By Joe Selzler
Up to this point we have been talking about developing an idea for a new business. We have even gone as far as testing out our idea with a week long trial run of a small donut production. (See our August/December issue for details.) Now, however, we come to the serious part of our course in "Starting a New Business": Applying the Business Plan. Just as an army commander would never go into battle without a plan of attack, we should never go into business without a plan. A good business plan not only helps us to start up a business smoothly and confidently, it also helps to convince those from whom we need financial support that we know what we are doing. If our bankers are confident that we have an intelligent then they will have a reasonable sense that our business will succeed and their investment will be safe.
The Seven Steps to Business Start-up
The first question you may have is of course, "What is a business plan?" The answer is, "A step by step course of action to take a business from planning stage to opening day." This is a good definition but I would say that it needs to go a bit further, to include the first three years of business. That is to say, a business plan for starting up a new company must not only get the company to the point of opening the doors, but also see it through its first three years. In reality, planning in business never stops. For our present study, however, we are only going to talk about the starting up stage, including the first three years.
What is included in the plan are your statement of purpose for the business, the market research you have done, the location for your business, the product range you will stock, the objectives for your first three years, your financial strategy, your launch strategy, your suppliers, your printing, packaging and advertising strategy, and any contingency plans you might need. By contingency plans I mean steps to take should your business not develop the way you have planned. Having alternate plans before things go wrong is a lot more likely to see a fledgling business through rough times than plans that are only developed when things do go wrong. Of course, we can not plan for every eventuality because we cannot foresee everything that will happen. We do, however, have the ability to see several possibilities and can therefore make plans accordingly.
When you are developing a business plan be as thorough as you can. It may take you some time, even years. I recently read about a couple who wanted to start a furniture making company. He was in the Royal Navy and decided that he did not want to make a career of it. So several years before he was to leave he began collecting tools and learning the necessary skills to make furniture. All this he did during his off times and was self taught. During those years his wife attended some evening classes in running a small business. They did research to find out what type of furniture the market needed and in what location clientele existed to pay the prices his work required. They now have a successful business that was due in large part to the preparation and planning they did while in the Navy.
This is probably where most new businesses get into trouble. The aspiring entrepreneur does not fully understand good business finance and therefore convinces himself that his idea is going to make a huge profit when in reality it could be a huge money loser. The problem comes from the misconception of profit. It is more than just the difference between the selling price and the cost of the raw materials. Suppose someone wanted to sell washing machines in their neighbourhood. They determine that they could make a huge profit if they bought the machines for £200 and sold them for £400 (Profit £200; Eureka!) Unfortunately, calculating profit is not that simple. There are other "operating costs" that need to come out of this profit. A delivery vehicle will need to be purchased, showroom space will have to be rented and an assistant hired to help with the delivery. Let's see what a possible year's costs would be for our washing machine sales person.
|One Years Costs For Washmachine Business|
|Total yearly costs:||£24,180|
*Note: A little calculation (£24,180 divided by £200) here will show that sales would need to be 120 machines in a year to break even. This business must sell 121 machines to make a £200 profit for that year. Now the importance of a business plan begins to come into focus.
The goal of a business plan, as that of a battle plan, is to win. To win in business you need to make a profit. I do not mean that we need to get rich. What I do mean is that we run a business that is vibrant and sustainable. It can mean a growing business, but it does not always have to be expanding to be successful. Without a plan for the above example the owner would be in a hit and miss situation; they might get lucky and sell the 121 machines, or they might not.
A good plan would consider how many households were available in the area to sell machines to, how many might be needing a new machine in the near future and how to advertise the new business to the households. Simply counting the houses solves the first one, advertising in local papers or passing out brochures answers the last. As for finding out how many houses might need a new machine the best way would probably be a survey. This could mean standing on the street corner and asking local people a series of questions that would give a fair idea of how many machines might be bought in a three year period, for example.
Undoubtedly, one of the most important things you can do in developing a strategy, is to make up a cash flow for three years. A cash flow is basically a good estimate of what you can expect for sales in your business, what those sales will cost in raw material, and what additional costs you can expect, including utilities, rent and wages. The calculation of these things will result in a profit figure for the first three years. This will give you an idea of whether or not you have a chance of being successful with your idea. It will also help you to determine what level of financial assistance you will need and at what points in the three years you will need it most. This is an important step and goes beyond the scope of this article, but there are books and other resources that provide help with creating a cash flow.
Finally, a plan is only good if we follow it. Many hours are required to research and develop a good plan for business, but it will be time wasted if we do not stick to it. It is very important not to be too rigid with our plan; things will happen that the plan never foresaw. These things, however, should only require minor adjustments to our plan, not a major deviation that throws it all into chaos. We have been endowed by our Creator with good minds that can foresee in a limited degree, which can analyse and make calculations. He does expect us to use those minds to aid the success of our businesses. It is equally important for use to humbly realise that He has an ultimate plan of which we are a small part and to trust that He will take care of every situation.
There is also an excellent book by Colin Barrow entitled "Routes to Success". It is a case study of 40 small businesses. It is currently out of print, but a library or used book dealer should be able to come up with a copy. Happy planning!
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