Every business starts with a concept or an idea. It doesn’t matter what the idea or concept is, a well thought out business plan is what helps to transform an idea into a reality. It is a common misconception to think that business plans are written for the sole purpose of securing financing. Actually, the most important reason for writing a business plan is to create an essential management tool to use in the present, as well as the future.
1. What is a Business Plan?
A business plan is a comprehensive detail rich document that describes and analyzes an existing business or a proposed business. The typical business plan provides complete and detailed information regarding the short term and long term plans for the operation of a business. The business plan should contain enough information about the businesses strengths and weaknesses for investors, partners, bankers, landlords, and suppliers to see the true business potential.
Developing a well thought business plan is an essential management tool – It identifies potential challenges and provides success strategies. It is critical for planning or operating the business, plus seeking investors, loans, real estate or partnerships.
Business plans can fulfill a variety of roles:
- It helps the entrepreneur with starting a business to consider all options.
- It may show the business is not viable and help realize the idea is flawed.
- It is a strategic plannning tool that can be shared with the investors, bankers or other funders, partners, and business development professionals.
2. Do I need a Business Plan?
In business, it is universally accepted to be a fact that "if you fail to plan- your are planning to fail." Having a business plan is no guarantee of success, however, not having a business plan is asking for failure.
Your business plan will:
Help to obtain various sources of financing.
Outline the businesses strengths and weaknesses and managements strengths and weaknesses.
Contain detail information about the business; past, present and future performance.
Provide detailed projections; balance sheet, profit & loss, cash flow, sales, etc.
Establish clear goals and performance and financial markers for management to compare to their actual performance.
Keep the business focused and increase the odds for success.
3. Things you need to think about to create an effective business plan.
There are four key areas to address when creating a business plan. These are; strengths and weaknesses, the business concept, the business operation, finances.
1. What are your/the company’s own strengths, weaknesses, opportunities, and threats (SWOT)?
2. What is your overall business concept? Is it manufacturing, retail, or service related?
3. What is the current situation? Create an overview of the business operation with particular attention payed to the competitive environment.
4. What is your current financial picture? Do you in need to bring in additional capital to reach your objectives? Can you demonstrate that the additional capaital will be sufficient to meet cash flow/operational needs?
The SWOT analysis – Regardless of whether you develop a full-blown “business plan,” you certainly want to plan your business. Planning isn’t just about creating a formalized document; it’s about figuring out how you’ll achieve your goals and tracking progress. A planning process–setting objectives, prioritizing, allocating resources and establishing milestones–will help you better manage your business.
What’s important is to get going. Don’t let the planning hold you back, but do let the planning hold you steady and help you manage. There are several good ways to do that, including a SWOT analysis, evaluating your market, developing your organizational identity or simply forecasting sales. The best way to start depends on you: who you are, who you’re working with and what your objectives are, among other factors. Some people work better with numbers first, while others prefer dealing with concepts.
With that in mind, I want to focus on the SWOT analysis–evaluating strengths, weaknesses, opportunities and threats–as one good way to start thinking strategically. It’s a natural brainstorming tool that everyone understands and works well for groups. I’ve used it with my company since the beginning when it was just me and still use it now that my company has 35 employees.
Here’s a good visual example of a SWOT analysis taken from a computer reseller’s plan.
The company conducted the analysis in a medium-sized university town a few years ago as major office stores came into the market pushing computers as lower-priced boxed goods that didn’t need service or support.
As you perform a SWOT analysis, try to involve other people; it improves the brainstorming value. Even if you’re running a one-person business, invite your spouse or significant other, a trusted friend who knows your business, and–if you can afford the hourly fees–your accountant or attorney. If you’re in a small business with a team, invite the team.
Brainstorming means generating a lot of ideas, not just good ideas, and then editing them down to a concentrated strategic list. Include plenty of bullet points. Make sure that during the brainstorming period you aren’t negative about or critical of any ideas.
