Who needs a written business plan? If you are thinking of starting a business, YOU DO. You've come up with the "hottest" idea since the invention of the wheel. This wasn't just a an overnight thing. You've pondered long and hard on this one, going over it in your mind while lying awake at 2 A.M. Your palms get sweaty just thinking about it. Perhaps you've even talked it over with some friends with encouraging results. They all liked it and better yet, they all said they'd buy one. You could make a fortune. You'll be able to afford the college education for your kids, comfort and security for your wife and even be able to retire early and enjoy yourself. You've got it all worked out in your mind. Even your brother in law says it can't miss. So why bother with a written business plan?

You must be honest with yourself and realize that everything you've done up to this point is wishful thinking and daydreaming. Now that's not to say daydreaming isn't important. In many ways, it is the driving force behind many successful ideas. But at this point that's all you've got - an idea. Remember the old maxim: A BUSINESS DOESN'T START WITH AN IDEA, IT STARTS WITH A SALE. Until someone gives you money for your idea, you don't have a business. And in reality, no one is just standing around waiting to throw their money at you. If you think they are, go take a cold shower, wake up and take a long hard look at the real world.

Going into business for your self can be exciting and rewarding. But it involves risks, serious risks. The hard truth of the matter is that 8 out of 10 business that are started each year will fail within three years. That means that the cards are stacked against you before you even open your doors. This doesn't mean you should give up your dreams. But it does demand that before you risk everything, you'd better be as absolutely sure as you can be that your business will have a chance of being one of the 2 in 10 that do survive.

Why do 8 out of 10 fail? Many studies come to the conclusion that most are undercapitalized and just run out of money. This is undoubtedly the case, in some instances, but our studies of small business failures show us that this is not true in a majority of cases. Of the 8 out of ten that fail, we find that fully half of those failed because the did not have a legitimate market niche and should have never been started in the first place. Of the remainder, many had enough capital to make success possible, but did not know how to manage their cash properly. They simply did not anticipate the ebb and flow of their cash far enough in advance to avoid the pitfalls.

So what does all of this have to do with a WRITTEN business plan? The neat little packaged answer is simple: IF YOU CAN'T MAKE IT HONESTLY WORK ON PAPER, IT CANNOT WORK IN THE REAL WORLD.

Read that last statement one more time very carefully. There are two very important ideas at work here. The first is honesty. You can make any plan say anything you want. You can play with the numbers to get the results that look good. But if you do, you really are wasting your time and most likely you will join the ranks of the 80% who fail in three years. If you play that kind of game with your figures in you plan, I would predict you won't have to wait three years to fail. You'll be gone long before that.

The second important idea in the statement is that although it cannot work in the real world if cannot be made to work on paper, you cannot guarantee the opposite. Business do fail, even well thought-out, well planned businesses. Marketing windows change, customers needs change, someone else comes along with a better widget. But a well thought-out business plan anticipates as many of these pitfalls as possible and plans for them. Although it offers no guarantee of success, it can prepare you for some nasty surprises. It can re-stack the deck, if you will, to give you a better chance of success.

We will assume that since you are still reading this introduction, we have succeeded in convincing you, at least partially, of the need for planning your business before you commit your life savings to your dream. You will soon find that a business plan is also much more than a document which helps you anticipate how you are going to operate your business. A business plan is also a prime fund raising tool.

Any financial institution or investor is certainly going to want to know why you need the money you are asking for, how you are going to use it and, most importantly from their point of view, how are you going to pay them back. All of these points are covered in the plan. A written business plan enhances your possibilities of obtaining funding, for it shows you've "done your homework." It shows that you've studied the various possibilities and overcome the foreseeable obstacles. In short, it will give your banker or investor the feeling that you really know what you are talking about and not just "shooting from the hip."

More importantly, a written business plan will help you keep on track. There is the constant temptation in new business to fly off on tangents when a new idea or potentially profitable situation comes along. These new possibilities may indeed fit right in with your business and may be very prudent to pursue. However, the opposite is often more likely true.

If you have a solid, written plan you can use it to weigh these new situations and help you decide if this new possibility is really a wise move.

A written business plan is not chiseled in granite. It is intended to be used, adapted and updated as unforseen situations arise. A business plan that is put into the bottom desk drawer and never referred to or updated is useless. The ideal business plan is more thumb worn than the phone book, if it is really used to its fullest potential. Perhaps it would be best to think of a written plan as curbs on the side of the road. They help keep you going in the direction you originally intended, but between those curbs, you have a lot of room to maneuver.

