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Thinking about starting a business?
If you are and you’re serious, then you’ll need to create a Business Plan.
Why?
Because every successful entrepreneur in my Rich Habits Study had created a business plan before embarking on their new business venture.
A business plan is critical for success because it forces entrepreneurs to peel back the onion and really understand the variable assumptions that underlie revenues and expenses. Those variable assumptions, when they are wrong, helped my Rich Habits entrepreneurs gain valuable insight and wisdom, which helped them pivot and make important adjustments. Without confronting those initial incorrect variable assumptions, it’s difficult to see what you’re doing that is wrong, which means you will continue doing things the wrong way.
The Rule of 3
Revenue: During my quasi-venture capital days, I learned from reviewing over 200 business plans that the amount of revenue you will make during the first five years of a start-up will be about one third of the amount you expected.
Expenses: I also learned that the amount of your expenses will be nearly three times what you expect during the first five years.
Lastly, under my Rule of 3 I learned that the amount of working capital you will need will be three times more than you expect.
So, in crafting your business plan, you need to create at least one scenario for your projected financials that reflect the Rule of 3: one-third expected revenue, three times expected expenses over a five year period and three times the amount of working capital you’ll need.
If your business financials still make sense using the Rule of 3 then it is worth taking the risk.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, “Effort-Less Wealth”, “Change Your Habits Change Your Life”, “Rich Habits Poor Habits” and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
