The Basics of Business Planning for Your Startup

1. The Basics of Business Planning

Details matter! You should be as detailed and as thorough as you can be when drafting your business plan. Although you can simply lay out a two-page plan on where you are, where you want to be, and bullet steps you need to take to get

there, it is in your best interest to be as thorough as possible, even to the point of writing out weekly activities and then keeping track of your success in accomplishing them. I generally choose the latter, even though it is time consuming initially. Once you get the basics documented, it is easier to maintain. If you are going to use your plan for any sort of funding—securing venture capital, hard- money loans, or even SBA-backed loans—you need to have a solid plan to present. You also need to be able to answer questions that will arise.

1.1. Basics

So what are the basics? Well, first you need to clearly state where you’re starting from—where are you now. This includes money, time, goals, direction, and who will be helping you, if anyone. You will want to document anything financial,

especially anything you need to look out for that could be a red flag for your business failing. Some examples of these red flags are income streams falling below a particular threshold or inventories not moving as you had expected.

1.2. Laying Out a Five-Year Plan—And Why Five Years?

We all hear of the five-year plan and the five-year business plan. In some indus­tries, like information technology, which experience rapid change, it’s tough to plan beyond two or three years. So why five? Five years is looked at as the standard for planning. Banks will want to know your five-year projections and investors will want to know their five-year returns. Five years is the point at which your business is considered relatively safe, so your initial plan should cover through that length of time.

There are many fantastic online tools, but the best one I have found is www. score.org/template_gallery.html. Score is a resource partner with the SBA, which, as we have already discussed, is a fantastic resource in and of itself.

Score calls themselves the “Counselors to America’s Small Business” They are a nonprofit organization, their mission being to educate entrepreneurs and to posi­tively impact the formation, growth, and success of small businesses nationwide.

Another great online tool is BusinessPlans.org, because of all of the samples of completed plans that you can view to get an idea of what you are shooting for within your own plan. BusinessPlans.org offers much more than business plan templates and examples. They also offer additional resources that you may be interested in, such as free business software, investor directories, marketing strategies, and even a newsletter to help keep you up to date with the rapidly changing entrepreneur environment. Their library has over 600 resources—all within a mouse click!

Yet another great online resource is MyOwnBusiness.org, because they literally walk you step-by-step through the creation process of your business plan, and other aspects of starting your first business. Visit www.myownbusiness.org/s2 for their section on business plans.

Please also refer to the Resources list, found at the back of this book, for some excellent tools and ideas. I recommend using a template to get you started. Even Microsoft Word Online has some good templates to begin with. You can down­load them directly into Microsoft Word and begin working on your business plan immediately.

1.3. Identifying Needs

Your plan will need to identify starting needs as well as needs to sustain your business through the first five years. Some business owners plan for three; this is okay, but five is recommended to maximize the potential for bank loans and investors. Why five years? We want to have a roadmap to fall back on. For example, when you are trying to decide whether or not to do something or to take action on a particular new venture within your business, you can quickly and easily decide yes or no by whether or not it’s in the five year plan. While plans change with markets, they don’t change without reason and can serve as a good guide.

What kind of needs will you need to identify? Here are some examples, although there are many more:

• Capital equipment. This is any major purchase, like computers, furniture, servers, copy machines, and so on—generally considered anything that will depreciate over time.
• Monthly expenditures until the business is self-sustaining.
• Office supplies (paper, pens, and so on).
• Office space rental costs, until the business is self-sustaining. If this is your home, it may be zero.
• Utilities, especially if you are renting an office building or office space (e.g., electricity, water, gas, cell phones, Internet).
• Services, such as legal services, accounting and payroll services, etc.
• Advertising and marketing, including your website! This is your monthly budget for advertising and marketing until your company is self-sustaining.
• Any professional and/or legal counsel you will need to start up and sustain your business until you are profitable.
• If your business provides a service, this is especially important to consider.
• Some office building or space rentals include nightly or weekly cleaning services. If yours does not, contracting an outside company for this needs to be considered, unless you will have time to clean house your­self. (Note that these costs also could extend to window washing and plant maintenance services.)
• Cost of capital (e.g., if you take money from a home equity line of credit [HELOC], the interest payments to the loan).

Note that although these suggestions are excellent starting points, there will be many that are specific to your business idea. Researching your own demographic, competition, and so on is highly advised to help in your business plan creation.

1.4. Calculating Revenue, Costs, and Returns

In your plan, you will need to estimate revenue, costs, and returns or profit. This can be the most difficult part of the plan. How, after all, are you going to know how many widgets you will sell? This is where your upfront planning and market testing comes into play. You can also get an idea, as noted in Chapter 4, by post­ing a few on existing sites like eBay and Craigslist and seeing how well they sell. If you’re a service business, you should have some idea how many clients you will have because you are already beginning to let others know about your new busi­ness and are tracking the response of interest you are getting.