To clarify, strengths and weaknesses are about you and your company, its nature, history, and what it does and doesn’t do well. You can change them over time, but it isn’t easy. Threats and opportunities are external– factors outside of your business. Your strategy should play on your strengths and away from weaknesses to take advantage of opportunities and avoid threats.
One of the great advantages of SWOT is how easily it brings people into the process. Companies differ, but in general, your planning will work better if the people who are supposed to implement the plan are involved in its development. SWOT involves people in the plan, helping them see the strategy and making them feel like part of it.
SWOT in a small business also offers a safe forum for generating new ideas and breaking through standing assumptions. For example, it was in a SWOT meeting that the product development director of my company, who was in his late twenties at the time, suggested that one of my company’s weaknesses was my messing with the software code instead of just being the president. He pointed out that we had professional software developers to do that. It might have been awkward for him to say that to the president and founder, but it was easier during the SWOT meeting. And in this case, it had a good outcome: He’s been promoted several times since then, and I stay out of the software programming.
4. What type of business?
If your company is going to be in the Manufacturing sector you should be able to discuss and explain;
What is the source of the competition?
Is there available skilled labor to be hired?
Will products be manufactured for inventory or on a per order/as needed basis and how much of each is to be made?
Will the company be manufacturing one or more products?
If your company is going to be in the Retail business be able to discuss and explain;
By what means will the business be kept current of fashion changes and taste changes in the business?
How will advertising needs be met?
How much inventory is needed to meet daily demands/inventory turnover?
What is the best type of space for the business? Mall, strip center, pad site, etc.
If your company is going to be operating a Service business you should be able to discuss and explain;
Are your skills or methods better than your competition?
How is the business to be paid for services rendered? Cash, invoice net 15, net 30, credit, etc.
Which markets are your going to be serving?
Should franchising be considered?
Identify your clear competitive advantage?
Explain in detai how the product application or service is superior to the competition.
The legal structure of the company.
The value proposition for the company/investors.
Progress to date. Contracts, patents, market research, etc.
The management team. Experience, strengths, weaknesses, etc.
How much capital has been invested in the business to date and how has it been deployed.
Summarize the past financial performance of the business. Profit & Loss, Cash Flow, etc.
Project future financial performance should the business meet its plans/benchmarks as outlined in the business plan.
Management payroll and salaries. Existing and additional management needed to accomplish plan.
5. What is your legal structure?
Corporation – A form of business operation that declares the business as a separate, legal entity guided by a group of officers known as the board of directors.
A corporate structure is perhaps the most advantageous way to start a business because the corporation exists as a separate entity. In general, a corporation has all the legal rights of an individual, except for the right to vote and certain other limitations. Corporations are given the right to exist by the state that issues their charter. If you incorporate in one state to take advantage of liberal corporate laws but do business in another state, you’ll have to file for "qualification" in the state in which you wish to operate the business. There’s usually a fee that must be paid to qualify to do business in a state.
You can incorporate your business by filing articles of incorporation with the appropriate agency in your state. Usually, only one corporation can have any given name in each state. After incorporation, stock is issued to the company’s shareholders in exchange for the cash or other assets they transfer to it in return for that stock. Once a year, the shareholders elect the board of directors, who meet to discuss and guide corporate affairs anywhere from once a month to once a year.
Each year, the directors elect officers such as a president, secretary and treasurer to conduct the day-to-day affairs of the corporate business. There also may be additional officers such as vice presidents, if the directors so decide. Along with the articles of incorporation, the directors and shareholders usually adopt corporate bylaws that govern the powers and authority of the directors, officers and shareholders.
Even small, private, professional corporations, such as a legal or dental practice, need to adhere to the principles that govern a corporation. For instance, upon incorporation, common stock needs to be distributed to the shareholders and a board of directors elected. If there’s only one person forming the corporation, that person is the sole shareholder of stock in the corporation and can elect himself or herself to the board of directors as well as any other individuals that person deems appropriate.
Corporations, if properly formed, capitalized and operated (including appropriate annual meetings of shareholders and directors) limit the liability of their shareholders. Even if the corporation is not successful or is held liable for damages in a lawsuit, the most a shareholder can lose is his or her investment in the stock. The shareholder’s personal assets are not on the line for corporate liabilities.
