How to Create an Effective Business Plan
by Eric Popkoff
Business Program, Brooklyn College
One of the most difficult and time-consuming processes facing the small business owner is the creation of an effective and comprehensive business plan. Business plans differ in size and scope depending on the type of businesses involved as well as the operating history of the small business. This article will describe the process of organizing and producing an effective and comprehensive business plan for a small business. In addition I will describe how a prospective small business owner can beat the odds and use this business plan to help their small business succeed.
The first decision for a prospective small business owner is to make the choice of a type of business to get involved in. Both product and service suppliers can be adapted as a small business. However before you choose your product or service, there are several items you should keep in mind. A prospective small business owner should attempt to select a business that they have some degree of knowledge. Considering the substantial barriers that a small business owner can face, a lack of knowledge of your chosen area of business can be insurmountable. Ideally a small business should be selected that is simple to understand and inexpensive to run, and within the owners area of expertise. Many small businesses however are not.
The first action taken in the creation of a small business is to put together a comprehensive, high-quality business plan. A business plan is a summary of the small business owners operational, financial and marketing plans as well as a detailed description of the backgrounds of the key personnel that will form the management team of the proposed business. The importance of this document can not be understated or underrated. A well researched and thoughtfully created business plan shows that the prospective owner is serious about their proposed future venture. A poorly constructed or sloppy business plan reflects poorly on the future owners and shows that they are either not well versed in their business venture, or just too lazy to care about the venture. A business plan that is well researched and organized should act as a blueprint for the future activities of the business, as well as a strategy of implementing of the future goals of the business. The business plan should also include a contingency strategy in the event the business must peruse alternative plans in order to adapt or survive under uncertainty. An effective business plan should be like a magnet and be able to attract venture capital from prospective investors
The business plan should be very comprehensive in scope and should include a mission statement (the purpose of the company), the goals and objectives of the business, as well as some financial information. The 4Ps of marketing should also be described in detail, that is, Product, Place, Price and Promotion as well as a detailed competitive analysis. A business owner should always tailor the FINAL version of the business plan to their own personality. A prospective small business owner may be requested to describe in detail their business plan on various occasions. If you did not write your own business plan or used a standardized program to create this plan you will come across as either lazy or having a lack of concern or knowledge about your business which can both be fatal errors when you present your plan to ” outsiders”.
The first step of the comprehensive business plan is to state the mission of the business. This can be as simple as saying “I would like to sell flowers in Brooklyn for a profit”. This is a relatively basic and broad statement that merely states the company’s purpose and future goals. In addition, it is recommended that prospective small business owner prepare a short executive summary that clarifies and highlights the key points of the business plan to prospective investors. Investors and financial groups that loan money to small businesses have notoriously short attention spans; therefore an actual business plan should not be too long or too short. Ideally it should be between 10-50 pages in length, depending on the complexity and operating history of the proposed business.
The second part of the business plan should include a detailed description of the proposed (or actual) business. This portion of the business plan should include the type of business form used (partnership, corporation etc.) as well as the type of business (merchandising, manufacturing service, franchise or other). A statement of the potential opportunities for growth should be included. The hours of operation should be included as well as the proposed method of servicing your customers.
The third step is the description of the company’s history. Many prospective companies will be startups and therefore will not have much of an operating history. It is OK to be in a startup as long as the rest of the business plan is strong and focused. If the company is not a startup, then a description of past history, operational as well as financial, future goals, and the method of implementation are warranted.
The fourth step that must be considered while constructing a small business plan is product or service being offered by your company. As easy as this sounds, there can be a great difficulty in selecting a product. A description of how the product or service you intend to offer (or are) offering will benefit the consumer should be included in the business plan. A description of the anticipated demand for your product or service should be included as well as potential cash flow from your product or service. One of the primary difficulties a small business faces is the type of product or service they will be selling to the public. In the case of a service you certainly do not want to be in an area where many other companies offer the same service as you do. This type of over saturation can lead to cutthroat competition and increasing costs to remain competitive (as we will describe later an in-depth comprehensive competitive analysis must be performed before deciding on the choice of a service or product for your company). As far as the choice of a product a prospective small business owner may choose to market a common product under a license from a third party or may want to become a distributor of one or more existing products. If possible a prospective small business owner should choose a product or service that they are familiar with or have experience with and they should attempt to select as simple a product or service as is possible.
