Business Plans by Gwen Moran and Sue Johnson
A member of Penguin Group (USA) Inc.
Business Plans by Gwen Moran and Sue Johnson
A member of Penguin Group (USA) Inc.
This book is dedicated to the brave, visionary people who start and run the businesses that power our nation’s economy.
ALPHA BOOKS Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, USA Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd., 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St. Stephen's Green, Dublin 2, Ireland (a division of Penguin Books Ltd.) Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty. Ltd.) Penguin Books India Pvt. Ltd., 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore, Auckland 1311, New Zealand (a division of Pearson New Zealand Ltd.) Penguin Books (South Africa) (Pty.) Ltd., 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd., Registered Offices: 80 Strand, London WC2R 0RL, England
Copyright © 2005 by Gwen Moran and Sue Johnson All rights reserved. No part of this book shall be reproduced, stored in a retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. No patent liability is assumed with respect to the use of the information contained herein. Although every precaution has been taken in the preparation of this book, the publisher and authors assume no responsibility for errors or omissions. Neither is any liability assumed for damages resulting from the use of information contained herein. For information, address Alpha Books, 800 East 96th Street, Indianapolis, IN 46240. THE COMPLETE IDIOT’S GUIDE TO and Design are registered trademarks of Penguin Group (USA) Inc. ISBN: 1-4406-9085-5 Library of Congress Catalog Card Number: 2005928079 Note: This publication contains the opinions and ideas of its authors. It is intended to provide helpful and informative material on the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering professional services in the book. If the reader requires personal assistance or advice, a competent professional should be consulted. The authors and publisher specifically disclaim any responsibility for any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book. Publisher: Marie Butler-Knight Product Manager: Phil Kitchel Senior Managing Editor: Jennifer Bowles Senior Acquisitions Editor: Mike Sanders Development Editor: Ginny Bess Munroe Production Editor: Megan Douglass
Copy Editor: Jan Zoya Cartoonist: Jody Shaeffer Book Designer: Trina Wurst Indexer: Heather McNeill Layout: Becky Harmon
Contents at a Glance Part 1:
Getting Started 1 According to Plan How your plan can help you
Part 2:
1 3
2 Figuring Out the Financing Understanding your business’s financial needs
15
3 Business Writing Basics Tips and pitfalls to consider while writing your plan
29
Putting Together Your Plan
37
4 Ready, Set, Write Putting your business ideas on paper
39
5 Getting Down to Business How to put your best business foot forward
47
6 Industry Overview Describing your industry and its climate
61
7 Who Are You? Your people are your primary asset; how to showcase your dream team
75
8 Analyzing Your Business in the Market Explaining how your business will perform in the market
87
9 Getting the Word Out Positioning and promoting your business for the best possible results
105
10 Sales Plan and Forecast Explaining how you’ll sell your stuff
119
11 Operation Success Making the most of your day-to-day business activities
129
12 Money, Money Financial statements you’ll need to know for your plan
141
13 Show Your Documents Supporting your claims with all the right backup documents
159
14 Executive Summary What you’re going to tell them in this critical part of your plan
Part 3:
Putting Your Plan to Work
169
175
15 Financing Considerations to Include in Your Plan How to use your plan for investment or lending purposes
177
16 Using Your Plan as a Management Tool How your plan can help everyone in the business get on the same page
189
17 Keeping Your Plan Current How to keep your plan up to date and relevant
205
Appendixes A Business Terms Glossary
215
B Sample Plans
221
C Resources
301
Index
307
Contents Part 1: Getting Started
1
1 According to Plan
3
Business Owner Basics ..................................................................3 Types of Business Plans ................................................................4 Securing Financing or Investors ....................................................5 Strengthening Operations ............................................................5 Preparing for a Sale ....................................................................5 How Can a Plan Help? ..................................................................5 Establishing a Vision and Direction ..............................................6 Keeping on Course ........................................................................6 Setting Goals and Benchmarking Success ......................................6 Outlining Operations ..................................................................7 Fiscal Fitness ................................................................................7 Checking the Ego ........................................................................7 Thorough Research ......................................................................8 Marketing Plan ..........................................................................8 Feasibility ....................................................................................8 Future Expansion ........................................................................8 Exit Strategy ..............................................................................8 Your USP ......................................................................................9 Finding Your USP Through Feedback ..........................................9 Doing It Yourself or Getting Help? ............................................10 Finding Free or Low-Cost Help ..................................................11 Hiring Help ..............................................................................11 Getting Soft ................................................................................12
2 Figuring Out the Financing
15
Understanding Debt and Equity ................................................16 Debt ..........................................................................................16 Equity ........................................................................................16 Money Sources ............................................................................16 Grants ......................................................................................17 Personal Resources ......................................................................17 Loans ........................................................................................19 Selecting a Lender ......................................................................21 Angel Investors ............................................................................21 Other Funding Sources ..............................................................22
vi
The Complete Idiot’s Guide to Business Plans EDA ..........................................................................................22 Community Development Centers ..............................................22 Trade or Business Groups ..........................................................22 What Lenders and Investors Want ............................................23 Capacity to Repay ......................................................................23 Capital to Invest ........................................................................23 Collateral ..................................................................................24 Conditions of Use of Money ........................................................24 Character of Owners ..................................................................24 Credit Rating ............................................................................24 Credit-Reporting Bureaus ..........................................................25 Your Credit Score ........................................................................26 Assessing Your Report ................................................................26 Increasing Your Score ................................................................27 Beware of Quick Credit Fixes ....................................................28
3 Business Writing Basics
29
Effective Business Writing ..........................................................29 Targeting Your Audience ............................................................30 Language and Tone ....................................................................30 Grammar ..................................................................................31 Cutting the Fluff ......................................................................32 Avoiding Clichés ........................................................................33 Presenting Your Information ......................................................33 Capitalizing and Punctuating Properly ......................................34 Writing, then Rewriting ............................................................35 Avoiding Writer’s Block ..............................................................35 Speaking and Writing Well ........................................................36
Part 2: Putting Together Your Plan 4 Ready, Set, Write
37 39
From Dream to Document ........................................................39 Being Organized ........................................................................40 Knowing Your Stuff ..................................................................40 Supporting Your Claims ............................................................41 Getting to the Goal ....................................................................41 Obtaining Financial Assistance ..................................................41 Attract Business Partners ..........................................................43 Operation Benchmark ................................................................43
Contents Obtain Assistance ........................................................................43 Iterative Process ..........................................................................44 Staying Updated ........................................................................44 Analysis ....................................................................................44 Annual Meeting ........................................................................45
5 Getting Down to Business
47
Getting Off on the Right Foot ..................................................48 Title Page ....................................................................................50 Table of Contents ........................................................................52 Confidentiality Agreement ..........................................................52 Executive Summary ....................................................................55 Purpose ........................................................................................55 Business Description ..................................................................55 Structure ..................................................................................55 Owners ......................................................................................56 Location ....................................................................................56 Hours of Operation ....................................................................56 Season’s Greetings ......................................................................56 What Is It? ..................................................................................57 We’re on a Mission ......................................................................57 Mission Statement ......................................................................58 Vision Statement ........................................................................58 Values Statement ........................................................................59
6 Industry Overview
61
Industrial Strength ......................................................................61 Understanding Market Research ................................................62 Interviews ..................................................................................63 Surveys ......................................................................................63 Focus Groups ..............................................................................63 Online Focus Groups ..................................................................64 Observation ................................................................................64 Understanding the Industry ........................................................64 Industry Life Cycle ....................................................................64 Industry Economics and Trends ................................................66 Opportunities and Obstacles ......................................................67 Innovations ................................................................................67 Regulations ................................................................................68 Economic Factors ........................................................................68
vii
viii The Complete Idiot’s Guide to Business Plans Price Comparisons ......................................................................69 Location ....................................................................................69 Competition ................................................................................69 Business Performance ..................................................................71
7 Who Are You?
75
Internal Assets ..............................................................................76 Owners and Partners ..................................................................76 Staffing ........................................................................................77 Management Team ....................................................................77 Outsourcing and Consultants ......................................................79 Employee or Contractor? ............................................................79 Who Is an Independent Contractor? ............................................80 Who Is a Common-Law Employee? ............................................80 Who Is an Employee? ................................................................81 Statutory Employees ..................................................................81 Statutory Nonemployees ..............................................................82 Organizational Chart ..................................................................82 Salaries ........................................................................................83 Strategic Partners ........................................................................83 Professional Resources ................................................................84 CPA ..........................................................................................84 Attorney ....................................................................................84 Bank ..........................................................................................84 Insurance Professionals ..............................................................84 Other ........................................................................................85
8 Analyzing Your Business in the Market
87
Getting Down to Strategy ..........................................................88 Targeting Your Customers ..........................................................89 Demographic Profiles ..................................................................90 Income and Spending Habits ......................................................90 Personal Characteristics ..............................................................90 Standard of Living ....................................................................90 Household Characteristics ..........................................................91 Getting Psychographic ................................................................91 Opinions and Values ..................................................................91 Political Views ............................................................................91 Style and Taste ..........................................................................92
Contents Defining Business-to-Business Customers ................................92 Type of Business and Ownership ..................................................92 Sector ........................................................................................92 Geography ................................................................................93 Psychographic Characteristics ......................................................93 Who Is Your Perfect Customer? ................................................93 Why Do They Buy? ....................................................................95 Do They Need It or Want It? Can They Afford It? ....................95 What’s Important to Them? ......................................................95 For Whom Are They Buying? ....................................................95 Who Are Your Customers’ Influencers? ......................................95 Are They Brand Loyal or Price Driven? ....................................96 How Do They Buy? ....................................................................96 Creating Profiles ..........................................................................96 Innovators ..................................................................................97 Thinkers ....................................................................................97 Achievers ..................................................................................97 Experiencers ..............................................................................98 Believers ....................................................................................98 Strivers ......................................................................................98 Makers ......................................................................................99 Survivors ..................................................................................99 Why You Shouldn’t Service Every Customer ............................99 Evaluating Market Segments ....................................................100 Defining Your Market Strategy ................................................101 The SWOT Approach ..............................................................101 Strengths ................................................................................101 Weaknesses ..............................................................................102 Opportunities ..........................................................................102 Threats ....................................................................................102 Predicting Market Share ..........................................................103
9 Getting the Word Out
105
Positioning Your Business in the Market ..................................105 Explaining Your Marketing Strategy ........................................106 Price ........................................................................................107 Place (Distribution) ..................................................................107 Promotion ................................................................................107 Putting Together the Marketing Plan ......................................113 Being Clear About Goals ..........................................................114 Planning the Action ................................................................114
ix
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The Complete Idiot’s Guide to Business Plans Budgeting Your Resources ........................................................115 Creating a Marketing-Cost Matrix ..........................................115 Timing Your Projects ................................................................116
10 Sales Plan and Forecast
119
Selling Yourself ..........................................................................119 Your Channels ............................................................................120 Direct Selling ..........................................................................120 Manufacturer’s Representatives ................................................120 Wholesalers ..............................................................................120 Retailers ..................................................................................121 Catalogs ..................................................................................121 E-tailing ..................................................................................121 Affiliate Programs ..................................................................121 Sales Tools ..................................................................................122 Database ..................................................................................122 Technological Tools ....................................................................122 Trade Shows ............................................................................122 Territories ..................................................................................123 Finding Prospects ......................................................................123 Referral Systems ......................................................................123 Vendor Contacts ......................................................................123 Expanding Existing Customers ................................................123 Joining In ................................................................................124 Offering a Better Price ............................................................124 Sales Cycles and Strategies ........................................................124 AIDA ......................................................................................125 Sales Cycle ..............................................................................125 Sales Forecast ............................................................................127 Outlining Your Assumptions ....................................................127 Considering Your Marketing Reach ..........................................127 Past Sales or Similar Industries ................................................127
11 Operation Success
129
Business Operations ..................................................................129 Equipment ................................................................................130 Technology Needs ....................................................................131 Equipment Leases ......................................................................132 Building Leases ..........................................................................132 Price ........................................................................................132 Length of Lease ........................................................................133
Contents Location and Traffic ................................................................133 Potential for Growth ................................................................133 Utilities and Services ................................................................134 Production/Service Provision Methods ....................................135 Quality Control ........................................................................135 Inventory and Supply ................................................................136 Managing Inventory ................................................................136 Purchasing Policies ..................................................................137 Suppliers ..................................................................................137 Handling Orders and Deliveries ..............................................137 Vendor Agreements or Letters of Intent ..................................138 Customer-Service Policies ........................................................139
12 Money, Money
141
Start-Up Costs ..........................................................................142 Creating an Operating Budget ..................................................143 Source and Use of Funds ..........................................................144 Managing Cash Flow ................................................................145 Creating a Cash-Flow Statement ..............................................145 Understanding Profit-and-Loss Statements ............................147 Understanding the Balance Sheet ............................................149 Determining Profitability with Financial Tools ......................151 Are You Profitable? ..................................................................151 Break-Even Point ....................................................................152 Outlining Repayment/ROI ......................................................152 Analysis of Financial Facts ........................................................153 Determining How Much Financing Is Needed ..........................153 How Much Owners Are Investing ............................................154 Insurance Needs ........................................................................154 Cover Me ................................................................................155 Prove It ..................................................................................156
13 Show Your Documents
159
Back Me Up ..............................................................................159 Resumés or Bios ........................................................................160 Personal Financial Statements and Tax Returns ......................162 Business Structure (Articles of Incorporation) ........................162 Loans ..........................................................................................163 Credit Reports ..........................................................................163 Franchise or Acquisition Agreements ......................................163 Leases or Mortgage ..................................................................164
xi
xii
The Complete Idiot’s Guide to Business Plans Licenses ......................................................................................164 Letters of Intent ........................................................................165 Market Analysis ..........................................................................166 Other ..........................................................................................166
14 Executive Summary
169
In Summary ..............................................................................169 What’s in the Executive Summary ............................................170 Selling in Your Summary ..........................................................171 Company Overview ..................................................................171 Operations Overview ................................................................171 Market Overview ....................................................................172 Financial Overview ..................................................................172 Paring It Down ..........................................................................173 What Not to Put in the Executive Summary ..........................174
Part 3: Putting Your Plan to Work 15 Financing Considerations to Include in Your Plan
175 177
The Money Plan ........................................................................178 Who’s Got the Cash? ................................................................178 What Lenders Want to See ......................................................179 Knocking a Lender’s Socks Off ................................................180 Negotiating Your Financing ......................................................181 Types of Loans ..........................................................................182 Transaction Loans ....................................................................182 Line of Credit ..........................................................................182 Term ........................................................................................182 Government-Secured Loans ......................................................183 Lease ........................................................................................183 What to Expect During the Loan Process ..............................183 Finding Investors ......................................................................185 Money Online ............................................................................186 What Investors Want ................................................................187 Other Financial Uses for the Plan ............................................187
16 Using Your Plan as a Management Tool
189
Planning to Run ........................................................................189 Planning Findings ......................................................................190 Solidifying Your Philosophy ......................................................190 Developing a Strategic Vision ..................................................190
Contents xiii Identifying Improvements ........................................................191 Preventing Distractions ............................................................191 Avoiding Misunderstandings ....................................................192 Implementing Your Plan ..........................................................192 Providing Strong Leadership ....................................................192 Stating Clear Expectations ......................................................193 Creating Actionable Steps ........................................................193 Being Ready for Barriers ..........................................................193 All Aboard ..................................................................................194 Creating an Advisory Board ....................................................194 Identifying and Building Relationships ......................................196 Strategic Partners ....................................................................196 Staffing Up ................................................................................198 Keeping Them Motivated ........................................................198 Creating Employee Incentives ..................................................199 Getting Employees Onboard with Your Plan ............................201 Managing the Future ................................................................202
17 Keeping Your Plan Current
205
Keeping It Going ......................................................................205 Measuring Your Company’s Success ........................................206 Getting Information ..................................................................207 Your Financial Statements ........................................................207 Your Customer Database or Sales Figures ................................207 Your Employees ........................................................................208 What Do Customers Really Think? ........................................209 Using the Information You Find ..............................................210 When It’s Time to Go, It’s Time to Go ..................................210 Going Forward ..........................................................................212
Appendixes A Business Terms Glossary
215
B Sample Plans
221
C Business Resources
301
Index
307
Foreword I have written dozens of business plans. I have read thousands of them. After almost 20 years of building companies, I have come to realize that the actual business planning document is almost always meaningless. That’s right. The final written product we call “the plan” is actually almost worthless. As a serial entrepreneur and angel investor, every business plan I ever read says the same thing: “We get rich in year five.” Each plan states that this new company addresses a “billion dollar untapped market” and furthermore, its financial projections are “conservative.” Let’s face it. These are both lies. If publicly traded companies are unable to unfailingly predict the financial goals they are able to hit next quarter, how can the new business owner predict what business will be like in year two? However, the process of researching and writing a plan for your business is valuable and essential to building a profitable company. President Dwight Eisenhower said, “I have always found that plans are useless, but planning is indispensable.” A business plan that is not properly researched or that is not regularly revisited and integrated into the company’s operations is useless. In business, as in most of life, things almost never happen the way we plan them. However, the actual process of considering all of the possibilities is critical. It teaches you essential survival techniques at all phases of your business. Stop searching for the perfect business plan format. There are no absolutely right answers. Don’t look for magic in pricey consultants. You need to write the first draft yourself because the process is a key learning step. Focus on the guidelines in this book as best you can. Write simply. Leave the cool buzz words and fancy jargon out. Build your projections from the ground up. Figure out what it will cost to make your product or deliver your service. How will you acquire new customers? How much business can you expect per customer? When you consider these questions, is your new business even feasible? These are some of the most valuable questions to answer! The work you do to find the answers is what matters, not how perfectly constructed the final plan is. After you have worked hard to put together the best plan you can, stop typing, researching, and surveying. Instead, get out of your chair and actually talk to people who might be real customers and are in a position to buy your product or service today. Are they willing to part with their cash to solve a problem they have? What is the Unique Selling Proposition (USP) you can offer prospective customers? You will not know the real answer until you ask someone to buy what you are selling. Although planning is essential, premeditated business can be a dangerous thing. If you create your plan and stick by it no matter what, you could doom your business to
failure by being inflexible. Write your plan, and revisit it regularly to change what’s not working. Too many small business owners set a goal and try to reach it no matter what. Sometimes, that tenacity is the backbone of their success. But sometimes, when they fail to see the signs that the goal might not be the best direction for the business, that lack of flexibility can be a business death sentence. What do businesses need most? Not a perfectly written business plan, but a wellresearched plan. Companies need enough cash to grow and thrive, which a good plan can help land. They need to manage that cash through constant analysis of cash flow. They need a management team that can execute the plan. They need a marketing and distribution component so prospects can access the product or service. Finally, they need repeat customers and referrals. Read this book. Write your plan. Keep talking to customers. And then modify your plan to make the most of what’s working and to stop wasting effort on what’s not working. These are the steps that will get your business off to a great start. —Barry Moltz, www.moltz.com Chicago, Illinois June 2005
Introduction There’s no feeling like starting your own business. Opening a fresh box of business cards with “Your Name, Owner” on them, or sitting in your brand-new office for the first time—it’s heady stuff and an achievement about which many only dream. But you’re different. You’ve taken the plunge, or are making the plans to do so. Because you’re holding this book in your hands, you’re also more likely than the average startup to succeed. Why? You’ve realized the critical importance of creating a business plan. Whether you’re in need of financing, or simply need a road map to guide your business, a wellprepared and properly targeted business plan will help you to achieve the goals that you’ve set for your business by documenting the goals, resources, and processes that will propel your business forward. There’s an old adage that says, “Failing to plan is planning to fail.” That is never more true than when it is applied to a business plan. We have seen this phenomenon firsthand, consulting with and counseling scores of businesses. Those ventures that operate without a solid game plan in place are much more at risk to fail than those that take the time to plan. Because we’ve both been in the trenches as entrepreneurs, we know how valuable your time is. As we’ve written this book, we assume that you know the basics—how to choose which business is right for you, how to structure it, how to staff it, and the like. We’ve written this book to show you how to take the facts about your business and put them on paper in a way that will interest lenders, business partners, or other decision-makers, and how to create a plan that will become a critical management tool for your business. So we’re going to dive into the nuts and bolts of crafting your plan. (If you do need to brush up on start-up basics, be sure to read The Complete Idiot’s Guide to Starting Your Own Business, Fourth Edition, by Edward Paulson.) And, again, because we have been entrepreneurs like you, we’ll share the best tips, secrets, and tactics that we’ve learned on our own. We know the amount of courage, resolve, and commitment it takes to do what you’re doing. We want to help you make that investment pay off.
Who This Book Is For The Complete Idiot’s Guide to Business Plans is for anyone who is starting or acquiring a business and wants to go the extra mile to ensure its success. Whether you’re using your plan to map out management and marketing strategies or going after big bucks, we’ll show you how to put the best possible words and numbers on paper.
xviii The Complete Idiot’s Guide to Business Plans What You Need to Know Before You Start The Complete Idiot’s Guide to Business Plans assumes that you’ve got basic business knowledge. We won’t explain the nuts and bolts of how to run your business because you already know the difference between a balance sheet and a budget. We assume that you have a solid business idea or prospect in mind. This book takes you through the process of extracting the information you need in an acceptable businessplan format to secure financing or to strengthen your business operations, management, and marketing. Anytime you put a series of goals and objectives, as well as a plan for fulfilling them, on paper, you vastly increase the chances of achieving those goals and objectives. That’s what we’ll help you to do. While we recommend a format and order for the information, you may find that mixing up that order works best for your business. That’s fine. You’ll see in the sample business plans that business plans come in many forms and formats. Write the plan that feels most comfortable for you and fulfills the purpose you need to achieve.
What You’ll Find in This Book The Complete Idiot’s Guide to Business Plans is organized to walk you through the process of writing your business plan in a step-by-step sequence. Because there are some sections that you’ll write out of order, we mention them within the sequence and then pay more attention to them when you’re at the point at which you need to write it. The book has four sections: Part 1, “Getting Started”: This is where we give you the basics, a few facts that you’ll need to know, and a briefing of what you’ll need to write your plan more easily. We’ve also included a chapter on business-writing basics that will help you with some of the common issues of structure, composition, grammar, and punctuation that often plague those who don’t regularly write for a living (and that sometimes plague those who do). Part 2, “Putting Together Your Plan”: Here is where the majority of the book’s focus lies. We’ll walk you through the planning process, including how to set goals for your plan and how to write it to achieve those goals. Throughout, we’ve woven sections of real-life business plans to show you how it’s done. Part 3, “Putting Your Plan to Work”: Once you’ve put your plan together, don’t just put it on a shelf or in a drawer! In this part, we’ll show you how to make your plan an important part of your business, how to keep it updated, and how to use it to obtain financing.
Introduction
xix
Appendixes: This isn’t your garden-variety “stuff at the back of the book.” Our last section is chock-full of sample business plans from various types of businesses, ranging from retailers to consultants to manufacturing firms and more. Our glossary will brief you on the terms you need to know, and our list of business resources will show you where to turn for help, information, and advice. Together, these four sections will tell you just about everything you need to know about writing a knock-their-socks-off business plan. And while we know that following these directions will leave you with a solid plan, it is our sincere hope that it will also leave you with a better understanding of and vision for your business. So let’s get ready to write.
How to Get the Most out of This Book To get the most out of this book, read it through first and examine the sample business plans. You can also head online to examine other sample business plans to choose the format that works best for you and your business. Once you’re familiar with the content, use the book as a guide to help you write your plan. By tackling each of the parts in this book, you can then use the order that we suggest, or reorganize the information the way that you see fit, or in the way that’s required by your lender, investors, or consultants. Either way, this book will help you get to the heart of the most important information more quickly. In Part 3, we also address the issues of using your plan as a tool. No business plan is worthwhile if it just sits in a desk or on a hard drive. We show you how to make your plan into a real tool for your business, as well as how to integrate it into your operations to keep it current and relevant to your business. Pay particular attention to the sidebars and margin notes, which include tips, warnings, secrets, and money-saving tidbits. These notes may be short in format, but you’ll find great value in how they can shorten your learning curve and boost your bottom line!
Bottom Line Booster Because time is money, these tips will help save you both as you write your plan.
