Bill Payne had a nice post on gust.com late last month titled  Using your business plan, in which he lists the different forms or outputs people confuse with a business plan and sets each one into the proper use context.

He defines the elevator pitch, video pitch, executive summary, PowerPoint presentation, and business plan as different forms. This fits beautifully with my thinking that the plan is what’s going to happen, when and why, and how much it costs and brings in; and all these variations are just the output. And I like his summary:

Imagine a fishing analogy:  The elevator and video pitches are lures – used to attract investors. After pitching, give those investors a copy of your executive summary.  Interested investors will then set up a verbal presentation.  Use your PowerPoint presentation to “set the hook.”  Expect lots of questions from your investor audience.   Investors who wish to pursue investment will ask for a copy of your business plan and enter a stage called “due diligence,” spending lots of time with you validating the investment opportunity.  “Reel the investors in” and close the deal.

For more on this, you could find a lot of the same kind of thinking in my form follows function post on my Planning Startups Stories blog, part of a series on business planning fundamentals. The illustration here is from that post.

And I like Bill’s specific advice here as well. These suggestions are all excellent:

• Don’t spend too much of your time with investors talking about products and technology.  Talk about solving customer problems.
• Do not hand investors your business plan when you first meet them.  They will politely accept it and then likely throw it away before reading.  Wait until you have attracted investors and they ask for a copy of your business plan.
• Do not estimate revenues as a percentage of the market.  Do a bottom’s up analysis.  Which customers will buy how much of your product.
• Don’t overemphasize the importance of “first to market.”  Investors know that among successful giants, like Facebook, Google and Internet Explorer, none were first to market.

In case you don’t know gust.com, it’s a web platform for entrepreneurs and angel investors to meet and share information.

I’m in my business plan marathon season again. This happens every April as I read business plans for my angel investment group in Oregon and for business plan competitions held this month by University of Oregon, Rice University, University of Texas, and the University of Notre Dame.

I want to make it clear, first, that I don’t confuse these business plan documents with the “real” business plans I recommend for every business. Real business plans are just big enough to manage the company, they aren’t usually even printed, and they are reviewed and revised often. These formal business plans, in contrast, are documents. They describe a business to an investor — or a judge in a business plan contest. They are meant to be read.

And most of these documents have the problem of built-in redundancy. The key paragraphs appear first in the executive summary. Then again in the company description. And again in the product description. And again in the strategy.

I don’t have a solution to this problem. The nature of this specialty-use kind of business plan document assumes that some people will read only the summary. So the key points have to be in the summary. And some people — me included — will jump around looking for specific detail. So the key points are there too.

I do like reading these formal business plans. But damn, I wish they didn’t repeat so much.

People are always asking for a list of fundamentals, a checklist they can use to start their own businesses. From your business type to your business model to your physical location, there are so many variables it’s not easy to come up with a list that will work for everybody. The key, regardless of what type of business you’re starting, is to be flexible!

That said, here’s are 7 steps to take before you start your business.

Step 1: Personal evaluation.

Begin by taking stock of yourself and your situation. Why do you want to start a business? Is it money, freedom, creativity, or some other reason? What skills do you have? What industries do you know about? Would you want to provide a service or a product? What do you like to do? How much capital do you have to risk? Will it be a full-time or a part-time venture? Your answers to these types of questions will help you narrow your focus.

Step 2: Analyze the industry.

Once you decide on a business that fits your goals and lifestyle, you need to evaluate your idea. Who will buy your product or service? Who would be your competitors? You also need to figure out at this stage how much money you will need to get started.

Step 3: Make it legal.

There are several ways to form your business ––  it could be a sole proprietorship, a partnership, or a corporation. Although incorporating can be expensive, it is well worth the money. A corporation becomes a separate entity that is legally responsible for the business. If something goes wrong, you cannot be held personally liable.

You also need to get the proper business licenses and permits. Depending upon the business, there may be city, county, or state regulations as well as permits and licenses to deal with. This is also the time to check into any insurance you may need for the business and to find a good accountant.

Step 4: Draft a business plan.

If you will be seeking outside financing, a business plan is a necessity. But even if you are going to finance the venture yourself, a business plan will help you figure out how much money you will need to get started, what needs to get done when, and where you are headed.

Step 5: Get financed.

Depending on the size of your venture, you may need to seek financing from an “angel” or from a venture capital firm. Most small businesses begin with private financing from credit cards, personal loans, help from the family, etc. As a rule of thumb, besides your start-up costs, you should also have at least three months’ worth of your family’s budget in the bank.

Step 6: Set up shop.

Find a location. Negotiate leases. Buy inventory. Get the phones installed. Have stationery printed. Hire staff. Set your prices. Throw a “Grand Opening” party.

Step 7: Trial and error.

It will take awhile to figure out what works and what does not. Follow your business plan, but be open and creative. Advertise! Don’t be afraid to make a mistake.

Above all, have a ball! Running your own business is one of the great joys in life!

Business planning is about determining your business future.

Where do you want your business to go?
Where should it be in three years?
What are the steps to get there?

