When it comes to running a business, you’ll find that many business consultants / teacher recommend putting together a business plan. There’s a very good reason for this – it enforces a structured methodology for reviewing threats & weaknesses in the business model. Here’s a few major things that a business plan allows you to do:
1. Get a Loan and/or Grants
Any institution that will provide you a loan will want you to have a business plan. There’s no guarantee they’ll give you one if you have one, but you won’t even be able to apply without having one. A few of these institutions might even require you to go through their particular program when creating the business plan before they’ll loan to you.
2. Best and Worst Case Scenarios
When I plan for a year, and specifically when I budget; I normally do three scenarios. A best case, worst case and ‘realistic’ case budget on my side. As an example, I estimated a 50%, 10% and 25% growth rate this year for each of those scenarios, with concurrent changes in the variable costs of the business. This gave me an idea if I could eat Ramen or Sushi through the year, depending on where we actually landed.
Personally, I hope for the best scenario but plan my expenses (i.e. my salary) around the worst option.
3. Forecasting capitilisation & cash-flow
Assuming you do a three year business plan, you can work you how much money you will need to keep the business ticking over even in the worst case scenario. This is rather important since a large number of businesses fail in year one to two because of lack of capitilisation. Sales are never as high as you expect and expenses always higher.
There’s another reason planning is important – cash flow for this business is very seasonal. November & December of 2009 was 33% of our entire total revenue for the year. Since the vast majority of our expenses are fixed (rent, advertising, legal & accounting, salary), this means that a large number of our expenses are going to be accrued through the year while the profits to pay for it is towards the end of the year.
4. Marketing, Logistics & Personnel Plans
So here you are, with a nicely forecast financial spreadsheet with an idea of where the business is supposed to go. It’s time to derive the rest of your business plans – everything from marketing to logistics to personnel will be dictated not only by your budget but your goals.
Let’s say you notice that you get a huge bump in sales November / December but not much else going on throughout the year. Maybe then it’s time to look at methods of increasing your sales (i.e marketing). Perhaps you could have a sale in March / April – a ‘Spring is here’ event. Perhaps during the summer months, you could target a variety of conventions; drumming up additional sales that way. Perhaps there are a few league tournaments you could run in Fall that would help.
Personnel needs from flow this to. More staffing during XMas obviously, but perhaps you need to get specific ‘convention only’ staff? Or maybe because of the longer hours in Summer, you could open the store later – meaning more staff too.
In any case, it’s the plan that should be letting you forecast these potential issues before they arrive.
Don’t get caught up in planning forever. There comes a point when it’s time to call it a day and start putting the plan into action. When? Sometimes it’s hard to tell – so that’s why you need friends. See next Best Practice.