Business Plans

Do I Need a Business Plan?
Not everyone who starts and runs a business begins with a business plan, but it certainly helps to have one. If you are seeking funding from a venture capitalist, you will certainly need a comprehensive business plan that is well thought out and demonstrates sound business reasoning.

If you are approaching a banker for a loan for a start-up business, your loan officer may suggest a Small Business Administration (SBA) loan, which will require a business plan. If you have an existing business and are approaching a bank for capital to expand the business, they often will not require a business plan, but they may look more favorably on your application if you have one.

Reasons for writing a business plan include:

• Support a loan application
• Raise equity funding
• Define objectives and describe programs to achieve those objectives
• Create a regular business review and course correction process
• Define a new business
• Define agreements between partners
• Set a value on a business for sale or legal purposes
• Evaluate a new product line, promotion, or expansion
  

What's in a business plan?
A business plan should prove that your business will generate enough revenue to cover your expenses, but a business plan may vary depending upon whom your audience is. If you are writing a plan for your colleagues and partners, for example, to expand an existing business, then the focus of that plan may be more operational than financial. Yes, you are going to show your partners how this expansion will mean more revenues, but they are going to want to know the nuts and bolts of how this new venture is going to be implemented.

If you are writing a business plan for a bank, your bank manager will want to see that your ideas are well thought out, but the most important aspect to him or her will be your financials. Are your assumptions realistic? And will the cash flow of the business be enough to ensure that you can make the monthly payments for the loan that you have requested? If your business is making $1,000 a month and your payments are $1,200 a month, the bank is likely to turn you away.

When considering an investment opportunity, most venture capitalists look at the obvious trends and market niches. Transcending the business elements, however, the most important factor in a decision to invest in a company is the quality of the people. In real estate, the three biggest criteria are "location, location and location." The venture capital axiom is "people, people and people." VCs will ask, how experienced are the people that are going to run this business? Do they have knowledge of the industry? Have they started successful ventures in the past?
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What makes a successful business plan?

• Presents a well thought out idea
• Contains clear and concise writing
• Has a clear and logical structure
• Illustrates management's ability to make the business a success
• Shows profitability

Bringing it all together…

Your business plan is like your calling card, it will get you in the door where you'll have to convince investors and loan officers that you can put your plan into action. You want your calling card to look impressive, so make sure your business plan is printed out on good quality paper, you have checked the spelling and grammar and that your numbers add up. Anyone who sees errors while reading your plan will wonder whether you are going to make similar errors in running your business.

A great business plan is the best way to show bankers, venture capitalists, and angel investors that you are worthy of financial support. Make sure that your plan is clear, focused and realistic. Then show them that you have the tools, talent and team to make it happen.

Business Plan Mistakes
Often you may hear about what a business plan consists of. While including the necessary items is very important, you also want to make sure you don't commit any of the following common business plan mistakes:

