The first step is to get to know your customers at a much deeper and critical level than your typical day to day relationship. You may do this work via a survey, customer visits, informal phone conversations or any other way of meaningfully gathering honest feedback. The goal is to dig deeper to understand your customer’s perspectives so that you may identify previous unknown strengths to exploit and weaknesses to improve. By investing time in your customers, you will gain tremendous insight for shoring up existing relationships and building new ones.

Here are some sample questions to get you started with the process:

• How satisfied are you working with us?
• What areas of need do you think require the greatest improvement by us?
• What do you like best about working with us?
• Are you currently considering alternative suppliers? If so, why?
• Who do you view as our competitors? What are their strengths and weaknesses?
• What are the most important considerations you make when working with a supplier like us?
• What new innovations do you expect us to deliver on this year and beyond?

If you would like additional information on this topic or a free needs assessment, please contact a Thrivepoint Advisor.

© 2008. Thrivepoint LLC. All Rights Reserved.

What are you selling? This is the most important thing to start with. Do not describe your company idea here. Simply state what product or service you will be selling. The key here is to focus on the transaction you will make with your customer.

Who are you selling to? Name your target customer. Describe their needs and wants. Figure out how many of them are out there. Determine how many could be your customer. State how you will put your product or service in front of them for their consideration.

Who else is selling to them? Ideally your product or service is unique but even if no one else in the world offers what you have, you are still competing with something else. There is always something else competing for your customer’s attention and money. Most people see thousands of product offers each day. How will you grab your target customer’s attention?

What resources do you need to fulfill an order? Do you need to hire people? Acquire property or machinery? Partner with foreign producers? What is it going to take to put the product or service in your customer’s hands?

How much does it cost? What will it cost for you to produce the product or service? How much will you charge?

How many orders do you need to sell to pay yourself a competitive wage? You need to pay yourself to succeed in business otherwise it would be more lucrative to work for someone else. This is a key step not to be forgotten.

Once you can answer these questions and feel confident about your idea, then it is time to look at doing some business planning projections.

If you would like additional information on this topic or a free consultation on your marketing efforts, please contact a Thrivepoint advisor.

© 2008. Thrivepoint LLC. All Rights Reserved.

Here are three key things to think about when starting a business:

Team

While going it alone is common, at some point you will need to hire someone. Whether this person is a partner, employee or independent contractor like a lawyer or accountant, you should have a pretty good idea of the type of people you want to work with. Early-stage investors often say that they invest in the team, not the idea. The team is critical to success and be it their expertise, tenacity or chemistry, the team can make or break the business and this holds for everyone associated with your organization, not just the founders.

• Do you know the general makeup of your team from legal to operations to client service to marketing?
• Do you have an existing network that you can tap into for all aspects of your team?
• Do you know your strengths / weaknesses and how to round out your team effectively?
• Do you know the type of people you work best with? and not so good with?

Target Customer

You need a customer base. Make sure whatever your idea might be, that there is a customer that you are targeting. You can not be successful otherwise. One mistake businesses often make is assuming that the public will recognize the orignality and value of their products or services when in fact, it is the business’ job to understand the customer and find a way to fit into their life.

Recognition and fulfillment of a customer’s need combined with effective communication to that customer is the key to success. Eliminating any one of the three parts of the equation will hamper your business’ chance of success.

Event Horizon

There are a couple of key events that occur throughout the early life of a business. Each of these events are hurdles that can make or break a business and recognizing each ahead of time will help you prepare for success.

• What is the latest date you can wait to start paying yourself competitively? Everyone has obligations and at some point, you will want to pay yourself (and your partners and employees) a competitive market salary. Otherwise it will be more lucrative to go out an get a job. Many business owners start out by saying they will take a limited or low salary – this is not relevant for the exercise. It is more important to determine how long you can work without a competitive market salary that you could earn elsewhere. If the time line that you would pay yourself the competitive market salary you could earn elsewhere is longer than you can live without a competitive market salary, then your business plan needs reworking to determine how you can pay yourself sooner. This step is the first critical step to success. So long as you can pay yourself, you can live to work another day.
• What is the free cash flow situation? Related to how much money you need to start the business, managing cash flow is critical to the early life of a business. Free cash flow is essentially the amount of money available to you to run your business after all obligations have been met. Questions to consider: What does it cost to sell and implement your product or service? How long will it take between when you spend money and collect money on a particular sale? A classic case: Business A wins its first big client and must invest resources to fulfill the order (like a big manufacturing run). It invests 100k of its savings into making and delivering the product over the course of 30 days. To ge the sale, they offered credit terms to the buyer and the buyer pays 90 days after delivery. In this situation, it might be 120 days between when the business spent $100k and when it collects its revenue. Add in payroll, taxes, rent, sales & marketing for other clients, etc. and if the lag between spending $100k and receiving $100k was not accounted for, there can be a significant crush to the business. Understanding your free cash flow situation will help you plan and determine how to best finance your operations.

