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Stick to the Plan
A written road map can help your business start off strong and stay that way.
By Mark Hendricks
Writing a business plan is one of the first steps you should take toward startup—well before you launch your business. “A lot of businesses fail to write a business plan at all until they get in a jam,” says Linda Pinson, author of Anatomy of a Business Plan: A Step-by-Step Guide to Building a Business and Securing Your Company’s Future. “They need money or a strategic partner. They come across a requirement for [which they need] business planning, and all of a sudden they’re panicked.”
A business plan will serve as your guide to decision making during the life of your business, beginning with the question of whether to start in the first place. The second use of a plan is to satisfy lenders and investors, virtually all of whom will require a written business plan before approving a loan or making an equity investment. Plans also serve as a means of communicating with potential partners, allies, vendors, employees and even customers.
1. Before putting pen to paper, research resources and tools that can help. Books and software programs can automate the task. You can get live help from your local SBA office or Small Business Development Center, college and university classes, and private courses or conferences. Unless you have a big budget, you probably shouldn’t plan to farm the entire job out to a consultant: “Good consultants run anywhere from $300 an hour down, and generally, the quality of the services is commensurate with the fee,” says Pinson, adding that having a consultant craft a good plan will run you $5,000 to $10,000.
2. Back up your concepts with numbers. Keep in mind, a business plan is both qualitative and quantitative. “[Creating] a business plan is not just writing about what your vision of your business is,” Pinson says. “It’s interpreting it in financial terms that you can measure.” That means you’ll need some numbers—as precise and accurate as possible—in addition to verbal descriptions of your plans.
Start by writing the conceptual part, then move to the financial part. “Interpret those concepts in terms of dollars,” says Pinson. For instance, starting with an idea of how frequently you’ll advertise, how large the ad will be and where it will run, you can find out your total costs. This will give you a number to plug in for advertising costs. Says Pinson, “The conceptual or text part of your plan has no validity without the financial part.”
3. Be realistic when making projections. “One of the most frequent errors made when writing a business plan is overestimating revenue and underestimating expenses,” Pinson says. Improve revenue estimates by narrowing your target market down to a realistic niche, then interpret revenue and expenses in terms of that market, Pinson advises. Start by identifying potential customers, then slice off those who aren’t ready to buy, can’t be marketed to effectively, can’t afford your solution or don’t consider it a need.
4. At minimum, include monthly cash-flow projections for the first year. “Cash flow is the critical issue,” Pinson says. Also, prepare an overall projection of profit and loss for three years, as well as a projected balance sheet. Calculate the break-even point, at which sales will cover costs. Research financial ratios specific to your industry, and look at published industry-specific ratios to make sure your assumptions are realistic. Says Pinson, “If grocers make a one-half-percent profit and you’re [projecting your] grocery store [will have] a 28 percent profit, you’d probably better rethink your projections.”
5. Pay special attention to marketing. First, develop goals. Second, do a market analysis, including identifying target markets, researching competition and assessing market trends. Then prepare a marketing strategy, including your approaches to sales, promotions, advertising, PR, networking, community building, customer service and other marketing channels and tools. Develop a plan to implement that marketing strategy, and include benchmarks to see if what you planned actually happened.
Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.