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10th edition How to Write a Business Plan by Mike McKeever

TENTH EDITION JANUARY 2011 Editor RICHARD STIM Cover Design SUSAN PUTNEY Production MARGARET LIVINGSTON Proofreading CATHY CAPUTO CD-ROM Preparation ELLEN BITTER Index MEDEA MINNICH Printing DELTA PRINTING SOLUTIONS, INC. McKeever, Mike P. How to write a business plan / by Mike McKeever. -- 10th ed. p. cm. Includes index. Summary: “Contains the detailed forms and step-by-step instructions needed to prepare a well-thought-out, well- organized business plan. The 10th edition has been completely updated with the laws, banking regulations, and resources”--Provided by publisher. ISBN-13: 978-1-4133-1280-5 (pbk.) ISBN-10: 1-4133-1280-2 (pbk.) ISBN-13: 978-1-4133-1297-3 (e-book) ISBN-10: 1-4133-1297-7 (e-book) 1. Business planning. 2. New business enterprises--Planning. 3. New business enterprises--Finance. 4. Small business--Planning. 5. Small business--Finance. I. Title. HD30.28.M3839 2010 658.15’224--dc22 2010021162 Copyright © 1984, 1986, 1988, 1992, 1999, 2002, 2004, 2007, 2008, and 2010 by Mike McKeever. All rights reserved. The NOLO trademark is registered in the U.S. Patent and Trademark Office. Printed in the U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, California 94710. Please note We believe accurate, plain-English legal information should help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state.

Dedication This book is dedicated to the memory of my late grandmother, Elizabeth Eudora Woodall Darby, whose influence I acknowledged only recently. Acknowledgments After more than a decade of working with many people, I am amazed at the uniform spirit of goodwill and cooperation. My first editor, Ralph “Jake” Warner, showed patience working with a first-time author. My second editor, Lisa Goldoftas, ­challenged the grammar while gracefully deferring to my knowledge about the subject. Also at Nolo: Steve Elias designed many charts; Adam Stanhope educated me about computers; Mark Stuhr tuned sections on computer- related material; Stephanie Harolde worked her word processing wonders on the manuscript; Terri Hearsh designed the book; Eddie Warner gave helpful suggestions on online information; and many more folks at Nolo improved the book greatly. A special thanks to a number of generous individuals, each of whom knows a great deal about starting and operating a small business. Peg Moran, Terri Hearsh, Roger Pritchard, Jason Wallach, Harry Keller, Dan Peters, Sharyn Simmons, Larry Healy, and finally, Hugh Codding and Leroy Knibb of Codding Investments. For these and all my readers, clients, and students who have shared their hopes, dreams, and problems with me over the years, thank you for your help. The best parts are yours—all the mistakes are mine. Many of your stories and suggestions appear here in disguised form. I hope all the readers will profit from your wisdom and generosity. Mike P. McKeever Santa Rosa, California

About the Author Mike P. McKeever’s education, work experience, business ownership, writing, and teaching careers give him a broad and unique perspective on business planning. He has a BA in Economics from Whittier College and a Master’s in Economics from the London (England) School of Economics, and has done postgraduate work in financial analysis at the USC Business School. Mike has taught classes at numerous community colleges in entrepreneurship and small business management. He has published articles on entrepreneurship for Dow Jones publications, the Sloan Publications Business Journal, and numerous newspapers and periodicals. Mike has successfully purchased, expanded, and sold a number of businesses, including a manufacturing company, tune-up shop, gas station, retail store, and commercial building. He has worked for a variety of companies ranging from small groceries to multimillion-dollar manufacturers. As an independent business broker, he ­assessed the strengths and weaknesses of hundreds of companies. As senior financial analyst for a Fortune 500 company, he wrote and analyzed nearly 500 business plans. Currently, Mike enjoys email correspondence with a few readers relating to business plan issues. He also acts as consulting controller and financial advisor to an online retail business. You can contact him at [email protected].

Downloading Forms and Other Materials The printed version of this book comes with a CD-ROM that contains legal forms and other material. You can download that material by going to www.nolo.com/back-of-book/sbs.html. You’ll get editable versions of the forms, which you can fill in or modify and then print.

Table of Contents Your Legal Companion................................................................................................................... 1 1 Benefits of Writing a Business Plan...................................................................................5 What Is a Business Plan?.................................................................................................................... 6 Why Write a Business Plan?............................................................................................................ 6 Issues Beyond the Plan...................................................................................................................... 8 2 Do You Really Want to Own a Business?..................................................................11 Introduction..........................................................................................................................................12 Self-Evaluation Exercises.................................................................................................................13 How to Use the Self-Evaluation Lists.......................................................................................17 Reality Check: Banker’s Analysis.................................................................................................17 3 Choosing the Right Business..................................................................................................21 Introduction..........................................................................................................................................22 Know Your Business..........................................................................................................................22 Be Sure You Like Your Business...................................................................................................24 Describe Your Business....................................................................................................................24 Taste, Trends, and Technology: How Will the Future Affect Your Business?.........30 Break-Even Analysis: Will Your Business Make Money?................................................34 What You Have Accomplished...................................................................................................47 4 Potential Sources of Money to Start or Expand Your Small Business...................................................................................................49 Introduction..........................................................................................................................................51 Ways to Raise Money.......................................................................................................................51

Common Money Sources to Start or Expand a Business.............................................59 Additional Money Sources for an Existing Business........................................................68 If No One Will Finance Your Business, Try Again..............................................................70 Secondary Sources of Financing for Start-Ups or Expansions...................................72 Conclusion.............................................................................................................................................75 5 Your Resume and Financial Statement......................................................................77 Introduction..........................................................................................................................................78 Draft Your Business Accomplishment Resume..................................................................78 Draft Your Personal Financial Statement..............................................................................85 6 Your Profit and Loss Forecast.............................................................................................101 Introduction....................................................................................................................................... 102 What Is a Profit and Loss Forecast?........................................................................................102 Determine Your Average Cost of Sales ...............................................................................103 Complete Your Profit and Loss Forecast............................................................................106 Review Your Profit and Loss Forecast...................................................................................119 7 Your Cash Flow Forecast and Capital Spending Plan..............................121 Introduction....................................................................................................................................... 122 Prepare Your Capital Spending Plan.....................................................................................123 Prepare Your Cash Flow Forecast...........................................................................................125 Required Investment for Your Business..............................................................................135 Check for Trouble............................................................................................................................136 8 Write Your Marketing and Personnel Plans.......................................................139 Introduction....................................................................................................................................... 140 Marketing Plan..................................................................................................................................140 Personnel Plan...................................................................................................................................152

9 Editing and Finalizing Your Business Plan............................................................157 Introduction....................................................................................................................................... 158 Decide How to Organize Your Plan.......................................................................................158 Write Final Portions of Your Plan............................................................................................159 Create the Appendix......................................................................................................................165 Create Title Page and Table of Contents.............................................................................166 Complete Your Final Edit............................................................................................................166 Consider Using a Business Consultant.................................................................................168 10 Selling Your Business Plan......................................................................................................171 How to Ask for the Money You Need..................................................................................172 How to Approach Different Backers.....................................................................................174 What to Do When Someone Says “Yes” ............................................................................178 Plan in Advance for Legal Details............................................................................................179 11 After You Open—Keeping on the Path to Success....................................183 Introduction....................................................................................................................................... 184 Watch Out for Problem Areas..................................................................................................184 Getting Out of Business...............................................................................................................189 12 Good Resources for Small Businesses.......................................................................193 Introduction....................................................................................................................................... 194 Business Consultants.....................................................................................................................194 Books...................................................................................................................................................... 196 Pamphlets............................................................................................................................................ 203 Magazines—Continuing Small Business Help.................................................................203 Computers and Business.............................................................................................................203 Online Business Resources ........................................................................................................206 Formal Education............................................................................................................................209

Appendixes A Business Plan for a Small Service Business...........................................................211 B Business Plan for a Manufacturing Business.....................................................227 C Business Plan for Project Development.................................................................245 D How to Use the CD-ROM.......................................................................................................255 Installing the Files Onto Your Computer...........................................................................256 Using the Business Plan Files.....................................................................................................257 Using the Spreadsheets................................................................................................................258 Forms on the CD-ROM................................................................................................................260 Index