Red Zone In business, mistakes can cost you. These sidebars will give you fair warning about potential pitfalls to avoid.
xx
The Complete Idiot’s Guide to Business Plans Back Office Secrets In these sidebars, we’ll make you privy to the tips, tricks, and littleknown facts that will help you write your plan and run your business.
Biz Buzz The world of business and writing business plans can be confusing. These sidebars provide definitions for the trickier terms.
Let Us Know What You Think For updates on the book and additional information about small-business resources, visit Gwen Moran’s website (www.gwenmoran.com). We welcome your feedback and success stories. If you have suggested resources or if this book has helped you, let us know at
[email protected] or
[email protected].
Acknowledgments We’d like to thank the folks at Alpha Books, including the amazing team who worked on this book: Mike Sanders, Ginny Bess, Megan Douglass, Jan Zoya, and the production team. Thanks to our agent, Bob Diforio, for all of his help, support, and constant contact through his Blackberry! Gwen would like to thank her family and friends for their support, advice, and assistance in writing this book. Thanks to her parents, Thomas and Jeanice Moran, who raised four individuals who are unafraid to open the door when opportunity knocks. Thanks to her brothers, Shaun, Brian, and Eric Moran, who are a great group of business advisors. And thanks to Joseph Raymond, who taught Gwen about the things that are possible when we choose our own paths. Thanks, also, to the many business owners Gwen has taught, with whom she’s worked, and about whom she’s written over the years—their spirit, tenacity, and energy never cease to inspire her. And special thanks to the entrepreneur who shares her home address—her husband, Henry Nonnenberg Jr.—and their daughter, Abigail. Sue would like to thank her mother and late father, Susan and Albert Mahalske, for always encouraging her by saying, “You can accomplish anything you want by putting your mind to it.” Thanks also to her loving husband, Bob Johnson, for supporting her through all of her crazy and wonderful ideas, ventures, and businesses, as well as to her two sons, Bobby and Chris, for all of their love and for being the wonderful young adults that they are.
Introduction
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She would like to extend special thanks to Bill Harnden and Vicki Lynne Morgan for their time and input to some of the material in this book. Bill is the Assistant Director of the Small Business Development Center (SBDC). After a long and distinguished career in finance, he is currently employed at Raritan Valley Community College providing financial counseling to many small businesses through the SBDC. Vicki Lynne owns Animal Brands, a marketing and sales representation agency, as well as Russmor Marketing Group, which focuses on private consulting, counseling, mentoring, and coaching for businesses, and is an SBDC counselor. Thanks to the great people she works with at SBDC and RVCC, especially Bill Harnden and Allison O’Neil for their team efforts and contributions, to their local SBDC, in assisting small businesses. Thanks, also, to the many wonderful small-business owners she has met and has had the opportunity to assist in their journey of pursuing their dreams. Thanks, also, to Gwen for reaching out to her to co-author of this book! A special thanks go to two very special businesses—Let’s Eat! started by owner Domenick Celentano and Stellar Academy started by two sisters, Mary Matthews and Dr. Margaret Buley—who have allowed us to use their business plans (modified for confidentiality) in this book to benefit and assist other future small-business owners. Through the Small Business Development Center, Sue Johnson had counseled with each of these businesses.
Trademarks All terms mentioned in this book that are known to be or are suspected of being trademarks or service marks have been appropriately capitalized. Alpha Books and Penguin Group (USA) Inc. cannot attest to the accuracy of this information. Use of a term in this book should not be regarded as affecting the validity of any trademark or service mark.
1
Part
Getting Started
Here’s what you need to know before you begin drafting your plan, including the financial and basic company information you should have on hand. This part also includes a few tips on business writing basics. In Chapter 1, we discuss plan basics, such as how your plan can help you run your business as well as give you an overview of what you can expect during the process. In Chapter 2, we give you an overview of financing options and help you understand the financing needs of your business. Chapter 3 gives you a head start on business writing basics to help make the process of writing much less intimidating.
1
Chapter
According to Plan In This Chapter ◆ Entrepreneurship in the United States ◆ How your business plan can help you ◆ Your Unique Selling Point ◆ Do it yourself or get help?
You’re finally acting on that great idea you’ve had for ages. Or perhaps you decided that you’ve just had enough of the commuter lifestyle and want to start a business of your own, closer to home. Whatever the reason you’re starting or acquiring a business, you’re already further ahead than most because you understand the importance of a good business plan. Your business plan can be an invaluable management and financial tool, keeping your business on track and helping you to grow. But there are a number of things you need to know before you start writing. So let’s dive in.
Business Owner Basics Entrepreneurship is a big part of the American dream, and more people than ever are starting up their own enterprises as full-time ventures or as sideline operations. In 2003, there were approximately 23.7 million businesses
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Part 1: Getting Started in the United States, according to the Small Business Administration (SBA). Of those, 572,900 were brand new. In fact, each year, hundreds of thousands of businesses open their doors, including start-ups, acquisitions, and franchises. Major factors that determine whether a company remains viable include an ample supply of capital, sizable enough to have employees, the owner’s education level, and the owner’s reason for starting the business in the first place, such as Biz Buzz freedom for family life or the desire to be one’s own boss. The companies that had the clearest sense of An entrepreneur is purpose—and a solid plan for survival—are the ones someone who launches a forprofit venture or business. that are still open today. The plan for survival is most effective when it takes the form of a written business plan. Beyond the organizational benefits, business plans can offer a financial benefit as well. More than 75 percent of small firms use some form of credit in their start-up or operations. Companies use many different sources of capital, including their own savings, loans from owners’ family and friends, and business loans from financial institutions. Credit cards, credit lines, and vehicle loans are the most common types of credit. Some other business owners turn to commercial banks, who are the leading suppliers of credit, followed by owners and finance companies. Some businesses turn to venture capital. Whatever the form of financing, the lender will want to see a solid business plan before making loans available to your business. In the upcoming chapters, we help you present your business in the best possible way, which can make the difference when you’re trying to secure financing or credit for your business.
Types of Business Plans Business plans come in several varieties, and it’s important to know why you’re writing the plan before you begin. A business plan can range from about 5 pages to 60 or more pages, although an average business plan usually falls in the range of 20 to 30 pages. If you’re writing a business plan to attract capital, then your plan may be longer and filled with more documentation than if you’re using it as an internal management tool. The length and form of your business plan depends on you and your goals for your business. The following sections look at some of the common varieties of business plans.
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Securing Financing or Investors Plans with financial goals place heavy emphasis on the business numbers—what are its sales, assets, projected revenue and income growth, and other factors that make the business a good financial risk? Lenders and investors want to be sure that their investment will be worthwhile, so you’ll want to put your best foot forward, emphasizing your management strengths, financing plan, profit margins, and potential sales growth.
Strengthening Operations If your plan will be used as an internal tool to help you grow your business, you’ll want to spend more effort examining how the business is structured, how products and services are delivered, and how the company markets itself. That way, you can fully outline and measure the success and growth of your business, beyond the bottom line.
Preparing for a Sale If you are looking for a way to sell your company, a business plan can help you streamline operations and find flaws that might make your business less attractive to potential buyers. If your business is a partnership, you have to clearly lay out your expectations for the sale of the business, including the selling price and how the proceeds are to be divided. It’s a good idea to consult an attorney to execute a partnership agreement or buy/sell agreement that spells out these details.
Biz Buzz A partnership agreement is a document that outlines the terms and conditions of two persons or entities entering into a business agreement.
How Can a Plan Help? The good news is that a thorough business plan can help you avoid many of the common challenges that new businesses face. How? A business plan is a road map of your business, both in context and in financial terms. A written business plan is an extremely important tool for any business. It can be used to provide analysis and milestones for the business owner. It serves as a means of communication with accountants, attorneys and others, and as preparation for financial needs and loans. It also acts as an iterative process of a working plan for your ongoing business.
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Part 1: Getting Started Writing a business plan enables you to assemble all of the components of your business together and document them. This process will ensure that you’ve considered the major aspects, expenses, and revenue potential of your business, as well as the staffing, location, and other needs it will have. It will also help you determine the long-term outlook and help you decide whether this is an endeavor that will fit your lifestyle. After you have written a business plan, it can serve as a guide for your business’s progress. With constant review and updates of the plan, it will give you a solid basis on which to make decisions, implement changes, and take action. As your business progresses, you will continue to learn more facts that can be implemented into your plan. Some of the purposes that your business plan can serve are discussed in more detail in the following sections.
Establishing a Vision and Direction Your business plan requires that you document what your vision is for your business. It’s a blueprint that takes the resources with which you’re starting, adds the experience of the key players and the strategy for making the business work, and filters all of that through the financial realities of the business. Done right, it’s a way to test the business on paper before making a significant investment of time and money in a new venture.
Keeping on Course Your business plan can also act as a compass, keeping you on the path that you originally set for your business. All too often, businesses get sidetracked from their core missions, leading to a slowdown in growth because resources are diverted to other efforts. Your business plan can serve to remind you of exactly how your goals should be focused.
Setting Goals and Benchmarking Success Your business plan will help you set the short- and long-term goals that will benchmark the progression of your business. By putting these goals down on paper and explaining how they will be accomplished, you map out the steps you need to take to make your business successful. Your business plan will also have projections about growth, revenue, and accomplishments. You can use these projections as measurements, to determine how well your business is performing. If you find that your business consistently fails to meet the
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goals that were set, then it’s a sure sign that you either need to ramp up some of the sectors of your business or you need to take a look at the measurement mechanisms you’ve put in place to determine if they are realistic.
Outlining Operations A large portion of your business plan will be devoted to the operations of your business, or how it will work. Who will be responsible for various business functions and how will the work get done? Outlining these responsibilities on paper may show you where improvements could be made, where you can save money and time, and if you’re overlooking a key component of how your business will get its tasks done.
Fiscal Fitness As noted earlier, another key factor of a business plan is to obtain money from debt (lenders) or equity (interest in the company) funding. Your business plan is your key to convincing a lender that you have a viable business idea in which they should invest. These money gatekeepers look for research—facts, figures, and demographics. However, they also look for intangibles, such as ingenuity, dedication, and management experience. So it’s critical that you include all of your assets, knowledge, and expertise in this document. The more complete the business plan, the more likely you will obtain funding. Your business plan can also serve as a working budget, to ensure that income is spent properly. Sure, it would be great to rent prime space and spend thousands on luxe décor for your new office. And when you get a fat check from a lender, it can be tempting to splurge on a few things. However, by outlining the cash flow that will be the lifeblood of your business, you’ll be less tempted to take money that should go toward growth rather than spend it on a too-lavish grand-opening party.
Checking the Ego Starting your own business can be a heady experience. Suddenly, you’re the boss, and you may have employees who rely on you to be their leader. You’re the one responsible for decisions for a business that is largely the result of your talent and ability. With so many people turning to them for answers, many entrepreneurs get caught up in thinking that they know it all. A business plan helps you to understand the realities of your business and helps you stay focused on what needs to be done in the best interest of growing your venture.
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Part 1: Getting Started
Thorough Research The process of writing a business plan will mean that you’ll need to do the necessary homework. That means researching your business idea and the marketplace to see if they’re a good fit. Research can take many forms and range from studying data from trade associations to conducting your own market research by talking to potential customers, vendors—and even competitors. If you ignore the research component of starting your business, you do so at your peril. A business plan that saves you from a business that fails because it was never viable in the first place is also a successful plan.
Marketing Plan The marketing component of your plan will set a clear course for getting the word out about your business, products, and services. Beyond that, your marketing plan will determine how your product is positioned, priced, and distributed, relative to your competition’s, giving you more insight into how your business will be successful.
Feasibility Throughout your plan, you’ll be reinforcing why your business is a good idea, where the market for your products and services will be, and, overall, how feasible your business really is. While some businesses simply hang a shingle and call themselves launched, your plan will force you to think through exactly how your business will be successful and exactly why people or businesses will want to become your customers.
Biz Buzz Many people use revenue and income interchangeably, but they are actually two different things. Revenue is your gross income, before any deductions. Income refers to the amount of money that remains after your business expenses, but before income taxes are paid.
Future Expansion Your business plan will explore how and when you will grow your business, including the staff, facilities, and revenue that you’ll need to do so.
Exit Strategy Because no one can run a business forever, good business plans also include exit strategies—game plans for leaving the business or selling it. Investors need to know the business will have longevity after the entrepreneur leaves for any reason.
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Your USP In the context of your business plan, you also need to show your unique selling proposition, or USP. Focusing on developing a USP isn’t a new concept, but it’s a critical one. Setting your business apart from the competition means having a strong platform to do so. If you can’t articulate why customers should buy from your company and not your competitors’, then you’re going to run into problems in selling yourself. Without a strong differentiation that makes your company the clear choice, you’ll find yourself often competing on price or constantly having to settle for customers that might not be the best fit for your company (or the selling cycle—the time frame in which you sell your products or services—will be vastly increased!). So what qualifies as a unique selling point? Following are some qualifications: ◆ New: If you’re first to market, then you have a unique selling point by default—
no one else does what you do. ◆ Improved: If you can clearly state how you’ve improved upon the existing prod-
ucts or services in your sector, then you have a strongly unique selling point. ◆ Convenience: Does your offering save people time or effort? If your product or
service is more convenient to use or provides some savings of time or effort, that can be a strongly unique selling point. ◆ Specialization: Is your product or service better for a specific niche of the mar-
ketplace? For instance, are your widgets manufactured for industrial use or is your service better suited toward more established businesses? ◆ Better quality: Do you do what you do better than the competition? Quality
consistently ranks ahead of price in surveys of why customers buy. So if your product is more durable, your service more reliable, or you’re otherwise head and shoulders above the competition, let your customers and prospects know.
Finding Your USP Through Feedback A good way to determine what your unique selling points are, if you’re already in business, is to ask your customers. Institute some mechanism, such as a survey that determines their level of satisfaction, to gather their feedback and ask them why they buy from you. It’s usually better if you gather the information through some sort of anonymous means. For instance, you can conduct surveys at checkout counters, or
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Part 1: Getting Started send surveys in the mail after the client buys from you, as you’ll get more reliable data that way. Some ways to do this include the following: ◆ Sending a survey to customers with an incentive to return the survey, such as a
discount coupon or chance of being entered into a drawing for a worthwhile gift. ◆ Including a short questionnaire with monthly invoices. ◆ Creating a suggestion box—this could be a physical drop-box or an anonymous
form on your website. Another idea is to teach employees to make note of anecdotal feedback that customers relay. For instance, if a customer says that a new display or service works really well, have a method of capturing that information. It could be as simple as a notebook in which these sorts of comments can be recorded. For more technical-savvy businesses, an e-mail report or entry into a shared database or contact management program can be more effective. Look for ways that you interact with your customers and try to integrate short, noninvasive methods of information gathering. The key to successful gathering of feedback is to keep questionnaires and surveys to a manageable length. This varies depending on your type of business, but the general rule is that shorter is better—five to six questions is ideal. Use a format of both multiplechoice and open-ended questions for best results.
Doing It Yourself or Getting Help? There are a number of business-plan writing services out there, as well as business-plan template software. Should you hire someone, or use software to write your plan for you?
Bottom Line Booster If your plan needs an editorial once-over, hire a business or communications student to help you fine-tune it. The student will get valuable resumé fodder and you’ll get the benefit of a budding wordsmith who can put your ideas into captivating prose.
We don’t think so—at least not for the first draft. The process of writing your plan is an exercise that will help solidify the direction of your business. By going through the process yourself, even if you’re not a good writer, you’ll be forced to think through various scenarios and learn more about how your business will run, market, staff, and grow. By hiring someone to do that for you, you’ll lose out on the benefits gained from that process. However, if you’re not confident in
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your writing skills and feel like you need someone to edit your plan before it goes to lenders or equity partners, it’s fine to hire someone for the final draft.
Finding Free or Low-Cost Help If you are still skittish about tackling your business plan on your own, you may want to consider getting some help. There are a number of resources to which you can turn to get that help for free (or almost free). If your plan needs just a bit of a kick-start, there are plenty of low- or no-cost resources to turn to for help. Try one of the following: ◆ Check out your local Small Business Development Center, which can provide
free and confidential counseling with assistance and review of your business plan, as well as many other free counseling services to existing and beginning businesses. These services cover marketing, financing, and much more. Visit www.asbdc-us.org for the center nearest you. ◆ Call SCORE (Counselors to America’s Small Business), which offers free coun-
seling to start-up or established business owners. Find out more at www.score.org. ◆ Visit the U.S. Small Business Administration online at www.sba.gov for a variety
of small business information, suggestions, and tips offered in English and in Spanish. ◆ Contact your local college. If you can offer a meaty assignment, you may be able
to attract a business student to intern with your company in exchange for credit or a small stipend. If not, see if the college has a business club that can help. ◆ Virtually all industries and professions have trade associations. These associa-
tions offer assistance, statistics, and research that can help you refine your business plan ideas. Visit the association’s website or call for help.
Hiring Help In addition to low-cost help, there are others who can help you write a business plan. Remember that bigger isn’t necessarily better. Don’t be seduced by a “big name” consulting firm, especially if your business is small. Instead, consider hiring a freelance writer or marketing consultant, rather than a management-consulting firm. In most cases, the soloist’s fees will be more affordable than hiring a company with lots of overhead. To save even more money, write the first draft yourself and hire a copyeditor or freelance writer to polish up the grammar and language.
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Part 1: Getting Started Red Zone If you hire a writer to complete your plan, he or she should have business plan experience, as well as a thorough understanding of how a business plan is constructed. Because business plans are proprietary, the writer may not be able to show you other plans that he or she has written. However, the writer should be able to produce at least two appropriate writing samples. In this case, it really pays to check references.
Other tips for hiring providers include the following: ◆ Seek recommendations. Ask other business owners who they would use or call
your local Chamber of Commerce or business association. ◆ Interview a few. Speak with more than one provider to get a sense of pricing and
service levels. ◆ Get and check references. Don’t just settle for an impressive list of clients—
choose specific companies from that list to call, instead of just settling for the references that are offered. And do call—you’ll sometimes be surprised at what the references really have to say! ◆ Review samples. Business plans are proprietary, so the professional may not be
able to share other plans (be wary if he or she does). However, you should still look at the provider’s portfolio. Does it suit your style? Oftentimes writing will be somewhat subjective—if you don’t like how the provider’s previous work looks or reads, chances are that you won’t like what he or she will do for you.
Getting Soft There are a number of business-plan software packages on the market today. These packages will lead you step-by-step through the process of writing your plan. Some of the more popular packages include these: ◆ Business Plan Pro 2005 by Palo Alto Software (www.businessplanpro.com) ◆ Plan Write by Business Resource Software (www.brs-inc.com) ◆ Biz Plan Builder by Jian Tools for Sales (www.jian.com)
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◆ Business Plan 12.0 by Out of Your Mind … And Into the Marketplace
(www.business-plan.com) ◆ Anatomy of a Business Plan by Linda Pinson (www.business-plan.com/
anatomy.html) This list doesn’t constitute an endorsement, and we think that you can write your business plan just fine without spending the money on software. However, these programs do make formatting convenient by providing step-by-step, fill-in-the-blank templates for writing a plan. The trouble is that your plan will look like that of everyone else who used the software. The choice is yours—it may save you some time, but only you will know whether the software is worth it. In this chapter, we covered the basics of why you need a plan. As we move forward, we’ll walk you through the process of putting the plan together. Take a deep breath— and let’s go!
The Least You Need to Know ◆ Businesses that have a solid business plan succeed more frequently than those
that do not. ◆ Revenue is not the same as income. ◆ A business plan can help you secure financing, grow your business, or accom-
plish other goals. ◆ Write your business plan yourself to get the most out of the process. Hire some-
one to help you clean up the prose later—for much less expense than writing it from scratch. ◆ Business-plan software can be a great convenience or an unnecessary expense,
depending on your writing skills. Check out whether it will work for you before you spend your money.
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Figuring Out the Financing In This Chapter ◆ Equity versus debt financing ◆ Types of financial resources available ◆ Types of lenders and investors ◆ What lenders want ◆ Understanding credit
Whatever the purpose of your plan, the financing portion will be an important part of it. You’ll need to figure out how much money it will realistically take to start or acquire your business, as well as how much money you’ll need to sustain it until it becomes profitable. It’s easy to underestimate the amount of money you’re going to need—and that’s a major reason why many businesses fail. Undercapitalization will constrict your cash flow and limit the opportunities you have to grow your business. You will also need enough money on the personal side to carry you through the start-up phase. Sometimes business owners run out of cash to cover their own expenses even when the business is viable. In later chapters, we discuss the specific financial statements that you’re going to need to develop. In this chapter, we address the broader strokes of making your plan appealing to financiers.
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Part 1: Getting Started
Understanding Debt and Equity As you examine the capital needs of your business, and consider using your plan to obtain that capital, you’ll first need to understand the two primary forms of financing: debt financing and equity financing.
Debt Debt financing means that you obtain money from a lender at a certain interest rate and term and then have to repay a set amount that includes interest and any fees that have been added to the principal amount. When you borrow money, the lender has no ownership stake or say in the decision-making processes, and you keep control of your business.
Equity Equity financing is when an investor purchases a part-ownership of your business in exchange for a certain amount of money. The investor and the business owner usually decide on the parameters of ownership rights to which the investor will be entitled. The biggest concern here is that investors usually want substantial control and input in the business to ensure that the business will be successful and get the type of return on their investments that they anticipate. Of course the negative is that you lose control over what you thought was your business. Just be careful with the negotiations. In addition, the investor usually maintains a percentage ownership stake in the business, and may be entitled to a percentage of profits from the business, which is the investor’s return on investment. The investor usually wants a buyout point that is stated up front, because they are looking for a return on their investment over a certain period of time. The period of time can differ between businesses and industries, but frequently it is less than five years.
Money Sources When you’re looking for money to launch your business, there are a number of options available, depending on the type of business you want to start, the collateral you have, and the amount of money you wish to borrow. These include grants, personal resources, savings, credit cards, and several different types of loans.
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Grants Despite some infomercials that tout the availability of grants for virtually any business, grants for garden-variety ventures such as hair salons or restaurants are actually relatively rare. Sometimes you can find special one-time grants online, if you regularly search around, but that may require more than a bit of luck. Still, if you find a grant that matches your business venture, by all means apply for it. Grants are terrific because they don’t need to be repaid as long as you fulfill the obligation that you set forth when applying for the grant. The searching and applying can be time-consuming, however, and often grant matches are not found. More commonly, grants are available for biolife science and high-tech businesses, often offered through various states to cultivate those types of businesses. Federal grants for these types of companies are offered through the Small Business Innovative Research (SBIR) and Small Business Technology Transfer (STTR) programs. Both government programs seek innovative and unique ideas. If your business qualifies, it could receive a grant for as much as $750,000 for the start-up phase and up to $1 million for the growth phase.
Back Office Secrets Because navigating the governmentgrant process can be tricky, you might want to seek help from your local Small Business Development Center (SBDC). SBDCs throughout the nation have consultants who can assist you with the application process. For SBDC locations near you, go to their national website at www.asbdc-us.org.
Personal Resources Most lenders and investors want to see that you’ve invested some of your own resources in the business. After all, if your money is on the line, you’re more likely to be cautious about risking that investment. The following sections discuss some of the personal resources that bootstrapping entrepreneurs have used to start and fund their ventures.
Savings Personal savings, including money in savings and checking accounts, CDs, mutual funds, and other investment vehicles, are often tapped for new ventures. The benefit is that there is no interest due on this money, but you also want to be careful that you don’t jeopardize your ability to pay personal expenses, such as mortgage, car, credit card, and other payments, not to mention having a few bucks left over for groceries, clothes, and other essentials.
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Part 1: Getting Started Home-Equity Loans or Lines of Credit A number of entrepreneurs have borrowed against their largest assets—their homes— in order to fund their businesses. This is a surefire way to get cash, and the interest may be tax-deductible; however, you need to be sure that you’re going to be able to repay this additional loan on your home, or you could end up losing it. A home-equity loan is just that—a loan for a fixed amount of money against your home, up to a certain percentage of the amount of equity you have in your home. A home-equity line of credit, on the other hand, operates much like a credit card. You have a maximum amount that you can borrow at any given time, and you can use checks or a charge card to access the funds, which you can then repay in installments or in full, depending on your ability and inclination to do so. Both have interest rates, which are usually a bit higher than conventional mortgage rates.
