Business Plan Basics
The business plan theme of this web-page concerns the fundamental choices that you face in the earliest stages of developing your business plan. Answering these questions will impact your goals/outcomes, and vice versa. The two groups of decisions evolve together.
Set your goals - keeping them flexible. Then make the choices called for on this webpage - keeping these plans flexible too. Then go back to your goal-setting plans and consider revising them. If you revise them, come back and reconsider the questions here. And continue until you can see nothing needing revision in either section.
Business Plan Fundamentals
As you develop your business plan, and make the initial choices required of a new business, it is important that you keep in mind the challenges that you will inevitably face. Some years ago a survey was conducted in which business owners were asked the foremost problems that their businesses encountered - problems that, left un-checked, could derail their businesses entirely.
Surprisingly, almost all the respondents came up with the same three problems at the top of their list. They were:
So let's take a quick look at these three issues before considering the other start-up choices essential to your business plan.
The ideal participant in your business is the one who treats the business as if she were one of the owners. Such a participant is rare - only to be found in the best-managed businesses - and even then most unusual, except in businesses actually owned by the employees.
The challenge of acquiring and retaining good personnel is huge, and the only solution lies in the details of the company's management plan, which we will discuss later. For now, just keep in mind that the choices you will make in this arena are crucial to the success of your business plan.
A business plan for a company that deals in tangible goods must include a detailed methodology for the acquisition, handling, protection, maintenance, tracking, re-stocking, and releasing of the items in the business's inventory. In addition, the company's budget must account for the substantial costs involved in this activity - including, at the least, the costs of receiving, storing, handling, insuring, shipping, and safeguarding the many items that will pass through the hands of your (not-always-honest) personnel.
Many businesses can only compete in their chosen markets if they extend credit to their customers. This is particularly true in manufacturing and in the wholesaling of tangible goods, though it also crops up in service industries. Unfortunately, when the economy is stressed, it can become difficult to collect the monies owing for past sales, and this can disrupt your cash flow with disastrous consequences.
For this reason, it is crucial that you anticipate the problem and decide how you will handle it if it occurs. The best solution is to be sure your business plan targets an industry in which all sales are for cash on delivery - thereby avoiding getting caught in the receivables trap that has sunk so many businesses. Failing in this, you will have to include setting up a collections unit as part of your business plan. Be sure it is run by an expert, else the trap will get you in spite of your efforts.
Developing A New Product
Many a business plan starts with the assumption that the new company will develop a wonderful new product. I have come to think of this mind-set as the "better mousetrap fallacy", because it is one that has snared me on more than one occasion. The most dramatic instance in my own experience was my encounter with the Fusel Oil Company that had acquired a brilliant technology for producing ethanol from sawdust.
A further attraction for me was the fact that the methodology allowed the waste materials to be turned into secondary marketable products, some of which were more profitable than the ethanol itself.
I spent two years of my life trying to get this project off the ground successfully - and failed. What I hadn't recognized was the fact that the company simply lacked the resources to get the job done. Today I wouldn't make the same mistake; but since then I made two other attempts to launch businesses based on product development. In each case the product was much needed, the proprietary technology was excellent, and the potential profits were huge. In each case my business plan was inadequate - based too much on enthusiasm - and not enough on the facts.
But, and this is the caution I want you to understand; in each case I lacked certain key resources to bring the project to fruition. Take my word for it, product development is not for the faint of heart. Before you invest significant time and effort in such an undertaking, be sure you have a solid business plan and all your "ducks in a row". Especially be sure you have ample capital available and a market under contract to distribute the goods that you will either manufacture or license for others to manufacture.
Unless you have tons of money available or terrific credibility in the eyes of folks who do, I urge you to forego this choice until you have these resources in hand. Otherwise the better-mouse-trap fallacy will get you too - I guarantee it!
Buying And Selling Others' Products
If your business plan calls for selling tangible products, and you aren't developing your own, the alternative is to sell products made by someone else. This decision leads to some further questions.
Are you sure you want to sell tangible products? If so, can you arrange for some well established company to handle the products for you - to function as your "fulfillment" service? If so this could save you a lot of headaches.
On the other hand, there are a lot of businesses that sell intangibles, like insurance or travel discounts. Such businesses avoid all the challenges that go with the tangibles market. Think this through carefully before committing to a course of action with more challenges and higher risks. What level of challenges and risks can you actually afford?
Will you sell retail or wholesale? As a retailer you would have more flexibility, but your store (assuming you will have one) will require more expensive real estate. A better idea might be to combine mail order with Internet sales and operate out of a warehouse. Of course, if you are going to operate out of a warehouse, you might also sell wholesale.
In this case, just be careful not to put yourself in the position of competing directly with your customers, the retailers who buy from you. Use "Wolf-pack Marketing" to solve this common dilemma. If you are unfamiliar with the concept, use the "Contact Us" link to ask me for more information. It's one of my personal specialties.
Another caveat is to know your market. To this end do your homework! Find out everything there is to know about the market for the products you plan to sell. If you are contemplating buying a franchise, don't count on the franchise company to tell you everything you need to know about the business. "Due diligence" requires independent verification of all the crucial details.