Your Legal Companion “Nine to five ain’t takin’ me where I’m Writing a plan is a journey through the bound.” mind of one person. Even in partnerships and corporations, usually one person has —Neil Diamond, from “Thank the Lord for the the vision and energy to take an idea and Nighttime” turn it into a business by writing a business plan. For that reason, I have addressed this “You’ve got to be careful if you don’t book to the business owner as a single know where you’re going because you individual rather than a husband-and-wife might not get there.” team, group, committee, partnership, or corporation. And you’ll find that the same —Yogi Berra financial and analytical tools necessary to convince potential lenders and investors A re you concerned about whether that your business idea is sound can also you can put together a first-rate help you decide whether your idea is the business plan and loan appli­ right business for you. cation? Don’t worry. What Kind of Plan Do You Need? How to Write a Business Plan contains detailed forms and step-by-step instruc­ You can use How to Write a Business tions designed to help you prepare a well- Plan to write whatever type of plan best thought-out, well-organized plan. Coupled suits your needs: with your positive energy and will to succeed, you’ll be able to design a business • Complete business plan. A complete plan and loan package that you will be business plan is especially helpful proud to show to the loan officer at your for people who are starting a new bank, the Small Business Administration, business. This form of plan is also or your Uncle Harry. excellent for convincing prospective After working with hundreds of business owners, I have observed an almost universal truth about business planning:

2  |  how to write a business plan backers to support your business. Revenue Forecast, Profit and Loss You’ll be more successful in raising Forecast, Capital Spending Plan, the money you need if you answer all Cash Flow Forecast, Appendix, and of your potential backers’ questions. Supporting Documents. A complete plan should include the following elements: Title Page, Plan quick plan Summary, Table of Contents, Problem Statement, Business Description, The “quick plan” icon appears at the Business Accomplishments, Marketing beginning of each chapter containing quick plan Plan, Sales Revenue Forecast, Profit and components and guides you to the sections Loss Forecast, Capital Spending Plan, you’ll need. Cash Flow Forecast, Future Trends, Risks Facing Your Business, Personnel • Customized plan. You can start with a Plan, Business Personality, Staffing quick plan and add components from Schedule, Job Descriptions, Specific the complete business plan to suit your Business Goals, Personal Financial needs. When deciding what to include Statement, Personal Background, and what to exclude, ask yourself: Appendix, and Supporting Documents. n Which of my statements are the • Quick plan (one-day plan). If you strongest? know your business, are familiar with n Which statements do my backers and able to make financial projections, want to see? and have done the necessary research, you may be able to create a plan in Note that the appendixes contain blank one day. But understand that a quick forms as well as business plans for a small plan is a stripped-down version of service business, a manufacturing business, a business plan. It won’t convince and a project development. All the forms either you or your prospective backers (except for the Loan Interest Calculation that your business idea is sound. It is Chart) and business plans are included on appropriate only if your business idea the CD-ROM located at the back of the is very simple or someone has already book. The forms—for calculating sales committed to backing your venture. A forecasts, personal financial information, stripped-down quick plan has these profit and loss forecasts, and cash flow few components: Title Page, Plan forecasts—are provided in Microsoft Excel Summary, Table of Contents, Problem spreadsheet format and include helpful Statement, Business Description, formulas for making calculations. The “CD” Business Accomplishments, Sales icon appears whenever forms or business plans are reproduced on the CD. (Note:

your legal companion |  3 If a series of #### symbols appear in a Getting Started box in a spreadsheet, that means that you will need to widen the column in order to Before you sit down to write your plan, display the numbers.) you’ll want to gather together these essentials: Meet Antoinette • a word processor In an effort to make sense out of the thousands of types of small businesses, • a calculator or computer spreadsheet I have roughly divided them into five program main ones: retail, wholesale, service, manufacturing, and project development. • a good supply of 8½\" by 11\" paper All the financial tools I present can be used by all five. However, for the sake of • several pencils and a good eraser, and simplicity, I follow one particular retail business—a dress shop. In so doing, I • access to a photocopy machine. illustrate most of the planning concepts and techniques necessary to understand Now, here’s a word about revisions and and raise money for any business. changing your plan. I firmly believe in writing your first thoughts on paper and As you read through the text you’ll letting them rest for a day or two. Then meet Antoinette Gorzak, a friend of mine. you can edit, expand, and revise later to Antoinette wants to open a dress shop, get a more perfect statement. In this book, and she has allowed me to use her plans I show examples of Antoinette’s writing and thought processes as an example of process. (I’m grateful she’s such a good a complete and well-prepared business sport.) plan for a retail store. You’ll find parts of her plan presented in different chapters as Most people discover about halfway we discuss the various components of a through writing their plan that they want complete business plan. to change either their assumptions or some of the plan they’ve already written. My best advice is this: Complete the plan all the way through on your original set of assumptions. That way you can see the financial impact of your ideas, and it will be much easier to make the right changes in the second draft. If you start revising individual parts of the plan before you have the complete picture, you’ll waste a lot of energy. If you’re like me, you’ll rewrite and edit your plan several times once you’ve finished the first run through.

4  |  how to write a business plan And a Few More Words 415-816-2982 and I’ll listen or help if I can. You can also email me at mckeever.mp@ As I write this, the book has been in print gmail.com. Please mention “Nolo Busi­ for over 25 years and has sold more than ness Plan Book” in the subject line of your 150,000 copies. I have heard that it has been email, otherwise I might delete it as a spam pirated in some parts of the former Soviet message. Finally, to avoid always using the Union. Since it first came out I have taught, pronoun “he” when referring to individuals lectured, and consulted on business plans in in general, and to further avoid clumsy a wide variety of forums. I have taken that neologisms like “s/he” and awkward experience and reformulated the exercises phraseologies like “he/she” and “he or in the book to make them more effective as she,” I have compromised by the random well as easier and quicker to use. use of “he” in some instances and “she” in others. I hope I have arrived at a fair I remain friends with many of the people balance. Also, keep in mind that wherever I met through the book and occasionally possible, this book uses plain language, not help them over rough spots in their jargon. As a result, you may find that I have planning, which is the most gratifying part often substituted simple terminology for of the experience for me. My business is helping people write business plans that traditional business plan lingo. ● find money for their businesses. Call me at

1C h a p t e r Benefits of Writing a Business Plan What Is a Business Plan?........................................................................................................................................... 6 Why Write a Business Plan?.................................................................................................................................... 6 Helps You Get Money..................................................................................................................................... 6 Helps You Decide to Proceed or Stop.................................................................................................... 6 Lets You Improve Your Business Concept............................................................................................ 7 Improves Your Odds of Success................................................................................................................. 7 Helps You Keep on Track............................................................................................................................... 8 Issues Beyond the Plan.............................................................................................................................................. 8 Bookkeeping and Accounting ................................................................................................................... 8 Taxes......................................................................................................................................................................... 8 Securities Laws.................................................................................................................................................... 9 Your Management Skill.................................................................................................................................. 9 Issues Specific to Your Business ................................................................................................................ 9

6  |  how to write a business plan “Marry in haste, repent at leisure.” your proposal ­seriously. Even some (proverb) landlords require a sound business plan before they will lease you space. Before “A stitch in time saves nine.” making a commitment to you, they want to see that you have thought through critical (proverb) i­ssues facing you as a business owner and that you really understand your business. What Is a Business Plan? They also want to make sure your business has a good chance of succeeding. A business plan is a written statement that d­ escribes and analyzes your business and In my experience, about 35% to 40% gives detailed projections about its future. of the people currently in business do A business plan also covers the financial not know how money flows through their aspects of starting or expanding your business. Writing a business plan with this business—how much money you need and book teaches you where money comes how you’ll pay it back. from and where it goes. Is it any wonder that your backers want to see your plan Writing a business plan is a lot of work. before they consider your financial request? So why take the time to write one? The best answer is the wisdom gained by There are as many potential lenders and literally millions of ­business owners just i­nvestors as there are prospective business like you. Almost without e­ xception, each owners. If you have a thoroughly thought- business owner with a plan is pleased she out business and financial plan that has one, and each owner without a plan demonstrates a good ­likelihood of success wishes he had written one. and you are persistent, you will find the money you need. Of course, it may Why Write a Business Plan? take longer than you expect and require more work than you expect, but you will Here are some of the specific and ultimately be ­successful if you believe in immediate b­ enefits you will derive from your business. writing your business plan. Helps You Decide to Proceed or Stop Helps You Get Money One major theme of the book may surprise Most lenders or investors require a written you. It’s as simple as it is important. You, business plan before they will consider as the prospective business owner, are the most important person you must convince of the soundness of your proposal. There­ fore, much of the work you are asked to do

