The Old Business Plan and How to Wire It Up Part Deux

Business Description

The business description section is about the structure and strategy of your company. It should be a textual snapshot of your business showing the primary activities of the business and how the business will make money.

Start with the basics: What type of business are you pursuing? Is it retail, service or perhaps a franchise? What is the product or service you offer? What is your market share? For example, if you will be competing with three other retailers with whom you will be splitting the market evenly, then you will have a 25% market share.

What resources do you currently have on hand for your business? How was the business established? As a startup, franchise, purchase or expansion? Where is the business located and what are the business hours?

In this section, keep the money flowing to the customer. Describe what problem you solve for the consumer. What niche do you fill? Don't worry so much about marketing at this point. That is reserved for the marketing section.

Include pertinent information from the past, present and future. What is the company's history? What is the current status of the company and what does the future hold? What milestones are down the road? What opportunities await you and what risk do you foresee and how can you prepare for them? You should deal with business goals in this section as well and how you will meet those goals.

Organizational Structure

Also include an organizational chart in the business section. The organizational chart is not only an opportunity to see your name at the top of a bunch of boxes but it describes roles and responsibilities, details that are very important in your business. You must detail out who is responsible for what and how they will be held accountable.

Product or Service Description

In this subsection, address the process by which you execute the strategy that was described in the business description. Quite simply this section describes the product. If it is a service business, the service is the product. Think of the product from the front-end for this section. What this means is, is there any research and development that needs to take place to bring a product to market? Do you need to register patents and trademarks? Who is going to make the product? You can include flowcharts for discussion of key processes within the company.

Discuss product specifics. Are they built to order or do you purchase the product? What materials are required to produce the product? Where do you get these materials? Will you have shipping costs? Is there any required capital equipment such as machinery, computers, etcetera that will be required to make the product? Why do you need the capital equipment and when do you need it? What are the costs? Make sure to account for depreciation and your financial projections.

Vendors and Suppliers

In Porter's five forces analysis, vendors and suppliers are pointed out as a key control factor in your business.

For example, if you only have one supplier of hamburger meat in a hamburger stand business and that supplier raises prices, how will this affect the business?

So the question here is who are your key suppliers and vendors and what is your relationship with them? How do you pay them? What is the quality level of the product you receive from them? Do they offer discounts? Do prices fluctuate? What happens if they go away? You should have backup suppliers and vendors in mind as part of a well-rounded business plan.

Inventory, Facilities and Personnel

If you need a warehouse to hold product or to assemble a product, then you need a warehouse. If you need an office space to deliver a service then you merely need office space. Will you subcontract out work or have all the work done in-house by employees? How many employees will you have? Remember, their roles and responsibilities should be detailed in the organization chart. How will you attract employees with the right skills? Is suitable labor available locally? Will you offer training? what pay and benefits will you offer in-house personnel contractors and trainees?

Also, detail product quality, any warranties and customer service in this subsection. If you offer both products and services, discuss both. Also include a discussion around important business information technology, both hardware and software. You can also include product strengths or weaknesses in this section.

Investors typically only give you money for a piece of business that they think is going to offer strong returns. Bankers are more likely to take a risk and loan you money if they think your product or service will sell.

Intellectual Property Description

You need to consider IP 101 in this section: any trademarks, patents, trade dress, copyrights that you will need to obtain for your business. You can describe domain names that you secured since they are intellectual property. Any trade secrets would go here as well and for appropriate protections you should visit with an IP attorney.

Management and Personnel

Great entrepreneurs and savvy investors know that the first thing to look at in an investment is the quality of the company's management team. Investors and lenders look to management experience, education, track record of success and of rewarding investors and or paying down debt. Money follows good management.

Again, an organizational chart is important in the business plan. You need to detail position titles, roles and responsibilities. This is important because down the road you will know for example that Phil is in charge of accounting. That means that whether he does the bookkeeping and taxes himself or hires it out, he is responsible for taking care of the business’s accounting. If the accounting gets screwed up then Phil is answerable as to why the accounting got messed up. This goes a long way in enforcing the structure of your business and should be used in tangent with follow-ups in weekly meetings to guage how each of the important areas are performing. This organization chart is one of the key foundation blocks to systematizing your business.

One of the first things you need to do for this subsection is to analyze what skills and tasks will be needed to make the business run. The research into your industry and competition should give you a list of necessary skills. Next you can rate your personal skill level in each of the categories that you need. You should be able to organize new job needs based on your areas of weakness as well as your time constraints and then devise job descriptions accordingly and hire. This exercise will help you determine the job roles necessary in your business. Also include future personnel needs.