To speak with a Thrivepoint Advisor on these topics or others related to starting your business, contact us.

First, focus on customers and revenue assumptions for the next three to five years. While establishing revenue targets are important, at this step, the purpose of the exercise is to focus on the the assumptions that will affect the business each day: pricing, customer averages, growth rate, renewal rates, market size, ability to execute, seasonality, etc. This process helps realistically determine what assumptions are required to hit the targets while identifying key metrics for measuring progress. There are three ways to to create revenue estimates (do each one!):

• Bottoms up – start with one customer and apply a *realistic* growth rate
• Worst case – what if your growth rate is 1/2 or 1/10 the expected?
• Top-down – what will it take to reach $100M (or some other pie in the sky figure); start with your pie-in-the-sky figure and work backwards in time to determine what your growth rate needs to be to hit that figure

Identify the incremental cost of each sale (Cost of Goods Sold or COGS). For example, are their credit card fees? software fees? materials cost? Etc. Knowing COGS and when they hit helps do two things: 1. understand if there is enough total and monthly margin (Revenue – COGS = Gross Profit) in the product to make it worth the effort (and provide money for profit and business investment) and 2. understand the ebb and flow of gross profit in the early days before reliable scale is achieved. This is critical because early on there is a strong likelihood a fluctuating margin will exist that could affect profitability and cash flow. For example, a software services firm…

• Sells a a software product which delivers revenue of $50k for month one and $25k per month thereafter.
• The client pays 30 days after the end of each month.
• The firm pays contractors $25k in month one to deploy (COGS) and uses full-time employees to support the customer in months 2-12 (OPEX, Not COGS).
• The firm buys $50k hardware and software to support the customer and has to pay upfront because the business is too new for credit or leasing terms; and there is a recurring $5k/month charge due upfront for maintenance & support.

Results

• In the above scenario, the *overall* deal nets the firm $325k revenue in year one with costs at $135k and therefore yielding $190k gross profit at a nice 58% margin for the year.
• However, breaking down into monthly increments revels that margin is -$30k (-60%) in month one and +$20k (+80%) in the remaining months.
• From a cash flow basis, it takes a full six months to come cash flow+ on the deal with the first two months carrying $80k of cash losses, $40k in month three, $20k in month four, breakeven in month five, and finally cash flow+ in month six <-not planning for a customer being cash flow negative for the first six months can put a company out of business fast.

Understanding cost of goods sold helps identify what operating budgets will be and the cash needed upfront to support customers. This step is critical because the worst case scenario is signing a new, game changing client or launching a new product and not being able to support them.

Estimate the fixed cost you carry each month (rent, labor, IT, etc.) or Operating Expense (OPEX). Do this last and only after you have a really good feeling about your revenue and COGS assumptions. Once revenue and COGS assumptions are established, you should have a good picture in your mind of the company resources needed to pull it off and then you can start on the OPEX.

For example, are 50,000 customers required to meet the revenue target? Then what type of Operations are needed to support that customer base – office space, phones, computers, admins, call center, etc. What if remaining money (ie. gross profit) would only realistically budget OPEX to support 50 customers? The OPEX is where, if you have not done it yet, you get honest with yourself about prioritizing resources.

Investment: Depending how revenue is collected and recognized, it may not be a problem to be unprofitable in the early going BUT it is critical to ensure you always remain comfortably cash flow positive. These monthly estimates can be used to project cash flow to determine when it will run negative. Using this estimate, you will be able to determine when and how much investment you will need to ensure you have enough cash on hand to comfortably operate your business.

If you would like additional information on this topic or a free consultation on your marketing efforts, please contact a Thrivepoint advisor.

© 2008. Thrivepoint LLC. All Rights Reserved.