Chapter 1  | benefits of writing a business plan |  7 here serves a dual purpose. It is designed pass through your plan. Then you read an to provide answers to all the questions that article about the declining exchange ratio prospective lenders and investors will ask. of U.S. dollars to Korean currency. After But it will also teach you how money flows doing some homework about exchange through your business, what the strengths rate fluctuations, you decide to increase and weaknesses in your business concept your profit margin on the jackets to cover are, and what your realistic chances of anticipated declines in dollar purchasing success are. power. This change shows you that your prices are still competitive with other The detailed planning process described jackets and that your average profits will in this book is not infallible—nothing is i­ncrease. And you are now covered for any in a small business—but it should help you likely decline in exchange rates. uncover and correct flaws in your business concept. If this analysis demonstrates that Improves Your Odds of Success your idea won’t work, you’ll be able to avoid starting or expanding your business. This is One way of looking at business is that extremely important. It should go without it’s a gamble. You open or expand a saying that a great many businesspeople business and gamble your and the bank’s owe their ultimate success to an earlier or investor’s money. If you’re right, you decision not to start a business with built-in make a profit and pay back the loans and problems. everyone’s happy. But if your estimate is wrong, you and the bank or investors can Lets You Improve Your lose money and experience the discomfort Business Concept that comes from failure. (Of course, a bank probably is protected because it has title Writing a plan allows you to see how to the collateral you put up to get the loan. changing parts of the plan increases profits See Chapter 4 for a complete discussion.) or accomplishes other goals. You can tinker with individual parts of your business with Writing a business plan helps beat the no cash outlay. If you’re using a computer odds. Most new, small businesses don’t spreadsheet to make financial projections, last very long. And, most small businesses you can try out different alternatives even don’t have a business plan. Is that only more quickly. This ability to fine-tune your a coincidence, or is there a c­ onnection plans and business design increases your between these two seemingly unconnected chances of success. facts? My suggestion is this: Let someone else prove the connection wrong. Why For example, let’s say that your idea is to not be prudent and improve your odds by start a business importing Korean leather writing a plan? jackets. Everything looks great on the first

8  |  how to write a business plan Helps You Keep on Track business. Experienced lenders, investors, and entrep­ reneurs want a plan that takes Many business owners spend countless these issues into account. Of course, this hours handling emergencies, simply book can’t cover everything. Here are because they haven’t learned how to plan some of the key business components that ahead. This book helps you anticipate are left out of this initial planning process. problems and solve them b­ efore they become disasters. Bookkeeping and Accounting A written business plan gives you a clear This book discusses the numbers and course toward the future and makes your concepts you as the business owner need decision making easier. Some problems in order to open and manage your small and opportunities may represent a change business. You have the ­responsibility of direction worth following, while others to create bookkeeping and accounting may be distractions that referring to your systems and make sure they function business plan will enable you to avoid. The a­ dequately. (Some suggestions for setting black and white of your written business up a system are contained in Chapter 6.) plan will help you face facts if things don’t work out as expected. For example, if One of the items generated by your you planned to be making a living three accounting system will be a balance months after start-up, and six months later sheet. A balance sheet is a snapshot at a you’re going into the hole at the rate of particular moment in time that lists the $100 per day, your business plan should money value of everything you own and help you see that changes are necessary. everything you owe to someone else. It’s all too easy to delude yourself into keeping a business going that will never Taxes meet its goals if you a­ pproach things with a “just another month or two and I’ll be While there are a few mentions of tax there” attitude, rather than ­comparing your issues throughout the book, most of the results to your goals. planning ­information doesn’t discuss how taxes will be ­calculated or paid. The book Issues Beyond the Plan focuses its efforts on making a profit and a positive cash flow. If you make a profit, I have written this book to provide you’ll pay taxes and if you don’t make a you with an overview of the issues that profit, you’ll pay fewer taxes. A CPA or tax determine success or failure in a small advisor can help you with tax strategies.

Chapter 1  | benefits of writing a business plan |  9 Securities Laws your management skills. If you have any doubts about your management ability, If you plan to raise money by selling check out the resources in Chapter 12. Also shares in a corporation or limited see Chapter 11 for a thought-stimulating partnership, you’ll fall ­under state or discussion of management. federal securities regulations. You can, however, borrow money or take in a Issues Specific to Your Business general partner without being affected by securities laws. A complete discussion of How successfully your business relates these issues is beyond the scope of this to the market, the business environment, book. For now, take note that you must and the competition may be affected by comply with securities regulations after you patents, franchises, ­foreign competition, complete your plan and before you take location, and the like. Of ­necessity, this any money into your business from selling book focuses on principles common shares or partnership interests. to all businesses and does not discuss the specific items that distinguish your Your Management Skill business from other ­businesses. For example, this book doesn’t discuss how This book shows you how to write a very to price your products to meet your good business plan and loan application. competition; I assume that you have However, your ultimate success rests on enough knowledge about your chosen your ability to implement your plans—on business to answer that ­question. ●



2C h a p t e r Do You Really Want to Own a Business? Introduction..................................................................................................................................................................12 Self-Evaluation Exercises.........................................................................................................................................13 Your Strong and Weak Points...................................................................................................................14 General and Specific Skills Your Business Needs............................................................................15 Your Likes and Dislikes..................................................................................................................................15 Specific Business Goals.................................................................................................................................16 How to Use the Self-Evaluation Lists...............................................................................................................17 Reality Check: Banker’s Analysis.........................................................................................................................17 Banker’s Ideal......................................................................................................................................................17 Measuring Up to the Banker’s Ideal.......................................................................................................18 Use the Banker’s Ideal....................................................................................................................................18

12  |  how to write a business plan Introduction Power. When it is your business, you can have your employees do it your way. There “Hope springs eternal in the human is a little Ghengis Khan in us all, so don’t breast,” said English poet and essayist be surprised if power is one of your goals. Alexander Pope several centuries ago. If it is, think about how to use this goal in He wasn’t describing people expanding a constructive way. or starting a business, but he may as well have been. Everyone who goes into Right Livelihood. From natural foods business for themselves hopes to meet to solar power to many types of service or surpass a set of personal goals. While businesses, a great many cause-driven your particular configuration is sure to small businesses have done very well by be unique, perhaps you will agree with doing good. some of the ones I have compiled over the years from talking to hundreds of budding If owning a small business can help entrepreneurs. a person accomplish these goals, it’s small wonder that so many are started. Independence. A search for freedom and Unfortunately, while the potential for great independence is the driving force behind success exists, so do many risks. Running many businesspeople. Wasn’t it Johnny a small business may require that you Paycheck who wrote the song “Take This sacrifice some short-term comforts for Job and Shove It?” long-term benefits. It is hard, demanding work that requires a wide variety of skills Personal Fulfillment. For many people, few people are born with. But even if you owning a business is a genuinely fulfilling possess (or more likely acquire) the skills experience, one that lifetime employees and determination you need to successfully never know. run a business, your business will need one more critical ingredient: Money. Lifestyle Change. Many people find that while they can make a good income You need money to start your business, working for other people, they are missing money to keep it running, and money to some of life’s precious moments. With the make it grow. This is not the same thing flexibility of small business ownership, you as saying you can guarantee success in can take time to stop and smell the roses. your small business if you begin with a fat wallet. Now, let me confess to one Respect. Successful small business major bias here. I believe that most owners are respected, both by themselves small business owners and founders are and their peers. better off starting small and borrowing, or otherwise raising, as little money as Money. You can get rich in a small possible. Put another way, there is no such business, or at least do very well thing as “raising plenty of capital to ensure financially. Most entrepreneurs don’t get wealthy, but some do. If money is your motivator, admit it.