When problems arise is often where the product being offered is new or completely unique to the marketplace. Most small business owners seek to protect a new product against potential theft by competitors. A common but at times misguided way of accomplishing this task is to seek a patent from the U. S. Government. A patent is an expensive and time consuming process that more often than not requires the help of an attorney to accomplish. In addition ALL patents require a detailed description of the product and how it operates. (ALL of these product descriptions are public information that is available at the website www.uspto.gov .) As a matter of law patents are protected for only 20 years and a new patent can be issued for a similar product that has a “material change’ from your product. What is a material change? It depends on what a judge thinks. In addition the cost of defending your patent if it is infringed upon is yours. Many smaller businesses may not have the capital to go through a protracted defense of a patent especially against a gigantic company. A better and far more workable idea may be to seek a non disclosure/ no‚íSidpete contract from your current employees. What this states is that all the employees that sign the agreement are bound to keep the companies designs confidential and ifÌ¹Xcp leave the company they cannot compete against your company in your industry for a reasonable period of time. This type of agreement is easy to enforce and can be easily drawn up and executed. If a company has a catchy logo it can seek a trademark for this logo. If the company has a nice jingle or a song that can be used to advertise this product then the company can seek copy write protection for this song or jingle. As a rule this is easier and cheaper to get then a patent and the protection is much longer (at least 75 years).
Another common problem that occurs with a product for a small business is” How do I produce this item?” If it is a small business that only needs a small amount of this product then it may be able to produce this amount on premises. However, if larger quantities of this product are needed then it may be necessary to find a way to manufacture this product in another location. As a general rule strangely enough small businesses usually seek foreign producers for these goods. Many assume that it is cheaper to produce abroad. This may be true, but the overall quality of foreign produced goods, along with the additional cost of transportation must be considered. In addition if there is a problem in a foreign country with the production of your goods how will you solve this problem? A better idea is to produce these goods domestically, and, if possible, locally. The advantages of this are myriad. The quality of the finished good is usually higher domestically. Transportation costs will be significantly less and if there is a problem it can be corrected more easily than in a foreign nation. However the best advantage to the small business may be in part psychological. Post 9/11 customers perceive that products “Made in the U.S.A” are better than goods produced in a foreign country. This bolsters a feeling of patriotism and helps to protect domestic jobs. In addition, if possible, it may be advantageous to produce these goods as locally as possible to your headquarters. This is socially responsible behavior, stating publicly that you are employing people from, and supporting your local community.
However the first question a small business owner would ask is how do I get a potential manufacturer locally? In that regard it is a good idea is to contact the union that covers the area that your product is in. Given the fact that many jobs are being exported overseas unions will now bend over backward to help a potential customer find the right manufacturer. If that does not work then a trade association in the area of your product can be helpful in getting you started. A small business owner may also find that there may be significant incentives available to produce products locally. In NY as well as other areas there are Economic Development Zones available. These EDZ are economically disadvantaged areas in and usually around an inner city. Doing business in an EDZ can create significant advantages for your business. Companies that move to or expand in one of 10 EDZ in New York City (among those available are Far Rockaway and South Jamaica in Queens, East New York, The Brooklyn Navy Yard and Southwest Brooklyn among others) may be eligible for significant incentives. Among these incentives are wage, sales, investment and real property tax credits as well as discounted rates on utilities. In order to qualify for these incentives a business must either net new investment or job growth in New York State. Further information on this worthwhile program is available at http://home.nyc.gov./html/sbs/html/ez.html. Based on the available incentives and the other advantages I listed before, I strongly recommend that a small business consider producing their products domestically and if possible locally.
