Dec 18, 2009
By Patricia A. Peacock, Ed.D, of Rutgers University
"He who fails to plan, plans to fail."
An Ancient Proverb
Starting a small business appears deceivingly attractive because of the apparent lack of governmental interference. This hands-off approach is perceived as the exception, rather than the rule. Initially, few enterprises require much more than a local registration of a tradename, and the filing with the state and federal taxing authorities before opening their doors. Little or no evidence is required to verify that a venture is viable, let alone developed by someone knowledgeable and capable of delivering the agreed upon product or service.
Driven by demands of the lending community, often coupled with the need to compile accurate and timely information, individuals are now engaged in the pursuit of any knowledge that will support their venture from concept to completion.
The business plan has evolved as a simple, albeit standard, well defined document. Its structure not only allows for the immediate evaluation of a business design against the backdrop of its industry, but also defines the manner in which the enterprise will measure success. This has become critical in an economy which still records a significant number of failures. Assurances are, therefore, defined by the data, and the procedures set in place to track and provide feedback on the implied and stated goals.
Today's business plan, whether written as an operational guide or financial proposal, demands unprecedented accuracy in detail and documentation. The role and resources of the local library have emerged as contemporary tools. Business reference texts and databases have gained in usefulness and prestige as individuals search for efficient, inexpensive methods of information and data collection.
Business textbooks offer sample business plans with limited application. The language is cumbersome for the neophyte. The actual research process remains a complex and complicated mystery. The application of fact and formula is viewed as overwhelming and lacking a logical or consistent structure.
Business Plans Handbook offers a template of successful plans enabling the entrepreneur to "plug in" their respective data and act with a plan in hand.
The business plan process begins with a database search to determine whether or not the product is manufactured or the service offered, perhaps under another name, or with another application. This initial search may suggest a manufacturer or a successful company. Use of the U.S. Securities and Exchange Commission Filings can offer data on publicly held companies, while Dun & Bradstreet Market Identifiers will provide detail on some privately held companies. But this initial review only begins to scratch the surface.
No single document or press clipping will provide all the information that will be required to make the final decision regarding a proposed start-up. The idea is to locate and identify any and all information. Each piece potentially contributes to an informed decision on trends and possible market entry.
General resources for locating information on products, services or companies include federal and state agencies and their respective regulatory agencies; financial institutions; chambers of commerce; local development authorities; local courts; trade associations; think tanks; trade magazines; as well as suppliers and vendors. Free technical assistance is available through the programs of the U.S. Small Business Administration (SBA), including the Service Corps of Retired Executives (SCORE); the Small Business Institute (SBI); and the Small Business Development Centers (SBDC). Contact your local SBA office (blue pages of your phone book) for the programs located in your area.
The more resourceful the entrepreneur, the more he will begin to appreciate the value of the thousands of nontraditional information sources such as public documents and industry experts. On-line databases, especially the ones maintained by the federal government, provide quick access to information on all types of companies.
Jeffry Timmons, an outspoken advocate and critic of the entrepreneurial movement in his text, New Venture Creation: Entrepreneurship in the 1990's wrote:
"Planning is a way of thinking about the future of a venture; that is, of deciding where a firm needs to go and how fast, how to get there, and what to do along the way to reduce the uncertainty and to manage risk and change." (p. 239)
The business plan, a critical but often overlooked document, has become a significant tool of the 20th century business owner. Banks, venture capitalists, and investors alike now ask the question: "Do you have a business plan?"
The construction of a useful plan is not an easy task. Not only is it helpful to know what comprises the required content, it is also important to understand the process as it relates to the finished product, the plan itself. The difficulty with many of the traditional approaches to developing a business plan is that they fail to assist the writer in the rudimentary process of fact finding. The results are often poorly constructed plans that cannot perform adequately for the entrepreneur.
A business plan may be defined as:
A written document that specifically articulates how an entrepreneur expects to seize the opportunity and execute a strategy he or she has identified.
The plan enables the entrepreneur to anticipate the opportunities, costs, difficulties and requirements of starting a specific business. The significance of the planning process is that the entrepreneur is forced to build the venture on paper first. It is a vital tool! It forces the entrepreneur to think about what must be done and how to do it. It provides creditors and investors with information and documentation to help them decide whether or not to finance the entrepreneur and the venture. Experts agree that the plan begins with researching the market. The typical research process consists of four steps:
Look at the big picture, first. The SIC (Standard Industrial Classification) Manual is the first source to check when researching a product or industry. The SIC Manual assigns a four-digit code which is widely used in business literature. To be effective in starting a business or expanding a product or service line, the entrepreneur must have a thorough understanding of the industry. Initial market research should include the Small Business Sourcebook, which identifies the professional trade associations, suppliers, trade shows, start-up information, educational programs, along with reference and statistical works; the Encyclopedia of Business Information Sources, which introduces newsletters and other publications, together with directories and resources of interest; and, the Encyclopedia of Associations, which details the specific services of the association including the availability of local chapters and instructional material. Infotrac, UMI Periodical Abstracts and Wilson's Business Periodicals Index offer a significant baseline of popular and business periodicals. The industrious entrepreneur will continue this search with several of the newspaper indexes including the National Newspaper Index and the Wall Street Journal Annual Index.
