Rule of Thumbs: Write a Business Plan

On occasion, I’ve been approached by small and medium sized companies. Some are start-ups. Many are established.  Others are handed down from generation-to-generation, modifying practices to accommodate trends, customer satisfaction, and up-to-date processes for profitability.   

So when I asked for copies of their business plans, their standard answer is “it’s all in my head.”   

Then I follow up with “is this where you want your company to be?  In your head? "

In an interview process, I ask questions like: 

"How'd you get started?"

"Where are you at now, financially?"

"Where do you want to be five years from now?" 

And, as predicted, I hear stories from not having enough capital, taking in too many orders, equipment is outdated, grew too fast, not enough sales, lost one huge account that represented 50% of their revenue, not being certified, losing good employees...this list goes on and on. 

After the dust settles, I cut to the chase and tell them that their companies are doomed; and, to stop the bleeding, they need to get their ideas on paper, not tomorrow but today.

A business plan is the most powerful tool a company can and should have.  Without it, it's a rudderless boat in a vast sea of uncertainty, desperately seeking land before supplies run out.  It’s not to say, rudderless boats never find land.  Travel would be so much easy with a map, navigational capabilities, a steady hand, and boat with all functional parts.

One person asked me about using a software program.  I told him, contrary to popular beliefs, that he didn't need a software program to write a good plan.  It's nice to have but not necessary, and sometimes not really effective.  I read a plan conceived through a software program, and it was "no bueno", very bad, hard to understand and did nothing to help the business owner.  

On the other hand,  I’ve seen strong and effective documents handwritten (on one example, diagrammed on the back of a brown paper bag as a mind map).  I truly believe, as long as whatever is written down on paper contains carefully thought out processes and, that the business owner recognizes the strength and value of it, then it serves as a valuable tool.  The next best route, should a person not have the time nor energy nor writing talents to pen his own personal paradigm, is to hire a writer but using as much of his words as possible.  This personal touch results to a stronger sense of pride and accomplishment.

In addition to and very important is that you will need to know where you are at financially. Balance sheets, P&L, and cash flow statements are fundamental in keeping a pulse on your company's health; and, if used properly, can be used to steer you in the right direction when you veer off course.  When I owned an operated a Durable Medical Equipment company, I reviewed these reports daily. My books were kept in a standard accounting (software) program that produced these reports within minutes, and I was ready to turn my wheel at a moment's notice due to any indicators or potentials for concerns.

On another note (and disappointing but important) is that a good plan sometimes prevents bad companies from starting.  For example, I conducted a SWOT ("Strength, Weakness, Opportunity and Threat") analysis with a series of  “what if” worst case scenarios with one client who felt 100% he had a good idea.  He saved money, had family ready to invest, and was thinking about quitting his full time job. On a recommendation, he asked me to write his plan and produce a three month, six month, one year and three years forecast with Pro Forma and cash flow analysis.  Upon completion, I sat with the client and gave my findings. I told him based upon the SWOT analysis and corresponding financials and if he was lucky enough to sell all his products based upon maximum production, he wouldn't make enough money to pay his bills.  Furthermore, he would crash and burn by the end of the year.  He not only thanked me but paid me handsomely for this assessment.

Moral:  Reading failures in writing is way better than feeling it in real life.  Just saying...

A business plan is a structured way in running a business (on paper)and reading results.

When you finally make that decision to sit down and start writing the plan, you will find yourself concentrating and focusing on four basic topics or categories:  Management, Operations, Marketing/Sales, and Finance.

Management:  Who will manage the company?  Are they capable?  Are they trained?  Do I need to hire?  How much will this cost?

Operations:  What is the product or service?  What operational process will be implemented to deliver the product/service on time hassle and defects free? What special equipment, tools, and skills will be needed to run operations?  What software system will be used to control and manage operational, customer service, and accounting data?  What special training will my staff have to undergo?  Do we need to be certified?

Marketing:  Who and what is a typical customer?  What campaign will be used to get the word out?  Is the price competitive?  What sets the company's products and services apart from competition?

Finance:  What is the initial cost/capital to start the business?  How much monthly revenue is needed to cover payroll, cost of goods, expenses, taxes and notes payable?  How much revenue is needed to pay back loans and investors?  What is a reasonable profit margin?

By utilizing these business process management tools, potential hazards can be identified, and you can modify your strategy.  Should contingencies that you pre-identified occur, you've already plans implemented to “nip it in the bud."

Rule of thumbs:

If you are thinking about starting a business, write a business plan.

If you are operating an established business, and don’t have one, write a business plan.

If you are an established business with a business plan, have it re-evaluated.

Take the time to include management methodology such as Total Quality Management, Management by Objectives, Statistical Process Controls, Theory of Constraints, Toyota Production Systems, Lean Enterprise, Six Sigma and other business process management tools that have statistically year-after-year demonstrated financial successes for fortune 500 companies.

In business there’s a strong rule:  Sink or swim.  There’s no such thing as swim badly. 

A well written plan will keep you swimming and ahead of others.

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