Again, this is another section where you can detail some weaknesses and how you will overcome those weaknesses. Again, there is no need to sugarcoat weaknesses. Serious business plan readers will see right through your oversight. By getting the elephant out from underneath the rug you have the opportunity to get ahead of the story and address how you will handle weaknesses.

Records

How will your bookkeeping and accounting be handled? Where will the records be kept? What about security? Will you be able to lock away sensitive materials?

Insurance

Insurance is not a mundane detail. In the realm of asset protection you only have two defenses against lawsuits. These include your entity and your insurance. You need to describe in this section what type of insurance you need and how much will you carry? Do you need property insurance? Also, do you need several liability insurance to protect against injuries? Consult with a good insurance agent.

Security

How will you prevent theft from inside your business?

Litigation

Typically the statement that goes here is “the company is not currently engaged in or threatened with any litigation or other legal proceedings.”

But if you are, disclose it here.

Risk Factors

A risk factor is any operating element outside of your control that could negatively affect your business. Examples include extreme weather, political upheaval, and acts of god.

On a more micro level they could include changing tastes and shifting demographics, technological advancements and management mistakes. In addition, risk factors can include common factors to new businesses such as the startup curve, management strategy and competition.

Location

If your business is a restaurant the location is going to be more of a vital factor then say if your business is a manufacturing plant. Of course the manufacturing plant needs access to good roads and highways and transportation in general, but you get the drift. This subsection should include the basics: the address of the business, why you chose this location and what facilities are at this location.

The Marketing Section

This section identifies appropriate markets and customers, the competition, and plans for efficient and effective distribution. It establishes relationships, identifies and implements appropriate advertising, details your awareness of industry market trends, and finds the perfect strategy for your business, including pricing, packaging and positioning. Marketing is the systematic process that inspires targeted customers to take action and buy your product or service. Keep in mind, marketing research doesn’t stop once the business plan is complete and the financing is secure. You should continually stay in touch with your target market, track their pulse and find out what they like or dislike about your business.

Again start this section with a brief overview of the details that are to follow as with previous sections.

Markets

Markets are usually described in two ways: the buyers and the dollars.

In terms of buyers, your market encompasses all the people who might pay for your product or service. This subsection should start with a description of the overall potential market and then work into a more manageable target market.

Start with who will purchase the product or service. Explain why this group will be interested in your product or service.

Narrow this group down by considering why these consumers would choose your product over your competitors. If there is more than one reason why they would choose yours then there might be more than one market in this group. Will they choose your product based on quality, advertising, ease, and distance or the price?

When it comes to identifying target markets, think in terms of demographics: age, sex, family size, income, occupation, race, religion and psychographics which includes needs, interests, attitudes and lifestyles, industrial demographics which includes SIC code, location, net worth, employee numbers and sales. What is the average income level and education level of this group? What is the gender makeup? Where do they live? Once you identify the similarities, then you have developed a target market. You can take the customers you know and start looking for other customers who share the characteristics of that existing group.

In terms of dollars, what is the size of the current market? How much of that market can you hope to capture and how? Is this market growing?

Now that you know how big your markets are in terms of dollars and customers, break it down even more. What do the members of each group buy and not just in your industry but in others as well. With this information you can extrapolate what elements consumers are looking for such as quality, price, customization and location.

Market Research

In order to do this section or to fill in information for the previous section you might have to track down census data from your local library. The hows and whys of your market research should be included in the marketing section. Discuss how you did the research and what you found out. What resources did you use? What were the results of your market research? What did you find out about your target markets? Are they growing or declining or remaining steady?

Don't forget to include demographics of the target market here as well.

Do your research and discuss how your business strengths, resources, and experience can serve your target market. Keep in mind that your product is not going to appeal to or be used by everyone. Back up your statements, assumptions and projections with data when you can.

Competition

First do some research. Over the Internet you can find out how all small independent businesses of your same nature fare against larger competitive rivals. You can see what their strategies are. You can also call existing businesses and ask them how they have implemented a competitive strategy. You can also get information on public companies at SEC.gov. You can look for 10 days and 10 queues for public companies.

One of the chief questions in this section is to ask who is your competition? Are their sales going up and down? Is the competition direct or indirect which means offering the same product or service to the same customer base or offering the same product or service but to a two different target market respectfully. How are they targeting their customer and can you target them better? Are there any untapped markets you can target?

At a minimum, you want to know the names and locations of your major competitors, products or services offered, pricing structure, methods of distribution, strengths, weaknesses, profitability and market share. In addition you'll be served by the analysis of how the competition is viewed by current or potential customers. What is their reputation? How has the competition performed in the past and how are they positioned for the future?

