Session 2: The Business Plan

https://www.scu.edu/mobi/business-courses/starting-a-business/session-2-the-business-plan/

OBJECTIVE: 

The business plan is the key ingredient for a successful business and is often ignored. This session shows you how to create an individualized business plan, and provides the tools to make it easy.

What is a business plan? 

The primary value of your business plan will be to create a written outline that evaluates all aspects of the economic viability of your business venture including a description and analysis of your business prospects. We believe that preparing and maintaining a business plan is important for any business regardless of its size or nature. But it will not ensure your success. If you maintain a correct assessment of the changing economics of your business, your plan will provide a useful roadmap as well as a financing tool. But if you have miscalculated the potential, then your business plan could become a roadmap leading to failure.

Since the My Own Business Institute (MOBI) course is broken down into 15 of the most important topics to consider in starting or operating a business, your business plan can easily be organized into this same format. You can download the business plan template included in this session, fill it in and print.

Search engines, libraries and bookstores provide sources that sell ready-made plans for specific businesses. But it is our recommendation that you be sole author of your plan. Write out the plan yourself, in your own words.

Keep in mind that creating a business plan is an essential step for any prudent entrepreneur to take, regardless of the size of the business. This step is too often skipped, but we have made it easy for you by providing this ready format to build your plan as you progress through this course.

Be aware now that most start-up entrepreneurs are reluctant to write down their business plan. It is, therefore, strongly recommended that you complete each segment of the plan as you progress through this course. 

Do not expect that all of your plan's initial assumptions will be correct. Instead, look at your business plan as an ongoing assessment that you will frequently review and change to conform to actual operating experiences. For example, your cash flow projection should be updated frequently to ensure ongoing liquidity (not running out of cash).

Your business plan will become your roadmap to chart the course of your business. But at the outset you cannot predict all of the changing conditions that will surface. So after you have opened for business, it is important that you periodically review and update your plan.

Why prepare a business plan? 

Your business plan is going to be useful in a number of ways.

• First and foremost, it will define and focus your objective using appropriate information and analysis.
• You can use it as a selling tool in dealing with important relationships including your lenders, investors and banks.
• Your business plan can uncover omissions and/or weaknesses in your planning process.
• You can use the plan to solicit opinions and advice from people, including those in your intended field of business, who will freely give you invaluable advice. Too often, entrepreneurs forge ahead ("My Way!") without the benefit of input from experts who could save them from potentially disastrous mistakes. "My Way" is a great song, but in practice can result in unnecessary hardships. To help get started in lining up appointments, you can fill in and use the Key People to Review My Business Plan template. People to meet with include your investors, family members, banker, lawyer, attorney, business mentors, trusted business friends, potential customers, competitors (distant ones), potential landlords, and the U.S. Small Business Administration.

What to avoid in your business plan

Place some reasonable limits on long-term, future projections. (Long-term means over one year.)At this point, stick with short-term objectives and modify the plan as your business progresses. Too often, long-range planning becomes meaningless because the reality of your business can be different from your initial concept.

Avoid optimism. In fact, to offset optimism, be extremely conservative in predicting capital requirements, timelines, sales and profits. Few business plans correctly anticipate how much money and time will be required.

Avoid language or explanations that are difficult to understand. Spell out your strategies in the event of business adversities.

Don't depend entirely on the uniqueness of your business or even a patented invention. Success comes to those who start businesses with great economics and not necessarily great inventions.

Business plan format 

The Business Plan format is a systematic assessment of all the factors critical to your business purpose and goals. Here are some suggested topics you can tailor into your plan:

A Vision Statement: This will be a concise outline of your business purpose and goals.

The People: By far, the most important ingredient for your success will be yourself. Focus on how your prior experiences will be applicable to your new business. Prepare your résumé and one for each person who will be involved in starting the business. Be factual and avoid hype. This part of your Business Plan will be read very carefully by those with whom you will be having relationships, including lenders, investors and vendors. Templates for preparing résumés are available online. 

Session 2 Getting Your Team in Place of our Business Expansion course provides detailed recommendations on delegating authority, employee motivation, training and other key management tools.

However, you cannot be someone who you are not. If you lack the ability to perform a key function, include this in your business plan. For example, if you lack the ability to train staff, include an explanation how you will compensate for this deficiency. You could add a partner to your plan (discussed in Session 5 Business Organization ) or plan to hire key people who will provide skills you don't have. Include biographies of all your intended management.

Your Business Profile: Define and describe your intended business and exactly how you plan to go about it. Try to stay focused on the specialized market you intend to serve. As a rule, specialists do better than non-specialists.

Economic Assessment: Provide a complete assessment of the economic environment in which your business will become a part. Explain how your business will be appropriate for the regulatory agencies and demographics with which you will be dealing. If appropriate, provide demographic studies and traffic flow data normally available from local planning departments.

Cash Flow Assessment: Include a one-year cash flow that will incorporate your capital requirements (covered later in Session 11 Accounting and Cash Flow). Include your assessment of what could go wrong and how you would plan to handle problems.

Marketing Plan and Expansion Plans: Your expansion plan should describe how you plan to test markets and products before rolling out. SCORE offers a great marketing plan guide:https://www.score.org/resource/marketing-plan-guide. 

