Summary
A business plan
can provide the owner-manager or prospective owner-manager of a small service
firm with a pathway to profit. This aid is designed to help an owner-manager
in drawing up a business plan.
In building a pathway to profit you need to consider the following questions:
- What business am I in?
- What services do I provide?
- Where is my market?
- Who will buy?
- Who is my competition?
- What is my sales strategy?
- What merchandising methods
will I use?
- How much money is needed
to operate my firm?
- How will I get the work
done?
- What management controls
are needed?
- How can they be carried
out?
- When should I revise my
plan?
- Where can I go for help?
And many more.
No one can answer such questions for you. As the owner-manager you have
to answer them and draw up your business plan. The pages of this
aid are a combination of text and workspaces so you can write in
the information you gather in developing your business plan -- a logical
progression from a commonsense starting point to commonsense ending point.
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A
Note on Using this Aid
It takes time
and energy and patience to draw up a satisfactory business plan. Use this
aid to get your ideas and the supporting facts down on paper. And,
above all, make changes in your plan on these pages as that plan unfolds
and you see the need for changes.
Bear in mind that anything you leave out of the picture will create an additional
cost, or drain on your money, when it crops up later on. If you leave out
or ignore enough items, your business is headed for disaster.
Keep in mind, too, that your final goal is to put your plan into action.
More will be said about this near the end of this aid.
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What's
in this for Me?
You may be thinking:
Why should I spend my time drawing up a business plan? What's in it for
me? If you've never drawn up a plan, you are right in wanting to hear about
the possible benefits before you do your work.
A business plan offers at least four benefits. You may find others as you
make and use such a plan. The four are:
- The first, and most important,
benefit is that a plan gives you a path to follow. A plan makes the
future what you want it to be. A plan with goals and action steps allows
you to guide your business through turbulent economic seas and into
harbors of your choice. The alternative is drifting into "any old
port in a storm".
- A plan makes it easy to
let your banker in on the action. By reading, or hearing, the details
of your plan he will have real insight into your situation if he is
to lend you money.
- A plan can be a communications
tool when you need to orient sales personnel, suppliers, and others
about your operations and goals.
- A plan can help you develop
as a manager. It can give you practice in thinking about competitive
conditions, promotional opportunities, and situations that seem to be
advantageous to your business. Such practice over a period of time can
help increase an owner-manager's ability to make judgments.
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Why
am I in Business?
Many enterprising
Americans are drawn into starting their own business by the possibilities
of making money and being their own boss. But the long hours, hard work,
and responsibilities of being the boss quickly dispel any preconceived glamour.
Profit is the reward for satisfying consumer needs. But, it must be worked
for. Sometimes a new business might need two years before it shows a profit.
So where, then, are reasons for having your own business?
Every small business owner-manager will have his or her own individual reasons
for being in business. For some, satisfaction comes from serving their community.
They take pride in serving their neighbors and giving them quality work
which they stand behind. For others, their business offers them a chance
to contribute to their employees' financial security.
There are as many rewards and reasons for being in business as there are
business owners. Why are you in business?
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What Business am I in?
In making your
business plan, the first question to consider is: What business am I really
in? At the first reading this question may seem silly. "If there is
one thing I know," you say to yourself, "it is what business I'm
in." But hold on. Some owner-managers go broke and others waste their
savings because they are confused about the business they are in.
The changeover of barbershops from cutting hair to styling hair is one example
of thinking about what business you're really in.
Consider this example, also. Joe Riley had a small radio and TV store. He
thought of his business as a retail store though he also serviced and repaired
anything he sold. As his suburb grew, appliance stores emerged and cut heavily
into his sales. However, there was an increased call for quality repair
work.
When Mr. Riley considered his situation, he decided that he was in the repair
business. As a result of thinking about what business he was really in,
he profitably built up his repair business and has a contract to take care
of the servicing and repair business for one of the appliance stores.
Decide what business you are in and write your answer in the following spaces.
To help you decide, think of the answers to questions such as:
- What inventory of parts
and materials must you keep on hand?
- What services do you offer?
- What services do people
ask for that you do not offer?
- What is it you are trying
to do better, more of, or differently from your competitors?
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Marketing
When you have
decided what business you're in, you have made you first marketing decision.
Now you are ready for other important considerations.
Successful marketing starts with the owner-manager. You have to know your
service and the needs of your customers.
