Plan a business — with care

By Jeff Wuorio

As a small-business owner — or would-be small-business owner — you get hit with a slew of golden rules: You need to adequately plan your business' activities, you need to identify goals and objectives, you need to allow enough time for the business to mature.

The rules are so tangled that the gold gets tarnished. But that doesn't mean you can't get a handle on the details critical to winning as a small-business owner. All it takes is careful thought, attention to detail and, perhaps most important, a brutal sense of honesty.

First things first: Will this business pay off?

You need to decide whether it's worth your time to start the business in the first place. Mark Weaver, executive director of the Center for Innovation and Entrepreneurship at Rowan University, urges prospective business owners to analyze their financial expectations and risks by using this five-step process:

1. Set your marketplace worth — how much would somebody else pay you to work for them, both in terms of salary and benefits? Say $50,000.

2. Add the elements of risk and return. Estimate how much money you plan to put into the business and then how much you, as an "investor," would expect as a return on your investment. For instance, says Weaver, if you put up $60,000 and want a 25% return — not an unreasonable sum — that's another $15,000.

3. Got anybody on the outside putting up money? You need to add the expected return for that investment as well. In our case, since the risk is all yours, that comes to zero.

4. Add it all up. In our example, the numbers total $75,000. Which means: Over the course of the first five years of your business, you should expect to generate $375,000. That's not necessarily $75,000 each and every year. As Weaver notes, startups being what they are, may earn you nothing the first year but make $150,000 in the second.

But, Weaver emphasizes, if you conclude that your business idea won't match the numbers in your projection, it's likely time to drop the idea.

"This can save entrepreneurs hours of frustration, because it really quantifies their opportunity," he says. "I would say that this destroys about 75% of the business ideas it touches. On the other hand, if you still want to go ahead — if you think you'd be happy with the business — that's good. But don't think that you can necessarily support yourself."

Your business plan: Make it a guide through danger

From there, tackle the business plan itself. The idea that a comprehensive business plan is important gets repeatedly tossed at small-business owners — but most people still don't know what goes into this comprehensive plan and how to use it.

Business authorities say it's easier to put together a business plan if you view it as a battle plan, one that includes any and all known threats and dangers.

"The primary reason for a business plan is that it can serve as a guide through an unfriendly environment," says Norman Scarborough, an associate professor of business at Presbyterian College in Clinton, S.C. "The place you want to fail is on paper, so it's important to pay attention to why your business might not work."

Business plans come in all sorts of shapes and sizes, but any solid plan should include the following:

An executive summary outlining goals and objectives.

A brief account of how the company began.

Your company's goals.

The service or product you plan to offer.

The market potential for your service or product.

A marketing strategy.

A three- to five-year financial projection.

An exit strategy.

Success is in the details

You can start your business planning right on the Web. Plenty of Web sites offer you the chance to create a "mini" business plan or to calculate your startup costs with "startup calculators."

Once you've created a basic plan, you'll want to make sure it offers realistic, solid projections about the course of your business success. So don't skimp on details.

What sets you apart? Weaver says business planning often disregards what he calls "sustainable advantages" — those aspects of the business that make your business unique and separate it from prospective competitors."It's critical to identify your competitive advantages," says Weaver. "So many business people fail to show those differences."

What makes customers like you? It's also critical to use a business plan to illustrate what is attractive about your product or service and, in turn, why customers will be happy that they found you. As Scarborough notes, far too many business plans leave a product or service in a virtual vacuum."It's important to translate a product into customer benefits," he says. "Business owners focus so much on the features of a product or service, they forget to talk about why it's actually going to sell."

How will you figure out your budget? And then there's the issue of financial assumptions versus how much you can really spend on marketing or other projects. Business planning expert Linda Pinson, author of seven business books, says that you've got to do some legwork if you want a realistic set of costs to work with."Business owners are always told to research their numbers, but they're rarely told where those numbers come from," Pinson says. "You've got to take the time to draw them up properly — for instance, if you're going to advertise once a week in the newspaper at two column inches a week, find out that cost." From that point, you can draw up a realistic ad plan that works with your budget.

How much time do you really need to succeed? Another question that often doesn't receive a clear answer is how long it takes to get a new business up and running. That, too, is a function of the business. For example, a landscaper who picks up clients from a former partner who can't handle the customer load can predict he'll be profitable within months.However, should your business be more involved, Weaver says it's essential to allot between five and seven years to develop a sustainable customer base, market a product effectively and to work out any kinks in the business' operation. And, at the end of the allotted time period, dust off the "financial exam" you completed and see if you're hitting your numbers. If you are, great. Stay the course. If not, track back through your business plan to see if you can identify anything that may be holding you back.

Are you writing to lenders or to investors? It's important to distinguish between lenders and investors because lenders are looking for payback on loans — as such, they're probably more interested in financial security and collateral. Investors are interested in profit, so they're more interested in potential growth rather than just being able to pay your bills every month.

Have you included supporting documents? As appropriate, you'll want to include cash flow projections, bank statements, accountant statements, partnership documents or other supporting information.As you might expect, the length of your business plan depends on the complexity of the business you're describing. While some simple service businesses may only need 10 pages or so to map out a reasonably detailed discussion, Weaver urges any serious entrepreneur to compile a more complete plan. This, taking in upwards of 40 pages, allows for the detailed breakdown and discussion of key elements.