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Business Planning—Don't Avoid It— How to Do It
If You Fail to Plan, You Plan to Fail
A business without a plan has as its guiding principle one word: luck. And luck comes in two forms, good luck and bad luck. Would you embark on a boating trip without planning your trip? Of course not. You might get to your destination, or you might sink on the way. The purpose of a business plan is to prevent your business from sinking. Without a plan you lurch from crisis to crisis and miss a lot of opportunities along the way.
If you seek financing for your business, either a bank loan or venture capital through selling equity, having a business plan is not an option - it's a necessity. Bankers and investors are not interested in your sparkling personality. They want to see numbers; they want you to show them why they should give you money. In a funny scene in the movie Shampoo, Warren Beatty, playing a womanizing hairdresser, is sitting before a banker discussing a loan to start up his own salon. In response to the banker’s pointed questions, all Beatty could say was: “I got the heads” (meaning his many lady customers). The banker wanted to see more of a business plan than that.
It’s a How-To Manual for Your Business
A business plan is a “how-to manual” specifically designed for your business. Think of it as a manual for how to get it done, the “it” being the sum of your goals. When you buy a new car, you get a huge owner’s manual and login instructions to a website with a gazillion megabytes. Doesn’t your business deserve as much?
The business plan is written on paper, not carved in stone, and it should be amended to account for new opportunities and realities. It is not a constitution and need not go through a complicated process for amendment. We often hear the famous quote “Make a decision and stick to it.” Like many famous quotations, you should question its wisdom. By all means stick to a decision, including all of those decisions in a business plan, but, be willing to change your decision and your plans when reality dictate. In Barbara Tuchman’s book The Guns of August, she discussed how World War I could have been avoided, if only the German general staff been willing to reverse the decision to mobilize for war. The German high command was steeped in a philosophy that once plans have been set in motion, they should not be stopped. President Kennedy, during the Cuban missile blockade, stated that he wished that every officer on the bridge of every ship would have read Tuchman’s prophetic warnings. Nothing in a plan, military or business, should be considered carved into granite.
The business plan focuses you like no other document in your office. It should be referred to regularly and with discipline. Make an appointment in your calendar to review it regularly.
Don’t Make it Complicated (Any More Than Necessary)
A lot of business people are intimidated by the complexity of the many business planning software tools out there. This is not the fault of the business plan software developers, bless their hearts, because they only mean to give you everything that you could possibly need. But many of the modules in the various programs do not apply to the basic small business. If your business is one you have no intentions of going public, or one for which you have no thoughts of seeking equity financing, you should err on the side of making the plan simple—or else you will never get it done! If you do plan major financing, whether debt or equity, you will want some consulting horsepower under your hood anyway. There are professionals who can assist you in writing the complex plan. There is also software to make the task easier. Business Plan Pro, by PaloAlto Software, is a popular tool. See www.businessplanpro.com. They’ll take you through the plan, step by step, and provide an explanation and examples for each module of the plan.
Components of the Formal Business Plan
Executive summary: This is a top-level overview of your business, essential for any third party, such as a banker. You do not want to bore a banker. They are boring enough. Use this to explain what your business is, what you’re up to, and why the reader of your plan may want to lend or invest.
Objectives: This part is important if financing is one of the purposes of the plan. It is also a useful guide for you, and it should be written with your goals right next to you. Items such as “break even by 2014” or “sales of $5 million” or “net profit of $1 million by 2015” should be listed here.
Mission: A mission statement isn’t just for companies like IBM; it allows you to express your vision for your business. You need to spend some time on this and turn your thoughts loose. It should be inspirational, thought provoking, and realistic. Part of Google’s mission statement is “Don’t be Evil.” This seems a bit weird, no? Don’t we all want to avoid evil without necessarily stating it? When writing your mission statement you might want to be guided by a principle: “don’t write stupid sounding mission statements.” Once your mission statement is written, you should memorize it and post it prominently throughout your office.
Keys to success: List, as extensively as possible, the major components that you see as the keys that will unlock your goals. It may include providing regular sales training, developing community relationships, hiring a skilled IT professional, or marketing through direct mail campaigns. You are the expert here. This is a good place to focus your thoughts. Here you develop Best Practices.
Company summary: This is a thumbnail of your business, not as detailed as the executive summary. This is one of the many useful places for a third party to refer to quickly.
Company ownership: This is a brief statement that describes who owns your business, whether shareholders in a corporation, partners in a partnership, or members in a limited liability company (LLC), or just you.
Start-up summary: If this applies to you, it is a summary of the steps it will take to launch the business, including a synopsis of the costs from the next section. It should be compelling and realistic. If someone—you for that matter—notices a huge revenue projection for the first year with only minor costs, you are kidding nobody but yourself.