How big will your finished plan be? That all depends. We have seen excellent business plans as short as 15 to 20 pages in length. We have seen very poor plans that were 50 or 60 pages long. In some plans, the marketing or production section may be quite detailed and complex. In others, they are quite concise.

There is only one hard and fast rule about writing a business plan. It must be written so that not only you completely understand what it says, but anyone who reads it will not misunderstand what you are saying. When possible, keep it as simple as you can. When necessary, elaborate. But what ever you do, make it as clearly understandable as you can.

The reason for this is simple. Lets say you present your business plan to the loan officer at your bank. You have a good meeting with him or her and you have "sold" the loan officer on your idea. At this point the Loan Officer agrees to take your proposal to the loan committee. Guess what? You are not invited to that meeting. The only representation you have at the meeting are the memories and notes of the loan officer (Hopefully the loan officer heard EXACTLY what you said and remembers what you thought was important, and he has your business plan. Any questions the Loan Committee has must be answered in the plan. Any important points you want them to know must be in the plan. It is speaking for you. It better be good. The same scenario is played out if you are going after an SBA loan or submitting your idea to a private investor. Your plan must speak for you when you are not there.

Finally, let's again reiterate what was said earlier about keeping it honest. If it won't work on paper, it won't work in the real world - no matter how you try to massage figures. It's your dream. But no matter how much you are in love with your idea if you can't make it work, thank yourself for finding it out on paper before you've lost a lot of time and money in the real world.
 

I. THE CONCEPT

The purpose of this section is to provide direction and help you establish your goals as clearly as possible. With this clearly spelled out, both management and employees can focus their efforts. Also it will help with investors and bankers in that they can clearly understand what your business is going to make, sell, distribute or do by way of a service.

The Concept section of the business plan should tell clearly and concisely what the business is going to do. This is the very basis of the entire plan and gives it direction. It should include the following information:

• A history of the company (if you're already in business) or a history of the idea development.
• A description of the products or services you plan to develop and sell.
• An explanation as to what is unique about your business and/or product. What sets you apart from the "Other Guy."
• What patents, trademarks or brand names do you hold?
• Who are the founders and, if you are a corporation, who are the board of directors.
• What successes have you had to date?

Sounds pretty simple, doesn't it? However, precision is needed here. Everything you do in developing your business depends on knowing precisely what type of business you want to be in. A client once asked for help in developing a business plan. When asked what type of business he was considering, he replied "The food business." That covers a lot of territory. Pressing further, it was discovered he meant the restaurant business. A narrower field, but not really too meaningful yet. What type of restaurant? White table cloth restaurant, a cat fish house, a hamburger stand? No, a restaurant specializing in soup and sandwiches. Better. Now we have some idea of what we were talking about. Proceeding further we found that it was going to be located in the western side of town where there were a number of offices. So now we have a restaurant in the western side of town, specializing in soup and sandwiches, primarily targeting office workers which tells us that this establishment is going after the lunch trade. Because it's target is the lunch trade we also can predict that the prices are going to have to be in the $4 to $8 dollar range. Likewise, we can predict that the busiest hours will be between 11:30 and 1:30, the traditional office lunch hours, so we have some idea of when we are going to have to schedule staff. Now we have a much better idea of what type of business we are talking about:

A restaurant in the west side of town, serving home made soups and home made sandwiches on home made bread , targeting the office lunch trade, with menu prices between $4 and $8 dollars.

Quite a bit different than being simply in the "food business", isn't it?

Of course, this section would explain the uniqueness of the business. In this case, all of the soups are home-made and the breads used for the sandwiches are baked on the premises daily.

Just as importantly, the concept section will also describe the market for your product or service in general (the universal market) and your particular market (the target market). In the illustration above, everyone who eats lunch away from home could be considered the universal market, but the target market is the office workers in the western section of town.
 

II. THE OBJECTIVE

In the first section of the plan you explained very clearly exactly what business you expect to peruse. The objectives section will spell out just what your goals are for the business. What do you want your business look like in five or ten or even twenty years? Do you plan to expand and grow into a statewide, regional or national concern with branches in major cities or remain small? If you plan to grow, how fast? At what point do you foresee having to expand? How are you going to do it?

There are two levels of objectives which are important for you to set.
 

The first of theses are your long term intentions. Are you establishing this business for the expressed purpose of building it up and then selling it? If so, at what point to you plan to sell it, in terms of years or profit levels. Perhaps you are planning to establish a firm which you intent to pass on to your heirs. If you intend to keep the business relatively small, these long term objectives can be personal objectives of the owner. If, however, you plan to grow or become involved with investors, stockholders or partners should be more specific. They should set the parameters of the business.

