metrics
If you go through the process of creating a forecast, you will be forced to think through things like Cost of Goods (COGS), Gross Margin, AR and AP days, Marketing Costs, etc. Once you go through the forecasting, and you set targets for all these key metrics, you are one step closer to being able to manage your business more efficiently and increase your chances of growth.
The next step in the Lean Planning process is to set up a monthly review meeting. Review your planned numbers against your actual results and analyze any discrepancies. Why were the numbers wrong? What assumptions had you made that are not true? You may have thought you could collect money from your clients every 30 days, but as you review and compare your actual results for a few months, you may realize that you are actually collecting money every 55 days.
With this information, you can easily react to the implications it will have on your cash flow by making necessary changes to prevent any problems. You could decide to spend more time and effort collecting money to bring down the collection days, for example, or you could decide to talk to your banker and extend a credit line, to float you over the longer AR period. Either way, by planning, and then measuring the actual results, you have information that you may not have had. You can directly see the impact of longer collections days on your cash in your bank account.
The last step in the Lean Planning process is where the Silicon Valley’s strategy comes into play. In order to make sure you don’t veer too far off course with a faulty plan of action, you need to make small adjustments, every three to four months, based on the variance between your plan and your actuals. Comparing these two numbers and understanding why the reality is different than the original plan will help you make decisions about what to change within your business operations so you can actually grow your company. This is similar to the Lean Startup idea that suggests experimenting with ideas, determining what works and then tweaking your product, service or business model. In this scenario you make educated guesses about what you can do rather than experimenting, if something does not go as planned, tweaking your business quickly is still just as easy and effective.
The Silicon Valley’s Lean Startup method is a highly effective strategy for quickly determining which startups will succeed and which will fail. Main Street America, however, needs to pair this idea with a more structured business plan to avoid running out of cash and to eventually experience growth and profit. Today’s business world requires entrepreneurs to be flexible and nimble and Lean Planning allows them to do this effectively while ensuring a more stable future financially.
Sabrina Parsons has served as CEO of Palo Alto Software since 2007. She and her husband, Noah, founded a UK software distribution company in 2001 that was acquired by Palo Alto Software in 2002. As CEO, Sabrina is a staunch supporter of entrepreneurs and entrepreneurial organizations.