Start-up costs: Again, if this applies to you, make it detailed and realistic. Be specific in coming up with your numbers. If your initial costs involve heavy direct mail advertising, check to see if a postal rate increase is on the horizon, and don’t forget the cost of the envelopes and return postage.
Company location and physical facilities: Be detailed. If there is something good to say, such as “excellent high-profile location,” say it here and include photographs.
Goods and Services: A summary of everything that your company sells. A self storage company, besides listing the obvious rental of storage units, would include here items like storage boxes, wrapping materials, soft drinks, coffee—anything that a customer pays money for.
Services (detailed description): This is a good place to focus on all the services you provide, including some that may surprise you. A guy who had a large graphic design company also served as a free drop-off point for advertising agencies to submit entries for advertising award competitions. This brought in no revenue, but it was a powerful public relations tool and rainmaker for his design business.
Competition: Nobody wants to think about it, but this is where you must think about it—carefully. This is an opportunity to distinguish yourself from the competition without trying to pull the wool over your own eyes. I have a young friend who asked me recently to kick around an idea he had for an Internet business. His concept was to provide a site for people to give their opinions of local businesses and professionals. I asked him if he ever heard of Angie’s List, the 12 foot gorilla of consumer sentiment sites. He never heard of it. If someone has “occupied the space” (to use a phrase from the Internet), you should face head-on how you will muscle into that space. This doesn’t mean that you should not proceed in the face of competition—far from it. Just be aware of who your competitors are and how you can be better.
Sales literature: Provide a brief description of your current literature, and insert copies of the brochures on the following pages or in an appendix. This is a good place to refer to your website for updates—and another reason to make sure your website is just that: up-to-date.
Fulfillment: Think of fulfillment as how you provide your service or product. Depending on what you are selling, fulfillment costs can be quite high, but this can be offset by purchasing UPS or Federal Express labels in bulk and charging the customer a reasonable shipping and handling fee.
Future services: Allow your marketing mind to go wild, and think about additional services you may bring to market. An insurance broker, for example, may think about providing fee-based risk management services. There is a food distributor in New York who has an extensive list of training courses for the food industry. He has turned his company into the regional food university. He charges for the courses and, more important, converts a lot of the attendees into customers.
Market analysis: What and who is the market for your goods and services? This is a critical part of your business plan. Spend some time here; you may come up with markets that you never thought of. Consider, for example, a young woman who opened an organic fresh foods deli. The reason she didn’t have a lot of competition is that selling fresh organic foods is very expensive, but she saw markets where a lesser mortal may have only seen high food costs. She supplies lunch services to large corporations and university meetings—people who love to feel that they are helping the environment and can afford her necessarily high prices. Can you see how the business plan is not just a place to write things but an actual tool for helping you create your business?
Market segmentation: An insurance broker may have thought her market was homeowners but, upon examination, realized that 60 percent came from businesses with a minimum of 20 employees. The first place to look is your market as it exists now. By looking at what you have and then imagining where you can go, you will come up with ideas about how you can target certain market segments. A dentist realized that a large part of his new practice might be children. He hooked up a VCR (this was a few years ago – today it would be a DVD player) in the waiting room and showed child-oriented dental health videos. The parents loved it, and they spread the word.
Market segment strategy: If you have identified your market segments, what is your plan to capitalize on that knowledge? Just as the dentist above, you can come up with all sorts of imaginative ways to strategize on market segmentation. There is a guy who immigrated to the United States from Brazil many years ago. He realized that Portuguese is not a commonly spoken language in America, especially Brazilian Portuguese. He has a successful limousine and tour business, catering strictly to Brazilian tourists and business people.
Market needs: What is your market missing? Come up with the answers to that question and combine it with your ability to provide it, and your business plan will be a success just from this module. The time-worn saying about the world beating a path to your door if you invent the better mousetrap couldn’t be truer. Your market might be missing something that exists, but should be better.
Market trends: Here you will need to do some research. You should not answer this question from your “gut feeling,” although the feeling in your gut often leads you to good research. Some people say that the way to spot market trends is simply to study what the late, great Steve Jobs did. But Steve Jobs was a rare force of nature—he didn’t spot trends, he made them. Read the business pages of newspapers, subscribe to good business magazines like Forbes or Inc., read your local business journals and attend trade shows. Keep in motion, and keep your eyes and ears open.
Market growth: You will learn about market growth during your research on market trends. A business plan is a place for you to think about the pressures outside the walls of you business. If you are in a very slow growing market or a stagnant one, you have some serious analysis ahead of you. When was the last time you saw a TV repair shop? A long time ago. Once, this was a thriving industry; but with the advent of printed circuit boards replacing vacuum tubes, the TV repair market and TV repair shops disappeared almost overnight. Look at some of the other things that were once all the rage and are now disappearing: fax machines (replaced with e-mail attachments or virtual fax services) and CD-ROMs, which were extremely popular a few years ago, just around the time that the Internet came into its own. We were amazed at the massive storage capacity of a typical CD-ROM: 650 megabytes. Now, a $15 flash drive can hold many gigabytes. If you believe the late Steve Jobs (and who doesn’t believe Steve Jobs), our storage needs in the future will be in “the Cloud,” not on a physical device.