Once this is settled, the next decision that the prospective small business owner faces is the location for the companies physical location .This is, at times, a difficult and emotionally charged decision process. Most business owners do not conduct enough competitive analysis to correctly determine the place they would like to open in. Most small business owners look for the most glamorous and densely populated areas to open in. In New York City, Manhattan is a favorite of new small business owners even though it may be prohibit ally expensive to open there. In addition the competition in Manhattan may be much greater than the outlying areas. I have found that business is like a battle, it is best to establish a safe “beachhead” before you move out into more dangerous territory. Small business owners would be better off starting up operations in an area that they are familiar with. In a “home” area an owner may have contacts in the local community and they will be known to their customer base. In addition if there are problems with the business they can adjust operations more quickly in a familiar area than in an unknown environment. There is no shame in starting off small in your home area and considering expansion later if the business is successful. Many small businesses are also dependent upon a steady flow of traffic through the area of the business which provides prospective customers for their goods and services. For those types of businesses it is vital to conduct a head count analysis (the number of customers that pass through in a given area in a specific period of time) which gives the owners a good idea of the amount of people that move through a given area at a particular time of day. Therefore it may be important to place this type of business in a heavily trafficked area that can provide the necessary customer base.
Another consideration for the selection of a product or service is the potential barriers to entry into the marketplace. Do you need a high degree of specialized training and knowledge to use the product such as with some high tech electronics? Do you need a specialized license to do business that may require years of training such as with a doctor or lawyer? If you are involved with food preparation you and your employees must take a food preparation training course before you can open. Almost all businesses require licenses or permits needed to operate and there is quicker way to fail then not applying for, and getting the necessary paperwork from both the city and state and other municipalities before you open up. There are some businesses that not only require a licenses but may require expensive insurance (such as a car service) before they can open for business. Many businesses will have to have some form of insurance in order to start up not only for legal but for protective purposes. Before you start up a small business you MUST research the barriers to entry, determine the costs of these barriers and make sure you are compliant with all of the regulations that govern your proposed business or face the prospect of being closed down due to non compliance.
One of the more important factors involved in selecting a location for the business is a through competitive analysis. Most small business owners might say “it is too time consuming and expensive for me to perform a competitive analysis”. In reality a good competitive analysis can be conducted inexpensively and quickly once the owner knows the right steps to perform. The first and most basic step is to survey the area you intend opening the business in. A good walk around this area may yield excellent results. In addition you may talk to other non competitive business owners to see their opinions on your business. An excellent forum for this is to join the local Chamber of Commerce for that area. This allows you gather information from other business owners in the area in an informal and relaxed setting. The Chamber of Commerce also allows you to network and brainstorm problems with other business owners which leads to productive ideas and the creation of strategic networking with other business owners (students looking for a job with a small business may benefit from joining their local chamber of commerce too). In addition many Chambers of Commerce are organizing together to offer group insurance policies to their members. This may be an excellent way to get a group policy such as health insurance at a reduced cost. A prospective business owner can also gather data on competitors by acting as a secret shopper and shopping at a competitor.
There are many sources that are publicly available that can be used to generate reliable data on potential competitors (or all Businesses) in a particular area. If you are opening up a Pizza shop in Brooklyn, for example you can expect competition. Obviously it is unwise to open up in an area with 10 other Pizza shops within walking range of your business. The site of the US Census report at www.census.gov is extremely helpful in finding demographic data. Inside of this site on the left hand side is a link to American Fact finder which offers micro based demographics that can be helpful to a small business owner. Another helpful site is www.melissadata.com where under free lookups on the home page there is a link to the zip code level demographics that are available from the U.S. Government. With these zip code level demographics you can investigate data such as the age, racial composition and income of a specific area. Another even more helpful site is available at the Brooklyn Public Library website at www.brooklynpubliclibrary.org. To use there numerous databases site go to their site and click on the link “Electronic Resources” on the home page then go to Alphabetic List of resources (you must have a Brooklyn Public Library card to use the site). The next step is to go to a resource called Reference USA. This resource, under its business database listings, has some information on almost every company even private companies. All a user has to do is find the name of a business (it does not have to be competitive) in an area. Once this name is entered into the business database finder the database will come up with information on that company. At the bottom of the information page a user can get the names and descriptions of EVERY business within a certain distance from the chosen business (from 1/10 of a mile to 5 miles). This can obviously be helpful in determine both competitors and other businesses in your chosen area. Any small business owner who uses these methods can create an excellent competitive analysis at a minimal cost, and by implementing the results of this analysis can avoid a serious and costly mistake.
Any good competitive analysis should include a definition of the target market and an idea of the potential growth of your market and potential market share for your product or service. By using the publicly available resources that I have previously described a small business owner should be able to complete a study into the potential market for any product or service.
