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Why Make a Business Plan?

In many cases business plans are very important but so much of the time it’s a plan to try to convince someone else that you know what you are doing with your business like banks, investors, partners, etc. Now it’s true that a well written business plan can also be a major benefit to your success as well if done right. It can guide you and keep you on track and can be the vehicle to get you were you want to be especially with so many outside forces now days that bombard you. A plan can be extremely important to your success especially when you look at the statistics that says 51% of small businesses fail sometime during their first 5 years.

So why make a business plan? I want to show you a totally different kind of business plan. What if you made a business plan that focused only on what you want for your life? You have dreams about what you would like your lifestyle to be, right? Why not make a business plan that could give you those dreams? What would your business look like if it gave you exactly what you want in life. What kind of salary would your business need to give you? Why not build a business plan around that? Decide how much salary you would need to support your dreams and then build a business plan that would show exactly how your business could give you that. Wouldn’t it be better to have your business work for you instead of the other way around?

Did you ever stop and think what a unique position you’re in as a business owner? I don’t know of any other way you can have as much control over your success than owning a business. When you work for someone else, you are totally at their mercy as to what your future may be like. It doesn’t matter whether it is a private business you work for or a large corporation. Your future is in their hands. The only thing that might qualify other than owning a business would be to inherit or win a lot of money that would give you everything you want in life.

So, why make a business plan the normal way when you could first make one that could give you what you want in life? Have you ever thought about doing a plan like that? Would you know how? Would you have the time to do it?

Well if you don’t or not sure, let’s at least see what’s involved.

Here are the steps you would need to take.

First, you would need to know all your current business numbers. This will be the basis for the plan. You’re going to need to know:

1. What your current average monthly sales are
2. What your current average monthly material cost is
3. What your current average monthly labor cost is
4. What your current average monthly fixed expenses are
5. What your current average monthly variable expenses are
6. What your average number of transactions per customer per month are
7. What your average dollar sale per transaction is
8. What your average monthly profit is
9. What your average monthly profit margin is
10. And what % capacity your business is at right now

Second, decide what you want your salary to be

Third, determine how many years in the future you want to plan for

Fourth, you will need to know:

1. What % is your material cost of sales?
2. What % is your labor cost of sales?
3. And what % is your variable expense of sales?

Why do you need to know these percentages? As your sales increases or decreases, your material cost, labor cost, and variable expenses will track accordingly. They will track very close to the same % as your current business. As an example, let’s say your current sales is averaging $100,000 per month and your material cost is averaging $20,000 per month. That’s 20% of your sales ($20,000 รท $100,000 = 20%). So, what would your material cost be if your sales were averaging $200,000 per month? It would still be 20% but it would be 20% of $200,000 or $40,000. So with these percentages, you can project your material, labor and variable expenses. See how it works?

But your fixed expenses don’t do this. They remain the same no matter what sales does. That’s why it’s call fixed. These are expenses like rent, taxes, utilities, phone, salaries, insurance, etc. A lot of business owners never consider this. They just lump all their expenses together. But you could never make an accurate plan if you combine all your expenses together. If you project your sales higher and want to know what your expenses will be, you have to separate your fixed and variable.

So, thinking about this principle, let me ask you a question. If your sales grew 10% and nothing else changed, would your profit margin be higher, the same, or less? Profit margin is % of profit against sales

If you said the profit margin would be higher, then you are right. Why would your profit be higher? If you said because of the fixed expenses, you would be right. Your material cost, labor cost, and variable expenses would have gone up 10% but your fixed expenses would have remained the same. You brought in more revenue because of more sales and you spent 10 % more on material, labor, and variable expense to cover the extra sales, but you didn’t spend any more on your fixed expenses. So, less overall expenses, would give you higher profit margin. Make sense?

So, let’s see how we would make a business plan that would show exactly how your business could give you the salary you want.

First you would determine what you would like your salary to be. You’ve dreamed about having a nice income to support your dreams I’m sure. Let’s say right now you only make what your profit is giving you which might not be much. So let’s say the first year, next year, you would love to have a consistent monthly salary of $4,000 a month, every month. And every year you would like to be able to increase it so that after 10 years it would be at $10,000 per month. And let’s say you would like to grow your business 10% each year.

