Part of starting a business is having a business plan. It doesn’t have to be complicated. We’ll discuss creating a simple business plan.
Business plan can be a scary term conjuring images of thirty-page documents. But it doesn’t have to be that involved. It’s just writing down what you have to get done.
Subscribe to the Show:
What is a Business Plan?
A simple business plan is nothing more than a map for your business that gives an outline of your goals and the steps you will take to achieve those goals. It’s not that different from having a plan to accomplish any goal.
If your goal is to pay off debt, you would outline a plan on how to do that; reduce spending by eliminating dinners out and taking lunch to work, do a balance transfer to lower interest rates, use the snowball or stacking method to determine which debt to work on first. Voila, you just wrote a business plan for paying off debt.
Having a long, detailed, formal business plan is really only necessary for businesses looking for investors or to show a bank to get a business loan.
Your business plan should fit on one page and include the following:
- A problem you have identified.
- How your product or service can solve that problem.
- How you would make money.
- Who your customers are and how many of them are there.
- What separates you from those already doing what you plan to do.
- How much it will cost to start your business.
- How much running room you have.
The Small Business Administration has templates to help you create a simple business plan.
The Money Part
This is the hard part. Depending on the type of business you want to start, you may have a pages long list of things you need to buy or really no list at all. You need to make two lists, one for your own personal cash needs and one for the cash needs of the business. Here are some common expenses for each:
* Food on the table
* Gas for the car
Specific to the Business
* Start-up costs
* Build out
* Burn rate: (how long can you last?)
* Cost of labor (employees or contractors)
You will already know the numbers for the things on the personal requirements list. And some of the ones on the start-up expenses list you can easily find too like rent and insurance costs. Others you are going to have to estimate the best you can by doing a crazy amount of research. Based on that research, you can make assumptions that will give you numbers to work with.
You should make your initial costs as lean as you can. Office space would be nice, but it’s not essential if you’re on a tight budget. That reduces rent expenses and utility expenses. Hiring dedicated employees would be nice but could freelancers do the same jobs in the beginning?
There are some basic numbers you want to calculate as part of your simple business plan.
Running room or runway is how much cash you need to have until your business starts to make money. This is your deadline for making a profit. This is probably less money than you imagine. More than 40% of small businesses are started for less than $5,000 and 64% started with less than $10,000.
Break Even Number
Your break even number lets you know how much you have to make monthly or yearly to cover your costs. To calculate this number you need to know the value of three variables;
Fixed Costs: These are things that have to be paid no matter how the business is doing like rent.
Variable Costs: These are things that depend on how much you’re selling, the cost to make the product (if you’re a consultant, for example, you won’t have these costs, your cost is your time).
Price: The selling price of your product or service.
The formula to arrive at that number is Fixed Costs divided by (Price-Variable Costs)= Break Even Number.
Burn rate is the rate at which a new company is spending money to finance itself before it starts making money. It’s usually calculated on a per month basis. If you have $10,000 to spend and you spend $1,000 a month, the burn rate is $1,000.
No matter what you want to do, someone has almost certainly already done it. These people can be a great source of research and advice. Especially for things that you can’t get a hard number on. Most people love to talk about themselves, so in many cases, all you have to do is ask.
They will tell you about what worked and what didn’t. They will tell you about expenses they did not anticipate. No matter how well thought out your business, until you are actually involved in running that business day to day, you just can’t think of all the variables. Talking to someone who is already doing it can fill in some of those gaps.
If the someone you want to talk to is very successful and well known, you have to be careful with your approach. If you walk into a single location coffee shop, the owner will probably be happy to answer your questions. Howard Shultz is too busy running Starbucks to talk to you.
Be a fan first. Everyone already wants something from this person, their time, their money, their advice. If you approach them as just another person looking for advice, they’ll blow you off. Spend some time cultivating a relationship. Tell them you admire them and give specific examples. Make yourself a part of any community they might be involved in.
When you have something of a relationship, they might be more willing to spend some time with you. But their time (and patience) is limited. Don’t waste your opportunity by asking a bunch of “beginner” questions. Have something specific to show them that you would like advice on. Have already had a few wins and a few losses to discuss. This will allow them to help you in a much more specific way than just asking, “How can I do what you have done?”