Chapter 2  | do you really want to own a business? |  13 success.” Unless you, as the prospective you don’t have the skills and temperament business founder, learn to get the most to run it. Simply put, I’ve learned that mileage out of every dollar, you may go no business, whether or not it has sound broke and will surely spend more than financial backing, is likely to succeed you need to. But that doesn’t mean that unless you, as the prospective owner, you should try to save money by selling make two decisions correctly: cheap merchandise or providing marginal services. In today’s competitive economy, • You must honestly evaluate yourself to your customers want the best you can give decide whether you possess the skills them at the best price. They will remember and personality needed to succeed in a the quality of what they get from you long small business. after they have forgotten how much they paid. • You must choose the right business. (How to select the right business is In practical terms, that means you covered extensively in Chapter 3.) must buy only the best goods for your customers. Anything that affects the image A small business is a very personal your business has in your customer’s mind endeavor. It will honestly reflect your should be first-rate. It also means that you opinions and attitudes, whether or not you shouldn’t spend money on things that don’t design it that way. Think of it this way: The affect the customer. For example, unless shadow your business casts will be your you’re a real estate broker your customers shadow. If you are sloppy, rude, or naively probably won’t care if you drive an old, trusting, your business will mirror these beat-up car to an office in a converted attributes. If your personal characteristics broom closet, as long as you provide them are more positive than those, your business an honest product or service for an honest will be more positive, too. To put this price. Save the nice car and fancy office, concretely, suppose you go out for the until after your business is a success. Sunday paper and are met by a store clerk who is groggy from a hangover and Self-Evaluation Exercises badmouths his girlfriend in front of you. Chances are that next Sunday will find you Here’s a question to ponder: Are you the at a different newsstand. right person for your business? Because running a business is a very demanding I’m not saying you need to be psycho­ endeavor that can take most of your time logically perfect to run a small business. and energy, your business probably will But to succeed, you must ask people suffer if you’re unhappy. Your business can for their money every day and convince become an albatross around your neck if a substantial number of them to give it to you. While providing your goods or services, you will create intimate personal relationships with a number of people. It

14 | HOW TO WRITE A BUSINESS PLAN makes no difference whether you refer to Antoinette Gorzak: people who give you money as clients, My Strong and Weak Points customers, patients, members, students, or disciples. It makes a great deal of Strong Points (in no particular order) difference to your chances of ultimate 1. Knowledge of all aspects of women’s success if you understand that these people are exchanging their money for the fashion business conviction that you are giving them their 2. Ability to translate abstract objectives money’s worth. into concrete steps The following self-evaluation exercises 3. Good cook will help you assess whether you have 4. Faithful friend and kind to animals what it takes to successfully run a small 5. When I set a goal, I can be relentless in business. Take out a blank sheet of paper or open a computer file. achieving it 6. Ability to make and keep good Your Strong and Weak Points business friends—I have had many Take a few minutes to list your personal repeat customers at other jobs. and business strengths and weaknesses. Weak Points Include everything you can think of, even 1. Impatience if it doesn’t appear to be related to your 2. Dislike of repetitive detail business. For instance, your strong points 3. Romantic (is this a weak point in may include the mastery of a hobby, your business?) positive personality traits, and your sexual 4. Tendency to postpone working on charisma, as well as your specific business problems skills. Take your time and be generous. 5. Tendency to lose patience with fools (sometimes I carry this too far— To provide you with a little help, I especially when I’m tired). include a sample list for Antoinette Gorzak, a personal friend who has what she hopes Your list of strong and weak points is a good business idea: a slightly different will help you see any obvious conflicts approach to selling women’s clothing. between your personality and the business You’ll get to know her better as we go you’re in or want to start. For example, along. Her strengths, weaknesses, fantasies, if you don’t like being around people and fears are surely different from yours. but plan to start a life insurance agency So, too, almost certainly, is the business with you as the primary salesperson, you she wants to start. So be sure to make your may have a personality clash with your own lists—don’t copy Antoinette’s. business. The solution might be to find

ChApter 2 | DO YOU REALLY WANT TO OWN A BUSINESS? | 15 another part of the insurance business that deficiency. For example, let’s say you want doesn’t require as much people contact. to start a trucking business. You have a good background in maintenance, truck Unfortunately, many people don’t repair, and long distance driving, and you realize that their personalities will have a know how to sell and get work. Sounds direct bearing on their business success. good so far—but, let’s say you don’t know An example close to the experience of the first thing about bookkeeping or cash folks at Nolo involves bookstores. In the flow management and the thought of using years since Nolo began publishing, they a computer makes you nervous. Because have seen all sorts of people, from retired some trucking businesses work on large librarians to unemployed Ph.D.s, open dollar volumes, small profit margins, and bookstores. A large percentage of these slow-paying customers, your backers will stores have failed because the skills needed expect you to learn cash flow management to run a successful bookstore involve more or hire someone qualified to handle that than a love of books. part of the business. General and Specific Skills Antoinette Gorzak: General and Specific Your Business Needs Skills My Business Needs 1. How to motivate employees Businesses need two kinds of skills to 2. How to keep decent records survive and prosper: Skills for business in 3. How to make customers and general and skills specific to the particular business. For example, every business employees think the business is special needs someone to keep good financial 4. How to know what the customers records. On the other hand, the tender touch and manual dexterity needed by want—today and, more important in glassblowers are not skills needed by the the clothing business, to keep half-a- average paving contractor. step ahead 5. How to sell Next, take a few minutes and list the 6. How to manage inventory skills your business needs. Don’t worry 7. How to judge people. about making an exhaustively complete list, just jot down the first things that come Your Likes and Dislikes to mind. Make sure you have some general business skills as well as some of the more Take a few minutes and make a list of the important skills specific to your particular things you really like doing and those you business. don’t enjoy. Write this list without thinking If you don’t have all the skills your business needs, your backers will want to know how you will make up for the

16 | HOW TO WRITE A BUSINESS PLAN about the business—simply concentrate on CAUTiON what makes you happy or unhappy. if your list contains several things you If you enjoy talking to new people, really don’t like doing and nothing at all that keeping books, or working with comput- you like doing, it may be a sign that you have ers, be sure to include those. Put down all a negative attitude at this time in your life. If the activities you can think of that give you so, you may wish to think carefully about your pleasure. Antoinette’s list is shown as an decision to enter or expand a business at this example. time. Chances are your negative attitude will reduce your chances of business success. As a business owner, you will spend most of your waking hours in the business, Specific Business Goals and if it doesn’t make you happy, you probably won’t be very good at it. If this Finally, list your specific business goals. list creates doubts about whether you’re Exactly what do you want your business pursuing the right business, I suggest to accomplish for you? Freedom from 9 you let your unconscious mind work on to 5? Money—and if so, how much? More the problem. Most likely, you’ll know the time with the children? Making the world answer after one or two good nights’ sleep. or your little part of it a better place? It’s your wish list, so be specific and enjoy Antoinette Gorzak: writing it. My Likes and Dislikes Antoinette Gorzak: Things I Like to Do My Specific Business Goals 1. Be independent and make my own 1. Have my own business that gives decisions me a decent living and financial 2. Keep things orderly. I am almost independence 2. Work with and sell to my friends compulsive about this and acquaintances as well as new 3. Take skiing trips customers 4. Work with good, intelligent people 3. Introduce clothing presently 5. Cook with Jack unavailable in my city and provide a 6. Care about my work. real service for working women Things I Don’t Like to Do 4. Be part of the growing network of 1. Work for a dimwit boss successful businesswomen 2. Feel like I have a dead-end job 5. Be respected for my success. 3. Make people unhappy.

Chapter 2  | do you really want to own a business? |  17 How to Use the Self- price required to be successful as a small Evaluation Lists businessperson. If you are still eager to have a business, you have said, “Yes, I After you’ve completed the four self- am willing to make short-term sacrifices evaluation lists, spend some time reading to achieve long-term benefits and to do them over. Take a moment to compare the whatever is necessary—no matter the skills needed in your business to the list of inconvenience—to reach my goals.” skills you have. Do you have what it takes? Reality Check: Banker’s Analysis Show them to your family and, if you’re brave, to your friends or anyone who Banks and institutions that lend money knows you well and can be objective. have a lot of knowledge about the success Of course, before showing the lists to rate of small businesses. Bankers are often anyone, you may choose to delete any overly cautious in making loans to small private information that isn’t critical to your businesses. For that very reason it makes business. If you show your lists to someone sense to study their approach, even though who knows the tough realities of running it may seem discouraging at first glance. a successful small business, so much the better. You may want to find a former Banker’s Ideal teacher, a fellow employee, or someone else whose judgment you respect. Bankers look for an ideal loan applicant, who typically meets these requirements: What do they think? Do they point out any obvious inconsistencies between your • For an existing business, a cash flow personality or skills and what you want sufficient to make the loan payments. to accomplish? If so, pay attention. Treat this exercise seriously and you will know • For a new business, an owner who has yourself better. Oh, and don’t destroy your a track record of profitably owning and lists. Assuming you go ahead with your operating the same sort of business. business and write your business plan, the lists can serve as background material or • An owner with a sound, well-thought- even become part of the final plan. out business plan. You have accomplished several things if • An owner with financial reserves you have followed these steps. You have and personal collateral sufficient to looked inside and asked yourself some solve the unexpected problems and basic questions about who you are and fluctuations that affect all businesses. what you are realistically qualified to do. As a result, you should now have a better Why does such a person need a loan, idea of whether you are willing to pay the you ask? He or she probably doesn’t, which, of course, is the point. People who lend money are most comfortable