There are many ways to find out about your competition. The Internet is replete with information and an excellent way to find out about public companies again is through SEC.gov. Other good sources are stock market reports and talking to customers, suppliers and distributors.

Don't forget to look down the road-who will be the future competitors?

Going forward don't forget to keep an eye on the competition at all times. You must monitor your competition to see what they are doing differently and if they are stealing your market share.

Distribution and Sales

Distribution should be results of your marketing research.

For example, you don't want to set up your entire system to deliver products as catalog sales if you know that your target market only buys in stores. Be sure you understand the purchasing patterns of your target customers and set up your business to make use of those patterns.

Be sure to include a discussion of any shipping necessary to your business. Give your view of your distribution strategy including all channels available to you. What shipping resources do you use and why? What is the cost and do you have backup plans? Include agreements, rates and other supporting documents to show that this is in place. If you're running a service business, discuss how you will handle delivering services. Will you go to customers or will they come to you and who will pay for travel?

As for sales, will you be selling business-to-business or directly to customers? Who'll be doing the selling? Do you have a sales department, sales staff, consultants or all of the above?

How will sales be conducted-in-store, online, catalog, direct mail, retail etc? If you use the Internet what is your web strategy? If you use retail, what stores will you have a presence in? What discounts will you offer, to whom, and under what circumstances?

At some point, you're going to include a detailed sales forecast broken out by month. This can fluctuate depending upon your customer classes if they change or not.

Marketing

Advertising, public relations, and promotions-they're all about the same thing-getting your product or service in front of potential customers. A sunnier shop is marketing. Your spouse telling a friend is marketing. Your business card stationary and even your business plan is marketing. Just about everything you do or say can be construed as marketing.

The results of your research should help you determine the best advertising campaign for your product or service. Keep your target market fresh in your brain. Are your potential customers reached more efficiently by radio or television? Which stations do your target customers listen to and when? Do they read newspapers or magazines? If so, which ones and how often?

Go back to your research on the competition. Where do competitors advertise? How often? Do competitors ad campaigns work? Why or why not? You don't have to reinvent the wheel in this section. Just see what your competitors are doing and if it is working. Learn,copy and improve. Explain your advertising plan in this subsection and include any visuals you have such as brochures, print ads and mail pieces. Who will be handling your marketing campaign-inside staff, or an outside firm? How much will it cost you to implement your plan? Give a timeline for your campaign.

Industry and Market Trends

Your business exists within a series of ever-expanding spheres of influence. The discussion of the spheres as elements affecting your business will be the bulk of the industry and market trends subsection of your plan.

The elements to consider include:

· Your business

· The competition

· The market

· The industry

· The government

· International affairs

· Other market factors

In this subsection, readers are more concerned with how your business interacts with the other elements or outside forces and how those interactions currently and in the future could affect your business’s potential to make money.

Consider how competitive the industry is and how easy it has been for new ventures to break-in. How healthy, financially, is the industry? Does your industry go through cycles? What does the future hold in terms of trends within the industry? The sphere of government influence is your business, the competition, the market in the industry. What regulatory bodies have influence on your industry? What regulations apply? Do you have intellectual property rights that may lose protection through expiration? How does the relative strength or weakness of the dollar affect your company? Are there geographic areas whose instability threatens your industry? Is war in the offing? What is the state of the world economy and how does that affect your company?

Pricing Strategy

Your pricing strategy should be based on a careful analysis of production costs and overhead, competition and target markets. Pricing may be a part of your marketing plan, or may be a standalone subsection.

First, you need to know how much it costs you to deliver your products and/or services to customers. Be sure to take all costs into account-the raw materials to shipping costs, from office rent or leases to taxes, from payroll to advertising, from lawyer fees to construction. Make sure your pricing will cover not only the day-to-day operating costs but contingency plans as well. Address how pricing may change over time based on market changes and cost changes.

Once you have a handle on your costs, you need to understand your competition's pricing, customer perceptions and market norms. How much does the competition charge for the same or similar products or services? What is the real and perceived quality of your product or service?

Services may be harder to price. Again, you need to understand the value of your offering to your business as well as the perceived value to customers. Consultants don't charge for the cost of paper named even if the only tangible product is a report. Clearly, what the consultant offers is more valuable than simply the tangible. Service offerings solve problems. Still, pricing is to reflect market norms.

Know where you want to be price wise within your market. One luxury end of the market can be difficult the margins can be significant.

Pricing can also include the detail of discounts offered.

Timing

Part of your business strategy should be the timing of your entry into the market. Your market entry should be more about the customer than about you. Perform a little research to see if your customers are ready for your business. Would your customers be more likely to buy your product or service during the winter or summer for example? Use common sense. Don't introduce a line of beach umbrellas to Denver in December.

