business Plan Un-Pro

This is just a summary of the most inportant stuff I know about planning of business of business ideas. I have no deep and approved knowledge about legal stuff or finance and everything here just represents my opinion. So don't count on it. Every chapter starts with the key elements you need and then there will be additional ideas/remarks.

Key elements look like this

Topics

What you should clarify before you start a business and what you should keep in mind can be clustered in some areas:

Your business plan should include:

1. A Vision and Mission
2. customer segments
3. Value propositions/creation
4. Marketing/Channels/winning new customers
5. Customer relationship/Sales/making money out of customers
6. finance
⋅⋅* cost structure
⋅⋅* revenue streams
⋅⋅* income sheet
⋅⋅* balance sheet
..* cash flow
7. key partners
8. key activities
9. key resources

---

1. A Vision and Mission

Define a compelling vision for you and your customers, containing:

* Why is your company needed in the world, 
* What do you want to do, 
* How do you want to achieve that, 
* How looks success for you and how can you see whether you are making progress,
* What are your core values
* How does you company differ to all other companies in your area

---

2. Customer segments

Define your target group(s) as personas:

* Social and demographic characteristics
* Major Drivers for bahaviour / Motivations
* Knowledge / Educations
* Income
* Places where he/she is reachable (app store or boutique ?)

---

3. Value propositions/creation

Define What kind of value/benefit you provide for which group of customers. 
Define why they can not get it somewhere else, what type of business you provide
and which needs you cover. Tell it as story.

Discovery / Value Creation / Value of the product or service

• Without value creation, a business can't exist
• A lot of value for some people or some value for a lot of people
• a business is a repeatable process
• a successful business is either needed or loved

Hierarchy of needs:

• maslow's hierachy of needs (physiology, safety, belongingness/love, esteem, self-actualization)
• Clayton Alderfer's adoption of maslow's theory ERG (Existence, relatedness, growth)

Business offer normally a combination of the following offering types:

• product: sell and deliver an item for more than what it cost to make
• service: charge a fee for help or assistance, e.g. a barber shop
• shared resource: charge for the access to an asset which cane be used by many people e.g. washing center
• subscription: charge a recurring fee for a benefit e.g. providing television service
• resale: buy and sell for higher price
• lease: give access to an asset for a predefined amount of time
• agency: market and sell an asset which is owned by a third party and take transaction fee e.g. headhunters
• audience aggregation: sell access of a group of persons to another business
• loan: Lend money
• option: offer the ability to do something for a fixed period of time e.g. licensing rights, movie ticket
• Insurance
• capital: money for a stake with corresponding portion of the profit

A good way to handle this is to offer the values modular and to offer bundles.

The value you offer is subjective, crucial is the perceived value which can be increased by:

• satisfy a core human drive
• offer an attractive easy to visualize end result
• remove hassle by reducing end-user envolvement for not valuable elements
• offer social signals

Additionally the people use the following criteria to estimate the value (perceived value):

• efficacy - how well does it work
• speed - how quickly
• reliability
• easy of use
• flexibility
• status - how does it effect the way others perceive me
• asthetic appeal
• emotion - how does it make me feel
• cost
• exclusivity - offer or quality other firms cant match

---

4. Marketing/Channels/winning new customers

Define channels which you will use to inform people about your product/service and
set up a strategy which satisfies: 

* your product should appear premium quality and you should appear trustfull
* you should give people something for free to create reciprocity
* you should only adress customers you want to have
* you should address Core human drives
* you should appear like a consultant for the customer and not as seller
* define your technical channels (Adwords or usergroups ?) and when to use which channel

Marketing is the art to attract the attention of qualified prospects effectively, its about getting noticed (sales is about closing deals).

expense stuff is good stuff

for example, increase the price and then reduce it and the people will buy it because they over-estimate it

reciprocity is a not rejectable

so do someone a favor and he will do the same for you, especially if the favor does not look artificial, for example:

• Krishnas Society offers roses for free
• when a man buys a drink for a girl, there is normally a return expected

people protect their invest (commitment)

especially when the change would lead to inconsistency (make decision public before). Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment, for example:

