Why You Need A Business Plan, Why You Resist Creating One by Dr. Jeffrey Lant Business plans are a lot like condoms. Everyone knows they're useful. Fewer people actually use them. To remedy this situation, I sought out Andy Bangs, author of one of America's premier business planning guides. Over 150,000 small businesses are now using his planning methods. Essentially I wanted to know two things: why someone in business ought to plan and why most business people don't. The ebullient Bangs was ready for me. Why Bother To Plan? Your business plan is primarily an operating tool. You use it to write your company's objectives, assess whether these objectives are realistic or not, and check your progress in reaching these objectives. There's nothing mysterious about a business plan. Indeed, it may be the most lucid and succinct document you ever write. A business plan is straightforward and direct. It's composed of just two major sections: information about the business you're in and financial data. The Business Section This section of your business plan helps first you and then others interested in your business understand what you're trying to do and who else is doing it. It provides a snapshot of your activities and gives information about others who are operating competiting kinds of businesses. Thus, step one is to provide a description of your business. What is it that you actually do? Seemingly a snap, this simple question perplexes a very large percentage of business owners. Not surprisingly, if you don't know what you do, how can you expect any one else to? Go on to discuss the market for what you're doing. Who do you think is going to buy what you're selling? How many of these people are there in the area you're servicing? What is their need? How great is it? When you've done that, complete the section on your competition. A lot of lip service is given to understanding your competition. The sad fact is, however, most people have only the most nodding acquaintance with what others in their industry are actually doing. However, Bangs rightly says that you've got to know these people as well as you do yourself. If you don't, you're at their mercy. Then add details about the location of your business. How will this help you reach your buyers? Why it is helpful, and (be honest!) what are its drawbacks? Where your business is located generally has an influence on the kinds of products and services you can offer. The business plan forces you to think about how your location impacts on what you're doing and your ability to reach your customers. The People Part Of Your Business Plan This section of the business plan provides information on two groups of people: management and personnel. Even if you're running a one-person operation, it's a good idea to consider each separately, despite the fact that in this situation you're both! The reason is that even the smallest business needs management and even the smallest business needs personnel. Each function requires different skills. Writing a business plan forces you to think about the management skills you have and the management skills you need. It also forces you to consider the kinds of personnel skills you and your business require. The Effect Of Any Loan Or Investment You're Seeking Most people think of business plans solely in relation to raising financing. This is, of course, a quite erroneous deduction. Whether you're seeking additional capital or not, you need a business plan. If you are seeking such capital, however, you need a section of your business plan to discuss what you will do with the money you are seeking and what effect this money will have. When you've written this section, you're half way through the topics you need to cover in your business plan. Total pages devoted to the subjects above? No more than 12 or 13 typed, double-spaced pages. If you know what you're talking about, you can say it concisely. If you don't, you can't. The Financial Data You Need To Include In Your Business Plan Despite the fact that there are more pages in the previous section than in this one, for most people number crunching is the hard part. Start with the easiest category: a listing of your capital equipment. Write down the equipment you've got and its current value. Then draw up a balance sheet as of today's date. This balance sheet should list your current assets (including fixed assets) and your current and long-term liabilities. The result is your net worth. (B. When you need more detail, use Robert J. Wiley's more thorough techniques. They're found in HOW TO EVAL'ATE YO'R NET WORTH: MAKING FINANCIAL STATEMENTS WORK FOR YO'. See the Resource Box for further details.) Now calculate your break-even analysis. Simply put, a break-even analysis provides you with a sales objective which is expressed in either the number of dollars or units of production at which your businness will be breaking even. As Bangs rightly points out, RIf you know your break-even point, you have a definite target that you can plan to reach by carefully reasoned steps.S Most business people haven't the foggiest idea of how many units of product or hours of service they need to sell before they begin to make money. Do you? The Other Financial Information You Need In Your Business Plan There are four other kinds of financial information you need for your plan. The first of these is a pro-forma income statement. This is also called a Profit and Loss Statement. This statement simply documents what income you have made during a certain period of time. Often these statements are done on a quarterly basis, usually for the period immediately passed. At the end of any given year, such a statement is supported by a copy of your company's most recent tax returns. Then there's the Pro-Forma Cash Flow statement. This shows how much cash you'll need; when it will be needed; and where it will come from. Finally, your financial statement will conclude with a list of all the sources of income for your business and how these funds will be spent. The financial data needed in your business plan should take up no more than 7 or 8 pages; the total length of your plan will be about 20 typed pages. These twenty pages are among the most important you will ever write in connection with your business. Instantly, aspirations are exposed as either fatuous or realistic. Indeed, just the way in which you compile and present this information can tell an experienced reviewer whether you know what you're doing. Tight, concise business plans backed up by a track record supported by hard financial data are irresistible. Take my word for it. The last time I needed to borrow money for my business from my very conservative, old-line bank, they took a look at my plan and supporting financial data and gave me my loan without a nickle's worth of collateral. Yes, plans are important. So, Why Don't More Businesses Have Them? Over the course of over 20 years helping primarily small business people get their enterprises off and running, Andy