In This Chapter

While a good business plan does not ensure your business will be successful, it does show that you have thought everything through carefully.

This chapter focuses on best practices for developing a business plan that helps you make the right decisions about your business and improves your chances of getting the investment support you need. You’ll also find out about best practices that relate to funding for your business, developing your initial budget for the business, and finding the expert advice you need.

A business plan is a formal document that includes information on the goals and objectives of your business and explains why you believe you can reach those goals. It also includes your detailed plan for meeting those goals by means of specific research, production, marketing, and sales initiatives.

Your business plan’s biggest value lies in the fact that it forces you to think strategically about your business ideas and their viability. This is why we believe that even if you are not looking for investment in your business, you should develop a business plan anyway!

Your business plan should include research that shows why you have chosen the right industry to be in. It should also show how you will create value for customers and deal with competitive challenges.

Entrepreneurs also frequently use business plans when they are ready to take their companies to the next level. For example, let’s assume that you own a deli and have been in business for a few years. You are considering expanding your deli into a full restaurant that’s open for lunch and dinner with increased seating capacity. A business plan will help you to effectively develop the road map for achieving your goals. Think of the plan as a decision-making tool.

Companies also use business plans when they are interested in expanding their product lines or increasing their service offerings. In addition, you can use your business plan to track your progress against the goals and objectives you set when you started the business.

Use the plan to think about the good and the bad aspects of doing business. Don’t just focus on all the great things you think will happen!

You should plan on spending at least a few weeks developing and refining your business plan.

There are many possible audiences for your business plan, depending on your objectives. If you are looking to expand your business and want to get investment from outside resources, you should target your business plan toward banks, investment capital firms, and others who might invest in your business growth.

You might also share portions of your business plan with employees so they understand your vision for the business. You could use the plan to set goals and objectives for specific departments to achieve in a set time period or in meetings with potential purchasers of your business or additional business partners.

Your business plan will include the following basic information:

You should also include information on the vision you have for your business, your mission statement, the industry you will be part of, the strengths you personally bring to the business (your background and experience), how you will legally structure your business, and any licenses or permits required for your business.

You will also want to ensure that your business plan addresses needs related to technology, location, e-commerce, website development, insurance, and resources.

Your budget and financial plans need to clearly capture the costs of running your business, keeping in mind that costs go far beyond money. Think about time and internal resources, too. For example, what will be required to secure a single customer for your product or service? Suppose you will be selling consulting services to help businesses market their products. You know you will need a business development resource—someone to seek out customers for your business. You estimate it will cost you between $3,000 and $5,000 to secure a customer and will require at least a three- to six-month time frame to close the deal. Once you have the customer, you will need an account manager to maintain the customer relationship. These are all part of your cost of doing business, along with salaries and benefits, marketing, leases, equipment purchases, and so on.

The operational section in your business plan should discuss how your products are produced, your customer service initiatives, how you will manage inventory, and costs associated with production of the product.

The competition for business financing is tough. Your plan might be sitting on an investor’s desk along with hundreds of other plans. What are you going to do to stand out from the crowd? What will make your business plan more attractive to a potential investor?

Certainly, ensuring that your business plan is professionally developed, well written, and free of spelling and grammar errors will help. And ensuring your plan is complete and includes details about your business—risks/rewards, short- and long-term goals—is a must. What else can you do to stand out from the crowd? Here are some suggestions that have worked for other businesses seeking financing:

Include a video. A 5- to 10-minute video of you presenting your plan enables the viewer to make a connection with you. You become more than just a piece of paper with data—you’re a real person explaining your goals and why you would like investment in your business. You can even upload your video to YouTube! However, you should ensure that it reaches only a small group or an individual (such as a bank officer) and is accessible only via a special link; you don’t want it to show up on public searches. This can be a very powerful technique for communicating with lenders and investors.

Have stellar references and/or recommendations. If you have already offered your services to others informally, ask for letters of recommendation to include in the business plan.

Include a product sample. If you have a prototype of the product you want to manufacture, allow the investors an opportunity to view it. This will show that you have made some personal investment in developing the product.

To stand out from the crowd, you must ensure that your plan shows that you have done your homework—that you know what is involved in branching out on your own to offer your products and services and that you are prepared for the risks and challenges ahead of you. Your plan shouldn’t be overly optimistic; make sure it is realistic.

You’ll also want to show that you know how to execute your business idea. It is all well and good to have a great idea, but if you are unable to execute it—and have no proof that you are able to do so—what’s the use of showing anyone your plan? If you have a product idea, test the idea out with potential customers to determine their level of interest. If you have an idea for a new service, interview prospective buyers and find out exactly how willing they are to purchase and use it. Include concise summaries of the results of your tests and interviews in your business plan. There’s no reason for anyone to believe your business can succeed unless you have tested the market-worthiness of your idea!

