There is a saying, “People do not plan to fail, they fail to plan.” This is quite true, especially in business. You need to have a plan in order to know how you are going to direct your business. Additionally, a business plan will facilitate obtaining financing for your startup company. This chapter will review the items that should be included in your business plan. Taking the time to form a business plan early in your venture will help determine if the project can be profitable. It will help you narrow and focus what your business is and what it will do. The plan can also help you find out who your customers are and how to best reach them. Let’s take a look at the business plan, in sections.
Your business plan should include a one- or two-page summary that outlines the highlights of your plan. This is known as an executive summary and should be done once you have completed the following items. The summary will set the tone for your investors and financers. Investors may decide to buy into the project if they understand it in a short, concise manner. Your banker has many other documents to review, but a good executive summary will help her make a decision quickly.
The first section of your business plan should explain what your business does or will do and creating it will help you define its purpose for yourself. Once you know this, you need to state it in a clear and concise manner. This section will be your first opportunity to sell your idea to the bank and investors.
What’s Your History?
If you have an existing business or if you started your business on a part-time basis without a business plan, you will want to add a section that provides a history of the business. Your track record can be detailed here, showing your banker or your investors that your business is successful and will continue to be successful in the future.
Provide the ownership information so that the bank and investors know with whom they are dealing. This information should include the names of the principal owners, their titles, and percentages of ownership. If your group is seeking financing, the bank will likely want to get personal guarantees from each owner. Typically, a business will not be extended credit on its own unless it is publicly traded, and in light of the Enron and WorldCom scandals, I’m certain that financing companies will further tighten their lending policies. Investors will want to know how many shares are outstanding, so that they know what percentage of ownership they will have after buying into the business, either by buying new shares from the company or existing shares from another owner. An investor will want to know or be assured that his interest will not be diluted. In other words, he doesn’t want to buy twenty-five percent today and have the company sell stock to another shareholder, causing his twenty-five percent to be reduced to twenty or even ten percent, instead.
Goals of the Business
Now it’s time to lay out the goals of the business. Up to this point, we have given the history or description of the business. We have stated who we are and where we have been. Now we need to state where we are going. Where will the business be in one year, five years, ten years, etc.? These goals are not just about how much money the company should be making, but also what its place in the market will be and what its market share will likely be.
It is important to define the scope of your business and to specifically define its target market. This will help you focus your attention toward the best customer group. Realistically, a business will not be able to reach all possible customers; therefore, developing a niche will help increase its profitability. What is the geographic scope of your client market? Will it be within your city, county, state, country? Or will it be global, which is possible with the Internet? What are the trends for this market? Are the customers purchasing locally or are they going online for their purchases? Is the industry expanding in sales and customers or is it contracting? Are there more customers purchasing fewer products or services, or do few customers purchase many products and services? Knowing market trends is extremely important when analyzing any business venture. Why is the customer going to purchase your products and services over those of your competition? This section involves the description of your company’s products and/or services and their advantages over those of your competition. Do you have a price or quality advantage? Does the customer see this quality as desirable? Are you going to provide additional services along with your product? Is your product an improvement over the competition’s? Will you be charging less for your product or service? What are the strengths of your business over the competition’s? This analysis will help you determine a way to attract customers to your company. You need to know who your competition is. Specifically, you need to know your competition by name, location, size, and market share. This analysis will give you a global view of the marketplace. You will know whom you are up against and how strong they are. Whom will you need to beat in competition for customers? Is there a major player who has the bulk of the market share, or are there several small companies with small market shares? You can use this information to determine your strategy to try to take market share or to set yourself apart and develop a niche in the overall market. Just as it’s important to be aware of your business’s strengths and advantages, it is important to know its weaknesses and disadvantages. With knowledge of your weaknesses and disadvantages, you can prepare to handle the times that trigger them.
Marketing is the next area to cover in your business plan. Marketing is much more than just advertising. How will customers know about your product or service? How will they know they can get it from you? The price of your product or service must be such that you meet your goals. If you are providing high-end services or products, you need to have an appropriate price for that target customer. The customer may not make many of these high-end purchases, but the profit margin per unit will be higher. For volume services or products, it’s more appropriate to have lower prices. While this may result in a lower per-unit profit, the volume will make the operation profitable. There are infinite variables between these extremes. The place that the services are performed, or the products are made available is also important. Does the product or service need a retail outlet, or can it be handled via the Internet? Products tend to be more easily translated to the Internet or online sales. However, the clever entrepreneur may find a way to provide services online too. It’s important to anticipate the demand for the product or service. You need to have a supply of the product or the capacity to provide the services. You may recall years ago when Gillette introduced the Sensor razor in its Super Bowl advertisement. The commercial was extremely successful. In fact, you might say too successful. The product was sold out by the following Monday and it was weeks before more product was available for sale. It’s also important to establish a strategy for marketing your product. It’s beyond the scope of this book to tell you how to market your product or service; however, as stated earlier, people don’t plan to fail, they fail to plan. Having the marketing plan in place from the beginning will help guide you to get your product out successfully. A key to success for any business, large or small, is the management team. You may have noticed that certain publicly traded companies’ stock prices increase or decrease based on who the new chief executive officer is. As I have said before, business is a team effort. Even if you’re the only manager, it’s important to be aware of the different responsibilities involved in the company’s management. It’s important to have a leader to guide the business. The company’s finances must be maintained and monitored by someone. This may be done by a bookkeeper, an accountant, or a CPA. The financial responsibilities range from receiving payments, making deposits, paying bills, and keeping track of cash flow. This is the lifeblood of any business. The marketing plan needs someone to ensure it is carried out. There may be additional managerial responsibilities depending on the individual business. These different management responsibilities should be assigned based on the legal structure of the entity and this structure should be determined early on. The legal structure was discussed earlier in this book. Again, the financial area of the business is its lifeblood. Financial requirements, which may include startup costs, cash for at least the first year, and additional expenses specific to the business, must be determined. If the business has been in existence, a review of its financial history is important. Prior-year financial statements and projected financial statements are likewise significant for the business plan. These financial statements should include income statements, balance sheets, and cash flow statements. To round out the plan, supporting documents should be included. These documents include sales agreements, contracts with customers, lease and purchase agreements, insurance documents, and others.
Aside from the business plan, it’s important to develop business objectives and a mission statement. Large corporations have these. If you want to have a business that is big and will increase your wealth, you need to put the company’s guiding principles in place. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. These items need to be identified and addressed. Exploring the four parts of SWOT will give the entrepreneur a snapshot of his business and its environment.
- Strengths — What does your company do better than your competition?
- Weaknesses — Where will your company have problems competing in the marketplace?
- Opportunities — What is out there waiting to help your company succeed?
- Threats — What is out there in the market that can hurt your business?
Whether you decide to get into an operating business or real estate, prepare a business plan and put it in writing, even if it’s just for your information. You will find that by putting your plan in writing you will feel the pressure to complete the project. It will help you stay on track. Remember that the business plan is a flexible document you can adjust in response to changes in your customer base, the economy, and other business concerns. Keep these points in mind as you progress along your road map to rich.
This article is an excerpt from my book, The Road Map to Rich: a Lawyer’s Perspective on Getting and Staying Rich. If you would like your own hard copy for free, please contact us and we will deliver to your preferred mail box.