18  |  how to write a business plan with people so close to their ideal loan has no relationship to hot dog selling. In candidate that they don’t need to borrow. this situation, you might be able to get a However, to stay in business themselves, loan if you hire people who make up for banks and other lenders must lend out the your lack of experience. At the very least, money deposited with them. To do this, you would need someone with a strong they must lend to at least some people software marketing background, as well as whose creditworthiness is less than perfect. a person with experience managing retail sales and service businesses. Naturally, Measuring Up to the Banker’s Ideal both of those people are most desirable if they have many years of successful Who are these ordinary mortals who slip experience in the software marketing through bankers’ fine screens of approval? business, preferably in California. And more to the point, how can you qualify as one of them? Your job is to show Use the Banker’s Ideal how your situation is similar to the banker’s ideal. It’s helpful to use the bankers’ model in your decision-making process. Use a A good bet is the person who has skeptical attitude as a counterweight to worked for, or preferably managed, a your optimism to get a balanced view of successful business in the same field as your prospects. What is it that makes you the proposed new business. For example, think you will be one of the minority of if you have profitably run a clothing store small business owners who will succeed? If for an absentee owner for a year or two, you don’t have some specific answers, you a lender may believe you are ready to do are in trouble. Most new businesses fail, it on your own. All you need is a good and the large majority of survivors do not location, a sound business plan, and a little genuinely prosper. capital. Then, watch out Neiman-Marcus! Many people start their own business Further away from a lender’s ideal is because they can’t stand working for the person who has sound experience others. They don’t have a choice. They managing one type of business, but must be either boss or bum. They are proposes to start one in a different field. more than willing to trade security for Let’s say you ran the most profitable hot the chance to call the shots. They meet a dog stand in the Squaw Valley ski resort, good chunk of their goals when they leave and now you want to market computer their paycheck behind. This is fine as far software in the Silicon Valley of California. as it goes, but in my experience, the more In your favor is your experience running a successful small business owners have successful business. On the negative side is other goals as well. the fact that computer software marketing

Chapter 2  | do you really want to own a business? |  19 A small distributor we know has a well- me, I’ll still do everything I can to keep my thought-out business and a sound business promise to my customer, even if it costs me plan for the future. Still, he believes that money.” This sort of personal commitment his own personal commitment is the most enables this successful business owner to important thing he has going for him. make short-term adjustments to meet his He puts it this way: “I break my tail to long-range goals. And while it would be live up to the commitments I make to my an exaggeration to say he pays this price customers. If a supplier doesn’t perform for gladly, he does pay it. ●



Choosing the Right Business 3C h a p t e r Introduction..................................................................................................................................................................22 Know Your Business..................................................................................................................................................22 Be Sure You Like Your Business..........................................................................................................................24 Describe Your Business...........................................................................................................................................24 Identify Your Type of Business..................................................................................................................25 Problem Statement.........................................................................................................................................27 Business Description......................................................................................................................................27 Taste, Trends, and Technology: How Will the Future Affect Your Business?................................30 Taste........................................................................................................................................................................31 Trends.....................................................................................................................................................................31 Technology..........................................................................................................................................................32 Write a Future Trends Statement...........................................................................................................34 Break-Even Analysis: Will Your Business Make Money?........................................................................34 Forecast Sales Revenue.................................................................................................................................36 Forecast Fixed Costs.......................................................................................................................................40 Forecast Gross Profit for Each Sales Dollar........................................................................................41 Forecast Your Break‑Even Sales Revenue............................................................................................43 What You Have Accomplished...........................................................................................................................47

22  |  how to write a business plan quick plan My answer is always the same—start a venture that you know intimately already. If you’ve chosen the quick plan I don’t believe any business exists that is method to prepare a business plan (see Intro- so foolproof that anyone can enter and duction), you need to read and complete only make a sure profit. On the other hand, a these sections of Chapter 3: skilled, dedicated owner often can make a venture successful when others have • “Problem Statement” failed. R­ emember, your potential customers • “Business Description” will exchange their money only for the • “Forecast Sales Revenue.” conviction that you are giving them their money’s worth. And that means you’ll need Introduction to know what you’re doing. While this point should appear obvious, sadly—it isn’t. This chapter helps you determine whether you have chosen the “right” business for Many people enter businesses they you—one that you know, like, and will know little or nothing about. I did it once work hard for and that makes economic myself. I opened an automobile tune-up sense. Most experienced businesspeople shop at a time when, seemingly, they complete several steps as a rough and couldn’t miss. I knew a good deal about ready template to decide whether to running a small business, had a personality complete a plan. If your business passes all well suited for it, and could borrow enough these steps with flying colors, it means it’s money to begin. The end of what turned a good idea to write a full business plan out to be a very sad story is that it took (although it doesn’t guarantee success). me two years and $30,000 to get rid of the On the other hand, if your proposal doesn’t business. Why? ­Because in my hurry to pass, you’ll probably want to modify or make a profit, I overlooked several crucial change your plans altogether. facts. The most important of these was that I knew virtually nothing about cars and I If you’re like most people, chances are didn’t really want to learn. Not only was I your business will pass some tests easily unable to roll up my sleeves and pitch in and fail some of the others. Antoinette when it was needed, I didn’t even know faces just that problem in this chapter. Pay enough to properly hire and supervise careful attention to how she ­approaches mechanics. In short, I made a classic that dilemma; her method of proceeding mistake—I started a business in a “hot” may help you in your decision. field because someone was foolish enough to lend me the money. Know Your Business How can you apply my lesson to your One of the most common questions people situation? Let’s say you’ve heard pasta ask me is this: What business should I start?

Chapter 3  | choosing the right business |  23 shops make lots of money and you want layout, as well as keep a coherent set of to start one. First, if at all possible, get a books. If it’s your elegant little restaurant job working in one, even if you work for and the food isn’t perfect, you’re the one free. Learn everything you can about ­every who e­ ither ­improves it in a hurry or goes aspect of the business. After a few months, broke. If you don’t like getting your hands you should be an expert in every aspect dirty, choose a clean ­business. of pasta making, from mixing eggs and flour, flattening the dough, and slicing it Are You Choosing a Risky Business? into strips. Ask yourself whether you enjoy the work and whether you are good at it. When considering the businesses you know, If you answer “Yes,” go on to the second it is helpful to know how well they typically important question: Is the business a fare. For instance, these businesses have potential money maker? You should have higher than average failure rates: a pretty good ­answer to this question after working in the field for a few months. • computer stores • laundries and dry cleaners If you’re unable to find employment • florists in the pasta business, make a tour of • used car dealerships delicatessens and shops that make their • gas stations own pasta. Interview the owners. To get • local trucking firms reliable answers, it’s best to do this in a • restaurants different locale from the one in which • infant clothing stores you plan to locate. Small business owners • bakeries are ­often quite willing to share their • machine shops knowledge once they are sure you will not • car washes compete with them. • e-commerce • grocery and meat stores. I remember reading a management If your business idea is on this list, it philosophy that said that a good manager doesn’t mean you should abandon it doesn’t have to know every job, only automatically. However, it should remind how to get other people to do them. you to be extra ­critical and careful when That approach may work well in a large preparing your plan. I’ve known successful corporation, but for a small business, it’s businesspeople in every category listed, just dangerously naive. In short, don’t start your as I have known people who have failed in small ­venture until you know it from the each of them. ground up. I mean this literally. If you’re opening a print shop, you should be able to run the presses and do paste-up and

