Your Own Business
How to write a Business Plan
The Business Plan Process
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The Business Planning Process
Many people think you do not need to plan, when you start a small business. The widely held idea is, let's just sell something and the rest will take care of itself. It is true, that you do not have to go into an elaborate process, if you start something small. But, you should remember, that the start of any venture will take time and other valuable resources, not least of all, some money. When you have lost your job, then these items become very important. And planning how you use your time and your money will not only be a survival strategy, but also be a key to your success.
When you start a business, you have to go about it in a deliberate and planned way, so that your venture and your efforts have a reasonable chance of success. Before you start a business plan or look for financing, you have to be clear in your own mind, what your business will be all about. "I want to make millions" is a good premise, but not a sufficient one to start a business. Here, therefore, are a few basic thoughts, from which you can expand your own thought process. They are not exhaustive, but, instead, a sort of "jogging your memory" catalyst, to put your on the right path.
Some Questions to Ask, before you start the Business Planning Process
The answers to some of these questions will determine which direction the business takes. Some ventures might be highly desirable, but, maybe, you lack the skills to pursue them. On the other hand, you might discover a skill you had that you never knew about. That is what this part of the process is trying to determine.
You can obviously lengthen the list with questions that are relevant to your particular circumstances. But, once you have a satisfactory answer to these questions, you can start to write or put together a business plan.
There are many commercial "systems" available for creating a business plan. What help you use, will depend on your own sophistication and understanding of the process. Some of the plan aids offered in the market, tend to be complicated, others simple and easy, but not less helpful.
The advantage of doing your own plan is that you know the intended business and how you want to operate and solve its problems best, even though, you might seek a second opinion.
Putting the Business Plan together
The Business Plan is a written Statement about the direction into which your business idea is taking you.Once you have completed it the plan has to give you a feeling about, whether you want to go ahead with your idea or postpone it.
You should also be able to give the plan to a trusted friend to check his understanding of what you are trying to do. He might see things you do not see and, he could be a source of valuable input. It is important though, that you trust him, because the last thing you want is that someone starts a business with your idea and your business plan. And, believe it or not, this has happened all too many times!
Goals of the Plan:
|The overall Goal of going through the Business Plan Process is to set the Strategies and to create a detailed Plan of Action for three to five years. Within that, you should have quarterly plans for the first, or even better, for the first two years.|
|You have to explicitly state the Objectives of the business and how you are going to achieve them.|
|You will have to set and identify the Priorities of the business.|
|You have to set specific and controllable Benchmarks at certain time intervals (first quarterly and then for the later years for each year), against which you measure your progress.|
In the first instance, the Business Plan is for yourself. It outlines and defines the benchmarks that you need to control your business performance. However, the plan can also be used for raising bank and equity finance or attracting new business partners.
You will have to be selective with the information, depending on who you write the Business Plan for.
One of the key issues you have to consider is to base your business plan on a conservative reality. Being too optimistic will cause your problems later. Visit and re-visit forecasts about sales and, especially, about cash flow. If a partner, bank or investor is also a recipient of your Business Plan and your forecasts are widely off the mark, you will lose all credibility.
|Include as much relevant business information as you can gather about your business idea.|
|Remember, it is a Strategic Plan, therefore, limit the details for your tactical and operational plans.|
|Make the plan concise, cut out wordiness and stick to the essentials!|
|Focus on the reader and what he needs to know|
|Put subsidiary information such as market data in an appendix|
|Make the Business Plan useable as a benchmark measure.|
The document has to look professional with covers, an executive summary, a contents page, relevant charts and product information. Be sure that the plan can be easily understood and if necessary, have it read by an outsider you can trust.
Define your products. This might not be easy. Especially, if your primary product is you and your inside knowledge of a specific industry, which you want to sell to clients as a consultant. But, you have to get a grasp at what exactly you sell to a client. If you cannot define it, neither will the client, and then, you are in trouble and your business idea will not go anywhere.
Some of the questions you want to ask and answer in the Business Plan are
|Describe and define your product or Products|
|State what makes your product different from others on offer in the marketplace.|
|Outline a product development path. Where do these products go, once you have entered the market place? How will you develop these products?|
Again stay within the realms of reality. Product development, for instance for consultant's products needs a lot of thought. The same applies to product differentiation.
