Why a SWOT Analysis Determines Success
At this point in my Framework to Business Development blog series we have covered the majority of the key components for your entire business. It is just as important to wrap the plan together with your financial projections. If there is an assumption in the projections that is not outlined in the plan, that’s a problem. If there is something outlined in the plan that isn’t covered in the financial projections, that’s a problem. Tying things together is an important check on your plan. While none of the things outlined here should be addressed during your concept phase, they all need to start becoming a part of your planning once you reach Early Development.
The final key to long term success comes from understanding the various components of your Business/Financial Plan. Those include a: business roadmap, financial projections and analysis, funding needs, and something I believe is THE key, an honest risk/SWOT analysis. Next month I will wrap up this blog series and discuss putting together your message to share with others.
Let’s start with the business roadmap. The best roadmaps are visual and have some historical milestones. They are a timeline of major events in your company’s progress towards reaching the goals outlined in your plan. It should include opportunities outlined in the plan along with key milestones that cover the entire business, from operations to financial to product development to regulatory to even major hiring milestones if necessary (like hiring a CEO). Depending on the stage of development your businesses is in, it may be based on a combination of assumptions not yet tested and/or verified. What it gives you early on, before you really have a solid set of verified assumptions for your business, is list of the important goals to strive for. As you move forward and solidify things it gives you a simple way to summarize your business.
I am not going to go into financial projections in detail here, I have blogged about them in the past and my first book, Mitch’s Guide to a Great Business Plan, provides a solid outline of what you need to put together. At a high-level, they need to be at least 3 years into the future for purposes of getting a loan or finding other sources of funding. If not, I still recommend 3 years unless you have been in business for at least 2 years and have a good handle on what your numbers mean and what the key performance indicators are for your business. Even if you have been in business longer, if you are seeking funding for something that will make a major change to your past business, you need to project into the future. If you are not going to show positive cash flow for a period of time, I recommend going up to 5 years into the future.
What should you project? Market size in volumes of things you intend to sell, your market capture rate, volumes of things being sold by revenue stream, pricing, revenue projections by some logical breakdown, cost of goods sold, gross margin, overhead costs (all of them…and not as a percentage of sales please) and your net income. You need to include a break-even analysis…the point at which you will become cash positive and stop burning through cash. You need to project tax consequences, especially if you choose to incorporate. Finally, you need to do a formal valuation analysis if you plan to seek funding.
Here is where making assumptions along with realizing constraints becomes very important. You need to make reasonable financial projections based on real constraints. If it takes 1 hour to make something and you have 1 person making them for 8 hours a day, you better not be planning on selling more than 8 a day or you have problems. That’s a simple example, but you need to think how it applies to every line item in your financial projections and build those assumptions into your financial model. I recommend making them changeable variables in your model so you can easily change them and see the impacts. Model everything: market share, monthly/annual growth rates, volumes, price per revenue stream, hours of work (based on a 2080 man year as a constraint), number of people doing a function, and on and on.
You also need to outline your funding needs if required. These are not simply the cost to get started, including labor, regulatory and other considerations. It is very rare for a new company, or new product line, to have revenue on day one, so any money you need to operate your business until you become cash positive must also be included. There are also legal and other considerations you need to understand to make sure you are “investor ready”. The sooner you make some assumptions on what will be required, the sooner those things will be on your radar to fully define. The list will often grow as you work through your entire planning process.
The final step in any good planning process is to take a critical eye to the plan and projections. I believe in doing critical SWOT analyses. Strengths, Weaknesses, Opportunities and Threats. As soon as you are out of the Concept stage of development you need to make assumptions for each of these things and as you move forward solidify each one. As you build your business/plan your strengths will become obvious. Listing them out and briefly defending each is a good exercise for marketing if nothing else.
Weaknesses and Threats need to be understood with assumptions made on how to best mitigate them. Weaknesses are things inherent to your business and built into the plan. Threats are the outside things you need to keep an eye on either to take advantage of or protect yourself against. Like an alcoholic that must first admit their problem before being able to break the cycle, understanding your weaknesses and working on them every day is how you avoid problems. Finally, the opportunities are the things outside the plan that could make you the next Facebook. They are outside the financial projections and immediate planning.
Listing your SWOT is not sufficient, analyzing it and understanding where your real risks may lie is the purpose of the exercise. Operational planning based upon the SWOT results is paramount to long term success.
Your challenge this week is to make sure you have all of the components and elements of your business defined. Re-read the blogs I have posted and be honest with yourself if you are missing anything. Then make it a goal for the rest of the year to fill in the holes.
Mitchell Bolnick – The Excel Consulting Group