FW1 - Mental Imagery
Look at the map.
285 days before open.
You have gotten a business idea. You must transform it into a first sketch.
In short, this quick sketch enables you to determine if your business idea is realizable by you. Have you the financial capacity to realize it? Is the idea profitable? You must answer to these two crucial questions before engaging you in more complex studies.
Lesson: 1 hour
External readings: 0
Do it yourself: About 21 hours
Total: 22 hours
Our objectives are to show you:
-How to draw up a first description of your product and organization according to your business idea.
-How to estimate your financial capacity for realizing it and the profitability.
By the end, you will know if it's worth to go ahead and to begin more extensive studies. In case of positive answer, you will implement the first steps of your business plan.
1-FIRST SKETCH: DEFINITION
The sketch describes:
- your service or your good in connection with your expected market and your competitive advantage.
-The organization and the skills you need.
-The costs and the financial capacity required.
Down earth advice:
A business idea can be great. It does not mean that you are able to realize it. May be you have gotten a great idea about the steel industry or the space exploration but it requires huge capital requirement and you will never be able to collect the money!
The fist sketch just takes place after the business idea. It corresponds to a logical progression. Look at the John progression:
-Firstly, he has a vision: "I want to create a large open air tourism company"
-According to this vision he has a business idea: "I want to set up a travel agency near the Perito Moreno glacier to show visitors round the glacier".
We can expect that this business idea is good: It should be good if john has a competitive advantage: For example, john has practiced mountain climbing for years and he can lead the tourists in some place which are inaccessible's for other agencies.
Secondly, there is a market: For example there are visitors all along the year and due to his competitive advantage john can target another segment of this market: experienced alpinists.
Clearly, John must now describe his idea into a sketch:
What is the service really provided? Is it a week trek in the mountains or a daily trip to the glacier?
What is the organization he needs? Does he need a large office and a lot of vehicles and drivers?
What are the starting costs?
Does he get the financial capacity for covering these starting costs?
Is the idea profitable? According to some quick calculations how much profit could he get in such a business?
2-DESCRIPTION OF THE GOOD OR SERVICE
Of course, in this description you will constantly target the customer benefit. You must constantly put yourself in the customers' shoes and know what he really wants, and the price he is prepared to pay. The marketing study must identify this problem. For the time being, you should know roughly what type of customer you will target.
Secondly, along this description you will constantly keep in mind your competitive advantage. It means that all the benefits you provide to the customer must be focused on this competitive advantage. Clearly, you must enhance this advantage.
You must therefore describe:
-The nature of the service or product.
-The value it brings to the customer.
-The life of the product.
-The product guarantee, the after sales service and so on.
In our John example, a visit to a glacier can be a weekly trek or just a daily trip.
Let 'suppose that it's a daily trip. you must then give details of what the customer wants in the form shown in the table below:
You give details about the service. You time each sequence. You draw up an overall schedule for the day. You will have to modify this description according to the further studies but at this stage, you must have a detailed hypothesis.
-Once you have chosen your offer and identify the tasks it implies you have to note down the means required next to each task: Transportation to the glacier, lunch, duration of the visit and so on.
Go back to the previous table about the glacier visit
-Once you have described your core offer, you have to think about its environment:
For example, you must implement a light organization for accounting , invoices, bank relations and so on. Any light organization may imply a secretary with fax, telephone and computer. What is more, it needs also a location.
In short, you list all the tasks and means and you break each problem into its components parts.
-Then you have to think about some possible hurdles:
The John's project can harm environment, disturb wild animals or bring troubles to local population. John must study the product or service's conformity with regulations ( the service must respect national park regulations). Is the guide job regulated? does he need an official diploma. What are the insurances to subscribe and so on.
Down earth advice
Beware of these regulations that many people ignore. Take care of them right now. A great business idea can only fail on some specifics point that the promoter had forgotten to check up. The french use to say that the devil is into the details.
We suppose that you have identified the tasks and all the means you need such as equipment, human resources and so on.
Then you will estimate the costs of these different means in distinguishing the start up period and then the running period.
41-The grid costs
411-Identifying the costs
According to your description of the tasks and means, You list all your costs per unit, per month, and then on several months in distinguishing the start up period and then the running period.