Defining the market into which you sell, is an important issue. The market place might not be as homogeneous as you thought and, there may be different market segments, some of which you might never have thought about entering.
If you look at the market, try to divide it into definable segments and focus on which segments you want to go after. That is to say, to which people in the market place are you going to sell your products? Some of the important issues you have to consider are shown below:
|How large is the market and within that how much is your identified market segment?|
|How stable is the market for your products? How volatile is it?|
|What are the main characteristics that identify your market segment?|
|What are your initial growth prospects within this market? What kind of market share are you aiming at?|
You will also have to define your typical customer within the market segment. This is an important issue, since it will determine how you have to approach your customer. The questions you might ask, in this area are:
|What is the profile of the customer?|
|Are you approaching the customer directly or do you need distributors to do that?|
|Is the customer base highly concentrated or widely geographically dispersed?|
|Is your customers demand for your products a derived demand or do they determine the consumption or use of the product themselves?|
If you are going to sell indirectly, namely through distributors, you will have to investigate some of the following issues further:
|How are the other competitors in the market distributing the product versus your proposed course of action? Are they using agents or third parties to sell?|
|What are the distribution channels open to you and what are the relative costs of each method? Look at all sales and management costs directly related to the sales.|
|How will the end user perceive your distribution network and how will he identify you as the originator of the product, if you sell indirectly, through distribution channels? Is this important to the end user?|
|How will you promote your product sales? (agent, advertising, direct sales)|
|What is the size of the promotional budget you will you have?|
As part of your market assessment, you will have to characterize your competition. Even if you are not sure, you should at least give some thought who your competition could be. Some of the more obvious questions to ask would be:
|Who is offering competing products or services to the customers you have identified as your market segment?|
|What is their price/performance as seen from your potential customers?|
|Where are your product strengths and weaknesses when contrasted to your competitors?|
|What are your arguments to a customer to buy from you rather than from your competitor?|
The importance of pricing is related to where in the market you position yourself. Obviously, the price of a product is related to its costs of production. But it is also related to the market place and to the other operators within the market. Therefore the questions you have to ask yourself should be :
|Where in the market place is your product or service positioned? High quality, high price? Low quality, low price?|
|Is your product/service a specialized product with a clearly identifying feature? What are its unique features?|
|How are you going to present the special features of your product to the clients?|
|What is the price sensitivity of your product? (i.e. can you vary - increase/decrease- price within a certain range without much reaction from the clients). Investigate each product, you intend to sell!|
|Look at the margin sensitivity of each product. How much Gross Margin does it contribute?|
You may start your business venture on your own and you may prefer to work, for instance, as a single consultant. This has its advantages, but also has inherent risks.
|For instance, who would be covering for you, if you were involved in an accident or some serious illness, which could keep you longer than a few days from your work? Similarly, if you work as a single consultant, you have to sell your services and, at the same time, do the actual consulting work. Moreover, you should not forget that, as a business consultant, every time you complete a successful consultants' assignment, you might have to look for a new client, because the problem the old client called you in for, has been solved!|
You may, even as a one man consultant need a secretary or someone to "mind the shop", if you are out working. Therefore, you have to think quite hard about what your requirements will be, in the first year, and then thereafter.
If, on the other hand, your business venture will require more than yourself, you have to plan, what skills these other people bring to the venture and how you are going to manage them to get your best out of these people. Some of the questions you should answer would be:
|What skill do you bring to the table yourself? And how will you fill your own lack of skills in certain areas? (for instance accounting, advertising, sales)|
|For which jobs will you hire people and what skills will they need. What are the costs for these skills and what are the minimum weekly/monthly contribution will they have to make in order to break even.|
|How will you manage these people and what kind of incentives will you offer to maintain their motivation?|
|What are the industries remuneration levels (costs of employment, salaries, fringes) and can you afford them?|
Depending on what kind of operation you will have and, what kind of products you sell, or services you offer, your manpower plan will differ. You have to adjust the questions to the activities, you are going to pursue.
