I’ve seen this situation more than once: Visionary entrepreneurs create a new company based on an innovative technology or creative new business model. The company experiences significant initial success. After a couple of years, the entrepreneurs find themselves being driven out of the business by their own operational teams. Why? Because the ongoing operation of a business is drastically different from the startup phase.
Visionary and creative leaders are great at developing new technologies or innovative business models but have difficulty turning those ideas into long-term businesses that generate profits, satisfy customers, and operate efficiently. A company must have a well-developed operational plan and financial forecast in its business plan to move from promising startup to solid performer. As I discussed in my previous articles in this series, a strong business plan includes the following elements:
- A business mission
- A competitive position
- The potential market for your services
- A sales and marketing plan
- An operational plan
- Financial forecasts
Here are several guidelines for the last two aspects of your business guidelines: operational plans and financial forecasts.
Last in a series
This is the last in a series of articles that discusses the elements consultants should include in their business plans. Previous articles covered developing a business mission and assessing a competitive position and determining the potential market for your services and a sales and marketing plan.
How does the business go?
Often, business plans are long on vision but short on the operational details. Many Internet firms—including the e-consulting firms that rose and fell so rapidly—developed compelling and persuasive language describing their innovative business ideas. Unfortunately, programs for turning those ideas into actual operating businesses were often neglected.
Operational plans address the actual steps, processes, or systems that the firm uses to turn talent, labor, and products into a valuable service for the client. These are the basic issues that the operating plan section of an IT services company’s business plan must address:
- How is the service performed? What methodologies, techniques, processes, and procedures will the firm use to deliver the services that clients request? This must cover high-level methodology questions, such as how projects will be managed, and mundane issues, such as timekeeping and billing.
- Who performs the services? What resources—from IT technicians to project managers, receptionists, billing clerks, and warehouse workers—does the firm need to run its ongoing business? What partnerships, such as vendor or subcontractor relationships, are vital to the successful functioning of the firm?
- How are the results managed and evaluated? Define the organizational reporting structure, the roles and responsibilities across the organizational chain, and the quality and performance evaluation tools used to ensure that customers get the value they’re paying for. An organization chart that clearly illustrates the reporting structure is a must for firms that plan to grow larger than a few consultants.
- What are the logistical details of providing these services? What are the actual operating policies and procedures of the business—such as accounting, billing, product receiving and shipment, purchasing—that must be successfully managed for the company to make a profit? Will the work be done on your site or the client’s site? What regulatory, tax, or licensing details must you understand? What is the flow of work, from the sales process through the proposal to delivery and billing?
The creation of a convincing operational plan is a critical illustration of an entrepreneur’s managerial capabilities. Especially in this post-bubble environment, investors, bankers, and prospective clients want to see that entrepreneurs have a business vision and that they’re mature and realistic enough to understand the nitty-gritty details of turning that vision into a real company.
Build me a chair
I worked as a technical advisor to an Internet startup a few years ago and made the rounds of venture capitalists with them. The company’s founders, though strong in technical vision, had no experience in managing a business and were overly reliant on the whiz-bang nature of their technology. In every meeting, the potential investors questioned the technology, how the technical vision would be realized, and how it would become a profitable business.
Finally, one exasperated venture capitalist said, “If I could design a chair that could automatically whisk you to any place on the globe, wouldn’t that be a great business idea?” When my clients enthusiastically agreed, he replied, “Okay, so tell me, how do you build that chair?” His point was that it’s not enough to have a great technical concept; entrepreneurs must think through the details of achieving that vision and making a business out of it. The same is true in our business of IT services. By thinking through the daily workflows, processes, and resource requirements needed to build a business, consultants can send a message to their investors, teams, and clients that they are ready to build a business for the long haul.
Creating realistic and believable financial forecasts is often the most difficult part of the business planning process. Many IT consultants aren’t experienced in the financial management of a business.
Building a credible financial forecast needn’t be an intimidating exercise. Most readers of business plans—potential investors, partners, clients, or employees—don’t usually expect to see detailed monthly projections and view them with skepticism when they are offered.
I advised a startup that was proposing a Web-based personal diet and exercise monitoring service. An accountant for the business had developed a precise projection of costs and revenues, down to the penny, for the next five years.
The team was very proud of its creation and felt that it would give them tremendous credibility with investors. I took them to a venture capital firm I work with, and we presented the business plan. When we got to the financial projections, my client’s accountant started to walk the investors through his numbers. After a couple of minutes, the VC stopped him: “We know that these numbers don’t mean anything until the business gets started. Just give me a quick snapshot of your basic expenses and sources of revenue.”
Although something like this is certainly valuable on some level, readers of a business plan don’t expect you to be a fortune-teller. They want to see that you understand the costs of running your business and where your income will come from. They expect to see that the planner has considered the following questions seriously:
- What are the firm’s financial needs to get started or continue operations? Think through the requirements for funds to recruit talent; purchase goods and materials; pay for salaries, commissions, facilities, marketing, and advertising; and carry out other operational activities. IT consultants need to include funds for ongoing training and certification, for example, to illustrate that they’ve thought through their true financial needs to stay competitive.
- What are the firm’s financial goals? How much revenue do you expect the firm to generate during the next few years? Where will the revenue come from? What types of billable services, product sales, or other revenue-producing activities will the firm engage in, and what percentage of the expected revenue will come from each of these activities?
- When will the firm be profitable, and what type of profitability is expected? Sophisticated investors understand that most firms aren’t immediately profitable and need time to build a client base and to refine and optimize their operating procedures. However, they want to see that entrepreneurs understand the need to generate sufficient profits to compensate investors, themselves, and their teams.
- What does the firm’s cash flow look like during the next few years? Cash-flow problems are the leading cause of premature business failure. Bankers, investors, clients, or potential employees will want to see that you’ve analyzed your need for cash to meet your payroll and other obligations, and that you have a solid plan for ensuring that a cash-flow crunch doesn’t smother your business.
Many business plans, especially those designed to solicit large capital investments from bankers or venture capital firms, require detailed and sophisticated financial projects, such as pro forma balance sheets and cash-flow projections. But, for the small consulting firm, these are overkill. Independent consultants creating small firms needn’t get bogged down in the creation of complex financial models.
Every business plan must, however, demonstrate that the planner is a serious businessperson who has taken time and applied the necessary discipline to consider the financial and operational elements required to create and sustain the business venture.
Refer to strong resources for beginning business planners. The Kauffman Center for Entrepreneurial Leadership’s entreworld.org, Bplans.com, and The Business Planning Institute are good starting points for coaching on basic planning concepts; they provide examples and sample plans that can be downloaded and modified. Writing a Convincing Business Plan by Art DeThomas and William Fredenburger and Complete Business Plan by Bob Adams provide templates that can significantly expedite the planning process.
Show us your business plans
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Rick Freedman is the author of three books on IT consulting, including "The IT Consultant." Rick is an independent consultant and trainer, working, through his company Consulting Strategies Inc., to help agile teams and organizations understand agile practices and migrate successfully.