Business Diagnostics Blog

Recent surveys indicate that 10 per cent of Canadians are considering starting their own business in the not-too-distant-future. Most poll respondents indicate that prudent fiscal management and concise small business planning will be key to their success.

In a June 30, 2010 news article in The Ottawa Citizen, certified management consultant Tony Wanless writes that in a recent survey, one in three Canadians said they were interested in starting their own business in the next two years. Of that group, 35 per cent said they’re going to follow through with those plans.

According to Wanless:

If we extrapolate from the survey of 1,010 Canadians by the tax and accounting software maker Intuit, that means about 10 per cent of Canadians plan to start their own businesses soon. If half of those do follow their dreams, that is quite astonishing.

What will also be astonishing, however, is if those thousands of would-be Canadian entrepreneurs proceed as 21st-century entrepreneurs instead of blindly imitating the methodology of 30 years ago.

Anyone who takes up the challenge of business startup today would do well to examine how entrepreneurship has changed in this century.

The biggest change is that today, less is best. Starting a business now is all about less — as in less elaborate business planning; less imitation and more innovation; less step-by-step execution and more going with the flow; less one-way delivery and marketing and more conversation with customers.

This less-is-best concept generally goes against traditional business training, which is based on the old industrial/retail system. Business plans, for example, are about execution of known factors, so if you’re building a factory that is going to be around for 10 or 20 years, you’ll need a business plan. But in today’s world of continuing change, any plan that details steps further out than quarterly or semi-annually is unsuited for anyone starting a small business.

The top entrepreneurship method now is the lean startup, an application of Lean thinking, which is an organizational method of operation derived from the Toyota production system.

In Lean thinking, an organization attempts to eliminate all wasteful effort and cost. Lean thinking means new startups rarely use formal business plans in the beginning because in a rapidly changing world they cannot obtain the information they need to plan several years in the future.

In fact, in 2002, the magazine Inc. surveyed founders from its Inc. 500 list of fastest-growing entrepreneurial companies and found that only 40 per cent had written formal business plans.

Of those, nearly two-thirds said they changed their businesses considerably from their original plan.

The lean startup applies the Lean thinking approach at the crucial period when new companies often have a concept but really don’t know how their businesses are going to evolve.

Since most new businesses — even those in traditional areas such as retail or services — now primarily operate online, this learning process is much easier.

So, what makes a start-up “lean”?

According to Wanless,  a lean start-up features three characteristics:

♦It keeps costs low by using open source and free software. If those aren’t available, it uses low-cost cloud computing (renting software and other services online) instead of initially buying expensive systems and software. They also endeavour to “rent” as many business needs, such as personnel, as possible;

♦It applies agile development when creating products or services. In this methodology, product development borrows from new software-creation models. Agile development is perfect for startups in which the problem (the genesis for all business concepts) and the solution (the business’ answer to the problem) are still fuzzy;

♦It constantly talks with customers, existing or potential, to see how they can improve. It usually begins with a simple product or service and then change or expand it to answer customer concerns. Its main business process is continual customer research and development.

Wanless provides a good example of this modern form of small business development:

Stewart Butterfield of Vancouver, who co-founded with his then wife Caterina Fake a company that had developed a multi-player online game.

The game went nowhere, so they dumped it and began working on an instant messaging application that had features such as game-like experience and the ability to handle photos. That evolved in 2004 into a photo-sharing application that became Flickr, now the dominant photosharing site on the Internet.

Fake, who has since divorced from Butterfield, said the pair couldn’t write a business plan because they couldn’t do any research on where the company might go. “We weren’t planning on building a photosharing site,” she said. “If we had done our research, we would have said we shouldn’t bother because it’s all been sewn up (by competitors).”

Flickr’s story is a tech one, but that doesn’t mean other entrepreneurs can’t learn from it and apply it to their own industry.

The biggest lesson is that in the early years businesses often change as they attempt to find a market niche in which their concept meshes with customer needs.