• someone who sells at the door tries to get 3 time a yes or offer some free consultancy, because then the buyer already invested time.
• soldiers brainwash for propaganda

rejecting to do a favor leads to concessions

So one way to increase your chances would be first to make a larger request of me, one that I will most likely turn down. Then, after I have refused, you would make the smaller request that y ou were really interested in all along. Examples:

• if someone on the street asks you to give hime some money and you refuse it, if he then asks to get the coffee you have in your hand, you will probably do it
• negotiation of the price of a used car
• If you are not interested, can you give me at least some names of interested persons
• In negotiations start with the big prize, after that the small prices will be seen less important, like a 500 buck car radio which has a value of 50 bucks, when purchasing a new car for 15k

** we have a tendency to assume that an action is more correct if others are doing it**

we have a tendency to assume that an action is more correct if others are doing it. E.g. Bartenders often “salt” their tip jars with a few dollar, advertisement for product as “fastest-growing” or “largest-selling” , empty restaurant

liking someone increases the value of arguments

elements for liking:

• Physical Attractiveness
• Similarity
• Compliments
• Contact familiarity
• Cooperation / shared experiences
• the nature of news (bad or good), infects the teller, There is a natural human tendency to dislike a person who brings us unpleasant information, even when that person did not cause the bad new
• association -> nike and air jordan, beautyful wifes and cars, deals at lunch or golf
• letting someone look better e.g. sports team “we are champions”, this is especially true in case of weak self-confidence

people follow authority

elements for authority:

• Titles
• Clothes
• style e.g. car and jewelry

see Milgram’s experiment for a good example

rarity makes sexy:

rarity makes items attractive E.g. if a product is limited, the interest increases because people are afraid of loosing a chanche A drop from abundance to scarcity increases effect

Core Human Drives will help you

Drivers are:

• Drive to Acquire: collect physical objects
• Drive fo social status: status, power, influence, Using social signs will lead to increase of sales
• Drive to Bond: desire to feel valued and loved by forming relationships
• Drive to Learn
• Drive to Defend
• Drive to Feel

some tips for marketing:

• It's about getting around the filters of the people
• People are receptive for specific categories at a specific time
• People are receptive for specific categories in a specific medium
• you have to focus on the probable purchaser / target group
• you have to focus on the end result (often a core driver) e.g. on the freedom of driving and the status, but not on how great the driving school is
• fight for attention where your customers are
• solve how to address your customers
• If your product is not wanted by the people it will fail, do not try to make them wanting it, instead find out what how your offer math to an already existing desire
• you want people to visualize how their live would look like once they've accepted the offer
• you want to frame the information, means you want to give only the important informations and expect customers to make assumptions about the resting parts. Your offer can differ on that not framed parts for your advantage, but don't cheat, means hide crucial information or massively differ from expectations. E.g. you can frame that the membership only cost 10 Euro, even if this is only true if the customers signs contract for a full year
• crafting a hook e.g. the four hour week or 1000 songs in your pocket, means make the value clear in one sentence with focus on result
• maybe you can use a controversial position to get attention
• give something for free for a short period of time and then ask for permission to follow (put them in your target group), because people are afraid of missing a chance and they maybe get the feeling that they own you something e.g. after giving someone a voucher, ask whether it is ok to put him on your mailing list and there will be a better chance that the mails will not end in spam folder
• you must be remarkable e.g. shoes which look like gloves
• you want to have a call to action (what to do next) in your message, e.g. instead of just "best burger in town", "take exit 42 and the best burger in town will be on your right side"
• you want to tell a story about the people who already have take the path and what they achieved
• you want to have a good reputation

example for great marketing

Tupperware party:

reciprocity (to start, games are played and prizes won by the partygoers; anyone who doesn’t win a prize gets to reach into a grab bag for hers so that everyone has received a gift before the buying begins), commitment (each participant is urged to describe publicly the uses and benefits she has found in the Tupperware she already owns), and social proof (once the buying begins, each purchase builds the idea that other, similar people want the product; therefore, it must be good) and liking (we most prefer to say yes to the requests of someone we know and like the Tupperware Home Parties Corporation arranges for its customers to buy from and for a friend rather than an unknown salesperson)