1. Putting it off.
   Don't wait to write a plan until you absolutely have to. Too many businesses make business plans only when they have no choice in the matter. Unless the bank or the investors want a plan, there is no plan.
   Don't wait to write your plan until you think you'll have enough time. "There's not enough time for a plan," business people say. "I can't plan. I'm too busy getting things done." The busier you are, the more you need to plan. If you are always putting out fires, you should build firebreaks or a sprinkler system. You can lose the whole forest for paying too much attention to the individual burning trees.
2. Cash flow casualness.
   Cash flow is more important than sales, profits, or anything else in the business plan, but most people think in terms of profits instead of cash. When you and your friends imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which equal profits. Unfortunately, we don't spend the profits in a business. We spend cash. So understanding cash flow is critical. If you have only one table in your business plan, make it the cash flow table.
3. Idea inflation.
   Plans don't sell new business ideas to investors. People do. The plan, though necessary, is only a way to present information. Investors invest in people, not ideas.
   Don't overestimate the importance of the idea, particularly the importance of the uniqueness of the idea. You don't need a great idea to start a business; you need time, money, perseverance, common sense, and so forth. Very few successful businesses are based entirely on new ideas. A new idea is much harder to sell than an existing one, because people don't understand a new idea and they are often unsure if it will work.
4. Fear and dread. Doing a business plan isn't as hard as you think. You don't have to write a doctoral thesis or a novel. There are good books to help, many advisors among the Small Business Development Centers (SBDCs), business schools, and there is software available to help you (such as Business Plan Pro, and others).
5. Spongy, vague goals. Leave out the vague and the meaningless babble of business phrases (such as "being the best") because they are simply hype. Remember that the objective of a plan is its results, and for results, you need tracking and follow up. You need specific dates, management responsibilities, budgets, and milestones. Then you can follow up. No matter how well thought out or brilliantly presented, it means nothing unless it produces results.
6. One size fits all Tailor your business plan to its real business purpose. Business plans can be different things: they are often just sales documents to sell an idea for a new business. They can be detailed action plans, financial plans, marketing plans, and even personnel plans. They can be used to start a business, or just run a business better.
7. Diluted priorities. Remember, strategy is focus. A priority list with 3-4 items is focus. A priority list with 20 items is something else, certainly not strategic, and rarely if ever effective. The more items on the list, the less the importance of each.
8. Hockey-stick shaped growth projections. Have projections that are conservative so you can defend them. When in doubt, be less optimistic

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Gathering Information For Your Plan
A common problem people encounter when writing their business plan is finding information about their business industry and competitive companies. Fortunately, in recent years the Internet has made information gathering simple and easy, but sometimes the best information is found much closer to home, with real people, in real time.

Always take a look at other businesses similar to your own, as a very good first step. If you're looking at starting a new business, you may well be starting one similar to one you already know. If you're doing a plan for an existing business, you are even more likely to know the business well. Even so, you can still learn a lot by looking at other similar businesses.

Look at existing, similar businesses.
If you are planning a retail shoe store, for example, spend some time looking at existing retail shoe store businesses. Park across the street and count the customers that go into the store. Note how long they stay inside, and how many come out with boxes that look like purchased shoes. You can probably even count how many pairs of shoes each customer buys. Browse the store and look at prices. Look at several stores, including the discount shoe stores and department store shoe departments.

Find a similar business in another place.
Find a similar business far enough away that you won't compete. For the shoe store example, you would identify shoe stores in similar towns in other states. Call the owner, explain your purpose truthfully, and ask about the business.

Scan local newspapers for people selling a similar business.
Contact the broker and ask for as much information as possible. If you are thinking of creating a shoe store and you find one for sale, you should consider yourself a prospective buyer. Maybe buying the existing store is the best thing. Even if you don't buy, the information you gain will be very valuable. Why is the owner selling? Is there something wrong with the business? You can probably get detailed financial information.

Always shop the competition.
If you're in the restaurant business, patronize your competition once a month, rotating through different restaurants. If you own a shoe store, shop your competition once a month, and visit different stores.

It takes a little hard work but by using the Internet and doing some research at local businesses, you should be able to gather all the information necessary for your business plan.

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Business Plan Maintenance
A business plan is not a one-time document, at least it shouldn't be. Most businesses put together a business plan during their start-up phase to organize, attract partners and employees, and to try and get a loan or financial investment. This is a great use of a business plan, however far too often once the company has started up the plan isn't touched again.

Ultimately, a business plan is about results, about making your business better. If you don't think doing a business plan will improve your business, then don't do one. Planning for planning's sake is a waste of time.

Where a plan is most likely to make your business better is by allowing you to:

1. Set priorities properly.
2. Track plan vs. actual results and make course corrections.
3. Plan and manage the critical numbers that aren't intuitive: not just profit and loss, but the relationship to cash flow, balance sheet, and ratios.
4. Communicate your plan to others: partners, employees, lenders, and investors. You may have a great plan in your head, but as soon as you need to explain it to others, you need to write it down.
   

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Reviewing Your Plan
So how do you maintain your business plan? We have to first establish that without regular review -- monthly or at least quarterly review of your planned vs. actual results, with practical analysis of the reasons for variance -- planning is likely to be a waste of time.
Real planning requires regular reviews just as much as navigation requires knowing where you are as well as where you were and where you wanted to go.