Remember that your plan is not static; it will change. New competitors in the marketplace, economic changes, new products or services, and significant growth are all situations that will require you to revisit your business plan and update it so it continues to be relevant.

As a best practice, review your business plan at least annually to ensure it is still viable and accurately describes your business and its objectives. However, if the industry you are in is rapidly changing, you may want to review your plan quarterly.

Finding money to start a business is not an easy task. You must be able to prove that you have looked closely at all the financial contingencies and created plans for dealing with them. You should also be prepared for your personal credit to be scrutinized closely. Be sure you have accurate, updated, and verifiable information for the following items:

We discuss each of these documents in detail later in Chapter 12.

You will certainly need to go beyond a year in your figures—you should plan for a three- to five-year range. If you are launching a start-up, much of this informatio will be guesswork, but those projections should be realistic. Any assumptions you make should be documented so that potential investors can understand your think ing. As a start-up, use your past experience and knowledge since you don’t have re numbers to show. Being realistic about your business finances demonstrates that y are prepared for the many challenges that lie ahead.

For any investment request you make, be sure that you are able to clearly describe what you want the money for, who else is involved in the initiative (your partners their backgrounds), your current finances, how much money you are seeking, and how you will manage that investment.

If you plan to invest some of your own money in your start-up business, make this clear in your business plan. Investors like to see where all of the money is coming from for the business, and investing some of your own cash makes it a more attractive investment for them.

When going for funding, expect to have to provide proof that you are able to pay your debts (if you have a poor credit history, you’ll find it difficult to secure funding). You may also have to put up collateral, in the form of your intellectual property (IP), your personal home, or other significant assets, for your business loan. For instance, if your company develops programs for critical skills training such as negotiating, communicating, and managing others, that training content is your IP. You can use that IP to help you secure a loan for your business.

There are numerous options for financing your business, including self-financing, personal loans from banks and credit unions, investments from venture capital firms, small business loans, microloans, and loans from friends and family. The following sections look at each of these more closely.

What is your ability to finance some or all of your business opportunity? For some businesses, you may need very little financing to get started—just some supplies and the ability to pay yourself. For instance, let’s say you want to open a consulting business specializing in helping companies and individuals manage their computers, including technical support, purchasing of computers, and setup and maintenance of systems. You do not need office space; you’ll be at client sites or working from your home. You’ll be working by yourself, at least initially. You already have a few customers lined up, so you have a head start. You’ll need financing to purchase equipment, to pay your bills, and to do a bit of advertising of your services. You’ll need about $100,000 to get started. You have $50,000 in savings and decide to finance the rest through a home equity loan.

Other options for self-financing include borrowing against your 401(k) (if you are currently employed and will keep your job as you start off in your own business), an IRA, or life insurance policies with a cash value. There are risks with all of these options, and you’ll want to be clear about those risks.

The recent economic meltdown has made borrowing money from banks much more difficult than ever before, putting lots of pressure on small businesses trying to start off or stay afloat. You may have better luck with credit unions, especially if you are a longtime customer.

Banks and credit unions both will want to know what you need the loan for and will certainly be interested in your ability to pay back that loan. You’ll need to present a business plan when applying for either a bank or credit union loan.

Many banks offer loans backed by the U.S. Small Business Administration (SBA) loan programs. SBA-backed loans provide a guarantee to the bank loaning the money, meaning that the SBA will pay a percentage of the loan to the bank if you default on the loan. We discuss the SBA program and other small business loans later in this chapter.

Before applying for a bank loan, make sure all your finances are in order. You’ll need impeccable record-keeping! This is also true of credit union loans. The more prepared you are, the more likely you will be successful in securing the loan. Remember, appearing unprepared is a sign of risk for most banks.

Your choice of venture capital (VC) firm to approach to fund your start-up (or the expansion of your business) will depend on your business and what stage of development you are in. VC firms provide financial funding to start-up firms with high potential for future success. The partners of the VC firm make their investment back (with interest) through owning equity in the business in which they are investing those monies. Many VC firms also provide oversight of business operations to ensure the appropriate use of the investment monies.

VC firms fund at various stages of a business. They provide seed money to businesses at the very early stages of start-up. Seed money is frequently provided to enable development of a prototype of a product or to introduce and test out a new service. Investors who provide seed money are sometimes called angel investors. Angel investors may agree to invest in a new business where a regular VC firm may not.

