In the beginning, there was created the heavens and the seas, and the birds and the bees, and humans. Sort of. So what is human, anyway. Well, a really good case could be made that humans are the animals with an advanced high capacity pre-frontal cortex. (Look, if you are gonna go there, leave me out, your making my eyes glaze over…)
The pre-frontal cortex is the part of the human brain that handles the executive functions of mind. These include the setting of goals, the preparation of a plan to accomplish those goals, plans to develop the capacity to fulfil the plan, monitoring the execution of the plan, and making corrections of action and behaviour to get back on course. For those who are interested, in most of us it is located behind and above the right eye. It is the last part of the brain to develop, as it was the last part of the brain to evolve, and is not fully matured until between 18 and 25 years of age, depending on environment and gender.
Types of Plans
In its most fundamental state, a plan is an elaborated to-do list. It might be a recipe, detailing what ingredients are to be combined in what orders under which conditions. It might be a project plan, with specific sequences of tasks assigned to certain individuals with appropriate equipment. It might be an agricultural plan, planning what seeds are to be planted in which fields at what times, together with fertilising and watering regimes. Here we are talking about business plans, and they are the most complex of all. They share the infrastructure and relationship nature of farming, the task assignment and time sequencing of project plans, and the artistry of executing puff pastry. And nowhere is the plan more needed than in dealing with a start-up or a small business. The margins for error are not large, and the stakes relative to the owner’s resources, usually quite high.
Coming from the outside in, a business plan is usually a document that describes the behaviour of a business, its key decisions, its resources, and the outcomes. It probably has a few numbers in it, since other people insist on them (your banker?), and it may well have some pretty pictures and graphs and such because either your accountant or someone else thinks they are persuasive. Here’s a clue. They aren’t persuasive, and depending on your audience, the entire document is a waste of time. No one will read it. It is pretty much irrelevant to anyone other than the business owner/operator. Heresy! Yup.
Why Bother
So if your reason for preparing a business plan is for someone else, save your time, and do some more selling – you may stay in business a bit longer. Of course, forget getting a source of external capital while you are at it, unless you are independently wealthy, and don’t need the money from an external source. In that last case, you probably will get the capital, but not because of your business plan.
You prepare a business plan to try and manage the future – anticipate problems and avoid them, put yourself in a position to benefit from new opportunities, to think creatively and constructively about your businesses shortcomings, and to make decision that will have a long term benefit to your operation. If you do not want to do that, then there is no need to read further.
Models are the Guts of a Plan
Here is what a business plan needs to be. You need a model of your business so that you can identify timing and relationships in your business structure. You need research so that you can reflect some reality in your model. And you need some advance decision making rules so that you do not spend all of your time making routine decisions when you could be out making money (those are called policies). All of this takes place inside a model.
There you go again with this model nonsense . . . A model is a representation of reality (or it had better be). Architects make models of their proposed buildings so they can explain their design. Mold makers make models to serve as templates for actual production. Claudia Schiffer is a fashion catwalk model that lets women see what that particular article of clothing will look like on them… Hmm, bad example, forgot about the reality part ….
These days, computers are used to model everything from nuclear reactions to the gravity effects on orbits in the solar system, to world trade and its effects on currencies. There is a reason that computers are used – it is fast and cheap. There was a time when building a prototype or pilot plan in engineering was considered good practice. Now, the first step is usually a computer simulation, using key mathematical relationships. If you are building a refinery mill for gold ore, you simulate it before you build a pilot project for new processes. The math might include elements like the grade (how much gold is in a ton of ore), the host rock characteristics like grind index, The capacity of crushers and ball mills to balance throughput, the quantity of cyanide to dissolve the gold from the ore, the capacity of settling tanks – all of these are describable by mathematics.
Ok, I am happy for them, but I’m not an engineer, I’m a business man – what mathematics. Well, you have the mathematics of time. You know that it takes 45 days for your to convert raw materials into finished products. You know that it takes 60 days to collect from your customers, but that you have to pay your suppliers in 30 days or they stop shipping. You know that your cost of materials is $12.00 per unit, and that your labour inputs are 24% of gross sales. You know that you have to pay your sales agents 10% on gross sales after promotional discounts. Money is the measuring stick of business performance – everything is converted to money, and all of that money is related in time. That is a simulation model that can be done on a computer.
Ahh, come on, too much work. I recently had a comment by a business person that said this is too much work. This is hilarious. These are people who will work 80 and 90 hours a week advancing their business, yet feel that 10 hours a month is too much work, let alone 20 hours a year!
A business plan, properly prepared is not a napkin, nor a doorstop, but a model that represents reality. A model will let you create new realities for your business, cheaply, and in advance. A business plan model is a crystal ball, in a world that does not believe in magic. Well it is magic – the magic of the pre-frontal cortex using a tool to extend its power and reach.
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