Every real plan needs to be full of specific dates, budgets, forecasts, and management responsibilities. People involved have to know there will be tracking and following up on specifics. Then that plan must be reviewed against results, and those reviews should produce course corrections and fine tuning.

Generally a business hopes for a consistent long-term strategy built on short-step incremental changes, not major revisions. Consistency is important to strategy, and the business should avoid the temptation to jump around from one strategy to another so quickly that no strategy is ever really implemented. Remember that even a mediocre strategy well and consistently implemented is much better than a brilliant strategy that wasn't implemented.

However, businesses do come to crossroads demanding major revisions in their business plan. These are some signs that indicate its time to review your plan:

• Major changes in market situation. Look especially for changing market factors and changing market behavior.
  • Have your underlying business assumptions changed? As an example, the Internet has changed the business landscape so enormously that in some industries almost any plan that was developed without a view of the Internet may need revisions. That may not be true for a landscape architect or restaurant, but for a travel agent, graphic artist, or market researcher it's obvious.
  • Do you have new competition? Have new competitors emerged, or existing competitors changed the business landscape so much that you need to review and revise?
  • Has the product or service picture changed? For example a new technology may have emerged, changing the market perception of what you sell. There may be new products or services offering related solutions to the same user needs you satisfy.
• Major changes in internal situation. The most obvious major changes are changes in ownership, which are frequently the result of changing partnerships, divorces, deaths, and investment. The company takes on new partners, or sells out to a larger company. On a more ominous note, the company suffers significant declines in sales, profits, and financial health.

Always keep the revision in perspective. While you do want to review and correct constantly, you don't want to change a strategy unless you are sure it isn't working or you see real changes in the underlying assumptions that formed the foundations of strategy.

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Maintaining Your Plan
The purpose of maintaining your plan is to use business results to guide your future decisions. The plan itself has no value if it doesn't help you improve business. That's regardless of how good or bad, how brilliant the ideas, writing, or how elaborate the tables and charts. Its value is the decisions it leads to. That means, of course, that to make a plan worth the effort of developing it, you'll want to follow it up. Whether that's every month or every quarter, you need to track results, analyze the difference between plan and actual results, and manage. Change things that need to be changed. Compare what you planned to what happened in reality. Ask yourself the following questions:

• What went wrong, and how can we fix it?
• What went right, and how can we take advantage of it?
• What changes took place in the competitive landscape that could be updated in the plan?
• What changes took place affecting our market that could be updated in the plan?
• What changes took place internally in our organization that could be updated in the plan?
  

After you've answered these questions, update your plan accordingly, set new budgets and milestones, adjust your financials, and repeat the process with another review of your plan again next month or next quarter. Update your plan accordingly again, and keep repeating. You'll find that maintaining your business plan gives you a better grasp on your business, your market, and everything else that happens with your company.

Design a Plan To Fit Your Business
Business planning is about results. For every business plan, you need to make the contents of your plan match your purpose. Don't accept a standard outline just because it's there.

The Essential Contents Of a Marketing Plan
Every marketing plan has to fit the needs and situation. Even so, there are standard components you just can't do without. A marketing plan should always have a situation analysis, marketing strategy, sales forecast, and expense budget.

• Situation Analysis: Normally this will include a market analysis, a SWOT analysis (strengths, weaknesses, opportunities, and threats), and a competitive analysis. The market analysis will include market forecast, segmentation, customer information, and market needs analysis.
• Marketing Strategy: This should include at least a mission statement, objectives, and focused strategy including market segment focus and product positioning.
• Sales Forecast: This would include enough detail to track sales month by month and follow up on plan-vs.........-actual analysis. Normally a plan will also include specific sales by product, by region or market segment, by channels, by manager responsibilities, and other elements. The forecast alone is a bare minimum.
• Expense Budget: This ought to include enough detail to track expenses month by month and follow up on plan-vs.-actual analysis. Normally a plan will also include specific sales tactics, programs, management responsibilities, promotion, and other elements. The expense budget is a bare minimum.
• Are They Enough?
  These minimum requirements above are not the ideal, just the minimum. In most cases you'll begin a marketing plan with an Executive Summary, and you'll also follow those essentials just described with a review of organizational impact, risks and contingencies, and pending issues.
• Include a Specific Action Plan
  You should also remember that planning is about the results, not the plan itself. A marketing plan must be measured by the results it produces. The implementation of your plan is much more important than its brilliant ideas or massive market research. You can influence implementation by building a plan full of specific, measurable and concrete plans that can be tracked and followed up. Plan-vs.-actual analysis is critical to the eventual results, and you should build it into your plan.

