Entrepreneurship 102: Creating A Business Plan

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Creating A Business Idea

 The point of a business plan is to clarify everything about the business

  • If you like to play it by ear, you can still run a business, but it won’t be very effective
  • Taking the time to put together a business plan not only clarifies the organization to you, but also to anyone else involved
    • Since nobody else is as passionate as you are, the business plan will help bridge that gap for others to see the idea played out
    • You are guaranteed to have forgotten something that the business plan will cover, even if you are extremely meticulous
  • Even if you’re not showing it to lenders or investors, a business plan always has the same format, which gives good practice for your future endeavors
  • Some of the smaller business ideas can be a business plan as small as 1 page

Before starting, think about the ultimate questions that all potential investors and lenders will want to see

  1. Is the idea timed too early where nobody understands it or too late where there are too many competitors?
  2. Is there sufficient talent, devotion and skill to carry out the presented idea?
  3. Is the idea itself sound and reasonable?
  4. Is the business model structured correctly?
  5. Will there be sufficient financing to perform the operations of the business?

1. Start with a title page, table of contents and an executive summary

  • The title should be catchy and memorable
  • The executive summary should be created last
    • It covers everything that a 5-minute interview will reveal
      • What will the product be?
      • Who will the customers be?
      • Who are the owners?
      • What does the future hold for the business and industry?
      • If there’s a loan
        • How much is needed?
        • How will it be used?
        • How will the money make the business more profitable to ensure the loan is repaid?
    • It needs to be enthusiastic, professional, complete and concise

2. Build a general company description

  • This is what the business will be and what it actually does
  • Start it with a mission statement
    • Typically 30 or less words
    • A message that shows guiding principles and the reason for the business existing
  • Write out company goals and objectives
    • Goals are what you want the business to be
    • Objectives are progress markers along the way to achieving those goals
  • Share the philosophy of the business in more detail
  • Briefly describe who the products will be marketed to
  • Describe the industry
    • Is the industry growing?
    • What changes are coming in the industry, short and long term?
    • How will the company be ready to take advantage of the industry’s changes?
  • Describe the company’s most important strengths and the best talents of its workers
    • What factors will make the company succeed?
    • What strengths are best to have a competitive advantage?
    • What background experiences, skills and strengths does everyone involved in the startup personally bring to the company?
  • Indicate its legal form of ownership and why
    • Sole proprietorships or partnerships to maintain personal legal ownership of the entire business
    • Corporations or Limited Liability Corporations/Partnerships (LLCs/LLPs) to give a legal barrier between the owners and business

3. Go more into detail about the products and services the company is giving

  • Describe in depth each of the products or services
    • Give as much detail as possible
    • Reference technical specifications, drawings, photos, sales brochures and any other bulky items to the Appendices in the back of the book
    • If you’re selling a variety of products, make sure you know how to use and operate every single one of them
      • Look at things with fresh eyes, as if you’re a new customer learning about it
    • When you think you’ve tested your product enough, test it some more
      • Never release a product until it has been tested exhaustively by people who don’t work for you
  • Show pricing, fees or leasing structures of the products and services
  • Give an analysis about what competitive advantages and disadvantages each product will give
    • The levels of quality compared to competitors
    • Unique or proprietary features
    • Its cost compared to competitors
    • Anything else that can make the product or service better or worse than others