Credit Cards You can also access your personal credit cards to tap cash to meet your business expenses, either by using them to charge items for your business or by taking cash advances. Be aware that this is usually a very expensive way to borrow for your business, depending on the interest rates on your cards, and running up big balances on multiple cards could also impact your personal credit rating. However, if your borrowing options are limited, credit cards can provide a means to get the money and financial flexibility you need, especially for the short term.
Family and Friends If all else fails, you can go hat-in-hand to your family members and friends for financial assistance. Although conventional wisdom says that it’s not a good idea to borrow money from your loved ones, it could be an option if there are no others. The key to successfully borrowing money from family or friends is to treat the transaction as you would with a stranger. Draw up paperwork that spells out the terms of the deal, how much is being borrowed, and how and when the principal will be repaid. You should also agree upon a fair rate of return. Then, stick to the payment plan. Nothing will sour a relationship more quickly than a money deal with a friend or family member gone bad.
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Loans You’ve probably taken a loan for something—to finance your education, to buy a home, a car, or some other big-ticket item—so, it’s pretty clear how they work. You apply for a certain amount of money and, based on a number of criteria, the lender decides whether you’re a good financial risk. Depending on how your profile shapes up, the lender decides how much to lend you, on what terms, and at what interest rate. Red Zone Beyond those basics, loans start to differ. Collateral is often reSome of the options available for financing a quired, but keep in mind that business include commercial loans, a line of IRAs, 401Ks, and other types of credit, micro loans, and SBA-guaranteed retirement investments are not allowed to be used as collateral loans. for business loans, so don’t count on them to strengthen your appliCommercial Loans cation. Commercial loans are granted from a bank or other lending institution. They are extended based on the lender’s evaluaBottom Line Booster tion of the borrower’s credit and credentials. Fees and interest rates on loans are often negotiable. Ask for Sometimes, closing, application, and other fees to be waived and also fees are associated with these loans, so be ask for a better interest rate. sure to get a full disclosure of any fees and You could save hundreds or charges that are associated with the loan thousands of dollars. before you agree to the terms.
Line of Credit A line of credit, as described previously, is much like a credit card. You have a maximum amount of funds that you can borrow. You can access any of the funds or the entire amount through provided checks or an associated credit card. You then pay back a minimum amount, the total balance, or any amount in between. You accrue interest on the outstanding balance. Lines of credit offer great flexibility during low cash-flow periods. After you are approved for a line of credit, the money becomes available whenever you need it, but if you do not take it, you do not pay interest on it (like you would with a commercial loan).
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Part 1: Getting Started Micro-loans Back Office Secrets
The SBA has a list of microlenders throughout the U.S. government, which can be found at www.sba.gov/financing/ microparticipants.html.
A micro-loan is an SBA-sponsored program offered through an intermediary lender that offers up to $35,000 to small businesses, including start-ups. Micro-lenders are often more flexible than commercial lenders and are willing to offer financing, even if you already have other debts, such as a first loan from a commercial lender.
SBA-Guaranteed Loans One of the most misunderstood concepts in lending is that the SBA lends money. It doesn’t. Instead, the government organization guarantees loans made through lenders. If a commercial lender is balking at lending you money because your enterprise may be too risky, you can apply for an SBA guarantee of usually between 75 to 85 percent of the loan. This guarantee will ensure that the loan will be repaid to the lender even if you fail to do so. The lender, then, has less risk and is more likely to approve a loan. Not all banks offer SBA loans, but the vast majority of them do. Some banks have SBA preferred-lender status, meaning that the lender can approve the loan internally without processing it through the SBA, giving borrowers shorter turnaround time on the loan approval. The two most common SBA loan programs are the 7(a) loan guarantee and the 504 loan program. The 7(a) loan is the most common SBA loan and can be used for most business purposes, such as working capital (maturity of up to 10 years) and fixed assets (maturity of up to 25 years). The maximum loan amount is $2 million to the small business with an SBA 50 percent guarantee to the lender (there are higher SBA guarantees of 75 to 85 percent on loans under $1 million). The 504 loan is also referred to as a CDC—Certified Development Company— because they are the SBA intermediary who offers these types of loans. These loans are usually for major fixed assets such as land and buildings. Usually 50 percent of the loan amount or project cost is from a lender, 10 percent of the loan amount is from the business itself, and 40 percent of the loan amount is from the CDC, thus lowering the risk to any one lender. The maximum amount of an SBA-guaranteed loan is $1 million.
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Selecting a Lender When it comes to choosing a lender, you have a number of options. We usually recommend that you start with the bank where you have your personal accounts, because you already have a relationship and a good history with that institution. Lenders offer different rates and terms, it’s a good idea to shop around and see what other lenders have to offer before you commit to one. Saving even one percentage point on a loan could mean thousands of dollars over the life of the loan. If you’re going to borrow money, it’s probably going to be from a bank. There are different types of banks—from small community institutions to huge financial conglomerates. They’ll usually have a loan officer Back Office Secrets on site who can tell you about their lending policies, and how much lending they do to The SBA maintains lists of the top small business, and if they lend to start-ups. If lenders of SBA-guaranteed loans to small businesses. You can you find that your local bank isn’t versed in access this list of small businessbusiness loans, it might be a good idea to find friendly banks at www.sba.gov/ one that is—and it may increase the likelifinancing/basics/lenders.html. hood of your loan being approved. Don’t forget to check out reputable online banking institutions, as well.
Angel Investors Angels, as they’re called, are individuals or groups of individuals who provide venture capital to entrepreneurial companies. Different angel investors have different criteria for investing, but they are almost always looking for equity in the company and a return on their investment. Most angel investors have some amount of control within the company in which they are investing. This could be a good thing, in that the inexperienced entrepreneur now has an experienced resource at his or her disposal.
Biz Buzz A business incubator is an organization that fosters the growth of entrepreneurial businesses by providing a range of support services, such as location assistance, financing, management consulting, and others that help small businesses become established and successful.
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Part 1: Getting Started Angel investors will usually look for a five-year exit plan in which they will recoup their money, plus a return. For that reason, it’s often difficult to find a good match. However, it’s worth trying, especially if your business doesn’t qualify for a traditional or SBA-backed loan. To find angel investors in your area, contact your local university, business incubator, or Small Business Development Center.
Other Funding Sources But wait …. There are still more places to find money for your venture.
EDA The United States Department of Commerce has an Economic Development Authority (EDA), and most states have a similar organization. These agencies/authorities often offer loan guarantees and tax incentives for small businesses. To find out more, go to the U.S. Department of Commerce website at www.eda.gov, as well as to your state’s EDA website.
Community Development Centers Many areas have Community Development Centers (CDC) or Community Development Corporations (CDC) that provide basic adult education activities and various developmental opportunities for budding entrepreneurs. These are often affiliated with a community church or religious organization. At times, these organizations will assist with small-business training, which has incentives tied to financing. Check your local religious communities, local business groups, and state business organizations for information about these programs.
Trade or Business Groups Trade groups and associations may also have information or funding programs. Whether it’s a local business group that offers grants to start-ups in economically disadvantaged areas or a trade group that offers funds for businesses to develop and maintain business relationships overseas, contact any local, regional, or state business associations, as well as industry associations, to find out if there are programs that might be financially beneficial to your business.
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Also, check your state department of commerce. These departments provide assistance to foster business in their communities. The United States Department of Commerce information can be found at www.commerce.gov. Also check your local state commerce department for specific business incentives in your state.
What Lenders and Investors Want Beyond the business plan, lenders and investors want to see several things in place when they look at an opportunity for investment. Many lenders prefer that a business has been in operation for at least a couple of years before they’ll lend money, but if a start-up plan meets certain requirements, it may be able to secure a loan for a new venture. We discuss these requirements in the following sections.
Capacity to Repay The people who give you money—whether to be paid back in installments or through profits in the business—will want to see a solid game plan that clearly maps out operations, marketing, growth potential, and financial specifics. You need to show how the business will generate revenue, how much it will generate, how that will translate into income and profit, and how, from that money, the investment or loan will be paid. Be careful not to be too ambitious about projections, however. Experienced lenders and business financiers have a good sense of how quickly a business can realistically grow. If your projections are overly ambitious, then it may make you look inexperienced, which could be a red flag for those considering giving you the capital you need.
Capital to Invest Lenders or investors like to see that the principals of the business have put their money where their mouths are. In other words, they want to see that you’ve invested a substantial amount of your own resources, as well. After all, if a business owner’s personal resources are on the line, or “skin in the game,” as well, the business owner is likely to be more conservative about risking that investment than if he or she has none of his or her own money on the line.
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Collateral Biz Buzz Collateral is something of value that can be liquidated and applied to satisfy the debt or to secure the investment. Collateral may take the form of cash, inventory, equipment, or other things of value.
Lenders and investors also want to see some sort of collateral. If your business lacks adequate collateral, you may be asked to sign a personal guarantee. This pledges your personal assets to secure the loan. If you’re asked to sign such a guarantee, remember that the things you own outside the business—your home, your car, your savings—may be subject to seizure should the business fail to meet its obligations, so be very careful about signing such a guarantee.
Conditions of Use of Money Lenders and investors will likely want an assurance or guarantee of how the money is to be used. You may need to provide a detailed list of the equipment that will be purchased and how much it will cost. Money will likely be divided and earmarked for working capital, staffing, and other expenses.
Character of Owners In addition to your financial and business background, the money folks will also want to see that you’re an upstanding member of society. They’ll want personal references, biographical information, and any supporting documentation that shows you’re entering into the business in good faith. If you’re a member of community groups, social and civic organizations, or philanthropic endeavors, include that information in your biography, or resumé.
Credit Rating The lender or investor usually wants to see the credit rating of the owner, partners, and primary shareholders of the company. This gives the lender an idea of how you handle your money and credit on a personal level, which could be a good indicator of how you’ll handle the money and credit in your business. A credit rating is needed for each partner in the business who has 10 percent or more ownership in the business.
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Credit-Reporting Bureaus Credit-reporting bureaus gather information on users of commercial credit, and they use that information to compile reports on each individual’s credit history. The information in these reports includes lines of credit—including loans, credit cards, mortgages, and the like—that you have open, as well as the user’s history in using that credit, including timeliness of payment, amount of debt incurred, bankruptcies, collection efforts and judgments sustained, and so on. Lenders and other entities use the information in these reports to determine whether to extend further credit, how much credit to extend, and at what interest rate. It’s important to obtain a copy of your report from all three credit-reporting bureaus, because errors on one report may or may not show up on all three. So while one report may be clear, other reports may have mistakes or outdated information due to clerical errors, mistaken identity, or even identity theft. Make sure that all three reports are as clean as possible. These three companies dominate the credit-reporting industry: ◆ Equifax
PO Box 740241 Atlanta, GA 30374-0241 Report fraud: Call 1-800-525-6285 and write to the previous address Order a credit report by calling 1-800-685-1111 ◆ Experian (formerly TRW)
PO Box 1017 Allen, TX 75013 Report fraud: Call 1-800-301-7195 and write to the previous address Order a credit report by calling 1-800-682-7654 or 888-397-3742 Experian also offers a website where you can look at your credit report for free: www.freecreditreport.com ◆ Trans Union
PO Box 390 Springfield, PA 19064 Report fraud at 1-800-680-7289 and write to the Fraud Victim Assistance Division PO Box 6790 Fullerton, CA 92634 Order a credit report by calling 1-800-916-8800
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Part 1: Getting Started Back Office Secrets You can obtain a free credit report once a year from www.annualcreditreport.com. Although they will give you your credit information so that you can validate that there are no errors, this free report does not include your FICO credit score. To obtain your FICO credit score, you have to pay a small fee.
Your Credit Score All of the information in your credit report is distilled into a credit score, which may also be called a FICO score. These scores generally range from 300 to 850 and factor in such criteria as your past payment history, amount of debt you owe, length of your credit history, and any new debt incurred, as well as past judgments, bankruptcies, and types of credit extended to you.
Assessing Your Report Review your reports carefully to ensure that the information is correct and up-to-date. Credit reports that contain errors or outdated information can negatively affect your ability to get a loan, reduce the amount for which you qualify, and increase your interest rate. So it’s very important to ensure that your credit report is as accurate as possible. Negative information generally stays on your report for seven years, while bankruptcies can stay on your report for up to 10 years. If you have negative information that is older than those parameters, you can contact the credit-reporting bureau to have it removed. Even if you have some negative credit, that doesn’t mean that you cannot get a loan. Lenders do consider the fact that you are making payments and are working toward correcting the negative situation. If you find late-payment information that’s more than seven years old, you can request that it be taken off your report. Bankruptcies remain on your report for 10 years. If you find incorrect information on your report, you can challenge it by contacting the credit bureau. By law, the bureau must verify the information within 30 days or remove it from your report.
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Different lenders have different cutoffs for how they rank credit scores, but in general this is how they rate: ◆ 720 and above: Excellent—your financial background will be a big plus. ◆ 700–719: Very good—A solid score. ◆ 680–699: Good—Perhaps you’ve had a few late payments in the past, but noth-
ing that should make a lender or investor balk. ◆ 620–679: Adequate—Your interest rate may be a bit higher, or you may find that
you need more collateral to get the loan. If your score is below 620, it may be considered a greater risk, and may affect your interest rate, loan amount, and terms. However, even if you don’t have a very high credit score, there are many lenders who will still take a chance on a solid business idea. And you can try applying for an SBA guarantee to make your loan even more attractive to lenders. Whatever your score, it’s important to keep your credit payments up-to-date in the months ahead. Even a few months of on-time payments can significantly increase your credit score.
Increasing Your Score Besides correcting misinformation and having outdated information deleted, there are several other ways you can increase your score. By reducing new charges, paying off existing debt in a timely manner, and decreasing the ratio of debt you incur to the amount you have, you can have a positive impact on your score. This ratio is important because part of your score calculation is the amount of debt you have versus the amount available to you. So if you pay off a balance, it may not be a good idea to close the card, which will reduce the amount of credit available to you and increase your debt-to-availability ratio. If you’re sure you can be disciplined enough to keep a zero balance, it may be a good idea to keep the balance-free card open. However, if you’ll be tempted to run up new charges, then close the card and continue to pay down your other balances to decrease your ratio.
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Part 1: Getting Started
Beware of Quick Credit Fixes Look out for scam artists offering to fix your credit quickly. They often use a number of tricks, such as sending a flood of bogus challenge letters to the credit-reporting bureau in an effort to get information deleted because the bureau was not able to respond to the massive number of letters within 30 days. Another (illegal) tactic that some use is to create a new tax identification number through the IRS. If you need help cleaning up your credit, contact the National Foundation for Credit Counseling (www.nfcc.org) to find a local not-for-profit credit-counseling bureau in your area.
The Least You Need to Know ◆ To get the money you need, you usually need to incur debt or give up a portion
of ownership. ◆ The SBA does not lend money. Instead, it guarantees loans to banks, enabling
these financial institutions to make loans to riskier ventures. ◆ Lenders and investors usually look for specific criteria, including capacity to
repay, cash to invest, collateral, character of owners, and credit, before they make money available. ◆ Interest rates and fees on loans are often negotiable. ◆ There are ways to increase your credit score without turning to quick-fix scams.
3
Chapter
Business Writing Basics In This Chapter ◆ How business writing is different ◆ Keeping your audience in mind ◆ Mastering language and tone ◆ A primer on grammar ◆ Presentation counts
Write?! I’m an entrepreneur, not a writer, you might be thinking. If the prospect of writing an address—let alone a multi-page plan—makes you a bit woozy, fear not. Your business plan doesn’t have to be the business equivalent of great literature. This chapter will share some tips to make the process of writing much less daunting.
Effective Business Writing Writing in a business setting is different than literary writing, promotional copy writing, or other types of writing. A common mistake that business owners make is to use stiff, formal language and corporate-speak in their business plans. Instead of writing clearly and succinctly, misguided business owners use complex sentences and long words to make their writing
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Part 1: Getting Started sound more intelligent. Unfortunately, using this style usually backfires and makes the writing long-winded and more boring than it should be. When writing about your business, you should write clearly, almost the way you speak. Your writing should convey the passion that you have for your business. The following sections discuss ways to make your writing more effective.
Targeting Your Audience There’s one key question that you should keep in mind whenever you’re writing a document: Who is going to be reading this? Always write for your audience and be sure that you’re focusing on the things that matter to the reader. If the purpose of your business plan is to obtain financing, then you need to target lenders or investors, so you need to pay particular attention to the issues of solvency, risk management, and return on investment. If you’re using your business plan as a management tool, however, you may want to pay more attention to potential risk factors and threats so that you can work with employees and advisors to come up with appropriate strategies to tackle them. Again, write for your audience. Why are you writing the document? Are you trying to persuade someone to do something? Are you trying to use the document as a tool for learning about your business or to put your thoughts in writing between partners? Focus on the reason you are creating the document and keep that in mind as you craft your words. As you edit your document, try to put yourself in the shoes of a member of your target audience. Ask yourself whether this document is saying the right things to that audience. What deserves the lion’s share of space in that section of your report? Are there elements that need detailed description? Once you’ve drafted the section, re-read it carefully to ensure that you’ve included the relevant information, explained yourself well, and cut anything that doesn’t really need to be there.
Language and Tone The words you choose in your plan will be almost as important as the information they describe. You want your language and tone to be clear, concise, and professional— not overblown, stuffy, or tired. Your first goal should be to jettison the jargon. Why say “employee on-boarding process” to refer to a job interview? Using jargon and corporate-speak—complex words or phrases to substitute for simpler ones—doesn’t make you sound more professional or
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competent. In fact, the opposite is true—it’s boring and makes it less likely that your message will get through. The more clearly, concisely, and colorfully you write, the more likely it is that your audience will absorb your message. If you must use industry terminology, do so sparingly and give definitions where necessary. Given the choice between lengthy narratives and brief descriptions, it’s almost always better to relay important information as briefly as possible, with backup in an appendix if needed. Biz Buzz Your plan’s tone should be positive and optiJargon is industry mistic. Flat, dull, or negative writing is more terminology that is generally difficult for the reader to absorb. You’re understood within a certain launching an exciting new venture—don’t be group, but not as well known outafraid to let your enthusiasm show through in side of an industry group. your writing!
Grammar Perhaps you haven’t given much thought to grammar since your eighth-grade English tests, but it’s time to brush up on those skills. Good grammar helps make your writing more powerful and lets you communicate your messages more clearly without the distraction of awkward language. Following are some guidelines to keep in mind.
Using Active Voice Active voice means that the person who performs an action in the sentence is the subject, which makes your writing more exciting. In passive voice, the thing acted on in the sentence becomes the subject. This tends to make the writing softer. Following is an example of both active and passive voice: Active voice: Alison Smith will spearhead our marketing efforts. [Here, Alison Smith is the subject. Our first image is of a person who will perform an action.] Passive voice: Our marketing efforts will be spearheaded by Alison Smith. [Here, in the passive voice, the first image is somewhat ambiguous (marketing efforts) and Alison Smith, the person, is buried at the end of the sentence.] Although the passive voice may be considered by some to be more formal, using active voice is almost always a better choice and makes your sentence structure stronger. However, whichever voice you use, be consistent and use it throughout the plan.
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Part 1: Getting Started Back Office Secrets Most word-processing programs have basic spelling and grammar-check functions. That’s a good start, but you should always proofread your document carefully as well, because spell-checks often miss some grammatical or spelling errors. Here’s an example: “Out (Our) business is successful.” This would pass right through the spell-checker.
Using Declarative Sentences You may recall from your third-grade grammar class that, in the English language, there are five types of sentences: ◆ Interrogative—Asks a question. Example: Why use plastic fittings in the
process? That simple adjustment cuts our manufacturing cost by 15 percent. ◆ Rhetorical question—Asks a question that the reader is not expected to answer.
Example: What more could anyone ask? ◆ Exclamatory—A sentence that has an exclamation point at the end. Example: It’s
one of the most revolutionary developments in the history of widgets! ◆ Imperative—Gives an instruction to the reader. Example: Sit back and read
about the next big thing in restaurant management. ◆ Declarative—States a fact. Example: The ACME ballpoint pen is a reliable writ-
ing instrument. By far, the majority of your sentences should be declarative sentences. Imperative and exclamatory sentences can turn readers off, and asking too many questions can be distracting. You need to state the facts and use these other sentence structures to enhance your writing or to reinforce key points.
Cutting the Fluff Don’t overuse hyperbole when describing how wonderful your company is. The fact is that lenders and investors have heard all of this before. Back up your claims with evidence, statistics, and other facts. The more you talk about how “revolutionary,” “innovative,” and “wonderful” your company is without citing specific examples, the less credibility you’ll have.
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For example, a business plan that asserts that “Our company is made up of a dynamic team of top professionals. Our innovative approach is unlike anything else in the marketplace today” is less credible than one that says something like the following: “Four members of our management team have worked for Fortune 500 companies. As a result of independent research that our company has undertaken in the field, we have been able to develop a patented approach to new home construction, which saves the builder approximately 20 percent on labor costs and up to 30 percent on materials costs. This enables our franchisees to price their services lower than other providers in the marketplace, while still maintaining Biz Buzz a higher profit margin.” Hyperbole is exaggeraSee the difference? The first one is all talk. The tion or stretching of the facts to make something seem more than second example doesn’t need any hyperbole— it actually is. the impressive facts speak for themselves.
Avoiding Clichés Clichés are those tired phrases that we’ve all heard hundreds of times—keep your nose to the grindstone, don’t make a mountain out of a molehill, fly in the ointment. Try to avoid using these phrases, which have all but lost their meaning through overuse. Try rewriting them, focusing specifically on what you mean to say.
Presenting Your Information How you structure your writing is also important. Long narratives are usually a no-no in business-plan writing. If you can, separate lengthy paragraphs with many specific points into bullets, which are easier on the eye and enable the reader to more quickly identify the various messages being written. Read the following paragraph: Our online promotions take a number of forms, including online discounts and coupons that can be used by ordering online, or which can be downloaded for use in our brick-and-mortar store. In addition, we use e-mail to communicate promotions, while our regular contests give customers and prospects chances to win something worthwhile to them. Banner advertisements put our messages in places where your customers and prospects are likely to frequent, and often tie in to current giveaways. To add a sense of urgency, we use time-sensitive offers
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Part 1: Getting Started and events, such as a web chats, online seminars, or web casts to attract more customers and prospects to our site. Now read the following: Our online promotions take a number of forms, including these: ◆ Online discounts and coupons that can be used by ordering online, or
which can be downloaded for use in our brick-and-mortar store. ◆ E-mail updates on current promotions. ◆ Online contests, which give customers and prospects chances to win some-
thing worthwhile to them. ◆ Banner advertisements that put our messages in places where customers
and prospects are likely to frequent. ◆ Giveaways. ◆ Time-sensitive offers and events, such as a web chats, online seminars, or
web casts to attract more customers and prospects to our site. The latter version breaks up the text and makes it easier to read.
Capitalizing and Punctuating Properly There are different grammar and punctuation rules depending on the authority you consult. Various style books have largely similar rules, but also have some important differences, such as where to use commas in a list, and other rules. Using one of these style books will give your writing better consistency—and will give you an easy reference book if you find yourself stuck in a tricky grammar or punctuation challenge. You can find most at your local bookstore or at one of the online booksellers. ◆ Strunk and White’s Elements of Style is a great and easy-to-use handbook of
composition rules. ◆ The Chicago Manual of Style, a style guide compiled by the University of Chicago
Press staff, emphasizes consistency and clarity in writing. ◆ The Associated Press Stylebook will arm you with style rules, and give you a primer
on copyright and libel laws. Whichever stylebook you choose, just be sure to apply its rules consistently.
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Writing, then Rewriting No matter how good you think the first draft of your business plan is, plan on doing a rewrite. Put the plan aside for a day or two and then go back to it, ready to tweak, edit, and improve its content. You’ll be surprised at how the words that sounded so perfect just 48 hours ago suddenly have so many areas that can be improved.