Depending on the size of your proposed operation, you will need access to facilities. This might mean that you occupy one room in your house, or maybe you need to rent office or warehousing space. In addition, you will, very likely, also have some equipment, even if it is only one computer and some business software, like Microsoft Office and Quickbooks for your accounts.
|Where are you operating from?|
|Does location matter? Is it just administrative or also production?|
|Do you have to make longer term financial commitments for the premises?|
|What equipment do you require?|
|What is your ability to expand at the proposed location? Does the proposed facility accommodate my planned business capacity?|
You most likely also need some sort of market or business information system. This might be quite simple, or could be elaborate. The important issue here, in the context of the Business Plan, is that you recognize the need and quantify the effort. The questions you would probably ask and, to which you need answers, are:
|How do you get Market and Business Information? How reliable is it?|
|How do you store and handle such information?|
|What effort do you have to make to keep such information up to date. (manpower and /or technology requirement?)|
|How do I maintain information on operational issues? (e.g. are you required to keep logs? If so, for how long?)|
|How is my ability to operate linked to the business information I have to get?|
Now, at this stage, everything you propose in your business plan, has to be translated into numbers. There will be three aspects of this financial planning:
The first one will refer to your operations, what you sell at what price, how much it costs to produce, how much your operation costs, etc. While the second part will explain how you intend to finance those operations. This first part, is forecasting the Profit and Loss Account, the second one, is forecasting your Balance Sheet. The Cash flow is the part that binds the two together.
|Project your sales by Product and by Month for the first two years and by quarter for the remaining three years of your Plan.|
|Project your direct costs for each Product on the same basis.|
|Project all your management costs, general marketing costs, general overheads that you cannot allocate directly to a Product, on the same basis.|
|State your Interest and Overdraft Cost as well as your Tax estimates (best guess)|
Once you have done that, you should end up with a Statement that looks about like the one below: (for simplicity and lack of space, we are showing this by Quarter only, though you have to produce it at least for the first year by month)
|Item||Quarter 1||Q2||Q3||Q4||Total for Year|
|Total Sales (A)||20||30||30||30||110|
|Total Direct Costs (B)||10||12||13||13||48|
|Gross Margin (C)=(A-B)||10||18||17||17||62|
|Marketing and Promotion Costs||2||2||2||2||8|
|Rent and Utilities||1||1||1||1||4|
|Salaries (Not allocable to direct Product Costs)||4||4||4||4||16|
|Any Other Costs (Contingency)||2||3||3||3||11|
|Total Indirect Expenses (D)||9||10||10||10||39|
|Profit (Earnings) before Interest and Taxes (EBIT) (E)=(C-D)||1||8||7||7||23|
|Interest and Overdraft
|Profit after Tax (I)=(E-(F+G+H))||0||4||5||2||11|
This is clearly greatly simplified. For Sales you have to show where, at least for the first year, the sales come from by product, if you have multiple products. The key to successful planning is: BE CONSERVATIVE in your sales revenue estimates. Similarly do not underestimate costs. You can put a contingency line on costs, where you put what in your estimation are cost variations or risks. Put as much detail into the early quarters of these projections as possible.
Forecasting the Balance Sheet and your Financing Requirement is a little bit more difficult, but should not pose a problem either. Here are some instructions on the Asset table below.
|Cash||This part is quite simple: Assume you start off with zero cash in your company.|
|Accounts receivable||These can be calculated: Assume you invoice goods and services with a 30 ( or 10 or 15, as the case maybe) day payment period, i.e. clients pay you 30 days after you have dated your invoice.You have projected what your annual income is. So you divide that by 12 (for 30 days) and that is what goes into accounts receivable. This makes the assumption that you have a more or less even flow of revenue every month. If you know, you have considerable fluctuations, you might have to adjust every months, based on the fluctuations.|
|Inventory||equals the purchase value (including any shipping charges ) of the goods you keep in stock for resale. Obviously, if you are a consultant, you will not have any inventory at all.|
|Work in Progress||is a form of inventory. If you have a manufacturing company, this will include items of an order that is in the process of production, but has not been completed and therefore cannot be invoiced to a client.|
|Total Current Assets||These are the sum of the above.|
|Fixed Assets||are all the capital items that you buy to conduct your business with and which have a life of more than three years, such as computers, office furniture, copiers, printers, software, the company car, if you need one. Put the estimated purchase value into fixed assets.|
|Depreciation||is the annual amount by which you use up these assets. For simplicity, use straight line depreciation over 5 years. In other words, divide the value of the fixed assets by five and take of the 20% depreciation from that value each year. Tax rules might allow you to take off more, but here, you are not concerned with that.|
|Net Fixed Assets||These are the fixed assets less depreciation|
The sum of the above will give you your Total Assets. That is the amount, you will have to finance in order to run your business.