---

5.Customer relationship/Sales/making money out of customers

Sales / Turning customers into paying customers

Identify why people should be loyal to you and how you can get money from them in a scalable way.
Find out how you can get around barriers which hold them back from paying and which price your customers are open to pay

In order to make you customers happy you should be aware of some things (and document them):

• Value Stream (set of steps and processes from all the way of processing up to the end-customer
• measure throughput of your value stream - 1.Unit Troughput / development time, 2. Dollar Throughput, 3. Satisfaction throughput (how long do you ned to get an happy and reliable customer)
• describe you distribution channel (especially if it is not direct-to-user)
• exceed customer expectation by something without advertising it
• ensure predictability (on time, with solid quality without any exception)
• know how to multiple / scale systems and artefacts (e.g. stores like McDonals or products like burgers, means create automation and processes with minimal manual efforts)
• know how to continously improve your process (kaizen / inspect and adapt)
• identify your system explicit

some rules:

• filter out bad customers before they do business with you
• you have to create trust directly from the start and build a long lasting reputation
• identify your common ground (interest of you and your customer which matches)

set a price by:

• replacement cost e.g. what would it cost to build a house like this
• market comparison
• discounted cash flow/net present value means how much is it worth if it can bring in money over time e.g. how much money would it bring if you rented it for a series of time
• value comparison
• identifying what your target group would pay / expect
• try education based selling, means help the customer to get knowledge about the topic and his trust for you and his priority/esteem for the topic will be increased
• compare with the next best alternative (what will the customer do if he does not get an agreement with you)

There are 3 universal currencies which can be replaced with each other as trade-offs in negotions:

• resources
• time
• flexibility

There are 3 dimensions of negotiation you have to prepare upfront:

• setup (set up an environment and know the other stakeholders very well)
• structure - frame your offer, find out the benefits for the stakeholders, find out the barriers which trade-offs are you willing to make, what can be the common ground
• discussion

other aspects of negotiation:

• think about whether it make sense to use a buffer, means someone who can push without that you are risking your relation to the other person (e.g. an agent who can be blamed after some overdrawn demands). Be aware of the interests of the buffer in this case.
• give free value in order to create reciprocation
• you can make a damaging admission to remove the feeling that "it is too good to be true" and to create trust
• use contrast, means 1000 Euro for a radio seems to be expensive but after you already decided to purchase a car for 40k it does not seems to be expensive any more
• use scarcity, the loss aversion of people is making scare things more valuable

classical barriers in negotiation for a deal, which you have to falsify or make irrelevant:

• costs / loss aversion
• fear that it will not work
• fear that it will not work for him
• no urgency / the prospect can wait, and has no prio to solve it now
• to difficult / needs to much contribution / to hard to manage
• power / permission to sign
• risk

Persuasion resistance:

• People are afraid of being tricked into agreeing to something which is not in their interest You have to overcome that to appear as as an "assistant buyer". Means you help the customer to make the best decision which is of course your product
• don't give the prospect the feeling that you chasing for him, that you desperatively need him, in the best case you make the prospect feeling to chase you

reactivation of customers:

• often effective, because customer already trusted you which means the customer acquisition cost is lower
• you increase Lifetime value

---

6. Finance

Identify your main cost and revenue drivers.
Create a income statement in order to identify profits, a balance sheet in order to find out your 
financial status and a cash flow statement in order to ensure that you do not run out of money

profit is difference between revenue and costs, it must be enough to:

• handle uncertainty (e.g. loosing a big client)
• Change (investing into improvements or adaption to market)

profit margin:

• how much profit can you make out of the total revenue or how much money do you have to spend to get a specific amount of revenue
• ((revenue - cost) / renvenue) * 100 = % profit marging
• e.g. spending 1 Dollar to get 2 dollars means 50% margin

markup:

