I suppose there is some truth to the claim that many are growing more confident in the economy (despite the turmoil in the markets). I have seen this in the number of clients asking me to help them with business planning over the past couple of months. As I am writing this, I am currently working with 4 clients who are either starting a brand new business or are significantly expanding their current operations.
A business plan is not only a step to take to satisfy a banker or investor, it should be used as an investment tool for the potential business owner to fully understand the risk and potential reward of the business model. By forcing one to tediously think through everything from growth rates and capacity to the timing of various costs, a more informed decision can be made as to whether the business is a good investment of time and resources.
Personally, nothing is as exciting as working through a business plan with a client. First and foremost, these guys and gals are extremely passionate about what they intend to do and are confident in their ability to do it. However, many times this passion and confidence blinds them to the obstacles they may face. When drunk on these ingredients, It's not uncommon for most to jump into the business without having strategically thought through their plan for the business. We have worked with many clients after starting a business who have overpaid on the purchase of a business or who have completely missed big picture issues that can and have eclipsed potential success.
While it is impossible to predict each and every obstacle, a good business plan helps a potential entrepreneur recognize many unforeseen risks. These risks often stem from misunderstood compliance requirements, unforeseen cash flow pitfalls, inadequate product pricing and inaccurate cost estimation.
There are many tools available to assist you in the development of a business plan, which range from cloud based solutions that walk you through each step (LivePlan) to simple templates you can use in Microsoft Office. Whatever medium you elect to utilize, there's certain components of a solid business plan you want to ensure you do not omit, including the following;
Every bit of the planning you perform, all the decisions you make, is in pursuit of the vision you set forth. Without properly thinking through the vision, you cannot possibly answer the questions you will face while planning for your business. It is essential, as it defines your organization from day one.
Who are they? How will you find them? How much will they buy? While defining your target market is a basic element of any business plan, you should also consider the various aspects of the product/service your customers love and which you can do away with. This allows you to properly prioritize getting the things they love right first, putting those not-so-necessary features to the side in the beginning.
Pricing is an area we could discuss to the point that we would likely fill up half of the internet. It is a crucial element to any and all businesses. Pricing is a strategic decision that directly correlates to marketing strategy. It is a comprehensive element of your brand's identity, one that is just as important as your logo, name, website, etc., because at the end of the day, it's what really tells your customer what you're about.
Detailed Cost Assumptions
No matter how or where you set your prices, a detailed estimation of costs to be incurred should be developed. Of course, this helps to identify the amount of capital needed to fund the entity. But it also tests the adequacy of your pricing by yielding the expected gross margin.
Cost assumptions do not only include expected amounts, but an estimation of when those amounts will be expended. The old saying that cash is king is accurate and if you cannot sustain the costs of operating before that big break hits, you want to know it now, not later.
Don't Forget About Taxes - Amazingly enough, many project huge profits but fails to consider the taxes that must be paid. The slightly more savvy may catch the fact that ordinary income taxes will need to be paid, but forget other taxes such as self employment, property, and payroll taxes. Whether you work with your CPA or just apply an estimated percentage, be sure not to forget this important element of small business ownership.
I know there are many other crucial aspects to planning a business that I've omitted here. However, we will hit on some of those in other posts.
Starting a business is exciting, fulfilling and occasionally terrifying. Embrace it.