Creating the Framework of Your Business Plan
Now, you're ready to begin creating your business plan. From this point forward, your business plan will be one of the most important documents in your life.
Your business plan is your road map. As you might have noticed by now, starting a business requires the coordination of hundreds and hundreds of details. Every item has to be thought through and planned for intelligentlyor your business will suffer. A logical, written plan ensures that you make the necessary arrangements, while at the same time, preventing or minimizing the feelings of being overwhelmed.
After your business starts, the business plan acts as your company handbook. What are your plans for the future? How will business be maintained? What terms do you offer clients? All of these questions are answered in your business plan, thus showing that your business is well thought out and consistent.
Rather than immediately writing your business plan from start to finish, you begin by constructing the framework, and then finish building the plan as you get the information you need to fill in the sections. You might need to rewrite some sections several times, as your plan becomes more precise and your assessment of business more realistic.
In this section, you learn how to begin building your plan by outlining a basic business plan "form" that lists all the necessary information and components of your business plan. Your business plan will be divided into sections; within each section, you will answer a series of questions that provide necessary information about your financial, logistical, and legal plans for your business. The basic format of the plan is shown in Figure 3.2.
Figure 3.2 This is the basic format I recommend for your business plan. You can create it in a word processing program or on paper.
These are the major headings that make up the framework of your business plan:
Assumptions, Expansion, and Exits
For additional help, check the many free publications available from the Small Business Administration. Much of the information can be downloaded from the website, http://www.sba.gov/library/pubs.html. Booklets and other informational pieces include a home business overview, how to determine if you are ready for business, and a wide variety of general and specific business plans. If you do not have Internet access, look up the nearest Small Business Administration (SBA) office in your phone book under the blue pages/government listings section.
Within each of these sections, you'll add information that answers a number of questions, as shown in Figure 3.2. The following sections detail these questions and discuss how to go about answering them within each of these important areas of your business plan.
As you fill in your business plan, create a list of any equipment, supplies, or other items you'll need to begin and run your business. If you know how much an item will cost, note that directly on your list. Save this list of items for the next chapter when you formulate a budget.
You'll need list
Notes from Chapters 1 and 2
Introduction/Overview and Goals
Though it appears first in your business plan, the introduction and overview are written last; these elements offer a summary of the rest of the business plan. Return to the introduction and write it only after you have completed the rest of the business plan.
A written listing of your goals should be included in the introduction to your plan. Naturally, one of your goals is to make money. But how much per year? $100,000? $500,000? More? Less? Be specific.
Moneymaking Business, or Nonprofit Organization?
Review your goals carefully. Your venture might be better suited to a nonprofit organization, as opposed to a business. For instance, you might set up a small publishing company as a home business. But if the goal of that company is to dispense information about a particular cause (for example, drug prevention, safety, or some other social cause), making money (beyond meeting your expenses and paying yourself a salary) might not be as important. Or, you might set up an insurance agency. But what is the goal of the agencyto make money, or to provide health insurance to as many people as possible? If you mention the latter, you will be better suited to a nonprofit organization. If this is the case, your process will be somewhat similarbut you will have donors who pay and clients who use your services, and your marketing will be called fundraising (or development).
Also, your business form will be that of a nonprofit organizationcheck with your state offices to determine what is required, and visit the IRS website pertaining to 501(c)3 (nonprofit) organizations at http://www.irs.gov/charities/index.html.
What other goals do you have? Most people considering a home business want to make money, but they also might want to
Have more control over scheduling, particularly family or child commitments (for example, attending a child's soccer game)
Do something they enjoy
Build a business to eventually sell at a profit or pass on to their children
Be sure that you are specific about your financial goals, but include your nonmonetary goals as well.
Outlining the Basics
In this section, you will outline the basic information regarding your business. The information you add here will answer these questions:
What is the business name? Is it a sole proprietorship, partnership, or corporation?
Where will the business be located? (Presumably, you have answered this, and the answer is in your home.) Is there a post office box?
Will the business have a web presence? What is the domain name(s)?
Who is the proprietor(s)? What is it about the proprietor(s) that makes him/her/them the right person(s) to run this business?
What needs or wants of customers are being met? (Give a brief overview of who you are serving and why.)
