11 From the Field: Writing a Business Plan & Budget
John Dille
Build a Business Plan & Budget
“A goal without a plan is a wish-”–old management adage
If the value proposition is the compass, the business plan is the roadmap, and the budget and the metrics used are the waypoints that guide the promised goals home.
What’s in a Business Plan?
There is no one specific template every investor expects when they ask for a business plan. But usually, a business plan will include some combination of the following:
- What you want from investors (aka your “ask”)
- A clear summary of the business, its product and the market you will serve (key activities, value propositions and customer segments from the Business Model Canvas)
- Financial information about the business—pricing, revenue, P&L, cash flow, return on investment, and pro forma (three-year) budget (cost structure and revenue streams from the BMC)
- Background about your company, its history and legal status, and the team
- A bit on your “secret sauce” that will enable you to be competitive (key resources, channels, customer relationships, key partnerships from the BMC)
- The metrics by which you’ll measure success
- Whether and why the business is worth doing or investing in financially
Today’s media marketplace is an on-demand, platform-specific landscape with a myriad of options available to consumers. Anyone in the media business these days knows the chaos that surrounds it and the search for new and more creative methods to monetize its content. Planners must be responsive to these historically disruptive conditions. Whatever plan you start out with, you’ll probably iterate and maybe even pivot to respond to user and customer needs and changes in the marketplace.
That said, having a flexible business plan remains central to the success of any project.
What follows is a look at the essential financial components of a basic business plan.
Developing a Pro Forma Budget
Assuming we have the other parts of the business plan in place, it is the budget process that can give the business plan the credibility and durability that both operators and investors seek.
The pro forma budget for new content or product is usually on a three-year schedule. From start to some level of market acceptance or rejection, three years provides a reasonable look. It is the last step in making the plan real. It is the quantification of the strategies and tactics included in the plan. Inasmuch it must ask, indeed force, the questions that engage the issues facing the enterprise.
The budget employs metrics that must be selected to accurately evaluate performance as well as offer tools that can guide actions that result in meeting desired goals.
Media lives at the convergence of the organization’s ability to create compelling and relevant content and its skill at converting it to money. The organization must do this in a digitally created on-demand landscape and in a marketplace whose players are moving at an uneven pace.
Still, fundamentals remain and the need to retain existing customers, upsell them where possible, and to constantly recruit new ones persists. The repeat customers are critical.
There are four primary components to a pro forma budget.
REVENUE — For our purposes we should think of revenue, not as one big number, but as the sum of a collection of smaller numbers. Revenue is the result of two numbers, for example, number of units, broadcast spots or ads or whatever times the price per unit sold. That then holds true for every income stream the operation offers the market.
A newspaper historically has had two primary sources of revenue: advertising and circulation sales or subscribers. In the digital space this converts to clicks and paywalls.
The real challenge facing media outlets and their revenue is monetizing smaller audiences in a way that remains of value to the advertiser.
- All sources of revenue
- These can be from third parties, such as advertisers, or directly from consumers. Go to the chapters on Business Models and Nonprofit Models for ideas on potential sources of revenue.
- What is the durability of these revenue or income streams?
- How often do buyers buy?
- What are the pricing models?
- What exactly are the buyers buying?
- Content
- Access to this content’s consumers?
- What will the profiled buyer pay? More, less or the same as competitors?
- If the marketplace competition is such that it will not support the desired price, is the value proposition still viable? Or can it be adjusted without disrupting the cost model?
- For decades media has priced on a Cost per Thousand readers/viewers/listeners basis. That model is now under attack as being imprecise and inadequate. This too, is under re-evaluation.
- What exactly are the buyers buying?
The message here is that the budget process must remain nimble enough to accommodate change quickly should the need arise.
COST STRUCTURE — All costs associated with the designated project. These include outsourcing costs as well as internal payroll and other costs used to fund the operation.
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- Fixed and variable costs
- Media has traditionally been a high fixed cost business. This means that regardless of the number or consumers, readers/viewers, the cost to produce the content is essentially the same.
- Office rent or insurance would be fixed costs.
- The cost of producing content will vary based on the volume and type of content you produce, and whether you use full-time or freelance employees. However, as a media business, you will always have this overhead.
- A building contractor, on the other hand, would hire carpenters and buy materials only when he had a building to construct.
- Media has traditionally been a high fixed cost business. This means that regardless of the number or consumers, readers/viewers, the cost to produce the content is essentially the same.
- Costs will vary depending on strategies chosen in the business planning process.
- Some elements of an operation may be higher. For example, an enterprise focused on building a specialized product may have higher service costs than an operation offering a one-size-fits-all product.
- The budget will need to take this into account.
- Fixed and variable costs
METRICS — Metrics used to measure performance are critical. If they are not employed in sync with the business plan they can provide not only incorrect information but misleading data and flawed conclusions.
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- Some metrics look back and are used as performance indicators. Income statements produced monthly include the predetermined budget for comparison between what revenues planners thought would come in versus what actually did happen.
- Retrospective information, for instance when comparing a monthly budget to actual costs, answers the question, “how’d we do?”
- Equally important are metrics that predict success. For example, sales managers know that the number of sales calls made by a seller of media on existing or prospects matters. There is a direct correlation here. Sellers who underperform usually aren’t making enough calls. This metric can guide an operation. Similarly, if a seller is selling, but his or her orders aren’t priced correctly, the total revenue generated will be insufficient.
- With this kind of predictive data, management can direct actions of employees and others to the desired goals.
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PROFIT or MARGIN — Revenue minus Expenses equals Profit.
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- Was it worth it? This is the question asked by all concerned. How did our effort on this project compare to what we could have done?
- Investors in particular ask this, but operators do as well.
- Breakeven analysis and Return on Investment are two more important data points available from the information created in the pro forma budget process.
- What do we need to do to break even or not lose money?
- What is the ROI on this course of action vs. our next best alternative? For instance, would we sell more advertising if we priced it at $2,500 instead of at $5,000?
- Or, in harsh reality, whether the project should be undertaken at all.
- Was it worth it? This is the question asked by all concerned. How did our effort on this project compare to what we could have done?
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All of this is at the heart of the business plan and is the “reality check” any plan requires.
John Dille is the president and CEO of Federated Media.