Determining the most efficient design and composition of a start-up or small, medium or new business requires planning and insight.

Business owners and aspiring business owners must have a firm understanding and appreciation of their business’s capabilities, value and potential.

When the time comes to expand operations to meet changing market conditions and growing demand, owners should have all their business plans in place to allow for financing, if and when needed.

“Business owners have to get their houses in order,” says Mike Thompson, co-author of Business Diagnostics. “Many small and medium sized business owners are faced with growing a fledgling enterprise to meet growing market demand. To access the capital they require, owners should be performing an internal and external Business Diagnostic ‘size-up.’ To determine exactly what they have, what they need and what they qualify for.”

Within Business Diagnostics, business owners are provided a step-by-step process on how to size-up their internal business operation and how to plan a proper course for a startup.

The internal size-up drills down into the company’s performance, evaluating its relative health from different viewpoints – financial, marketing, operations, human resources, and technology.

Meanwhile, Business Diagnostic’s external size-up examines the business environment (political, economic, societal and technological factors) along with prevailing industry conditions.

Glowing pre-G 20 summit reviews of Canada’s fiscal health, planning and forbearance has cast this country’s banks, regulators and best business minds in a remarkably positive light.

A June 20 Associated Press article titled “Canada’s economy is suddenly the envy of the world,” goes so far as to suggest the rest of the world could learn from Canada’s prudent approach to debt management and long-term planning:

Canada thinks it can teach the world a thing or two about dodging financial meltdowns.
The 20 world leaders at an economic summit in Toronto next weekend will find themselves in a country that has avoided a banking crisis where others have floundered, and whose economy grew at a 6.1 percent annual rate in the first three months of this year. The housing market is hot and three-quarters of the 400,000 jobs lost during the recession have been recovered.
World leaders have noticed: President Barack Obama says the U.S. should take note of Canada’s banking system, and Britain’s Treasury chief is looking to emulate the Ottawa way on cutting deficits.
The land of a thousand stereotypes — from Mounties and ice hockey to language wars and lousy weather — is feeling entitled to do a bit of crowing as it hosts the G-20 summit of wealthy and developing nations.
“We should be proud of the performance of our financial system during the crisis,” said Finance Minister Jim Flaherty in an interview with The Associated Press.
He recalled visiting China in 2007 and hearing suggestions “that the Canadian banks were perhaps boring and too risk-adverse. And when I was there two weeks ago some of my same counterparts were saying to me, ‘You have a very solid, stable banking system in Canada,’ and emphasizing that. There wasn’t anything about being sufficiently risk-oriented.”
The banks are stable because, in part, they’re more regulated. As the U.S. and Europe loosened regulations on their financial industries over the last 15 years, Canada refused to do so. The banks also aren’t as leveraged as their U.S. or European peers.
There was no mortgage meltdown or subprime crisis in Canada. Banks don’t package mortgages and sell them to the private market, so they need to be sure their borrowers can pay back the loans.
In Canada’s concentrated banking system, five major banks dominate the market and regulators know each of the top bank executives personally.
“Our banks were just better managed and we had better regulation,” says former Prime Minister Paul Martin, the man credited with killing off a massive government deficit in the 1990s when he was finance minister, leading to 12 straight years of budget surpluses.
“I was absolutely amazed at senior bankers in the United States and Europe who didn’t know the extent of the problem or they didn’t know that people in some far-flung division were doing these kinds of things. It’s just beyond belief,” he told the AP.
The Conservative Party government of Stephen Harper that took over from Martin’s Liberals in 2006 broadly stuck to his predecessor’s approach, though he cut taxes and, when recession struck, pumped stimulus money into the economy, with the result that Canada again has a large deficit.
But it is recovering from the recession faster than others, and although its deficit is currently at a record high, the International Monetary Fund expects Canada to be the only one of the seven major industrialized democracies to return to surplus by 2015.
This month Canada became the first among them to raise interest rates since the global financial crisis began.
George Osborne, Britain’s Treasury chief, has vowed to follow Canada’s example on deficit reduction.
“They brought together the best brains both inside and outside government to carry out a fundamental reassessment of the role of the state,” Osborne said in a speech.
It’s a remarkable turnaround from 1993, when the Liberals took office facing a $30 billion deficit. Moody’s downgraded Canada’s credit rating twice. About 36 percent of the government’s revenue went toward servicing debt.
“Our situation was dire. Canada was in a lot of trouble at that point,” Martin said. “If we were going to preserve our health care and our education system we had to do it.”
As finance minister, he slashed spending. A weak currency and a booming U.S. economy also helped Martin balance the books. In the 1998 budget the government estimated that about 55 percent of the deficit reduction came from economic growth and 35 percent from spending cuts.
“The rest of the world certainly thinks we’re the model to follow,” said Martin, who was prime minister from 2003 to 2006. “I’ve been asked by a lot of countries as to how to go about it.”
Don Drummond, Martin’s budget chief at the time, says the U.S. and Europe won’t have it that easy, because the economic climate was better in the late 1990s than it is now, with large trade gains and falling interest rates.
“There’s a lot to learn from Canada but their starting conditions are worse,” he said. “Even though we were on the precipice of a crisis we weren’t in as bad a shape as many of them are.”