Some VC firms provide financing to help new businesses market their products or services, develop products, and hire the right resources for the early stages of the business. This is frequently called start-up funding.

The next two rounds of funding by a VC firm are called first-round and second-round funding. First-round funding is for a business that is ready to begin to sell their product or service and continue development on their product. Second-round funding helps start-up businesses to market and sell their products by hiring the right resources to do so. At the second-round funding, many start-ups are still not making any profit and the VC funds are paying the bills for the business while they are trying to become profitable.

All of this funding takes place in the early stages of a new business before they are making any profits. Once a start-up business is making a profit, they may partner with a VC firm to get funding to expand their business with new products and services.

As a best practice, consider the following questions prior to approaching a VC firm to get funding for your business:

When you apply for VC funding, expect to be grilled on the thinking behind your business plan, your ideas, and the viability of both. The VC investors want to know what is in it for them—they want a return on their money in a reasonable period of time. Expect to hear some “no’s,” but don’t give up—you have many options!

You may also want to consider the website Prosper (www.prosper.com). This site connects individuals who need to borrow money with those willing to invest. Similarly, Lending Club (www.lendingclub.com) is a peer lending service that partners individuals looking for investment money with those interested in investing in them. For small businesses in an economy where business loans are not easy to get, Prosper and Lending Club are two great options to help you finance the expansion of your business!

The U.S. SBA provides a variety of loans, often through banks and other lending institutions, for small businesses. Frequently the SBA is willing to loan smaller amounts than a bank or VC firm.

One option for an SBA-backed loan is the 7(a) Loan Program. This is the SBA’s primary loan program and provides banks and other lending institutions a guarantee that the SBA will cover a portion of the loan should the borrower default. This is also a flexible loan program, as it enables borrowing for a variety of purposes for small businesses. SBA loans are applied for through a bank or lending institution directly, not through the SBA. These types of loans have the following requirements:

There are a few different types of 7(a) loans, including loans for international trade or special purposes. The SBA website provides all the information you need on 7(a) loans, including requirements, how to apply, terms, and minimum and maximum loan amounts.

The SBA also provides a CDC/504 Loan Program. This is a longer-term financing option for small businesses to provide monies for brick-and-mortar operations. It may be used to purchase land to build facilities or for improvements to existing facilities. It may also be used to purchase machinery and other equipment for manufacturing. The CDC/504 loans are frequently used to expand and grow existing small businesses.

Microloans are short-term loans to small businesses that don’t need a large investment—no more than $35,000—but do need some support to get started in their endeavor. These loans can be used for working capital or to purchase supplies, inventory, and equipment for a business.

Let’s look at an example. You want to open a business making pottery to sell to other businesses. You need help in purchasing the materials and equipment—such as an oven and the clay—to make the pottery. You only need $20,000, and you have collateral to cover the loan. A microloan may be perfect for you.

The SBA is the largest source for small business financing and should not be overlooked as you think about funding opportunities. SBA loans come through banks; the SBA does not loan directly to business owners. However, the loans are backed by the SBA. This section provides only a very brief overview of your SBA loan options. Visit SBA’s website for a variety of resources to help small businesses.

Don’t discount friends and family for small loans. You may be able to borrow money from them at a very low interest rate (or, if you are lucky, no interest!). Be just as buttoned-up here as if you were applying for a bank loan. Walk through your business plan with them!

According to Henry Gregor, author of Business Genesis: A Strategic Approach to Starting a Business (www.strategicvisions.org), many smaller companies turn to bootstrapping to get themselves started. Bootstrap financing is a way of acquiring funds without raising equity or getting a loan from a bank. It may include borrowing from friends or family, using credit cards, selling personal assets, or using the business owner’s personal savings.

The initial budget for your business needs to be focused on what you plan to spend to get your business started and any revenue you expect to receive. Your expenses will probably exceed any revenue, especially in the first year. In fact, you may find for the first year that you have no revenue at all! Given that many start-ups are unprofitable for an extended period, this is to be expected. Your goal in budgeting for your business is to keep your expenses as lean as possible to get through those tricky first years.

A budget helps you to understand the expenses involved in running your business and how those expenses compare to the revenue you are bringing in. You can’t fully understand your profitability without understanding the expenses associated with the revenue.

For example, let’s assume that you are considering selling a product for $20. When you look at the costs of creating, marketing, and selling that product, you realize that it costs you $19. That leaves you a profit of only $1! And what happens if you want to, or have to, provide a discount? You have no wiggle room at all. You need to consider how to either reduce the cost of developing and marketing the product or to increase the price of the product to increase your profit. A budget will help you to look at all your costs to see where you can make some changes to increase profitability.