Another problem for a prospective small business owner is deciding on the physical location of the business. Many small business owners prefer to operate their businesses from their homes. This method has both several negatives and positives. Among the positives are that there is little or no commute, you can work at literally any time and there are significant tax advantages to running a small business from your home. However among the negatives are the fact that you can be expected to work continually without separation from your business. There is something to be said for leaving the office and getting away from work. In a home based business other distractions can occur such as children, pets, friends etc. Another significant problem is that most potential customers look down at small home based businesses as being too minor to meet their needs. It may be fine to run a small, service business from your home but a manufacturing or larger business should seek an actual place of operation. It is relatively inexpensive to run a small business from a local space and in many cases may be to your advantage in the long run.
Another rather touchy problem that faces a small business owner is “How much do I charge for a good or service?” As a rule most small business owners think that they must discount there goods or services dramatically in order to get customers to “try them out”. This may not be true in all instances since that type of philosophy can lead to a cutthroat competition war with a better capitalized competitor. In fact most of your companies’ competitors are probably better capitalized and established than your business. Pricing a product should net a small business a profit, however most small businesses must assume for cash management purposes little or no revenue for the first year of operation (even though this assumption may not be true). A possible effective strategy is to give out a free trial or free sample to the product or service you carry for a limited period of time. This will give a prospective customer a chance to “try it out” and give your business a chance to gain a prospective customer. Once you gain a reliable customer base it will become easier to generate an effective pricing strategy. This strategy should be based on several factors including the income of your target market and the total amount of market share that you would like to have in the marketplace. Obviously the market strategy must also take into account the cost of the goods (so you can make a profit) and the prices that the market will bear (those charged by your competitors).
Another very important concern of potential small business owners is getting sufficient funding to be able to operate a business for at least a year or two without any significant revenue. Many small businesses will have very limited revenue for the first two years of operation. Most small businesses will not make a real profit for at least two to three years. Money in a business is like blood in a human being, both will die without enough. It is very difficult to raise venture capital for a small business unless you have an established operating history. Many small businesses go to a bank seeking capital. This method is especially fruitless and frustrating since most banks will not loan money to small businesses without collateral. Another method that is popular is to seek out a financial “angel” (a person or group that invests in small businesses) that can loan you money. This method is also ineffective since most financial angels get a multitude of business plans and tend to only invest in a “sure thing”. This leaves the potential small business owner with only a few options they can use to raise capital. One of the most popular ones is raising the money yourself through credit cards, savings or a potential mortgage on your house. This method is rather expensive and can create a multitude of problems for the small business owner if the business fails. The problem can be even worse if the prospective small business owner raises money from family and friends. Family and friends may give you money but what price will you pay if the business fails? Another interesting method of raising money is to determine who will benefit from your business being in operation. An example of this is if you own a gasoline station a local tanker company would benefit from your operation since you would probably have to use them to get gasoline to your business. In this situation it is possible to ask a potential suppler to help fund your business since this type of strategic partnership can be beneficial to both parties. You can find a local supplier through a local chamber of commerce, a trade association or by using Reference USA (the procedure for use of this database can be found earlier in this article). Also a local chamber of commerce or a trade association can help a prospective small business owner find a connection for venture capital. Another totally untapped source of venture capital contact is a union that could benefit from your operation. Most trade unions have good contacts with larger companies that can help you network and get venture capital for your business. Another widely used method of raising venture capital is to contact the SBA (Small Business Administration a governmental agency) at www.sba.com and seek a loan from the government. This method is difficult for several reason among them the fact that the government requires a very complex business plan to even consider your application. In addition government is notoriously slow in clearing their loans and it appears that the SBA may now be under funded leading to even more problems securing potential financing for your business.
Another integral part of a small business plan is a description of how the employees and staff will play an important role in the total operation of your business. A good business plan goes beyond the general resumes that are included in this plan. Among the factors that should be considered are:
1- How does your or your employee’s background and business experience help you in this business?
2- What are your strengths and weaknesses and how can you compensate for them?
3- What are the duties of all of the employees and how do they fit into the long term plan for the organization?
4- Do you have all of the employees you need? Must you hire and train additional personnel? Will they be ready in time to help your business?
5- What salaries, benefits, etc. will you are offering your employees? Will they be competitive with the other companies in your field?