4. Provide a detailed marketing plan the business will start with

  • Show the results of the marketing research
    • There must be enough research to prove the data is consistent and answer any uncertainties
    • Be as specific as possible with statistics, numbers and sources
      • The marketing plan will later in the document be the source for sales projections
  • Give economic facts about the industry
    • The total size of the market
    • The current demand in the market
    • Trends in the market like growing trends, shifts in consumer preference and product development trends
    • The growth potential and maximum opportunity for a business of this size
      • If the business will be a major factor in the market, the percentage the business will dominate the market
    • The scope of the content and the way it will appear to the customers
    • Barriers to entering the market and how to overcome each one of them
      • High capital costs, production costs, shipping costs or marketing costs
      • How well consumers will accept a new brand and how well it can be recognized
        • What will happen if the brand does not take off and the product is regarded as a commodity
      • Necessary training and skills
      • Unique technology and patents
      • Union involvement
      • International tariff barriers, quotas and taxes
    • The ways that changes will affect the company
      • New technology
      • Government regulations
      • Economic shifts and changes in the industry
  • Share the product from the customers’ point of view
    • List all the products and services with their features and benefits
      • Describe their most important features and why it’s special
      • Describe the benefits of what they will do for the customer
      • Pay attention to the difference between features and benefits: features are built into the product to sell the benefits
    • You may think your product is perfect, but your clients won’t
      • Your opinion is probably not be the best one, so listen to user feedback
      • Be careful about being misguided: if a product makes a customer unhappy but they don’t know why they will ask for unimportant and unrelated features
    • Share the after-sale services that will be given
      • Delivery of the product and the costs covered
      • Refund and return policy
      • Warranties and service contracts
      • Technical support during and after the warranty
      • Follow-up about the customer’s experience
  • Describe who the customers of the product will be like
    • Identify the target customers, their characteristics and their geographic locations
      • This varies depending on the potential clients
      • Analyze everyone involved if distributors, wholesalers or retailers are giving the product to an end-user
    • For each type of customer, create a demographic profile
      • Age and gender
      • Physical location and regional lifestyle elements
      • Income level, social class, occupation and education
      • Anything specific to the industry
    • For business customers, the demographic factors will be different
      • Industries involved, or what portions of the industries
      • Physical location
      • The size of the organization
      • Quality, technology and price preferences
      • Anything specific to the industry
  • Share who the competitors will be
    • List every one of the major competitors
      • Their names and addresses
      • Will they compete everywhere or just for certain products, customers or locations?
      • Will there be important indirect competitors, such as from a different industry?
    • Compare the two largest competitors on the following table:
      • competitors
      • The key competitive factors in the left column may vary depending on the industry
      • Rate the other companies on a scale from 1 to 5
        • Clarify how important every value is to customers
      • Very honestly and bluntly rate the startup on a scale from 1 to 5 by comparison to the ideal
        • Consider the company’s values into the rating
        • Use a disinterested stranger for the best feedback
        • It is impossible to be everything to everyone, so there has to be a number of 1’s on the rating scale
  • Share the marketing strategy on how the product will actually be marketed
    • In one short paragraph, describe the one specific corner of the market (niche) that the company will hold
    • Share how the marketing strategy will work
      • Explain how it will be promoted
        • How will you get the word out to customers?
        • What advertising media, why and how often? Why not other alternatives?
          • Social media
          • Website
          • Search engines
          • Printed media
        • Are there any ways to take advantage of low-cost ways to advertise?
        • Will there be methods other than paid advertising?
          • Trade shows
          • Catalogs
          • Dealer incentives
          • Word-of-mouth (and how will it be stimulated?)
          • Networks of friends or professionals
        • What image do you want to project, and how do you want customers to see you?
        • What are the plans for graphic image support?
          • Logo design
          • Cards and letterhead
          • Brochures
          • Signage
          • Interior design, if there is a physical place of business
        • What is the promotional budget for the above?
          • Before the startup
          • Ongoing costs
      • Give the pricing for the products
        • Explain the thinking that sets the prices
          • Include some of the commonly overlooked costs
            • The cost of consulting, meals and entertainment before the product is discussed
            • Travel expenses
            • The loss in profit from the likely negotiation of a customer
            • Overhead costs (administrative, attorney, accountant, etc)
          • Undercharging is not sustainable
            • A higher profit margin is extremely important in a startup
            • Focus on quality, expertise and niche focus instead of price
            • Any idiot can undersell you
          • Share how it matches the competitive analysis
        • Share the prices and compare them with the competition
          • Describe how important prices are as a competitive factor
        • Clarify the customer service and credit policies
      • Indicate a proposed location
        • Many startups can run successfully from home for a while
        • The location will simply be a reference for the marketing until the operational plan
          • How is the location important to customers if at all?
        • Show the location’s marketability as a venue
          • Is it convenient to get to or is it out of the way?
          • How is its parking?
          • What do its interior spaces look like?
          • Is it consistent with the image and what customers want or expect?
      • Provide the distribution channels (how the products will be sold)
        • This must be clear, since the customer’s lifestyle connects closely to it
        • Sent straight to the customer
          • Retail
          • Direct through mail order, web or a catalog
          • The company’s own sales staff
          • Digital download or sharing across the cloud
        • Sent through a third-party
          • Wholesale
          • Third-party agents
          • Independent representatives
        • Bids on contracts
      • Give data-minded sales forecasts that tell how well the company will do
        • Have a well-estimated projection that lines up most likely with expectations
        • As a backup, it can help to give a worst-case scenario sales projection that you’re confident you’ll reach no matter what