The same lessons learned on the international stage apply to the small and medium size business environment.

Proper planning, prudent budgeting and sizing up your business to determine health and wealth and future prospects is crucial.

If you do not know what you have now, how can your react to opportunities and challenges in the future?

The financial health of a company is the crucial component of the business’s survival and success. Without a clear picture, and proper planning, owners work themselves into a corner, eventually having nothing but debt and a diminished capacity to react to new business opportunities.

“Business Diagnostics was written to help business owners and business managers avoid scenarios such as this,” adds co-author Rich Mimick. “Business Diagnostics provides a pragmatic framework for sizing up the health of a company and proper financing and planning strategies.”

Business Diagnostics provides business owners a step-by-step process on how to size-up their internal business operation and assess its relative strengths and weaknesses. The internal size-up drills down into the company’s performance, evaluating its relative health from different viewpoints – financial, marketing, operations, human resources, and technology.

A recent article in the Financial Post section of the National Post notes that many small business owners and start-ups turn to the Internet to download free business planning templates.

That is what the founders of Smiths Falls, Ont.-based Maple Lane Equestrian did when they launched in 2005.

“We did a financial business plan on paper when we set up our business, and we used a template from the Internet and one from a program I had taken,” Marsha Houlahan, co-founder and president of Smiths Falls, Ont.-based Maple Lane Equestrian, told reporter Alexandra Lopez-Pacheco. “It [the template] covered the financials as well as how to market and what products we should bring in at the beginning–that kind of thing.”

In the same article, Theodore Homa, managing partner in consulting at Business Development Bank of Canada, said the main purpose of a business plan is to obtain financing. The better organized, thoughtful and comprehensive the plan, the better the ultimate pitch the startup will make to the banker.

However, with free, boilerplate-style planning forms, you usually get what you pay for says Mike Thompson, co-author of Business Diagnostics, insisting that start-ups – and more mature operators – need to carefully plan and prepare their proposals using well-structured, professionals guides and advice. A poorly structured financing pitch can set a new business back and damage long-term viability.

In the same article, Mr. Homa suggests business owners focus on two core areas when preparing a business plan:
The first is a market analysis. “Have you done market research? Why is there a need for your product or service? Who buys it? What’s your position in the market and why would you have success in selling your product?” Mr. Homa said.

The second is cash flow and profitability. “So how much are you going to spend on developing this product? How much are you going to earn from selling it? What’s your expected profit and your break-even points?” he asked.