Avoiding Writer’s Block There are few things as daunting as a blank page. Just the thought of churning out a 20-page report may make any creative thought in one’s head just evaporate. If you find yourself faced with writer’s block, try these strategies: ◆ Write the easy part first. Look at your outline and pick a section, subsection, or
even a paragraph that you think will be easy to write. Then, dive in and begin writing that section. Choose what you know best about your business—it could be the marketing strategy or the product-development approach. Once you’ve written one small part, you should find that the writing comes more easily. If not, choose another small section that you know well. Keep chipping away at the project in small pieces and you’ll begin to see progress being made. ◆ Create a routine. If you’ll be working on your plan over a series of days or weeks,
create a mini-routine that gets you prepped to write. Clear your desk, grab a cup of coffee, close the door, and begin. These little rituals can do wonders to get you ready to work. ◆ Carry a notepad. You may find that ideas for how to write your plan will strike
at the oddest times—in line at the grocery store, in your car, etc. Keep a notepad or compact voice recorder close by so that you don’t lose these gems. ◆ Eliminate distractions. Lock the door. Let voicemail or your assistant answer the
phone. Then set a timer for 30 or 45 minutes. Write about your topic for that period of time, and do not allow yourself to be interrupted. Don’t worry about the quality of what you’re writing—just do a brain dump onto the page. You can always clean it up later. ◆ Relax. Sometimes, writer’s block stems from anxiety about writing. If you sus-
pect this is the culprit, do some deep breathing exercises or go for a walk to relax yourself. The great thing about working on a writing project like this is that you can edit it, tinker with it, and improve it for as long as you like.
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Speaking and Writing Well Another very helpful tactic for nonwriters who wish to write more easily and with more polish is to use a voice recorder to make the job easier. If you find that you can explain your business more easily than write about it, this may be the solution for you. First, use a hand-held voice recorder to discuss each point in your outline. Pretend that you are explaining each component of your business to a friend or a customer, and record that information. Transcribe the tape yourself or have someone else do it. After your plan is drafted, you should also read it aloud to ensure that the language flows easily. It’s much easier to spot typographical, punctuation, and grammatical errors when you’re reading aloud instead of silently. In the latter case, your eye is more likely to compensate for the error because you knew what you meant to say. By reading aloud, you pay closer attention to the structure and style of the document. After you begin to pay more attention to your business writing, you’ll find that other areas of your correspondence, such as memos, sales letters, and so on, benefit as well. Written communication is a powerful representation of your business, so it’s worthwhile to invest some time in ensuring that you’re putting your best foot forward on paper, as well as in the marketplace.
The Least You Need to Know ◆ Write with your audience in mind. ◆ Skip jargon and long, complex language. It doesn’t help your reader and can
usually backfire. ◆ Get familiar with common rules of punctuation and grammar. ◆ Overcome writer’s block by creating an outline, staying organized, and taking a
relaxed approach to the process. ◆ Use a voice recorder to give yourself a head start on the writing process.
2
Part
Putting Together Your Plan
From management to marketing to operations to sales, this part walks you through the various segments of your company that you’ll need to explain and showcase. Whether you’re just mapping out a game plan or going after big-buck financing, we show you how to put your best foot forward. This is the part where we get into the nuts and bolts of writing your business plan, from the overview of drafting your cover letter and title page in Chapter 4; to putting together the meat of your management, operations, and marketing analyses in Chapters 5 through 11; and delivering a primer on financial documents in Chapter 12. Chapters 13 and 14 cover the backup documentation you should have and your executive summary, respectively.
4
Chapter
Ready, Set, Write In This Chapter ◆ Preparing your ideas for paper ◆ Setting goals for your plan ◆ Using your plan for operations ◆ Putting your plan into action
Now that you’ve got the business basics under your belt, it’s time to get ready to write. But before you sit down at your computer to tap out “The Great American Business Plan,” it’s important to get organized and put a bit of thought into what you’re going to write. Having the materials you need on hand as you write, and having a good understanding of what the purpose of your plan will be, will also save you time as you begin to write. Try to develop a clear sense of whether you’re using your plan to attract capital or if it’s solely for your internal purposes.
From Dream to Document Now it’s time to begin the process of creating your plan. Although different plans have different sets of goals and will be structured differently, most plans have similar components. However, there are some constants
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Part 2: Putting Together Your Plan for all plans, including being organized, knowing your facts, supporting your claims with documentation, and getting help with the financial aspects, if you need it.
Being Organized Separate your information into logical sections, including executive summary, operations, industry forecast, marketing, financial projections, and the like. This will help your reader get to the most relevant information quickly.
Knowing Your Stuff Don’t just cite industry statistics from a trade association press kit. You should be able to explain, in detail, every component of your business plan. Remember that this isn’t just a mindless chore—it’s a living document that can help your business to be more successful. So as you do your homework, perhaps reviewing secondary research from an industry association, for example, be sure that you understand the information and statistics that you’re reading and incorporating into your plan. Too often, time-strapped business owners don’t take the time to really pay attention to the information they’re capturing. Instead, they read the information with preconceived notions about their business and its sector. Smart entrepreneurs ask questions and get answers about areas, numbers, or facts which they don’t understand. Keep in mind that the higher the loan amount you’re requesting or the bigger the equity stake you’re offering to a business partner, the more likely it is that the person reading your plan to make a decision about its viability will ask you very detailed, specific questions about your plan’s contents. If you stumble or show that you don’t have a good grasp of what’s written, then you’re going to greatly reduce your chances of sealing the deal.
Back Office Secrets Need help analyzing industry data? Check in with your city or county economic development office or your local Small Business Development Center. These entities are created to help businesses, often with free counseling and advice. You can often get no-cost access to management professionals, economists, and others who will knowledgeably help you decipher statistics and facts that are a bit unclear.
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Supporting Your Claims Just as you should have a high level of knowledge about your business, you should be able to cite documents, studies, statistics, and other sources to support any claims about your industry and its future potential. The more homework you do, the more attractive your plan will be. In Chapter 13, we discuss how to thoroughly support your claims and which documentation you should include in your plan. You want to be thorough in your plan, but busy lenders, investors, and other professionals don’t usually have time to pour over hundreds of pages. Aim to create a report that’s about 20 to 25 pages long (some are shorter) and, if you wish, add additional supporting documentation as an appendix. This should give you plenty of space to state your case, without overwhelming your readers.
Getting to the Goal Business plans can serve many purposes, as we’ve discussed. Your plan’s goals will determine how your document is structured and which information is presented most prominently. First, you need to think about how you will use your plan to determine the goals that are necessary for accomplishing the plan’s purpose. For example, as an internal management tool, your plan will help you create a game plan for moving your business forward. In this type of plan, it’s critical to focus on the mission and vision of your business. This type of plan will be used to keep your business focused on its core purpose, rather than letting it get off-track by pursuing sideline ventures. In this type of plan, you’ll want to pay close attention to the core purpose of your business, its products and services, the competition, and if or how the business will evolve or grow to remain viable while maintaining that business model. The following sections discuss how to “get to the goal” of your business plans.
Obtaining Financial Assistance If your plan will be used to obtain financing, it should be written to persuade, impress, and showcase the strengths of your business. The most important components of this type of plan will be the financial statements, although details about sales, marketing, and management will also be important. The key messages will vary slightly depending on the type of financing you’ll be seeking, as noted in the following:
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Part 2: Putting Together Your Plan ◆ Loans—If you’re using your plan to obtain a loan, you should continually rein-
force the levels of profit and the means you’ll use to obtain them in your plan. Sales and expense projections, as well as identifying any collateral, will be important, as lenders want to see that the business will be able to repay the loan. We cover this more in Chapter 12. ◆ Venture capital—If you’re using your plan to attract venture capital, you’ll want
to focus more on the business profit margins and growth potential. Industry growth specifics, as well as sales projections and methods of controlling expenses to maximize profit, will be most important. Venture capitalists want to see that their investment will pay a return. Your plan should also outline an exit strategy for the money that is invested. In other words, investors want to see a means for how they will recoup their original investment, plus a return, within approximately five years. ◆ Grants—As we discussed earlier, grants are difficult to find. However, when they
exist, it’s usually for a specific purpose or industry, so you’ll want to write your plan to support that purpose. For example, if your business is trying to obtain a grant as part of a community-revitalization project, you’ll want to showcase how your business will contribute to the overall well-being of the area.
Back Office Secrets So you got a grant to start or grow your business. Part of the process likely requires you to document how the money is helping the business—and, in a larger sense, the organization giving the grant—create positive change. Some of the areas on which you’ll likely want to report include: ◆ Jobs created by your business. ◆ Tourism or tax revenue to the community due to your business. ◆ Detailed accomplishment of the specific parameters of the grant. For instance, if
the grant was given to help you restore your headquarters, be sure you report on how the money was used for that purpose. In addition, you’ll want to include any residual effects. If you’re getting much more traffic as a result of restoring your building, document it in your report to the granting agency.
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Attract Business Partners Perhaps your plan is being used to attract new equity partners to your business or to present your business in a way that makes it attractive for a potential merger with another business. In this case, you’ll want to showcase your USP, as well as your operations and management processes. Profitability will also be important in this case, so you’ll want to be sure that your financial statements are strong and accurate.
Operation Benchmark Your business plan can also be used as a management tool to keep your business on track and to ensure that you’re hitting certain goals and milestones necessary for your company to sustain itself. By putting these facts in writing, you have a simple reference that can be reviewed periodically and by which you can measure goals and maximize resources. For example, are you meeting goals that you set for your business? Your business plan can show you where you’re excelling and where your business needs to improve. Are you meeting sales projections? Are expenses being kept in check? Have you staffed your company as you anticipated? All of these measurements of success will be evident when you compare your business to your written plan. By reviewing your plan regularly, you should also see areas where you can consolidate your business operations, cut expenses, or increase your profits. For instance, you may find that you’ve grown to the point where it makes sense to hire a full-time marketing person instead of outsourcing your promotional efforts. Or you may see that outdated equipment is beginning to negatively affect your productivity, so it may be time to purchase the equipment your business needs to make it state-of-the-art. In other words, your plan should be written so that your goal of tracking operations is easily measured.
Obtain Assistance As you write your plan, you’re likely going to want to turn to some of your current advisors for assistance. These may include your accountant or attorney. Turn to your accountant for help with preparing proper financial statements. As a financial advisor, he or she should be familiar with the financial information you’ll need to include in your plan, as well as the best way to present that information. Having an accountant on board from the start is key to accurate record keeping and financial success.
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Part 2: Putting Together Your Plan If you’re looking for investors or are committing to certain responsibilities related to grants or other programs, you’ll want to have your attorney review your plan to ensure that you’re not presenting any information or making any assertions that could get you into a legal bind. Attorneys are also very helpful with structuring your business, creating partner agreements, and with buy/sell agreements, leases, employment laws, and various business contracts.
Iterative Process The iterative process is essential to make your plan an effective tool for your business. This process includes a variety of necessary activities, including staying updated, analysis, and an annual meeting.
Staying Updated Biz Buzz The iterative process is the repeated review and integration of your plan to keep it up-to-date.
Make time regularly to review your plan and ensure that it’s updated on an ongoing basis. Financial statements should be reviewed at least semi-annually, and new processes, information, staff, and other relevant information should be updated in your plan at least quarterly.
Analysis As you review your plan to ensure that it’s up-to-date, take the time to read and review it. Ensure that your goals are still realistic, and evaluate whether they need to be changed based on your business’s growth or market factors. In addition, sometimes the purpose of a business plan changes. You may have originally written your plan to land financing, but now have found that you need it to be more of a management tool. When this happens, re-tool your plan for the needs of your business.
Back Office Secrets As you review your plan regularly, you’ll likely find that some goals or elements are out of date or no longer relevant. Replace those sections with new goals and objectives— those that will help your business grow. For example, if you’ve established your name in the marketplace, it may be time to re-evaluate your marketing budget and focus it on developing new niche markets.
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Annual Meeting As a corporation, you are required to hold a board-of-directors meeting at least once a year. At this meeting you review and document any changes to the business. During the meeting, you take corporate minutes, which are later distributed to the board and inserted into the corporate books. (And with these books you also keep the corporate seal—to use, when necessary, to seal official corporate documents.) This process may sound trivial, especially if there is only one shareholder/owner, but nonetheless it is required. If you do not hold or record annual meetings, or update the corporate books, and there should be a lawsuit, the opposing side could ask to see the corporate books (not updated) and then get Biz Buzz off on a technicality stating that you are not Your corporate seal is a acting like a corporation. This is what is device that engraves the official referred to as “piercing the corporate veil.” A seal of your corporation onto corporate book and seal should be set up if an paper by pressing it between two plates. You receive the seal attorney forms your corporate entity. If you from the state in which your cordo not have this, you can purchase one either poration is filed. Your corporate online or at a business-supply store. books are where board meeting In Part 3, we discuss in more detail how you minutes and other corporate paperwork are kept. can make your plan a critical tool for your business. But, first, let’s move forward on the writing.
The Least You Need to Know ◆ Your plan should be a well-researched, professional-looking document of an
appropriate length—usually about 20 to 25 pages, which can vary. ◆ Organize information according to your plan’s goals, so that you showcase the
most important information for your purpose. ◆ Get assistance from your accountant or attorney if you need it. ◆ Update and review your plan regularly.
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Getting Down to Business In This Chapter ◆ Crafting a strong cover letter ◆ Title page and table-of-contents basics ◆ Creating your business description ◆ Writing mission, vision, and values statements
The initial parts of your business plan package are your first impression to lenders, business partners, and others who will see your plan. Your plan should look clean and professional, reflecting the image that you want your business to project. Creating a well-organized plan is also essential to make your document easy to use. While we suggest ways to organize your plan, the truth is that many business plans present information in varying order. It really depends on your business and the target audience. However, whatever form your plan takes, it’s also critical to distill the essence of your business down into a clear, compelling description that shows your knowledge and expertise.
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Getting Off on the Right Foot If your business plan is being used for external purposes, such as seeking financing or investment partners, you’ll need a proper introduction. A cover letter is the document that introduces your plan to its readers. This one-page letter is a brief statement of your business plan’s purpose, as well as what the reader can expect to find in your package. Elements of a well-written cover letter include the following: ◆ The date. ◆ Your name, the name of the company, and contact information. ◆ A salutation that addresses the reader by name (e.g., “Dear Ms. Smith” instead
of “Dear Loan Officer” or “Dear Sir”). ◆ An introductory purpose that states the purpose of the plan and benefits to the
reader. For example, “We’re seeking to obtain ….” ◆ A brief statement of the amount of money you’re seeking, if you’re using your
plan to secure financing, as well as a line or two about your assets and collateral. ◆ A call to action. This means that you state what you wish to happen, as in, “I
hope that we can meet to further discuss financing options,” or “Please advise with a time that will be convenient for you to tour our facilities.” ◆ A statement of enclosures. That will include your business plan, as well as any
supporting documentation you choose to include. Your cover letter, like your plan, should be neat, clean, and free of grammatical errors, spelling mistakes, and coffee stains. You want to look like the consummate professional you are. An example follows:
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ABC Enterprises 123 Main Street Anytown, USA 01234 (555) 123-4567 DATE Mr. John Jones Venture Capital, Inc. 444 Yellow Brick Road Moneytown, USA 45678 Dear Mr. Jones: It was a pleasure to meet you at last week’s Venture Capital America Fair. Based on our discussion, I’m pleased to forward you the enclosed business plan for ABC Enterprises, for which my partners and I are currently seeking $250,000 in financing. ABC Enterprises is a full-service graphic design and printing firm serving the pharmaceutical industry. Led by Eric Ericson, a 20-year veteran of the printing and publishing industry, and Jack Jackson, an award-winning graphic designer, we have designed a state-of-the-art facility that maximizes productivity and minimizes expenses. Please review our plan and feel free to contact me if you have any questions. I hope that we can meet to further discuss our financing proposal and determine how Venture Capital, Inc. can become part of our excellent team of management, investors, and advisors. After you’ve had a chance to review the enclosed plan and additional financial statements, I hope that we can arrange a time for you to tour our facility. I’ll plan on following up with you in three weeks. Thank you for your interest in ABC Enterprises. I look forward to our next meeting. Sincerely,
Jack Jackson President
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Part 2: Putting Together Your Plan Back Office Secrets Be sure to find out if your target audience has specific format requirements. Different lenders or other strategic partners may have guidelines or preferences for business-plan organization or presentation, including what should be included in each segment. Ask your intended reader if this is the case and tweak your business plan format to meet those requirements, if necessary.
Title Page The title page of your document is the first visual image that the reader will have of your company. It should be neat and easy to read. Avoid artsy fonts, unless you are including your logo and it’s made of an artsy font. Your title page should include the following: ◆ Your company’s name or logo ◆ Your company’s physical address, phone number, fax number, e-mail address,
and website address ◆ The name or names of the individual or individuals presenting the plan (usually
the company’s owners, partners, or key shareholders), as well as the titles of those individuals listed ◆ The date that the plan is being submitted
Biz Buzz A notice of confidentiality is simply a statement that informs the reader that the information in a document should not be shared, distributed, or otherwise disclosed.
◆ Optional: a notice of confidentiality, although we
prefer including a separate page that outlines the provisions of confidentiality And that’s it. Don’t clutter your cover page with too much information. It should simply include the who, what, when, and where of your business plan. There’s plenty of room to expand on those topics, and include the why and how inside the plan.
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Sample title page.
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Table of Contents The Table of Contents (TOC) helps your reader navigate your plan more easily. The TOC simply lists the order of subjects in your plan and the pages on which to find them. Your TOC can be as detailed or general as you like. However, we think it’s a good idea to include all of the main sections of your plan, such as Mission and Vision, Operations, Marketing, and so on, as primary headings on your TOC. Then include the various subheads that fall under that section. That way, if a reader needs to refer back to a specific fact, he or she can find it with a quick scan of the TOC, instead of getting frustrated while leafing through page after page of the report. Of course, you should compile the TOC after you’ve written your plan, otherwise you’ll waste time changing it as your plan evolves.
Confidentiality Agreement You’ll probably want to include a confidentiality agreement in the early part of your business plan. Similar to the notice of confidentiality, this document, which is signed by the reader, is an agreement that the reader will not disclose the contents of the business plan to another party without your expressed, usually written, permission. It also includes a place for the reader to sign the agreement, indicating his or her agreement to keep the information confidential. You’ll need to decide whether or not to include this. Sometimes, confidentiality agreements can be off-putting to potential business partners or venture capitalists who may choose to become involved in one of several similar businesses. Signing such an agreement could potentially leave them open to liability if they choose to invest in another similar company. However, if you have a business plan that relies on proprietary information or research, or if you have a product that you are concerned may be copied in the marketplace, a confidentiality agreement may protect you. So weigh your options and include one if you think you need it. This agreement is generally a short one- to two-paragraph statement that includes the following: ◆ The information in the report is confidential in nature ◆ The reader agrees not to disclose this information without prior written consent
from the business owner or plan author ◆ Disclosure of confidential information could harm the business ◆ Agreement to return the business plan to the owner or author when finished ◆ A signature and date line for the reader to indicate agreement
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Sample Table of Contents.
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Sample confidentiality agreement.
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Executive Summary Usually, the executive summary comes next. This is a one- to two-page document that summarizes the key themes of your plan. It targets the reader, basically distilling the business plan down to the most important parts. It’s best if this is written last so that you can easily identify the most important parts of the business plan. We discuss the executive summary in more specific detail in Chapter 13.
Purpose The purpose portion of your business plan quantifies what your business is and its reason for existence. In this early section, you lay out the essence of why your business exists. This should include a business description, a structure, a history, an owners’ section, a location section, an hours-of-operation section, and the Season’s Greetings section.
Business Description The business description includes an overview of what, exactly, your business does. Whether you sell widgets or service whatnots, here is where you will succinctly describe what it is that you do. In this beginning section, avoid hyperbole and stick to just the facts. Your readers don’t want to hear that your business is the best thing since sliced bread—they want to know that you’ve invented a new way to slice the bread. If the company is not a start-up, when was it founded and by whom? Trace the highlights of the company’s history, including any strengths or advantages that have added to its longevity. Your history should be no longer than one page, and less, if possible. Be sure to include the length of time the company has been in business and any background that will showcase its staying power.
Structure In this section, you describe how your business is structured, including whether it’s a sole proprietorship, partnership, or some form of corporation. If there is a compelling reason why you’ve chosen one form of structure over another, you may wish to explain that, as well.
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Biz Buzz A sole proprietorship is an entity in which the owner is personally liable for the debts and obligations of the business. A partnership is a business entity that involves two or more owners, either individuals or entities. Corporation or LLC creates a business that is separate from the individual, and may shield business owners from liability (provided they do not commit intentional fraud).
Owners Although you’ll go into greater detail about the company owners later in your plan, here you should briefly state who owns the company. List yourself if you’re a sole proprietor, or list any partners or other shareholders in the business. Later you will include a resumé or bio in the appendix for each partner, highlighting pertinent past experiences.
Location Describe your location, including the community and the physical space in which your business is located, as well as your rationale for being there. If you did any research that indicated that your current location would be a good one for your business, then include that as well. This description doesn’t need to be long—perhaps a paragraph or two describing the area. However, if there is a reason to go into greater detail—such as a community development program that will support your business and help deliver customers, you certainly can make it longer.
Hours of Operation This is short and simple: what days and hours are you open? If there are specific reasons for your schedule, explain them here.
Season’s Greetings If your business is seasonal, describe the dates that you are open for business. In addition, describe any revenue opportunities for the off-season. For instance, if you own a landscaping company and dabble in snow removal during the winter months, include that information.
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What Is It? You’ve described your business. Now it’s time to get into the specifics of what you sell, produce, or service. Give an overview of your products and services. In addition, you should do the following: ◆ Explain the target market. Instead of going into the specifics of who your cus-
tomers are, which will come later, here is where you describe any niches you intend to fill, as it relates to your product. For instance, if you’re a retailer specializing in children’s furniture, here is where you describe that specialty instead of the profile of the customers who buy children’s furniture. ◆ Explain the edge you have over your competition. In addition, you’re going to
want to give a taste of your competitive edge, or as we discussed in Chapter 1, your USP. Include a brief description of why customers will choose you over your competition. Again, stick to the facts here—don’t use vague hyperbole such as “we’re the best!” That type of fluff will backfire. ◆ Describe key business achievements and assets, if the business has any yet. Finally,
are there significant achievements, awards, media attention, or honors that your business or its personnel have received? Include these; you should also include any supporting documentation in the plan’s appendix.
We’re on a Mission Beyond the day-to-day functions of being in business, there are other reasons why most businesses exist. Companies, like their owners, have sets of passions, values, and priorities. These can be critical assets that serve to drive the business through its life cycle. The part of your plan that breaks down these philosophies includes your … ◆ Mission statement ◆ Vision statement ◆ Values statement
What’s the difference? Well, they are similar, each succinct and about one paragraph in length, but they also have some very distinct differences as described in the following sections.
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Mission Statement This section states why your business exists. Why is the business in existence and what is it in business to accomplish? The answers to these questions may address your market niche, the reason why you founded the business, and profitability, among other principles. Your mission statement should address the overall purpose of your business including a succinct statement of how the business will be carried out. Touch on such issues as your management and staff, resources, and other factors that will be integral to your success. Following is a sample mission statement: AMT is built on the assumption that the management of information technology for business is like legal advice, accounting, graphic arts, and other bodies of knowledge, in that it is not inherently a do-it-yourself prospect. Smart business people who aren’t computer hobbyists need to find quality vendors of reliable hardware, software, service, and support. They need to use these quality vendors as they use their other professional service suppliers, as trusted allies. AMT is such a vendor. It serves its clients as a trusted ally, providing them with the loyalty of a business partner and the economics of an outside vendor. We make sure that our clients have what they need to run their businesses as well as possible, with maximum efficiency and reliability. Many of our information applications are mission critical, so we give our clients the assurance that we will be there when they need us.
Vision Statement A vision statement shows the long-term projections and outlook for the business. This is a marriage of what the organization hopes to accomplish in the future and how the organization can best thrive in the long-term, from the perspectives of growth, purpose, profit, and stability. Think of your vision statement as how your business will operate five or ten years from now. How will it continue its growth? How will it evolve into a stronger organization? Include answers to these questions in your vision statement.
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Following is an example of a vision statement: Hal’s Electronics Warehouse seeks to grow into the largest and lowest-cost provider of electronic components in the tri-state area. Through aggressive cost-cutting across all levels of our organization, we will pass our savings along to our customers and reinvest in our organization as necessary to promote growth.