|Work in Progress||5||5||5|
|Total Current Assets (K)||9||30||30||30|
|Long Term Assets|
|Fixed Assets (Computers, Furniture, Cars, Lease Hold Improvements)||5||15||15||15|
|Net Fixed Assets||5||13||13||11|
|Other Assets (if any)||-||-||-||-|
The Assets are financed with Liabilities. The Liabilities include everything from what your business owes to other banks, employees or suppliers or other businesses, including your own investment into the company, the shareholders equity. Remember, the company is an independent legal person from yourself, the owner. Hence, your shares are what the company owes to you. Here are some instructions on the Liability table below.
|Bank Overdraft||is what you owe to the bank on your current or checking account. For the Financing stage, this should be left at zero.|
|Accounts Payable||is the amount that you have bought from suppliers, but not yet paid. Your open invoices from suppliers.|
|Current Taxes||is what you owe to the IRS or the State, County and Municipality in Taxes. Since they are current, they are due within this business year.|
|Provisions and Contingencies||You might know that the business you are in, has a high client default rate, i.e. people do not pay their bills, or, maybe, it has a high loss rate of specific goods. The item should be related to sales revenue and should vary with that.You might want to provide for that, even at the planning stage.|
|Other||This might include items, money your business owes to someone else, specific to your business. Though, at the planning stage you should always be able to identify, why you owe that and to whom.|
|Total Current Liabilities||is the sum of the above|
|Share Capital||is the amount you paid into the company, your investment.|
|Retained Earnings||This is the Profit, the amount of money your sales made after all the costs, including tax deductions (which will go into Current Taxes).|
|Total Share Capital||is the sum of the Share Capital and the Retained Earnings.|
|Loans||is for the longer term borrowings from a bank or anyone else. For the Financing Plan this should be left at zero, unless you have already agreed a loan.|
|Financing Requirement||This is the amount you want to determine: How much financing does my business operation need. You add Total Current Liabilities Plus Total Share Capital and deduct that from Total Assets. If that figure is positive, then you have a financing requirement, if the figure is negative, then your business creates more funds than it uses. This may change from quarter to quarter.|
|Total Liabilities||you enter here, for planning purposes, the same amount as in Total Assets.|
|Provisions & Contingencies||-||1||2||2|
|Total Current Liabilities (L)||4||6||7||8|
|Long Term Liabilities, Equity and Financing Requirement|
|Retained Earnings (Cumulative)||0||4||9||11|
|Total Share Capital||5||9||14||16|
|Loans (already agreed)||0||0||0||0|
The whole purpose of this Balance Sheet planning is, to find out how much financing your business venture requires. Once you have determined that, you can then decide, whether you want to cover your financing requirement with additional share capital, with loans that you negotiate with a bank or a private investor, with bank overdrafts or a combination of all three of those.
What you will use to finance your business venture will depend on the costs of your credit or its availability.
|Additional Share Capital||0||0||0||0|
|Loans or Revolving Credit Line||18||18||18|
|Total Financing Requirement||5||28||22||27|
Other considerations might be how long you will project a need for financing. If you have a long term need, you might want to increase the share capital. If it is only temporary, use a loan or the bank overdraft if that is available to you.
If you start a more complicated business, you have to produce a Funds Flow Statement for your financing needs. To explain this here, would be going too far for the production of a simple business plan.
|However, we have given you some
reference books that are easy to use and do not
require specialist accountants knowledge.
Performance ratios are a way to compare your business with industry standards. They also tell you certain risks about the business when the ratios move outside some predetermined range. That range depends on many issues, not least on your own and the industries, investors or your banks perception.