After you calculate your estimated revenue (plan for a worst case scenario—better to have a pleasant surprise) you will need to calculate your monthly costs of oper­ation. I don’t recommend calculating this on a yearly basis because some things will be due monthly or even more often, like utilities and employee paychecks. You need to be sure you have working capital every month, not just at the end of the year. Try telling Sprint that you will pay next year and see what they say!

So you’ve estimated your yearly revenue and then divided it by 12 to get your estimated monthly revenue; assume that you will sell more of your products or services toward the end of that year than in the beginning, because people won’t be aware of your business right away. Then estimate yearly costs and divide by 12. Revenue minus costs is your projected return or profit—the bottom line.

Your bottom line may well be “in the red,” or negative, for the first few months— this is somewhat normal, depending on the type of business and how quickly your company grows. Even retailers often run in the red the entire year until Black Friday, or the day after Thanksgiving, which officially kicks off the holiday shopping season. Many retailers wait all year for Black Friday, so named because

it is when they go “into the black” and turn a profit for the rest of the year, making up for the losses over the previous 11 months.

You may have a black “year” and not a Black Friday—in other words, you may run in the red for quite some time, especially early on in your business. Just know what to expect and how long to plan running deficits for, so you can keep an eye on cash flows and know when you expect to turn a profit.

2. Getting Started

To get started collecting data for more than just the basics, you’ll need to think through everything you anticipate encountering over five years. As daunting as this sounds, it actually is rather simple, as long as you do your homework. This includes employee growth, unexpected demand for your product or service, unexpected lack of demand for your product or service, a recession, an economic

boom, high interest rates, low interest rates—your plan needs to be contingent on everything you can feasibly put into one document. Remember, this won’t just serve you for investments but will also be your personal guide to success.

As said by Gertrude Stein, “It is awfully important to know what is and what is not your business,” meaning you should start by having a mission and vision statement in your plan.

Your mission is what you will accomplish in your business, and your vision is what you see it doing, attaining, the goals you see it fulfilling. Your mission and vision are closely tied together because your mission should fulfill the vision you see for your company.

If you don’t know where or how to start drafting your mission or vision statement, or both, check out the article “Developing Effective Vision and Mission State­ments,” written by Jay Ebben. In his article, Jay details what makes a strong mis­sion and vision statement and what to avoid. You can find his column published on Inc.com’s website at www.inc.com/resources/startup/articles/20050201/ missionstatement.html.

2.1. Collecting Data for Your Plan

As you get deeper into your plan, beyond first year or year one-through-three financials, you will need to collect more data. This includes what your potential market base is, how much of that market you can reach with your plan for adver­tising and marketing, what it will take to achieve your goals, how high you want to aim, and so on. Remember the old adage about reaching for the stars—it is engraved on a plaque I earned in elementary school—“Reach for the Stars—If You Don’t Reach Them, You’ll Land Pretty High Up Anyway”—or something to that effect. It’s premise has held true for me throughout life and throughout businesses and change.

I am not suggesting by any means that you rely on luck for your business growth, but I am suggesting that you can make your own luck by taking every opportunity, meeting every possible person who can benefit from you (not the other way around!), and offering value to everyone you work with. If you help enough people, you will more often than not be paid back with endless help from others.

So what else is in your plan? Most business plans follow the following organization and include the following sections:

 Executive Summary

This section should be detailed, yet succinct. Your executive summary will usually be one to two pages in length, highlighting the important aspects of the business, the founders, and the plan. In essence, your executive summary should read like an overview of your plan as a whole. Just as you may read a movie review when determining which movie to see this weekend, those who receive your business plan (usually investors, bankers, loan officers, etc.) will read your executive summary to determine if the rest of your plan is worth reading through—does it peak their interest?

Description of Business

-Name

-Organization structure—this is where you will explain the legal structuring of your business (LLC, Inc., 401[c]3, etc.)

-Introduction of founders, owners, stakeholders, etc.—traditionally this section will include a brief but detailed biography of each founding member, including education, relevant experience, key connections, etc.

-Length of time business has existed (or what starting date the business will exist from)

-Accomplishments to date (if business already exists, as applicable)

Description of Product/Services

This is where you get to really boast about your new business. What are you offering? Why is what your offering different than everyone else’s? How much are you going to charge? What types of products/services will you offer in the future?

Note that this section can be included as a part of your “description of business” or can be a stand-alone section.