Values Statement The values statement defines those tenets that the organization holds as most important. What are the core priorities of your business’s culture? Values don’t necessarily have to be selfless. Actually, in the case of a successful business, values may include factors such as profitability, proper staffing, and other factors that will improve the staying power of the business. Some values that a business might have include the following: ◆ Providing a high quality of service at a premium price ◆ Selling a wide variety of merchandise at affordable prices ◆ To reinvest in the business community ◆ To consistently achieve a level of profitability that enables us to grow ◆ To recruit a highly talented staff and retain them through fair treatment, com-
petitive wages, and a pleasant working environment. Remember that ongoing training, recognition, thanks, and praise of your staff are important. A valued staff exhibits energy and quality of work to your customers. Values vary greatly from business to business. The only criterion is that you write the values that truly reflect your business. Following is a values statement: Hal’s Electronics Warehouse values our customers and our commitment to low prices. We have a minimalist approach to our surroundings and amenities, keeping our locations modest in décor and fixtures, while providing helpful sales assistance.
Red Zone Unless you’re a soloist, don’t craft your company’s mission, vision, and values statements on your own. If you have a management team, advisors, or employees, then get their input on these important parts of your business plan to ensure that what’s on paper is shared by the people involved with your business.
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Part 2: Putting Together Your Plan Congratulations! You’re done with the first section of your plan. Now we’re going to dive into the mechanics of your business to show you how to “wow” even the pickiest of business strategists!
The Least You Need to Know ◆ Although they are listed at the beginning of your business plan, write your Table
of Contents and Executive Summary last. ◆ Keep cover pages and cover letters clean and concise. They’re going to make a
first impression on your reader, so you want them to be clear. ◆ Confidentiality agreements are a double-edged sword, which may protect you
but also worry potential investors. Think about whether or not you need one. ◆ Mission, vision, and values statements define your company’s purpose, future,
and philosophy. Be sure that your team agrees with the statements you craft.
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Industry Overview In This Chapter ◆ Defining your industry ◆ Understanding market research ◆ Locating information about industry trends ◆ Explaining your business’s role in the industry
Industrial Strength Analyzing your industry requires combining your company’s collective expertise with market research and trend information about the sector in which you’re doing business. This will show your plan’s target audience that you have done your homework and have a solid understanding of the market and its forces. Your industry analysis should be one to two pages and fulfill several purposes, including the following: ◆ Explaining the industry, and whether it’s growing or shrinking ◆ Explaining any trends or significant market factors, such as techno-
logical advancements, relevant legislation, or influencers ◆ Identifying opportunities and obstacles within the industry
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Part 2: Putting Together Your Plan ◆ Acknowledging competition ◆ Analyzing how your business will perform amidst this competition
Overall, your industry analysis is the big picture of your market and its viability. In this section of your plan, you’ll explain to your plan’s target audience why this is an attractive market for your business to court.
Understanding Market Research When it comes to analyzing your business market, knowledge is power. The more information you have about your market, customers, competition, and prospects, the more effective your management and marketing strategies will be. So why do so many businesses ignore the power of even the most basic market research? Many business owners feel that research is either too expensive or that it can’t tell them anything about their business that they don’t already know. Some entrepreneurs take the word of friends, neighbors, and relatives that their idea is great so they overlook the value of market research. However, there are market-research options available to even the smallest businesses—and those who avail themselves of such fact-finding are those who maximize success. Fundamentally, there are two types of research: ◆ Primary research: This is research that is done directly on behalf of an enter-
prise. An example of this would be when a company does interviews or surveys. ◆ Secondary research: This type of research is gathered from sources already in
existence, such as Census data or industry surveys. In addition, research is further defined as qualitative or quantitative. Quantitative research answers basic questions—who, what, when, where, how many, how much, and how often—using statistical analysis of data to draw conclusions. Quantitative studies can benchmark awareness levels for your company, brand, product, or competition and give you a glimpse of what your customers, prospects, and other audiences think of each. This is the more objective of the two disciplines. Qualitative research, on the other hand, is generally designed to answer more open-ended questions, such as “why” and “how.” These studies are used to guide product/service development, the development of marketing programs, advertising messages, direct-mail pieces, etc. There are a number of research mechanisms available to businesses. The following sections discuss some of the more effective mechanisms.
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Interviews Conducted by a trained, independent researcher, the interviewer draws information from the interviewee either in person or by phone. The results should not be biased by preconceptions, emotional attachments, or business pressures. The interviewer is given criteria by which to evaluate prospective interviewees. High-traffic areas like shopping malls, amusement parks, and the like are prime locations for in-person, or “intercept” surveys. Increasingly, interactive kiosks, which allow interviewees to answer questions electronically, are also popping up in high-traffic venues to capture consumer feedback.
Surveys Surveys can be done by mail, telephone, e-mail, or in person. Again, it is important to pay attention to how the survey is worded, to ensure that biased language does not influence results. Surveys can range from one or two questions to multi-page documents. It’s important to be sure that the questions asked in a survey are not leading. You’re going to get very different information from the question, “What are your favorite foods?” than “What healthy foods do you like?” The latter gives the interviewee direction as to what type of answer is expected. Good interviews are more objective in nature and help you capture your customers’ true opinions instead of what they think you want to hear.
Red Zone Tainted data can be hazardous to your business’ health! Basing decisions on faulty data is a sure-fire way to make the wrong decisions. Whether you’re conducting surveys, focus groups or other methods of information collection, take pains to ensure that the data is pure. Don’t inject leading questions. Try not to show a reaction when an interviewee answers or expresses an opinion. By keeping your data collection as objective as possible, you ensure that you’re truly capturing the opinions of your customer, rather than capturing their interpretation of what they think you want to hear.
Focus Groups Focus groups range in size, but generally are most effective with between eight and a dozen participants. Led by a moderator, they are used to encourage free and open
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Part 2: Putting Together Your Plan discussion. Although focus groups generally reveal helpful information, they are vulnerable to the dynamics of the group. A participant with a dominant personality or the perception of a moderator’s bias can drastically influence results. Therefore, be sure that you hire a trained moderator who has experience in or a thorough understanding of your field.
Online Focus Groups Quickly growing in popularity because of their relatively low price, some of the larger chat-based websites are offering online focus group opportunities. Online chat sessions are less likely to be skewed by a dominant participant, as the relative anonymity of the situation may bolster individuals who might otherwise be shy. However, this bravado can also lead to exaggerated responses or enhanced claims by participants. Again, hire a trained moderator who understands the dynamics of the tool—and your industry. Some companies that conduct online focus groups include E-Focus Groups (www. e-focusgroups.com), Qualitative Research (www.decisionanalyst.com), and Good Mind (www.goodmind.net).
Observation More subjective in nature, a number of companies are studying the habits of their buyers by observing them. This can be done by using on-site video surveillance or inperson observation. One company has gone to the lengths of giving subjects disposable cameras that are used to photograph their own usage habits in certain situations.
Understanding the Industry Once you’ve done your research, you need to be able to explain it—and how it is relevant—in your business plan. First, take a look at the industry as a whole. How has it changed over the past five years? Explain whether it has grown or has been shrinking and why. Is it on the rebound? How will these factors affect your business? Also consider how trends and fads will impact your business idea.
Industry Life Cycle Industries, like products, have life cycles. Where the industry is in the life cycle will influence your business and how customers will react to your products and services.
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The four basic segments of an industry life cycle are as follows: ◆ Emerging—Also referred to as the em-
bryonic phase, this is when the industry is brand new. Online retailing was in the emerging stage in the mid-1990s. ◆ Growing—This is when the industry is
expanding, with new products and services being offered. More customers are aware of the segment and are interested in spending their money with these types of businesses. The market for digital music devices, such as iPods and other mp3 players, is growing.
Back Office Secrets The North American Industry Classification System (NAICS) assigns code numbers to various industries to help clarify the business that they are in. These codes have largely replaced Standard Industry Classification (SIC) codes, which essentially did the same.
◆ Mature—At this point, the industry has reached its critical mass and doesn’t
have much room for expansion. Key players generally dominate the market, but there are opportunities, especially for niche businesses. As we mentioned earlier, the soft-drink market as it is today is a good example of a mature market. ◆ Decline—Markets that are in decline are past their prime, and are losing
ground. Markets at this phase of life are generally being replaced by new technology or innovations. For instance, the typewriter industry is in decline, largely being replaced by personal computers. Understand where your industry is in the life cycle. This can often be determined from trade associations and publications and by looking at industry statistics from the government and other sources. Explain how your business will benefit from—or overcome—its industry’s characteristics. Some of these resources might include: ◆ Trade associations. ◆ Your county or state economic growth commission ◆ The Small Business Administration (www.sba.gov) ◆ The Bureau of Labor Statistics (www.bls.gov) ◆ U.S. Department of Commerce (www.doc.gov)
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Part 2: Putting Together Your Plan Back Office Secrets Launching a business in a mature industry—in other words, one that is established and isn’t experiencing much growth—or one that already has many established competitors, isn’t necessarily the kiss of death, but you need to be able to show how your business will secure a profitable portion of the market. For instance, Nantucket Nectars, the highly successful juice and soft-drink company, started with two partners selling refreshments in a small boating community. Today, it’s a multi-million-dollar company, in spite of the fact that they competed against established players like Ocean Spray, Motts, and many other juice makers. They made a difference by setting themselves apart with the quality and flavors of their products. You need to find your exceptional difference from the competitors in your industry and make it clear in your plan.
Industry Economics and Trends As you work on your industry analysis, you’ll need to take the economic temperature of the sector in which you’re doing business and examine any trends or current events that will influence your business. There are many places to find statistics, trends, and other information about various markets. General population information can also give you clues about emerging markets. For example, a baby boom means more demand for childcare and child products in the short-term, and increasing demand for the products and services these children will need as they reach adulthood. Some of the best places to look for excellent secondary information include the following: ◆ Census data (www.census.gov) tells you about population statistics and trends in
the United States, as well as a wealth of business data. ◆ United Nations Statistics Division (www.unstats.un.org/unsd/industry) has
information on the production of major industrial commodities in countries around the world. ◆ BizMiner (www.bizminer.com) houses reports on 16,000 categories of business
in 300 areas of the United States. (They charge a fee for access.) ◆ Minority Business Development Agency (www.mbda.gov) includes many reports
specific to minority business, but also has terrific general information, as well.
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◆ Trade journals and associations. Visit the websites of trade organizations and
publications that cover your industry. If they don’t have archived information on their sites, contact the management offices and publishers to request back issues and additional information you need. ◆ Local and State Government. Contact your state, county, and local planning
boards and, if applicable, business-licensing offices, or state economists’ offices. ◆ Local libraries. Reference librarians are among the best-kept secrets when it
comes to finding facts and figures. Visit your local library’s reference desk, and, in many cases, you’ll be able to access directories, databases, and online research tools that will help your search.
Opportunities and Obstacles As you gather information about your industry, you may begin to identify both opportunities and obstacles. These factors will influence how your company does business. These are discussed in the following sections.
Innovations What new progress, inventions, or ways of doing business have been introduced in your sector? How is your business either incorporating or competing with these developments? Innovation can have a huge impact on how an industry sector performs overall. For instance, the advent of digital cameras has largely changed the way many photographers conduct their business. Photographs can now be seen instantly and proofs e-mailed or posted on a website for review, eliminating the need for costly printing. Identifying these opportunities through innovation will show your audience that you’re not afraid of change and that you’ll keep your business technically current.
Back Office Secrets Identifying obstacles isn’t necessarily a deal-breaker. Lenders and business partners will want to see that you’ve realistically evaluated the marketplace. If you can provide sufficient solutions or ideas to overcome the obstacles, it’s likely that your innovative approach to the matter will impress lenders and potential business partners.
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Part 2: Putting Together Your Plan So how does this relate to your plan? Explain how your business will apply technology or innovation to reduce costs or streamline operations. In the case of a photography studio, for instance, the business owner may include the cost savings enjoyed by using his website to take orders instead of printing photographs. In addition to the positive impact on his financial statement, he can show how this will save him and his employees time in their day-to-day operations, and allow them to deliver their products and services more quickly, effectively, and/or cost-efficiently to customers.
Regulations Government regulations can have devastating effects on businesses. For example, if your business violates environmental legislation or your products include ingredients that are determined to be harmful to its users, you could soon find yourself out of business and facing very significant fines and lawsuits. Examine the regulatory climate surrounding your market sector and explain it to your target audience. Outline your plan for dealing with any potential regulation.
Bottom Line Booster Keeping an eye on regulations that can affect your business is smart business. Explaining these regulations in your business plan is also a smart move, showing readers that you understand the regulatory environment in which your business is operating. For instance, if your business is home-based or located in a residential area, you need to understand the restrictions that are placed on your operations at the local, county, and state levels. Violate these regulations and you could easily be shut down. If your business will use materials that are potentially hazardous or that may damage the environment if improperly used, you should explain how you will take care that your business maintains adequate safety measures in the use and disposal of these products. After all, getting shut down because your business doesn’t play by the rules can be devastating for both you and your investors.
Economic Factors Those economic stats on the evening news aren’t just random numbers—they can significantly impact your business. Explain how your region’s economic climate will impact your business. For instance, a luxury-goods dealer launching during a recession period would likely need to clearly explain why there is a market for those products and how the business will reach that audience to market its wares.
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Price Comparisons Pricing is also an important consideration. In mature markets, pricing is often less flexible than in emerging markets, so you’ll need to provide a brief description of how your prices will fall within the market—most expensive, least expensive, or in between— and determine whether your business can operate properly under those constraints. Polarization in pricing may put middle-of-the-road companies at risk. The cost of doing business in mature markets should, in theory, be less than the research, development, and other costs of a start-up. Therefore, in a mature market, pricing for distribution partners and end users may be actually lower and more flexible.
Location If your business has location issues, such as an unexpected or out-of-the-way location, address that here, too. For instance, you may be located in an urban community that’s undergoing revitalization. Lenders may see an unsavory address and become concerned about crime or other factors. Instead, explain that your business is on the ground floor of an exciting new community-redevelopment program. Include evidence of this statement in your appendix, including news clippings about the effort. Similarly, if there are any features about your physical location that are beneficial, state those. Did you take over an old bank building and plan to use the existing driveup window to offer an innovative new drive-up service for your business? Are you located near an attraction that draws a great deal of foot traffic that will pass by your business? Say so.
Competition Now that you know your business, you need to figure out how it stacks up against the competition, and honestly evaluate how their product, service, or business is better than yours. Because larger competitors generally have large marketing budgets, you need to be creative in how you sell your business’s products or services to new and existing customers. Knowing that you’re strong where your competitor is weak gives you an important advantage that you can use to level the playing field. Conversely, learning where your competitor excels can drive you to make improvements in your business that can sharpen your competitive edge. To get the goods on your competitors, you need to become a sleuth. Find out everything you can about the company so that you can determine where it falls short of your operation. This will provide you
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Part 2: Putting Together Your Plan with important information that you can use to differentiate your company. If you can offer specialized products, knowledgeable service, personalized attention, better atmosphere, or other advantages, this can be your key to maintaining your share of the market. If possible, visit your competitor’s place of business or talk to customers. Also go to the local retail store, restaurant, or other venue that may potentially take market shares away from you. If that’s not possible, read industry publications for information about the company or do some online research. By gathering information about your competitor, you can get a clear picture of how it measures up against your business and which weaknesses you can use to your advantage. Other great places to get the goods on competitors include these: ◆ The company’s website. Look for a background or history on the company, and
its mission or vision, which can tell you where its future plans lie. In addition, employment sections can tell you if the company is staffing up or has lost a key team member. Read news releases or copies of media coverage that are included on the site to get additional insight. ◆ On the wire. If the company’s releasing info about itself, it may be doing so on
one of several press-release distribution services. Most of these are available online, so do a company search on such websites as PRNewswire.com, PRWeb.com, PressReleaseNetwork.com, and Businesswire.com. ◆ As a stockholder. Purchase just a few shares of your competitor’s stock and you’ll
receive a slew of helpful information from the company’s investor relations department. This can give you great insight into strategy, new products or services, changes in direction, and other key information. Or, save a few bucks and contact the investor relations department and request information as a prospective investor. (But if you do invest, you’ll often get information sent to you regularly and automatically.) ◆ Credit report bureaus. For a fee, large credit-reporting bureaus such as Dun &
Bradstreet and Experian will sell you company information that may include number of employees, revenue levels, and other important facts about your competitors.
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◆ Complaint department. Opinion sites such as ePinions.com, as well as more formal
complaint aggregators, such as the Better Business Bureau, may have information about problems that customers have had with your giant competitor. (You should note that it’s almost never a good idea to use complaints about competitors in your marketing. However, complaints that you see over and over again can help you understand some of the weaknesses of your competitor.) ◆ Directory assistance. Check some of the popular business directories, such as
Standard and Poor’s Register of Corporations, Directors and Executives, or Ward’s Business Directory, published by The Gale Group. These directories give information on revenue base, number of employees, contact information, and other basics. ◆ Uncle Sam’s two cents. The Federal Government can be a wealth of information
about your competitor. Check out information from government agencies, such as the Small Business Administration or the Patent and Trademark Office. ◆ Search engines. Type the company’s name into a few search engines—especially
the more inclusive ones such as Google or one of the meta-search engines like Dogpile.com, which also search a number of directories and databases. Scroll through the results and you’ll likely be surprised at what you find.
Business Performance It seems like a great deal of information to cram into two pages, but you’ll need to include one more thing: How your business is expected to perform in the market. Think of your industry analysis as a broad description of the sector in which you’re doing business. Identify its benefits and challenges. Then explain why your business is perfectly suited to succeed in this climate. Again, don’t use a great deal of hyperbole or exaggeration. Simply state, matter-offactly and with supporting documentation, why your business will be successful in this market, which you understand so well.
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4.0 The Market The prospect base for our component products is the hundreds of manufacturers of products that incorporate electrical/electronic components. We have concentrated on the southwestern United States and will be expanding throughout the western United States in the coming year. Our initial thrust has been to manufacturers of "rough usage" products. This continues to be our primary product, but as our reputation for quality components is growing, we are gaining new customers who manufacture "average usage" products. We have also targeted the southwest/western region for Smart-Lite with prospects mainly concentrated in urban areas. The composition of our customer base is projected to be: Some of the prospect base are expected to be customers of our component products. We will concentrate on prospects experiencing good profit margins and have the resources to install and benefit from the use of Smart-Lite. It appears that Smart-Lite has many of the attributes necessary to cause the prospect to purchase it, but the purchase of a product like Smart-Lite is secondary to the prospect's main business. Therefore, we will have to make a strong argument for the cost savings resulting from the use of Smart-Lite.
4.1 Segment Size Market Segment
% of Sales
National Distributors Area Distributors Local Distributors
60 % 30 % 10 %
4.4 Objectives The prospects for our components are usually the purchasing agents of product manufacturers, however, it is often the design engineer who initiates the interest in our products. Their objectives are mainly to improve the reliability of their product(s), thus improving customer satisfaction and reducing maintenance costs. The proven superiority of our components in providing continuous performance under extreme conditions is the reason the prospect wants to purchase from us. The prospect for Smart-Lite falls into two categories, builders of new facilities and managers of existing facilities. In either case the product is beneficial in facilities of medium to large business enterprises or public organizations (schools, libraries, museums, etc.). The prospect's objective is to lower the operating costs of their facilities, which is addressed well by our claims of a 10% to 15% reduction in their electric bills with a full return on their investment in the first year.
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4.5 Segmentation The major market segment for our component products is the manufacturer of "rough usage" products. There are small secondary market segments of manufacturers of "very close tolerance" products and high voltage video display terminals. We do not sell directly to these manufacturers, but rather to distributors of electrical and electronic components. We have thus far limited our distributor network to the southwest U.S. with plans to expand through the western U.S. in the coming year. We expect the market for Smart-Lite to be quite diverse, as it is beneficial to any enterprise with facilities that have more than twenty offices. This is such a large market that we are not yet sure how to segment it for our initial sales efforts. We are planning on working closely with our distributors in monitoring the response to their initial promotional efforts. This information will help us to focus on more specific market segments for the first one to two years. Due to the nature of our products the majority of our prospects will be commercial businesses located in urban areas with populations of 100,000 or more.
4.6 Size We estimate that there are in excess of 10,000 manufacturers (1) within the U.S. manufacturing more than 30,000 unique products (1) that could be improved by using our components. The annual sales for these products is approximately one billion dollars (2). This is a growing market as more and more products are being manufactured for outdoor work or pleasure uses. There are in excess of 500,000 office complexes (3) in the U.S. that could benefit from Smart-Lite. In addition there are many thousands more buildings such as hospitals, schools, libraries, etc. that are also prospective users of Smart-Lite. Assuming that on the average each of these facilities would use twenty units, this represents a Total Available Market (TAM) greater than ten million units. (1) Manufacturers Digest, April 200x (2) Sales in Review, Summer edition 200x (3) IRS Report # 17633, November 200x
4.7 Environment The trend toward use of more electronic devices for outdoor activities ranging from surveying tools to all weather radios is a positive influence for the sales of our component products. Also military actions such as the Middle East situation creates a demand for more sophisticated "field" devices that require high performance electrical components. Smart-Lite is being introduced as the public is becoming more and more sensitive to the need to conserve energy. A 10% to 15% reduction in the electric bills for 500,000 large office complexes is a major step in the direction of conservation!
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4.8 Alternatives The main reason HiLight Inc was formed was that manufacturers did not have a good alternative to improve the durability of their "rough usage" products. Our components are expensive, but in the long run result in a more cost effective product and a more satisfied customer. Selling the manufacturer on that concept is our major task. Smart-Lite offers reduced electric bills and, to some extent, improved convenience. If the buyer wants to achieve these objectives its alternatives are to use Smart-Lite (or a competitive product) or train their personnel to always turn out the lights when they leave a room. A more expensive solution is to rewire for new, energy conserving light bulbs, or there is now a technique of routing sunlight via fiber optic cables to each office in the complex (very expensive).
Sample Industry Overview and Analysis.
The Least You Need to Know ◆ Your industry analysis explains the sector in which you do business. ◆ You should know your NAICS Code, which is used by lenders and government
agencies to identify your industry. ◆ Primary research is research done especially for your business. Secondary
research is gleaned from other sources. ◆ There are many resources to find trend information and statistics about your
industry. Use these to support your claims and to present your analysis. ◆ Thoroughly research your competition and how they position and market them-
selves. There are many sources to which you can turn for free information and insight.
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Who Are You? In This Chapter ◆ Creating effective job descriptions ◆ Describing the assets of your management and staff ◆ Developing an organizational chart ◆ Hiring employees or contractors? ◆ Describing consultants and strategic partners
A business is only as good as its people. Even if you run a business based primarily on technology or one where machines perform many functions, your people are still the ones who will interact with and sell to your customers. They’re the ones who will navigate challenges with their experience and will develop innovation through their creativity. You’ll want to showcase those human assets in this section of your business plan. Describing the organization and personnel involved in your business is a critical component to inspiring confidence in your enterprise. As you craft your organizational structure, think about how you can build upon it in the future, and be sure that you’re laying a strong foundation for the future.
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Internal Assets Regardless of the type of business, all businesses share one key element of success— the people who are involved in running and operating the company. These internal assets include the management, the employees, and the collective body of knowledge that those individuals bring to the business. Finding the right staff, the best management strategy, and the most efficient organization of these people are key elements in the success of any business, and the inclusion of these will be important components of any business plan. This section of your business plan will explain how and by whom your business will be run, showing lenders the strong leadership and capable staffing that you have in place. If you’re using the plan as a management tool, you can get everyone on the same page as to who does what.
Owners and Partners In this section, you describe the experience, roles, and responsibilities of the people at the helm of the business. Ideally, as the owner or partner of the business, you will have experience in the type of business you’re launching or acquiring. If you owned or were involved in a similar company, or have background in that industry or sector, it’s important to highlight that, as well as any accomplishments you had there, such as employment promotions, the profitability of your previous company, and the like. One gift-shop owner we know began her business after years in shopping-mall management. Although it wasn’t exactly the same type of business, she did know the retail sector very well. She was able to secure financing because lenders saw her previous experience as an asset. If you have other experiences that are relevant, be sure to mention those, as well. For instance, our gift-shop manager was involved in marketing the shopping mall that she managed. That experience was also valuable because it showed lenders that she knew how to promote retail businesses. Even if you’re opening a house-painting business and don’t have experience working for such a company, if you’ve managed a profitable company in the past, have experience in a service business, or have slowly built a small clientele by working weekends, make that clear. The more relevance you can show between your experience and the business you’re launching, the better.
