PART II - Do You Need A Business Plan ?
OK, you have created your Life Plan and know what is truly important to you. Your life plan details where you will be going, and how you plan to get there. You have mapped out what makes you happy, "rich", and content, today. You have mapped out what will make you happy, "rich", and content tomorrow. You have decided that no matter how successful your business becomes it will not change the person you are. You have decided that should your business not succeed, it will not change the person you are.
You understand the challenges, the risks, and the rewards. And your conclusion is by God, “I am an entrepreneur, and I am committed to becoming the mother, father, sister, brother and of course rich uncle to my idea for a business. Notice I said idea. You are not in business yet, but congratulations, you are on your way to being an entrepreneur. Remember our story on Dorothy and the Land of OZ, if she only had a PLAN - Remember, the Lion wanted COURAGE, the Scarecrow a BRAIN the Tin Man, a HEART - You already have those 3 ( Brain, Courage and Heart ) otherwise; you would never even consider starting your own business. It is the PLAN the alludes you, "do I need one"!
Most people face this cross road. If you are reading this and have considered or started a business, I will bet you have asked yourselt that exact question!
The question the Ad Marketing Guy is most often asked is. . . “I am starting a business, do I need a business plan”; and the next most often asked question, “Why”?
To Plan or Not to Plan, that is the question
Whether it is smart in one’s mind to suffer
The slings and arrows of outrageous fortune,
Or to create a business plan and avoid a sea of unknown trouble
by NOT planning? To DIE: to SLEEP
No more; and by a sleep I say the end of your business.
With the Ad Marketing Guy's apologies to William Shakespeare I think you may NOW have the answer.
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The real question people should ask is how detailed a Business Plan (BP) do I require before going into business. What BP do I require after I am in business. The answer; how complicated is your idea, your product, your market. Next, important question, how do you plan on financing your business, and how will you use these finances. What does your business require to make it through your first two years. Reality is no small business should ever plan beyond 2 years, unless you are seeking outside venture capital, and then only if that capital will not be paid back in 2 years. I will talk more about that in a later. So lets begin,
Planning Your Business
You have considered and dreamed of going into business for yourself, you've already engaged in some degree of business planning. Most likely your planning was intertwined with your thoughts about the personal issues that accompany a decision to start your own business.
In its most general sense, business planning is all about taking your dream and turning it into reality. A business plan is the document you create when you take an idea for a commercial endeavor and work through all the factors that will have an impact on the successful startup, operation, and management of your business. You should plan, not because your accountant or business advisors tell you to, but because you understand that it increases your chances for success. Sure, there are successful businesses whose owners fly by the seat of their pants and never create a written plan. But they succeeded despite the lack of a formal plan, not because of it. How much better might they have done had their good ideas been coupled with some solid planning? Those who have decided to embark on a new enterprise have probably already taken some steps, however informal, to confirm the viability of the new business. Creating a written plan is the next logical step in that process. For example, a business plan can be the vehicle that carries your new idea from the conceptual and planning phase down the road to the building and operational phases. Or, it may help to establish your business's credentials for purposes of obtaining bank financing or investment by future partners. A plan for an existing business may just deal with a single aspect of your business, such as a new product introduction and its impact on financial management and other ongoing operational issues.
What Can a Business Plan Do for You?
Many people think that the only reason to develop a business plan is to convince potential lenders or investors to provide financial backing. This view is a little short-sighted, however. A well-developed plan can serve as one of your most important management tools. A good plan will provide a blueprint and step-by-step instructions on how to translate your idea into a profitably marketed service or product.
Remember that no two business plans will look alike, nor should they! There are a number of key considerations that will play an important role in shaping the content. These considerations include whether you're writing the first plan for a new business or business opportunity, or a plan that updates or supersedes an already existing plan. Obviously, your business's position in the life cycle will have a significant impact on the type of planning that's needed. An ongoing business might require a plan that relates primarily to a new market that it wants to enter, or a new product that it wants to introduce
Benefits of a Written Plan
Everyone who opens his or her own business has a plan, however informal. The camera store clerk who decides to open a photographic studio may not have a formal, written plan outlining the steps to be taken. Hopefully, however, at some level she has organized the relevant information, performed her own analysis of the market, and decided that she can make a living by starting out on her own. Perhaps she has been moonlighting by photographing weddings and other special occasions, and the demand for her professional services seems sufficient to support her without the camera store job.
What steps did she take to reach that decision? Hopefully, at a minimum, she sat down and tried to compile a list of what it would mean to leave a salaried position and take on a free-lance career. At the top of the list would be a comparison of the net income from free-lancing to the net salary. That would involve estimating the number of jobs she could reasonably expect, the cost to provide the required services, and the prices she could charge. The irregular timing of payments versus a steady income might present personal cash flow problems. The availability and cost of benefits would also rank high. So would all the intangible factors that differentiate self-employment from employee status.