Read on to learn about answering these questions within your business plan.
As your first task in this section, you need to state the business name. When naming your business, be sure to choose a name that does not conflict with an existing business. If your name is truly unique, consider making it a trademark.
Visit the website of the Patent and Trademark Office, http://www.uspto.gov. A visit to this website will not only provide information about the trademark process, but also help you make a decision whether you need the help of a lawyer. If you decide to hire a lawyer, contact your local bar association and ask for a referral to an intellectual property (IP) attorney.
Whether you choose to trademark your business name or not, check business licenses filed with your local government, Fictitious Business Name statements filed with your local or state clerk's offices, as well as phone directories and other public sources for existing businesses in your area. Avoid any name that might be confused with another business.
In most instances, you will need to file a Fictitious Business Name Statement.
To verify the Fictitious Business Name requirements where you live, check with your city or county planning and development offices. In most cases, your city or county government will provide you with a consolidated checklist of all local requirements for a business. These checklists can be very helpful, and often provide additional information, such as how to do business with the city, county, or state.
You also must state whether your business will be a sole proprietorship, partnership, or corporation.
A sole proprietorship is you, by yourself, owning and running the business. This is the simplest and most common form of business organization. Your income and expenses from the business are reported as part of your federal tax return on Schedule C, and you don't need to file incorporation papers to "form" your business.
The simplicity of this form of business is a distinct advantage, but it offers some disadvantages, as well. The chief disadvantage is that liability flows directly to you. This means that a customer can sue you directly for failing to perform the services you agreed to provide. Your home and other assets could be at risk. You can mitigate this risk by purchasing liability insurance (or errors and omissions insurance). If you own few assets (and rent, rather than own, your home), the liability issues might not be as important.
The more assets you have, and the more people who know you have liability insurance, the more likely you are to be sued.
The nature of your business is also a key factor. Are you offering services in which safety could be a factor, such as a building contractor who has to be sure that a staircase doesn't fail? Are you offering services that could greatly impact someone's life if done incorrectly, such as accounting or legal advice? What happens if you don't perform as promised? The greater the potential fallout to the client, the more likely someone could be injured or killed, and the more likely someone could be financially ruined, the more likely you are to be sued.
A partnership is a formal partnering of you with at least one other person. Forming a partnership generally requires an attorney.
As a home business, you might not be allowed to form a partnership unless it is with your spouse or domestic partner (depending on regulations of home businesses in your area). But this could make a partnership the ideal business structure. If you and your significant other are going to share in the work and expenses anyway, this might be a way to formalize that agreement.
Forming a partnership with someone not living with you is a bit trickier. But this is the twenty-first centurythe era of the virtual company. If this is someone you know you can trust, and zoning regulations allow it, there's no reason why two people in different citiesor even different states or countriescan't use this business form. (With more than one state or country, however, bear in mind that you might have to report income or file forms twiceonce in each jurisdiction.)
Whether your partner is in the next room or the next country, however, always consider such an arrangement carefully. Ask yourself whether you really know the person you are partnering with for this business. And no matter how well you think you know him or her, treat it as any other professional transaction. This means that
All partners are willing to disclose their current financial positions and ability to contribute to the partnership financially.
All partners are willing to fully disclose the skills and experience they bring to the partnership, as well as any potential liability.
All partners are willing to provide other partners with a credit report, background check, or other documentation supporting their viability to be involved in the business.
All partners are willing to formalize who does what, when they do it, and why, in a partnership agreement.
If you choose to form your business as a partnership, be sure to discuss how the partnership will work and draft an agreement prior to engaging an attorney. This will save you time, money, and the embarrassment of trying to negotiate partnership terms in front of a third party.
Why is this so important? Business partners generally all agree to pay the debts of the partnership. So, if one partner runs up debt and disappears, the remaining partner(s) is left repairing the financial situation and the reputation of the business. Having a partner is a great way to split the risk and the work, but it can be a headache if you don't know the other partner(s) well.