Your initial budget should cover at least the first two years of your business operations and should include information about the following start-up expenses:

Break down all of your expenses into fixed expenses (such as rent, utilities, and lease payments) and variable expenses (such as production costs, income taxes, bank fees, and materials).

As a best practice, if you are developing a product, ensure your variable costs are shown per unit. That enables better analysis of your cost per development of a single unit.

Your budget should include the estimated monthly sales of your product or service. For a start-up business, this can be a bit tricky—you don’t yet know what your sales will be. Of course, you have done your homework and likely have an idea of your sales. Include in your initial budget:

Let’s look at an example of best-, worst-, and probable-case scenarios. Your business will be selling coffee from around the world. Based on your market research (and a promise from friends and family to purchase your product!) you predict the following sales for the first year you are in business:

In the preceding table, you see three estimates for sales of coffee product for the first year: predicted sales in the best-case, worst-case, and probable-case scenarios.

You should then break your estimated sales down further throughout the 12 months of the year based on factors that might affect your business, such as seasonality or time to market your product.

Looking at the probable-case scenario, your 12-month sales would look like this:

Of course, making sales doesn’t mean you are making a profit. You would then take your sales, subtract your costs, and determine your profit for the month and for the year.

You must also address the painful fact that you will probably not collect all of your money. Sad but true: not every customer will pay his or her bill. Certainly some businesses have fewer worries about collections than others. For instance, you may request only cash or credit or debit card payment for coffee purchases. This may mean that you collect 100 percent of sales (or perhaps 99 percent if you aren’t diligent about checking credit cards!). However, you may also accept checks, which may bounce and reduce your collections.

If you assume you will collect 90 percent of all sales, and you predict that you will make $5,000 in sales for the month, you can assume you will only collect $4,500.

As you’ll begin to see when you develop your initial budget, you may not be able to sustain all the expenses during the critical first year or so of your business. The question is: what can you do without?

Suppose you have built your initial budget and found that your expenses are way over what you can afford, by about $20,000 a month. You have some great ideas but want to find a way to reduce expenses so that you feel more comfortable managing your finances while you try to secure a loan. You want to also ensure that any cuts you make in your budget do not affect the professionalism of your business. You decide that you can take the following steps to reduce your expenses:

Making these changes enables you to adjust your initial budget so that you feel more comfortable with the expenses you’ll have to cover while you are getting customers and bringing in sales.

Developing your initial budget before you actually start your business gives you a detailed account of what you will need to cover each month in expenses and how much you’ll be able to pull for a salary for yourself. The lower your expenses, the fewer worries you will have about meeting your commitments, and the better you can manage your business as it grows. What’s more, your business will look better when you apply for that business loan! However, remember that your budget is a living document and is not set in stone. If some fantastic opportunity comes up and it makes sense for you to take advantage of it, you should consider reworking your budget.

You may want to seek a professional review of your business plan to ensure it is complete and would be well received by any potential investors or bankers. However, there are some areas you should be able to handle yourself given all the resources available on the Internet and in print. These include:

Remember that you are the expert in your business. If something you hear from someone else just doesn’t make sense given your business idea and plans, get a second opinion.

Your resources include accountants, attorneys, other small business owners in your industry and external to your industry, advisors from SCORE (you’ll learn more about SCORE later on in this book), your local Chamber of Commerce, and your local banker or credit union representative. Many consultants provide advice to individuals starting businesses. If you seek out the advice of such a consultant, ensure that they have worked in your particular industry before; that way, they will better be able to support your efforts and be a sounding board as you run your ideas by them.

Seek advice from other business owners on what challenges they faced in starting their business and how they managed to secure business loans or investment monies. What documentation and information did they find was most useful in stating their case to secure monies for their business?

The more you know at the outset, the more likely you are of running a successful business with growth potential.

Some areas of your business are better left to the experts. For example, if you are unsure about what taxes you need to pay (and most of us are), you will want to hire an accountant to be sure your books are set up properly and you make the required tax payments.

If your business is strongly affected by government regulations, licensing, or permit requirements, seek professional advice so that you dot all the i’s and cross all the t’s. Making mistakes here could have a negative impact on your business and be quite costly.

You may also choose to hire someone to assist you in securing investment monies for your business. Working with investment capital firms is not an easy task, and an expert in this area can provide invaluable guidance.

Additionally, anticipate hiring an expert in contract law to review agreements between you and vendors or suppliers. You want to be sure your interests are protected, and a contract attorney can definitely help you on this front.