Ideas are Easy, Implementation is Hard

Ideas are Easy, Implementation is Hard

You probably have a great idea for a business.  Perhaps it comes from a hobby or interest that you have or people have told you that they love your brownies or your handyman skills.

The truth is that most everyone has “an Idea” a few times a year, but what happens next is critical.

Without historical data for your specific idea these early months of planning become wrought with delusional pitfalls.  What I mean by that is it is very easy to lie to yourself and not even know it.  Here are a couple of examples:

• A well-meaning friend or relative tells you you’re crazy and it will never work, and you believe them.
• A well-meaning friend or relative tells you it’s a great idea, and you believe them.
• You are already selling to a few customers from your part-time, home based, hobby business, so you tell yourself that there must be a huge market for what you sell.
• When projecting how many units a day you will sell once open.
• Not considering all the overhead, the cost of goods, and whether the price you can charge will sustain all those expenses.
• You don’t value your own time, so you figure out the costs without considering YOU.
• In determining what size, the business should be.
• Confirmation bias; you only tend to consider data that confirms what you want the truth to be.

These are just a few examples, but there are many more.  The reason it is so easy to lie to yourself is the lack of data.  You might have access to similar businesses’ numbers but those numbers may or may not apply to your cost, especially because for you to build a similar business will cost a lot more in today’s dollars.

So, if we do not have sufficient data with which to base decisions on, how do we “project” what your business will, [1.] Cost to start, [2.] Cost to run, [3.] Have to sell each day.

Doing a Feasibility Analysis is the answer.  And when it comes to Feasibility, I have a few things to say, as I have been doing them for 30 years, and I have a BIG issue with the way most feasibility is done, so please bear with me and see if my method makes sense.

Conventional “proforma” Feasibility Analysis is done in a Profit & Loss format.  Line by line you will enter your monthly fixed expenses, take a guess at your monthly sales revenue, and work your cost-of-goods expenses as a simple percentage of revenue… DONE.

When I look at these types of projections, all I see is 20-30 lines of data that we likely lied to ourselves when entering, and one line, the revenue, that is purely a S.W.A.G. (silly wild a** guess).  Your Banker knows this and therefore disbelieves everything you’ve projected.

The best way to combat against this is what I like to call a “bottom-up” approach, rather than the “top-down” method previously explained.

When we look at construction on a per square foot basis, when we look at sales as units, labor as hours, and commissions on dollars, determine how much labor and supplies will go into each unit sold, we can begin to get a good idea of what the optimum size should be, how many employees we will need, how many hours a week we will need to be open, what the price needs to be and/or how many units need to be sold each day.  Then we can ask ourselves; can we sell that many units a day, can we find that many employees at that wage, how many hours a day should we be open… are these expectations reasonable?

By using the “what if” method we will be able to optimize the size and scope of the operation, and adjust pricing and volume until we have dialed in the correct configuration that will maximize profitability and more importantly the chances for success.

The size of your business is very critical component.  It is just as big a faux pas to build it too small as it is to build it too big, and this method will allow you to find the size that is “just right”.  Therefore, I recommend going through this process before you determine location and real estate.

Thirty years ago, when I first started doing Feasibility, I was only able to tell if a business was viable or not, and I saved a lot of people from making a huge mistake.  But today when I perform this service for potential businesses, I can help them understand the variables, the reasons why the business model won’t work, and help to tweak the business model for success.

Here at Resources & Development I work with Clients who have a vision, they know what they would like to do, and we put the numbers, and put the data together, so that they might find funding, but more importantly, so they can shape that vision into a model that has the greatest chance for success.

If you’re good at numbers you can use this method too, but here is why it is best to have a third-party work with you:  A neutral party can help you to not exaggerate your numbers, they will add credibility to your business plan for Lenders to better believe your projections and they will help take the confirmation bias blinders off.  And the bonus of using the “Bottom-up” method is that the Lender can see the rationale used in projecting those numbers.

Skip Williams

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