Planning Your Business
At some point in the process of starting a new business, it’s pretty much guaranteed that you will hear the following statistics (or variations thereof): 25 percent of new small businesses close their doors within the first year and 60 percent are gone within three years. The exact numbers here may vary, but the message will be the same: be afraid, be very afraid!
The good news is this: you are not a statistic. Think about this – if it was reported that small business owners succeeded more often when they started up after the age of 50 and you were 35, would you wait until you were 50-years-old to start your business? Not likely. You would start whenever you felt ready. And that’s the point – only YOU can know. Only you can know when its time to start and only you can make the intelligent decisions that will ultimately make the difference between success and failure.
The very fact that you are here doing your homework puts you way ahead of the curve. Thorough research and a well-thought-out business plan will put you in the best possible position to continue not being a statistic.
Planning is a Process Not a Goal
The first thing to understand about business plans and financial projections is that the process of compiling them is often even more important the final product. Sure, the actual sheets of paper, filled with spreadsheets and graphs with pretty arrows pointing up and to the right are great – and can be very important in helping you to secure funding. However, when it comes down to the brass tacks of building a successful business, it’s the process, not the paper, that counts.
For example, at a certain point, you will be asked to project how much cash you’ll spend in your fifth year of business. You’ll think, “Are you kidding? I haven’t even opened my doors yet and you want me to describe what my expenses and revenue will be like in five years?” Well, the quick answer is yes.
Now nobody reasonably expects you to actually hit that exact number in five years time, but the point here is accountability. A really great small business plan forces you to think through your goals, associate a dollar value with each, and articulate clearly how you will make them a reality. By declaring your projected revenue in month seven or your expenses in year five, you are giving yourself a benchmark for success.
That’s why it’s also important to include a mission statement in your business plan. This is you chance to clearly state exactly who you are, the kind of business you want to forge, and how you are going to make it happen.
What Goes Into a Small Business Plan?
A Small Business Plan asks you to consider each of the core elements of starting and growing your enterprise in turn and to project how you plan to make the numbers stack up.
You’ve probably considered what goods and services you’ll be offering, but have you researched the cost of sourcing your raw materials? How about the cost of turning those raw materials into your finished product? Have you understood how much you’ll need to charge for your products/services in order to cover the expenses of renting a space, paying employees, leasing equipment, paying for permits, regulations, and more? Moreover, have you considered if the answers to these questions will provide the kind of operating margin you’ll need to pay yourself a salary?
Once you’ve considered the questions in the previous paragraph you should start thinking about how your products/services stack up against potential competition. Because unless you are offering something ground-breakingly innovative, chances are that your potential customers are currently having their needs met by another business. How will you compete?
Trying to compete on price is rarely an effective long-term strategy, so how will you differentiate your offering? With awesome customer service? Or maybe superior product quality? If so, how will you allocate your budget to make that possible? How will you get customers through the door? What will your marketing budget be?
That’s a lot of questions we threw at you, but essentially, your plan has to answer one thing most critically: How will you achieve the kind of sales volume required to keep the doors open and set your business up for growth?
At a Glance:
- The failure rate of new small businesses is soberingly high, with 60 percent closing their doors within three years.
- Compiling a business plan forces entrepreneurs to really confront the nitty-gritty of their business idea, such as permits and regulations, operating costs, marketing budget, etc. The process is therefore as important as the result.
- There’s more than one way to enter the world of small business, with many choosing to take over an existing business or buy into a franchise.
Points of Entry: You’ve Got Options
For many aspiring small business owners, the risk of starting completely from scratch leads them to explore other options. Taken broadly, you can break down the entry points for small, local business ownership into three categories:
Start your own business
Buy an existing business
Buy into a franchise
We’ve been focused on the first category so far, but the attractions of the second category, buying an existing business, are clear. These enterprises will often come with brand awareness, a customer base, trained employees, an established supply chain, and most importantly we hope, demonstrated profitability. As a result, the myriad start-up risks can be diminished greatly by taking this route. That is only true, however, if you make sure to carry out thorough due diligence on the existing business.
Due diligence is the process of going through the current owner’s books with a fine-tooth comb to verify inventory information, sales data, average ticket price, and every other aspect of the business. Doing all this yourself is difficult and time-consuming, so you’ll probably want to involve specialist accountants and lawyers to ensure that you cross all the t’s and dot all the i’s. A big red flag to watch out for here is how intertwined the current owner’s personal expenses are with the business accounts – this can obscure the genuine flow of cash in and cash out of the business. The purchase price of an existing business is often calculated as three-to-five times net annual revenue, so you’ll want to take that figure into account before you make any offer.
With the third category, franchise businesses, the risk of getting started is potentially the lowest of all, as you are often buying into a clearly established business model. You will also often benefit from the initial support of the franchisor, including advice around site selection, training and orientation, employee hiring, and product mix coordination. This support and assurance, however, comes at a premium. On top of the normal startup costs (space, equipment, etc…), you’ll have to pay a franchise fee to the owner, which is often tens of thousands of dollars, as well as a percentage of your revenues on an ongoing basis.
At the end of the day, while starting a business from scratch may well be your riskiest route, in many cases it also turns out to be your most affordable. Furthermore, it allows you the complete freedom to create your own vision, which is probably the biggest attraction of starting a small business in the first place!
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