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Staffing If your business is a solo practice or will be run by you and your partner, you don’t need to say much about your staff. However, if you intend to hire employees—or grow your business to the point where you’ll be hiring employees—you need to address staffing issues. If there are weaknesses in your staffing structure, you should address them and describe how you’re going to overcome them. Financial projections are often made for three years into the future. So if you plan on hiring employees in year two, you need to discuss that here and add these numbers to your calculation. Your projected future growth is important for lenders to know as well as for strategic planning for your business.
Management Team Clearly defining your management team is the next step. This section of your business plan usually has a separate listing for each person on the team, with the highest-ranking managers and employees listed first. You should then list the rest of your employees in a pecking order. For example, you might list yourself and your partner first, then your vice-president of sales, director of finance, director of customer service, marketing manager, and so on. Be sure to highlight the relevant experience and the job responsibilities of all of your employees. Look closely at how you intend to run your business and where you’ll need help. Often it’s a good idea to hire managers and employees who supplement weaknesses in the business. So, for instance, if you are terrible at balancing your checkbook or hate working with numbers, you should supplement the financial side of your business with a part-time bookkeeper or an accountant who will handle your payroll and tax paperwork. If you’re going to be spending most of your time working on the inventory and marketing of your new store, you’ll need an employee or two to run the register. If you’re launching an ice-cream manufacturing company, you’ll need people to actually make the ice cream, a team of salespeople, marketing, and package-design staff, as well as a group of office staff to handle orders, returns, and customer service.
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Staff stats.
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Outsourcing and Consultants Sometimes, especially in the early phases of a business, it’s important to keep staffing costs down, and this can be done through the use of consultants or independent contractors. Such individuals are often hired to perform a specific task or provide specific expertise. For instance, you may have an independent contractor who works from home and handles bookkeeping for a number of clients, or you may hire a consultant to oversee your company’s marketing or graphic-design needs. Hiring such talent on a per-diem basis often enables you to tap more specialized expertise than you could afford full-time. An experienced, full-time bookkeeper might cost you $35,000 to $40,000 per year, plus taxes, benefits, and expenses (as well as the additional office space you would need for the bookkeeper). However, you might be able to hire a person with similar experience for $40 to $50 per hour. If you only need to hire her for 10 hours’ worth of work per month, that’s $400 to $500 per month, or $4,800 to $6,000 per year, plus you pay no taxes or benefits. That’s a huge savings and a smart way to run your business. However, before you go out and begin hiring independent contractors left and right, it’s important to understand who is an independent contractor and who is an employee.
Employee or Contractor? The Internal Revenue Service (IRS) uses a series of definitions and criteria to determine whether an individual is an employee or an independent contractor. Generally, if the individual is an employee, you must withhold taxes from his or her pay, and you may be subject to other regulations, depending on the state in which you live. According to the IRS, before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. This person could be … ◆ An independent contractor ◆ A common-law employee ◆ A statutory employee ◆ A statutory nonemployee
The relationship often boils down to the degree of control you have in the relationship and the level of independence that the individual has in performing services for you.
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Part 2: Putting Together Your Plan It’s very important that you have a clear understanding of who in your organization is an employee and who, if anyone, is an independent contractor. Incorrectly classifying an employee as an independent contractor could leave you liable for back Social Security, Medicare, and other taxes, penalties, and interest on that withholding. Generally, such taxes are not withheld from the money paid to independent contractors. The following sections describe the IRS guidelines.
Who Is an Independent Contractor? A general rule is that you, the employer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. For example, Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies, which she obtained through advertisements. Vera is an independent contractor.
Reporting Payments Made to Independent Contractors You may be required to file information returns to report certain types of payments made to independent contractors during the year. For example, you must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees (e.g., independent contractors) for services performed for your trade or business.
Who Is a Common-Law Employee? Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is true even when you give the employee freedom of action, in other words, the ability to determine when and how the work will be done. What matters is that you have the right to control the details of how the services are performed. To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be considered. In an employee-independent contractor determination, all information that provides evidence of the degree of control and degree of independence must be considered.
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Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.
Red Zone Make no mistakes when it comes to determining whether an individual is an employee or a contractor! Choose incorrectly and you could be faced with stiff penalties, back taxes, and interest. Carefully review the IRS guidelines available at www.irs.gov and remember that just because someone doesn’t work in your office or works for you only part-time doesn’t mean that the IRS doesn’t consider him or her an employee.
Who Is an Employee? A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. Here’s an example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works six days a week, and she is on duty in Bob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and groupterm life insurance for Donna. Donna is an employee of Bob Blue.
Statutory Employees If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories, or meet the three conditions described under Social Security and Medicare taxes. ◆ A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or
bakery products; or someone who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission. ◆ A full-time life-insurance sales agent whose principal business activity is selling
life insurance or annuity contracts, or both, primarily for one life-insurance company.
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that must be returned to you or to a person you name, and you also furnish specifications for how the work is to be done. ◆ A full-time traveling or city salesperson who works on your behalf and turns in
orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.
Statutory Nonemployees There are two categories of statutory nonemployees: direct sellers and licensed realestate agents. They are treated as self-employed for all federal tax purposes, including income and employment taxes, if … ◆ Substantially all payments for their services as direct sellers or real-estate agents
are directly related to sales or other output, rather than to the number of hours worked. ◆ Their services are performed under a written contract provided that they will
not be treated as employees for federal tax purposes.
Organizational Chart After you’ve done the narrative portion of your organizational chart, it’s a good idea to map out the specifics so that your reader can see the business organization in an at-a-glance format. An organizational chart is a series of boxes, structured in a tiered format, that illustrate the hierarchy of management in the business.
Bottom Line Booster If you hire consultants and they play key roles in the company, they can also be included, showing the person to whom they report. They should, however, be shown as consultants. Generally, if you have a solo practice, or very few employees, an organizational chart is not necessary.
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Salaries If you’re using your plan to secure financing or business partners, you’ll also want to explain the compensation structure for owners, managers, and employees, as well as the rationale for putting that structure in place. Lenders and partners will want to know that you’re not asking for money to fund an inflated salary structure. Plus, in your start-up or early acquisition phase, you’ll want to keep your expenses lower to keep as much cash on hand as possible. Consider using some sort of commission or bonus structure tied to performance of job duties, instead of higher salaries. That’s generally attractive to lenders because it raises the amount paid to an employee only when an employee is positively contributing to the company’s bottom line. Here, you should also note industry standards in salary levels (check with your trade association or use your firsthand knowledge of the area), as well as any special compensation considerations for your geographic area. For instance, your business may be located in an area with a high cost of living, such as the northeast or northwest, where average salaries are a bit higher than they are in other areas of the country.
Bottom Line Booster As the business owner, it’s important that you compensate yourself properly, but that you not overshoot the boundaries of what’s reasonable. A good self-check when deciding how to compensate yourself is to check with trade or professional associations and determine what the salaries traditionally are in your sector. In addition, you can tap salary surveys and calculators like those on www.salary.com or www.salaryexpert.com. Your accountant may also have resources to help you calculate what’s reasonable for your business, its location, and other factors.
Strategic Partners Your business may have special relationships with other businesses or individuals that are assets to its management, operations, or other areas. Be sure to include a narrative description of these alliances or strategic partners. For instance, if you are starting a company to promote an invention and have a contract with an overseas supplier who will produce the product for an excellent price, describe that relationship. If you own a contracting firm and have relationships with other contracting firms that will refer business to you during their busy times, say so.
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Professional Resources In addition to your employees, consultants, and other alliances, you likely have a few more members of your support team whom you should include in your plan. These partners are the mark of a professionally run firm.
CPA Name your accounting firm and its role in your business. For example, if you hold quarterly meetings with your accountant to review business profits and expenses, or if your accounting firm manages your payroll and tax-filing requirements, then you should include that information.
Attorney You’ll likely need an attorney for some of the start-up activities of your business, including incorporation, as well as drafting and reviewing contracts and agreements. Name your attorney, his or her firm, and the role that the firm plays in your business.
Bank It’s a good idea to cultivate a relationship with the manager or managers of your bank. These people can help you secure lines of credit or additional financing for your business. Keep them updated on your business successes, such as expansions, new product lines or services, acquisition of new clients, or significant jumps in revenue. They may also be in a position to refer business to you, so it’s a good idea to keep them in the loop about what and how your business is doing.
Insurance Professionals Regardless of the type of business you have, it’s likely that you’re going to need some type of insurance. If you’ve received professional consultation about the type and amount of insurance you will need, describe that, as well as how this advice is helping you limit your potential liability.
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Other Include any other types of professional advisors or partners. You may have hired a realestate professional to help you choose the right location for your business; include that information. If you have received a loan guarantee from the Small Business Administration, or counseling from the Small Business Development Center or local business development group, include that. If there is a professional who is at your disposal or upon whom you rely for advice, include a brief description of that person and his or her contributions. Now you have a clear vision of your management and staffing structure. It’s time to move on to some of the more external factors that will concern your business.
The Least You Need to Know ◆ Experience in a particular area is a very valuable asset to a business. ◆ Properly showcasing the experience and contributions of your management and
staff is critical to showing lenders how your business will be run. ◆ Use your plan to show how you’ve hired or aligned with employees or consult-
ants to strengthen your business. ◆ Be sure you know the IRS rules about who is an employee and who is a contrac-
tor, or you could leave your business open to big liabilities, including back taxes and penalties. ◆ Create an organizational chart to show your management at a glance.
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Analyzing Your Business in the Market In This Chapter ◆ Analyzing your customers ◆ Understanding demographics and psychographics ◆ Defining your market segments ◆ SWOT Market Analysis
Proper analysis is the key to a good business plan. This will be the first part of your plan where you take the cold, hard facts and use them to paint a picture about your business and the climate within which it will be operating. Here, you’ll explain who your customer segments are and why you’re targeting specific populations. You’ll also get into prioritizing market segments. This chapter also discusses a popular business approach called SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, Threats. This is a valuable tool, and one which you should use regularly to evaluate the state of your business.
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Getting Down to Strategy After you’ve presented the cold, hard facts about your business, you need to put it in some context to help your target audience understand your business prospects. Here, you demonstrate that you not only understand your business, but you also understand the market in which it will operate, and the customers you can expect to attract. When you work on the market-analysis portion of your plan, you can often turn to industry trade associations for facts and figures, which may supplement your efforts. It’s critical that you have a good understanding of the size of your market and how and why your customers will buy from you. This needs to come across loud and clear in your industry analysis. This is also the first part of your plan that should be approached from a strategic, rather than a factual, perspective. That means that you’ll want to analyze information instead of just presenting it as is. For instance, if you’re a florist and know that there are approximately 500,000 people within your geographic target area who are likely to buy flowers at least once a year, you need to present a strategy, a plan of action, designed to accomplish a specific goal, to show how you’re positioning your business as an attractive alternative, and why you believe customers will know about and choose you as their floral provider. External market factors also play a role in how you’ll analyze your market. These can include the economies of your country and the countries in which you do business, legislative issues, changing customer attitudes, innovations in the sector, and other influences that are beyond your control (such as changing technologies). If these concepts seem a little far-reaching, then you need to consider the real-life businesses that have dealt with similar circumstances. One such business is Canada’s Manitoba Harvest Hemp Foods and Oils. They had plans to expand their successful hemp-foods business into the United States. They launched their expansion in September 2001, just ten days before the terrorist attacks. Then, in October of that year, the United States Drug Enforcement Agency announced its plans to ban hemp foods, essentially making Manitoba’s products illegal. This made at least one of the company’s major customers pull the products off of its shelves. The company took part in a lawsuit that eventually overturned the DEA’s decree and made hemp foods legal, but it did cost the company in lost sales and legal fees. Over the long term, the company held hundreds of seminars to educate both customers and consumers about the product and its benefits. That helped Manitoba stay in business and, ultimately, grow.
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Obviously, this is an extreme example. However, it illustrates why it’s important to consider pending legislation and government action, as well as the other big-picture concepts that we’ve discussed.
Back Office Secrets Different businesses have different markets. Business-to-consumer (also called B-to-C or B2C) models sell directly to consumers. Business-to-business models (B-to-B or B2B) sell to other businesses. Each of these strategies employs different approaches to marketing and selling to its respective audience. Consumer markets are often motivated by price, convenience, or other factors valued by an individual. Business customers are often motivated by price as well, but are usually more driven by how a product or service will benefit the overall organization.
Targeting Your Customers Your industry analysis should begin with your target customers. These are the people who are most likely to buy your product or service. Obviously, not everyone can or should be a customer. Even the largest companies with the most mass-market products don’t believe that “everyone” is their customer— there are people who don’t drink soda or who prefer cloth towels to paper towels. Your market is likely much narrower than that of a Fortune 500 consumer-products company. Even if you sell a specific product or service, your business, and your customers, will differ depending on how you position that product or service. For example, your restaurant may be promoted as an affordable place to take the family, or as an exclusive, upscale dining experience for special occasions. Each of these establishments will have very different customer profiles. Whether your company has already been in business for a while, or whether you can glean information from competitors in the area, trade associations, and the like, you still need to determine/identify a profile of who, exactly, your customers are. Understanding the characteristics of people, businesses, or organizations who will be your best, most profitable prospects means that you can pour your marketing dollars into vehicles that reach them and eliminate waste. If you try to be everything to everyone, you will be less profitable.
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Part 2: Putting Together Your Plan That means—get ready for a shock—that you may actually want to turn away business, or, at least temporarily, ignore some of your less profitable markets. It’s a scary proposition, but when you understand that clients who aren’t a good fit may actually be costing you money, it becomes easier.
Demographic Profiles For business-to-consumer business models, the first method of defining your customer base is to turn to demographic profiles. Demographics are objective and quantifiable characteristics of an audience or population. The following sections discuss different demographic points to help you define your customer base.
Income and Spending Habits Will you target a certain customer household income range? It’s not always best to target the highest income brackets and assume that they have the most discretionary income. For instance, if you have a small grocery store, your best customers will likely be in the middle-income bracket (which varies depending on the cost of living in your area). Individuals with very high incomes might not do their own grocery shopping. So be sure that you think carefully about the earning power of the people who will buy from you.
Personal Characteristics What does your customer “look” like? Is your customer generally male, female, or both? What is the age range of your customer base? Does your business appeal to any specific ethnicity or religion, based on your geographic location, product mix, or other factors?
Standard of Living How do your customers live? Are their homes upscale and in exclusive neighborhoods, or are they more modest? Do their children attend private schools? Standard of living is often, but not always, relative to income level. You’ll want to define, as closely as possible, the lifestyle that your prospective customers lead.
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Household Characteristics Consider what the household of your customer looks like. Is it a family with children, a childless couple, or an individual? How does this household run? What is the education level? What products and services does this household need—and who chooses them? Understanding how your target lives is critical to understanding how to market to him or her. Virtually any household or personal characteristics constitute a demographic profile. It’s up to you to determine which of these characteristics is most common among your key customers and how it affects the reasons that they do or will buy from your business.
Getting Psychographic In addition to understanding the demographics of your customers, you also need to understand the psychographics of your customers. The demographics are the physical characteristics and can be measured objectively, whereas psychographics are psychological characteristics and attitudes that affect purchasing behavior. Important psychographic data will vary from business to business, but some of the areas that may be important to know include opinions or values, political views, and style or taste.
Opinions and Values Your target likely has some opinions and values that he or she holds dear. Some customers want to pay for higher quality whereas others want the best possible price, regardless of quality. Some customers value convenience and others value price. Your customers may have strong opinions about what they look for in a landscaper, a restaurant, a gift shop, or a personal service provider. The better you understand what’s important to your customers, the more likely it is that you will be better able to connect with them.
Political Views It may be important to determine whether the majority of your customers are liberal or conservative, and how they feel about certain issues. For instance, a small grocery chain may wish to consider whether it sells alcohol in a very conservative region that may frown upon that product choice.
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Style and Taste Knowing what your customers’ interests are and how they spend their leisure time will enable you to more closely connect with them. You will be able to make appropriate inventory, service, and marketing choices. For example, a music store in a rural southern area might require a different inventory mix than a music store in an urban area with a mix of various ethnicities.
Red Zone Demographics are objective measurements that can be easily quantified (e.g., how much money someone makes, the area of the country in which someone lives), whereas psychographics are a bit trickier. Although they can give important insight into your customers and their preferences, they should be used with caution. Opinions, values, and the like are very fluid and can shift and change, unlike demographics. Psychographics, if analyzed improperly, can lead you to make incorrect assumptions about your clientele.
Defining Business-to-Business Customers Businesses that sell to other businesses can look at similar characteristics to determine their target customers.
Type of Business and Ownership Is your best customer a sole proprietorship with two employees, or a LLC with 200 employees? Each type of business has different needs, concerns, and buying habits. If you’re an accountant, it may be more profitable for you to target companies with 50plus employees that need more accounting services than small soloist or few-person businesses. On the other hand, if you sell copy machines, the size of the business may not matter to you, as long as they have a need for photocopying equipment.
Sector Your customers may do business in one sector or across the board (broad market area). A sector is part of a business area (the manufacturing sector or the private sector). This may impact the type of services they need or the manner in which they require services
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delivered. If you’re doing work for government agencies, you may need to apply for certifications or licenses. If your customers are airlines, you’ll likely have a stringent set of requirements relating to your goods and their manufacture.
Geography Examine where the best prospects for your business are, from a geographic perspective. Are they within a certain distance from your place of business? Or are they located in areas that meet certain geographic criteria? For instance, a gift shop may find its best customers within a 10-mile radius of its store, whereas a manufacturer of snow-removal equipment will target areas where, obviously, it snows during the winter. If you are selling a product on the Internet, then geography is usually not an issue because you can ship your product to anywhere in the world.
Psychographic Characteristics Businesses also have psychographic characteristics. Is the corporate culture conservative or outrageous? Does it position itself as a high-end provider of goods and services, and wants that same mind-set from its vendors? Examine the culture and values of your customers to better serve and communicate with them.
Who Is Your Perfect Customer? How can all of this information help you? By collecting as much data as you can about your customer base, you can better predict their buying habits and preferences. You can profile the individuals or businesses that will be most profitable for you and understand their motivations. That lets you better target your marketing efforts, create messages that are meaningful to these customers, and invest in marketing methods that are more effective. Targeting your marketing becomes easier when you’ve been in business for a while. Then, you can do the following:
Bottom Line Booster As you begin to create profiles of your audience, crafting marketing messages and approaches becomes easier. You may find that you have more than one profile within your customer base. Prioritize them and, if you find that you need to divide your marketing dollars, distribute them according to the respective size of the market they represent.
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Part 2: Putting Together Your Plan ◆ Turn to your database. Track customers’ buying habits. Who are your most
profitable customers—the ones who routinely buy in larger quantities or the customers who are loyal, need little attention or assistance, and continue to do business with you? Do they come from a particular industry? What other characteristics do they have? ◆ Ask your employees. Who do they consider to be their “best” customers and
why? Who do they enjoy working with? ◆ Create your own wish list. Are there customers that you wish you had, but
don’t? What are their characteristics? Where can you find them? What’s the best way to reach them? Take the information you’ve gathered and piece it together to develop a perfect customer profile. A mid-size computer networking company might find that its best customers are on-site information technology professionals in companies with fewer than 100 employees that need simple networks, and are within 50 miles of the company’s headquarters. A restaurant may find that its best customers are the people in local office buildings for weekday lunch business. A small but nationally oriented consulting firm may find that its best customers are Fortune 500 companies in major cities. After you know who your best customers are, you’ll better know where to find them. If your company’s a start-up, then you can find out information about ideal customers by doing the following: ◆ Speaking to similar businesses. Contact people who own the kind of business
you wish to start. If you can’t find local proprietors who will speak to you, you may have to go outside your market area. However, you’ll likely be surprised at how forthcoming business owners are—even with wanna-be entrepreneurs who may end up being their competition. ◆ Consulting trade associations. Industry associations will likely have statistics on
buying trends and may even have customer profiles or analyses. Start with the public relations or membership departments to find out what information is available. ◆ Contacting Small Business Administration Resources. The United States Small
Business Administration offers many resources and will supply you with a list of their affiliates who provide free consulting. Some of the best resources are the agency’s Small Business Development Centers, or SBDCs, which will help you access myriad sources of secondary research. The Centers can put you in touch with consultants who can help you analyze that market data.
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◆ Using your experience. If you’re starting or acquiring a business in a particular
area, it’s likely (and advisable) that you have experience in that area. Use your own experience to define the customers who have been most beneficial and profitable in your past dealings.
Why Do They Buy? In addition to understanding your customers, it’s also critical to understand why they buy. Knowing their motivations, needs, and wants will help you to better position your company to service the market sector that will be best for your business. The following sections describe some of these motivating factors.
Do They Need It or Want It? Can They Afford It? Is this purchase a necessity or is it something that the customer desires, but doesn’t necessarily require? Getting a car serviced when it breaks down is a need. Getting it detailed and buying accessories for an automobile is a want.
What’s Important to Them? What factors do your customers take into consideration when making a buying decision? Price, quality, convenience, selection, brand, prior experience, level of urgency, and availability are all factors that influence the buying decision.
For Whom Are They Buying? Many times, the person who purchases a product or service may be doing so for someone else. For instance, a mother will likely choose everything from clothes to a hair stylist for her children. In these cases, you need to determine how to reach the decision-maker.
Who Are Your Customers’ Influencers? Influencers are the people or entities who influence your customers’ buying decisions. Influencers range from respected authorities, celebrities, and trendsetters to media, and even individuals or family members. For instance, the customer of a small grocery store may be a woman in her 30s, but the type of juice or cereal she buys may be
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Part 2: Putting Together Your Plan significantly influenced by her family members. Similarly, an apparel or music customer may be a young person in his 20s, but his influencers may be celebrities or media who showcase a particular type of clothing or music. You can use your knowledge of influencers by reaching out to your target audience in a way that reinforces the influencer’s impact. In-store signage that reflects a clothing trend or music sampling may enable customers to try the latest hits. You may wish to showcase articles written about the products you carry to further encourage customers to purchase that product. Service businesses can also take advantage of influencers by using them to cultivate referrals.
Are They Brand Loyal or Price Driven? Some customers would rather remain loyal than switch from their favorite brands or service providers. Others will go wherever they can get the best price. If your customers fall into the former category, it’s easier to work on cultivating relationships and high levels of service, and you have some flexibility in pricing. If, however, your customers are price driven, it’s more difficult to compete on factors other than the cost of the product or service.
How Do They Buy? Think about how your customer buys your product or service. Does it require face-toface interaction or does the customer prefer the convenience and relative anonymity of an online transaction. Can the product or service be purchased remotely by phone, fax, or online? Explain the process and how you’ve put systems in place to ensure that you’re meeting the buying preferences of your customer.
Creating Profiles There are many companies that create certain profiles of customers. They group customers according to certain characteristics that research has shown are indicators of certain buying patterns. One such company is SRI Consulting Business Intelligence (SRIC-BI), which types U.S. adult consumers in what they call VALS Types™. These profiles help segment the market and help companies determine the characteristics that they should be looking for. The following VALS Types are excerpted with permission from SRIC-BI, and are a good illustration of how all of this demographic and psychographic information can
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pay off in helping to create detailed profiles of your customers. Which of these types would be the best customer for your business?
Innovators Innovators are successful, sophisticated, take-charge people with high self-esteem. Because they have such abundant resources, they exhibit all three primary motivations in varying degrees. They are change leaders and are the most receptive to new ideas and technologies. Innovators are very active consumers, and their purchases reflect cultivated tastes for upscale, niche products and services. Image is important to Innovators, not as evidence of status or power but as an expression of their taste, independence, and personality. Innovators are among the established and emerging leaders in business and government, yet they continue to seek challenges. Their lives are characterized by variety. Their possessions and recreation reflect a cultivated taste for the finer things in life.