Corporations file Form 1120 with the IRS and pay their own taxes. Salaries paid to shareholders who are employees of the corporation are deductible. But dividends paid to shareholders aren’t deductible and therefore don’t reduce the corporation’s tax liability. A corporation must end its tax year on December 31 if it derives its income primarily from personal services (such as dental care, legal counseling, business consulting and so on) provided by its shareholders.
If the corporation is small, the shareholders should prepare and sign a shareholders buy-sell agreement. This contract provides that if a shareholder dies or wants to sell his or her stock, it must first be offered to the surviving shareholders. It also may provide for a method to determine the fair price that should be paid for those shares. Such agreements are usually funded with life insurance to purchase the stock of deceased shareholders.
If a corporation is large and sells its shares to many individuals, it may have to register with the Securities and Exchange Commission (SEC) or state regulatory bodies. More common is the corporation with only a few shareholders, which can issue its shares without any such registration under private offering exemptions. For a small corporation, responsibilities of the shareholders can be defined in the corporate minutes, and a shareholder who wants to leave can be accommodated without many legal hassles. Also, until your small corporation has operated successfully for many years, you will most likely still have to accept personal liability for any loans made by banks or other lenders to your corporation.
While some people feel that a corporation enhances the image of a small business, one disadvantage is the potential double taxation: The corporation must pay taxes on its net income, and shareholders must also pay taxes on any dividends received from the corporation. Business owners often increase their own salaries to reduce or wipe out corporate profits and thereby lower the possibility of having those profits taxed twice-once to the corporation and again to the shareholders upon receipt of dividends from the corporation.
Partnership – A legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships.
If your business will be owned and operated by several individuals, you’ll want to take a look at structuring your business as a partnership. Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.
Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form.
One of the major advantages of a partnership is the tax treatment it enjoys. A partnership doesn’t pay tax on its income but "passes through" any profits or losses to the individual partners. At tax time, the partnership must file a tax return (Form 1065) that reports its income and loss to the IRS. In addition, each partner reports his or her share of income and loss on Schedule K-1 of Form 1065.
Personal liability is a major concern if you use a general partnership to structure your business. Like sole proprietors, general partners are personally liable for the partnership’s obligations and debts. Each general partner can act on behalf of the partnership, take out loans and make decisions that will affect and be binding on all the partners (if the partnership agreement permits). Keep in mind that partnerships are also more expensive to establish than sole proprietorships because they require more legal and accounting services.
If you decide to organize your business as a partnership, be sure you draft a partnership agreement that details how business decisions are made, how disputes are resolved and how to handle a buyout. You’ll be glad you have this agreement if for some reason you run into difficulties with one of the partners or if someone wants out of the arrangement.
The agreement should address the purpose of the business and the authority and responsibility of each partner. It’s a good idea to consult an attorney experienced with small businesses for help in drafting the agreement. Here are some other issues you’ll want the agreement to address:
- How will the ownership interest be shared? It’s not necessary, for example, for two owners to equally share ownership and authority. However, if you decide to do it, make sure the proportion is stated clearly in the agreement.
- How will decisions be made? It’s a good idea to establish voting rights in case a major disagreement arises. When just two partners own the business 50-50, there’s the possibility of a deadlock. To avoid this, some businesses provide in advance for a third partner, a trusted associate who may own only 1 percent of the business but whose vote can break a tie.
- When one partner withdraws, how will the purchase price be determined? One possibility is to agree on a neutral third party, such as your banker or accountant, to find an appraiser to determine the price of the partnership interest.
- If a partner withdraws from the partnership, when will the money be paid? Depending on the partnership agreement, you can agree that the money be paid over three, five or 10 years, with interest. You don’t want to be hit with a cash-flow crisis if the entire price has to be paid on the spot on one lump sum.
Proprietorship – A business that legally has no separate existence from its owner. Income and losses are taxed on the individual’s personal income tax return.
The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as Nancy’s Nail Salon. The fictitious name is simply a trade name–it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business’s debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money.