A corporation is an entity that is completely separate from any person. In fact, corporations file their own taxes and have many rights and obligations, just as individuals do. Corporations offer some distance between you (an officer in the corporation) and the entity itself, which might be helpful when dealing with liability. (However, these rules have changed in response to scandal, and vary from state to state, so you will need to talk to an attorney to understand any benefits and limitations.) There are many types of corporations, and an attorney will be needed to advise you on the best corporation type for your business. Some forms of corporation can be one person, so check the corporation laws in your state to determine if this is the best organization for you.
As with partnerships, your city or county might restrict or forbid this type of business from operating from a private residence.
There are also some hybrid forms of business, which are not truly and entirely like a typical partnership or standard corporation. Those include
A Limited Liability Company (LLC), which mixes the decreased direct liability of a partnership with tax advantages more common to a corporation.
A Professional Corporation, again, mixing some aspects of a partnership and a corporation. This corporation type is usually available only to certain types of businesses, however, and often limited to high-risk occupations such as doctors, lawyers, and accountants.
An S Corporation is a corporation that has formed a standard corporation (as described previously) but filed proper forms with the IRS to have the business' profit taxed as if the business were a sole proprietorship. (Standard corporations are often also referred to as "C" corporations.)
For more information on business structures and considerations, visit http://www.AllLaw.com.
If you are uncertain which business entity is the right type for you and your business, check with an attorney. It is not unusual to start a business as a sole proprietorship and expand it to a partnership or corporation as the business grows, or as liability and other issues become more serious. Incorporating is an additional expense that, as a new business owner, you might not be able to justify until your income from the business can easily cover such costs.
After choosing a business entity and registering it with the appropriate state agency, you might need to obtain an Employer Identification Number (EIN), also called a Federal ID number or Tax ID number. Visit http://www.irs.gov/formspubs/index.html for more information on whether you need or would benefit from obtaining this number for your business. For state tax information, contact the Department of Revenue in your state.
Your Business Location, Address, Web Presence, and Domain Name
Next in this section, you must describe where your business will be located and whether it has a post office box.
Presumably, your business will be located in your home. This might not mean, however, that your business will share your home's mailing address.
Using a post office box is one way to separate your personal mail from your business mail. It also affords you some privacy, as you do not have to provide your home address to as many people. Because most boxes are modestly priced, this is a relatively inexpensive way to help separate your business from your personal life.
Within this section of the business plan, you also must answer the questions, "Will the business have a web presence?" and "What is the domain name(s)?"
The answer to the first question, in almost all cases, should most certainly be "yes." As with business names, domain names should be researched carefully to avoid confusion and possible trademark violations.
Check for existing domain names on an Internet registration site, such as http://www.Register.com. This website provides information on whether a name is in use, and if so, who owns it and when the registration is set to expire.
Describing the Proprietor
Within this section, you need to name the proprietor(s) of your business and describe what makes that person (or those people) capable of running the business.
Thinking through the answer to this question is an important part of preparing your business plan because it helps you understand your business' strengths and weaknesses in the marketplace. It is highly unlikely you are beginning a business that is truly unique. If a prospective customer knows 30 plumbers, or 40 graphic artists, why should he choose you? What makes you stand out from the crowd of your competition? Address these issues as you answer the questions in this section of the business plan, and be specific.
Describing What Need Your Business Fulfills
The final question in this section of the business plan asks, "What needs or wants of customers are being met?" (Give a brief overview of who you are serving and why.)
The information you add here should flow directly from the information you offer to the previous question in this section. If your unique ability to perform graphics work and provide printing services distinguishes you, for example, your target customers might be people who want "one-stop shopping" and want to save time and money by using you for both services.
The Business Overview section of your plan will include answers to these questions, as described in the subsections that follow:
What does the business do or provide?
Who or what does the business provide these service(s)/product(s) to? Are there specific industries or geographic locations that services are provided to, or are they offered to the public? Is the entity Business to Business (B2B), Business to Consumer (B2C), or both?
Describing What the Business Does or Provides
To answer the first question in the Business Overview section, list all the services your business will provide. Be specific. For example, if you are starting a bookkeeping business, you might be providing bookkeeping, tax preparation, audit assistance, and financial records organization services.
Offering more than one service provides your business with an advantage. You will draw more customers, and you can often cross sell servicesoriginally gaining a customer because of one service and selling him others as your relationship grows.