Bangs has been keeping an Excuse Register, the reasons people give him and themselves for not bothering to write a buisiness plan. Here are some of the best of these unfortunate reasons. I don't need one People in this category say things like, RMy business is unique; or I haven't got any competition, or In my business you can't plan ahead. You have to take things a day at a time.S Bangs and I agree: these excuses are entirely erroneous and often downright stupid. Planning is more important in a small business than a large one. Citicorp will survive writing off billions of dollars from their fantastic miscalculation of loaning money to Brazil. But most small businesses are severely shaken by the loss of even $10,000. Plans not only prevent mistakes. They prevent small business people from doing what most avoid only with difficulty, namely projecting success based on nothing stronger than their wish for it. Sure, I've got a plan. It's in my head! How many times have you heard this! I hear it daily. A bunch of ideas hastily written on the backs of envelopes does not a plan make. You need to know precisely what you're doing, precisely how you expect to finance what you're doing, precisely who you're selling to and precisely who else is selling to these same people. You cannot keep this information in your head. It's impossible. To say you've got it stored in the cranium is merely to say you have no business plan at all. Stop deceiving yourself. I'm so busy running my business, I don't have time to plan. This is another stunner! RPutting out fires,S says Bangs adamantly, is It's the leading reason small business owners never have enough time to get the really important things done and often is a sign that bankrupcy has become a distinct possibility for your enterprise. Planning gives you the surest handle on your business you're ever going to have. It tells you where you've been and whether what you did worked. It suggests where you should be going and lets you know whether you have the resources to get there. Nobody would ever take a trip into the middle of the Sahara without giving travel gear and preparation some thought, but millions of people think nothing of launching a business that is supposed to provide them with current income and meet the expectations of a lifetime with only the barest thought of what to do. Astonishing, isn't it? I'm bad with numbers. I love this one! I'll tell you something. Back in school, I was bad with numbers, too. They bored me. But the trouble was, those numbers didn't have any bearing on my life. Now that they do, I'm a whiz! And you will be, too. Moreover, as Bangs rightly points out, the hard part of the business plan is not the numbers but the directional thinking, the where am I going? part. Once you've got that straight, other peopleQlike accountants and bookkeepers can help with the numbers. I'm not ready yet. Plans start from day one of any business. No matter how small your enterprise is, it will be stronger with a plan. Yet many people are afraid to write their plan now. They fear that because they are small they will either a) be laughed at or b) they'll disappoint themselves. Too, they worry that things will change and that what they write today will change tomorrow. Well, I've got news for them. Most businesses start off small. The ones who didn't want to stay that way planned. Furthermore, only a clod (but please note they do exist) will snicker at a small enterprise. There will be would-be employees and bankers who will scoff because you aren't General Motors after ninety days. The world isn't fair. But you have feet, don't you? So, walk away from them. As for change, of course your business plan will need to be updated. Today's projection becomes tomorrow's reality. Then, in an instant, it's history. You can plan on it! The fact that what you write today will be outmoded tomorrow as a plan is no excuse, none whatsoever, for not writing it in the first place. Let the accountant write the plan. Americans, formerly the great do it yourself nation, now have a love affair with Rlet somebody else do it.S But that simply won't work with a business plan. The primary purpose of your plan is not to raise finance capital. Not at all. It's to force you to think through where you are going, how you're going to get there, and what competition is nipping at your heels along the way. No accountant can tell you this and write the plan. Your accountant is the servant of your business. He can tell you the best alternatives to use once you tell him where you're going. But, not being the master of events, he must not be allowed to determine your business strategy. You cannot delegate the business planning function to an accountant. But, once you've determined on the direction to take, you can use him to supply crucial tactical information on how to succeed in reaching your objective. Bangs has logged other excuses, too: I'll do it tomorrow; I know what I'm doing, so why bother to plan?; and Why write a plan? I'm not going to be borrowing any money. When he hears them he knows that here is yet another self-deluded business owner. The result of these excuses is business uncertainty, slow growth, lack of direction and, all too frequently, bankrupcy and the despair that inevitably accompanies it. Remember: four out of five businesses still fail within the first three to four years of operation. Most of these failures could have been predicted, and many avoided, had their owners bothered to take the three or four days that it takes to write a realistic business plan and make realistic projections based on their findings. If you're not anxious to swell these grim statistics, create the necessary written plan that'll help you avoid such an unhappy result. ____________________________________________________________________ __________ Resource Box Andy Bangs' 122-page B'SINESS PLANNING G'IDE is concise and easy-to- read. It tells you what to do and offers examples of how to do it. If you haven't got a written business plan, you need this key resource. Soft cover. $19.45 postpaid. For more information on determining your net work, use HOW TO EVAL'ATE YO'R NET WORTH: MAKING FINANCIAL STATEMENTS WORK FOR YO' by Robert J. Wiley. 248 pages. Hard cover. $22.45 postpaid. Get both from The Sure-Fire Business Success Catalog, 50 Follen St., Suite 507, Cambridge, MA 02138. Or call (617) 547-6372 with your MasterCard or Visa. Don't forget to ask for your free copy of this unique business-solutions catalog! =============================================================== Dr. Jeffrey Lant is author of many books, including his newest, MONEY MAKING MARKETING: FINDING THE PEOPLE WHO NEED WHAT YO''RE SELLING AND MAKING S'RE THEY B'Y IT and TRICKS OF THE TRADE: THE COMPLETE G'IDE TO S'CCEEDING IN THE ADVICE B'SINESS. Each is $32.50 postpaid from The Sure-Fire Business Success Catalog, 50 Follen St., #507, Cambridge, MA 02138. Ask about his new copywriting service for more persuasive marketing materials.