Don’t Dive In
You don’t have to dive straight into your business. You can test the waters a bit first in most cases. A brick and mortar business is always going to come with the most expenses. But you don’t necessarily have to have a storefront to test your product.
You can sell your product on Etsy, farmer’s markets, or craft fairs first to see how good the demand is. You can do a pop-up stand or partner with a store to carry your product. M. Gemi sells handcrafted shoes made in Italy. The company started as on-line only but have been so successful they have just opened a brick and mortar location in New York City.
All of these solutions will allow you to progress your business in small, testable increments. And if one fails, you can try another. Maybe it was just a bad location, and the farmer’s market two towns over won’t be able to get enough of your bespoke lollipops. The point is, you haven’t gone whole hog and set up a brick and mortar store on an idea that won’t work in a particular place.
Other People’s Money
If you needed business funding in the past and didn’t have friends or family willing to give or loan you the money, you had two choices, find an investor or take out a bank loan. Now you have another option to raise money; crowdfunding.
Sites like Indiegogo and Kickstarter allow you to solicit donations in return for something; a free product or service for example.
A good round of crowdfunding raises cash, but as importantly, it creates customers, customers who have a stake in your success. Even if your campaign is a flop, you can collect information that can help you improve your business and try again.
Creating value just means creating something, a product or service, that people are willing to pay for. According to the Personal MBA, there are 12 forms of economic value.
12 Forms of Value
1. Product – Create a single tangible item or entity, then sell and deliver it for more than what it cost to make.
2. Service – Provide help or assistance then charge a fee for the benefits rendered.
3. Shared Resource – Create a durable asset that can be used by many people, then charge for access.
4. Subscription – Offer a benefit on an ongoing basis, and charge a recurring fee.
5. Resale – Acquire an asset from a wholesaler, then sell that asset to a retail buyer at a higher price.
6. Lease – Acquire an asset, then allow another person to use that asset for a pre-defined amount of time in exchange for a fee.
7. Agency – Market and sell an asset or service you don’t own on behalf of a third-party, then collect a percentage of the transaction price as a fee.
8. Audience Aggregation – Get the attention of a group of people with certain characteristics, then sell access in the form of advertising to another business looking to reach that audience.
9. Loan – Lend a certain amount of money, then collect payments over a pre-defined period of time equal to the original loan plus a pre-defined interest rate.
10. Option – Offer the ability to take a pre-defined action for a fixed period of time in exchange for a fee.
11. Insurance – Take on the risk of some specific bad thing happening to the policyholder in exchange for a pre-defined series of payments, then pay out claims only when the bad thing actually happens.
12. Capital – Purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend.
What forms of value make the most sense for your market?
You know what your core business is but how can you add value for your customers on top of that? Think of all the reasons people go to Starbucks that have nothing to do with buying a drink. People who work from home might go there to get out of the house and because they have reliable WiFi.
People use it as a place to meet friends or dates. Parents use it to get out of the house with the kids. People use the excuse of needing and an expensive cup of coffee to get out of their office for a few minutes.
Think of reasons other than just the thing that you’re selling that will be appealing to customers.
Like we discussed earlier, there is nothing new under the sun. Whatever business you start, there are others like it already in existence. People are creatures of habit. We’ll use the Starbuck’s example again. Lots of people go there as a part of their routine, maybe on the way into work, after the gym, or at lunch. You open your coffee shop just across the street.
People are creatures of habit. They might try your coffee shop out once out of curiosity, but if there is nothing that really makes your shop or your coffee stand out, they’ll just continue going to Starbuck’s because that is what they’re used to.
You have to differentiate your business in some way that makes people change their routine. Finding ways to add value as we discussed above can hold those customers.
You don’t have to poach another business’s customers, though. You can find new ones. Maybe the Starbucks’s across the street is mom and kid central. You can differentiate yourself by making your shop a more adult and less kid friendly environment. People who are trying to get work done or score with their Tinder date don’t want to hear howling babies.
You Can’t Plan for Everything
There are a lot of unknowns when you are starting a business. Things will crop up that you could never have planned for. But having a simple business plan can help you deal with those eventualities.
LMM Tool Box: All the things we use to manage money.