Software development is an incredibly exciting industry to be involved in, but it’s also a complex business that can take years to become profitable. Many companies fail during this early stage, even the very best ones. The key issue is usually that they took too much outside investment and didn’t manage their cash flow effectively.
If you’re thinking of starting your own software development company, this article will start you on the way to building a solid business plan.
When it comes to writing a software business plan our experience is that most companies get it wrong because they don’t have enough information about their customer base and market research.
Let’s assume that you have no clients yet but are thinking about setting up a software development business. Your challenge is to set up a business that can deliver against as many as possible of the following types of services:
- Outsource development – Hourly rate
- Outsource development – Monthly managed service
- Short contracts (e.g. 1 month) for smaller projects e.g. £3,000 to £10,000
- Longer contracts (e.g. 6+ months) for larger mid-market projects up to £120k-£500k when you would have a dedicated team
- Sell products or services that last the lifetime of the customer e.g. monthly support fees for mapping systems, etc
- Rent out your software development time to a consultancy agency
- Be paid by other companies to help them set up their own software development company and get clients for them.
The above is just an example of the many possibilities you can choose from. The first thing to do is to prioritise these options into a list according to how much money each service would make you.
If your background is in software development then you should find this easy, but if it’s then no problem – just take our word for it until you have enough cash to pay someone else to write your business plan for you.
Once you have a prioritised list of services, the next thing to do is research each one in turn until you’re happy that there are enough potential customers out there to make it worthwhile. Just because I’ve listed above 10 different types of service doesn’t mean they are all worth offering; it simply gives you a starting point for your research.
You might find that only the first one is worth pursuing but let’s assume that you think all 10 are worthwhile and plan to focus on them equally. You’re now ready to start writing your business plan.
We suggest writing it in two parts; firstly document how much each service would earn you (don’t forget to include your wage plus profit) and then secondly document how much each service would cost to provide; again don’t forget to include your own wage.
Once you’ve done that then it will be far easier to estimate the time it will take you to reach financial independence (the point at which your software company is earning enough cash to provide a comfortable living for you and your family).
Finally, before writing your business plan make sure that you don’t have any outstanding tax or financial commitments from previous employees/contractors. Remember that the purpose of this document is to get investors on board with your company, but it’s no use doing that if there’s already a trail of the unpaid tax or other financial commitments that could lead to your being sued!