Marketing Plan/Strategies

-Industry

-Customer/target demographic -Competition (competitive analysis)

-Advertising and PR

-Location of your storefront (when applicable)

Suppliers, Contractors, Vendors, Etc.

Operations and Management

Who will lead your business, who will handle the day-to-day operations, who will work on forming strategic partnerships, who will work on expanding your client/customer base? These, and more, are all questions that will need to be answered within this section. You may want to state that resumes/CVs are avail­able for key managers—your investors/lenders will want to see what makes them “right for the job”!

Financial Plan

-Current standing and position: profits and losses

-Projections: profits and losses

-Need

If you are seeking funding, state here how much, with verifiable data that sup­ports your request.

Technological Plan (as applicable—recently becoming a popular section) -Computer requirements

-Peripheral requirements (printers, fax machines, scanners, etc.) -Backups -E-mail -Company-wide calendaring

-Remote access capability

-Disaster recovery plan

-3 to 5 year growth strategy for technology

-Web hosting

2.2. How to Get Information That Is Reliable

One of many things even managers of big firms grapple with is determining what information is reliable. I heard on a major news network this past year that even information from the Associated Press has to be fact-checked before going to a story with it—and it never used to be that way. We are not short on data these days, with everyone posting everything and anything on the Internet, so you need to know how to spot reliable and unreliable information. As a professor of statistics, I can shed some light on this, although I’ll spare you the scholarly verbiage and confusing analytical mumbo-jumbo.

First, look for bias within the analysis of the information. Does the researcher or the author have a reason to publish or print a specific finding or “fact”? If so, toss it out unless she was honest enough to list biases with regard to her research and what assumptions were made for the study. For instance, if you are reading a document on marketing and it is written by a company that provides small busi­ness marketing, it may simply be promotional material disguised as research.

If the information you are looking at is actual research, are assumptions and limitations listed? Assumptions and limitations are the basics of all types of research. Assumptions are the things the researcher assumed in doing the study and limitations are the things the study didn’t touch or reach. An assumption is something assumed for the research that may lead to bias. For instance, I may assume that the sample that I studied is representative of the population at large.

In my survey for this book, I assumed that people answered honestly and had no reason to lie. Limitations are things that limit the scope or results of the study. My study was web based, so that is a limitation. If a small business owner did not have web access, he or she did not get an opportunity to respond to my survey. If you read research material, look for these elements because they need to be well documented in any research you read.

The next thing to look for: What is the sampling rate? If you are looking at a survey that interviewed 20 people, you may not have a reliable survey. For social sciences and business, we generally look at obtaining 1016 or so participants when conducting a survey, which gives us a 95 percent confidence in the data the results produce. I won’t bore you with the mathematical equation behind this, but you should know that polling many more people than this doesn’t change the confidence level much, but polling fewer definitely does. A confidence level is how sure the researcher is that the results are accurate. Common confidence levels are 95 percent, 98 percent, and so on. These are also known as Z scores, but that is much more than you need to know for the scope of this book.

That said, you can have a valid and reliable survey with a small sample size if the sample that is tested is representative of the population. Look for studies with small samples to mention this in the limitations. While small samples don’t make the data necessarily bad or unrepresentative, they do mean that the researcher had to take special precautions and use specific tests to keep validity intact. If she didn’t, toss it out.

I used two words here that are key—reliability and validity. Validity is how accurate the information is with regard to its representation of the population at large. If airlines survey 30 passengers on one flight and try to apply the findings to flying in general, they are using a highly skewed, invalid sample.

In the airline example, they are also using an unreliable sample, because reliabil­ity refers to repeatability—if a new researcher ran the exact same study on that same population, would she get similar results? If so, it is reliable. If the survey is representative and repeatable, you have a reliable and valid study—the stuff that good things are made of!

Note: When it comes time to present your idea to lending institutions, venture capital firms, and investors (whether they are strangers or family and friends), being able to produce statistically valid and reliable data will greatly increase your chances of a successful meeting, as it shows a great deal of attention to your planning and an understanding of “the numbers.”

2.3. Creating a Plan That Works for You and Achieves Your Goals

Ultimately, the plan you create may be viewed by quite a few people, and you should get feedback on it. But remember that the goals should fit your goals— your lifestyle requirements and how fast you want the business to grow—which may not be the same as how capable the business is of growing. You may want it to grow faster than it can, or you may not want to invest the time it takes to make it grow as fast as possible. Bottom line—keep your goals in mind when you create your plan and pay particular attention to ensuring that they are aligned.

If you have data that doesn’t make sense, you can be darn sure the money lenders will notice and ask.

Source: Babb Danielle (2009), The Accidental Startup: How to Realize Your True Potential by Becoming Your Own Boss. Alpha.