5. Create an operational plan about how the organization will run from day to day

  • Describe how the products or services will be produced, with explanations about:
    • Quality control (maintaining a good quality product)
    • Customer service
    • Inventory control (preventing theft, decomposition or damage)
    • Product development (improving the product)
  • Give more details about what you need in a location
    • Provide a drawing or layout if it’s relevant, which is often necessary for manufacturers
    • Physical requirements
      • The necessary amount of space
      • The type of building and its zoning
      • Necessary utilities like power and water
    • Accessibility
      • How much it needs to be convenient for transportation or for suppliers
      • If it needs easy walk-in access
      • Requirements for parking
      • How close it needs to be to the freeway, airports, railroads and shopping centers
      • The hours the business will be open or needs to be open to the public
    • The construction of the building
      • Most startups shouldn’t put money into making a building
      • If there are plans to build, costs and specifications will be a large part of the plan
    • Costs
      • The approximate occupation expenses
        • Rent
        • Initial remodeling costs and maintenance
        • Utilities
        • Insurance
  • Give information about the legal environment for the business
    • Licensing and bonding requirements
    • Necessary permits
    • Health, workplace or environmental laws
    • Special laws that cover the industry or profession
    • Zoning or building code requirements
    • Necessary and elected insurance coverage
    • Trademarks, copyrights and patents (pending, existing or purchased)
  • Describe the employees that will work there and what they will do
    • The number of employees, detailed job descriptions and their pay structures
    • The types of labor (skilled, unskilled, professional)
    • The quality of the current staff
    • Where and how the employees will be found, how they will be trained and their requirements
    • Whether contract workers will be used in addition to employees
    • The tasks each worker will be assigned to do, and how the responsibilities will change over time
    • Schedules and written procedures to manage employee behaviors
  • Describe the inventory at the work site
    • The type of inventory being kept (raw materials, supplies, finished goods)
    • Average value of the initial investment of inventory stock
    • The rate of inventory turnover and how it compares to the average of the industry
    • How seasonal inventory builds up
    • The time it takes from ordering to delivery
  • Identify the key suppliers to the company
    • Their names, addresses, history and reliability
      • Many suppliers see small business owners as easy to take advantage of, so backup plans are essential
      • Don’t bother trying to sue for damages, they are usually not worth the cost and time to hassle with
        • A threat of a lawsuit may work to negotiate a fair settlement, but it will cut off any future relationship with the supplier
    • The type and amount of inventory they will provide
    • Their credit and delivery policies
    • Whether there will be supply shortages or short-term delivery problems
    • The stability of the supply costs, and how to deal with the natural fluctuations in cost
    • Whether the supplies can come from an unpredictable and unconventional source
      • Auctions
      • Craigslist/eBay
      • Flea Markets/Swap Meets
      • Thrift Stores
      • Friends & Family
  • Describe the credit policy
    • Accounts receivable, the money owed to the company
      • Plans to sell on credit, and whether it’s needed or not from the culture
      • Policies for issuing credit and how much
      • How to check the credit of new applicants
      • When the credit will be due
      • Prompt payment discounts, if it’s customary from the culture
      • The costs of extending credit and how they have been built into the prices
      • Show a sample accounts receivable chart with aging
      • Describe when to send a letter, make a phone call or threaten with an attorney with slow-paying customers
    • Accounts payable, the money the company owed
      • Describe whether vendors will offer prompt payment discounts
      • Show a sample accounts payable chart with aging

6. Describe the management of the organization

  • Indicate who will manage the business every day
    • Provide their experience and what it brings to the business
    • Clarify special or distinctive talents or abilities
    • Inform whether the business can keep functioning if this person can’t work anymore
  • Create an organizational chart showing the management hierarchy, position descriptions and who is responsible for important tasks
    • Include the resumes of the owners and key employees if this plan is going to be seen by investors or lenders
  • Describe who will be providing professional and consulting support
    • The board of directors
      • An official group who determines the path of the organization
    • The management advisory board
      • An informal group of about 3-5 outside advisors that have no financial interest in the organization
        • Adds measurable and distinctive value to the organization
      • A good management advisory board has to be the right kind of people:
        • Objective, honest and skilled differently than the owners
        • Respecteed and knowledgeable in their own fields
        • Genuinely interested in the success of the organization
        • Effective communicators and problem solvers
        • Diverse in their skills,work and life backgrounds
        • Well-connected with networks that can help the owner
      • When forming a management advisory board:
        1. Require non-compete and non-disclosure agreements
        2. Set expectations for everyone’s commitment to a meeting and adhere to an agenda
        3. Clarify the type of assistance that each memeber will be providing
        4. Express gratitude for their time, and make sure to rotate board members if it’s an ongoing group
    • The company’s primary attorney, accountant, insurance agent and banker
    • Mentors and key advisors to the company
    • Any outside consultants

7. Give draft financial statements to show the estimated status of the organization

  • This should show all the assets, liabilities and personal net worth of everyone involved
  • Include personal financial statements for every owner and stockholder
  • Create reports that show the startup’s initial expenses
    • Be as honest as possible
    • Make room for error in one of two ways:
      1. Create “padding” to each item in the budget, though it can destroy the accuracy of the plan
      2. Add a separate item called “contingencies” that plans for what can’t be planned for
        • This is the best approach, since it keeps the plan accurately established
        • This should be based on the experiences of other entrepreneurs in the same industry
        • A general rule is to make contingencies about 20% of the other startup expenses put together
    • Explain every expense and why it is the amount indicated
  • Provide all the conventional accounting reports for the first year of business
    • 12-month Profit & Loss Projection
    • 4-year Profit Projection (optionally, if that can be estimated)
    • Projected Cash Flow
    • Opening Day Balance Sheet
    • Break-Even Analysis in different scenarios to determine where the company starts becoming profitable
  • The company can lose profit many times, but it can only run out of money once
    • 2-3 months’ worth of operating costs in an emergency fund along with an untouched line of credit will give enough time to adapt
    • Create an MVP (minimum viable product) as soon as possible to find out the highest return on investment

8. Include anything that is industry-specific or that comes to mind into the appropriate parts of the plan

  • Share the major milestonese that will indicate success for the business
    • Though this involves money, it doesn’t always have to
    • It can be a sales result or a marketing exposure result, but it always has to tie to a number
  • Give trend analysis in a separate category if it’s a non-profit organization
Next: Creating A Business