Know Your Customers
Research your customer base first. Your present customers are probably your most important market. Know as much as you can about who your present customers are, where they find you, what they like about you, and what they don't like. Your present customers can lead you to future customers too.

Unless you are a brand new business with no customers at all, your market research should begin with learning as much as possible about your present customers.

Start by classifying your customers into useful groups, or segments. Market segmentation can lead you to better marketing. Classifying customers can help you understand their needs, channels, and differences.

More is not necessarily better when it comes to customer data. If your company sells three products a year, the crucial data will come from these key customers. After collecting some demographic information, your company will be able to focus on the best way to get feedback from the customer. For example, if your company sells home and garden tools, your best target might presumably be the married, dual income, weekend shopper. As soon you have qualified the customer, move on to the surveys and complaint responses.

Look as well at complaints and problems as a valuable source of customer market information. Studies show that 2-4% of dissatisfied customers complain, which leaves 96-98% unaccounted for. Can you identify these other unhappy customers? By contacting them you may learn of a product problem, discover a solution to a problem, and/or repair and save customer relationships. Remember, if they are not talking to you, they may be complaining to your next potential customer.

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User Satisfaction Surveys
Consider using customer survey information to find out more about your customers. The obvious information includes general characteristics that help divide the customers into segments. Do your customers divide into groups:

• By age, income, or gender?
• By profession, educational level?
• By type of company or industry?
• By how much disposable income they have?
  

This information can be extremely useful. However, you may need to filter information from questions that might encourage customers to give incorrect answers, such as questions about age, income level, and intent to buy. (Following material is taken from the book Inc.'s How to Really Deliver Superior Customer Service, published by Inc. Magazine.)

After systematically gathering targeted expectation data, consider using the following information to design a quantitative survey. Here are some guidelines for that survey. These were provided by Tom Carnes, of PDQ Printing in Las Vegas, NV:

1. Obtain inside agreement as to the purpose of the survey. Too many have eight purposes, none of which is served very well by a short survey. Firms need to ask all critical stakeholders: How do you think we should use the satisfaction data? Then consensus should be reached before the survey is designed.
2. Keep the survey fairly short. The response rate drops significantly when a survey starts to take more than 10 to 15 minutes to complete. At 10 or 15 minutes, though, you can achieve an average response of 65% to 75%.
3. Send the survey to more than one contact within the account. If this is not done, you run the risk of getting high levels of satisfaction and then having the relationship ended by a dissatisfied and unsurveyed account contact.
4. All responses need to be confidential. The rule of research is that unless confidentiality is guaranteed, you are probably not going to get the whole truth.
5. Use the appropriate scale to generate actionable data: account-prioritized improvement areas. A comparison of performance data with expectations provides comparison of the most robust improvement data.
   

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Focus Groups
Consider using focus groups to find out more about your customers, and what they think of your products and services. Most people know the focus-group technique, where customers are brought together and asked their opinion by a professional facilitator. In initial business-to-business satisfaction focus groups, we usually ask key account contacts a number of pointed questions about their expectations and how well the supplier is meeting them.

Focus groups take up more time and effort than surveys, but the interactivity of a focus group may provide clearer feedback.

Many companies use focus groups to look at new products, or focus on identifying solutions to problems. Software publisher Intuit used focus groups to assemble people who hadn't purchased its software, but were considered potential customers. It asked them why they weren't customers, what problems they had in related areas, how software could help them.

This case study was included in Inc.'s 'How to Really Deliver Superior Customer Service'.