So, what would your business look like over the next 10 years to give you that?

Could you build a plan that would show exactly how your business could do that?

It would show what your sales, fixed expenses, material cost, labor cost, and variable expenses would need to be. It should also show you how many customers you would need and would show you what your profit and profit margins would be each year.

All it takes is your current business numbers as we listed earlier and you can make a business plan as many years out as you like.

Now, in addition, when you know the average number of transactions per customer and you know your average dollar sale per transaction, you can also project how many customers you would need over those 10 years as well. This would tell you everything about what your business would need to do to give you the salary you want.

So, wouldn’t it be nice to see what a plan like this would look like? Could you do it? It might not be as tough as you might think.

There is no doubt it would take some time and would require a lot of calculations, but when you understand these principles and know how to put it together, you could probably do it. What do you think? Have you ever thought about doing a plan like this? It’s actually kind of in reverse. You decide what you want and let your business give you that.

Now assuming you did do this and it looked reasonable to you, how would you go about making it happen? What approach would you use? This could be a little harder. Well let me show you something. It might be easier than you think.

Did you know there are 7 ways to increase profit in business? If we decided to grow our business, most likely the first thing we would think about would be to add more customers. Adding customers will increase sales and as we seen above can increase profit as well, but it might not be the most effective way to increase profit. Take a look at these and see which ones you think could work for you. Would it be to:

1. Add more customers?
2. Increase your transactions per customer?
3. Increase your average dollar sale per transaction?
4. Decrease your fixed expenses?
5. Decrease your variable expenses?
6. Decrease your material cost?
7. Or decrease your labor cost?

What’s more important, sales or profit? Profit is what generates your salary. You could actually make more profit with less sales. Less sales could actually be less work. The most important thing for a business is to make money. That’s profit. Now some might say, I don’t care so much about making a lot of money. I like the freedom of owning a business. Well that is probably true, but if you don’t watch your profit, you might lose that freedom.

It’s always amazed me how most businesses, even very large ones, talk about how much their sales are. You hear comments like, that’s a $10,000,000 company. But what’s a $10,000,000 company if it has no profit. Now I do admit that 2% net profit of $10,000,000 is a lot bigger than 2% of $1,000,000 but most likely the large one carries a lot more headaches too.

Maybe it would be much better to have focused on profit than sales. What if profit had been the focus instead of sales. What if this could have been the result?

$10,000,000 x 2% = $200,000 profit
$1,000,000 x 25% = $250,000 profit

So when using one or more of these 7 ways to increase profit, the first one (adding more customers) might be the one you want to focus on last. It’s probably more expensive

Now, if you had your plan completed and it showed what your business needed to do over the next 10 years to give you the salary and profit you wanted, the next thought would be how do I make it happen. Well the best way would be to take it one year at a time. Concentrate on next year first and then choose one or more of 2 through 7 to work on before trying to add customers.

As an example, let’s say your current average number of transactions per month per customer is 3.0. Which says on average each customer does business with you 3 times each month. You could calculate how much more profit you would get if you could increase it to 3.5. And I can tell you that would probably be enough to meet your plan. And if that did generate enough profit, all you would have to do is maintain everything else; sales, expenses, labor, average dollar sale, etc, and then just figure out how you could increase your transactions from 3.0 to 3.5. Maybe it could be with some type of promotion that would get customers to come in more often.

Once you chose which one or more of the 7 you want to use and calculate exactly how much impact they have on meeting your plan, you would now have a definite approach on how to make your plan work.

It seems simple. At that’s what it’s all about. It’s about how to make your plan work the easiest and smartest way you can eliminating all the guesswork or trial and error methods. Want to increase your profit? This is a good way to do it.

So, you see, once you decide which of the 7 ways you’re going to do, then the only thing left for you to do is figure out how to make the one or ones you have chosen work.

No doubt there would be a lot work to do to do a plan like this. You would need to figure out how to put it all together, do all the calculations, do a lot of what if’s, etc.. And I’m sure one of the biggest things would be, would you actually take the time to do something like this or even have the time to do it? You could pay someone to do it but that would probably cost you a lot. Plus if you did that, most likely it would require a lot of back and forth work to get it just like you wanted it which would be even more expensive. But even then, would you spend the money to do it?