Your business analysis: Here you’ll discuss yourspecific business, its prospects, and how it fits into the marketplace. It should be a clearly written narrative, explaining everything about the market and your business that you can think of. People often make the mistake of writing a business plan with befuddling jargon or stilted words. Clear writing is for everyone, including you when you refer back to your plan in the future. Would you rather read “We work within a demographic paradigm of differential age cohorts” or “Our market is spread over different age groups”?
Sales forecast: This will be presented in graphs, charts, or diagrams, accompanied by a text summary. Recall that very funny TV commercial for Federal Express where an assistant security checker calls his boss to look at the air traveler’s presentation portfolio. “He’s leading with sales figures,” yells the assistant, while the security supervisor says, “I’m bored” and then starts to snore. There is a lesson to be learned here: save the good stuff for last, including sales projections, to build a sense of suspense—assuming your plan is aimed at a potential financier. And, by all means, use color. Don’t exaggerate—and watch your credibility?
Strategic alliances: If you have them, this is the place to discuss them. Traditional shippers hook up with Internet powerhouses, grocers align with food distributers, and software developers pal around with business seminar groups. A strategic alliance can move your business forward much farther than its own resources alone. A strategic alliance is a classic win-win for all members of the alliance.
Milestones: What are the major milestones that you want to achieve? Some examples might include logo design, a commercial website, or a computer network setup. These milestones should be specific and should include budget numbers and estimated dates of completion. Some milestones must be reached before other things can happen. This is just plain common sense business planning. For example, you would not want to do a direct mail campaign before you have a well-functioning website to which you will refer in the direct mail pieces. “Coming soon” often means “We don’t have a lot of capital, so we’re trying to bootstrap it.” Don’t call attention to problems, and that’s why planning your milestones carefully is critical.
Management summary: This is a discussion of your management team, or yourself, if you are the team at present. Say as many good things about your key people as possible. If Melissa Jones, your finance manager, graduated from SUNY at Oneonta, that’s fine, but don’t leave out the fact that she graduated magna cum laude and won the finance medal.
Management team gaps: You need to carefully analyze what is missing from your team. Some personnel positions, such as IT, can be farmed out; but others, such as finance and accounting, might need to be employed managers. Here, you should also include a discussion of future plans for hiring managers.
Financial plan: Do you intend to finance future growth through cash flow, debt, or equity financing? You’ll want to include a textual review here accompanied by financials. The plan should show a projected income statement, cash flow forecast, and balance sheet. It might be helpful to break these out as separate main headings. Financial planning is a basic element of a good business plan.
Assumptions: Any future-looking financial plan is based on assumptions. You assume that you will sell X number of widgets or have X number of clients/customers paying you Y amount of dollars while you spend Z amount in expenses. These assumptions should all be in your plan. If you are working in an Excel spreadsheet, these assumptions should appear at the bottom or as comments in a data cell (comments are the little text bubbles that appears when you hover your mouse over the cell). Did you ever look at a financial statement entry and ask yourself, “What the hell does this mean?” In a business plan, you or anyone reading it, should never have to ask that question.
Breakeven analysis: This important part of your business plan shows, based on your assumptions, how much business you need to break even at a point in the future. If yours is an existing business, this may not be appropriate, unless you haven’t broken even yet. But in the hands of a competent spreadsheet designer, it can be exciting to show that you broke even two years ago and are now on a serious profit trajectory. If you are a start-up, knowing when you can expect to break even is a question of major importance. How much cash, your own or a bank’s or investor’s, will you “burn through” before the red ink turns black?
Ratios: You should discuss business ratios with your accountant, who should point you to resources for finding key ratios for your type of business or industry. This is something that any accountant should do as a matter of course but it is not always done. Ask for it. If he doesn’t provide it, ask for it louder. Understanding ratios is a good skill to develop. A seasoned financial person can breeze through a complex set of financials in short order because he or she knows what ratios to look for, since they are key indicators of the health of a business.
A Business Plan That isn’t Used is a Waste of Paper
Once your plan is completed, don’t file it away and forget it. You should refer to it constantly, perhaps weekly. Set a date in your appointment book to do just that.
Failing to plan is planning to fail. The first part of planning is to begin. How about now?
Parts of this article are excerpted from the forthcoming book The APT Principle: The Business Plan That You Carry in Your Head © 2012 by Russell F. Moran