6- What will you do to keep your employees happy and productive?
Another integral part of a small business owners plan should be an in depth discussion of the budget. A small business owner must establish a sound and realistic budget that determines the amount of money needed to open up their business and the amount of money needed to keep it open. A startup budget may include one time costs such as major equipment, utility deposits etc. as well as non recurring costs such as stationary, telephones etc. A good budget should also include for a reasonable operating budget. Too many business owners overestimate there first years revenue. A good idea is to assume little or no revenue for the first year of operation. The final part of the financial section of the business plan should include the following items:
1- Loan applications that is both current and filed.
2- All capital equipment and a supply list
3- Balance sheet and break even analysis as well as pro forma projections (profit and loss) and anticipated cash flow.
4- Any extraordinary items that may affect the company in the future.
It should be noted that any financial projection that is beyond one year is notoriously inaccurate and should not be considered accurate or indicative of the company’s future prospects.
Most small business have other concerns that may create problems down the road. One of these problems is keeping accurate records about your business. All organizations require accurate business records including the licensing and tax bureaus. In order to correctly run your business you will need a computer, some good analysis and tax software (you should hire a CPA to do taxes) and a good filing or inventory system. Failure to keep accurate records can create grave consequences for your business.
Another concern for a small business is costing and inventory control. Many an excellent small business has failed due to a misinterpretation of their costs and inventory. A small business owner must eventually make a profit or eventually face failure. A small business owner must have an excellent idea of their costs and inventory so that costs can both be minimized and inventory controlled. There are several good off the shelf software programs that can help such as QuickBooks or Quicken that are both inexpensive and useful.
There are many available resources that can help a small business owner. Among the available resources are:
1- www.inc.com The homepage of Inc magazine that includes a great set or resources for small business owners.
2- www.entrepreneur.com The home page of entrepreneur magazine. This magazine has many resources that can be of great use to a small business owner.
3- http://mel.lib.mi.us/business/BU-smallbiz.html This list of resources can help small business owners find information that can help them operate.
4- www.smallbusinessresources.com. This is a useful commercial site with many valuable links.
5- www.allbusiness.com. This is another good commercial site that offers useful resources for a small business owner.
6- http://smallbusiness.yahoo.com. Most major portals such as Yahoo and MSN among others offer useful resources that can help a prospective small business owner.
There are also additional resources that can help a prospective small business owner produce a business plan. There are several resources that will describe the parts of a business plan; however there are some sites that actually allow for the downloading of useful software. Among these sites are
1- www.planware.org. This useful site provides several links to programs that can help produce a business plan.
2- www.download.com. This excellent site has several free programs that are very helpful in creating a business plan. I recommend two of those programs. The first, The Business Plan Workbook, is a template that once filled in creates the steps that are necessary to create a good business plan. The second, The Business Plan Toolkit, is another effective business plan program.
3- www.arcamax.com This very useful site provides many commercial business programs including business plan software for just the cost of shipping (usually $5 or less per program).
4- www.bplans.com This site has some useful information including some templates and sample business plans.
following is from the SBA Website at http://www.sba.gov/starting_business/planning/writingplan.html
It provides a useful template you may wish to use in writing your own business plan.
What goes in a business plan? The body can be divided into four distinct sections:
1) Description of the business
Elements of a Business Plan 1. Cover sheet 2. Statement of purpose 3. Table of contents I. The Business A. Description of business B. Marketing C. Competition D. Operating procedures E. Personnel F. Business insurance
II. Financial Data A. Loan applications B. Capital equipment and supply list C. Balance sheet D. Breakeven analysis E. Pro-forma income projections (profit & loss statements) Three-year summary Detail by month, first year Detail by quarters, second and third years Assumptions upon which projections were based F. Pro-forma cash flow
III. Supporting Documents Tax returns of principals for last three years Personal financial statement (all banks have these forms) For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchisor Copy of proposed lease or purchase agreement for building space Copy of licenses and other legal documents Copy of resumes of all principals Copies of letters of intent from suppliers, etc.
I hope that this article has been informative and useful. The author of this article, Prof. Eric Popkoff can be contacted at Brooklyn College through the Economics Department at 1-718-951-5000 or by e-mail at firstname.lastname@example.org. I would welcome any comments on this article.