If you’re starting your business, you’ll know that writing a comprehensive business plan can be time-consuming.
While you may eventually need a business plan in order to apply for a loan or obtain funding, do you really need to get all your ideas in perfect order before you start up? What if you’re still testing different ideas and what if you’re bootstrapping your business?
Enter “lean planning.”
Lean planning is a set of tools for discovering a business model that works, building an action plan to test your assumptions, creating financial models and a plan for a viable business, and tracking your performance so you can adjust your plan on the fly, quickly and easily.
The lean planning methodology doesn’t replace the business plan, it simply includes the steps that happen before – and in some places instead of – the formal business plan document.
Of course, you may need to deliver a formal business plan to someone at some point, especially if you are raising money for your business. But, that document is just an extension of the Lean Planning process and flows naturally from it.
Historically, advocates of the traditional business planning method have emphasized the need for a completed document, as though, despite not yet being in business, you already have everything mapped out.
Unfortunately, this approach does not account for the reality of starting and running a business: things are going to change – the market, your product, your competition – and you’re going to need to be flexible enough to change with them. If you’re weighed down by a 40 page plan, can you do this? Furthermore, if you’re going to need to change anyway, why waste the time writing a lengthy document that really should be a living tool.
Because there are multiple benefits to the plan-as-you-go approach, a concept pioneered by Tim Berry, and embodied within Lean Planning, we’re going to review the 5 key components of the process.
The lean planning process
Step 1: Create a pitch that defines your hypotheses
At this very early stage, you are providing a summary of the problem your business is solving as well as an overview of your intended target customer. Defining “the problem” is the most important part.
We’ve found that too many entrepreneurs fail because they don’t fully understand the problem they are solving.
In addition to identifying the problem you intend to solve, in this first section, you will also summarize your solution; how you intend to make money; who your target market is; who comprises your team; who your competitors are; and what differentiates you from them.
Collectively, we refer to these steps as “the pitch” — a living tool entrepreneurs can use to validate their business idea. You will use this section to raise questions that need answering: for example, does your business solution actually solve the problem or, will your target customers pay for your solution, and if so, how much?
This section should be updated regularly to reflect the real-world problems and challenges included in running your business.
Step 2: Draft an action plan that will allow you to test hypotheses and refine your pitch
Once you’ve drafted your pitch, or the first version of it, you will need to create an action plan.
Simply put, the action plan is a list of milestones that focus on validating the assumptions you outlined in your pitch in step 1.
These milestones should be as specific and actionable as possible. They may look something like this:
- Conduct customer interviews
- Send out surveys
- Research physical locations
- Interview potential suppliers
The action plan is essentially a two-part process. When you start creating it, you will focus on tasks that validate your pitch. As your solution becomes less uncertain, the milestones you create will evolve and focus more on tasks that relate to implementation (see step 4).
At this stage, it’s essential to ensure accountability. That means each milestone should have a date and a person responsible for completing it. They should also be regularly reviewed and adapted, if necessary.
Step 3: Build a financial model to prove that a viable business can be formed
So, you’ve got a great idea that solves a problem and has a valid target audience that needs the solution your business offers.
The next step will be to do a bit of basic forecasting and budgeting. After all, you’ll need to be sure the numbers work out so that your great idea can also be a great business. If financials looks bad, despite everything else, you don’t have an idea worth pursuing.
You’ll want to be as realistic as possible in putting together your best guess at what the immediate future will look like. Begin with a basic expense budget and bottom-up sales forecasts. In general it’s better to assume the worst rather than the best so that if things don’t work out — if perhaps people don’t visit the store or your website — you still have a business that can keep its doors open and pay the bills.
Step 4: Flesh out the specifics with more detailed planning
Now you’ve completed your pitch, validated your ideas and created a viable business as predicted by your forecasts, the next step is to begin getting specific.
Identify the areas that need fleshing out. What should you spend more time on? Where should you plan more? Take the time to review your cash flow forecasts so that you have a good understanding of how much money you will need to take your business through its early stages.
You don’t need to polish this document to the extent that you’re now just creating the traditional business plan document, but you should spend some time expanding on those items you worked through in the pitch. Now that you know your target market, how many people are in it? Do you know how to reach this market? Consider this your secondary bullet list.
As we mentioned in step 2, your action plan will now likely be changing. When you first started the process your focus was on business idea validation. Now you know you’ve got a working model, the milestones you set yourself and your team should focus more on getting things up and running.
Step 5: Track your performance so you can spot problems early
While we consider performance tracking the final step in the lean planning process, it’s actually something you should be doing as long as you’re in business.
Depending on the type of business you operate — a Main Street store or an online store — there are a number of metrics you can track. If you own a restaurant, it may be the number of table turns, if you operate an e-commerce business, it may be sessions or conversions.
Beyond industry-specific metrics, you will also want to keep an eye on key financial metrics like cash, sales, expenses, accounts payable and accounts receivable.
While you can do this from within Excel spreadsheets or your accounting software, products like LivePlan — that incorporate a financial dashboard — will make it easier to get get a rapid overview of your business’s health.
These numbers should paint a picture that allows you to either continue doing what you’re doing or adapt. If you need to change something, you can easily adjust your plan and go through the lean planning process again.
Ultimately, the lean planning methodology should make planning easier, faster and more actionable so that you can validate your ideas, open shop and then spend time on making the necessary changes.
This article by Noah Parsons is brought to you as the part of a SmartBrief and Bplans partnership. Over the next few weeks, we’ll be bringing you articles to help you start and grow your business. Interested in learning more about lean planning? You can find the “Lean Planning 101” guide on the LivePlan blog.