Phelps County Bank of Rolla, Missouri, whose case is included in the same Inc. book, turned to focus groups to ask senior citizens what they liked and didn't like about the bank. The bank invited 80 seniors from among its customers, and was surprised when 60 people, instead of the 20 it expected, showed up for a discussion. The facilitators broke the group into three separate groups, and ran three focus groups. Among the important discoveries was that seniors wanted special treatment, but didn't like most existing programs in competing banks. Eventually the bank created a seniors group, called "PC-Bees," that became very successful.

At PDQ Printing from Las Vegas, NV, focus group discussions with customers are videotaped and used for several related purposes. With the tapes, there is an edited record of customer responses whose uses are limited only by the firm's creativity. Such tapes can be used to:

1. Tighten and align the questions on satisfaction surveys.
2. Bring the "voice of the customer" directly into internal training programs.
3. Help determine which internal delivery systems are out of alignment with customer expectations.
4. Develop quicker employee buy-in for any process or system improvement.

Video focus groups are among the most powerful ways to create a sense of urgency about service quality. Employees tend to listen to customers more than they listen to their own supervisors. At the same time, video focus groups are a powerful way to capture targeted customer expectations systematically. There's no better way to leverage a research investment.

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SWOT Analysis
AMT is a computer store in a medium-sized market in the United States. Lately it has suffered through a steady business decline caused mainly by increasing competition from larger office products stores with national brand names. The following is the SWOT analysis included in its marketing plan.

Strengths

1. Knowledge. Our competitors are retailers, pushing boxes. We know systems, networks, connectivity, programming, all the VARs, and data management.
2. Relationship selling. We get to know our customers, one by one. Our direct sales force maintains a relationship.
3. History. We've been in our town forever. We have loyalty of customers and vendors. We are local.
   

Weaknesses

1. Costs. The chain stores have better economics. Their per-unit costs of selling are quite low. They aren't offering what we offer in terms of knowledgeable selling, but their cost per square foot and per dollar of sales are much lower.
2. Price and volume. The major stores pushing boxes can afford to sell for less. Their component costs are less and they have volume buying with the main vendors.
3. Brand power. Take one look at their full page advertising, in color, in the Sunday paper. We can't match that. We don't have the national name that flows into national advertising.
   

Opportunities

1. Local area networks. LANs are becoming commonplace in small business, and even in home offices. Businesses today assume LANs as part of normal office work. This is an opportunity for us because LANs are much more knowledge and service intensive than the standard off-the-shelf PC.
2. The Internet. The increasing opportunities of the Internet offer us another area of strength in comparison to the box-on-the-shelf major chain stores. Our customers want more help with the Internet, and we are in a better position to give it to them.
3. Training. The major stores don't provide training, but as systems become more complicated, with LAN and Internet usage, training is more in demand. This is particularly true of our main target markets.
4. Service. As our target market needs more service, our competitors are less likely than ever to provide it. Their business model doesn't include service, just selling the boxes.
   

Threats

1. The computer as appliance. Volume buying and selling of computers as products in boxes, supposedly not needing support, training, connectivity services, etc. As people think of the computer in those terms, they think they need our service orientation less.
2. The larger price-oriented store. When we have huge advertisements of low prices in the newspaper, our customers think we are not giving them good value.
   

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Set Your Marketing Objectives
A good marketing plan sets specific marketing objectives. Think about sales, market share, market positioning, image, awareness, and related objectives.

Remember to make all your objectives concrete and measurable. Develop your plan to be implemented, not just read. Objectives that can't be measured, tracked, and followed up, are less likely to lead to implementation. The capability of plan-vs.-actual analysis is essential.

Marketing objectives are likely to be based on sales revenues and market share. They may also include related objectives such as presentations, seminars, ad placements, review coverage, or proposals.

Sales are easy to track and measure. Market share is harder, because it depends on market research. There are other marketing goals that are less tangible and harder to measure, such as positioning or image and awareness. Remember, as you develop the objectives, it is much better to include the measurement system within the objective itself. This is especially true when those measurements aren't obvious.

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