There is a better way. If you would like to develop a nice plan like this for yourself and give yourself a good shot at making your life better, then find a planning software that does it all for you.

One place and probably the only place I’ve found is http://StrategicBusinessSolutionsLLC.com.

A Sample Business Plan for a Small Business May Not Be the Best Way

You can find a sample business plan for a small business in all kinds of formats. There is a sample business plan for a small business where you basically fill in the blanks or you can have access to a sample business plan for a small business where you can pattern yours from it or you can develop a business plan that is centered on what you want for your dreams and your life.

I don’t know of better way than to let your business give you what you want for your lifestyle. Whether it’s a sample business plan for a small business or one where your business gives you a plan, it should tell you what is needed to take you where you want to go and when and how you can get there and it should be in clear simple terms, supported with all the specifics.

So using a sample business plan for a small business is just one of many ways to make a business plan but frankly I think designing one that will have your business give you exactly what you want is by far the best way.

So, why not start out with what you would like to have in life for you and your family? Then develop a business plan that could show you exactly what your business would need to do to give you that life style. If you think about it, there is no other way where you have more control over what you want in life than letting your own business do it for you. If you work for someone else, you’re sure not going to have as much control over your future.

So how would you go about making a plan like this? Well if you know a fair amount about business, you can. It will take some special calculations and some work but if you know how to put together a Profit & Loss Statement, you can probably do it.

You would first do a P&L for the present year for your existing business and the first year and as many years after as you would like to have your plan cover. Your existing business financials will be the foundation for building yourself a business plan for as many years out as you want. This data will tell you a number of things but first if you want to build your plan around what you want in life, you would need to decide some things about your life:

1. You would need to decide how much income you would like to have for yourself for each of the years you plan for.
2. You would need to determine what kind of profit margin you would want from your business for each of the years.
3. And by combining these 2 things into a P&L format you can develop a financial business plan that can extend as for into the future as you would like.
4. The first thing it will show you is how much sales you would need each year to give you the income and profit you would like. Once you see the sales needed, if you know your business well enough, you should be able to estimate those additional expenses needed to overcome capacity constraints that will occur as your business grows.

With this information you can actually predict not only what your sales will be, but you can see how much your fixed and variable expenses will be, what your labor cost will be, your material cost, and your profit.

1. So let’s first look at what exactly are fixed expenses? They are exactly what they say they are; they are fixed. This simply means these are expenses that are ongoing whether you have a lot of sales or “0” sales. They are expenses like utilities, taxes, rent, salaries other than the wages used in the making of the actual product or doing a service, business fees, telephone, etc. See how these expenses would continue on even if you have 0 sales? Any expenses that fall into this category are fixed expenses. Far too many small business owners never divide their expenses into fixed and variable. As a matter of fact, if you could have a business that had “0” fixed expenses; this would be the best of all worlds, why? If you had “0” sales, you would have “0” expenses. So the closer you could get to this the better you would be.

2. Variable expenses are those expenses that track directly with sales. If sales stop they stop. These are expenses like supplies used to support in the making of your product or doing your service. Such things as shipping cost for raw materials for your product or service. If you have no sales then you’re not going to be purchasing materials so your shipping cost for those materials will stop as well. As an example, if you have a lawn mowing business and there are no lawns to mow, then you wouldn’t be buying gasoline to travel to your lawn mowing site. These kinds of things are variable expenses. If you’re producing a product, it would include supplies used to produce that product like sand paper, glue, finishing materials, cutting tools, etc.

3. Labor and material costs are also directly proportionate to sales. These are things that go directly into the making of the product or into doing the service.

a. Labor cost is the actual direct labor used in the making of product or doing the service. The cost would also include all the fringe benefits like social security, payroll taxes, vacation pay, holidays, sick pay days, etc.
b. Material costs are all the materials used in the making of product or in doing the service. In the lawn mower service as an example it would be the gasoline used in the mower and any other materials used directly in that service. For producing a product it would be all the materials used in the product that is sent to the customer including all the packaging materials.

Average Selling Price

Now when you calculate your average selling price which is your cost of sales (material + labor) divided by (1-gross profit), you can determine how many customers you would need and then come up with what you think your conversion rate would be for converting leads to customers, you can determine how many leads you would need. Then from this and with the aid of the U.S. Census Bureau and some basic research on your own you can actually have a pretty decent idea of what size your market is and is going to be in the future so you can see if it will support your business plan or not.