The narrative and work blocks that follow are designed to help you work
out a marketing plan for your firm. The blocks are divided into three sections:
Section One - Determining the Sales Potential
Section Two - Attracting Customers
Section Three - Selling to Customers
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Section
One - Determining the Sales Potential
In the service
business, your sales potential will depend on the area you serve. That is,
how many customers in this area will need your services? Will your customers
be industrial, commercial, consumer, or all of these?
When picking a site to locate your business, consider the nature of your
service. If you pick up and deliver, you will want a site where the travel
time will be low and you may later install a radio dispatch system. Or,
if the customer must come to your place of business, the site must be conveniently
located and easy to find.
You must pick the site that offers the best possibilities of being profitable.
The following questions will help you think through this problem.
In selecting an area to serve, consider the following:
- population and its growth
potential
- income, age, occupation
of population
- number of competitive services
in and around your proposed location
- local ordinances and zoning
regulations
- type of trading area (commercial,
industrial, residential, seasonal)
For additional help in choosing an area, you might try the local chamber
of commerce and the manufacturer and distributor of any equipment and supplies
you will be using.
You will want to consider the next list of questions in picking the specific
site for your business.
- Will the customer come to
your place of business?
- How much space do you need?
- Will you want to expand
later on?
- Do you need any special
features required in lighting, heating, ventilation?
- Is parking available?
- Is public transportation
available?
- How much rent must you pay
each month?
- Estimate the gross annual
sales you expect in this location.
When you think you have finally solved the site location question, ask your
banker to recommend people who know most about locations in your line of
business. Contact these people and listen to their advice and opinions,
weigh what they say, then decide.
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Attracting
Customers
When you have
a location in mind, you should work through another aspect of marketing.
How will you attract customers to your store? How will you pull business
away from your competition?
It is working with this aspect of marketing that many small retailers find
competitive advantages. The ideas that they develop are as good as and often
better than those that large companies develop. The work blocks that follow
are designed to help you think about image, pricing, customer service policies,
and advertising.
Image
A store has an image whether or not the owner is aware of it. For example,
throw some merchandise onto shelves and onto display tables in a dirty,
dimly lit store and you've got an image. Shoppers think of it as a dirty,
junky store and avoid coming into it. Your image should be concrete enough
to promote in your advertising and other promotional activities. For example,
"home cooked" food might be the image of a small restaurant.
Write out on a worksheet the image that you want shoppers and customers
to have of your store.
Pricing
Value received is the key to pricing. The only way a store can have low
prices is to sell low-priced merchandise. Thus, what you do about the prices
you charge depends on the lines of merchandise you buy and sell. It depends
also on what your competition charges for these lines of merchandise. Your
answers to the following questions should help you to decide what to do
about pricing.
- In what price ranges are
your line of merchandise sold -- high, medium, or low?
- Will you sell for cash only?
- What services will you offer
to justify your prices if they are higher than your competitor's prices?
- If you offer credit, will
your price have to be higher than if all sales are for cash? The credit
costs have to come from somewhere. Plan for them.
- If you use credit card systems,
what will it cost you? Will you have to add to your prices to absorb
this cost?
Customer Service Policies
The service you provide your customers may be free to them, but you pay
for it. For example, if you provide free parking, you pay for your own parking
lot or pick up your part of the cost of a lot you share with other retailers.
Make a list of the services that your competitors offer and estimate the
cost of each service. How many of these services will you have to provide
just to be competitive? Are there other services that would attract customers
but that competitors are not offering? If so, what are your estimates of
the cost of such services? Now list all the services you plan to offer and
the estimated costs. Total this expense and figure out how you can include
those added costs in your prices without pricing your merchandise out of
the market.
Advertising
Advertising was saved until the last because you have to have something
to say before advertising can be effective. When you have an image, price
range, and customer services, you are ready to tell prospective customers
why they should shop in your store.
When the money you can spend for advertising is limited, it is vital that
your advertising be on target. Before you think about how much money you
can afford for advertising, take time to determine what jobs you want to
do for your store. List the strong points of your store. List what makes
your store different from your competitors. List the facts about your store
and its merchandise that your advertising should tell shoppers and prospective
customers.
When you have these facts listed and in hand, you are ready to think about
the form your advertising should take and its cost. Ask the local media
(newspapers, radio, and television, and printers of direct mail pieces)
for information about the services and results they offer for your money.