Wouldn’t it be great if you had someone who could help you through the hard parts of business planning? Maybe give you a guiding hand in the how and why of it all?

This week we’re going to be posting Tim’s popular business planning video series.

Tim has spent years studying and honing his process of writing successful plans. And he’s passing that knowledge on to you.

We’re starting with the first two videos.

(If you can’t see the videos above, you can view them on our how to write a business plan video page)

Every year, I spend a lot of time reading and judging  business plans for business plan competitions. I have read some great plans and some not-so-great plans, but that is how it always turns out in any business plan competition.

I thought it might be useful to talk about the most common deficiencies that have come up in the reading of these plans.

Executive Summary – Frequently, business plan authors are so immersed in their business and their business concept that they forget that all potential readers of the plan aren’t experts in their industry. Many executive summaries that I read assumed some degree of knowledge about the industry and in some cases even the business and business concept. Executive summaries need to be short, direct, and provide an overview of the business opportunity. The idea of an “elevator pitch” is critical here. A good plan will communicate what the business does, who the target market is, and what the potential upside is in no more than 5 sentences.

Expenses – A common failing in business plan financials is to either under-estimate expenses or to leave out some expenses altogether. Several plans I read recently neglected to include any personnel costs. This is fine if you are bootstrapping the business, but this needs to be explained clearly in the supporting text. On the flip side, don’t discuss plans for a sales team and then neglect to include the costs of that team in your personnel plan.

On the expenses side, make sure that your P&L includes all of your fixed costs for running your business. You’d be surprised how many people forget things like rent, insurance, hosting costs for a web site, etc.

Optimism – Optimism is great and a required attribute of any entrepreneur but it can be a minor detriment in planning. While it is tempting to create a sales forecast that shows exponential growth, make sure your forecast is realistic. Most business plan readers are going to question what appears to be overly optimistic growth scenarios and it is important to back up these claims with text if these projections are realistic.

Market Size – Similar to my point on optimism above, it is very common for businesses to define their market too broadly in their plans. It is not uncommon to see plans that define their markets in the billions of dollars and millions of potential customers. While this is not a bad thing on its own, it’s very important to sub-divide this huge market into manageable target markets or market segments. Divide your market into manageable segments such as location, customer needs, age, income, etc. Without a realistic market segmentation strategy and a marketing plan that addresses that segmentation, you will have a difficult time implementing the plan.

There are plenty of other topics worth focusing on to build a successful business plan, but these four I mention today are common enough that they merit being singled out for discussion.

What’s the difference between a marketing plan and a business plan? Doesn’t a business plan include a marketing plan? Why would anybody do one without the other?

Good questions, and since I get them a lot, I decided to answer them here:

1. A business plan covers the entire business, including overall strategy, financial plans, target markets, sales, products and services, operations, and how they all relate to each other. A marketing plan, in contrast, focuses on the marketing: marketing strategy, target markets, marketing mix, messaging, programs, etc. Cash flow is vital for a business plan, but not usually included in a marketing plan
2. Yes, a business plan almost always includes the marketing portion. Emphasis varies, and I’ve seen some plans that focus much more on product or service than on marketing. But those are unusual.
3. Lots of people do marketing plans rather than business plans because their job or their attention or their focus is on the marketing, not the whole business.

A few days ago entrepreneur.com published my 5 steps to creating a marketing plan, my most recent column there. I’m including a summary here:

Step One: Your identity as a business.

Create separate lists that identify your business’ strengths, weaknesses and goals. Put everything down and create big lists. Don’t edit or reject anything.

Then, find priorities among the bullet points. If you’ve done this right, you’ll have more than you can use, and some more important than others. Kick some of the less important bullets off the list and move the ones that are important to the top.

This sometimes requires input from your managers as well. For example, your management team thinks being conservative on spending is a weakness but you don’t. That might be something to drop off the list.

Step Two: Focus on markets.

The next list you’ll need to make outlines your business’ opportunities and threats. Think of both as external to your business — factors that you can’t control but can try to predict. Opportunities can include new markets, new products and trends that favor your business. Threats include competition and advances in technology that put you at a disadvantage.

Also make a list of invented people or organizations who serve as ideal buyers or your ideal target market. You can consider each one a persona, such as a grandmother discovering email or a college student getting his or her first credit card. These people are iconic and ideal, and stand for the best possible buyer.

Put yourself in the place of each of these ideal buyers and then think about what media he or she uses and what message would communicate your offering most effectively. Keep your identity in the back of your mind as you flesh out your target markets.

Step Three: Focus on strategy.

Now it’s time to pull your lists together. Look for the intersection of your unique identity and your target market. In terms of your business offerings, what could you drop off the list because it’s not strategic? Then think about dropping those who aren’t in your target market.

For example, a restaurant business focused on healthy, organic and fine dining would probably cater to people more in tune with green trends and with higher-than-average disposable income. So, it might rule out people who prefer eating fast-food like hamburgers and pizza, and who look for bargains.

The result of step three is strategy: Narrow your focus to what’s most in alignment with your identity and most attractive to your target market. In other words, focus on the area that is shared by all three lines in the diagram here.

Step Four: Set measurable steps.