The second level of objectives are referred to as operational objectives. These are much more specific and express the business in terms of sales goals, profit goals and market share. They must be reasonable, believable and measurable. For example, a valid operational objective could be expressed as reaching a sales level of $1 million dollars in annual sales by the end of the third year. Its measurable in both time and dollars and it may be quite reasonable for your type of business. Another valid objective might be to open 12 new accounts in the next 6 month. You can measure your results.

Not all operational objectives have to be quite so exact. For instance, an objective which states that you plan to have a positive cash flow by the 12th month of operations is perfectly valid. It's reasonable, obtainable and measurable even though you haven't stated exactly how much of a positive cash flow.

On the other hand, an goal such as you wish to "corner the market" in your first year of operation simply isn't an objective. It's unrealistic in a timing sense and probably impossible to measure. It's a nice daydream, but you can't quantify it.

Once you have spelled out what your goals and objectives are, you need to explain how you intend to allocate your resources to obtain those goals. These, too, should be specific. For example, you may say you intend to commit 10% of your sales to marketing. Another might be that you will add an account representative for every 30 accounts opened. Or, you will need to add personnel in the shipping department when the 3000 orders are processed monthly. Or a new assembly line when sales reach 10,000 units per month. What you are doing here is explaining how you plan to grow and operate your business. Although it may seem that you are looking into a crystal ball, you are really trying to make an educated appraisal as to what the foreseeable problems you are likely to encounter and how you plan to manage them.

Pick key objectives. It is easy to become bogged down in minute details. If you aren't careful this section of your plan could begin reading like the Great American Novel. What is important here is to demonstrate that you have a path in mind for your business and have thought out how you are going to measure your progress.

At this point, especially if you are using your business plan to assist you in raising funds from a banker or investor, you should explain what you intend to do with your projected profits. Do you intend to re-invest all profits for the first 5 years into expansion? Or, do you intend to disperse profits to partners and stockholders after the second year? Your investors will surely want to know when they can expect to recover their investments and your banker will appreciate knowing when you will be able to pay him back.

The objectives section will become your road map. With it, you will be able to keep yourself on track and measure your progress as you go along. As with all sections of a business plan, the objectives you set at the beginning are not carved in stone. Situations do change. New product opportunities and market niches appear every day which may be very tempting. You should consider these very carefully in light of the objectives you had when you began your business. They may fit in very nicely. They may, however, require a radical shift in direction for your company which means a whole new set of objectives. Should you peruse that new direction? That is a management decision only you can make, but having your original objectives carefully and clearly defined will hopefully give you reason to pause and give the new move careful consideration before you commit your resources.
 

III. MARKET ANALYSIS
 

The professionals define Market Research as a systematic collection and analysis of information relating to the market for your business. It is designed to give you basic information about your industries trends and outlooks as well as information concerning the demographics, location and size of you market. Most importantly, it will give you indications about the markets receptiveness to your product. Sound impressive?

Well, what it all means is if there are not enough customers for your product, you won't be in business very long. Market research will indicate how many folks out there will give you money for what you have to sell them. Pretty important information to know, isn't it?

Market research gives you basic information which allows you to make intelligent decisions about your proposed business. Yet, the strange fact is that market research is often neglected by people who are trying to go into business. There are a number of reasons for this. Many entrepreneurs are independent and impatient by nature. They feel they already know everything they need to know to start their business. The truth is they are in love with their idea and frequently fear that some solid market research will prove their idea really isn't marketable.

There are professional organizations which will do market research for you, for a fee. But if you know how to go about it, there is nothing preventing you from doing a very adequate job of market research on your own. The key to knowing how to go about it is simply knowing the types of information necessary for new businesses. There are basically three main areas of information you need.

First, information about your industry. What's going on in your industry? What are the developing trends? Is the industry as a whole growing each year, or is it shrinking? Is the technology used in your industry new? Is it stable technology or is it constantly changing? If constantly changing, how will that effect your idea or method of production? Will you constantly have to upgrade your equipment just to stay competitive? What economic changes affect your industry? What are the industry experts saying about the future of the industry? Are there any government regulation pending in the foreseeable future which will impact your business?

Industry information should also identify the various channels of distribution in your industry, both from your vendors to you and from you to your customers. It should explain the pricing conditions in your industry and how you determine your cost and the selling price of your product

Second, information concerning you customer is needed. Who buys your product or service? How many potential buyers are there? How much will they spend for your product or service? Where are they? Will they come to you or do you have to go to them? How will you reach them? What does your potential customer read, listen to, like to do?