24  |  how to write a business plan Be Sure You Like Your Business because your business idea is yours, you have an emotional attachment to it. You Does the business you want to own should. Your belief in your idea will help require skills and talents you already you wade through all the unavoidable muck possess? If you have the necessary skills, and mire that lies between a good idea do you enjoy exercising them? Think about and a profitable business. However, your this for a good long time. The ­average ego involve­ment can also entail a loss of small busin­ ess owner spends more time perspec­tive. I’ve seen people start hopeless with his venture than with his family. This endeavors and lose small fortunes because being so, it makes sense to be at least as they were so enamored with their “brilliant careful about choosing your endeavor ideas” that they never examined honestly the as you are about picking your mate. A negative factors that doomed their ventures few of us are sufficiently blessed that we from the start. can meet someone on a blind date, settle down a week later, and have it work out Describe Your Business wonderfully. However, in relationships, as in business, most of us make better What is your good idea? What business decisions if we approach them with a little do you want to be in? It’s time to look at more care. the specifics. Let’s say you want to open a restaurant. What will you serve? What Be sure you aren’t so blinded by one will your sample menu look like? What part of a small business that you overlook equipment will you need? Note that all others. For example, suppose you love including french fries means you’ll have music and making musical instruments. to install french-fryers, grease traps in the Running your own guitar shop sounds like sewer line, hoods and fire extinguishing it would be great fun. Maybe it would be, systems. On the other hand, by not serving but if you see yourself contentedly making fried foods you will save a lot of money guitars all day in a cozy little workroom, in the kitchen, but maybe you’ll go broke you’d better think again. Who is going to when all the grease addicts go next door. meet customers, keep the books, answer the phone, and let potential customers Or suppose you want to sell DVDs, know you are in ­business? If you hate all games, or digital cameras. Do you plan to these activities, you either have to work have a service department? If so, will you with someone who can handle them, or do make house calls, or only accept repairs something else. at your store? What sort of security system will you install to protect your inventory? Here’s one last thing to think about when What about selling c­ omponent sound ­considering how much you like your busi­ systems or home entertainment centers? ness idea. In fact, it’s a danger that threatens almost every potential entre­preneur. Precisely

Chapter 3  | choosing the right business |  25 What about competition from nearby • Retail. Retail businesses buy r­etailers? merchandise from a variety of wholesalers and sell it ­directly to Answers to these types of questions will consumers. Some ­retailers provide be crucial to the success of your venture service and repair facilities, while and to ­writing your business plan. Let me most do not. Most ­retailers just take tell you from hard, personal experience in the goods and mark up the price, that you need a written document—even sometimes doubling their purchase if you’re sure you know exactly what your price to arrive at a sales price. business will do. Supermarkets, mail order catalogue ­merchants, online stores (e-tailers), With this foundation document to refer computer stores, dress shops, to, you are less likely to forget your good department stores, and convenience plans and r­esolutions in the heat of getting marts are retailers. your business under way. Any changes you later make can be made both consciously • Wholesale. Wholesalers buy merchan­ and with consideration. dise from manufacturers or brokers and resell the goods to retailers. To write a complete description of your Normally, a wholesaler maintains ­proposed business, simply follow the an inventory of a number of lines. suggestions on the next few pages. A whole­saler normally does not sell to consumers, in order to avoid Identify Your Type of Business competing with his retailer ­customers. Whole­salers ­usually offer delivery Find the business category listed below service and credit to c­ ustomers. This that most closely matches your business. type of busi­ness is characterized by You’ll use the ­description that follows as low gross profit ­margins (sometimes a reference when you describe your own varying between 15% and 33% of the business. wholes­aler’s selling price) and high inventory investment. caution Wholesalers typically buy in large lots and sell in smaller lots. Like Each of the business categories retailers, they seldom make any requires different skills to run efficiently. Many changes to the products. Most whole­ small businesses involve one or two types of salers aren’t well known to the general business in the same endeavor. But if your idea public. will involve you in several types of business, it may be too complicated for you to run • Service. People with a particular efficiently. As a general rule, small businesses skill sell it to consumers or to other work best when their owners know exactly what they are about and strive for simplicity.

26  |  how to write a business plan businesses, ­depending on the skill. the finished product before she begins The end product of a service business work. When the project is complete, is normally some sort of advice or the the developer sells her interest in the completion of a task. Occasionally, a project, normally directly to the user or service business sells products as an consumer. ancillary function. For example, a baby diaper cleaning service may also sell To understand project developers, diapers and baby accessories. Service consider a woman building a single- business ­customers normally come family house on speculation. She from repeats and referrals. It’s common buys the lot, secures permits, hires a to have to meet state licensing contractor, gets a loan, builds a house, requirements. and sells it. She is then ready to go on to another project. Other examples of Hairdressers, carpet cleaners, con­ project developers include someone sultants, housecleaners, accountants, who buys, restores, and sells antique building ­contractors, and architects are cars and someone who purchases examples of service businesses. dilapidated buildings at a bargain • Manufacturing. Manufacturers assemble price, fixes them up, and sells them. components or process raw materials into products usable by consumers or tip other businesses. This type of business ranges from an artisan who makes craft Software development note: Softw­ are items to Toyota. The most difficult part development differs from soft­ware production of the manufacturing business is to find and sales in that software developers create a product, or even better, a series of a product that another entity produces and products, that have acceptance in the markets. For example, Fred Jones creates a marketplace and generate a steady sales bookkeeping program for employment agencies volume. Or, as one businessperson put on his own time. Then he sells or licenses it: “Production without sales is scrap.” production and marketing rights to the Acme • Project development. Developers Programs Co. for $1,000 cash and 5% of future ­create and finish a saleable com­ sales. Fred is the project ­developer and Acme is modity by assembling resources for the manufacturer. If Fred also produces copies a one-time project. Normally, the and markets them himself, he acts as both developer knows the market value of developer and manufacturer.

ChApter 3 | CHOOSING THE RIGHT BUSINESS | 27 Problem Statement Problem Antoinette’s Dress Shop Will Solve Successful businesses share a common attribute: They do something useful for Professional working women like to buy their customers. One way to determine fashionable, slightly conservative clothing what is useful for your customers is to at moderate prices. They prefer shopping identify and describe the problem that your at convenient times and patronizing stores business will solve. For example, a window that offer a wide selection of merchandise. washing service solves the customer’s twin These women like to talk to sales clerks problems of wanting clean windows and who understand fashion and know their lacking either the time or physical ability store’s merchandise; few clerks in the local to clean windows himself. If you accurately department stores have this knowledge. understand your customers’ problems and At the present time, many of these women needs, your business will have a better travel 45 miles to shop because no local chance of success. store meets their needs or carries today’s most popular labels. For example, here’s a problem faced by a customer of a pizza-by-the-slice stand: Business Description “I’m hungry and I don’t have much time or money, but I’m tired of hamburgers and Next, describe how your business will want a change of pace. Also, I’d like to be solve your customers’ problem. Take your able to specify the exact ingredients I want time and do a thorough job. It’s very likely in my meal. And, it would be really swell that the first time you attempt this task, to have a glass of wine or beer with the questions will occur to you that you didn’t meal.” consider previously. If so, figure out a good answer and rewrite your description. Now, think about your customers for The important thing is not how long it a minute. What is the problem that you takes to do this, but that you end up solve for them? Write out your description with a realistic, well-thought-out business of the problem your business solves for its description. After all, it’s cheaper to answer customers. This statement will become part questions and solve problems on paper of your completed business plan. than it is with real money. Your business description should explain exactly what you will provide for the customer as well as what you’ll exclude.

28  |  how to write a business plan Each of the choices you make in your 9. Who will handle critical tasks like business description will affect the amount s­elling, ordering, bookkeeping, of money you’ll need to start or ­expand marketing, and shipping? and how much sales revenue you can ­expect. 10. How will I advertise and promote my b­ usiness? Consider the following series of questions when writing your business 11. What are the competition’s strengths description. If you answer both the general and weaknesses? business questions and each question that applies to your business, you’ll present 12. How am I different from the compe­ your business accurately and fairly. ti­tion, as seen through the eyes of my customers? (Make sure that you For an example of a well-thought‑out answer this question from a customer’s business, refer to the accompanying perspective and not from an owner’s sample, which contains the first draft of point of view.) Antoinette’s Dress Shop’s business descrip­ tion. You will find three additional business Specific Business Questions descriptions in Appendixes A, B, and C at the back of the book. Some issues your business faces can be categorized by business type. Make sure General Business Questions your business ­description addresses both the general business questions that apply These questions apply to most small busi- to your business and the questions specific nesses. Feel free to skip any questions that to your type of business. don’t pertain to you. caution 1. What problem do I solve for my customers? If you plan to conduct operations in more than one category, be sure to use the 2. Who is my typical (target) customer? specific questions for each type of business 3. How will I communicate with my that applies. target customer? Retail 4. What products and/or services will 1. How will I keep abreast of fashion and I provide? Are there any products or taste in my field? services my customers may expect me 2. Does my location have enough drive- to provide that I don’t plan to provide? 5. Where will my business be located? by or walk-by traffic to support my 6. Where will I buy the products I need? business, or must I rely on heavy 7. What hours will I operate? advertising for sales? 8. Who will work for me and how will they be paid?

