Phase II – Pilot and Percolate

 
Steps

 Phase II has three steps:

1. To build a pilot, demo or “starter version” of your concept
This is done to:

• test its saleability and  
  
• identify any practical issues that need to be addressed before you start spending money bringing your concept to life.

Its important to consider that how YOU perceive your product or service and how other people (or the "market") sees you and your services could be different.

2. To Prepare Financial Projections
In Phase I we worked on the StartUp Budget ie: the amount of money you may need to spend just to determine if you have a viabile business idea. In this phase, we will work on determing:  The Set up Costs, The Projected Profit & Loss and the Projected Cash Flow Forecast.

These schedules will help you get a preliminary sense of:

• if or when the business will be profitable;
• how much capital (or money) will be needed to both start the business and keep it operating.

3. To begin Percolating about items needed in Phases III & IV
Start thinking about the key factors that you will need to address when you move into Phase III - the Set Up.

Do not make any definate decisions in this phase, but just start thinking about factors such as: business name, location, staffing and other topics as detailed in later section of this Phase.

Action

Step 1 - Build a pilot, demo or starter version:

This step is divided into 2 activities, being to Source a Manufacturer and Test the Market for Sales.

Source a Manufacturer
If your concept involves the sale of a product, here is when you need to seek out a manufacturer to make a demo or sample of your product.

Here are some factors to consider:

• Find a manufacturer that you can really work with and build a long term business relationship (Note: depending on the complexity of the product, you may need to retain an engineer to develop a plan that is suitable for the manufacturer).
  
  
• Consider having the manufacturer sign an NDA (as discussed in Phase I) so that they will not take your idea and copy it for someone else!
  
  
• Work closely with the manufacturer to identify any production problems such as sourcing materials, design and functionality issues.
  
  
• Depending on the complexity of the manufacturing process, consider buying the manufacturing equipment and making the product yourself as opposed outsourcing the manufacturing.

• Be sure to think about & discuss: packaging, labelling, warehousing & delivery issues.

Test the Market for Sales
It is important to recognize that your product or service is ultimately only worth what somebody is willing to pay for it.

One of your primary objectives now is to try selling a small quantity of your product or service to gather practical feedback on its acceptance in the market place and its selling price.

Some factors to consider are:

• Where are you going to sell these demo/pilot products? (Who is your customer and where are they located?).
• Would this product be better positioned to sell online? With limited advertising and marketing, is this even a viable route to test sell your product?
• Is putting your product for sale on consignment an option? (see our Glossary of Business Terms for important information on this).

How are your customers going to find out about your product? what advertising & marketing possibilities have you explore?

If you haven’t already, you will likely need to start thinking of a marketing campaign, which will likely include some advertising and promotion ideas.

This could be any thing from a simple print advertising (even just a copy of your business card) in local newspapers to full creative radio/TV infomercials (depending on your product, target market and budget).

Step 2 - Preliminary financial projections

In Phase I, we worked on the StartUp Budget ie: the amount of money that you may need to think about spending just to see if you have a viable business idea.

In this Phase, we are now going to look at the costs of actually setting up the business. We are also going to run some preliminary financial projections to assess both the profitability of our business and its cash flow needs for the first 12 months that it will be in business. This is important for two reasons:

1. It is easy to get lost in the excitement of this idea and lose sight of whether the concept will be profitable or not.
   
   
2. It will give you a preliminary sense as to how much capital (or money) will be needed to both start the business and keep it operating.

Note: If you do not have a financial background, we strongly recommend you consider working with an accountant or business consultant to prepare these projections as they are critical to your business.

We are providing you with the following information as a guide so that when you are meeting with your business advisor, you will have some insight as to what types of projections are needed.

The projections typically include three components:

• Estimated Setup costs

• Projected Profit and Loss

• Projected Cash Flows

It’s important to recognize that these projections are estimates and are therefore subject to change. The objective of preparing these projections is just to get an overall sense of the numbers, not exact solutions.  

Estimated Setup Costs
The objective of this schedule is to get a preliminary sense as to how much money you may need to actually set up and start the business.

This schedule excludes the StartUp Budget costs covered in Phase I as well as the costs of operating your business once you have started it.

This schedule enables you to both:

• Identify what you may need to spend at each phase of the business “roll-out” and;
• Step back and get a good sense of what this whole process could cost which may make you more selective on some of the choices you make in setting up your business.