The third area is competitor information. Who else is selling to your potential market? What are they selling? How much do they charge? What terms are they offering? How are they selling it? Who are their suppliers? What product or service do they have that can be substituted for your? It should determine that there is adequate room for your business to penetrate enough of the market to make an adequate profit.

Sound like nothing but a bunch of questions? Well, basically, that is just what market research is all about, answering all the questions you can think of to help you make some very important decisions about your business. The trick is in knowing what it is you really need to know. This requires you plan your questions and research process. Good research questions are those with answers that lead you to better judgement about you one overriding question: WILL YOU SUCCEED?

There are two types of market research: primary and secondary. Primary is actual "field research" such as opinion surveys (done either by mail, over the phone, or face to face), taste test, trial marketing and de-briefings, focus groups and observation. You go into the market place and ask people about what it is you want to know. This type of research can be as basic or as elaborate as you wish to make it. And, yes, it does take time and some money. But the only way you are going to find out if a customer will buy your product or service is to ask.
 

Secondary research is any and all information you can find from published sources. Its easier and less expensive than primary research, but it is also limited in what it can tell you. It is very dangerous to rely solely on secondary data to decide if you should enter a business.

With all these shortcomings secondary research is important. All industry data you need is already available for you at the library. Standard and Poor's, Moody's, Dun and Bradstreet and Thomas Register of American Manufacturers are standard in almost every library and contain a wealth if data on business and industry. Most libraries subscribe to magazines and trade journals.

Trade Associations are constantly issuing research reports, statistical forecast, consumer reports and market trend studies. While most libraries won't have this information, many will have a publication called the Encyclopedia of Associations which will give you names, addresses and phone numbers of every major and many minor associations whom you can contact for information. If you can't find a particular association for your product or service, look up the address for the Association of Association (honest, there really is one) and ask their help.

Finally, there are Government documents. If it happens in America, odds are the Feds have paid someone to do research to find out what it is that is happening, how to do it better or at the very least how to tax it. If you have a college or university in your area, call their library and ask if the are a Government Depository. If they are, they have access to any and all publications and studies done by the Federal Government which isn't classified information. You will be amazed at what you will find. All types of studies are done by the Department of Commerce on business pattern, trends and so on. The Census department has data on populations broken down even to the local level. The IRS even publishes a Corporation Source Book of Statistic of Income, which tells you how much income different industries make each year. (It's generic in most cases so you can't find out how much XYZ Company made last year - but Standard and Poor's can tell you that, if the company is publicly traded.) Best of all, this is all FREE! Well, to be honest, it isn't free. You paid for it with your taxes, so you might as well use it.

You are probably thinking now that all this is great information, but how do you get stated? You start with secondary research and conclude with primary research. This may seem backwards, but that's the way its done. There are several reasons for this. Secondary research is usually less time consuming and less expensive than primary research. More importantly, proper secondary research will go a long way towards helping you define what questions you need to ask and who it is you need to ask in your primary research. Secondary research can often uncover information about your product, service or proposed market which may tell you that your idea may have a very poor chance of success. Your product or service may be outdated. Your proposed market may be saturated with competition. The government may be planning to issue regulations which in effect will make production of your product many times more expensive.

On the other hand, you just may prove your case that your idea has merit and deserves primary research. You may even find a better way of doing whatever it is you plan to do. The point is, you don't know until you do the research.

Once you've done the secondary research and have found out all you can about your industry and your potential market, you are ready to design your primary research. You should now know what you are going to ask and who you are going to ask. The problem now becomes, how are you going to ask.

There are a number of ways to approach this, and much depends on who the customer for your product or service really is. If the product is designed for the general public, you may want to consider interviewing people at the local mall. If it's a food product, you may be able to arrange a taste test at the grocery store. But if its a product designed for use in the office, you need to find a group of secretaries to interview. If it's a toy, you need to find out what the kids think about it - so you might find a pre-school which will allow you to let the kids play with the toy then ask the kids questions. All of these illustrate ways of talking to people face-to-face, which is the preferred method.

Survey by phone is acceptable for some types of research, but it is really an art which is best left to professionals unless you are really sure of what you are doing. Surveys by mail are the least preferred, simply because you have no control over who is filling out the survey or how long it will take you to get your information back.

The point is, be as careful of how and what you ask as who you ask. Test the questions. Also, be aware of bias in your questions. You are not trying to lead the person to the answer you want to hear.

Once you have done your secondary and primary research, what do you do with the information? How do you analyze it?

There are two levels on which you must make a judgement. The first is the basic objective of this whole project: HOW MUCH OF THE POTENTIAL MARKET CAN I CAPTURE? This is done by quantifying all you data and incorporating it into a sales projection for the next three years. Just how to do this will be explained in the FINANCIAL section.