However, even if our hypothetical camera store clerk had a well-thought out plan entirely in her head, at some point she will need to communicate it to others, such as suppliers, professional advisors, and perhaps a banker from whom she wants to obtain a line of credit. Having a written plan is an essential communication tool, since it's not practical to explain your operations in person each time someone needs to know who you are. Moreover, the odds are that our budding entrepreneur has not thought out every significant aspect of her future business. Going through the process of creating a written plan can help her to be sure she hasn't missed any significant factors that can cause her fledgling business to do a quick nose-dive.
If you're just starting out in business, a written business plan can help you organize all the pieces that will have to come together to make your business a success. A business hoping to expand its operations in some way can achieve the same benefits. A well-established business trying to grow out of a business-as-usual rut can use a plan as a modeling tool to examine various options before committing to one.
Many small business owners feel that they can keep track of everything without the need to write it down. A written plan, after all, is really just the embodiment of the internal planning that every business owner does anyway. However, the structure a written plan provides makes it more likely that you will consider all relevant factors and that nothing important slips through the cracks.
What justifies the additional time and energy you'll spend creating a written plan that presents a blueprint of your business idea? An increased chance for success. More specifically, a plan can be:
- a reality check when you first examine the feasibility of your business idea, which forces you to consider all relevant factors
- your business's resume, which will be vital in dealing with lenders and outside investors, and an important tool in negotiating with vendors and attracting employees
- a timetable for operations, helping you to coordinate all the diverse activities that go into running your own business
- a modeling tool that helps you evaluate the variable factors that affect your business, so you can better prepare to deal with situations that may arise as conditions change
- a vehicle for tracking the progress of your business
- a blueprint against which you can adjust operations in order to achieve your goals
- a starting point for future planning
Reality Check
When you come up with an idea for your business, how do you go about assessing whether it is a good idea? How do you convince yourself (and others) that you can make money exploiting the idea? A written business plan is one way to evaluate an idea before you commit to pursuing it. The process of creating the plan can reveal factors that you might otherwise not consider. And that can save you big money.
Some years back, before there were a dozen gourmet coffee shops in every town, most people bought coffee in the grocery store. There were a few specialty stores that roasted and sold their own beans, and a couple of mail order firms that sold rather expensive whole bean coffee. Customers paid a tremendous premium in exchange for the freshness that comes from grinding the beans just before brewing the coffee. But people were willing to indulge themselves for a few extra dollars a pound. The cost per cup just wasn't that high.
An entrepreneur friend of ours saw an opportunity to bridge the gap between the specialty shops, which purchased the beans green and roasted them, and the supermarkets, which mostly carried canned coffee. He took a chance, borrowed some money, and opened a coffee store. He found a mail order source that would sell to him cheaply enough so that he could compete against the few local specialty shops that existed. As time went on, he found a local roaster that didn't operate a competing retail outlet, and he was able to reduce his cost while maintaining or increasing the quality of the product.
Even though sales volume slowly increased and his profit margin rose as he reduced costs, it seemed like he could never make ends meet. He restocked coffee only as his bins were depleted, added teas, spices, and brewing equipment, but never really hit big, as he had hoped. Sales growth slowly declined as more competitors arose. When the bigger chains entered his Midwestern market, the game was over. He couldn't hope to compete with Gloria Jean's or Starbuck's. The business slowly ground to a halt, superseded by the larger mass marketers.
What went wrong? It would be easy to say that he failed because of the unanticipated entry of new competitors into the market. But that was really just a symptom of the failure to plan. When he opened his first store, he knew what coffee cost, he knew what his fixed expenses were, and he set prices that let him cover expenses plus generate a small living wage. But he didn't go any farther.
He had no plan that tied advertising to specific sales targets. When business was slow, his creditors and suppliers were paid late. And the big chains were already swiftly expanding across the country, even though they hadn't reached his market yet. A little research, a little planning, and he would have realized that it wouldn't be long until the big chains were a force in his market. He also would have seen the nature of the market shift, with customers expecting to purchase fresh-brewed coffee in addition to whole beans. He had correctly identified a niche, but failed to follow through with the planning that would have revealed the strengths and weaknesses of his plan.
In retrospect, this entrepreneur often bemoaned the fact that he could have positioned the business in such a way that the big chains, rather than ignoring him, would have bought him out. Perhaps he could have. Had he kept closer tabs on trends in the industry, he would have realized that the competition wasn't just selling beans anymore. They were opening early to offer commuters fresh morning coffee and bakery goods.
What is certain is that his decision to fly by the seat of his pants, without benefit of a plan, cost him dearly. It was easy to dismiss the existing competition, and he overlooked the new competitors who were already making inroads into "his" market. The failure to anticipate new entrants into the market, the failure to consider what kind of sales volume levels were required to grow the business, and the failure to establish realistic measures by which to judge his success were fatal to the business. He operated his business reactively: adjusting as best he could to the changing market.
Moral of the story: if he had taken the time to create a written well thought out, and researched business plan, he would have had the opportunity to more closely examine some of the assumptions he made when he started out. He would have had the opportunity to make continual prudent decisions about his business.
Do you need a Business Plan? . . . You Can Bet Your Life That You Do!
Next in this series . . . A Simple BP Outline including Your Marketing Plan!