• comparison of price of an offer to its total costs
• ((Price - cost) / cost) * 100 = % markup
• e.g. get 2 dollar for something which costs for production has a markup of 100%

value capture:

• retaining some percentages of the value provided in every transaction

how to check sufficiency of business:

• Target montly revenue

value of a company (called Valuation):

• depends on profit margins
• the higher the Valuation, the more money you get for a share
• depends on the perceived future of the company
• Cash flow statement (bank account over a certain amount of time, normally splited in operations, investing and financing)
• free cash flow (money which comes in minus costs which have to be taken e.g. for equipement, assets and personel)
• money on disposal
• Income statement / Profit and loss statement / net profit / accrual accounting, means profit margin per product/item (in order to get this value you have to map revenue to costs of an item) Revenue - costs of goods sold - expenses - taxes = net profit
• balance sheet (snapshot of what the company owns and owes) formular could be described like Assets - Liabilities = Owner's Equity -> Company net worth. Under Liabilities include everything you woule have to pay if the company would be closed like salaries, financing, ... Assets is an estimation of everything the company owns e.g. products, money, stocks, ...
• if the company is new, when a break even can be expected ?

financial ratio (comparison of 2 important elements):

• return on assets (net profit / total assets) percentage of invested money returned as profit
• debt-to-equity
• Interest coverage defines how much profit goes to pay off interests
• ...

take decisions on financial base:

• cost-benefit analysis
• amortization (when does the investment pays out, how much does it make per unit)

increase revenue:

• increase number of customers
• increase average size of each Transaction by selling more (upselling)
• increase frequency of transactions per customer
• raise prizes

worth of a customer:

• Life time value (over some years)
• your allowable acquisition cost is Lifetime value - value stream costs - fixed costs * (1 - % desired profit). The fixed costs are your overhead costs for that years / customerbase. e.g. a life time value of a customer is 2000 Euro over 5 years, the costs for offering the product and delivery for a customer is 500 Euro (stream value costs) and you have fixed costs of 500.000 in the next 5 years and 500 customers and you want to ahve a margin of 60%, then you can pay 2000 - 500 - (500.000 / 5000) * (1 - 0.6) = 500 * 0.4 = 200 Euro allowable acquisition cost

some point for glossar:

• purchasing power assets, cash, ... everything wich can be used to pay fixed costs
• receivables promises of payments you've accepted from others
• debt is a promise you made to pay someone at a later day
• opportunity costs is value you are giving up because you invest your money in something else

setup plan for a new business idea

• identify the value you create for the people
• identify the economic values you provide
• evaluate the market
• check competitors
• identify Core Human Drives for marketing purposes
• build a protoytpe
• define critical assumptions - facts/characteristics that must be right in order to make your idea successful and test them, if needed by shadow testing
• reasoning from first principle (Elon Musk) to check whether your idea can work
• focus on the Minimum viable offer

glossar:

• accounts receivable: money you will get .e.g. already sold products which are not paid so far
• balance sheet: a statement of the assets, liabilities, and capital
• income statement: profit and loss account
• Cost of Goods Sold (COGS) / Cost of Sales: direct costs attributable to goods produced and sold e.g. material costs Selling, General and Administrative expenses: fixed or non-production related costs like personal costs
• Depreciation / Amortization: allocation/percentage of cost e.g. 10% cost of an expensive machine which will be used the next 10 years
• Gross profit/margin: Revenue - Cost of sales
• cash flow statement: shows how changes in balance sheet accounts and income affect cash and cash equivalents
• GAAP: generally Accepted Accounting Principles (GAAP)
• accrual basis accounting: real time accounting, means put every transaction in your statements according to the current state and not only after sale
• Intangible assets: patents, ...
• Accrued expenses payable: obligations that a business has incurred, for which no invoices have yet been received from suppliers
• short-term notes payable: short-term liability if it is due within the next 12 months
• retained earnings: portion of net income of a corporation that is retained by the corporation (plowed back) rather than distributed to shareholders as dividends (paid out).