The second level of judgement is to compare your projections with industry averages which you found while doing you secondary research. Are your projected expenses and profits about average for the typical business in your industry? Unless you've come up with a truly revolutionary process or a major technological breakthrough, you'll probably fall somewhere within the average range. If not, you'd better recheck your thinking.

Finally this section should include a breakeven analysis.

All of this seems like a lot of work. It is! But if you are still not convinced it will be worth while in helping you make an honest assessment of your chances of success, there is one other reason for going through with market research. If you are going to use your business plan as a fund raising tool, no banker or investor will loan you a dime if you haven't done some honest market research.
 

IV. PRODUCTION

The production section is basically designed to answer one overriding question: What will it take to produce the product or service? It should show the cost mix between labor, equipment, manufactured parts and bought parts. It should explain in detail your needs for facilities, examine the sources and cost of your raw materials or inventory, explain the labor demands needed to assemble or produce your product or service

The Production section should also explain how will you handle projected growth or react to lack of growth. If you are producing a product, this section should also examine how you will handle servicing your products.

As a general rule, new companies should remain lean - do not tie up more than is absolutely necessary in facilities, inventory, equipment and fixed cost. This is typically a serious problem for start-up who think they need full capacity immediately when in reality they should conserve their early dollars until absolutely needed.
 

V. MARKETING

This section deals with the most important question business owners have to deal with: how you will create customers? It must explain in detail all facets of marketing plan including :

• methods of selling and advertising.
• Channels of distribution.
• How you compare with your competitors.
• Credit and terms of receivables.
• Credit approval procedures.
• Pricing procedures.
• Anticipated competitive response.
• Budget and timing.
• Responsibilities and duties of personnel involved.
• What will be done if growth is not as anticipated?

VI ORGANIZATION AND PEOPLE

This section is a detailed account anticipated organizational needs. Typically in a small, start-up business it included a resume of the owner or owners. It explains oho is accountable to whom, pay, incentives and benefits used to attract talent, how salaries will be determined and when will new people be added.

It explains the job descriptions of essential personnel and gives an anticipated schedule of what personnel will be added and the conditions that will trigger their being added.
 

VII FINANCIAL PROJECTIONS.

Finally we get to the section where most people mistakenly start their business plan. The purpose is to identify how much money you will need and when you will need it and

also establish return on investment. Doing this prior to doing the previous sections of the business plan is a futile effort because until you do the other sections you will not have a firm grasp as to the costs involved in operating your business. Without Fully understanding your market research, any sales projection you may create will be little more than wishful thinking.

What you need to create at this point is a detailed cash-flow projection. This has three basic elements:

• Cash in - identify all sources.
• Cash out - identify all uses.
• Timing - anticipate when each of above will happen.

Cash flow projection yields cumulative cash flow position. This figure gauges your current cash condition. You must know this in order to establish your breakeven point.

From cash flow projection two additional documents developed. Your balance sheet and your income statement (P & L).
 

VIII OWNERSHIP

This section explains to your reader two important elements. First is the form of business organization you are establishing. An investor or banker must know this because each form has certain legal and tax implications. The typical forms are:

• Sole proprietor.
• Partnership.
• Limited Liability Company
• Corporation.
• Sub-Chapter S Corporation

If you are seeking a loan, they you must disclose how much you are trying to raise, how you will use the proceeds, how long you need it and how you plan to repay the loan. It should give a detailed debt service schedule.

If you plan to raise capital by Sale of Equity, in other words selling part ownership in your business you must by law reveal certain things to the investor. You must disclose the percentage you wish to see, who else owns shares in the company and how much they paid for their shares, the projected returns for investor and finally the investors exit policy. You must also disclose plans for anticipated further funding.

The form you choose will dictate, in many instances, wether you raise capital by debt or equity. In a sole proprietorship, for example, it must be by assuming debt. In a corporation you can either sell shares or assume debt. Indeed, it is not unusual that an investor doesn't want to assume the risk associated with actual ownership of shares and may wish to loan your corporation money. Or, because of certain tax advantages, they may insist that you organize as a Sub Chapter S corporation or a Limited Liability Company instead of a standard C-corporation

You must be aware there are certain state and Federal limitations of raising capital through investors. Depending on your form of organization, there are limits to the number of investors you may have without coming under Security and Exchange Commission regulations. If you are a Sub Chapter S corporation, all of your investors must be American Nationals. Before you decide on your form of legal organization, you are urged to consult an attorney to clarify the legal implications and an accountant to clarify the tax implications of your decision.