This short note deals with how to create a more conventional business planning document, one that I prefer to call an Invitation to Invest or an investment plan, from Osterwalder and Prigneur’s business model canvas (BMC).
A business model is just that— a model or a concept of an organisation (an enterprise, a system, or sociotechnical network) designed to realise what is called the value proposition of the business, which will be embedded in a product or service, or, more often than not, a combination of the two. The model does not incorporate strategies for dealing with competitors and their actions, anticipated or otherwise. What is now generally now accepted as a business plan it’s still not the ‘real thing,’ it is also a concept, although it does incorporate, explicitly, actions deemed to be necessary to gain entry to what Michael Porter called an Industry (a network of already established relationships between firms and their customers), and, afterwards maintain a competitive position within it. What the BMC does, the advantage of using it, is to allow the essence of a business plan to be established quickly through experimentation and validation processes associated with the Lean Startup approach to enterprise development of which the BMC is part. It also helps organise the main inputs to a business plan document such as the one outlined below. First a reminder that I view the business model as a concept of a system, a particular and specific way or how of realising the exchange value of a product or service, which embodies the value or the benefits a customer/end-user derivers from the product-in-use or through the experience of a service (e.g., the experience of eating at a good restaurant, or having a ride on the latest ride at a funfair).
‘Business Plan’ template derived from the BMC
Should encapsulate in concise way the essence of the document’s purpose and content.
Section 1.0 Purpose of the document
To construct a case or justification for a financial investment in a particular enterprise activity. OR…
to set out the operational plan for implementing a business model.
All sections below should be completed mindful of the target readership. This could be a potential investor, a bank (if you are seeking an overdraft or loan), your spouse (emotional and other support) employees and fellow directors of the enterprise seeking guidance on how the enterprise’s objectives will be achieved.
Section 2.0 Purpose or raison d’etre of the proposed enterprise and value proposition
This section should establish the purpose of the enterprise undertaking, which should be derived from the value proposition (exchange value + use-value) as defined in the BMC.
Generally, enterprises exist to ‘do good’ and this may be achieved in some broad ways: in relation to a problem and its solution, or to give pleasure.
The purpose of an enterprise can be categorised in one or a combination of those listed below.
Defining problems (most evident in business and engineering consultancy)
Solving problems (creating solution concepts, designs)
Making or engineering solutions (or elements thereof)
Delivering solutions (or parts thereof)
Supporting or maintaining the effectiveness of solutions
Generating and maintaining pleasure (comedy and other entertainments, music making, thearts, Art and crafts etc.)
Fundamentally, a value proposition is the benefit a customer or end-user of a product or service is able to derive from it. It is also the effect, or more specifically the improvement if you like, on the manner of living of a customer/end-user. If no benefits arise for the customer/end user, there will be no exchange. You won’t get anything in return, in exchange, neither money (the price of the product or service) or any other kind of good by way of barter. A businesses core purpose will be to deliver the value proposition.
NB. All businesses provide a service so maybe we should think about selling experiences. The above are all effects on the customer or the person who benefits or derives value from the existence of the enterprise. It is only a guide to the types of enterprises that currently exist. Products, which embody solutions, may also give pleasure, and enterprises engaged in a-e will also attempt to ‘delight’ the customer too. For example, by the novel ways in which a solution is delivered. There are also an increasing number of examples in which ‘enterprises for pleasure and delight’ can be used to solve problems such as clinical depression. For example, therapy through music making/listening, through engaging with arts and crafts.
Section 3.0 How the purpose will be achieved.
Putting this another way: How will the value proposition be realised? The ‘how’ of an enterprise is derived from the key activities indicated in the BMC. From these are derived key resources, and key partners.
NB Activities are processes. It might be beneficial to map them using, for example, flow charting software or the IDEF methodology (see this blog). These can then be appended to give a visual fix for those either investing in or implementing the plan. This is fairly easy to learn how to do and is part of MS Office, software that is commonly available.
3.1 Key Activities. This subsection should also include those activities related to building and maintaining customer relationships, and those involved in creating and maintaining marketing channels. That is, not only how you get your product to customers/end users, but also how you get information to them about your product, where they can buy it from (advertising and promotions). Use Key Activities to locate subsidiary ones, which add to the cost of the operation. Identifying Key Activities will also help lead you to the legal or other regulations that activities are subject to, and best practices.
3.2 Key Resource requirements
3.2.2 Physical equipment—machines, devices, buildings
3.2.3 Data/Information and knowledge requirements
3.2.4 Energy requirements
3.3 Key Partners
3.3.2 Partners with expertise/knowledge
3.3.3 Partners with finance
3.4 Although not in the BMC, a key activity will always be the administration or the overall management of the business, which is usually the prime responsibility of the Managing Director and her Board. They set policy/strategy and ensure the business operates within the laws or regulations operating where the enterprise is located. Although typically this activity does not add value, it does cost and has to be accounted for in the next section.
Section 4.0 Cost of achieving the enterprise purpose.
Costs are, again, derived from the key activities and accompanying processes/resources required to realise them. Key Partners will also lead you to costs of what they supply, whether in terms of a service or components, including energy prices, interest on loans and overdrafts from banks or other sources. All activities or processes need to be identified for this section to be complete.
Both expenditure (costs) and revenue (next section) need to be modelled over time. You do this using a spreadsheet to produce a cash flow model. That is, a model of cash flowing into the enterprise (i.e., revenue) and out of it (i.e., expenditure). The cash flow model is the basis of other financial reports you will need to complete to demonstrate, to yourself, and other investors, that the money invested in the business is properly used. This is the purpose of balance sheets and profit and loss statements. More on this later.
Section 5.0 Revenue
This is derived directly from the research concluded in the BMC. Like expenditure, revenue or income has a time dimension. Knowing revenue/income over time is vital to modelling the cash flowing in and out of your business. Revenue is, of course, related to the price charged for product and/or service and the quantities in which they are provided. The information required here will relate to product/service pricing policy and any changes you might make for strategic or tactical reasons to attract and acquire customers or in response to, for example, the anticipated actions of competitors.
AT THIS STAGE ALL THE INFORMATION THAT CAN BE DERIVED FROM THE BMC HAS BEEN. THE NEXT STAGE OF CONSTRUCTING THE DOCUMENT REVERTS, MORE OR LESS, TO THE CONVENTIONAL PROCESS OF BUSINESS PLAN CONSTRUCTION.
Section 6.0 Narrative of the results financial modelling.
To complete this section will require you to complete a cash flow model using the information on costs and revenue, plus the following financial statements: balance sheet and profit and loss statements. Depending on the nature of this document and its intended readership you might also have to include a break even point analysis.
A narrative here refers to the story ‘told’ by the numbers. It is your opportunity to anticipate any questions an investor or other kind of stakeholder might ask as a result of exploring the combined financial statements. In this section the reader is talked through through the financial statements beginning with the cash flow model. Your purpose is to explain, for example, any anticipated shortfalls that will require you to seek investment or a bank overdraft, and in what amounts, any decisions you have made that result in, for example, odd patterns in expenditure or drops in sales income.
Section 7.0 Investment Requirement
This should be a statement of any investment required and on what terms you are seeking it. E.g., how much equity might you be prepared to offer an investor in return for a injection of finance.
Section 8.0 Risk Assessment
Although this could be included in section 6.0, a separate section makes it plain you have considered risk. One approach to risk assessment is to experiment with the income and cost figures. For example, reducing revenue by 10% over a year and looking at how this effects the profit outlook for the business or how it changes the investment requirement.
Financial Models and Statements
CVs of Key Personnel.