So if you can put this all together, you can have a complete business operating plan that would show you exactly what your business would need to do to give you the income and profit you would like to have and a rough idea whether your market would support it or not. All you would have left to do would be to figure out how to make it all happen.

It’s like planning backwards.

1. Determine what you want in life
2. Figure out what your business would need to do to give you that life.
3. Figure out how long it would take you to reach it.
4. Figure out how big of a market it would take each of the years you’re planning for.
5. Then see if that market is big enough.

Isn’t this a much better way to go about planning your business? Shouldn’t your business be designed to give you want you want instead of you working yourself to death just hoping for the best?

So how would you go about calculating all this?

There is quite a bit of calculations and you should know a little about business principles but it isn’t that complicated. So first let’s look at figuring out your future needed sales with this formula:

Projected sales = fixed expenses divided by (1-(var exp % of existing sales + mat cost % of existing sales + lab cost % of existing sales + desired net prof %))

So, let’s say you existing sales is $850,000 annually, your fixed expenses are $275,000, variable expenses is $55,000 or 6.5% of the $850,000, material cost is $236,000 or 27.8%, labor cost is $109,000 or 12.8%, and your existing profit margin is $175,000 or 20.6%.

Now let’s say next year you want to have a profit margin of 25% so what would your sales need to be to give you that profit margin? Now you might think you would simply tack on 4.4% more to sales (25% – 20.6%) and you would have it. Well not quiet. it doesn’t work that way because you are going to have the additional variable expenses, material cost, and labor cost too. Remember, the more sales the more each of these expenses and cost will be.

So here is how you would do it:

Projected sales = fixed exp ($275,000) divided by 1-(6.5% + 27.8% + 12.8% + 25% (your new profit margin) = $896,057 (new sales)

You can do this for as many years out as you want. Obviously this is based on your first year’s fixed expenses remaining constant and no consideration of depreciation, inflation, or taxes.

But most likely you would need to increase your fixed expenses because you’re going to probably have more rent, utilities, or such as your business grows. So, you would simple put in your new fixed expense number in place of the existing one for each of the years you would be planning for.

So, you see if you decided you wanted a 35% profit margin at year 5 then you could see how much sales it would take to give you that.

Now it’s also important to know how many more customers you would need as well so you should always look at that unless you have another way of growing your sales other than with new customers.

Let’s say your average selling price for your service is $925.50 and you have one transaction per year per customer.

Using that first years sales example we used above, you would calculate it this way.

$896,057 divided by $925.50 = 968 customers needed for the year. Now if your average transactions per customer are more than 1, then you would need fewer customers. As an example, let’s say your average transaction per customers per year is 2.5 then 968 divided by 2.5 = 387 customers per year.

Now let’s say you estimate your conversation rate to be 3% of turning leads into paying customers with the advertising method you’re going to use, how many leads would need to contact to get 387 customers? Simply divide 387 by 3% and you get 12,909 leads you’re going to need to contact.

Then the question is; is your market going to be big enough to provide you with 12,909 leads for the next year and how many will you need each of the following years?

It may be easier than you think to figure this out. You would do some research and with the aid of the U.S. Census Bureau you can roughly determine whether your plan can be supported by your market or not.

So what do you think? Is it better to build a business plan around what you want in life then see how your business can maybe give you that or is it better to use a sample business plan for a small business where you are probably guessing?

I’d love to help you some more. Please go to http://www.StrategicBusinessSolutionsLLC.com and see what might be available.

Writing an Effective Business Plan For Your Small Business

Plans are Useless; Planning is Indispensable

“Plans are useless; planning is indispensable,” according to Dwight D. Eisenhower, then Commander of the Allied Forces in Europe during WWII. Now, you may be in total agreement with the first part of that statement, but you are really not convinced of the truth of the second part.

At this point, you may be tempted to skip writing a business plan altogether, viewing it as an unnecessary exercise in jumping-through-the-hoops, suggested by some old business professor who probably never held down a “real” job anyway. Maybe it’s okay as an assignment for an MBA class, but it would be just too confining and irrelevant for today’s fast-paced business environment. Anyway, you’re ready! You’ve thought about this business venture for a long time and talked it over with friends and everybody agrees it’s a great idea. Best to strike while the iron is hot!