If you compile this yourself, start by putting down what you have spent to date. Then, each time you identify an expense associated with starting up your business (not an expense to operate your business once it is operating) you should update it.

Projected Profit & Loss
The objective of this schedule is to determine whether the business will be profitable or not. It’s typically prepared on a monthly basis and over a 12-month period or longer.

This schedule has two main sections.

• Projected sales/revenues.
• Projected expenses.

The total projected sales/revenues minus your expenses will determine your net project profit for the period.

Projected Cash Flow
The objective of this schedule is to get a preliminary sense as to how much money you may need to invest in the business once it’s operating.

The Projected Cash Flow takes the Projected Profit and Loss and predicts when you will actually receive the cash for your sales and make the actual payments for your expenses.

For some business, such as retail stores, you typically get paid the same time you make the sale. For many business however, customers often expect to take 30, 60 and some even as much as 90 days before they will actually pay you for your goods or services.

Also, while many of your business expenses, such as rent and telephone, will be paid monthly, some will be paid quarterly and some annually.

There could be some expenses that are more ‘ad-hoc’ , for example a trade show). This would trigger costs for travel, accommodations, meals and entertainment as well as the one-off cost of having a trade show booth designed and constructed.

In addition, some of your business vendors may provide you with flexible payment terms, such as 30, 60 or even 90 days before you are required to pay for their goods or services.
It is important to consider all of these factors in the preparation of your Projected Cash Flow Statement. You typically need to make a series of estimates in order to make these projections.

Step 3 - Items to Percolate on:

Legal stuff
A good business lawyer can be a significant contributor to your team. In addition to being able to offer sound practical business advice, they may also have a “rolodex” of contacts to help you with your business.

A lawyer can also help you with various legal contracts and/or agreements contracts such as incorporating a business, patents, trademarks, shareholder agreements, wills, distribution agreements, employment contract/issues and many more items.

Finding an Accountant
Accounting is an area where a little bit of knowledge is a dangerous thing. It is the language of business, if you cannot “speak it”, surely you should have someone strong in your business that can!

Please see our Glossary of Business Terms for some help in understanding the different types of accountants and the various services they provide.

Bookkeeping
What about bookkeeping? Who will do this? This is an area people often cut corners on and find that the records land up in a mess and they have no timely and accurate financial information to run their business.

Our Glossary of Business Terms has some important information on the selection of a bookkeeper.

Look in the mirror
As we mentioned this in Phase I, we recommend you carefully consider your strengths, weaknesses and core competencies.

Starting AND Running a business are both difficult things. You need to have taken some formal business courses on topics which could include: business administration, marketing, accounting, economics, sales, basic business law.

Review your resume and interview yourself to carefully assess whether you have these skills to run a business. And this is not any business, it could be one that you are investing your life savings!

Recommendation: Read “The E-Myth” see “recommended readings”.

Marketing
Start to think about the following important factors:

• Branding
• Logo
• Business name 
• Web site name

Build your team
If you have not already started building an advisory group, now is the time to start doing so (as we recommended in Phase I).

• Begin assembling an informal advisory group that you can use to ask questions and test some of your ideas and concepts.
• Be very careful in choosing people for this group. You want people with proven business track records!
• Your advisory group could come from friends, relatives and possible work colleagues
• Consider using the skills of Lawyer, Accountant or Business consultant

Conclusion

At the end of Phase II, you should have:

• Built or developed a pilot (or demo/starter version) of your product (if possible)
  
  
• Successfully sold your goods or services on a limited test basis
  
  
• Made your goods or services available in the marketplace, so you are clear as to your competitive advantage (i.e.: price, service, quality etc).
  
  
• Developed a good preliminary sense of what your primary sales channel is going to be (for example, wholesale, web-based or perhaps retail, and if retail, some sense as to optimal location(s)).

• Tracked your spending to date and projected what your upcoming startup costs will be (this is based on the estimated startup costs)

• Forecasted if or when your business will be profitable (based on your Projected Profit and Loss)
  
  
• Projected how much money you may need to invest in the business or borrow from the bank (or friends/relatives) once it’s operating (based on your Projected Cash Flows)

Once you have this, congratulations! It’s time to move to Phase III – the Set-Up.