Thoughts on starting a new business. Part 3

This post is part of a series. Click here to read the previous post. Click here to read the next post. Click here to read the first post of this series.

Business Plan: Theory vs Reality

Theory-Reality

In theory, every child goes to school, gets a degree and lands a job at Google.

In theory, everyone is reasonable, sympathetic, and willing to help out the fellow man.

In theory, every business starts off with a great idea and a detailed business plan to support its growth via marketing, funding, and competent leadership & management.

In theory… you get the picture.

Reality, however, rarely ever mirrors plan or theory. But that shouldn’t dissuade us from planning ahead, especially when it comes to our career path or business plan.

There are essentially 2 schools of thoughts out there when it comes to creating a business plan. One that completely disagrees and maintains that street smarts and the ability to adapt to changes alone is the key to a successful business. The other takes a more textbook and systematic approach to launching a business and requires a formal detailed business plan to manage every aspect of the startup. Most companies in fact do not have business plans. Out of the ones that do, most never revisit the business plan more than once. Most skeptics and fans of business plans will agree, however, that when funding is involved, business plans are a requirement. But that is precisely the problem, money & funding clouds their judgment and drive them to make a business plan when in reality it is so much more than a requirement your bank or investors force you to complete.

A business plan is a map, a barometer, and a thermometer. It can provide guidance,  help you understand the external trends and pressures of the market, while at the same time, revisiting it can often tell you the current health of your business versus what it was supposed to be, in theory.

Whether you are creating a business plan because you are a firm believer in it or whether you are doing it just to obtain funding from investors or your local bank, we are here to help. Encure Corporation helps individuals and businesses review and create professional and result driven business plans. With our team of seasoned professionals and the tools and resources at our disposal, we are able to offer our services to small and medium size companies in and around the tri-state area.

5 Best Practices for writing a business plan

1) Be Patient. There is a lot of information that needs to be gathered. Market research, industry’s strengths, weaknesses, opportunities and threats, current and future market trends. It takes a week or two to do proper research and editing that goes into creating a business plan. So be patient and don’t rush to get it done and over with. A business plan that gets ignored is just as well not a business plan at all. Take your time to perform proper fact-checking so that it doesn’t come back to bite you in the end should an investor raise a question about your estimates, facts or figures.

2) Be Fair. Unless you have mastered the art of nuclear fission, chances are that your business plan could always use some improvement and a reality-check. Do not be overly biased (both in favor of or against) towards your business plan. One way to do this is to write a business plan and then revisit it after a week or two with a fresh pair of well-rested eyes. Often you will find that a few facts may have been embellished just a little too far or certain topics needed to be expanded much more into detail to make an impact to someone reading and thinking of investing money in your business.

3) Be Accurate. Nothing puts an investor off like a miscalculated projected P&L or a 5-years returns chart that has the profit year over year add up to be so infinitely large that it looks like your medication for Adderall needs a revisiting. Inaccuracies in the calculations often leads the investor to question your ability at managing finances and therefore it creates doubt on whether you will be successful in running your business effectively. To overcome this consider going over the proposed numbers with a trust-worthy business partner or at the very least practice your presentation of the numbers and try to explain them to yourself in a fashion that would make perfect sense even to a novice. One way to avoid this mistake is to use a customized software solution which takes arithmetic out of the equation. We highly recommend Palo Alto Software’s Business Plan Pro. This is a software suite we use ourselves for our clients and we recommend it to all our clients.

4) Practice your pitching. Want to know a painful truth? That business plan you spent 4 weeks preparing will be skimmed through and tossed aside in less than fifteen minutes. That is about the average time it takes for an investor to sift through a business plan. About 5-10 minutes or less is what you will have to pitch your idea and make it stick. Never rely on a detailed business plan alone and  never read from the PowerPoint or directly from the business plan in front of the investor. Know your plan inside out and the only way is to practice and practice often.

5) Share your plan. No you haven’t misread that and no we don’t mean on Facebook. Most people think that business plans are always supposed to be confidential but what good is an idea that cannot stand a healthy debate or some aggressive questioning. Talk the idea through with a friend or a partner, business or otherwise. Some venture capitalists in fact recommend running the business plan/idea by a member of the opposite sex to get a different perspective.

