Can you imagine what would happen if an orchestra forecast their forthcoming performance rather than rehearse it? Now imagine what might happen if a newly-formed orchestra forecast their show? It’s quite absurd, isn’t it? Imagine the ensuing racket and red faces!
And yet it’s accepted practice for businesses – especially newly-formed businesses – to prepare forecasts for at least 12 months based on, well, guesses. They might be good guesses, they might even be guesses based on ‘industry norms’ which have an air of authority about them. I find these sorts of business plans absolutely hair-raising …and yet it’s how just about everybody does it.
It’s no wonder the vast majority of startups fail – according to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. EIGHTY PERCENT. Forbes contributor Eric Wagner lists five reasons for these failures:
- Not really in touch with customers through deep dialogue.
- No real differentiation in the market (read: lack of unique value propositions)
- Failure to communicate value propositions in clear, concise and compelling fashion.
- Leadership breakdown at the top (yes — founder dysfunction).
- Inability to nail a profitable business model with proven revenue streams.
Much less documented – in fact it’s virtually unrecorded – is how many trading companies’ forecasts prove to be complete and utter bilge. The stuff we do get to see is limited to quoted companies. It surfaces as ‘profits warnings’ that, if spectacular enough, make the mainstream news. Sure, there are examples that draw my sympathy (mostly limited to Acts of God) but for the most part, the genesis of next years’s ‘profits warnings’ is a sketchy, assumption-packed spreadsheet.
A cure for all the above, which addresses Eric Wagner’s five points and much else, is to think differently about business planning: rehearse the next 12 months, in as much detail as possible.
- Don’t guess a target turnover figure, then divide it by 12 as ‘monthly sales’.
- DO work through every month thinking about where, specifically, sales will come from – and what you are going to do and spend to get them.
- Don’t assume that an industry norm will apply to you.
- DO check your numbers against industry norms.
- Don’t assume growth every year – to quote Star Trek’s Picard you have to “Make It So”.
- DO, as above, think about where, specifically, sales will come from – and what you are going to do and spend to get them.
- Don’t assume that if your competitors – or former employers – can achieve “X”, that you can meet or beat “X” – you must understand how they achieved “X”. In fact, I wouldn’t base anything on “X” other than use “X” as a hypothesis to test.
- DO, as above, check your numbers against theirs.
- Don’t just put “£100 a month” in the office supplies budget. Ask yourself: “what would I want from the stationers in Month 7?” Maybe it’s nothing, or maybe around mid-year is when you could expect the expensive laser printer cartridges to need changing.
- DO think about all purchases.
I could go on, but the themes can be summed up as DO NOT ASSUME and DO NOT ‘JUST GUESS’.
- Don’t mistake recording notes of your ‘assumptions’ as a justification for assuming. Scratch ‘assumptions’ from your plan and think of them as conditions. Specifically do not, for instance, rely on an ‘assumption’ that an industry norm for, say, hotels is X% occupancy – run through every day of the year thinking about how you would fill the hotel and all the other conditions that affect room sales – your marketing efforts, the weather, Easter etc.. Think through all 365 days. What occupancy possibilities do you discover, and what influences them?
“Goodness me”, you may be thinking, “that’s a huge amount of work!”
“How could I possibly know?” you may be asking.
Well, you need to know, otherwise every month is going to be packed with surprises. Your capital – and that of investors, lenders, friends and family – is going to be at risk.
Yes, it is a huge amount of work – but before the plan period begins you’ve got all the time in the world to think about this. To get prices for things …to talk to potential customers …to talk to suppliers to get real prices and also lead times for things you may one day need …and to talk to people who do the jobs you’ll one day need to hire for. You have to get as close to ‘knowing’ as possible. This is rehearsing the future.
The huge effort now, however massive it might seem, will take less time – and cost less money – than having unwelcome knowledge thrust upon you later. The time and sleep you will lose when your ‘assumptions’ prove to have been naive, wildly optimistic or plain wrong, will be far greater and largely outside your control.
If you think you know it all, prove it. What constitutes proof is worth a look at too. Understand that “I’ve done it before in my last job” or “We did it last year” do not constitute proof, they are nothing more than base data to guide the rehearsal.
Ponder how utterly absurd it would be for an orchestra to blithely turn up at a venue expecting a spreadsheet to be any kind of indicator of the great performance the paying audience is anticipating.
And then consider how bizarre it is that people put their life savings, raise debt on their homes and expect others to the do the same to back 12 columns of ‘guesswork and industry norms’ …for 80% of their ventures to implode within 18 months.
It doesn’t have to be this way, I can share with you some very sophisticated but simple-to-use business design tools with you, and help with your ‘rehearsal’. Use my tools and you won’t be joining the 80%.