ChApter 3 | CHOOSING THE RIGHT BUSINESS | 29 Business Description for Antoinette’s Dress Shop Antoinette’s Dress Shop will be a women’s schedule fashion shows for our customer base retail clothing store designed to serve the as a marketing device. growing market of professional working women. Our store will buy clothing and Antoinette’s will offer a relaxed atmosphere accessories from the most popular labels with personalized attention and unlimited that provide consistent quality and service. fitting-room time. Our store will feature a Antoinette’s Dress Shop will resell them “as contemporary design and inviting feeling. is” to our target market. Antoinette’s will All our employees will be knowledgeable specialize in fashionable, reasonably priced about fashion in general and about the clothing suitable to this city’s working clothing we sell. Antoinette’s will be located environment. The store will sell a limited line in approximately 2,000 square feet in the of sportswear or leisure wear. We will carry downtown mall and will maintain regular business suits, pantsuits, and dresses for mall hours of Monday through Friday from daytime wear, together with accessories like 11:00 a.m. until 9:00 p.m. and Saturdays purses and belts. We will make prompt minor from 10:00 a.m. until 6:00 p.m. These hours alterations at no charge. will be a convenience to our customer base. The store will not offer delivery on a regular Antoinette’s will regularly publish a basis, although we will offer Federal Express newsletter containing clothing tips for working shipments when requested and we will women, which we will send to customers on maintain a website together with an active our email list. We will maintain a file on each email correspondence with customers so they customer that contains their size and style can express their feelings about any concerns. and color preferences. Antoinette’s will 3. Is it better to be in a shopping center Wholesale with high rents and operating restrictions, 1. Which product lines will I carry in or in a separate location with lower costs and less drive-by or walk-by inventory and which will I order as traffic? required? 2. Will I carry accounts for my customers 4. How much inventory will I buy in or work on cash only? comparison to my expected sales 3. Are there any exclusive distributorships revenues? (This is a critical question in available to me? the retail field and deserves your close 4. Will I have to market all the products attention.) myself or will the manufacturers have marketing programs?

30  |  how to write a business plan Service 3. Am I sure of the time factors? What will 1. Are my credentials and skills equal to or happen if it takes longer than expected to complete and sell the project? better than others in my field? 2. Can I sell my service as well as I can 4. What portions of the work will I contract with others to perform? perform it? 3. Will I take work on speculation or will I 5. Is there a definite buyer for my project? If not, what costs will I incur before it’s insist on cash for each job? sold? 4. Do I have a client list to begin with or Taste, Trends, and Technology: will I start cold? How Will the Future 5. Am I better off associating with others Affect Your Business? or being independent? Let’s assume you have a good description of your proposed business, and the Manufacturing business is an extension of something you 1. Does my manufacturing process create like and know how to do well. Perhaps you have been a chef for ten years and toxic or polluting materials? If so, how have always dreamed of opening your will I deal with them and what regula­ own restaurant. So far, so good—but tory agencies handle them? you aren’t home free yet. There is 2. Is there a pool of readily available, another fundamental question that needs afforda­ ble skilled labor where I want to answering: Does the world need, and is it locate? willing to pay for, the product or service 3. Will I make products for inventory or per you want to sell? For example, do the order? people in the small town where you live 4. Will I make one product only or a line really want an Indonesian restaurant? If of ­products? your answer is “Yes” because times are 5. If I succeed on a small scale, do I plan good and people have extra money, ask to sell out to a larger company or try to yourself what is likely to happen if the compete ­nationally or internationally? economy goes into a slump ten minutes 6. Is my competition from small or large after you open your doors. firms? To make this point more broadly, let’s Project Development use a railroad train as a metaphor for our 1. Am I sure of the selling price of my economic ­society. And let’s have you, as a potential new businessperson, stand project? 2. Am I sure of my projected costs? What will happen if my costs are higher than estimated?

Chapter 3  | choosing the right business |  31 by the tracks. How do you deal with the rapidly? If so, you are likely to go broke no train when it arrives? You can get on and matter how good a manager you are and ride. You can continue to stand by the how much you love your business. tracks and watch the train disappear in the ­distance. Or you can stand in the middle of Trends the tracks and get run over. It’s one thing to understand that people’s To continue this metaphor, let’s now tastes have changed and will undoubtedly assume the economic train has three change again and again, but it’s a lot engines: taste, trends, and technology. harder to accurately predict what will be Together they pull the heavy steel cars popular in a few years. I wish there were which can give you a comfortable ride or a central source of information about flatten you. Let’s take a moment to think predicting future trends in any field, but more about each of these engines. there isn’t. You have the task of looking into the future and deciding where it is Taste going and how that ­affects what you do today. Fortunately, a little ­research can do People’s tastes drive many of the changes wonders. Here are some tips on how to our ­society speeds through. For example, proceed. in the 1970s, many of us changed our taste in automobiles from large gas guzzlers Read everything you can about your to small, well-built cars. American manu­ field of interest. Attend trade shows and facturers didn’t recognize this change in talk to people in small businesses at the taste until they almost went broke. The cutting edge of the field. Talk to people Japanese were in the right place with small, in similar businesses. Read back issues of r­eliable cars and realized great prosperity. magazines aimed at your proposed field. Your goal is to know enough about your Consider popular music as another proposed business to spot the trends that example. Music styles change every few will continue into the next decade. For years, and some bright businesspeople example, if you’re interested in opening succeed by selling clothing and other a night club from the 1950s featuring a acces­sories associated with each new piano bar, mixed drinks, and lots of room music style. for smokers, you should know that the consumption of hard liquor and cigarettes What does this mean to you? Look at has gone down sharply in recent years and your business idea again. How does it fit that nonsmoking lounges with wine and with today’s tastes? Is your business idea imported beer are doing very well. Putting part of a six-month fad? Are you going this information together with other factors, into something that was more popular five years ago than it is now and is ­declining

32  |  how to write a business plan such as your anticipated location and target beyond your reach unless you plan to have customers, should give you a pretty good your small business grow in a hurry. Many idea of what drinks you should offer. You companies expect to lose money for years might decide to serve a number of ­varieties during product development and approval of fine wine and imported beer and ­forget before developing a big hit. However, about a hard liquor license altogether. there are often ways creative small business owners can find to participate in new Technology technological trends. For e­ xample, many computer software companies started Technology is your innovative kitchen with little more than a good idea and a appliance, your home ­computer, NASA’s computer. Or to think even smaller— new spacecraft, and even the proverbial but not ­necessarily less profitably—lots better mousetrap. For example, lots and of carpenters have done well making lots of people are working feverishly to ergonomically correct furniture for computer come up with better video games, laser work stations. toothbrushes, wristw­ atches, TVs, and the like. Sometimes it takes years to perfect Pay attention to new developments in an item. That can be good news for small your chosen field and think about how you business owners, as there is plenty of time can take advantage of them. The explosion to prepare to profit. in mobile devices has popul­arized applica­ tions (or “apps”) that enable users to Of course, there is a downside to new accomplish many functions previously technology, too. It often involves high assoc­ iated with desk bound computers. risk. There’s no guarantee of success Can your business benefit from creating just because the product is new. In fact, such an app? Can you modify your soft­ something like 80% of the new ­products ware or website development business to introduced into the marketplace die a accommodate the massive app market? quick death. Remember HD-DVD players, the Edsel, and eight-track tape players? In short, new technology is a mighty engine that can pull the economy in new What should you do to take advantage directions at terrific speed. Be sure you are of new technologies? First, recognize riding on the train and not picking daisies that large-scale new technology ventures on the tracks in front of it. require vast amounts of money and will be

Chapter 3  | choosing the right business |  33 E-Business Basics From the initial dot-com boom in the late In this model, the online retailer pays the 1990s through the subsequent “dot bomb” manufacturer’s invoice at a wholesale cost and in 2001, through the post 2001 rebound and collects cash via the customer’s credit card 2008 mortgage meltdown, the only “constant” before an electronic purchase order is issued in the in online business world is “constant to the manufacturer. change.” And online retail business also requires One thing is certain: the pre-2001 approach intensive management and sometimes of just exploiting a hot domain name and requires a bit more vigilance than a typical buying up cyber “real estate” no longer retail store. These businesses often work guarantees success. Today, successful online on lower than average gross profit margins. companies track the same metrics as their Since many online shoppers use the shopping offline counterparts—that is, they carefully bots mentioned earlier, savvy retailers make watch revenues, costs, and profit and loss sure their products are found by the search analysis. For example, one savvy Internet engines. Finally, online retailers must either entrepreneur eventually closed his retail know, or must hire others who know, website sporting goods store because employees—too programming as well as online banking and busy shipping orders to Internet customers— fulfillment operations—all of which are were neglecting brick-and-mortar customers. necessary to generate profits. Some trends for success have emerged: a Online retail sales have been growing successful online retailer commonly carries a steadily and are forecast to continue growing. wider assortment of goods than a traditional The same is true for online companies that brick-and-mortar store. Online retailers cater provide services. Google, for example, earns to an international market that operates steady profits from its online advertising pro- around the clock. Many online retailers try to gram where a business pays a fee for each click keep inventory investment as low as possible through to the sponsored link. One advantage by having some of their suppliers ship orders of this program is that a merchant can track directly from the manufacturer’s location to the cost effectiveness of the program on a the retail customer (known as “drop shipping”). daily basis (and stop or start it at any time).

