Monday, January 28, 2008

Mini Business Plans - Part One

In my last post I talked about minimum monetary thresholds for new "opportunities" that drop in your lap.

Let's say that you decide to pick up a shiny new entrepreneurial adventure. Before you claim it as your own and get to work, you need to run the numbers That is, you need to pencil out what it will really cost, and really bring in.

So sharpen that pencil. We'll walk through the process.

I always create a "Mini Business Plan" for the various ventures I'm considering. These are not full-blown, lengthy documents. But they fulfill a very imporant role:

They provide an executive summary for my wife.

If you make decisions with a life partner, a mini business plan is a good way to organize your thoughts, summarize your goals, and present projections.

This process is a bit of a loop. You start with money, move to a brief written description, and then revisit the numbers in light of the written document.

The whole thing is 2-3 pages.

No Hobbies

If you have a good accountant, you've been warned that you can't claim business expenses on something that's really a hobby. If you set up shop just so you can practice your hobby, lose money, and deduct your hobby from your taxable income, Uncle Sam will take away your deduction (and possibly your house).

Important safety tip: A business should be set up to make money.

Crazy, I know. But it's true.

So let's say you have great new opportunity in front of you. What's next?

Running the Numbers

Here's a sample of running the numbers. The sample here is a hosted software service.

Notice that this is just a "view from 10,000 feet." It's not a business plan, but it's the first step.

Basically, you pump a handful of numbers into an excel spreadsheet. What can you think of as sources of income? What can you think of as expenses in this venture?
Qty Per Monthly Annual
-------- -------- ---------- ----------
Monthly Clients 500 20 $ 10,000 $120,000
Total Revenue


Rack Space 1 600 600 7,200
Equipment 833 10,000
Programming 25 150 3,750 45,000
Insurance 167 2,000
Labor (maint) 5 120 600 7,200
Misc. / Admin 2,500
Total Revenue 73,900
Profit 46,100

You don't need to have all the details. The goals here are very simple:

1) What's the ballpark revenue?

2) What's the ballpark cost?

3) What's the ballpark profit?

Once you have a general idea of whether there's any money to be made, you can decide whether you wish to proceed to the next step.

Please make sure you know what you require as your minimum revenue or minimum profit in order to undertake a new venture (see previous posting).

If the numbers don't look good here, STOP.

It takes practice and experience -- and a few bad decisions -- before most of us learn to set limits and stick to them.

If you overstate income, it only hurts yourself. Same is true for understating expenses.

The real purpose of the budget exercise is to help you brain-storm about what's really involved in your project.

All Projects Look Good at First

Before you dig into the details, every project looks good. After you start digging into the details, "reality" begins to color your vision.

There are two main reasons to opt out at this point:

1) The startup costs are too high. You don't have the cash, can't come up with the money, or don't think the long-term pay-off is worth the initial investment.

2) The payoff is too low. We all need an extra thousand dollars (or ten or hundred). But how much effort are you willing to expend to collect that money? Will you spend $900 to earn $1,000? $800? $950?

And the non-monetary questions are just as important.

Next time we'll talk about the mini business plan itself.

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