Tuesday, November 10, 2009

Business plan: what, and why?

SWOT analysis diagram in English language.Image via Wikipedia

A business needs a business plan, which basically defines a business's misson, and the systems in place that clarify the procedures, as well as define the metrics that are critical to the operations of a business. We will go into What is a busines plan? why you need a plan, what would be in a plan, and how you write a plan.

== WHAT IS A BUSINESS PLAN? ==

A business plan is basically a blueprint of your business, defines what go where, what materials to use, and so on. To take the blueprint metaphore a bit further, you don't need the specific details, like what wallpaper to use and such, but at least a general outline, like "earth tones".

A business plan should start with a mission, and it better NOT be "make money". Even businesses that sell things are there to fulfill needs. After all, people buy things to fulfill needs. This "mission statement" should be left relatively simple.

Ford's mission was "automobile for the masses". Before Ford Motor Company (FoMoCo) and Henry Ford came along, automobiles are very rare, very expensive, very unreliable, basically playthings of the rich. Henry Ford believed that he can build cars by the masses cheaply, but sell a lot of them. He's out there to fulfill a need.


Dell's mission was "computer for the masses". There were plenty of PC clones before Dell, but Michael Dell had a vision that he can leverage the power of mail order, mass purchase, and custom configuration, to provide computers cheaper than anyone else.

MacDonald's mission was "decent food, consistent quality, anywhere you go". There are plenty of burger joints, but if you go to a MacDonalds, you can be sure that the burger's quality is maintained no matter where you are in the world. A cheeseburger in China tastes about the same as a cheeseburger in Los Angeles or Sydney (Australia).

A business plan should then defines the systems that serve the mission. As each business is different, this section will vary greatly.

If you are in the goods-selling business, you'll have to define the manufacturing, shipping, sales, marketing, finance, and personnel (probably a few more I forgot). If you're selling services, you can take out manufacturing and shipping, but you'll still need the rest.

One system most people seem to forget is regulatory compliance. Every business is regulated by somebody, Federal, State, County, City all have a hand. If you sell stuff you'll often need a reseller's permit, pay sales tax revenue to your state tax board, and more. If you have employees you'll need to buy worker's compensation insurance, pay for unemployment insurance, social security and medicare (and the city may have a say as well, such as San Francisco), and you are under oversight of OSHA. In short, you need to know which regulations affect you, who has oversight over you, and so on before you start.

If you sell goods, "customer service", "return of merchandise", and such are important systems, but often overlooked. Another area often overlooked is security and loss prevention. Customer feedback, performance evaluation, are also areas often overlooked.

Remember, you're defining systems and how they interrelate, and how they serve the overall goal. We don't need details about how many trucks you need to move goods from factory to distribution centers. Just the fact that you know you need trucks would be enough for now. The actual details of the system can be refined later. The bigger the business, the more systems you'll need. Smaller businesses only have a handful of systems.

A bus charter business would have the following systems

Order Intake -- how do the orders come in and what is done
Dispatch -- determine who does what jobs when using which bus
Personnel -- how to process employees, HR procedures like promotion and termination
Maintainence -- bus maintainence intervals defined, breakdown procedures, where to call for maintainence
Finance -- invoicing, cashflow, taxes, loans, etc.
Marketing / Sales -- how to get additional customers
Safety/Regulatory Compliance -- DOT, PUC, drug and alcohol test, driver qual files, etc.

If possible, try to calculate the costs and income of each system.

Once you got the systems defined, it's time to set a five year goal, like "I want to grow my sales to $10 million in 5 years". Be both realistic, AND ambitious, with specific numbers.

Next step is to do the SWOT analysis. SWOT = strength/weakness, opportunity/threat. Start listing your business' strengths and weaknesses, as well as opportunity and threat.

MacDonald's SWOT would probably look like:

strength: tremendous brand recognition, consistent system delivers consistent quality anywhere
weakness: also synonymous with bland generic food, system slow to respond to changing market

opportunity: coffee market, "premium" image food
threat: bad economy, plenty of competition from multiple sectors

Next step is to identify the major challenges you'll face on your way to that goal, and how you think you can manage them.

Using MacDonald's again:

Challenge 1: image of generic bland food
Solution: Market campaign that emphasize choice and premium quality ingredients, and that the customers are WORTH the premium stuff.

Challenge 2: employee turnover
Solution: make each employee replaceable, by making the jobs very clearly defined, and cross-train those who show more promise (with attending higher pay)

You get the idea.

From the five year goals, and these challenge / solutions, you will need to create 1 year plans out of them.

Then you'll need to create the projected financials for each year, each system, expected income / revenue, expenses, growth, taxes, and so on. The more detailed the numbers, the better.

That's pretty much your business plan.

How do you know if it's complete? If someone else reads your plan and understands completely what your business is about and can build the business from that plan, it's complete.


== WHY BUSINESS PLAN? ==

You want your business to succeed, right? But how will you know which way to go without a map?

To paraphrase the Cheshire Cat in "Alice in Wonderland", "If you don't know where you want to go, then it doesn't matter which way you're going."

You wouldn't build a house without a blueprint, right? You don't build a house by simply having a bunch of people show up and give them the materials and say "get to work". You have to have a blueprint, a foundation, you have to have the framers cut pieces of lumber to build the frames, assemble the frames into a house, put a roof overhead... and so on and so forth.

You need a plan.

Yet most people trying to move from E to S or B quadrants would start a small business or even a self-employed business without any sort of a plan. Or their plan consists of two words: "make money". As a result, 9 out of 10 small businesses FAIL wthin the first three years. And 9 out of 10 won't survive 3 years after that.

As Rich Dad has said, a company has two missions... spiritual mission, and primary mission. If the two are in line, the company will prosper. Primary mission may be "make money" whcih is fine, but lack of spiritual misison will likely doom a company. Spiritual mission is the mission to serve a need of some sort, to help the clients. If you don't know what your mission is, then your business has no "purpose".

We will discuss later what are the three types of interpersonal power: principle-based power, utility power, and coercive power. If the business have a purpose, and the employees share that purpose, then you are leading the employees with principle-based power. If you don't have a mission/purpose, then you must rely on utility power (i.e. pay and benefits) to lead the employees, and that only lasts until someone else offers a bigger/better deal elsewhere.

People who move from E to S or B are the fiercely independent sort, often with a bit of an ego. After all, you would have to be quite confident of yourself to break out of the E mold, don't you? It validates you as tougher and smarter than the average E quadrant "drone". Yet this is where the ego trips you up: you basically don't want to be tied down to a plan. You ENJOY flying "by the seat of your pants", solving crisis as they appear. However, Rich Dad (tm) had said, "If you can't leave your company to run by itself for a period of time, what you got is a JOB, not a business."

A plan maps out what is truly needed for your business, and allow you to pinpoint something you may have overlooked, such as regulatory fees, additional expenses, and so on.

A plan is also 'risk analysis'. If you figured out the challenges ahead of time, and have a plan in place, you can head off the problem long before it becomes too big to handle.

A plan will reduce your stress level significantly. If you are "fighting fires" in your business all day (i.e. solving one small crisis after another), you are NOT really managing your company. With plan in place, your employees can often handle small stuff without you.

And finally, a plan will help you get loans at a bank to grow your business. Bankers love detailed business plans. They will crunch their own numbers, but they want to see your numbers, so they can see if you're realistic with your goals, and how will you manage risk. After all, they are taking a risk with their money by investing in you.

Thus, a buisness plan is needed for almost any business. If you don't have a plan, how would you know where to go?




















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