Simple example income statement, balance sheet and cash-flow statement

Example:

• Let's say the company started with cash of 10$, $5 from capital stock and 2$ which needs to be paid back and $3 of own money
• Let's say we bought 100 items for 10$
• Let's say we have packaged each sold item, which costs 2$
• Let's say we are getting 15$ for each sold item
• Let's say we sold 85 items, but only 80 are paid so far (5 payments will come hopefully soon)

income statement:

Item	amount	Result
dynamic
revenue	$1200	$1200
Cost of Sales	($960)	$240
(80x10 for products = 800)
(80x2 for packaging = 160)
.
fixed/expenses
Selling, general and
administrative costs	($45)	$235

cash-flow statement:

Item	amount	Result
dynamic
revenue	$1200	$1200
Cost of Sales	($1160)	$40
(100x10 for products = 1000)
(80x2 for packaging = 160)
.
fixed/expenses
Selling, general and
administrative costs	($45)	($5)

Is the company profitable ?

The company made a cash-flow loss, but the company has now 15 items in inventory with a value of $150 ($225 if selling) and has Accounts Receivable of $75 (5x$15) because some people have not paid so far but are expected to pay. But the company could be out of cash.

balance sheet:

balance sheet	amount
Assets
Cash	$5
Accounts Receivable	$75
Inventory	$225
Assets (non-current)
Tools and equipment	$2
.
.	= $307
Liabilities
Accounts Payable	($5)
.
Owners' equity
Capital Stock	($2)
.
.	= ($7)
sum	$300

which lead to a balance sheet of $300 of virtual balance

Real financial statements will be never look so simple. I just want to show here the relationship and the core idea between the sheets, more details below.

elements of an income statement

Your income statement will probably contain elements like:

Depreciation expenses: in the example above I put Tools and equipment on the lists, the reality is that even if a machine is paid immediately, normally the costs are virtual spreaded over several years, what is called Depreciation, so you would put only the part of the costs for that year in the sheet

Interest expense: if you borrowed money you have to pay interests

Income tax expense: If you earn money, it is very likely that you have to pay tax

A more realistic example for an income statement could be:

Item	amount	Result
dynamic
sales revenue	$1200	$1200
costs of good sold	($800)	$400
(Gross margin = 400)
.
fixed/expenses
Personal costs	($50)	$350
Advertising	($100)	$250
(Selling, general and administrative costs = 150)
Deprecation expense	($10)	$240
(Operating earnings = 140)
.
other
Interest expense	($5)	$235
(Ernings before tax = 235)
.
tax
Income tax expense	($35)	$200
.
Net income		$200

elements of a balance sheet

A more realistic balance sheet might look like this:

balance sheet	amount
Assets
Cash
Accounts Receivable	...
Inventory	...
Prepaid expenses	...
Property plan and equipment	...
accumulated Deprecation	...
Intangible assets
.	...
Liabilities
Accounts Payable
Accrued expenses payable	...
Income tax payable	...
short-term notes payable	...
long-term notes payable	...
.	...
Stockholder's equity
Capital stock	...
retained earnings	...
.
.	...

.

uncertanity of financial statements

Use the best information you have to define the financial charts, but don't expect them to be correct in detail. There are dozens of reasons why they might differ to reality, just let me give you some examples:

• What is the real value of you tangible assets ? for example if an airline purchased some airplanes for some hundred millions of euros, what is the current worth of them ? If they are not in use and no one would buy them, they maybe have no value. Maybe an airline keeps them in their asset with the purchasing price in order to have a nice balance sheet for investors.
• What about Deprecation ? You maybe purchased a machine. You thought that you would use the machine 5 years, but maybe that changed meanwhile.
• What about indirect production costs ? Often personal costs is calculated as fixed costs instead of cost of sales and often that makes sense because if you want to sell 3 time as much items, you do not need 3 times as much employees, but can you do it without any new personel ? Is a marketing campaign to sell products not part of the selling costs ?

So financial statements are educated guesses. They are getting better with more data, but even if you have no data, there is no reason not to do it. Estimate what you do not know and then inspect and adapt.

relationship between financial statements

TODO

Example:

• buy something -> inventory
• send it to customer
• then get money