But It Was Such A Great Idea!
Hey! That wasnít supposed to happen!
These, or words to this effect, are the famous last words of just about every small businessperson uttered just before locking the door of their failed venture for the last time.
We all know business failures sometimes canít be avoided. This is especially true in times like the depression and more recently in the real estate and oil & gas industries recessions.
As convenient as it may be to say luck wasnít on your side, sometimes itís just not true. Sometimes, the responsibility rests firmly in the hands of the business owner. Again, the entrepreneurís failure may be due to many causes, but we are going to explore just one cause this month Ė planning.
When we talk about planning, we arenít just talking about planning the grand opening. If that were all it took to have a successful business, tax collections from corporate profits would be so high, Congress would be able to fund every pork barrel project they want to and still have a budget surplus.
The planning we are talking about starts with deciding how much you really want to work for the worst boss you will ever have - you! If you still want to proceed, we now begin to lay plans for the day to day operations of your business then you must lay plans for the future of your business. This doesnít just entail guessing how much money you think you are going to make. It covers everything from investigating the market for your business to opening your business to designing a plan for future growth. It may even include planning when and how you will get out of the business. Now we are ready to discuss some of the key elements in a good business plan.
Description of the Business
The first section usually includes a description of the business, including whether it is an existing business or startup. What is your businessí purpose, other than to make you rich? What will it sell and how will it operate? Where will it operate? What are your mission and your goals? These questions should cause you to reflect on: ďWhere am I now, where do I want to go and how do I plan to get there?Ē The answer to these questions are just the starting point in your business plan, but they are key.
Market, Competition and Marketing Plan
If you plan on working for yourself, itís probably a good idea to have a product or service people want to buy. The market for ice is probably not very strong at the North Pole and space heaters most likely arenít in great demand in the tropics.
If you are going to ask for financing, the first thing a lender is going to ask is what are you going to sell and what makes you think anyone will want to buy it. You better have an answer, or you will probably be politely told your business is not needed.
So, how do you find out about the market for your product or service? Just ask. You ask everyone you can think of what they think about your product. You find any industry or trade groups and get any information they have. You look at how many competitors you will have and how busy they seem to be. If you are starting a business as a franchisee of a national company, you find other franchisees and ask them.
If, in the course of investigating the market, you find there is not much of a market, you quit. What if there is a large market, but there are so many competitors, or the cost of breaking into the market is so high you canít afford it? Better you should quit after spending a little time and money than after the bank takes your home and all your assets, including your childrenís education fund, to pay your tab.
If you find there is a market, then you need to know how to sell to that market. Do you go door to door or spend a ton on advertising? Will you sell from your home or an office or storefront? There are numerous similar questions, which must be addressed before committing your money and life to a new venture.
Regardless of the ultimate answer to all of these questions, the point is you need to have a plan. Then you have to stick with your plan until itís complete and itís time for a new plan, or it doesnít work and you have to try something new.
Operations and Personnel
If you are starting a business, you should have a fair idea of how you are going to run the business. That includes whether your are going to make or purchase the product to be sold, if it involves product, and who is going to do the work. Who is going to take care of all the financial records? Where will you get people? Are there enough people in your area to fulfill your staffing needs?
Financial Data and Budgeting
Budgets and projections are probably the most hated words in the businesspersonís vocabulary, next to taxes. They are also the most critical in establishing your business.
Each budget/projection spreadsheet should consist of the capital budget and the operating budget. While budgets tend to be directed more at a current operating year, projections tend to look forward over two to three years. For our purposes, both of these will be called budgets in this article.
The capital budget tells you how much you expect to spend on equipment and other long-lived assets. You can get a pretty good idea of how much furniture, equipment, and software are going to cost by calling potential suppliers.
Once you have that number firmly in mind, add 50% to 100% to it. There is this funny little guy running around named Murphy and his work ethics rival even the worst workaholic. He will certainly be on hand every step of the way to opening your business.
The operating budget is based on the rest of your income and expense. It includes what you expect sales to be, how much you expect your product or service to cost in terms of direct materials and labor; how much general and administrative expenses there will be and how much your going to pull out of the business in terms of salaries, dividends and any perks.
The first reason for a budget is simple. It will tell you whether or not you can expect to make money. Put another way, it is a first step in your breakeven analysis. What if there is a market for your new Supercomputer XL, but you have to sell 50 of them to breakeven and the market is only 10 and it will only grow to 25 in the future?
The operating budget can be a very good tool in a number of other ways. If it is poorly done, it will make great kindling for your fireplace. If it is properly done, it will help you evaluate how well the business is doing based on what you expected. A good budget may actually help you cut expenses by showing you where there may be waste. That is, if you use it. Many times, budgets are established and looked at only by the bankers and investors. Use the budgeted and actual financial data to help you make the most money you can.
We could spend hundreds of pages talking about business plans and how to prepare and present them. We donít want to put you to sleep, so we wonít do that here. While we have discussed only the most common purpose business plan, which is to start up a business, a business plan can be a very useful tool for a business already up and running. It can be particularly useful in times of transition or crisis, such as when it is time for a capital infusion, you are considering a major expansion or there is a down turn in the market.
Also, doing an objective evaluation like this with your personal finances might prove to be equally helpful. In either case, whether for your personal or professional life, a business plan might mean the difference between success and Ė well, not reaching your highest level of achievement. And, as we said before, we are often subject to forces beyond our control, every day in fact. But, when we do our part, fully, we can rest assured weíve done our part. The rest Ė well, we have no control over that.
For additional information, one source you can turn to is the U. S. Small Business Administration at http://www.sba.gov/starting/indexbusplans.html. Another truly great resource you have is this firm. We invite you to give us a call and let us help you with your business planning needs. Whether you are starting up a business or simply want to formalize plans for your current business, we can help you make the most out of your great ideas.