The Makings of A Business Plan
Gwinnett Chamber of Commerce Presentation
Creating a long-term business plan for your company is one of the most critical things you can do to help you combat the high failure rate as a new business. More than 80% of new companies fail in the first five years of operation. The number one reason is for lack of working capital. The number two reason is due to lack of proper planning. If you do your planning properly, you will know how much working capital you will need.
If done properly, your business plan will not become another book on your shelf. It will become your operating budget for the next several years, whose numbers you can use to fill in your budget fields of your accounting software. You can then directly measure your actual results compared to the business plan.
Just as a home builder would not undertake the building of a house without a blueprint, (even though in Georgia, I really think that some builders do!) a successful business owner will not form or try to run their business without a business plan. The opening sentence in my textbook on Managerial Accounting when I was completing my MBA said that “a business that fails to plan, plans to fail”, and that “Every well-run business has a business plan”.
In addition to determining the financial impact of your business over the next three to five years, we address over 50 other items relating to the operation of your business. The purpose of this is to really make you focus on your business by asking some pretty tough questions.
What are some of the issues you address in a long-term business plan besides the financials?
- Your mission statement- What can you say in one to three sentences that totally summarizes the purpose of your company? A good mission statement can be a critical element in defining your business and communicating to employees, vendors, customers, and owners, partners, or shareholders.
- How is (or will be) your company structured? Who are the officers? Board members?
- What services (current and future) will you be offering? You would be surprised how many companies I see that cannot answer this question!
- How do you compare to your competitors? What makes you different (and hopefully better than your competition (not just pricing, but also in the actual product or services)?
- Who are your main competitors? Where are they? I recently informed one of my clients who had thought he had found the perfect location that there were 39 competitors (as defined by him) in a three mile radius of his proposed perfect location!
- What’s going on in the market place for your product or service? How big of a market is it and what percentage do you think you can capture? You would be amazed at how many people think that they will capture at least 25% of the market and then be bought up by the likes of Microsoft!
- What are the buying patterns of your customers? What “makes them tick”?
- How will you effectively promote or market your product? Successful start-up companies usually spend 10% or more of their first year’s revenue on marketing their product or service.
- What does your management team look like? What skills do they bring to the table? What are your “weak links” and what will you do about it? Remember, if you are going after financing, the bank will look at the management team as being the company. The success of your company (and thus the bank’s investment) will depend on the strength of the key players in a company. They won’t mind so much that you have a “weak link” as long as you have an action plan to fix this weakness.
- What are your personnel plans for the present and future? How much are you going to pay your people? Are you top-heavy on staffing or salaries?
- On the financial section, what are the important assumptions you made in building the budget? How long will it take you on an average to collect on your billing? How quickly will you pay your bills? How long and at what interest rate will you finance your loan(s) if you are going after funding?
- All financials (income statement, balance sheet, cash flow statements, break even analysis, revenue forecasts, personnel plans and financial ratios) must be calculated and also backed up with supporting documentation! Most business owners know their product or service “inside out” but don’t have a clue when it gets to the accounting side of the business plan.
These are just some of the issues addressed in our business plans. A typical business plan if done correctly will take between 30 and 50 or more hours to complete. Much of this time is spent by the client with our guidance all along the way. We provide an outline of questions to be answered, instructions on how to answer the questions, and samples of completed client input.
If we do primarily the financials and the binding of the finished business plan, it usually takes us 20 – 30 hours and will cost between $4,000 and $6,000. If we do the majority of the plan, you are looking at between $4,000 and $5,000 on an average. Prices vary mainly due to the complexity of your business plan regarding the methodology needed to build your revenue and expense models. We can also review and suggest changes to complete business plans prepared by you for between $1,000 and $2,000. Many smaller business plans have been completed in the $3,000 to $4,000 range.
This will be the best investment in your business’ future that you can make, as many business owners secure business loans with personal assets, such as your home for collateral. If the company fails due to improper planning, you could lose your personal assets. I have had to tell clients to cut their losses and get out of their business before they mortgaged their house and other assets. We have saved other clients from potential losses by the research we did on their proposed business locations and reviewing lease contracts before they obligated themselves to the terms and conditions on the lease.
Remember… Failure is not an option. It is, however, a nagging possibility that helps to keep you focused!
New Business Start-Up Errors and Oversights
In all of my years of preparing business plans, I have noticed some common errors made by people starting a business. These errors account for the reason why between 80% to 90% of new businesses fail in the first five years. The number one reason per the Small Business Administration (S.B.A.) is because they run out of money. The number two reason quoted by various sources is due to lack of proper planning. If you do your (business) planning properly, you will know how much funding you will need so that you will not run out of money. I know this is true, because I always ask a new business plan client how much start-up cash they think they will need. By the same percentage as the failures, the client usually drastically underestimates the amount of start-up cash that is required, where often the actual amount required is double their original estimate (or more).