The U.S. Industrial Outlook further documents this global picture of the industry providing five year projections, background information, statistics, trends and forecasts. At this point it would be preferable to gather information on the application of the venture at the local or regional level that the business is intended to serve. Review the local scene as depicted in area or regional newspapers and business journals.
In defining a market niche, a thorough knowledge of the competition is necessary. Libraries offer a substantial number of other reference sources, including Moody's Manuals, which offer comprehensive information on the companies listed on the U.S. Stock Exchanges, including corporate history, income statements and balance sheets; Standard & Poor's Industry Surveys; the Predicasts Basebook, which gives historical economic data from 1960 on 16,000 industrial statistical series; Statistical Abstract of the United States extracting data from the Censuses and many other statistical sources with excellent reference citations; and the Economic Censuses. With diligence and the skillful eye of a detective, trends and forecasts of your industry, as well as contemporary issues, will emerge.
To add supporting evidence to the market research plan, specific company information should be gathered. Companies are either publicly or privately held. There is no one perfect source of information, however, Dun's Million Dollar Directory provides the best national source for identifying companies by SIC code and geographic location; or, the Thomas Register lists data on more than 100,000 manufacturing companies by type of product, a company name index, and product catalogs of many firms.
Local and regional company directories may include: MacRae's State Industrial Directory with product/service, SIC and company name indexes arranged geographically by county and city; the State Directory of Manufacturers; the State Employer Directory; the Macmillan Directory of Leading Private Companies indexing more than 12,500 companies; the Dun's Directory of Service Companies Other other regional purchasing guides may also provide excellent starting points.
These reference texts and directories offer answers or insight that the entrepreneur might address thoroughly in the narrative section of the business plan. This first section of the plan must discuss in detail, with as much supporting evidence as possible, the opportunity, the intended market, the marketing approach, existing competition and proposed market niche, location, pricing formula, management and personnel needs.
When looking for specific help, for example, when establishing pricing formula, do not overlook the popular college and university textbooks on small business management, together with the recommended retail price guidelines available from the manufacturer or distributors.
If the purpose of the plan is to serve as a financial proposal, an additional section entitled "Application and Expected Effect of the Investment" or "Investor Participation" is also required. The critical issues include: Will the cash infusion make a difference in growth? Will the revenues be sufficient to service this new debt? The content must "grab" the attention of the reader to go on to the other sections.
Throughout the narrative of this plan the entrepreneur must answer the questions of intention. Can the new company's business functions be properly managed? Are goals identified and measurable? Can these goals be reached? Can the product be produced efficiently? Can it be marketed effectively? What are the future trends and expectations? There is no one way to structure a business plan, and experts agree it is not an easy task, but standard, acceptable models do serve as a dependable starting point.
It is often of value to include the entrepreneur's mission statement. This is accompanied by the short-term strategic plan which simply delineates the entrepreneur's specific objectives for the initial twelve month period, providing the timeline and budget for each. The opportunities and threats of each objective are also discussed in detail. The detail of the strategic plan must tie back to the cash flow presentation.
The financials include a current balance sheet, together with pro-forma income and cash flow statements for a three year period beginning with the implementation of the plan. The income and cash flow statements are prepared on a monthly basis for year one, and by quarter for the second and third year. Existing companies must also submit a budget deviation analysis covering the previous years activity. Once again, the business reference section of the library can be an invaluable resource in identifying most of the information on industry averages and financial data. The Dun and Bradstreet's Key Business Ratios provides common-size percentages for the 14 key business ratios, representing over 800 different liens of business as defined by SIC code; or the RMA Annual Statement Studies provides comparative financial data and ratios in broad industrial categories. Troy's Almanac of Business and Industrial Financial Ratios offers the entrepreneur valuable information enabling a review of proposed numbers against industry norms. It also answers many basic concerns, for example, what is an appropriate budget for advertising or bad debt, rent or officer compensation?
When compiling and writing a business plan, keep in mind these recommendations from the lending community:
REMEMBER: Unless you have clearly explained to the contrary, the merit of your plan will be evaluated against existing industry standards. These are the Dun & Bradstreet Key Business Ratios or the RMA Annual Statement Studies. Every exception to the acceptable range should be explained in what the accounting industry describes as "Notes of Explanation." Using professionals as an active part of the review process can be invaluable.
In the past, developing and writing a business plan was in itself, a formidable task, often "given the lowest priority" in the planning cycle. The danger has been and continues to be that the owner, lacking control over the sources of information and fearing the demands of the research process, overlook the facts in favor of a quick fix alternative. These deceptions often lead to failure.
Work? Yes. Worth it? Definitely. Professionals believe the planning process is invaluable. These guidelines will help entrepreneurs identify expectations and plan for internal and external risks, some of which they may not be able to control, but all of which need to be taken into consideration.
Patricia A. Peacock, Ed.D.
Rutgers University - Camden
School of Business
Regional Small Business Development Center
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