Mike Thompson says Business Diagnostics was developed to assist business owners in these specific areas. Business Diagnostics is a manual, guide and reference for current and aspiring business owners. The book provides a unique framework that helps small and medium size company owners and managers evaluate their corporate health while providing indispensable insight and reference for small business start ups.

Essential for everyone in the small to medium sized business sector, authors Rich Mimick and Mike Thompson are highly regarded management, accounting and commercial banking experts and have compiled a remarkable resource of information and guidance on raising equity, obtaining financing, implementing growth strategies.
Business Diagnostics can be reviewed and purchased here.

The results of the semi-annual HSBC Global Small Business Confidence Monitor, small business owners worldwide are bullish on the first half of 2010. Many indicating they plan to increase capital investment and recruitment.

Canadian business owner respondents to the survey are confident on economic growth, capital investments and recruitment. However, the survey found Canadian business owners need to broaden their geographic reach for consistent, strong growth.

According to the report released the first week of February, in Canada, nearly 20% of respondents say they do business internationally, compared with an average 31% for the 20 countries surveyed. Thirty-nine per cent of Canadian business owners cited bureaucratic red tape as the chief barrier to operating globally, followed by lack of product demand (37%), lack of knowledge or contacts in overseas markets (35%), low profit margins (34%), high shipping and storage costs (32%), and unstable financial conditions (31%). More than 6,000 businesses across 20 countries were surveyed.

Meanwhile, Canada’s job market continued a six-month surge in January, creating 43,000 jobs even as payrolls in the U.S. kept shrinking. According to a February 6, 2010 Canwest News Service report, employment in Canada has grown by a total of 137,600 since bottoming out last July. The job market gain in January was strong, at 43,000 jobs, although nearly all were part-time ones, which generally pay less. Unemployment fell one tenth of a point to 8.3 per cent, the best reading since it peaked at 8.7 per cent last summer.

Local and national small businesses will drive Canada’s economic turnaround and create new jobs. According to a December 2009 Scotia Capital report, companies with less than 100 employees have been less likely to lay-off workers during the recession than larger firms. This will mean those smaller firms that have retained and retrenched staff will be more likely to prosper early in the recovery.

Small firms are disproportionately represented in the construction trades and services, health care, environmental services, information technology and management consulting sectors. Accounting for almost 70 per cent of paid employment in these sectors, these areas expected to recover faster than others.

However, commentators such as Alfie Morgan, a retired University of Windsor business professor who for more than two decades has championed small business interests at the local chamber of commerce, says the lack of consumer confidence has caused lenders to be extremely cautious, unwilling to take chances on sectors dominated by small enterprise.

This why it is crucial for all small business owners to have contingencies in place and a firm understanding and appreciation of their business’s capabilities, value and potential. When the time comes to expand operations to meet changing market conditions and growing demands, they should have all their financing needs and plans in-place.
“Business owners have to get their houses in order,” says Mike Thompson, co-author of Business Diagnostics. “Many small and medium sized business owners will soon be faced with hiring and investing to meet growing market demand. To prepare, they should be performing an internal and external Business Diagnostic ‘size-up.’”

Within Business Diagnostics, business owners are provided a step-by-step process on how to size-up their internal business operation. Owners are instructed on how to assess their business’ relative strengths and weaknesses.
The internal size-up drills down into the company’s performance, evaluating its relative health from different viewpoints – financial, marketing, operations, human resources, and technology. Meanwhile, Business Diagnostic’s external size-up examines the business environment (political, economic, societal and technological factors) along with prevailing industry conditions.

Every business venture has a life cycle. Navigating a business through the various stages of growth and maturity can be a challenge. We have developed a matrix of sorts, that helps this sometimes treacherous process, helping owners move through these various phases of development and growth.

This three-part-series covering the three phases (Start-up Stage, Growth Stage, Maturity and Divestiture Stage) answers some of the questions we often receive, can be read in our Business Insights resource centre.

