A business plan is your map to the money. It tells you where you’re going to get it and how much of it you’re going to be able to keep. And just like any map, the more detail the plan has, the easier it makes it to get to your destination.
Do you need a business plan? Would you hire someone to remodel your kitchen who didn’t have a set of blueprints? I’m sure you wouldn’t think of it. So why run a business without a plan? Unfortunately, it happens all the time, which may be the reason well over 500,000 businesses fail every year.
Most of the small business owners I deal with really know their craft. They know what materials to use, which vendors offer the best terms, which customer is most likely to complain, and so on. They’re also pretty good business people. They understand controlling expenses, tracking labor and material, and pricing their product to make a profit. They work hard and are justifiably proud of the results.
Their business plans, though, all too often sound like “If I build it, they will come.” That may work in the movies, but it stands as much chance for success as a plan to install a tonneau cover that doesn’t include the model number of the truck.
If you expect to run a profitable business, you need a business plan for many of the same reasons you need a plan to remodel a house. It helps you focus on the important factors that contribute to success. It helps you make key decisions on everything from the types of work you look for to the number of employees (if any) that you hire. A sound business plan is also an absolute must if you are looking for capital, whether it be from investors, banks, or even suppliers.
A concrete business plan identifies the customers, quantifies the sales they will produce, and analyzes how profitable those sales will be. It’s like a job estimate that begins at the end of the process (the sale to the customer) and works backward. It helps you determine how much material to order and how much labor to plan on, project the costs, and figure out whether the job will be profitable at the price quoted. Only, instead of doing it on a job-by-job basis like an estimate, the business plan does it for your company as a whole over a period of time.
A business plan isn’t really about what kind of work you’re going to do or how much shop space you need. Those are elements of it, but they are so minor that they’re almost footnotes. There are five basic components:
1. Business Description – A short statement about why the business exists and what it hopes to accomplish. Generally, the more specific—and shorter—the better.
2. Marketing Plan – Answers the questions about how the business will be successful. Who is going to buy the product or service? Why? What need does it satisfy? How many potential customers for it are there? How often will they buy? What are their competitive alternatives? What price will they pay? How will they know about it? How will you get it to them?
3. Financial Plan – Shows the expected financial results of the marketing plan. How much income will be produced? What net worth will be generated? Who will receive that income (you or the bank)?
4. Cash Flow Plan – The step-by-step instructions for generating cash and keeping it. How will the working assets be acquired? When will operating cash be needed? How soon will profits appear? What happens until then?
5. Management Plan – Describes the shop owner or manager’s role in the business. Who will do what? What are their qualifications? How much training expense and time is required? How much time will be devoted to production, marketing, and administration? It also includes contingency plans for events like natural disasters, up- and downturns in the economy, and competitive changes.
This very brief description of each component is not at all complete but it should give you a flavor of what kind of information, hard data, guesstimates, and reasoning go into the business plan. Most of all, a good business plan needs to be grounded in reality, not wishes. I like to say that it should produce an optimistic outlook based on pessimistic expectations.
Preparing a good plan doesn’t happen over a lunch hour. It requires research and thought. Sound business plans can come in many forms, but they all have one thing in common: they are in writing. Whether you use one of the many good software packages available or fill up a loose-leaf binder with pencil-written notes, the act of writing it down forces you to give your plan the time and thought it deserves.
Dave Donelson distills the experiences of hundreds of entrepreneurs into practical advice for small business owners and managers in the Dynamic Manager's Guides, a series of how-to books about marketing and advertising, sales techniques, motivating personnel, financial management, and business strategy.