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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 ÷ $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.

Three Tips To A Better Business Plan

A Business Plan Has To Be More Then Information

I was reviewing a business plan yesterday for a client who had spent hours working on it. He had a deadline he had set for completion and was very frustrated as it seemed that there was so much still to do. He had taken a sample plan that he found on line, for a similar company and made modifications thinking that this could be the perfect plan to go forward with.

What he had failed to understand was what the plan itself was actually for. I explained to him a business plan should serve one to two purposes an internal one and, in his case, an external one. Because he was looking for funding, he needed to have a plan that he could show possible investors along with a tool to help him guide his business.

Where he had gone wrong was that he thought by copying someone else’s work he had developed a plan. As I explained to him, the external purpose of the plan is to prove to investors you accurately understand your business. Which means:

1) Do you know who and what your direct and indirect competition is?
2) Do you know how much money it’ll cost you to operate a business like the one you want to establish?
3) Do you understand the needs, demands and wants of the market today and into the future?
4) Do you know what your value proposition is and how to articulate it in a way that can make you unique?
5) What is your marketing strategy and how will you employ it to obtain clients and create a differentiation from the competition?
6) How long is your sales cycle, and what will it cost to get your sale?
And So On!

Your Numbers Must Make Sense

This is one of the things that will turn an investor off faster then anything else. The first page an investor will go to in your business plan is your numbers. They’ll bypass all the glossy pictures and your executive summary, they aren’t going to check out your resume and your background, they’re going to see if the figures make sense.

So make sure the fundamentals are covered. Make sure you have a spread sheet where all your numbers foot, silly as this seems, I see this problem all the time. Also, if you quote numbers anywhere in your plan, an investor needs to have the ability to find those numbers inside your spreadsheet easily, and they better match. So if you say that you anticipate 10% growth in the first year and your chart displays 12% growth, your plan will likely be rejected before you get any farther. Regardless of how great the copy is.

Your numbers also have to be reasonable for your industry. Try and find as many companies out there, doing something similar to what you do. Observe how their growth has progressed. That should provide you with an idea of what you can expect. Don’t be too aggressive, unrealistic targets either way are not good, but growth that’s too rapid can harm a business as bad, if not worse, then sluggish growth.

Your Business Plan Needs To Show You Understand What’s Coming & Its Impact

It’s not sufficient to be able to show your snapshot in time. Your plan also needs to illustrate where you see your market heading over the following five or more years. It will tell an investor that you actually have an understanding of current and future trends of the business. It will also provide them insight into how you see the strategy for your company going forward. They may challenge your strategy and assumptions, but that’s better then outright rejection because they feel that you don’t have a clue about where your industry is going.

Remember, your investors are in this with you for a long haul. What you do to build your business over the next twelve months will be a significant indicator of your survival skills. What you do over the following five years will make the difference between a so-so investment and a terrific one. So this is your one chance to prove you’ve got what it takes.

Two more quick points to remember when submitting a plan.

You don’t get the chance to explain anything when your plan is in an investors hands, if the plan doesn’t do a good and concise job of explaining things, then you are cooked.

With every paragraph you write, you will need to ask yourself “So what”. In other words, you write something about your market, how important is it to growth and profitability. If an investor can say “so what, how is that going to make me money?” to anything you have written, don’t put it in there, unless you have answered the question.

Finally, your business plan also must be a guidance tool that you can utilize to run your company. It is a gut wrenching process to get it completed. But after you have completed it, don’t put it on the shelf, use it as a road map towards your success.

7 Simple Steps to a Better Business Plan

Here are 7 easy tips to help you get started right now on your business plan.

It’s possible that even though you may have all this information on doing a business plan, you may not be any further ahead. We understand. The first time you do something is the hardest…

Like Mr. Miyagi in the Karate Kid movies taught his protégé: Wax on; Wax off… over and over again. The more often you do something the more “expert” you become at it.

Follow these seven “simple” steps and then you can get a business plan together pretty quickly:

Step 1: Start with the end in mind – you need to visualize and be able to describe what you want at the end of the day.

Step 2: Write it down. Do not worry about competing with Shakespeare – he wasn’t so good at the business side of things, but do take the time to jot done your ideas and expectations, starting with Step 1.

Step 3: What is your USP? What is your unique selling proposition? Are you going to be the “best” in the world, the city, the block? Do you need to be the best? Watch out for superlatives when describing your business and focus on customer benefits and value.

Step 4: How will you make money? Are you going to be selling a widget? How much for the widget? What goes into the making or acquiring of the widget? You do not need to be an accountant to explain this, but do take the time to follow the advice in step 2 – write it down!

Step 5: Who (whom my fifth grade grammar teacher would have corrected) will be buying whatever it is you are selling? How do you know them? How will you reach them? How will you grow them? By answering these questions (in writing) you will have the basis of a marketing plan.

Step 6: Putting together an operational budget and cash flow. It might sound complicated but work your budget by extending out Step 4. Do your cash flow by including your sales from your marketing plan.

Step 7: Do you have your exit plan ready? Again, working as a guerrilla means having the end in mind. Having that end forces us to have a firm understanding of our current situation. Answering some queries in a “partnership” questionnaire may help.

“Wait, I do these seven steps and I will have a business plan?” No, but you will have the necessary components to now begin to build your plan – whether using a kit or a third party service!

Keep smiling!