Thinkers Thinkers are motivated by ideals. They are mature, satisfied, comfortable, and reflective people who value order, knowledge, and responsibility. They tend to be well educated, and they actively seek out information in the decision-making process. They are well informed about world and national events and are alert to opportunities to broaden their knowledge. Thinkers have a moderate respect for the status quo institutions of authority and social decorum, but are open to considering new ideas. Although their incomes enable them many choices, Thinkers are conservative, practical consumers; they look for durability, functionality, and value in the products they buy.
Achievers Motivated by the desire for achievement, Achievers have goal-oriented lifestyles and a deep commitment to career and family. Their social lives reflect this focus and are structured around family, their place of worship, and work. Achievers live conventional lives, are politically conservative, and respect authority and the status quo. They value consensus, predictability, and stability over risk, intimacy, and self-discovery.
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Part 2: Putting Together Your Plan With many wants and needs, Achievers are active in the consumer marketplace. Image is important to Achievers; they favor established, prestige products and services that demonstrate success to their peers. Because of their busy lives, they are often interested in a variety of timesaving devices.
Experiencers Experiencers are motivated by self-expression. As young, enthusiastic, and impulsive consumers, Experiencers quickly become enthusiastic about new possibilities but are equally quick to cool. They seek variety and excitement, savoring the new, the offbeat, and the risky. Their energy finds an outlet in exercise, sports, outdoor recreation, and social activities. Experiencers are avid consumers, and spend a comparatively high proportion of their income on fashion, entertainment, and socializing. Their purchases reflect the emphasis they place on looking good and having “cool” stuff.
Believers Like Thinkers, Believers are motivated by ideals. They are conservative, conventional people with concrete beliefs based on traditional, established codes: family, religion, community, and the nation. Many Believers express moral codes that are deeply rooted and literally interpreted. They follow established routines, organized in large part around home, family, community, and social or religious organizations to which they belong. As consumers, Believers are predictable; they choose familiar products and established brands. They favor American products and are generally loyal customers.
Strivers Strivers are trendy and fun loving. Because they are motivated by achievement, Strivers are concerned about the opinions and approval of others. Money defines success for Strivers, who don’t have enough of it to meet their desires. They favor stylish products that emulate the purchases of people with greater material wealth. Many see themselves as having a job rather than a career, and a lack of skills and focus often prevents them from moving ahead. Strivers are active consumers because shopping is both a social activity and an opportunity to demonstrate to peers their ability to buy. As consumers, they are as impulsive as their financial circumstance will allow.
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Makers Like Experiencers, Makers are motivated by self-expression. They express themselves and experience the world by working on it—building a house, raising children, fixing a car, or canning vegetables, and they have enough skill and energy to carry out their projects successfully. Makers are practical people who have constructive skills and value self-sufficiency. They live within a traditional context of family, practical work, and physical recreation and have little interest in what lies outside that context. Makers are suspicious of new ideas and large institutions such as big business. They are respectful of government authority and organized labor, but resentful of government intrusion on individual rights. They are unimpressed by material possessions other than those with a practical or functional purpose. Because they prefer value to luxury, they buy basic products.
Survivors Survivors live narrowly focused lives. With few resources with which to cope, they often believe that the world is changing too quickly. They are comfortable with the familiar and are primarily concerned with safety and security. Because they must focus on meeting needs rather than fulfilling desires, Survivors do not show a strong primary motivation. Survivors are cautious consumers. They represent a very modest market for most products and services. They are loyal to favorite brands, especially if they can purchase them at a discount.
Why You Shouldn’t Service Every Customer In the hustle and bustle to get new business, many small businesses collect customers that are, at best, undesirable and, at worst, costly. Although it’s important to attract revenue to sustain your business at the start, be careful of collecting a customer base that is made up of customers that don’t fit your “perfect” customer profile—or who don’t even come close. Check your customer base against your perfect profile periodically by the following steps: ◆ Checking your invoice records or database. Do you have customers who consis-
tently pay late or don’t pay until you threaten them? Customers who take up more time than can be recouped from the profit you make from them?
100 Part 2: Putting Together Your Plan ◆ Asking your employees. Are there customers who are consistently troublesome
or who are even abusive to your staff? ◆ Looking around you. Who are the people coming into your place of business and
placing orders? Do these people match your perfect customer profile?
Bottom Line Booster It’s possible that certain customers are actually costing you money. If a customer is very difficult to service, constantly returns items or asks for credit, and yet keeps coming back to your business for more, you could actually be losing money on that customer’s transactions. Certain big-box retailers have started tracking such “difficult” customers and, after they exceed their return limit, place restrictions on their transactions. If you have a customer who is costing you money, you may need to take similar action, or politely suggest that the customer find a new provider.
Evaluating Market Segments After you determine the profiles of your various customers, you can begin determining whether each of these market segments is worthwhile to pursue. This will depend primarily on how many customers are in each market segment and how you can reach them. How many of this type of customer are there? Consult the industry and local population statistics that we discussed earlier in this chapter. You may find that doctors who own poodles are a great market for your product or service. However, if there are only a few of them, it may not be worth the time and expense to actively market your business to them.
Biz Buzz A market segment is a portion of your prospective customer base defined by demographic or psychographic means.
In addition to establishing the number of people or businesses within a market segment, you must determine whether you can reach them. Are there mailing lists for physicians who own poodles? Magazines? Television shows? How will you reach this audience to let them know about your products or services? If you can’t do so relatively easily and with little waste of time and money, it’s likely that this won’t be a good segment to pursue.
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Defining Your Market Strategy Now that you have a clear vision of your customers and market segments, you’ll need to decide the strategy that you’ll use to attract them to your business. Some of the questions you’ll need to consider include the following: ◆ Will you focus on one primary market segment, or target several equally? ◆ How will you use your USP to set your business apart and serve those markets? ◆ How will you position your business to serve those markets? ◆ How will you reach these prospects and customers? ◆ What are some of the potential barriers to your success? ◆ Why will customers buy from you?
The SWOT approach is one of the methods that you can use to define this market strategy in language that lenders and other business partners will understand.
The SWOT Approach SWOT stands for Strengths, Weaknesses, Opportunities, Threats. This is a common analysis approach used in business. The S and W are internal processes that determine what makes your company unique, whereas the O and T components of the process detail external factors that can come into play.
Strengths Obviously, your strengths are the areas in which your business, product, or service excels. For example, one New Jersey hardware store survived when a retail mass merchant moved in next door, by marketing how knowledgeable his staff is. The fact that everyone in the store is a hardware expert—versus the more generalist employees at the larger retailer—was a significant strength and appealed to do-it-yourselfers who may need advice about which types of products and tools are best for the job at hand. Other types of strengths may include unique features of your business, your location, staff, product mix, or service offerings. In this part of the analysis, discuss the things that make your business special.
102 Part 2: Putting Together Your Plan Back Office Secrets When you’re considering the strengths of your business, it’s important to understand the difference between benefits and features. Benefits are the tangible or intangible assets that the customer will gain. Features are the elements of the product. For instance, when purchasing a computer, the hard drive and internal components are features. The fact that the buyer will be able to work at a higher speed is a benefit. People tend to buy benefits, instead of features.
Weaknesses What are the challenges within your business? These can be things such as financial constraints, lack of awareness in the marketplace (a common issue for start-ups), limited staff, poor location, or other potential pitfalls. It’s important to deal with your weaknesses in an upfront manner, and provide explanations of how you’ll overcome them.
Opportunities Earlier, we discussed external market factors. These can also be benefits. What are the market factors that are working in your favor? Are you introducing a product for which there is an emerging demand (e.g., MP3 players) or are you capitalizing on new technology (such as opening a new radiology clinic with the latest innovations in the sector)? Is the local economy doing well or do you have exceptional supplier agreements? If so, outline them to show how your business is well equipped to handle challenges that come its way.
Threats Just as you were upfront about your business’s weaknesses, you should honestly evaluate threats to your business. Is the market heavily saturated with competition? Are price increases or pending legislation going to make it difficult for your business to conform to its pricing structure? Discuss these potential threats and the solutions you’ll use to ensure that they don’t derail your business.
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Predicting Market Share Your research will help you determine what share of the market you can expect to capture, which can then help you better estimate your revenue projections. For example, if you are opening a childcare center, you might determine that there are 5,000 families in a 10-mile radius of your center who have children under the age of five, who would likely need childcare. Through your research, you determine that there currently are four other childcare centers serving the same area, and you are now number five. You then hypothetically have a one-fifth share of the market for childcare in your area. However, just because you now have 1,000 potential families in need of daycare, that doesn’t mean that all 1,000 will become your customers. There are many other factors, including personal preference, price, and location. However, let’s say that you calculate that you need 100 children enrolled in your program to meet expenses. Then you have more than enough market share to be successful. If you were in an area where there were 100 other childcare centers serving the 5,000 families, you could estimate that each center would have 50 children, and you would not reach your 100 child break-even point. The market in that area would be saturated. The following chart will help you to concisely present and determine how your business stacks up to the competition. Your Business Competitor #1 Competitor #2 Competitor #3
Product/service Price Value Branding Location Uniqueness
104 Part 2: Putting Together Your Plan The Least You Need to Know ◆ Get to know as much as you can about your customer so that you can communi-
cate and serve him or her better. ◆ Create market segments that can be evaluated for viability. ◆ Understand why your customers buy, and then position your business to address
those motivational factors. ◆ Analyze your business in the marketplace using the SWOT approach—
Strengths, Weaknesses, Opportunities, Threats. ◆ Create a matrix that compares your business to your competition.
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Chapter
Getting the Word Out In This Chapter ◆ Your market position ◆ Explaining your market strategy ◆ Tools you can use ◆ Steps to creating your marketing plan
You might have the greatest business in the world, but unless you have a solid plan in place for promoting it, you’ll surely be out of business quickly. Lenders and investors know that all too well and will want to see that you have a solid plan in place for promoting your business.
Positioning Your Business in the Market After you understand your target market, you can begin to explain how you will reach these targets, and what messages you’ll use to get customers reasons to spend money at your business. In other words, you need to explain your marketing plan. For example, two restaurant owners may take vastly different approaches to attracting customers to their locations. One may decide to go for an upscale, exclusive image, whereas the other may decide that the market really needs a more informal, home-style dining establishment.
106 Part 2: Putting Together Your Plan The upscale restaurant owner may want to approach his or her local restaurant writer to discuss how the restaurant is creating low-fat gourmet cuisine, or the owner may wish to send out richly designed mailers to local businesses. The family-style restaurant owner may hold coloring contests for children who dine in the restaurant and may want to start a birthday club for families, offering discounts or free food to families who celebrate Biz Buzz at the restaurant. Marketing is the process Understanding the act of properly targeting a cusof developing pricing, promottomer segment is critical because investors will want ing, and distributing goods or to know that you have a game plan for reaching out services to reach an appropriate to your audience. If you can’t show them that you base of prospective customers. understand how to reach the universe of people who The purpose of marketing is to create brand identity, build trust, are likely to buy your product or service, they will and give people reasons to buy likely be nervous about how you will attract and susyour products and services. tain business, especially in the start-up or new acquisition phase.
Explaining Your Marketing Strategy In addition to your analysis of your customers and what they want, your marketing strategy primarily involves four areas of discussion: ◆ Product ◆ Price ◆ Place (distribution) ◆ Promotion
The product section of your marketing strategy relates to the features and benefits of your product or service. It should answer the following questions: ◆ What is it? ◆ Why will customers want it? ◆ What is special about it? ◆ Why is it better than other similar products or services on the market?
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Price You also need to discuss pricing as part of your marketing strategy. Are you going to offer the upscale, more expensive option or the low-end, high-volume option? Or will you fall somewhere in the middle? Explain your choice and why you think it is the best option for your business.
Place (Distribution) Place means different things to different businesses. If your product isn’t readily available in a particular area (for instance, you will not sell many snow shovels in Florida), it doesn’t make sense to waste money on marketing there. When you consider how this element figures into your marketing strategy, you’ll want to consider such questions as these: ◆ Where is my product or service available? ◆ Do I want to promote it in all the places it is available, or focus on specific areas
at specific times? ◆ Are there benefits or opportunities that my location, distribution mechanism, or
other means of providing products or services provide?
Promotion The promotion component of your marketing plan is important for showing your audience how you intend to let people know about your business. After all, the best business in the world will fail if no one knows about it. Promotions should be focused on the target market and measured to determine if they are working. The sequence of your promotions is important. There are very cost-effective marketing tools to consider, especially if there is lack of a substantial marketing budget. Before deciding upon any marketing tool, the business owner needs to determine what his or her goals are before deciding exactly what tools are best. The big question is whether the target market will actually be influenced by a particular marketing tool. Without this approach the marketing investment may not pay back the rewards. Also, continuity, consistency, and multiple exposures in the marketing message/ endeavor is needed for it to take effect. Here you need to explain which of the many marketing tools you will use to get the word out. The following sections describe the most common promotional tools.
108 Part 2: Putting Together Your Plan Advertising Although advertising is sometimes used as a synonym for marketing or promotion, this definition is actually not correct. Advertising is the specific action of purchasing space or time in or on a media vehicle and creating messages, artwork, or broadcast productions in or on that space. So if you purchase an advertisement in a magazine, you are buying the space in that magazine and creating the ad to fill that space. There are a number of types of advertising, of which you might want to be aware: ◆ Print: Print advertising includes advertising in magazines, newspapers, newslet-
ters, and other periodicals. ◆ Broadcast: Broadcast advertising includes messages played on radio or television. ◆ Outdoor or transit: This includes ads placed on vehicles, on billboards, build-
ings, or other outdoor spaces. ◆ Banner: Banner advertising is done on websites.
When deciding which type of advertising will best meet your needs, find out what your advertising choices will cost. You may then change your mind about certain choices, but more importantly, these numbers will be needed later in the financial section of your business plan.
Point-of-Purchase Advertising With point-of-purchase advertising, you can take advantage of “impulse shopping” habits that make people purchase your products or services when they see them in specialized displays or in on-site signage and other vehicles. Point-of-purchase advertising is most effective at the checkout counter, but other point-of-purchase displays include floor stands, display bins, and window displays. Many manufacturers will create and provide you with point-of-purchase displays when you sell their products at your business location. Generally, they’ll also compensate you with discounts for using their displays. These may include the following: ◆ Displays ◆ In-store signage ◆ Shelf “talkers” (small cards or signs that affix to shelving units) ◆ Banners ◆ Window décor
Chapter 9: Getting the Word Out 109 Promotions can also be used to draw attention to the business, such as special offers, grand openings, seasonal discounts, and so on.
Collateral Materials Collateral materials are the print materials that are used to communicate information about your business to customers. These are some of them: ◆ Logos ◆ Sales sheets
Bottom Line Booster If there is something inherent about your business that will afford your business greater visibility or better service, include information about that in your marketing plan as well as your location description. For instance, if you’re located at a busy venue that lets your signage reach a vast audience, mention this in the marketing section of your business plan.
◆ Stationery and business cards ◆ Newsletters
Direct Mail Direct mail includes a variety of advertising messages mailed directly to your targeted customers and business prospects. Highly targeted and measurable, this form of communication can be very effective. Brochures, letters, fliers, and other forms of collateral can be used as direct-mail pieces. In your direct-mail pieces, you should include some type of offer that will generate a response or ‘call to action’. With direct mail, you want your recipients to take action: You might want them to place an order or request more information about your products or services. Or you might want them to visit your business location. Here are some examples of direct mail: ◆ Letters ◆ Postcards ◆ Packages
Direct Marketing Direct marketing encompasses all forms of advertising that sell your product or service through media that provides direct contact with prospective customers, such as mail order, televised infomercials, telemarketing, package inserts, and door-to-door selling. Direct marketing is a measurable form of marketing and includes the use of
110 Part 2: Putting Together Your Plan lists and databases. The lists and databases are often targeted to include a select geographic area or demographic (type of prospective customer). Here are some tools for direct marketing: ◆ Infomercials ◆ 800-numbers ◆ Direct response-websites ◆ Trade shows and business expos
Public Relations and Publicity Although it is often confused with publicity, public relations include many more activities. Publicity is a component of public relations, or PR, which also includes creation of events, conducting media tours, creating audience outreach, and other tactics. Public relations, on the other hand, is the practice of interacting with and communicating to different stakeholders, such as customers, employees, shareholders, community members, and others. Tools used in PR may include the following: ◆ Meetings and events ◆ White papers, which analyze a particular topic ◆ Surveys and polls ◆ Trade shows ◆ Speaking engagements
When a story in a publication or on a broadcast or website mentions you or your business, this is called publicity. It differs from advertising because you don’t pay for that mention. In fact, it is unethical to pay for publicity, unless it is clearly labeled as an advertising supplement or “advertorial.” Some tools used in publicity include the following: ◆ News or press releases ◆ Media alerts ◆ Feature stories ◆ Radio and television scripts
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◆ Fact sheets ◆ Media lists and directories
Bottom Line Booster Publicity is a great way to build credibility. When your business receives positive coverage in a story, you receive an unspoken third-party endorsement. After all, the writer wouldn’t have quoted you unless you were the expert, or written about your business unless it was a good example to support the story, right? So be sure to develop relationships with the journalists who are likely to cover your business in key media outlets.
Community Relations Community relations play an important role in your marketing program. By sponsoring and participating in community events, you can increase your exposure in your local community, create goodwill, and boost sales. Align your business with charities and causes that have meaning for yourself and/or your target market. Volunteer your time and expertise to local community efforts and be prepared to reap the benefits. Including information about your community relations efforts will show readers that you understand your business’s role in its community and that you’re interested in fostering relationships that will benefit both the reputation of your company and the loyalty your customers feel toward your business. Here are ways to develop community relationships: ◆ Meetings with community leaders ◆ Sponsorship of local events and charities ◆ Support of community efforts, from posting signage about upcoming events, to
participating in drives, to making donations.
Employee Relationships It’s always a good thing to keep your employees informed about, and involved with, your marketing efforts. Happy employees can be a great advertising tool, increasing “word-of-mouth” opportunities and enhancing your business efforts. Depending upon your business, you can use a variety of media in your employee communication efforts. These include the following:
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Part 2: Putting Together Your Plan ◆ Newsletters informing employees of specials, events, and so on ◆ Motivational advertising specialties for employees only ◆ Company intranet or e-mail updates
Online Marketing Online marketing includes the use of websites and e-mail to forward your advertising messages to prospective customers. Many businesses use online marketing to build brand loyalty while increasing sales of their products or services. If you want your online marketing efforts to be effective, you should integrate the advertising messages with content that is useful or of interest to your potential customers. Some tools include these: ◆ Websites ◆ E-mail marketing campaigns ◆ Banner advertisements ◆ Online publicity
Red Zone Unsolicited commercial e-mail is called spam. Spam is illegal unless you’re sending it to someone who has requested information about products and services like yours or unless you’re contacting someone with whom you have had an existing business relationship. To be sure you’re keeping within the boundaries of the law—and to avoid big fines for improper use of e-mail, get familiar with the CAN-SPAM Act of 2003. You can find more information about compliance from the Federal Trade Commission (www.ftc.gov).
Network Marketing Relationship marketing is different from public relations because it involves interacting one on one with customers. Some of the disciplines of relationship marketing include the following: ◆ Networking—Networking means actively seeking out and meeting others in
your business community. For many small businesses, this is the easiest and most
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effective way to market your business. The purpose of networking is to make contacts who may bring you business or who may be able to assist your business efforts in some other way, by providing either services or information. Through networking your opportunities to ask for and receive qualified referrals. By networking and helping other business people, you gain the visibility and trust you need to grow your business. For many small businesses, this is the easiest and most effective way to market your business. No form of promotion is more powerful than a face-to-face introduction of your business and its products or services. Generally, people prefer to do business with, and refer others to, those professionals whom they know and trust. Ask other business owners about professional groups. ◆ Stakeholder meetings—Stakeholders are people who are directly affected by
your business. These could include customers, community members, neighbors, partners or shareholders, or employees, among other groups. Holding small gatherings to address their concerns, or addressing them one on one, is a great example of relationship marketing. ◆ Cultivating referrals—Don’t assume that just because customers are happy with
your service they’re going to refer you to others. They may not think of it or they may think you’re too busy already, especially if you’re always talking about how swamped you are. Inspire customers to act as your sales force by giving them an incentive to bring you new customers. This may include a discount off their next service, a small gift, or credit on their account. Be sure to ask new customers where they heard about your business so that you can track referrals and the effectiveness of your marketing endeavors.
Putting Together the Marketing Plan Oh no, more planning, you may be thinking. Well, putting together a marketing plan is much more specific than putting together your overall business plan, but it’s critically important. Just as a winning football team always goes onto the field with a solid game plan, your business needs to have an outline of how to reach out to prospective customers in order to succeed. Because you’ve already done much of the homework necessary to complete your marketing plan, such as defining your target audience and segmenting your markets, the process will be easier than if you were starting from scratch. Of course, having a clear plan of action when it comes to promoting your business will be something that investors will want to see when they read your plan.
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Being Clear About Goals Now that you have a sense of where you are, you can decide where you want to go. Ask yourself what you are trying to accomplish with this plan. Do you want to increase sales? Change the perception of your business among target audiences? Generate more store traffic? Do you want to enter a new market where you may not have much experience? The right marketing tools can help you in a variety of ways. Outline each of your goals, being as specific as possible. Although you should be optimistic, use a healthy dose of realism to keep you grounded. Remember that the best marketing plan in the world is not likely to increase sales 80 percent by next year unless there are special circumstances, such as an outstanding new product introduction or the sudden disappearance of your competition. Although it’s fine to have multiple goals, be sure to prioritize them so that you can create a realistic plan for achieving them.
Planning the Action This is the heart of your game plan. For each goal that you have outlined, you need to create a strategy, key messages, and a series of steps that will help you accomplish the goal. You have many tools at your disposal. It’s best to create a spreadsheet for one year that clearly identifies each marketing tactic and the timing for each. As you examine each of your goals, conduct a mini-brainstorming session. Consider what the best vehicles for your message may be. You may decide to use newspaper, radio, television, magazine, or outdoor advertising; you might also use direct marketing programs, including postcards, sales letters, flyers, business-reply cards, newsletters, 800-response numbers, etc; public relations elements such as publicity, events, speaking engagements, sponsorships, opinion polls, and the like are also useful. Perhaps you can accomplish your objectives and cut your costs by teaming up with related, noncompeting businesses for in-store promotions or cross-promotional outreach. Online promotional opportunities are more abundant than ever, and you may want to consider designing a website or uploading information into a newsgroup or special interest forum. For each step you plan, keep asking yourself, “Why should I do this?” Don’t get trapped into big, splashy promotions just for the sake of doing them. It’s much more effective to have smaller, more frequent communications if your budget is limited. For example, a small accounting firm wanted to increase publicity in local newspapers. The owner made a $10,000 donation to a local charity’s annual gala, believing that this would make a great news story. Although the gesture was greatly appreciated by
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the charity and its supporters, that money represented the majority of the firm’s annual marketing budget. In return, the owner got one small story in the local newspaper. If the organization’s goal was to become more philanthropic, the donation would have been an effective gesture. However, because the original goal was to increase publicity, the money would have been better spent on a diverse program with more components. Finally, be sure that the promotions project the right image. If your audience is conservative, don’t create an outrageous promotion. Similarly, if you need to project a cutting-edge image, be sure that your efforts are smart and sophisticated.
Budgeting Your Resources Some business owners believe that marketing is an optional expense. This is one of the most tragic myths in business. Marketing expenses should be given a priority, especially in times of slow cash flow. After all, how are you going to attract more business during the slow times if you don’t invest in telling customers about yourself? Take a realistic look at how much money you have to spend on marketing. Although you do need to ensure that you are not overextending yourself, it is critical that you allot adequate funds to reach your audiences. If you find that you do not have the budget to tackle all of your audiences, then try to reach them one by one, in order of priority. For each of your tactics, break out each expense. For example, a brochure’s costs include the writing, photography, graphic design, film, printing, delivery, and so on. Outline the estimated cost of each. Then you can beef up or pare down your plan, depending on your situation.
Red Zone Just as you budget your money, budget your time, too. Many marketing campaigns fall by the wayside because the owner underestimated how much time it would take to complete. (People don’t realize that certain campaigns are long-term projects, while others simply get bored or distracted.) Start small or hire help for bigger projects.
Creating a Marketing-Cost Matrix Just as you created a matrix that compared your business to its competition, you can use the same sort of grid to compare the costs of different marketing options. The following chart shows you an example.