In the travel agency example, let's suppose that we have the following costs in $:
-Rent a location in town: 600 per month
-A secretary for administrative work: 1000 per month
-A driver: 200 per month
-A guide: 600 per month
-Consumables: 1150 per month
-A computer: 1000 (Purchase price on catalog)
-A vehicle with little equipment: 20200 (idem)
-Promotion: 10000 during the starting period for launching the product.
412-Starting and running costs
In this example, we suppose that you will not get cash receipts during the six first months. It's the starting period. All the costs during this period should be covered by the money you bring for starting a biz.
On the contrary, by the end of this period you will get receipts from the customers. It is the running period. The costs occurring during the running period are calculated on 12 months.
You can now list the human resource, together with their Cost, using the previous list. The costs can be calculated approximately from the labor market situation and social regulations.
item---- monthly cost---- starting cost---- running cost
Secretary ---1000----------- 6000----------- 12000
Driver---- ----200------------ 1200------------ 2400
Guide --------600------------- 3600----------- 7200
Consumables disappear as soon as they have been used, such as , renting of the premises, energy, petrol, drinks, coffee
Item-------- monthly cost--- Starting costs--- running costs
Renting----------- 600------------ 3600------------ 7200
Consumables----1150------------ 6900----------- 13800
Carry out the same calculation for Equipments, i.e. goods you can use for several years
item---------- quantity--------- catalog cost------- Total cost
4/4vehicle --------1---------------20000------------ 20000
Thermos ----------5 ------------------ 20-------------- 100
Ice box -----------5 ------------------ 20-------------- 100
Computer ---------1---------------- 1000 -------------1000
Categories------- Starting period------- Running period
Equipments--------- -21200--------------------- 0
Consumables : -------10500----------------21000
TOTAL--------------- -52500---------------- 42600
This evaluation shows that you must have $52500 in cash for covering investments and costs during the starting period. If we add the miscellaneous (10% of the former total), we reach $60000.
Once you have done that, I pretend that in fact you have done nothing! you have just set up a shopping list. Any low skilled person should be able to do the same job.
Of course, these costs are certainly too high compared to the money you can invest. Disheartened, you will give up. This hopeless scenario affects 9 out of 10 promoters.
As you are following a training, you will therefore think differently: You have to show your creativity.
-Firstly examine any item and ask yourself the following question: What service is provided for the customer? How much is the customer prepared to pay for this service? What benefit do I gain from this cost? By asking questions in this way, you will notice that certain costs are unnecessary.
-Secondly examine the price of each item. There are the catalog price for the equipments and the market labor salaries for the human resource. Now, apply to these costs the following golden rules:
-Equipments: Whenever I can, I rent. If I can't rent, I buy second hand on the international market. You would be surprised to find just how many machines are for sale for peanuts!
-Staff: I only hire people on open-ended contracts. I try to use temp agencies. I make use of teleworking: It exists today on the market self employed secretaries or drivers.
-Globally: Whatever the mean (Equipment or staff) I do not buy, I do not recruit: I just assemble. I only pay a material or a person for the period I need them.
If you apply these golden tips, be sure, you will halve the costs of your operations. Instead of 60000, you will finally reach 30000!
We reach now a critical moment. You must now check that you have the financial capacity to realize the project and secondly that it has a reasonable profitability. If the project does not answer both to these two questions, it should be worthless to go on with detailed studies going nowhere.
I will give you two quick tests for answering these crucial questions:
51-Financial feasibility: The starting equity/starting cost ratio.
The starting equity/starting cost ratio is an easy tip that we have invented for simplifying your job.
Let us imagine that you have $10 000 to invest from your savings. According to your calculations, the Starting project cost is:
It means that whatever your savings S, the evaluation method is very straightforward:
You can think that this method is conservative because it does not take in account venture capital and bank loans. In fact, a bank only lends 1$ per 1$ of your personal equity. You will never be able to borrow 3$ for 1$ of equity!
Down earth advice:
Do not believe in the fairy tales. Statistics show that for a start-up like you, the chances of obtaining a loan are about 0.5%!
What is more, the formalities are very lengthy. Do not allow 1 year to create your business, it is more likely to take you 2 or 3 years!