Damage Control Plan: All businesses will experience episodes of distress. Survival will depend on how well you are prepared to cope with them. Your damage control plan should anticipate potential threats to your business and how you plan to overcome them. Here are three examples:

• Plan for 35% loss of sales: During economic downturns, your survival will depend on your ability to maintain liquidity for a period of at least 12 months. Can your Damage Control cash flow plan show how to avoid running out of cash? Session 11 Accounting and Cash Flow will explain cash flow control.
• Plan for a catastrophic incident: Businesses can be overturned by unforeseen disasters which can be avoided by maintaining appropriate insurance. You will need the assistance of a qualified business insurance agent.
• Plan for product obsolescence: If your business is in a rapidly changing technology area such as Netflix's home delivered DVDs, you will need to plan now to keep a step ahead of technical changes or advancements.

Eight steps to a great business plan 

Start-up entrepreneurs often have difficulty writing out business plans. This discipline is going to help you in many ways so don't skip this planning tool! To make it easier, here are eight steps that will produce a worthwhile plan:

1. Set time aside to prepare your business plan as you work through the MOBI courses.
2. Focus and refine your concept based on the information you have collected.
3. Gather all the data you can on the feasibility and the specifics of your business concept.
4. Outline the specifics of your business, using a "what, where, why, how" approach.
5. Include your experience, education and personal information.
6. Fill in the templates at the end of each session.  Use clear language and realistic projections.
7. You may wish to enhance your presentation with bar charts, pie charts and graphics.
8. Share a draft of your plan with trusted advisers.  Use their feedback to improve the plan. 

Does your plan include the following necessary factors? 

A Sound Business Concept: The single most common mistake made by entrepreneurs is not selecting the right business initially. The best way to learn about your prospective business is to work for someone else in that business before beginning your own. There can be a huge gap between your concept of a fine business and reality.

Understanding of Your Market: A good way to test your understanding is to test market your product or service before your start. Do you think you have a great kite that will capture the imagination of kite fliers throughout the world? Then craft some kites and try selling them first.

A Healthy, Growing and Stable Industry: Remember that some of the great inventions of all time, like airplanes and cars, did not result in economic benefit for many of those who tried to exploit these great advances. For example, the cumulative earnings of all airlines since Wilber Wright flew that first plane are less than zero. Success comes to those who find businesses with great economics and not necessarily great inventions or advances to mankind.

Capable Management: Look for people you like and admire, who have good ethical values, have complementary skills and are smarter than you. Plan to hire people who have the skills that you lack. Define your unique ability and seek out others who turn your weaknesses into strengths.

Able Financial Control: You will learn later the importance of becoming qualified in accounting, computer software and cash flow management. Most entrepreneurs do not come from accounting backgrounds and must go back to school to learn these skills. Would you bet your savings in a game where you don't know how to keep score? People mistakenly do it in business all the time.

Financial Management Skills: Build a qualified team to evaluate the best options for utilizing retained earnings. This information is contained in Session 6 Alternatives for Capital Allocation of our Business Expansion course.

A Consistent Business Focus: As a rule, people who specialize in a product or service will do better than people who do not specialize. Focus your efforts on something that you can do so well that you will not be competing solely on the basis of price.

A Mindset to Anticipate Change: Don't commit yourself too early. Your first plan should be written in pencil, not in ink. Keep a fluid mindset and be aggressive in making revisions as warranted by changing circumstances and expanding knowledge.

Formulate (and reformulate) your business plan 

Donald N. Sull, associate professor of management practice at the London Business School, in an article in the MIT Sloan Management Review, offers some practical suggestions on managing inevitable risks while pursuing opportunities. Here is a capsulation of his suggestions on how to formulate (and reformulate) your business plan:

• Be flexible early in the process and keep it fluid. Don't commit too early. Expect your first plan to be provisional and subject to revision.
• Ask yourself if your experience or expertise gives you the right to an opinion on your specific opportunity.
• Identify your potential deal killers: variables that are likely to prove fatal to the venture.
• Clearly identify what you see as the key drivers of success. What are you betting on here?
• Raise only the amount of money required to finance the next experiment or evaluation you envision, with a cushion for contingencies. 
• Delay hiring key managers until initial rounds of experimentation have produced a stable business model.
• At some point, take the plunge and test your product or service on a small scale in the real world through customer research, test marketing, or prototypes.
• Test and refine your business model before expanding your operations.

Top Ten Do's and Don'ts

THE TOP TEN DO'S

1. Prepare a complete business plan for any business you are considering.
2. Use the business plan templates furnished in each session.
3. Complete sections of your business plan as you proceed through the course.
4. Research (use search engines) to find business plans that are available on the Internet.
5. Package your business plan in an attractive kit as a selling tool.
6. Submit your business plan to experts in your intended business for their advice.
7. Spell out your strategies on how you intend to handle adversities.
8. Spell out the strengths and weaknesses of your management team.
9. Include a monthly one-year cash flow projection.
10. Freely and frequently modify your business plans to account for changing conditions.

THE TOP TEN DON'TS

1. Be optimistic (on the high side) in estimating future sales.
2. Be optimistic (on the low side) in estimating future costs.
3. Disregard or discount weaknesses in your plan. Spell them out.
4. Stress long-term projections. Better to focus on projections for your first year.
5. Depend entirely on the uniqueness of your business or the success of an invention.
6. Project yourself as someone you're not. Be brutally realistic.
7. Be everything to everybody. Highly focused specialists usually do best.
8. Proceed without adequate financial and accounting know-how.
9. Base your business plan on a wonderful concept. Test it first.
10. Pursue a business not substantiated by your business plan analysis.