Guest Post by: Robert Goodman
New start up CEOs dooms their new company by pinching pennies in the wrong place. Instead, what they need are pivotal insights from experienced consultants who can provide the guidance the entrepreneur needs for producing a realistic, genuinely implementable business plan.
Your business plan is not some academic document – instead, it is your crucial road map to successful implementation of your vision for your new company.
The most important part of any business plan is the detailed financial projections that are the basis for the entire business model of every new company. There are four sets of underlying assumptions that drive all the projections:
1. Start up costs – what will you need to spend up front to get the company going?
2. Sales forecast – the single most important set of assumptions for your whole plan – how many of what, will you sell, for how much, at what costs, when?
3. Personnel – how many, of what kind of employees, will you need at what cost, when?
4. Operating costs – what will it really cost to be in business, generate sales, give necessary sales support and exemplary customer service and cover all back office expenses?
Every part of your financial projections is just arithmetic – based on those four sets of driving assumptions. Because it is just arithmetic, many entrepreneurs make the often fatal mistake of assuming it is trivial and can be done easily and cheaply.
But – if you guess wrong on any of these assumptions, then most of your projections are wrong – including two of your most important projections: your cash flow and your capital needs. If you guess wrong on your assumptions that impact these, then you will probably run out of money and your new company will fail.
Number crunchers and bean counters are great at arithmetic. So are newly minted MBAs. And, they can be relatively cheap to hire. But this cheap hire may be the most expensive mistake you will make as a start up CEO.
These cheap hires almost never have any experience base or expertises that help entrepreneurs make meaningful assumptions. So, entrepreneurs who use this approach for their business plans end up with GIGO: garbage in, garbage out projections that are misleading at best – but more often, fatal in the end.
As the adage goes, the only thing worse than going the wrong direction – is going the wrong direction enthusiastically. By basing your business plan on the wrong assumptions, you end up going the wrong direction – probably enthusiastically – believing your bean counter-generated plan will be the path to wealth.
Entrepreneurs who have thought they were saving a few hundred dollars by hiring cheap number crunchers or inexperienced MBAs, end up losing everything they’ve invested in their new company – all because they were penny wise – and dollar foolish – or rather, thousands, hundreds of thousands or millions of dollars foolish. Cash is always limited for start up companies – but this is one place you do not want to get trapped by false savings.
What’s the best way for you to avoid the second biggest mistake for your new start up company?
Hire an experienced management consultant who specializes in start up companies – particularly a consultant who has started at least a dozen of their own companies. That way, you get insights based on real life experience that will help you end up with a genuinely implementable plan for the future – your future and the future of your new start up company.