Do not think that the fact to begin little condemn you to remain small for ever. Constantly keep in your mind the following facts:
-$1 that makes 20% a week turns into $13 000 after a year: $10000 would therefore earn you $ 130 million in a year!
-Small equity x Creativity = Big money. Everything depends on your creativity. Creativity is in fact the real big equity that you need!
52-Profitability feasibility: The running costs/selling price test
For testing the profitability, people use frequently the break even analysis. You will find it in further module. For the present moment you have not yet a detailed market study or a detailed analysis of all your producing costs. You need a quick test to just see if you are in the good way or in the wrong one.
For this purpose, we currently use the Running cost/Selling price test or alternatively the Running costs/Customers test.
-Firstly, just take the total of your yearly running costs. In our example 42600.
-Secondly observe the average price on the market for the type of service you intend to sale. In our example, let's suppose that a day trip to the glacier is currently priced $60 per person.
-Then just apply the following formula: 42600 /60= 710.
This means that you must have 710 customers to recover your total running costs without making any profit. With 700 customers you go in red. With 720 you begin to make profit.
Now let's suppose that the total number of visitors in the entire area amounts 600 per year! It means that you will never reach 710 visitors and that your project has not any chance to get a profitability.
-If you are alone on the market because your product is new, you have not any average market sale price.
-In this case, determine an expected number of visitors. You can have an idea about it according to your production capacity. For example, with one vehicle, you can only manage two visitors per day. If the season lasts 6 months, it means that you can manage:
------------ 2 visitors* 20 days a month* 6 months = 240.
-Then, apply the formula: 42600/ 240= 177
This means that you must price $177 per person the day trip to the glacier for recovering your total running costs without making any profit.
Obviously, this selling price is not reasonable. It's not worth to spent your time in more complex studies. You have to reduce your costs and may be to change your business idea.
You have a business idea. You must establish a simple first sketch.
This sketch describes the good or the service you will offer.
It gives a short description of the organization required and lists the tasks and the means
It enables you to estimate the cost of all the means. The grid cost analysis distinguishes starting costs and running costs.
Finally, you can check the global feasibility of your project: The Starting equity/ Starting cost ratio enables you to check your financial capacity to do the project and the Running costs/Selling price ratio provides you with a quick test about its profitability.
DO IT YOURSELF
You have to establish:
1-A description of the good or service you are going to offer.
2-A description of all the tasks you have to perform for offering this good or service:
3-A description of all the means you need for starting and then running the biz: Consultants, human resources, equipment etc
4-A short description of your organization
5-A grid analysis of the costs:
It's the difficult part of the job and you need to collect some information's around you:
-About human resources.
Make a list of self employed staff you might need: Lawyers, accounting firms . Ask about their fees.
Pay a visit to temp agencies. Ask about their tariffs.
About consultants, go to: www.score.org . This site provides list of consultant in every domain and the volunteers of Score who are mainly retired executives can provide you with free advices trough e-mails.
Look at the large temp agencies and ask for their prices:
-About material and equipments
Ask your local chamber of commerce for second hand equipment.
Go to www.ebay.com and click on "Business and industrials". You will find here all type of materials and equipments to buy for a dime!
6-Then do the two feasibility tests. If their results are positive, begin to write down your sketch. You will use it for writing your executive summary which currently is the opening of your business plan.
7-Open your business plan.
Your business plan is your road map. It is made up of chapters and spreadsheets. Along your next studies, you will enter their results in the right chapters. What is more you will use the spreadsheets for your calculations.
The best way is to use some stuff already existing on the web. I have selected for you the following sites:
go to www.planware.org . Click on "business planning freeware" and download a free business plan frame.
For the present moment, just include your business idea in a first chapter. Add right now a second chapter titled "Business description" and report inside the description of the tasks, the short organizational sketch and your grid analysis. Theses papers should be removed or modified ,step by step, with the further courses.
This job could take 20 hours or more according to your project. A complex project could take three times more: The grid cost analysis needs frequently a long time. Of course computers facilitate but the analysis for reducing the costs currently take a bit of time!
You could send for examination and advice your business idea and your sketch.
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