Product design and packaging is an important topic for this section as trade dress. When you look at for example Robert Keith Sacchi's Rich dad book series you see that the trade dress is all in purple and gold. It is important to keep this in mind when developing a product series. Get another taste and preference of your target market as well as some of the psychology behind the packaging of your product, which is your first chance to make an impression on consumers.

Every time you change your design you start your branding all over again. Visual recognition is strong. Sometimes, a change in your product packaging design can cause more confusion than changing your product name. Get it right the first time then watch business build on its own momentum.

Positioning

Positioning separates your product or service from the competition. Explain how your product or service is unique and/or how it will take unique advantage of the potential market.

The Financials

The first thing I wish to see in the financials is cash flow. I want to see if the business can make money and then I'll want to know what those assumptions are based on. So the chief thing for me to see in your business plan is the first year of cash flow broken out by month and then a brief summary on how you reached the key assumptions in a cash flow including sales, cost of goods sold, and the various operating expenses. I also want to see a breakdown of your start up expenses including an itemized list of one-time capital expenses as well as operating expenses multiplied by the number of months you expect to be unprofitable. So for example I would like to see a number of months of working capital requested in order to cover your operating expenses in the startup care.

Additionally, a starting and ending first year balance sheet will show if the business is retiring debt and building equity. A cash flowing business that is building equity is a successful business.

Don't sugarcoat your projections, do not present blue sky here. You want to be realistic for your investors and bankers say that chiefly for your own sake. You do not want to go into business based on unrealistic and some assumptions that show he will simply make “a lot of money.”

The main statements include:

· The Income Statement

· The Balance Sheet

· The Cash Flow Statement

· income Projections

· Breakeven Analysis

· Uses of Funds

Quite simply the income statement is income minus expenses equals net profit or loss. This statement shows operating profit, not cash per se, it does not show the principal payment on your loan, it will reflect the interest payment but it will also include depreciation expense which is a non-cash item. The best way to think of the income statement again is income minus expenses equals what is left over. You want to project this out for the first three years of your business, the first year being broken out monthly.

The cash flow statement is done on a cash basis. It includes your starting cash balance, subtracts out all your expenses for uses of funds, includes any new funds for sources of funds, and then reports your ending cash balance. One of the chief differences between the cash flow statement and income statement is the cash flow statement will record transactions when money changes hands.

So for instance if you purchase materials in January that you don't pay for until March, the income statement will show the cash outflow from the two serials purchased in January but the cash flow statement will not show the cash outflow until March.

This is known as a cash accounting basis and the same would be true for your receivables as well. Also the cash flow statement will not reflect a depreciation expense since this is a non-cash item but it will include the principal payment of your debt along with the interest payment, both a cash expense.

The cash flow statement will also include running balances of your financing as well as the activity of your financing. So the banker can see a picture of your retiring or increasing of debt.

The balance sheet is a snapshot of what your business, owns what your business does and the difference between the two for the equity.

For example, a beginning balance sheet would include an asset of $100,000 as a piece of equipment in which $50,000 is out against it in a long-term liability. The difference of $50,000 would be considered equity. If over time the business is able to pay down the debt to $25,000 you would now have $75,000 equity in the piece of equipment.

Investors and bankers want to see that your business is able to cash flow and retire debt which are signs of a healthy business that is not throwing good money after bad money. If the business is not cash flowing, it will be stagnant on its debt repayment.

“Just to beat a dead horse John and recap what we have covered, here’s the major business plan element information again.”

Business Plan Elements

There are five standard sections of the business plan:

1. The Business

2. The Marketing

3. The Operations

4. The Financials

5. The Supporting Material

1. The Business

This section discusses all pertinent information relevant to your business. It might include subsections such as Operations, Legal Structure, Business Model, Management, Personnel, Strengths and Weaknesses, Core Competencies and Challenges, Product or Service. It covers, soup to nuts, from product conception to follow-up after the sale – how does the business model work?

2. The Marketing

This section details the industry you are in and your place in it. This covers outside forces – economics, customers, competition, as well as more rudimentary items such as ad campaigns and a traditional marketing strategy. The sections might include; Target Market, Customers, Competition, Distribtution, Advertising, Pricing, Industry and Market Trends, Strategy and Market Strategy.

3. The Operations

This section should build off of your Mission Statement and Goals and should lead to a detailed organization chart and the standard operating procedures manual.