34 | HOW TO WRITE A BUSINESS PLAN Write a Future Trends Statement Future Trends Affecting Antoinette’s Dress Shop With this discussion of taste, trends, and technology, I have attempted to focus your T here are two conf licting trends af fecting my attention on the broad movements in the business. First, more women are entering the economy that can affect your business workforce. However, women increasingly idea. Also, remember that there are similar must work to pay for family necessities trends in your local community. It’s at least rather than to make money for extras. For as important that you pay attention to my business, this means that professional these. For example, perhaps you live in a working women will appreciate even more farming community with no manufacturing in the years ahead the extra service and industries and many migrant workers. It is convenience that we offer. unlikely that a high fashion clothing store would do well there, but you might do Second, as the baby boom matures, the very well selling a new lighter, stronger, number of women in the age group that cheaper work boot, or chain saw, or stump enters the workforce is declining. This means puller. that I cannot count on an ever-expanding population base for my business. Write down your first thoughts about what trends affect your business and where To accommodate these trends, I plan to they will be in five years. Nobody expects pay attention to my customers’ changing a perfect forecast, but most financial tastes as they grow older. I also intend to backers want to know that you have find new ways to market to the smaller thought through how your business will fit number of younger women entering the into the world in the next few years. workforce. Break-Even Analysis: Will Your Business Make Money? Some people have a bigger problem than others when opening a new business. These are folks who are positively enam- ored with their business concept and are desperately eager to begin. They are so smitten and eager to start, they have no patience with the economic realities involved in their business. If you recognize

Chapter 3  | choosing the right business |  35 this tendency in yourself, it’s extra tool for new business ventures. They won’t important that you prepare a financial write a complete business plan unless their forecast carefully and pay attention to what break-even forecast shows that the sales it tells you. This step tells you whether revenue they expect to o­ btain far exceeds your idea is a sure winner or a sure loser what they need just to pay all the bills. or, like most ideas, whether it needs work Otherwise, they know their business will and polishing to make it presentable. not last very long. How can you tell if your business idea caution will be profitable before you implement it? The honest answer is, you can’t. This You can use this technique as a “quick essential fact makes business scary. It also and dirty” profit analysis, but don’t use it as a makes it adventurous. After all, if it were substitute for the full profit and loss forecast a sure thing, everyone would go into p­ resented in Chapter 6. A break-even forecast business. is a great screening tool, but you need a more c­ omplete analysis before spending any money. Just because you can’t be sure you will make money doesn’t mean you should tip throw up your hands and ignore the whole problem. You can and should make Project development note: The some educated guesses. I like to call them break-even analysis described below does SWAGs (“Scientific,” Wild Ass Guesses). not apply to a project development, since The challenging part is to make your profit only one sale o­ ccurs. This exercise is designed estimate SWAGs as realistic as possible and for a continuing business with ongoing sales then make them come true. revenue. Before they begin, developers must know how much profit they will make after The best way to make a SWAG about the project is completed. A developer prepares your business profitability is to do a break- a break-even forecast every time she calculates even forecast. Although a break-even the likely sale proceeds and subtracts analysis or forecast can never take the estimated costs. Developers can skip this place of a complete business plan, it can section, unless they need a refresher course on help you decide if your idea is worth break-even analyses. pursuing. To complete a break-even forecast of Most financial backers expect you to your business, you’ll make four separate know how to apply break-even analyses to estimates: your business. Your backer may ask what your profits will be if sales are slightly • Sales revenue. This consists of the total higher or lower than your forecast. d­ ollars from sales activity that you Many experienced entrepreneurs use a break-even forecast as a primary screening

36  |  how to write a business plan bring into your business each month, part of your business plan. Much of your week, or year. hope for success rides on how accurately • Fixed costs. These are sometimes called you estimate sales revenue. “overhead,” and you must pay them regardless of how well you do. Fixed Keep in mind that you’re honestly trying costs don’t vary much from month to to decide if your business will be profit­ month. They i­nclude rent, insurance, able. This means that you must base your and other set ­expenses. forecast on the volume of business you • Gross profit for each sale. This is defined really expect—not on how much you need as how much is left from each sales to make a good profit. If you estimate sales dollar ­after paying for the direct costs too high, your business won’t have enough of that sale. For example, if Antoinette money to operate. But if you ­estimate sales pays $100 for a dress that she sells for too low, you won’t be prepared or able to $300, her gross profit for that sale is handle all the business you get. $200. • Break-even sales revenue. This will be Here are some methods different the dollar amount your business needs types of businesses use to forecast sales each week or month to pay for both revenues. direct p­ roduct costs and fixed costs. It will not ­include any profit. cd-rom caution A copy of the Sales Revenue Fore­ cast is also included on the CD-ROM in Excel Math alert: The following section spreadsheet format (known as .xls). You can r­ equires that you make some simple math­ find it under the filename SalesRevenue.xls. ematical calculations, which you’ll use to ana­ Note that formulas have been embedded lyze your business before writing a complete in the spreadsheet document so that it will plan. If the very thought of math makes automatically calculate revenue totals. your head spin, you’ll probably want to find someone to help you. tip Forecast Sales Revenue You may decide to round off your forecasts to the nearest $1,000 instead of Your first task is to estimate your most writing out each single dollar amount. For likely sales revenue by month for your first instance, a monthly sale of $33,333 would two years of ­operation. This is both the become $33,000. After all, these are guesses, hardest thing to do and the most important and it’s hard to guess at single dollar amounts when you’re in the five-figure area.

Chapter 3  | choosing the right business |  37 Retail Sales Revenue Forecast number of people in the area gives them the average sales per person from grocery The simplest way to forecast retail sales stores. revenue is to find the annual sales revenue per square foot of a comparable store. Then they compare the average sales per Then multiply that dollar figure by your ­person with state averages. If it’s higher, it estimated floor space to derive an estimate might mean that people living in the area of your annual sales revenue. have a higher-than-average income. They can verify that by ­referring to the United Example: States Census, which lists average income A similar business shows $200 of sales per family and per person for ­every census per square foot per year. If you have tract. If the income per person is ­average 1,000 square feet of floor space, your or below average, and sales per person are estimated annual sales revenue will higher than average, it probably means that be $200,000 (1,000 × $200). Naturally, people come from surrounding areas to your estimate should take into account do their shopping. If the sales per person everything that makes you ­different are lower than average in the area, it from the other store. might mean that income is below average or that people leave the area to do their Some chain stores, such as supermarkets shopping. On the basis of this sort of data, and drugstores, have refined the art of together with an analysis of competition estimating sales to a science. Of course, and demographics, supermarket executives they have the a­ dvantage of learning from can develop relatively accurate estimates of their experience with their other stores. sales volume for a new store. Even so, they occasionally make bad estimates. Service Business Sales Revenue Forecast Supermarket executives first gather To estimate sales revenue for a service statistics on how much the average business, you’ll need a good understanding person living in town spends every week of what steps you go through to generate in grocery stores. In some states, these a billable sale. Then make a forecast of numbers are available by obtaining total how many times you expect to go through sales volume of grocery stores from the all those steps every week or month and state sales tax agency; normally that data how much revenue you’ll derive from those is broken down by county. They estimate steps. how many people live in the area for which sales volume statistics are gathered. Don’t forget to allow time for internal D­ ividing the sales volume data by the matters and marketing. If you’re a sole proprietor, you’ll need to allow somewhere between 20% and 40% of your time