However, you will want to refrain from offering too many services. Aim for three to five separate services. Fewer than three, and customers are less likely to come to you. More than five, and prospective customers might not believe that you can do everything you say, or might feel that you do so many things because you do nothing well.
As an example, let's say that you offer sales consulting. Now, if you also offer computer repair, writing, and graphic design, you will be sending a message to clients that you aren't focusedthese services don't mesh well together, and there appears to be too many of them.
In the preceding example, it would be wise to jettison the computer repair. You could then recast the writing, graphic design, and sales consulting as a "one-stop marketing shop," or a sales-boosting business. The writing and design continue to be offered, but only for sales-related materials for your clients. This pulls your business in to a cohesive offering. Instead of four disparate, unfocused services, you are now offering one, cohesive, inclusive servicebuilding credibility and attracting more clients.
Defining Your Customer Base
The second question in this section of the business plan asks "Who or what does the business provide these service(s)/product(s) to? Are there specific industries or geographic locations services are provided to, or are they offered to the public? Is the entity Business to Business, Business to Consumer, or both?"
Using the final two questions from the previous section, as well as the description of services you wrote for this section, provide a detailed description of your ideal customer. This doesn't mean that you cannot have customers who don't fit this description, but you should have some idea of your target market.
You will probably have more than one target customer (or market segment), and it is important to provide details for each segment. For instance, as an attorney, you might provide services to individual clients as well as small businesses. Your individual clients might be people specifically concerned with estate planning, whereas your small business clients might have a need for succession planning (for example, who buys, operates, or inherits a business).
Creating Your Marketing Plan
You might think that cash is the lifeblood of your business. You are wrong. It is marketing.
It is the one activity (well actually, an entire group of activities) that will make or break your business. The day you aren't marketing is the day that your business stagnates.
In this section of your business plan, you'll answer these questions:
How does the business reach customers?
What are the unique features this business offers that competitors do not?
How will the business interact with and retain customers?
How is pricing structured in your line of work? What is the going rate for the service you provide?
Read on to learn about the information you'll enter to answer these questions.
Describing How Your Business Will Reach Customers
Pulling together the information you'll use to answer these questions might be quite simple. If you are offering surfing lessons, for example, you are probably reaching your customers on or near a beach. You are fulfilling their desire to learn how to surf and have fun in the water.
Of course, most answers to these questions are more complex because determining how to market to the right audience can be a complex task. You want to insert information about you and your business right in front of the people most likely to hire you. Where are they located?
If you are having difficulty answering this, visualize the target customer(s) you described in the previous section. Imagine one composite person who represents an entire target customer segment. When does this person get out of bed in the morning? What kind of home does he or she live in? Sketch an imaginary day in the life of Carl or Connie Customer. At what point in the day is their desire for your product or service at its high point? That is where and when your marketing should take place!
Describing the Unique Features of Your Business
Also in this section, you must answer the question, "What unique features does this business offer that competitors do not?"
In an earlier section of the business plan, you discussed your unique skills. The information you'll enter here is similar to that information, but here, you describe those skills in the third personas a quality of your business, not as a personal quality.
So you might say, "Carol Anne Carroll Communications offers one-stop shopping, from conception to printed product, for a wide variety of documents." Or, it could be your location: "We're the only full-service bookkeeping business in the tri-county area." Or perhaps your equipment makes you stand out: "We are the only photographers with a fully-digital photo development process in the area."
Here, too, you will need to do some competitive analysis. What does your competition offer, and how is your business better?
Stating How Your Business Will Interact with and Retain Customers
You already know when your prospective customer most wants your services. How will he learn of you at the right time? If he wants to surf, and you offer lessons, will he receive a flyer as he arrives on the boardwalk? Will he hear your ad on the radio as he drives to or lays on the beach?
And how will you respond to customer contact? How will you work with them and follow up on their interest? What information will you provide over the phone? Do you send customers a brochure or price list? You should plan for a clear exchange of information, so your customers know how you will provide the services offered.
Describing Pricing Structure and Rates
I will talk more about pricing in the next chapter. But for now, be aware that you should know the going rate for the services you provide. If you are providing services to customers in more than one geographic area, be sure that you know the going rate for each location. Then, in this section of the business plan, you'll need to list and describe the pricing structure you intend to use for your business and the going rate for similar businesses in your market.