Get down to the details that are concrete and measurable. Your marketing strategy should become a plan that includes monthly review, tracking and measurement, sales forecasts, expense budgets and non-monetary metrics for tracking progress. These can include leads, presentations, phone calls, links, blog posts, page views, conversion rates, proposals and trips, among others.

Match important tasks to people on your team and hold them accountable for their successes and failures.

Step Five: Review often and revise.

Just as with your business plan, your marketing plan should continue to evolve along with your business. Your assumptions will change, so adapt to the changing business landscape. Some parts of the plan also will work better than others, so review and revise to accommodate what you learn as you go.

I’m amazed how often I still get emails asking me to either write a business plan or recommend a business plan writer for somebody who has a great idea and mistakenly thinks having a business plan done for them, by a supposed expert, will sell that idea to investors.

Sorry, it just isn’t so. Your business plan is the key to what you say in the pitch, and how quickly you can respond to questions. Investors want you, not an outsider, to plan your business. And that’s what they’re after — planning, which leads to management and controlling your destiny — not just a plan document.

I say “still” in my first paragraph because this should be common knowledge by now, but the myth of the “great” plan lingers on.

When you imagine a business plan document so great that some investor will read it and want to invest, you’re being wildly unclear on the concept. They don’t want the business idea by itself; they also want people who can make that idea a reality. The idea by itself isn’t enough.

Anybody who can develop a business can develop a business plan. A plan is good or not based on its content, specifics, milestones, scalability, defensibility, financial projections, and team in charge. It’s not style, writing, or formatting.

Maybe a coach can help, somebody to look over your shoulders, particularly on the financial projections. You want the math and finance to be correct. But having it your own plan, that you know backwards and forwards, and that you can change in an instant, is many times more important than any quality you’ll get by farming it out to an outsider.

Having just completed my spring business plan season — three big business plan contests and our angel group investment — I think it’s a good time to poke some holes in several damaging and far-too-common myths about startups.

Furthermore, as I write this I’m just leaving Disney World, so the myth of the Pied Piper (the illustration here, in case you were wondering) comes to mind too.

1. Be your own boss

Forget it. That’s a myth. Sorry, but if you’re looking for freedom and independence choose wealthy parents, win a lottery, or learn to live on no money at all, and have no relationships you care about. If you’re going to build a business, you’re going to have lots of bosses. In the best businesses, every customer is a boss. And then there are the people you owe money to, the people who owe you money, strategic allies, and your own employees. All of them can be bosses at times.

And if you have investors, you have bosses. One thing they buy with their money is their voice.

2. Finding investors is a win

That’s what we teach in business schools and classic entrepreneurship: you develop a business plan, you get financed, and then you start. And often it is a win, and it is good. But it ain’t necessarily so.

It’s a conditional win. It’s only a win if 1.) you need the investors and you can use the money to grow your business; and 2.) you find compatible investors you can work with. If you don’t have both those conditions met, then winning investment can be a big loss.

Getting investment from the wrong investors can be like a bad marriage. It can spoil your business and your life.

If you can build your company without investment, there are some important advantages, like in that case you own it all yourself. Nobody is looking over your shoulder, or at least nobody with as much power as investors. Owning it yourself is a good thing, if you can make it.

Of course it depends on the opportunity. There are some businesses that need investment badly, and would not make it without it. And there are some that have a choice. They may grow slower on their own, but they can make it.

3. More money is better

It’s out of date now, but if you look for it, you can find the 1997 Dun & Bradstreet research on causes of business failure that listed “too much money” as one of the causes. It seems silly, of course, but they were serious. There’s a lot to be said for spending money wisely, and filtering spending opportunities according to the related business benefits.

I think there’s a startup sweet spot, for most startups, in which the resources available match the opportunity. Money is spent the right way, building the business, but without overspending.

And my own company, Palo Alto Software, might not have survived the dot-com crash in 2001 if we’d had more money to spend in 1999. We didn’t have enough monetary rope to hang ourselves with. That was a good lesson.

(Image: J. Norman Reid/Shutterstock)

I was happy to pick up this quick piece from Jeff Bezos last month on Business Insider. Jeff, founder of Amazon.com, ought to know. In Business Insider’s Instant MBA series, Jeff says Business Plans Are Important and Necessary. He says it’s not about being right and guessing the future correctly. It’s about guiding your business and managing better:

“You know the business plan won’t survive its first encounters with reality. It will always be different. The reality will never be the plan, but the discipline of writing the plan forces you to think through some of the issues and to get sort of mentally comfortable in the space. Then you start to understand, if you push on this knob this will move over here and so on. So, that’s the first step.”

So my conclusion, from Jeff’s advice, is that developing a plan is good for your business, but sticking to that plan, not so much. Develop the plan, start moving, review and revise often. Keep it flexible.

It’s a plan, not a document.

I stumbled on this short video from ABC with Susan Solovic talking about the business plan for starting a new business. It’s a few months old now, but it’s also a really good summary of why and how you want to have a business plan for a startup, and what that plan should include.

If for any reason you don’t see the video here, you can click this link for the original on the ABC site.