How you spend advertising money is your decision, but don't fall into the
trap that snares many advertisers who have little or no experience with
advertising copy and media selection. Advertising is a profession. Don't
spend a lot of money on advertising without getting professional advice
on what kind and how much advertising your store needs.
When you have a figure on what your advertising for the next twelve months
will cost, check it against what similar stores spend. Advertising expense
is one of the operating ratios (expenses as a percentage of sales) that
trade associations and other organizations gather. If your estimated cost
for advertising is substantially higher than this average for your line
of merchandise, take a second look. No single expense item should be allowed
to get way out of line if you want to make a profit. Your task in determining
how much to spend for advertising comes down to the question, "How
much can I afford to spend and still do the job that needs to be done?"
In-store Sales Promotion
To complete your work on marketing, you need to think about what you want
to happen after prospects get inside your store. Your goal is to move stock
off your shelves and displays at a profit and to satisfy your customers.
You want repeat customers and money in your cash register.
At this point, if you have decided to sell for cash only, take a second
look at your decision. Don't overlook the fact that Americans like to buy
on credit. Often a credit card, or other system of credit and collections,
is needed to attract and hold customers. Customers will have more buying
confidence and be more comfortable in your store if they know they can afford
to buy. Credit makes this possible.
To encourage people to buy, self-service stores rely on layout, attractive
displays, signs and clearly marked prices on the items offered for sale.
Other stores combine these techniques with personal selling.
List the display counters, racks, special equipment (something peculiar
to your business like a frozen food display bin or a machine to measure
and cut cloth), and other fixtures. Figure the cost of all fixtures and
equipment by listing them on a worksheet as follows:
Type of Equipment Number x Unit Cost = Cost
Draw several layouts of your store and attach the layout that suits you
to the cost worksheet. Determine how many signs you may need for a twelve
month operation and estimate that cost also.
If your store is a combination of self-service and personal selling, how
many sales persons and cashiers will you need? Estimate, I will need __________
sales persons at $__________ each week (include payroll taxes and insurance
in this salaries cost). In a year, salaries will cost $__________.
Personal attention to customers is one strong point that a small store can
use as a competitive tool. You want to emphasize in training employees that
everyone has to pitch in and get the job done. Customers are not interested
in job descriptions, but they are interested in being served promptly and
courteously. Nothing is more frustrating to a customer than being ignored
by an employee. Decide what training you will give your sales people in
the techniques of how to greet customers, show merchandise, suggest other
items, and handle customer needs and complaints.
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Buying
When buying merchandise
for resale, you need to answer questions such as:
- Who sells the line to retailers?
Is it sold by the manufacturer directly or through wholesalers and distributors?
- What delivery service can
you get and must you pay shipping charges?
- What are the terms of buying?
- Can you get credit?
- How quickly can the vendor
deliver fill-in orders?
You should establish a source of supply on acceptable terms for each line
of merchandise and estimate a plan for purchasing as follows:
Act of 1970. You may obtain a copy of Standards for General Industry
from the Superintendent of Documents, U.S. Government Printing Office, Washington,
D.C. 20402, or a field office of the Occupational Safety and Health Administration.
Labor Skills. List the labor skills needed to run the equipment:
|
Skill Classification
|
Number of
Persons Needed
|
Pay Rate
|
Availability
|
|
|
|
|
|
List the indirect labor (for example, material handlers, stockmen, janitors,
and so on) that is needed to keep the plant operating:
|
Skill Classification
|
Number of
Persons Needed
|
Pay Rate
|
Availability
|
|
|
|
|
|
If persons with these skills are not already on your payroll, where will
you get them?
______________________________________________________________________________
Space. How much space will you need to make the product? Include
restrooms, storage for raw material and for finished products, and employee
parking facilities if appropriate. Are there any local ordinances you must
comply with?
______________________________________________________________________________
______________________________________________________________________________
Do you own this space? Yes __________ No __________
Will you buy this space? Yes __________ No __________
Will you lease this space? Yes __________ No __________
How much will it cost you? ________________________________________________
Overhead. List the overhead items which will be needed in addition
to indirect labor and include their cost. Examples are: tools, supplies,
utilities, office help, telephone, payroll taxes, holidays, vacations, and
salaries for your key people (sales manager, plant manager, and foreman).
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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How Much Money is Needed?
Money is a tool
you can use to make your plan work. Money is also a measuring device. You
will measure your plan in terms of dollars; and outsiders, such as bankers
and other lenders, will do the same.