The same applies to the level of acceptable working capital. Here are some instructions for the table below:
|Working Capital||This is Total Current Assets less Current Liabilities. The figure provides a measure of risk related to how much financing you generate from current operations to cover current operations|
|Weeks of Inventory you hold||You take the level (amount) of inventory you hold in the quarter or month, divide it by the Total Direct Costs for the whole year sales and multiply this by 52 (the number of weeks in a year). This gives a good guide. If you have large quarterly variations in inventory, you might want to use quarterly, rather than annualized figures. Sometimes people use a measure called inventory turnover, i.e. how often the inventory turns over (is sold) in a given time period, e.g. a quarter or a year. Both methods measure the same.|
|Accounts Receivable Period in Days||The level of Accounts Receivable held at the end of the quarter divided by the Sales made in this quarter, times 91 (the number of days in the quarter) will give you the number of days that you have outstanding Accounts Receivables. Remember, the faster you can collect from your clients the less financing you require.|
|Accounts Payable Period in Days||The level of Accounts Payable at the end of the Quarter, divided by the amount of quarterly Direct Costs plus Indirect Expenses times 91 (the number of days in the quarter). This will give you the number of days you have outstanding Accounts Payable.|
|Debt to Equity Ratio||This shows you how much debt you carry in relation to your shareholders equity (share capital plus retained earnings). The bank wants to know that, since it is a sign of how large your own financial engagement in the venture is, relative to others, themselves included, if they give you a loan or overdraft.|
|Working Capital (K-L)||5||24||23||12|
|Weeks of Inventory you hold||3.25||10.83||10.83||10.83|
|Accounts Receivable Period in Days Outstanding||27.3||30.3||30.3||30.3|
|Accounts Payable Period in Days unpaid||19.2||16.5||15.8||15.8|
|Debt to Equity Ratio||1:1||3.1:1||1.57:1||1.68:1|
Our sample company could for instance increase the number of days it leaves bills unpaid and through that lower its financing needs. That all depends on the financial arrangements, it can make with its suppliers (e.g. net 30 rather than net 15 payment terms).
Once you are at this point, it will be a good idea to make a summary of your overall business ventures strength's and weaknesses. You should already have done that for each product, you intend to sell. List, say, the first and most important five or ten items.
|The Strengths||The Weaknesses|
|I bring unique knowledge to the venture. I am well known in the industry.||I have to do the Selling and the Product Implementation (or Consultant's work)|
|We operate in a small niche market, almost without competition and difficult to enter.||The industry is at the end of its life cycle and has a life expectancy of about ten years left|
|We have low costs (working out of a home office)||Several potential clients have financial difficulties and are therefore high credit risks|
|The venture has limited sensitivity to prevailing economic conditions.||I have limited own funding.|
|There is significant potential in a number of countries that relied on my expertise.||The high costs of travelling to those overseas countries and acquiring the clients.|
There are, obviously, a number of strengths and weaknesses tests you should do, whilst you are putting this plan together. This is something like the "final sanity test". The importance here is, you have to look at things impationately. You might be the best in the business, but do other people perceive you like that? Are clients willing to invest further in an area that appears to be a dying industry? Questions like these, and others, have to be answered honestly. If necessary, have a friend look over it and ask some questions! He might have the necessary distance to the issues.
Once you have started your venture, or maybe even before you start it, you want to know where the future lies. You might have only ten years of your working life left and then you are happy if your venture carries you over that period and into happy and financially secure retirement. But, you might also be in your mid 30's and have, literally, another 35 years to go, before you can even think of retirement. Then, the stakes are different.
If you are going to start a business venture with a long term future, then you want to look at issues of long term growth that might range from products, customers and markets to how to secure the right human resources to run and manage your business. It is likely that you then have to clarify long term goals and strategies, so that your business will survive changing market and technology conditions.
But for a start, you will have more than enough to do, to clarify the "here and now" conditions, to put your idea on its feet and create a business foundation from which you can work and, not least, which makes you the money to survive.
And, finally, some books that might help you better understand what you are doing! You might think, you should have read some of these books, before you started the business plan, we thought it was better, and more educational for you, to do this afterwards!
|Some Books from amazon.com|
We wish you the best of luck and if you have any comments or suggestions, write to this e-mail
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