Describing the Physical Logistics of Your Business
Your business plan needs to include a full description of the physical location, size, and layout of your business. In this section of the plan, you'll answer these questions:
Where is the business located? How much space is rented/allocated?
What necessary equipment do you own, and what remains to be purchased? See Chapter 6, "Getting Technology You Really Need (and Only What You Need)," for more tips on purchasing technology.
What arrangements have been/need to be made with other businesses in order to provide the product(s) and/or service(s) offered by the business?
The following sections explain how to answer these questions.
Describing the Geographic Area and Allocated Space
You must first answer the question, "Where is the business located? How much space is rented/allocated?"
You've already stated that the business will be in your home, but here, you should describe your home's location. What is your neighborhood like? Will clients be able to take public transportation (and will you)? Are coffee shops, restaurants, and other amenities nearby? Is there something you wish were close by, but isn't? How does that affect your business?
Next, describe where your office will be located within your home. Do you need a separate workshop space, too; if so, where is that? (Ideally, a workshop and office would be located right next to each other, but the layout of many homes would make this impractical.)
Outlining Equipment Needs
In this section of the business plan, list what equipment your business will need and whether you currently own or must purchase that equipment. Many home businesses require a computer, printer, fax machine, business phone line, and office supplies, as well as letterhead (including envelopes) and business cards. Your business might have other equipment needs, as well.
Don't try to save money by using your home phone for work. The cost of your work phone is usually a deductible expense and allows you to further separate your business and home life. Imagine picking up a call because you are expecting a lucrative deal to come through, and instead, a chatty former co-worker is calling "just to see how things are going"? Of course, high-speed Internet or cable options will allow you to maintain multiple lines on one infrastructure. (See Chapter 6 for more discussion on this topic.)
Also in this section, describe the necessary supplies you'll use in your business. Imagine the complete cycle of meeting your ideal customer, convincing him to hire you, performing work for him, and being paid. What supplies do you need at each step? What about software? Beyond word processing and spreadsheets, you will probably need software to store and manage client contact information, invoices, and orders. You might also need special software to perform the services you offer, such as database, graphic design, and/or presentation software.
Defining Relationships with Outside Vendors
Finally, within this section, answer the question, "What arrangements have been/need to be made with other businesses in order to provide the product(s) and/or service(s) offered by the business?"
Particularly if you offer "one-stop" shopping, you might need to subcontract with other businesses. For instance, if you are a writer and offer finished newsletters, you will need to work closely with a printer. Have you made that connection? Talk with any potential subcontractors and discuss how you will do business. Will you need to advance them a deposit when work is ordered, or will they bill for their services? Will you include the cost of their services on your invoice to the end client, or will they send a bill to the end customer separately?
Come to a formal, written agreement, involving an attorney to finalize the contract.
Planning the Financials of Your Business
This section will largely be completed in Chapter 4, but here is the information it will contain:
How much money do you need to start this business (Day 1)?
How much money do you need, monthly, to operate the business?
How much money do you need, monthly, to live on? Where will this money come from during times of little or no business (such as during startup or down times)? Will this come from savings, partner's/spouse's income, part-time job, or other source?
Note that you will be keeping two separate spreadsheets: what it costs to start your business, and what it costs to keep it running.
How much money can you reasonably expect to make from the business initially? (Take the going rates from the Marketing section of your business plan and expand them here.) What variables exist in pricing? What is the maximum income you can generate?
What can you reasonably expect to earn from the business during the first year? Second? Third? Fourth, Fifth? Years Six through Ten?
Although you will "crunch numbers" in the next chapter, as you prepare information for this section of the business plan, think about where you want to be in 5, 10, and 20 years. Knowing what life you want to be living in the future can help you make decisions about what services you offer and how much you work today.
Describing Your Assumptions and "What Ifs"
This section of your business plan performs two separate tasks:
It clarifies what assumptions you have made.
It provides you with objective measurements for closure and expansion.
In this section of the plan, you'll need to answer these questions:
What assumptions have you made in order for your financial projections to work? What happens if those assumptions are incorrect?