Now that you have your business plan and ideas together and are ready to make a leap to the next step of starting your business, the next step is to choose a form of business that best suits your needs. We will have more on that in our next post here.

The art of outsourcing. Part 1

What is outsourcing really?

outsourcing

When we hear of the word outsourcing, it often brings to mind the image of Dell’s call centers in Bangalore or news stories of companies like Infosys and Tata Consulting that are embroiled in million-dollar lawsuits because of workers rights violation charges. Big corporations “shipping jobs overseas” often comes up when discussing outsourcing and many people, understandably, get pretty passionate about it.

In truth, outsourcing is much closer than Asia and is very much a part and parcel of our everyday life. Do you have a landscaper? Do you use a drycleaner? Do you eat out regularly? Do you have someone else prepare your tax returns? If you answered yes to any of these questions then you have been outsourcing chores you, your partner, your child, or your pet could have been doing! (Yes, we meant the taxes).

Outsourcing is a part of everyone’s life and for good reason. It frees up valuable time. Time that could then be spent on other more productive things, like reading this blog, for example.

In business, when done correctly, outsourcing frees up valuable resources and allows the company to focus on the more important task of conducting business and letting the “experts” deal with logistics, IT, facilities, and other aspects of the company that are essential but not what the company needs to focus its resources on.

What happens when outsourcing goes wrong?

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The key phrase here is “when done correctly”. Too often we are called to discuss projects that were outsourced to third party vendors that went nothing like planned or ended up creating more problems than fixing them.

Case in point: A wholesale grocer in New York had multiple vendors hired to do work on their logistics system. Each of them naturally worked independently of the other and with minimal supervision added to the recipe of management, one thing led to another and each vendor’s solution blossomed into its own full blown system that had its own independant system for tracking specific kinds of products. Business went on as usual except for the fact that the guys in finance had to pull all nighters to get the financial information from each of the systems before combining them with their own main book keeping software, and then repeat the process every month for eternity!

The solution

happy jumping

To solve this issue we had to create a datawarehouse for the firm, storing all the information in an SQL Server 2008 environment and then build custom reports and an interface to run the reports that got the finance department the revenue and cogs information they needed. It took us close to a year from business requirements gathering, to working with the vendors to get access to their data, to testing and getting the final UAT sign off by the business. But the important thing was that we left the project feeling proud of what we’d accomplished something meaningful. We made a positive impact in the way they ran their business. The company still continues to grow and they continue to outsource the logistics system to the same vendors. The difference, however, is that now management has more of an awareness and understanding as to how new projects need to be handled and what steps must be taken and what questions must be answered by the vendors in order to ensure minimal disruption to the other departments within the organization.

In our next post we will discuss the key take-aways when it comes to proper management of outsourced projects. Questions/Comments are always welcomed.

Thoughts on starting a new business. Part 2

This post is part of a series. Click here to read the previous post. Click here to read the next post.

Using the funnel method to find a niche

Ideas_Funnel

Most people’s idea of starting a new business revolves around an invention. A better mouse trap. The elusive canned bread. Something no one else has ever come up with before. An idea so revolutionary, they can’t ever discuss it with anyone and must apply for a patent immediately before the first prototype is ready. That, however, is the old way of launching a business.

We know that it is very likely for new businesses to fail. The statistics are somewhere around 8-9 out of 10 that are slated to fail within their first 10 years. We also know that good ideas don’t come by easily too often and often the seemingly good idea an entrepreneur comes up with is in an industry where he or she has absolutely no experience in. This is very much like putting the cart before the horse. You are focusing on a niche and then considering the market/industry afterwards. A visual representation of this is like that of an upside down funnel.

wrongwayThe downside of coming up with a new business idea this way is that it is counter-intuitive and can easily make the entrepreneur miss an opportunity to evaluate other niches he or she may be more adept in.

Thankfully there is a better way to come up with startup ideas. Just turn the funnel upside down!upsidedownWith this methodology of brainstorming for a startup idea, the entrepreneur begins by choosing the industry he or she already possesses work experience in. After deciding on the industry, the next step is to drill down further into the larger markets and then finally identifying a niche that is under-served and has a potential for growing and sustaining growth.

Here’s a quick example of how it works and how powerful this methodology is. Utilizing information from S&P’s NetAdvantage Industry reports, an entrepreneur can quickly compile data on various industries, their recent performance, factors affecting growth now and in the future, as well as come up with a likely outlook scenario based on historical data.