For more comprehensive and incisive insight, visit Business Diagnostics and order Business Diagnostics – 2nd Edition.

Glimmers of optimism continue to appear in Canada’s retail, housing and resource industries. Some have suggested the recession has ended and a return to economic growth is not far off.

For many business owners who have maintained the status quo or even reduced operations in late 2008 and through much of 2009, they now face the daunting task of preparing a Business Plan to attract new equity investment or obtain a line of credit from their bank.

Investors and lenders often receive voluminous presentations that are invariably never read in depth due to the sheer volume of content and the absence of a clearly defined message. Business Diagnostics de-mystifies the Business Plan preparation process and provides some practical tips on ‘standing out from the rest of the crowd’.

This is an abridged chapter from the book – Business Diagnostics-2nd edition – authored by Richard Mimick and Michael Thompson, offering insight on the Business Plan preparation process. Additional information can be obtained by visiting the authors’ website – or by ordering Business Diagnostics – 2nd edition.

Know Your Audience

External Audiences (investors, bankers, other lenders) will typically receive an initial overview of an investment or banking opportunity by way of a short and simple ‘Business Opportunity Document’. This will be supported by a formal Business Plan and, if an investment opportunity is being pursued, a public offering and/or private placement process may be initiated via another set of documents, the Offering Memorandum and/or Prospectus.

Internal Audiences ( senior management, employees, Board of Directors or Advisors) will also have the opportunity to review the Business Plan, which acts as a foundation document. It is then followed by a Strategic Plan along with a detailed Budget and Forecast.

The Written Proposal
The Business Plan structure can be summarized as follows:

• The Executive Summary
• Company and/or project description
• Marketing plan
• Production and Operations plan
• Financing plan
• Management plan
• Appendices

Seven Ways to Create an Effective Business Plan

Focus on the Market

• Strive to be market driven (meeting customer needs) rather than technology driven. The potential of the marketplace and resulting revenue/earnings is far more important than the product’s technical features.
• Demonstrate the users’ benefit rather than promoting the product’s virtues and innovation. If the product can provide significant cost savings to clients (e.g., a pay-back period under two years), this translates to a significant user benefit.
• Document booking orders with supporting data indicating the number of customers who have committed to purchase. This allows you to provide a convincing projection of the “rate of acceptance” for the product or service and the pace at which it is likely to be sold.

Anticipate Investors’ or Lenders’ Requirements

• Investors: Are they friends and family, angels, venture capitalists or strategic corporate investors?
  Primary objectives will be a defined exit strategy (cashing out) and setting an appropriate price and percentage ownership.

• Lenders: Why is financing required?
  Amount of funds required?
  Repayment: Over what timeline and from what source (ongoing earnings,sale of assets?)
  Security: What company assets are available?

Emphasize Management Depth

• Does your management team have:
  Proven industry experience?
  Previous start-up experience?
  Track record in bringing new products / services to market?

Clearly Define Your Customers and Competitors

• Customers
  Segmentation – Which are the most attractive segments?
  Targeting – Who is buying from you?
  Preferences – What do they buy from you?
  Timing – When do they buy?
  Criteria – Why do they buy?

• Competition
  Demonstrate your knowledge of the competition, how you are keeping track of them (latest product offerings, price discounts, etc.) and how you differentiate yourself from them.

Obtain Feedback

Show drafts of your business plan to business advisors, senior management and other key employees. Ensure that your lawyer has confirmed that the plan meets all necessary regulatory issues (especially from an investment standpoint).

Prepare Realistic Financial Projections

Investors and lenders will focus on the accuracy and integrity of your financial numbers.
Projections and revenues, gross margins and earnings have to be carefully supported by assumptions that are reasonable and that can be defended. Complete ‘best-expected-worst case’ scenarios.

Complete the Executive Summary (last)

This is the most important section of your Business Plan. People will read it first and formulate their initial impressions based on these critical pages.