Small Business Plans

Without a doubt, the most commonly misunderstood business concept is the business plan.

The overwhelming majority of clients I see who are starting a business need assistance in business planning. Here are a couple of their typical questions:

Q: I'm trying to get a business loan from my bank, and they tell me I need to show them a business plan. Why do I need a business plan?

A bank, or any other financial intermediary that would loan you money or invest in your company, will want to see your business plan to ensure that you have a specific and well thought-out strategy to make your business successful. This would show that if your plan is accurate, you will be able to pay off the loan or generate a healthy return on investment.

The part of your business plan that will be of particular interest to your banker or investors will be your financial plan. This section will include all of your financial assumptions and estimates regarding:

• expenditures (equipment and other assets needed)

• expenses (lease payments, employee salaries)

• revenues (sales of product/services).

This part of your business plan will let your financial backers know what points in time your business will become profitable and they can recoup their original investment, the anticipated return on that investment, product development and sales estimates, debt to equity ratios, and in general how risky their investment is.

In reality, the main beneficiary of business planning is not your bank or investors. It is you. A good business plan will force you to think about many of the important factors that can be the difference between success and failure. Let's take a brief look at some of the other major elements of a business plan.

First is a description of your product or service. This description should not only discuss the business you will be engaging in, but also the reasons you believe you will be successful. This may be because you have patented a better mousetrap that can do a job better, faster, and less expensively. Or you will be exploiting a niche in a market that currently has no competition. Or maybe you just believe you can provide a better product or service than is currently out there.

Your market analysis and strategy will require you to perform the necessary legwork and homework to determine whether your venture is truly feasible and how you plan to market it. This will involve a close look at historical and anticipated trends in your industry, competition that exists both nationally and locally, and the extent to which you can capture a large enough market share to make a profit. Along the way, you should be asking yourself a number of important questions, such as:

• At what price do I need to sell my product in order to be competitive?

• What will be my strategy to market the product?

• What is my administrative overhead for the product?

• What does my manufacturing or wholesale cost need to be in order to sell the product at that price and still make a profit?

A good business plan will both provide you with a solid strategy and give your financial backers a sense of confidence that you will be successful.

Q: I've been in business for several years and never completed a business plan. Should I still have one?

The operative word in a business plan is "plan". Although you may not need a business plan to show potential financial backers because you are not seeking additional financing or investors, you should still have one.

A business plan should be a living document that contains a strategy that you intend to follow, revisit frequently, and revise as appropriate. For instance, you may have falsely assumed that your product would appeal to the mass consumer market, and all of your manufacturing plans, marketing strategies, and financial estimates were based on that assumption. After market testing the product and finding little demand to the general consumer, you find out that it does have appeal in specialized industry-specific applications. As a result, your business plan should change to reflect all the changes that would occur in your manufacturing, marketing, and financial plans.

Any company that operates under a "business as usual" philosophy without thinking about the future will eventually fail. That is why business planning is so important.