The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law. The sole proprietor owner will typically have customers write checks in the owner’s name, even if the business uses a fictitious name. Sole proprietor owners can, and often do, commingle personal and business property and funds, something that partnerships, LLCs and corporations cannot do. Sole proprietorships often have their bank accounts in the name of the owner. Sole proprietors need not observe formalities such as voting and meetings associated with the more complex business forms. Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner. Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.
Because a sole proprietorship is indistinguishable from its owner, sole proprietorship taxation is quite simple. The income earned by a sole proprietorship is income earned by its owner. A sole proprietor reports the sole proprietorship income and/or losses and expenses by filling out and filing a Schedule C, along with the standard Form 1040. Your profits and losses are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the "bottom-line amount" from Schedule C is transferred to your personal tax return. This aspect is attractive because business losses you suffer may offset income earned from other sources.
As a sole proprietor, you must also file a Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment tax you owe. You need not pay unemployment tax on yourself, although you must pay unemployment tax on any employees of the business. Of course, you won’t enjoy unemployment benefits should the business suffer.
Sole proprietors are personally liable for all debts of a sole proprietorship business. Let’s examine this more closely because the potential liability can be alarming. Assume that a sole proprietor borrows money to operate but the business loses its major customer, goes out of business, and is unable to repay the loan. The sole proprietor is liable for the amount of the loan, which can potentially consume all her personal assets.
Imagine an even worse scenario: The sole proprietor (or even one her employees) is involved in a business-related accident in which someone is injured or killed. The resulting negligence case can be brought against the sole proprietor owner and against her personal assets, such as her bank account, her retirement accounts, and even her home.
Consider the preceding paragraphs carefully before selecting a sole proprietorship as your business form. Accidents do happen, and businesses go out of business all the time. Any sole proprietorship that suffers such an unfortunate circumstance is likely to quickly become a nightmare for its owner.
If a sole proprietor is wronged by another party, he can bring a lawsuit in his own name. Conversely, if a corporation or LLC is wronged by another party, the entity must bring its claim under the name of the company.
The advantages of a sole proprietorship include:
- Owners can establish a sole proprietorship instantly, easily and inexpensively.
- Sole proprietorships carry little, if any, ongoing formalities.
- A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
- Owners may freely mix business or personal assets.
The disadvantages of a sole proprietorship include:
- Owners are subject to unlimited personal liability for the debts, losses and liabilities of the business.
- Owners cannot raise capital by selling an interest in the business.
- Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
One of the great features of a sole proprietorship is the simplicity of formation. Little more than buying and selling goods or services is needed. In fact, no formal filing or event is required to form a sole proprietorship; it is a status that arises automatically from one’s business activity.
Limited Liability Company – A limited liability company (denoted by L.L.C. or LLC) in the law of many of the United States is a legal form of business company offering limited liability to its owners.
A form of business organization with the liability-shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership.
Many states allow a business form called the limited liability company (LLC). The LLC arose from business owners’ desire to adopt a business structure permitting them to operate like a traditional partnership. Their goal was to distribute income to the partners (who reported it on their individual income tax returns) but also to protect themselves from personal liability for the business’s debts, as with the corporate business form. In general, unless the business owner establishes a separate corporation, the owner and partners (if any) assume complete liability for all debts of the business. Under the LLC rules, however, an individual isn’t responsible for the firm’s debt, provided he or she didn’t secure them personally, as with a second mortgage, a personal credit card or by putting personal assets on the line.
The LLC offers a number of advantages over subchapter S corporations. For example, while S corporations can issue only one class of the company stock, LLCs can offer several different classes with different rights. In addition, S corporations are limited to a maximum of 75 individual shareholders (who must be U.S. residents), whereas an unlimited number of individuals, corporations, and partnerships may participate in an LLC.