Industry Recent Performance Factors Affecting Growth Outlook
Banking[1] Trailing four-quarter profits for the US banking industry through the third quarter were $153.1 billion, up a robust 15.9%. Regional banks are performing strongly, as loans grow and interest rates rise. Pockets of strength have emerged, such as auto lending, a highly profitable business for banks. (see Exhibit 1) -US ECONOMY GROWTH RATE -HOUSING MARKET ACTIVITY -NET INTEREST INCOME GROWTH RATE -FINANCIAL REGULATORY REFORMS: THE DODD-FRANK ACT, THE VOCLKER RULE The next 12 months for these banks will likely depend on the growth of the US economy, housing prices, the length of the low interest rate environment, and regulatory costs.
Computers: Software[2] SaaS revenues grew from $29 to $36 million from 2012 to 2013. However many software companies see about one-third of revenues coming from each of the three regions (the US, Europe, and Asia). Accordingly, software companies tend to be exposed to global economic trends and, overall, the US met expectations, Europe was a bit weaker than expected, and Asia was mixed, with results varying by country. (see Exhibit 2) -SaaS BUSINESS MODEL -DEVICE PROLIFIRATION OF SOFTWARES INTO EVERYDAY HOUSEHOLD APPLIANCES. -BIG DATA -CYBER SECURITY -MERGERS & ACQUISITIONS OF IT COMPANIES Overall as an industry, S&P believes that the companies are right-sized due to the M&A’s that occurred during the recession and are prepared to make the most of any upturn in end markets.
Healthcare: Facilities[3] In 2011, the S&P Health Care Facilities subindex declined 20.8%, versus a 0.3% drop for the S&P 1500 Super Composite Stock Index. However, in 2012, the subindex advanced 29.1%, versus 13.7% for the S&P 1500. Year to date through December 6, 2013, the subindex was up 46.8%, compared with the 27.1% increase in the S&P 1500. (see Exhibit 3) -RISING HEALTHCARE COSTS -2% MEDICARE RATE CUT DUE TO SEQUESTRATION -OPERATIONAL VOLUMES (SO FAR REMAIN WEAK) -LONG-TERM REIMBURSEMENT OUTLOOK REMAINS TENUOUS -PENALTIES TAKE EFFECT FOR HOSPITALS NOT LOWERING READMISSION RATES -UNCERTAINTIES DRIVING MERGERS & ACQUISITIONS Rates paid by managed care organizations (MCOs) to hospitals will remain steady, rising in the mid-single-digit range for both 2013 and 2014. This would be generally in line with the increases experienced over the past several years.
Retailing: Specialty[4] Those fortunate enough to have jobs continue to spend at a modest pace. To maintain their current standard of living, consumers have also dipped into their savings and increased the borrowing on their credit cards. While we don’t think this behavior is sustainable over the long term, total retail sales (in nominal terms) increased 5.0% in 2012. While this is a solid number, it is also the lowest rate of growth since 2009 (by comparison, retail sales grew 8.0% in 2011). We expect sales to decelerate further in 2013, given the additional pressure placed on consumers with higher taxes and anemic wage growth. (see Exhibit 4) -UNEMPLOYMENT -RECENT PAYROLL TAX LEGISLATIONS -STOCK MARKET GAINS -FALLING U.S. SAVINGS RATE -HOME IMPROVEMENT AND HOME FURNISHING RETAILERS CONTINUE THEIR RECOVERY -CONSUMER ELECTRONICS FIRMS SQUEEZED BY PRICE COMPETITION Home-Improvement and Pet-Supply stores will continue to gain momentum and increse their revenues while office supplies and consumer electronics retailers’ future is predicted to be rather bearish according S&P.

[1] Enk Oja, “S&P Capital IQ Industry Surveys – Banking – January 2014”

[2] Barbara Coffey, “S&P Capital IQ Industry Surveys – Computers: Software – August 2013”

[3] Steven Silver, “S&P Capital IQ Industry Surveys – Healthcare: Facilities – December 2013”

[4] Michael Souers, “S&P Capital IQ Industry Surveys – Retailing: Specialty – September 2013”

Now that you know how to use the funnel method, it is time to start talking about a business plan. Read more about it here.

Questions and comments are welcomed as always.