Press for Success

Far be it from me to dampen your enthusiasm, but you should give yourself every opportunity for success. That’s what the planning part of the process of creating your business plan will do. By the time you have pressed your way through it, you will not merely have some neatly arranged document to keep on file, you will have a working tool that addresses the essential factors that influence your future.

Besides, your friends may be 100% behind you in your new venture, but, in case you are hoping to involve others who have actual money to invest, you may need to be able to make a convincing case. Wouldn’t it be nice to have anticipated possible questions and be ready with plausible answers? If you are risking your own money, that is perhaps even a stronger reason to do some indispensable planning.

Easy Writer

If you are one who is intimidated by the blank page, never fear! There are several good software packages that will guide you through the process, such as Business Plan Pro Complete from PaloAltoSoftware. Business Plan Pro Complete walks you through the entire planning process and generates a complete, professional and ready to distribute plan with a proven formula for success. The planning wizard makes it a snap to get started since you simply answer yes or no questions to create your custom business plan framework. Bplans.com offers free business plan samples and how-to articles as well as a wealth of other information. It is definitely worth taking the time to checkout. Microsoft Office Online Templates also has a variety of free templates to use with their products. The wizard indicates the information you need and you fill it in as you go.

You may find that the easiest part is the actual writing of the plan. The real work comes in the data-gathering, which may take you a hundred hours or more, depending on what you already know or have researched. If your new venture is in an area where you’ve been working, you may already know about your customers, your suppliers, your marketing plan, your organizational structure, your financial and cash flow needs, equipment, inventory, and so on. If you know all of these except for Marketing, say, then this is where you will need to invest some time and effort. You can find a wealth of information by utilizing the traditional data sources such as chambers of commerce, major cities’ websites, trade associations, the US Census Bureau, trade journals, magazine and online articles and advertising, etc. Performing keyword searches on Google, or Ask will bring up websites to check out. Following are some places to start:

  • James J. Hill Reference Library (jjhill.org): One of the nation’s premier business libraries to bring you FREE and affordably priced tools and resources you can use to create a better business plan based on relevant and credible data.
  • U.S. Census Bureau (census.gov): A source for a variety of useful statistics, especially the Economic Census that comes out every 5 years.
  • American Demographics (adage.com/americandemographics): Just as the title suggests, numerous free reports about consumer demographics in the U.S. nationally and by statistical area.
  • Internet Public Library – The Census Data and Demographics (ipl.org)/: An especially useful site that has links to information about countries other than the U.S.
  • Corporate Information (corporateinformation.com): Features information summaries on over 350,000 companies in the U.S. and abroad for competitive analysis.

You can find a variety of companies online to help you with your market research. For example: Sundale Research’s (sundaleresearch.com) primary goal is to provide new and mature businesses with objective, accurate industry data and market analysis on a wide range of topics. Their market research is intended to save you time and money while keeping up with industry trends.

But your idea may be so new that you may also need to talk to potential customers, host some focus groups, talk to an ad agency, or maybe even make a prototype and float it past some people. Be prepared to spend the time. Remember, it’s not about the Plan but the Planning.

Build It on Paper First

Whether you decide to use business plan writing software or to just follow this guide and create your plan with your word processor, here are the sections of a good plan and the questions that need to be addressed:

  • Cover Page – Show the name of the company, your name, and the date.
  • Introduction – What is the name and address of the business? Who are the principals, their titles, and their addresses? What is the nature or purpose of the business? What is your launch date? How much start-up and/or operating capital is needed?
  • Executive Summary – One to three pages that summarize all the information to follow; come back and write this last.
  • Industry Analysis – How does your product or service compare with what is currently on the market? What is the trend in the overall industry? What have been the total sales in this industry over the previous 3 to 5 years? What new products or technologies have had the biggest impact on this industry recently? What is the future outlook for these and what trends are emerging? Who are the competitors, where are they located, and how are they doing? What advantage do you offer over them? Who is buying this product or service now? Describe the typical customer for this product or service. Are there emerging markets or market segments? Where does this product or service currently perform best? Possible Data Sources: trade associations; trade journals; attorneys & accountants dealing with the industry; industry salespeople; state business websites; focus groups.
  • Description – What product(s) or service(s) are you offering specifically? Are any patents, copyrights, or trademarks needed? Have they been acquired/filed? What is the size of your business? Where will it be located? Will this require purchasing or building a facility? Will this require leasing a facility? At what cost? Has a lease been negotiated? What personnel will you need? Where will you find suitable employees? What equipment do you need? Will it be purchased or leased? What are the qualifications of your principals? How do their backgrounds promote the success of this venture? Why do they think this will be a successful venture? Possible Data Sources: local Chamber of Commerce; community colleges & local universities; local employee leasing company; real estate agents; US Patent & Trademark Office; US Copyright Office.
  • Production Operation – If a product must be manufactured, what is the process? Will the work be done on-site or subcontracted? Who are the subcontractor(s)? If on-site, what space, equipment, machinery, production employees are needed? What suppliers are needed? Who are they? How will quality be assured? What is the anticipated production output? What established credit lines do you have? Possible Data Sources: local Chamber of Commerce; yellow pages; trade associations.
  • Service Operation – If a service is offered, describe it. Will the work be done by company personnel or subcontracted? Who are the subcontractor(s)? If on-site or in cyberspace, what employee qualifications, equipment, and technologies are needed? How will quality be assured? What performance levels are anticipated per employee? Possible Data Sources: local Chamber of Commerce; yellow pages; trade associations.
  • Marketing – How is the product or service priced? How will it be distributed? How will it be promoted? Will it be promoted by the venture or an outside agency? What agency? How have you determined what amount to set aside for marketing? How have you determined product or service forecasts? Possible Data Sources: on-line searches; Amazon; local outlets; trade journals; industry attorneys & accountants; salespeople.
  • Organization
  • How is the business structured? Who are the principals and the principal shareholders? What authority does each principal have in the venture? What are management’s qualifications? What is the job description for each position? What does the organizational chart look like? Possible Data Sources: on-line templates for job descriptions & organizational chart.
  • Risk Assessment – What weaknesses are inherent in this venture? What vulnerabilities face this type of venture? What impact will these have? What new technologies may affect this venture over the next 1 to 3 years? What contingency plans are in place? What level of liability insurance is required? What does it cost? Who is the carrier? Possible Data Sources: trade associations; trade journals; Service Corps of Retired Executives (SCORE); industry salespeople; customers; focus groups.
  • Financial Plan – What is the anticipated income? What are the cash flow projections? What is the anticipated budget over the next 3 years? What is the break even point? When is it anticipated to be met? What funding is needed and where will it come from? What funding is currently available? What collateral is available? What is the net worth of the principals, if applicable? Possible Data Sources: accountant; accounting software; Small Business Administration; Small Business Development Center; SCORE; banks; venture capitalists.
  • Appendix – Resumes of principals/management; letters of recommendation from current business associates/customers/suppliers; marketing research data; demographic data; leases or contracts in place or as promised; business licenses; price lists from suppliers; trade or industry articles or data; floor plans; information on subcontractors; liability insurance policies.

Impress for Success – Now you have to admit, this is going to make an impressive package! Put it in a binder and you have built something to be proud of – the first of your many business accomplishments. Your potential investors will appreciate the depth of your analysis, but this tool will prove helpful in describing your venture to your employees, customers, and suppliers, as well. After you have been up and running for a few months, you will find that the planning that you have done will sensitize your inner “business compass” and allow you to flexibly adjust to contingencies. And that is indispensable!

In Summary

Planning out your business on paper first gives you long-term benefits with potential investors, employees, vendors, and suppliers. The business plan becomes your roadmap to success, with pertinent data that shapes the course of your business start-up and lets you adjust your journey as contingencies arise. Business planning templates are readily available and data sources abound at your fingertips. You will achieve a solid understanding of your business as you work through each section of your plan.

IMPress Action Checklist:

Below is a list of the steps that will help you put together your business plan. Check off each step as you complete it to keep track of your progress.

  1. Purchase business plan software or download a template
  2. Read over the business plan sections to decide what data you have, what data you need
  3. Gather data via the internet, phone interviews, print material
  4. Fill in the plan’s sections
  5. Write the Executive Summary
  6. Print and Bind Your Plan