The LLC also carries significant tax advantages over the limited partnership. For instance, unless the partner in a limited partnership assumes an active role, his or her losses are considered passive losses and cannot be used as tax deductions to offset active income. But if the partner takes an active role in the firm’s management, he or she becomes liable for the firm’s debt. It’s a catch-22 situation. The owners of an LLC, on the other hand, do not assume liability for the business’ debt, and any losses the LLC incurs can be used as tax deductions against active income.
However, in exchange for these two considerable benefits, the owners of LLCs must meet the "transferability restriction test," which means the ownership interests in the LLC are not transferable without restriction. This restriction makes the LLC structure unworkable for major corporations. For corporations to attract large sums of capital, their corporate stock must be easily transferable in the stock exchanges. However, this restriction isn’t as problematic for smaller companies, where stock ownership transfers take place relatively infrequently.
Since the LLC is a relatively new legal form for businesses, federal and state governments are still looking at ways to tighten regulations concerning them. Unfortunately, some investment promoters use LLCs to evade securities laws. That’s why it’s imperative to consult with your attorney and CPA before deciding which corporate structure makes sense for your business.
6. Front End Parts of the plan.
Cover letter – States why the business owner is creating and submitting the business plan. The cover letter should;
Highlight important information covered inthe plan.
Contain the personal information of the person the business plan is being issued to,
Non-Disclosure Statement – This informs the reader to keep the plan’s contents confidential.
Title Page – Contains the following information;
Company email address
Company telephone number
Company website address
Table of Contents – Should specifically outline core sections and sub-sections of the business plan; it is a good idea to wait until the plan is written before adding page numbers.
Executive Summary – This section is the most important part of any business plan and should be written when the plan is complete; if you can’t sell the plan in the executive summary, your plan has less chance of being read, it should include;
Business Description – Must specifically state what the business is and why it will be successful
Vision and Mission Statement – Your vision statement describes where you want to be. Your mission statement describes how you will get there, its what makes your business unique. Your mission statement should address;
What competition exists,
The product/ service
7. The Body Content
Location – Where will the busines be located? Address how the location of the business fits in with the overall business strategy. Such as;
Manufacturing – Where will the busines be located? Where are the majority of the customers located? Does the location effect shipping costs? Where are the suppliers located?
Service – Where will the business be located? What is the distance from the customer base? What foot traffic does the location have? What are the demographics of the area?
Retail – What will the business hours be? Where will the store(s) be located? What foot traffic does the location(s) have? How accessible are the store locations? What are the demographics of the area(s).
Process – How will the product/service be made/performed?
Stage of Development Issues;
What are the challenges/problems in the development of the product/service?
Which industry associations will the owners be affiliated with?
Are there established industry guidelines that must be complied with?
Are there government regulations that management must follow/
Who are the suppliers, and alternate suppliers, to the business?
What are the costs, proces, terms and conditions of the various suppliers?
Production Process Issues;
Has the product/service been testes or prototyped?
What are the basic requirements for the business? Cosider land, equipment and office space.
When will production actually begin?
How long will it take to produce the products?
Who will be in charge of purchasing and inventory control?
How will the company respond if demand for the companies products/services fluctuates?
Environment and Market – Conduct a market analysis: Market research that supplies information about the marketplace that involves;
Competitive Analysis – One must know who the competition is and what they are doing. Competition is the rivalry among firms operating and competing in a given market to fill the same customer needs. One ust also include information on Competive Intelligence in this section of the plan. Competitive Intelligence is the publicly available information on the competition, current and potential.
Competitive Intelligence has three parts;
Defensive Intelligence – That intelligence which is gathered to avoid being caught off guard: serves to keep track of moves that deal with the firm’s business.
Passive Intelligence – That information obtained for s specific decision (i.e. a company may seek information about a competitors return policy when developing its own).
Offensive Intelligence – Identifies new opportunities.
You might have to rework your franchise plans depending on where you are in life. If you do not have enough experience for a big brand franchise, you might have to gain the work experience first. After time you may be able to participate with a bigger franchise business. But it doesn’t hurt to start big and work your way down, because you might just get that franchise you really want.
10. Time and Energy commitment
The last step is to give your franchise all of your time and energy to get the business off the ground. The first few years of any business are the hardest.