What assumptions have you made in your marketing and logistics? What happens if those assumptions are incorrect?
At what point would it be impractical to run the business? At what point financially would you decide to throw in the towelthat is, how much money would you have lost (or risk losing), and for how long? If the business made money, would there be other factors that would make you consider closing or selling the business? (For example, your business is profitable, but will come under greatly increased regulation if you continue to operate it in to the next 35 years. Or your business is profitable, but requires you to be available weekends and eveningssomething, perhaps, that you didn't realize at the time you started the business.)
At what point would it be impractical to run the business from your home? For instance, at what point would you need to hire so much additional help that you could no longer operate from home legitimately? At what point would you have to purchase so much additional equipment that working out of your home would be impractical?
Defining Your Financial Assumptions and Contingency Plans
First within this section, you must answer the question, "What assumptions have you made in order for your financial projections to work? What happens if those assumptions are incorrect?"
Are you assuming that your spouse will continue to work at his job, where he can obtain sufficient health insurance? Then that assumption goes here. Along with that assumption, write a contingency plan. What if he changes jobs? How much extra would you need to pay for health insurance? (Granted, he might leave his job five years from now, but you should have some idea of the cost of any alternatives.)
What happens if your rent is raised higher than you anticipate? What if your homeowners association raises its rates beyond the expected $10/month?
Defining Marketing and Logistics Assumptions and Contingency Plans
Next, answer the question, "What assumptions have you made in your marketing and logistics? What happens if those assumptions are incorrect?"
If you find that you cannot use the space you set asidesay a lengthy construction project starts on that side of your home as soon as you set up an officewhere else in your home would you place your business?
If you believe five of your current clients will come with you when you leave your employer, what happens when only three of them actually do?
What you need to do here is think of the obvious assumptions you are making and come up with a plan that addresses, "What if it isn't like that, after all," as outlined in these scenarios:
You're assuming that you will work out of an area in your home. What happens if construction, noise, or natural disaster strike? What if you had to sell?
You're assuming that you will have health insurance coverage for your family through your spouse or partner's employer. What if your spouse or partner were laid off?
You're assuming that you can work and watch your children. What if you can't do that? What if you need to work and they need to be at violin lessonsat the same time?
List, one by one, all the assumptions you are making. This can be difficultbecause the very nature of an assumption is that we just "assume" and don't think about other options or disruptions to the plan.
To be sure that you address all of your major assumptions, visualize a day in the futureyour ideal business day. What do you do, during that day, step by step? These are your assumptions. They are right therefrom assuming that the time you get up will be 7 a.m. to assuming that the phone will be quiet until your project is finished to assuming that you can get your work done before the kids return home from school at 3 p.m. Yes, this is a little like taking your dream and looking at it through nightmare-focused lenses, but that is how you unearth assumptions and consider alternate solutions in the event that those assumptions are incorrect.
Creating an Exit Plan
Next in this section, describe specifically at what point it would be financially impractical to run the business. At what point would you say, "I'm not making enough money?" Or, at what point would you be making enough money, but not enough to justify the hassle, sacrifice, or hard work? For many people, money and logistics will be tied together. In other words, perhaps at breaking even, you would not be willing to put up with as much sacrifice as you would if you were making six figures a year.
These are the lines in the sand that provide your best dreams and worst nightmares. How long are you willing to work (or how long can you work) and not make enough to meet basic expenses? What if you cannot reach your financial goals? Would your business still be worth running? What if you met your financial goalsbut never got a weekend free?
Part of this question is answered in the next chapter, but in this section, you'll determine your financial limits. You might determine, for example, that you will have to close shop if you make less than $30,000 per year for two years. Also consider contingencies under which those limits might flex. For example, given the preceding scenario, could you continue to run your business if your children received scholarships paying part or all of their school expenses? Also in this section, consider at what point would it be financially or logistically impractical to run the business from your home.
To make this determination, ask yourself at what point you would consider moving to a separate location, outside your home. How many, and what type, of customers would justify a separate office, retail, or industrial space?
You might decide to move the business outside your home if you have more than 30 customers (for example, the maximum you think you could handle without hiring at least one employee). This type of expansion is discussed later in the book.