4. The Financials

Statements that might be included in this section include; Uses of Funds, Income Statements, Cash Flow Statement, Balance Sheet, Cash Flow Forecast, Profit and Loss Forecast, Income Projection, Sales Revenue Forecast, Income Forecast, Capital Spending Plan, Assumptions, Budget and Break-Even Analysis.

It is important to benchmark similar companies in this section so you can show where your numbers are in line with the industry and where you have advantages.

5. The Supporting Material

Typically, supporting materials include resumes, letters of reference, credit reports, legal documents, agreements and contracts.

In addition, you want to include an executive summary as well as mission and goals.

“Writing the plan is the first battle John, but where most business plan writers and business owners really drop the ball is in the implementation of the plan. I profess that any individual can write a “pretty document” that lays out all the business delusions of grandeur. The real trick is in the implementation. Here is an article I wrote for CNN.com which tells you how to wire the plan into your business.”

The Engine for a Better Business Model

The Business Plan - Well Yeah There is an Outline But This is Not War and Peace

If you perform a web search on the term “business plan outline” or peruse your local book warehouse, you will inevitably come across a half a dozen, varying outlines. My motto is – find one that you are comfortable with and then get very comfortable with that outline - quite similar to Warren Buffet’s “put all of your eggs in one basket and then watch that basket closely,” except he has a billion dollars. If you are dusting off the old business plan or starting from scratch then you need to familiarize yourself with a good outline. And remember, this is not an Ayn Rand novel.

A Living, Breathing, Implementable Document

In a perfect world, your business plan would sprout arms and operate the cash register but the truth is it is probably dead in a drawer somewhere next to an old Kenny Roger’s CD you keep around for “me” time. Your mission now is to find that drawer, open drawer, grab feather duster and get to work. Your business plan in part contains your hopes and dreams for your business as well as how to operate the whole thing. It sure as heck deserves a better fate than Kenny.

As far as the living, breathing and implementing part, your business plan should be wired into your business. At a minimum, you should do this by reviewing the key elements of the plan in bi-weekly team meetings and quarterly strategic meetings and tracking progress. According to Dr. Matt Marvel, Professor of Entrepreneurship at Western Kentucky University, “the bane of most entrepreneurs is the lack of business plan implementation. For the most part, business owners find it difficult to integrate the plan into the business. This is a critical failure point for most small businesses.”

Let’s examine specific sections and see how you are stacking up:

The Vision and Mission – sometimes viewed as the enlightening, blue sky statement that hangs on the manager’s wood paneling – it sounds idealistic and cute but the real world says otherwise. The real world says to hell with your idyllic view of how you think your business should run, I’m in charge. But isn’t the Mission why you went into business in the first place? The Vision and Mission at a minimum is the driving force of the business, the fountainhead the business is chasing after. The whole point of having one is to use it to drive through the daily onslaught of reality. It should be kept at the forefront and reviewed daily. If you haven’t developed an overall mission or vision stop now, do not pass go, do not collect $200. Get to work putting one together by asking who do we serve, why do we serve them and how do we serve them? What is our overall purpose for being in business? What should our business look like now and in the future? Write it down and read it at every meeting.

Business Description and Product or Service Description – this is the section that says “we will deliver quality service and products in a unique and outstanding environment. Our customers will be wowed by us until they explode.” Great! Now the question is, how is this glorious statement tied into the business? What is your standard for checking up on customer satisfaction and product quality? Do you survey the customer on a regular basis, bring up the results in team meetings and pow-wow on solutions to the situation? You should be.

Which brings us to our next area of planning and integration …

Management and Personnel

If you really brought your “A” game to this section then you developed an organizational chart. If you brought your “A” game, a cup of coffee and a knack for delegating, then you fleshed out roles, responsibilities and accountability for each position listed in your org chart. In keeping with the previous product and service example, if you show up at a meeting and don’t know who is responsible for improving customer service, then chances are you have some unhappy customers. If the org chart indicates that Joe is responsible for customer satisfaction then the meeting script would go something like this … “Joe, we are receiving a fair amount of customer complaints. Any insight into this?” or “Joe, our customers are raving happy, how’d you do this?” Joe would ideally wake up from his nap and respond “are you talking to me?”

If everyone knows their roles and responsibilities and accountability, then there should be no big surprises.

Marketing

In the marketing section you literally listed out the varying channels that you would employ to market the business – web, print, radio, blimps, wacky waving inflatable arm flailing tube men, etc. Hopefully you also included a measure on how to grade the effectiveness of each channel. How are you doing? If the newspaper ads are providing a rate of return of 150% but the radio spots are barely breaking even, perhaps it is time to kick the radio channel and beef up the print ads … or invest in half a dozen more wacky waving inflatable arm flailing tube men.