When you determine how much money is needed to start (or expand) your business,
you can decide whether or not to move ahead. If the cost is greater than
the profits which the business can make, there are two things to consider.
Many businesses do not show a profit until the second or third year of operation.
If this looks like the case with your business, you will need the plans
and financial reserves to carry you through this period. On the other hand,
maybe you would be better off putting your money into stocks, bonds, or
other reliable investments rather than taking on the time consuming job
of managing a small business.
Like most businesses, your new business or expansion will require a loan.
The burden of proof in borrowing money is upon the borrower. You have to
show the banker or other lender how the borrowed money will be spent. Even
more important, the lender needs to know how and when you will repay the
loan.
To determine whether or not your plan is economically feasible, you need
to pull together three sets of figures:
- Expected sales and expense
figures for 12 months.
- Cash flow figures for 12
months.
- Current balance sheet figures.
Then visit your banker. Remember,
your banker or lender is your friend, not your enemy. So, meet regularly.
Share all the information and data you possess. If the lender is ready to
help you, he (or she) needs to know not only your strengths but also your
weaknesses.
Expected Sales and Expenses Figures. To determine whether or not
your business can make its way in the market place, you should estimate
your sales and expenses for 12 months.
Cash Flow Figures. Estimates of future sales will not pay an owner-manager's
bills. Cash must flow into the business at the proper times if bills are
to be paid and a profit realized at the end of the year. To determine whether
your projected sales and expenses figures are realistic, you should prepare
a cash flow forecast for the 12 months covered by your estimates of sales
and expenses. A cash forecast is a management tool that can eliminate much
of the anxiety that can plague you if your sales go through lean mnths.
Is additional money needed? Suppose at this point that your business needs
more money than can be generated by present sales. What do you do? If your
business has great potential or is in good financial condition, as shown
by its balance sheet, you will borrow money (from a bank most likely) to
keep the business operating during start-up and slow sales periods The loan
can be repaid during the fat sales months when sales are greater than expenses.
Adequate working capital is needed for success and survival; but cash on
hand (or the lack of it) is not necessarily an indication that the business
is in bad financial shape. A lender will look at your balance sheet to see
the business's Net Worth of which cash and cash flow are only a part.
Even if you do not need to borrow money, you may want to show your plan
and balance sheet to your banker. It is never too early to build good relations
and credibility (trust) with your banker. Let your banker know that you
are a manager who knows where you want to go rather than someone who merely
hopes to succeed.
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Control and Feedback
To make your plan
work you need feedback. For example, the year-end profit and loss (income)
statement shows whether your business made a profit or took a loss for the
past twelve months.
Don't wait twelve months for the score. To keep your plan on target you
need readings at frequent intervals. An income statement compiled at the
end of each month or at the end of each quarter is one type of frequent
feedback. Also you must set up management controls that help you insure
that the right things are done each day and week. Organization is needed
because you as the owner-manager cannot do all the work. You must delegate
work, responsibility, and authority. The recordkeeping systems should
be set up before the store opens. After you're in business it is too late.
The control system that you set up should give you information about stock,
sales, receipts and disbursements. The simpler the accounting control system,
the better. Its purpose is to give you current useful information. You need
facts that expose trouble spots. Outside advisers, such as accountants,
can help.
Stock Control. The purpose of controlling stock is to provide maximum
service to your customers. Your aim should be to achieve a high turnover
rate on your inventory. The fewer dollars you tie up in stock, the better.
In a small store, stock control helps the owner-manager offer customers
a balanced assortment and enables you to determine what needs ordering on
the basis of (1) what is on hand, (2) what is on order, and (3) what has
been sold.
When setting up inventory controls, keep in mind that the cost of the stock
is not your only cost. There are inventory costs, such as the cost of purchasing,
the cost of keeping stock control records, and the cost of receiving and
storing stock.
Sales. In a small store, sales slips and cash register tapes
give the owner-manager feedback at the end of each day. To keep on top of
sales, you need answers to questions, such as: How many sales were made?
What was the dollar amount? What were the best selling products? At what
price? What credit terms were given to customers?
Receipts. Break out your receipts into receivables (money still owed
such a charge sale) and cash. You know how much credit you have given, how
much more you can give, and how much cash you have with which to operate.
.