116 Part 2: Putting Together Your Plan Sample Cost Matrix Marketing/Advertising Method
Cost
Phone book/Yellow Pages Mailed coupons (two times/year) to local zip code Brochure Business cards Stationary Start-up website development Total
$400 $500 $600 $200 $250 $1,500 $3450
Timing Your Projects Now that you have identified and categorized the steps involved in each activity, allot a segment of time and a deadline to each. Again, be sure that you are not overextending yourself or you may get burned out. It’s better to start with smaller, more consistent efforts than to begin with a program that is overly ambitious and then discarded a few months later. What you now hold in your hands is probably the most effective “to-do” list that you will ever write. You have prepared a document that will help you reach your audience segments from a point of knowledge and expertise instead of from “shoot-from-thehip” hunches. Don’t put the marketing plan on a shelf and forget about it. Your marketing plan should be a living document, which grows and changes over time. As your business reaps the benefits of your initial marketing strategies, you may want to increase the scope of your marketing. We discuss more about how to keep your plan updated in later chapters. Again, your marketing plan will show your target audience how you’re going to attract business, and the costs associated with doing so. So use the best tools available to get the word out.
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The Least You Need to Know ◆ Decide how your business will be positioned and create your marketing mes-
sages accordingly. ◆ Remember that marketing is about more than just promotion. It also includes
your pricing, distribution, and the overall features and benefits of your product or service. Marketing creates exposure to get noticed to create brand identity, build trust, and to attract and keep customers. ◆ Have clear goals for your marketing plan: How many people do you need to
reach? What is the time frame for execution? Think about what you want to accomplish and craft your plan accordingly. ◆ Get familiar with the laws governing marketing and advertising in your business
sector, especially new laws regarding electronic marketing, by visiting the FTC website or contacting your industry association. ◆ There are many tools that you can use to promote your business. Tools should
be integrated, with a theme and continuity in the message. Before you start using them, be sure you understand how they will reach your key audience and your budget. ◆ Budget your time as well as your money to ensure that you won’t end up aban-
doning your marketing process because it is too time-consuming. Consider this an investment in your business.
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Sales Plan and Forecast In This Chapter ◆ Why sales plans and forecasts are important ◆ Understanding channels ◆ Your sales strategy ◆ Creating your sales forecast
The sales process is how you actually complete the process of getting your products and services to your customers. Sometimes this is done directly and sometimes it’s done through third parties. Regardless of who handles it, your sales and sales figures will provide the backbone of your financial plan. Here, we’ll discuss how to arrive at those figures and how to best communicate your approach through your business plan.
Selling Yourself Regardless of the business that you’re in, you’ll need to explain how you will sell your products and services to new and existing customers. In addition, your target audience will want to see some sort of prediction of sales performance, based on a set of circumstances or assumptions. This forecast
120 Part 2: Putting Together Your Plan Biz Buzz A forecast is a prediction or estimate, based on a particular set of circumstances or criteria.
will be the backbone of your financial statements, predicting revenue levels and profit margins. The more information you have, the more likely your sales forecast will be on target, whether your business is a start-up or has been a player in the marketplace for some time.
Your Channels Channels are the avenues by which you deliver your products or services to the marketplace. Depending on the type of business you have, you may have one channel or multiple channels. It’s important to spell out each of these distribution and delivery methods, as well as what they mean for your business and your sales activities so that your plan’s readers see how you intend to get your products out into the marketplace. The following sections detail some channels that you should include.
Direct Selling If you have an in-house sales force that handles sales, give specifics on the size of the team and what their responsibilities are. How do you divide territories or accounts? How do you compensate these salespeople to maximize their performance?
Manufacturer’s Representatives If you don’t have salespeople on staff, or if you wish to beef up the coverage of your sales effort, you may wish to hire a manufacturer’s representative. These companies or individuals operate independently of your business, and represent a number of products or services within a particular sector. They are often, though not always, paid on commission, so you pay them when they sell products or services for you.
Wholesalers Wholesale distributors buy your product at a discount and re-sell it, often to small, independent businesses that will offer the product or service at a retail price. Wholesalers can be an excellent way to reach myriad small businesses that might not be profitable targets individually. Explain any wholesale relationships and how they expand your reach into the marketplace. For example, if your company will produce bath products that you’ll sell through day spas, specialty boutiques, and direct sales
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both online and through home parties (think Tupperware), then you should explain each of those venues and how it will contribute to your overall sales picture.
Retailers Another means of distribution, especially for products, is through retailers. These may range from small, independent shops to big-box operations like Home Depot, Best Buy, or other national chains. Having your product sitting on the valuable real estate that is the shelves in these retailers is an excellent way to attract financing. If you don’t have wide retail distribution yet, explain how you’ll achieve it, if that is part of your sales strategy. Include information on any commitments or orders from retailers in your sales summary.
Catalogs Print or interactive catalogs generally sell directly to the consumer, enabling him or her to browse from among a number of products or services, comparing prices or offers. If your company has a relationship with a catalog company or will be printing a catalog of its own, explain the rationale for doing so.
E-tailing As more people become comfortable doing business on the Internet, you may wish to have a sales function as part of your online presence. Depending on your agreements with retailers or other distributors, consider offering an order and payment function on your website and explain that as part of your sales component.
Affiliate Programs Look for businesses that may profit from offering your products or services on their menu. This may be through subcontractor agreements or consignment. Consulting firms, for example, will routinely hire smaller operations with a specific area of expertise. The larger firm promotes the individual’s skill set as part of its overall offerings. Look for larger fish that can promote your business to a bigger audience, and be sure to highlight these relationships in your sales plan.
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Sales Tools Your sales efforts will rely on a variety of different tools. The more developed these tools are, the more they become valuable assets to your business, and are worthy of mention in your sales plan.
Bottom Line Booster There are many affordable customer information management software options on the market today. Even a simple contact management database like ACT! or Goldmine can help you store valuable information, predict trends, and monitor buying patterns. If such a database isn’t appropriate for your type of business, consider a point-of-sale software package that will enable you to capture sales information at the register and will give you similar buying trend information, although not necessarily by customer.
Database Do you have in-house or access to a database of customers or prospects? Explain how this has been compiled or accessed and what role it plays in your sales efforts.
Technological Tools Explain any technological tools available to your sales force. Do you have inventory management systems? Do your salespeople have laptops or personal digital assistants that enable them to connect to your inventory system and to place orders? Does your retail establishment use traffic counters to help determine the busiest times of the day?
Trade Shows Do you participate in industry events, such as trade shows? Even if you can’t afford the booth space, you can often walk the floor for much less and reap many of the same rewards. Visit from booth to booth, distributing your informational materials and networking with prospective customers and contacts. Explain how you put these events to use in your sales approach.
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Territories If your company is national, it’s likely that your sales areas will be divided into territories. These territories may be geographic, such as the northeast, a state, or a locale within a state. Territories can also be divided by type of account, with some salespeople handling large national accounts and others managing regional accounts, or they can be further divided by industry. However you divide your territories, be sure to explain them clearly and how they are specifically relevant to the type of sales in which your company engages.
Finding Prospects Another thing that lenders, business partners, and investors will want to know is how you find your prospects. There are several immediate ways that can be included in your plan.
Referral Systems One of the quickest ways to generate more business is to cultivate referrals from existing customers. It’s been said many times that satisfied customers can act as a free sales force for your business. However, it’s important to remind customers that referrals are welcome because sometimes people don’t make the connection on their own. You can do this by offering an incentive to refer new business or by simply reminding customers to refer business your way. Be sure to include information about how you do this in your plan.
Vendor Contacts Look to the people who provide products or services to you to suggest referrals. Accountants, lawyers, bankers, suppliers, and others may be in a position to refer you business. Ask them to do so.
Expanding Existing Customers If you’re a copywriter working for the marketing department of a large company, find out if the human resources department needs help with newsletter development or if
124 Part 2: Putting Together Your Plan the CEO needs help with speechwriting. Then ask your customer to forward your information along with an endorsement. This way, you’ve leveraged your relationship with one initial customer contact and turned it into new sales opportunities within the same company.
Joining In Rotary Clubs, Chambers of Commerce, or business networking groups at the local or national level can be great places to find more customers and influencers. Local groups are helpful if you draw your customers and resources from a regional pool, and some groups are specifically designed to generate leads for each other and only allow one of each type of business to join their ranks.
Bottom Line Booster More nationally focused businesses may be better off looking for a good trade association and attend their regular meetings or conventions to connect with prospects, vendors, and other important contacts. These types of connections also show that you’re establishing yourself and your business as leaders in the community, so be sure to include information in your plan.
Offering a Better Price It’s usually not the best idea to sell on price against a big competitor, as it can often backfire. Still, if you do have legitimately lower prices, this can be a valuable tool in attracting price-conscious customers. Perhaps you’re able to deliver your service more economically because you keep your overhead low. After careful evaluation, if you reach the decision that price promotion should be part of your marketing strategy, you can do so effectively through advertising, point-of-purchase displays, publicity, or direct mail.
Sales Cycles and Strategies It is also important to include information on sales cycles and any strategic approach you’re taking to selling your products and services. So if your business has big seasonal jumps, such as a landscaping business or a wedding boutique might, it’s clear that your sales cycle is supposed to vary and that lower numbers in certain months aren’t a sign that the business is in trouble.
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AIDA Most first-year business students learn the four components of buying behavior by the acronym AIDA, which stands for … Attention: To get a prospect interested in your product or service, you need to get their attention. This means breaking through the clutter of competing sales messages and finding ways to get your product or service in front of the customer in a way that is meaningful and memorable. Interest: After you’ve gotten the prospect’s attention, the next step is to capture their interest. You generally have only a few seconds, so your sales pitch or materials should be compelling. This is where your research about your customers’ and prospects’ buying behavior and motivations will pay off. You should be able to succinctly define why they should want or need your product or service. Desire: If your messages and tactics are successful in capturing your prospects’ interest, you will create a desire or want for the product or service. This is the third phase of the buyers’ behavior. Action: If the desire is strong enough and there is no compelling reason not to take action, you have achieved the final phase of buying behavior, with the goal of having the prospect purchase the product or service.
Sales Cycle The AIDA analysis of buying behavior can take place in a matter of seconds or a matter of months or even years, depending on the sales cycle of the particular product or service. Here is where you need to know how your customers buy, as well as why they buy. Some impulse items, such as small novelties offered at retail checkout counters, can generate the entire process in a matter of seconds. The sales cycle for real estate, however, is much longer and the entire process may take months. Use your plan to explain how your customers go about their decision-making process.
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Sales We currently have a staff of 3 personnel who are responsible for interfacing with our distributors. They create all promotional materials and provide them to the distributors. We will be adding two more personnel during the year as the Smart-Lite promotions get under way. Presently there is no marketing manager, the personnel report to the president. This will probably continue until sometime next year. Our personnel do not receive sales commissions.
Distribution We currently have one large wholesale distributor who offers nationwide service and several hundred local or regional distributors for our component products. They are all located in the southwestern part of the United States. We plan to expand to distributors throughout California, Oregon, and Washington this year. Our discounts range from 40% to 65% for these distributors based on order volume or committed sales volume. All of our component sales occur through the distributor channel. The majority of our sales are COD, although if a distributor can pass a very stringent credit review we will ship with an invoice. Smart-Lite will also be sold through distributors. However, less than 50% of our current distributors handle "assembled" products. We expect to enlist many new local and regional distributors for Smart-Lite, but do not expect to establish a relationship with a nationwide distributor until next year. We expect that about 20% of our sales will be "direct" this year dwindling to 5% within two years.
Logistics After several years of operation we are able to predict demand for our component products fairly well and usually have product in stock at the time of order. We have defined reorder points and quantities for each component based on past order experience. Warehousing space is adequate to handle our projected finished goods inventory for this year. We use UPS delivery service to deliver product to our distributors. Our normal shipping mode is "blue label" which assures two day delivery. The distributor may request overnight delivery at an extra cost. The service has been quite satisfactory to date and we expect to continue in this manner for both component products and Smart-Lite.
Sample sales plan.
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Sales Forecast Although it’s important to explain how your company sells its products and services, it’s even more important to create a sales forecast that predicts, based on a set of assumptions or criteria, how much revenue your business will generate over specific periods of time. This will be the basis for most of your other financial statements and will provide the basis upon which budgets and future financial projections are created. Pay close attention to your sales forecast. It’s important that you be clear about the factors contributing to the sales figures that you project, because lenders and investors will be looking closely at those criteria and the corresponding numbers. If they don’t look reasonable, that could ruin your credibility and your chances of getting the cash. To avoid any misunderstanding, you should define your assumptions and consider your marketing reach and past sales.
Outlining Your Assumptions Be clear about the criteria upon which you based your forecasts. For instance, if you’re assuming that you’ll have a certain number of salespeople or employees or that a particular increase in demand will spike your sales, explain why. For example, if you own an ice-cream shop, it’s fair to assume that your sales will spike in the summer months. However, if you base your sales projections on the productivity of five employees and you only have two employees working, your numbers could be vastly skewed.
Considering Your Marketing Reach How expansive your marketing effort is will also have an impact on your sales forecast. How many targets do you anticipate reaching? After you consider that, you can begin to determine how many of those targets will choose to buy from you instead of from your competition.
Past Sales or Similar Industries If you’re in a new market or your business is new, you can look at the performance of similar businesses in a particular geography or industry. For instance, you might be opening a small deli in a downtown area. Perhaps there are no statistics on how delis have traditionally performed in that particular area, but you might be able to find out how other restaurants or grocery stores have performed and extrapolate your information from there.
128 Part 2: Putting Together Your Plan Industry Associations Your industry associations might be able to give you insight as to how a particular type of business may fare in various geographic areas.
Market Factors Examine the characteristics of the market, including how the economic climate is among your target audience members, how willing they are to consider new providers, and how much competition there is for their business. The stiffer the competition or the poorer the economic climate, the more conservative your sales projections should be.
Trends It’s advisable to create several sales forecasts, including one as a best-case scenario and one based on much more modest factors. This will show your target audience that you’ve considered what will happen if you don’t meet the most ambitious goals and that your business is viable even if initial sales are more modest.
The Least You Need to Know ◆ You may need several different channels to properly sell your products and ser-
vices. ◆ Lenders and investors will want to see the specifics of your sales strategy, so lay
out all of the tools at your disposal. ◆ Create territories based on the parameters that make sense for your business,
either geographically or by type of account. ◆ Be careful when you create your sales forecast. Creating a forecast that is not
accurate or well supported with documentation can call the rest of your plan into question. ◆ It’s a good idea to create more than one sales forecast, depending on different
sets of circumstances.
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Chapter
Operation Success In This Chapter ◆ Crafting an organizational plan
◆ Outlining your equipment and technology needs ◆ Managing inventory ◆ Implementing appropriate quality control and customer-service policies
Putting your operations on paper will help you to map out, precisely, what your business will need to perform daily functions and produce the products and services at the volume and level of quality that you need. For management purposes, this section will help you to identify weaknesses in your game plan, because lenders and investors will need to see a solid operational plan in place before they fork over the dough.
Business Operations The next part of your plan will address your operations and include information and documentation about how and where your business operates. This demonstration of your infrastructure will assure your target readers that your business has made provisions for its day-to-day performance, as well as its future.
130 Part 2: Putting Together Your Plan If your business has a highly technical or unusual method of delivering its products and services, you may wish to break the following segment out into a separate operational plan. Otherwise, addressing them clearly and thoroughly under their individual subheads should be sufficient. In either case, it’s important that you demonstrate stability in each of the following areas. In addition, whenever you have the opportunity to show how these operational components and activities support your short- and long-term business goals, you should do so.
Equipment What equipment does your business need to succeed and to deliver products and services most effectively? In this section, you’ll want to show your audience which machines, gadgets, and gizmos are necessary to keep your business efficient and effective. Explain what your business will need, both now and for the foreseeable future. Obviously, this will differ greatly depending on the type of business you’re starting. A rough equipment list for a start-up public relations firm may look like this: ◆ Five computers ◆ Five desks ◆ Server ◆ Local area network
Biz Buzz When you write your plan, you’ll need to know the difference between equipment, which is machinery, technology, or other permanent fixtures that you need to run your business, versus supplies, which are the disposable, expendable, or easily replaceable items that are used in the operation of your business.
◆ Word-processing and spreadsheet programs ◆ Fax machine ◆ Photocopier ◆ Five telephones ◆ Postage meter ◆ Digital camera ◆ Document binding system ◆ Postage scale
The rough equipment list for a small ice-cream manufacturing company may be much more complex:
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◆ Two computers with high-speed modems ◆ One laptop with wireless modem ◆ Four desks ◆ Word-processing and spreadsheet programs ◆ Fax machine ◆ Photocopier ◆ Postage meter ◆ Postage scale ◆ Five telephones ◆ Five large refrigeration units ◆ Seven commercial ice-cream makers ◆ Three refrigerated delivery trucks ◆ Packaging system ◆ Three hand trucks
Of course, you would be much more detailed in your list, including the specific features of the equipment in your business. If you’re writing your plan to secure financing for the equipment and other areas, you may even need to include the vendor from whom you will purchase the equipment as well as the cost. If any of the equipment will make your company especially productive or more efficient, be sure to state that. If you have plans to upgrade a facility or create a state-of-the-art workspace, you should discuss why that’s necessary and how it will differentiate your company from the competition. Back Office Secrets
Technology Needs In addition to your equipment needs, it’s also likely that you’ll need specific technology for your business. This can be incorporated into your overall equipment outline, but you should specify those needs, as well as their accompanying costs.
Don’t overlook the basics when you’re investing in equipment, such as a computer backup system. If your computer hard-drive crashes and you did not back up your data, this could be devastating, costly, and possibly put you out of business.
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Part 2: Putting Together Your Plan Additionally, you should explain the current technology standards in your industry and the needs of your business. If you aren’t using the latest technology, explain why that isn’t a detriment to your business, or how you’ll be upgrading your systems to meet industry standards and the time frame you have for doing so.
Equipment Leases Chances are that you won’t purchase all of your equipment, but that you’ll lease some of it. This may be true for vehicles, computers, or other equipment that is likely to become outdated on a regular basis. Leasing can provide you more flexibility, and enable you to keep more of your cash liquid. If you do have or plan to have equipment leases, include copies of the lease or lease information in the operations section of your plan.
Building Leases If you’ve secured a location for your business, or have one in mind, this is the place to discuss it. For existing locations, you’ll want to include a copy of your signed lease; or, if you’re purchasing or own your location, then include the deed, loan agreement, or annual tax bill for the property. In this section of your plan, you’ll want to highlight the facts and benefits about your location. Issues that lenders and investors will want to know about include price, the length of your lease, the location and traffic, and growth potential.
Price Are you paying a fair price for your rent or purchase? Commercial real-estate prices are often described in price per square foot. For rentals, this is translated into monthly rent by multiplying the price per square foot by the number of square feet that you’re renting, and dividing the total by the number of months in a year. For example, if a property is $22.00 per square foot, and the office you’re renting is 2,400 square feet, your monthly rent would be calculated this way: $22.00 × 2,400 = $52,800 (your annual rent) $52,800 ÷ 12 = $4,400 (your monthly rent)
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If you’re purchasing real estate, you calculate the total figure. For instance, the purchase price for a 2,000-square-foot office offered at $100 per square foot would be as follows: 2,000 × $100 = $200,000 (the purchase price of the unit) You’ll want to show that your rent/purchase price is comparable to similar rents/sales in the area. In addition, this will be a key figure as you calculate your expenses. Depending on the type of business you have, Bottom Line Booster your rent or mortgage could be one of the largest expenses. Sometimes landlords will make improvements to the building, at their own cost, to meet your Length of Lease business needs, such as upgrading a bathroom, putting up a If you’re renting, show the length of your wall for an extra office, or buildlease. Lenders and investors will want to see ing a front reception counter. Be that you have a stable location for a fixed sure to negotiate this into your period of time. Many leases will also offer a lease. A better layout will surely renewal option, albeit often at a higher rent, have a positive effect on your so include that information as well. business.
Location and Traffic This is also a good area to further discuss your location and how it benefits your business. If you’re in the heart of downtown, where the foot traffic of many potential customers will be passing your door and bringing in business, it’s worth paying a bit more for your location. Are there other sites nearby that will attract potential business?
Potential for Growth Discuss how the location will accommodate the growth of your business. As your operations expand, can the property provide you with increasing amounts of space? If you anticipate great growth in your business, consider the cost of moving those operations, or the expense and reduced productivity of having to house your business in multiple locations. If the property you’ve chosen can’t accommodate the growth you anticipate, you need to explain how you will overcome that handicap or why it’s worthwhile to house your business in this facility for a period of time as it grows.
134 Part 2: Putting Together Your Plan If there are specific benefits to the location, such as special redevelopment programs that give you tax incentives, proximity to other businesses that will feed into your own, or property attributes that will enhance your business, then be sure to state them.
Utilities and Services Your rent or mortgage isn’t the only location expense that you’ll need to consider and factor into your financials. You’ll need to include information about the utilities and services that will be necessary for your business and how much those will cost. These may include the following: ◆ Electricity ◆ Gas ◆ Internet connectivity ◆ Water ◆ Sewer ◆ Garbage pickup
There may also be common area maintenance (CAM) fees required in your lease. These are items outside your physical space but are needed for business operations, such as: signs, roof, snow removal, garbage pickup, and landscaping. Often these fees will be assessed by the landlord and may be adjusted every few months. The CAM fees are certainly something to inquire about and plan for in your budget. In addition, depending on the type of business you have and the services you wish to offer your employees, you may need the following: ◆ Cleaning ◆ Cable television ◆ Drinking-water delivery ◆ Coffee service
As you itemize these expenses, explain their validity. Such seemingly superfluous items as coffee service could go a long way toward building morale, so state those goals along with the expenses.
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Production/Service Provision Methods Your equipment list won’t give the whole picture when it comes to how you deliver your products and services, so you’ll want to explain that here. How have you developed your systems so that your business is most efficient? How do you train your employees to be effective? How do you ensure that your operations run smoothly and without interruption? If you own a company that makes something, describe the production process, from the intake of raw materials to the finished product. What machinery or method of assembly is used? Who does it? How do they learn to do it? If your company provides a service, you need to answer many of the same questions: How is the service delivered? Who does it? How do you teach your employees to deliver the service to your expectations? Similarly, for retail or distribution businesses, you need to explain how your business acquires the products it will sell and how it ultimately delivers them to the marketplace.
Quality Control A key component of your operations is quality control. Without some assurance that your products or services are being constructed or delivered each time at the same level of quality that customers come to expect, you could potentially lose customers because they won’t be able to rely on you for consistency.
Biz Buzz Quality control refers to the measures that your business takes to ensure that you’re consistently delivering your products and services to an acceptable standard.
How will you ensure that you regularly meet the level of satisfaction that customers demand? This might be done through regular inspections of the manufactured product, or it could be addressed through regular training and continuing education of your staff. Overall, it’s easier to ensure that a manufactured part or product is delivered consistently. You can see it, you can test it, you can taste it—if it meets an objective standard, your quality level remains intact. However, if you’re delivering a service or running a retail store, ensuring quality can become trickier. In cases like these, it’s a good idea to turn to external monitors, such as so-called “secret shoppers” that visit your establishment or sample your service anonymously and give feedback on the experience. If you make use of such outside services or consultants to regulate the quality of your service or the customer’s experience, be sure to say so. This is an excellent way to show your audience that you’re serious about making your business the best it can be. However
136 Part 2: Putting Together Your Plan you go about making sure that your business delivers its products and services to acceptable standards, you should outline these measures in your business plan.
Inventory and Supply Many service businesses don’t need to worry about inventory beyond ensuring that they have enough staff and resources on hand to meet customer demand. However, for most other types of businesses, managing inventory and suppliers is an essential part of keeping their businesses running smoothly. It’s important to include information about inventory management in your plan, since it’s such an integral part of a well-run business. If you don’t maintain enough inventory, you have nothing to sell and customers will be dissatisfied when they cannot get what they need from you. If you have too much inventory, you unnecessarily tie up valuable assets. Inventory that sits too long may become obsolete, or may become undesirable or unable to be sold for a variety of reasons. You need to show lenders and investors that you have a system in place to ensure that you maintain the most appropriate inventory