The biggest disadvantage of buying a franchise is that it ties you to the franchisor in ways you might not like down the road. You are generally better off having multiple sources of whatever product line you want to sell. Otherwise the failure of a single supplier can potentially put you out of business. Ask to talk to some other people who have bought the franchise a year or more ago. If this isn't permitted, run away.
Before committing to your plan, make sure your marketing and distribution systems are well proven. This is not an issue to be solved by trial and error. It only takes one error to put you out of business.
In many businesses it is possible to develop multiple income streams. Can you include this in your plan? Well thought-out secondary income streams can literally double the value of a company. They also hedge your risks if your primary income stream is diminished or interrupted for some reason.
Still another start-up decision you need to make is how much capital you need as a cushion or cash reserve at the outset. Businesses rarely take off as quickly as you hope/expect they will. Many a business has gone under just before it would have succeeded, had it not been under-capitalized. In fact, under-capitalization is probably the most common origin of small business failure. I myself succumbed to it on two occasions. These can be very serious setbacks.
Selling services is a popular choice these days. Are you thinking of doing this as an alternative to selling goods? If so, craft your business plan accordingly. Be sure you know who will provide the services, how they will be delivered, and where they will be delivered. In this section of your business plan it is vital that you include all the maintenance issues that you will face.
As an example, a friend of mine had a tanning salon. Compared to his competitors, his prices appeared to be high. He often lost customers when a new competitor opened a tanning store on his side of town. But over the years I noticed that he stayed in business while his competitors came and went. The customers that left to go elsewhere usually came back when the new outfit folded.
I asked him one day how he did that. He explained that he knew to within a gnat's eyebrow how much it cost him to maintain his equipment in top working order - and he figured that cost into his pricing.
Meanwhile his less experienced competitors set their prices below his - and thereby failed to generate enough cashflow to cover their maintenance costs and remain profitable. They usually went out of business when about half their tanning units were inoperable. See how important your business plan can be?
If you are going to sell services, a choice with many advantages, your last choice should always be to sell your own personal time. Doing this always mean that you limit your inventory to your own twenty-four hours per day. Not the best choice if you can avoid it.
On the other hand, if you train other people to provide the service, they will eventually quit and start their own service businesses - perhaps in competition with you. You have two ways to deal with this. First be sure your business plan calls for having a really good contract with these folks with a really good enforceable "not to compete" clause.
And second, consider making the contract the basis of a joint venture in which you share the profits with your trainees, who are in fact delivering the service that you sell. If this is done right you will retain most of your competent personnel, avoid creating your own competition, and be able to draw on the group's creative resources to expand and promote the business. This has the further advantage that it takes the cap off the business's income potential.
Solo Enterprise, Joint Venture, or Employer
Another choice that you need to make early-on in your business planning is whether your new business will be a solo enterprise or whether it will involve other people. If the latter, what will be your relationship to those other folks - will it be some form of partnership or will they be your employees?
If you like to be in total control of the situation, you probably lean toward having employees. In this event you can boss them around, tell them what to do and not do, hire and fire them at will, and generally rule the roost. If this is your preference, I heartily urge you to reconsider! Being the boss in this way is a sure recipe for failure.
Instead, I urge you to consider ways to make partners of the people who work with you (whether they are employees or not). When you do this, the likelihood of your success increases exponentially. There are a number of excellent managerial models that facilitate this methodology. They differ in various ways, but they all have one feature in common. The end result is a business in which your presence becomes unnecessary.
As much as you may enjoy the feeling of being needed, this is not a good thing for your business - nor for your personal/family life. On the contrary, one of your business planning outcomes should be to continuously reduce the company's dependence on your oversight and operational control. If done correctly, this will ultimately lead to your ability to retire in comfort. Failing in this, you will sooner or later come to resent being constantly needed by the business. When that happens, the failure of the business will not be far in the future.
Choosing the Right Legal Structure
In order to do any kind of legitimate business, your business plan must include the creation of a "business entity" of some kind. Your choice in this will determine:
If your business fails, none of these considerations will matter much. But if it succeeds, they will have a huge impact on your business, your peace of mind, and on your lifestyle generally. So I suggest you consult with knowledgeable advisors, choose wisely, and spend a few thousand dollars getting it right. Don't leave this to chance. Include it in your business plan.
For the sake of your business plan I will outline your choices below; but since I am not a licensed attorney, accountant, or financial advisor, state and federal laws forbid me to advise you formally on this choice. I can and will, however, tell you my personal preferences.
Each of the structures listed below is legal and available in the U.S. and, with minor variations is also legal and available in other countries. With one exception, as explained below, I personally favor the foreign structures over the domestic ones.
As litigious as many folks are these days, and as intrusive and demanding as most governments are, you will have far fewer "headaches" and get to keep keep control of far more of your company's earnings, if you set your business up and do most of your banking overseas.
With Or Without OPM
Many business "gurus" suggest that your business plan should involve "leveraging" your start-up resources by using other people's money (OPM). While this strategy has some distinct advantages, it also poses some substantial challenges and risks. Let's look at this choice in some detail in the