“Plan it today or later you’ll pay!”
“You need a business plan”
“Failing to plan is planning to fail”
Actually, you don’t need a business plan. “Need” means something that is necessary, and since businesses are started, run, and even grown every day, without business plans, it’s hard to argue that a business plan is a need.
But they can be very helpful. Of the 95% allegedly “failed” businesses that actually did fail, a significant portion of them could have been successful if they’d thought about and prepared for contingencies, which a business plan would have done.
But I don’t know how to write a business plan
This phrase I learned from my father, and you’re going to hear it a lot whenever you bring up something you don’t know how to do:
Whose problem is this?
A business plan is something to help you… it’s of no benefit to anyone else. So isn’t it worth the effort to figure out how to write a business plan? In fact, learning how to write a business plan is one of the items on the long list of things you get to learn while starting your first business.
Happily, even though this is your problem, I’m going to help you with a solution. I can’t promise that you’ll ever enjoy the process as much as I do (I’m an organization geek) but you can learn the process well enough to write one when you need it.
The following layout won’t make a business plan that you can take to the bank and use to get a loan. But it will ensure that you’ve given consideration to all of the big pitfalls and thought of ways around them. It will also give you something to look at a year from now so you can remember what the heck you were thinking.
Step 1: Questions
I don’t necessarily expect that you will know all of this off the top of your head. Some will require brainstorming; others will require Google. All I ask is that you have answers to these questions before you move on.
What will you need to start your business? A laptop? An oven? A car? A location with a counter? An app phone? A whole bunch of merchandise?
How much will that cost?
Can you afford to go a few months without income? If not, how are you going to get that income? Factor your salary into the loan? Keep your day job? Get a day job? Not start the business until you have enough savings to go a few months?
How much will it cost you to be open for a month, even if you don’t make a single sale? Factor in heating, lighting, employee salaries, your salary, rent, phone, internet, monthly payments on equipment, advertising expenditures, etc. This is called your overhead, or fixed costs.
How much will it cost you per transaction? Factor in the cost of what you sold (wholesale price or cost of components), employee bonuses, your bonuses, gasoline, milage, delivery costs, sales tax, etc. This is called your variable costs.
Is there a manufacturer’s suggested retail price? How much do your competitors charge for similar products? What’s the standard markup in this industry?
How will customers get to you, or you to them?
How will your customers find out about you? Advertisements? Signs on your store? By finding you on Google? Word of Mouth? Where will you advertise? Flyers? Classified ads? Twitter? Referral or affiliate programs? Telll-a-friend-get-a-bonus cards?
How many potential customers read the papers in which you plan to advertise, or walk by your store, or search for your keyword? How many people have the problem you solve? How many of them know they have that problem?
What hours will you work? Will those hours be convenient for your customers? Do you need employees to cover extra hours?
Step 2: Analysis
Now take all your answers; we’re going to go through them one by one.
How do you expect your customers to find you? List out all the ways you think you might get potential customers.
For each item on the list, write down the implications of it. If you expect a lot of people to find you through newspaper ads, which newspapers will you advertise in, and what will it cost? If you expect to get a lot of referrals, what can you do to encourage your customers to tell a friend? If you expect a lot of repeat business, what can you do to increase the odds of customers’ returning?
For each advertising method, how many people will have the potential to see your ad? (This is called your number of exposures). That is, how many people subscribe to this magazine/newsletter/newspaper. How many people search for these keywords? How many people drive by this billboard, or walk in this mall? To how many people will you send coupons in the mail?
Divide the above numbers by 100 — this assumes that 1% of the people who are exposed to your ad will actually act on it. (This will be low for some media but high for others. Feel free to change the number if you have good evidence that the conversion rate is not 1%. But 1% is a pretty reasonable average.
Add up all your divided-by-100 numbers; this is the number of customers you can expect to get from all your promotions.
List everything you can think of that you’ll need to start your business. Next to each one, write down how much it will cost.
Whatever your total cost comes out to, multiply it by 1.1 — this gives you a 10% “cushion” for things that you’ll need but didn’t think of.
If you’ll need to take salary out of your start-up capital (you’re going to be doing this full-time, and don’t have the savings to go without income), factor in at least 3 months’ worth of salary, and maybe 6-12 months’ worth.
Add all of that up, and it represents what you’ll need for start-up capital. You’ll need to get loans from the bank, loans from friends/family, your personal savings, angel investors, venture capitalists, or some other method to provide this much money.
Will your customers come to you, or you to them? Either way, what will it cost you?
Pricing and break-even
If you charge somewhere in the same vicinity as your competitors, will you be able to make a profit? (is the price they charge higher than what it costs you to buy/make each product?) If not, can you lower costs? Can you think of a way to make your product so much better that consumers would pay more to have it?
Given all that, what will you charge, and why?
For each product you have, what is your gross profit?
- Gross profit = (price you’re charging) – (what it cost you to get it)
How many of those will you have to sell in a month to cover your fixed costs? This is your break-even point
- Break-even point = (Cost to stay open for a month) / (Gross profit)
Step 3: Feasibility
1) Does your pricing seem reasonable, based on MSRP, competitor’s pricing, and the standard industry markup? You can be higher than your competitors as long as you have some competitive advantage that will make the higher price worth it to your customers.. perhaps a more convenient location, better service, or higher-quality products. But you can’t be too much higher, or your customers will decide that organic notepads aren’t worth it.
2) Is the number of expected customers per month substantially higher than the break-even point? All of these numbers are estimates, and you want to leave room for the estimates to be wrong. If you’re guessing that you’ll have enough customers per month to break even, and not enough to make a profit, you’re running a risk that you won’t be able to pay the bills.
3) Can you obtain the required start-up capital?
If the answers to the above 3 questions are “yes”, then you are good to go. You can start this business knowing that it’s got a pretty good chance of success.
If the answer to one or more of the above questions is “no”, despair not. You still have a chance, you’ll just need to get more creative. Tomorrow we’ll discuss ways to tweak your business plan to let you turn a “no” into a “yes”.