Also, I have noted common reasons why a start-up company doesn’t get financed by either a bank or an investor. Here are some of the common business plan errors made by entrepreneurs trying to get a new business funded or other errors they make getting a new business started:
- Lack of logic in the development of your numbers: If your business plan does not have logic in the development of your revenues and expenses, you will not get funded. You must break down your sales and expenses on what is called a “unit” basis: What does one unit sell for and how much does one unit cost? Then, how many units are you going to sell each month? Are the unit sales per month reasonable?
- Lack of accounting for variables in your business: Most companies do not “hit the ground running” when they open the doors. Even though you expect to sell 1,000 widgets per month, it will probably take you some time to get sales to this level. Allow for ramp-up time, usually over several months. I often allow for one year or more (minimum of 6 months) for clients to get up to selling capacity, unless other logics prevail. Don’t forget about seasonality and inflation for additional variables.
- Do not skimp or ignore up front marketing and advertising: So many new start-ups think that once they open the doors, customers will come! Sadly, when they ignore the up-front marketing and advertising, they learn the hard way that they missed a critical step. Because so many businesses depend on referral business from existing clients, there is a compounding effect that is missed if you ignore this area at start-up.
- Location, location, location! Before you sign that long-term lease, make sure that you are in the right location. This requires two things: You need to know where your competition is in relation to your proposed location and you must be in an area that is growing, with a lot of traffic. High traffic alone is not the only criteria, as I had a beauty supply client that came to me and told me they had found the “perfect” location. The area was in a high traffic area, but it was also hard to see from the main traffic in the area. I looked at the competition as defined by my client in a 3 mile radius (instead of the normal 5 mile radius) and reported back to them that I had found 39 competitors as defined by them. Second, I noticed that there were only one or two cars parked in their parking lots. Those were the workers! Where were the customers? Instead of signing the 5 year lease there (whereby the customer would have died in the first year), he signed his lease in a Publix shopping center and is still there, 8 years later!
- Do your research on the major purchases and expenses you need up front: I am amazed by how many clients have not done an in-depth look at the cost of opening an office. They often forget about minor details such as office furniture, computers, telephone systems, signage, alarm systems, etc. They also don’t consider the fact that landlords often have build-out expenses of the new rental space that they often pass on some or all of it to you. They also usually require a first and last month’s rent in advance. There are also usually utility and phone deposits required up front.
- Allowances for Accounts Receivables and Payables: If you deal with inventory, how much will you need to purchase up front before you open your doors? How long will it take to collect your money from your customers? Will you have to pay for labor, materials, shipping, etc. up front for a customer that you must invoice and wait 30 to 45 days for payment? These factors add significant costs up front and can sink your boat very quickly.
- Don’t forget to include a salary for you in your plan: All too often, people go to the bank for funding, telling them that they are going to leave their former place of employment and start this new business. When the bank sees that you have eliminated a major source of personal income and have not replaced it with income from the new business, they do not see your capacity to pay back the loan if the business fails (yes, they will look to you to guarantee the loan in the event the company fails). Too many people make the mistake of thinking that they will forego their salary until the business takes off. In reality, this may happen, but for financing, include your reasonable salary.
- Don’t expect to capture a major market share or even make a profit in the first year: These two items are usually looked at as being unreasonable in the eyes of a banker or investor and will actually be red flags on your business plan. You do not want a business plan that is often referred to as being “pie in the sky”. If it looks too good to be true, it probably is!
- Back up your numbers with actual quotes for products, services and equipment: Where possible, back up the numbers you put in your business plan with actual quotes from service providers for services, equipment, products and services. This will give a comfort level to the banker or investor that these are real numbers instead of the “pie in the sky” numbers referred to above. I know of some banks that have a normal policy of discounting down business plans by 25% due to the above unless you back up the numbers.
- Don’t get your funding and put your business plan up on the shelf: Your business plan should be your operating guide for the first three years! Enter the business plan numbers into your accounting software as your budget for each year and then compare your actual results to your budget! I have many business plan clients that update their business plan every year.
- Choose your operating entity wisely: If you will be exposed to potential liabilities, you need to incorporate of form an L.L.C. Work with your tax advisor to make sure you are protected. You want to build a wall between your personal assets and the company’s assets. Please know, however, that you will still be personally liable for bank loans, investor funds and payroll tax liabilities (and probably rent payments, too), as personal guarantees are often required by the banks and landlords. The IRS will not require you to sign a personal guarantee, but I can promise you, they look to both the company and to the officers for payment of taxes!
I hope the above helps you to avoid many of the pitfalls that cause new start-ups to fail. Remember, a failure to plan is a plan to fail! Another caption I like (author unknown) is: “Failure is not an option. It is just a nagging possibility that helps keep me focused!”