Disbursements. Your management controls should also give you information
about the dollars your company pays out. In checking on your bills, you
do not want to be penny-wise and pound-foolish. You should pay bills on
time to take advantage of supplier discounts. Your review systems should
also give you the opportunity to make judgments on the use of funds. In
this manner, you can be on top of emergencies as well as routine situations.
Your system should also keep you aware that tax monies, such as payroll
income tax deductions, must be set aside and paid out at the proper time.
Break-even. Break-even analysis is a management control device that
approximates how much you must sell in order to cover your costs with NO
profit and NO loss. Profit comes after break-even.
Profit depends on sales volume, selling price, and costs. Break-even analysis
helps you to estimate what a change in one or more of these factors will
do to your profit. To figure a break-even point, fixed costs (like rent)
must be separated from variable costs (like the cost of good sold).
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Making
Your Plan Work
To make your plan
work you will need feedback. For example, the year end profit and loss (income)
statement shows whether your business made a profit or loss for the past
12 months.
But you can't wait 12 months for the score. To keep your plan on target
you need readings at frequent intervals. A profit and loss statement at
the end of each month or at the end of each quarter is one type of frequent
feedback. However, the P and L may be more of a loss than a profit statement
if you rely only on it. In addition, your cash flow projection must be continuously
updated and revised as necessary. You must set up management controls which
will help you to insure that the right things are being done from day to
day and from week to week.
The management control system which you set up should give you precise information
on: inventory, production, quality, sales, collection of accounts receivable,
and disbursements. The simpler the system, the better. Its purpose is to
give you and your key people current information in time to correct deviations
from approved policies, procedures, or practices. You are after facts with
emphasis on trouble spots.
Inventory Control. The purpose of controlling inventory is to provide
maximum service to your customers. Your aim should be to achieve a rapid
turnover on your inventory, the fewer dollars you tie up in raw materials
inventory and in finished goods inventory, the better. Or, saying it in
reverse, the faster you get back your investment in raw materials and finished
goods inventory, the faster you can reinvest your capital to meet additional
consumer needs.
In setting up inventory controls, keep in mind that the cost of the inventory
is not your only cost. There are inventory costs, such as the cost of purchasing,
the cost of keeping inventory records, and the cost of receiving and storing
raw materials.
Production. In preparing this business plan, you have estimated the
cost figures for your manufacturing operation. Use these figures as the
basis for standards against which you can measure your day-to-day operations
to make sure that the clock does not nibble away at profits. These standards
will help you to keep machine time, labor man-hours, process time, delay
time, and down time within your projected cost figures. Periodic production
reports will allow you to keep your finger on potential drains on your profits
and should also provide feedback on your overhead expense.
Quality Control. Poorly made products cause a company to lose customers.
In addition, when a product fails to perform satisfactorily, shipments are
held up, inventory is increased, and a severe financial strain can result.
Moreover, when quality is poor, it's a good bet that waste and spoilage
on the production line are greater than they should be. The details - checkpoints,
reports, and so on - of your quality control system will depend on your
type of production system. In working out these details, keep in mind that
their purpose is to answer one question: What needs to be done to see that
the work is done right the first time? Will you have to do extensive quality
control on raw materials? This is an added expense you must consider.
Sales. To keep on top of sales, you will need answers to questions,
such as: How many sales were made? What was the dollar amount? What products
were sold? At what price? What delivery dates were promised? What credit
terms were given to customers?
It is also important that you set up an effective collection system for
"accounts receivable," so that you don't tie up your capital in
aging accounts.
Disbursements. Your management controls should also give you information
about the dollars your company pays out. In checking on your bills, you
do not want to be penny-wise and pound-foolish. You need to know that major
items, such as paying bills on time to get the supplier's discount, are
being handled according to your policies. Your review system should also
give you the opportunity to make judgments on the use of funds. In this
manner, you can be on top of emergencies as well as routine situations.
Your system should also keep you aware that tax monies, such as payroll
income tax deductions, are set aside and paid out at the proper time.
Break Even. Break-even analysis is a management control device because
the break-even point shows about how much you must sell under given conditions
in order to just cover your costs with NO profit and NO loss.
In preparing to
start or expand a manufacturing business you should determine at what approximate
level of sales a new product will pay for itself and begin to bring in a
profit.
Profit depends on
sales volume, selling price, and costs. So, to figure your break-even point,
first separate your fixed costs, such as rent or depreciation allowance,
from your variable costs per unit, such as direct labor and materials.
Return to Contents
Last updated: 8/20/01
- jfb
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