Do I Really Need a Business Plan for My Business?

Most successful businesses have created a business plan at some point, usually before their start-up.

Why?

A business plan is needed to address all of the central components to starting a business. It is essential to make sure that you, as a new entrepreneur have carefully thought through many if not all, of the important components of your business. Ideally, you need to do this BEFORE starting your business.

What is a business plan?

They are generally prepared for two reasons:

1. To obtain financing for the business

2. To help determine if essential components of starting a business have been considered.

Often times with new entrepreneur’s (and sometimes even with the more experienced!) they overlook certain aspects of starting a business. So the business plan helps to ensure that most, if not all reasonable questions have been answered and strategies thought about.

Although business plans are often considered optional – they serve a vital importance to entrepreneurs.

Many aspiring entrepreneurs and even experienced entrepreneurs fail to recognize their importance. It is often considered an “optional” component of their business and should only be prepared when absolutely necessary.

Not so!

It is needed to address all of the central components to starting your business. It is essential to make sure that you, as an entrepreneur of quality, have carefully considered what you are offering, how you are offering it and whom you are offering it to.

Although it may be tempting to say “I have everything in my head about my business” – could lead to a lack of clarity.

Why?

The idea of keeping everything in your mind makes it possible for you to:

  • forget certain things
  • remember things incorrectly or too modified to later be useful
  • misconstrue thought combinations that you had at one point but later revised
  • revisit ideas that you already have thought of and since dismissed…

Preparing a business plan will allow you to document what you know and have the permanent impact of writing it down.

But this is complicated – Right?

In the context of the larger corporate world a business plan is not only essential but required. Many formats of business plans are modelled after the layouts and inclusions used for larger public companies. The time frame and level of detail is much greater for large corporate entities as they are required for various interested parties (stakeholders). However, it is not necessary for smaller businesses, especially start-ups to prepare overly lengthy and complex documents.

Your business plan need not be a time consuming, uncontrollable and over-the-top difficult process!

How Can I, As an Entrepreneur Achieve This?

Through the simple process of preparing a Preliminary Business Plan you will:

  1. Engage in a key strategy that will help you to organize your thoughts
  2. Help you to focus on your business intentions.
  3. Apply a straightforward, step-by-step process to prepare one.
  4. Obtain clarity about your business.

Why is it called a Preliminary Business Plan?

Traditional business plans, like those used for large public corporations can be very complex and have the level of detail that is not required for most smaller, private businesses.

A Preliminary Business Plan is shorter, designed more for the start-up of the business and it is easier to understand and prepare.

Here are just some of the questions that it should answer:

  • Describe in detail exactly what your business is to be.
  • Describe whom your products and/or services are for.
  • How do you plan to deliver your products/services to your customers/clients.
  • What pricing do you plan to use.
  • If you have a product, list the major suppliers
  • Indicate whom your major customers/clients are likely to be.
  • What are the risk factors that you see for your business.
  • What current businesses pose as competition to your business?
  • How many employees do you plan to have in the company and at what point will they become active?
  • Have you completed one?

It will address all of the central components to starting your business. It is essential to make sure that you, as a new entrepreneur have thought carefully through and considered all that you need to BEFORE starting your business.

A Preliminary Business Plan is a step-by-step method that allows you to organize your thoughts and WRITE DOWN your intentions through documenting them in a meaningful way. It also provides you with a document to provide to interested parties (for example, banks, investors, etc.) if the need arises.

You need to prepare one, if you are:

  • An aspiring entrepreneur who is serious about properly planning a business and would like to discover if you need one for their new business.
  • An experienced entrepreneur who never has prepared one, but would like to learn how.
  • An aspiring entrepreneur who is skeptical, but would like to explore the process and know more.
  • Any entrepreneur who has heard about them, but are confused and would like some clear DIRECTION of what to do.

Writing Your Business Plan (Traditional or Online Business)

How To Write A Business Plan

In my previous article, I talked about how you can plan your business startup. I defined a business plan as a written description of the future of your business. This is a document that indicates what you intend to do and how you intend to do it. I further explained that if all you have is a paragraph on the back of an envelope describing your business strategy, you have written a plan, or at least the beginning of a plan. I also said that a business plan consists of a narrative and several financial worksheets.

I mentioned that the ‘writing of a business plan’ as one of the pivotal steps involved in setting up a successful business. By now you should understand the need for writing a business plan. Writing a business plan, for a traditional brick and mortar business, will probably take a lot of time. It may take up to 100 hours or even more. For obvious reasons, a new business needs to carry out a lot of research before a business plan can even be developed.

For an online business, a detailed and in depth business plan is usually not necessary unless you are trying to combine your online business with a traditional business. For most online business startups, the detail involved with planning a traditional business is not required. However, it would still be beneficial to you if most of the topics were still covered, even if only briefly. Having a written plan in front of you will help you to focus on important aspects of the business.

You may not have thought much about your competition or outsourcing some of your work, but things like that will impact your ability to make a profit. And you will find this especially so in the beginning phases of your business. Even you are just opening a lemonade stand in the front yard, you will still need to know what Susie is selling her lemonade for on the next street over!

So, although a detailed business plan may not be required for an online business, I am going to include it here so you can at least look at and consider each section and determine yourself if it applies to your business.

Here I shall be discussing the basic steps involved in writing a business plan:

1. Executive Summary: The first step involved in writing a business plan is the executive summary. Here, include everything that you would cover in a five minute interview.

Explain the fundamentals of the proposed business: What will your product be? Who will your customers be? Who are the owners? What do you think the future holds for your business and your industry?

Make it enthusiastic, professional, complete, and concise.

If you are applying for a loan, state clearly how much you need and be precise in how you are going to use it. Also include detail about how the money will make your business more profitable, thereby ensuring repayment of the loan.

2. Business Description: After the executive summary, you need to write a short description of the business you are going into. You need to give a general description of the industry your business belongs to. You will write about your company’s mission statement, goals and objectives, business philosophy, as well as its legal form of ownership (sole proprietor, corporation, LLC, etc.).

Describe your most important company strengths and core competencies. What factors will make the company succeed? What do you think your major competitive strengths will be? What background, experience, skills, and strengths do you personally bring to this new venture?

3. Marketing Analysis/Strategy: The next thing to write (after the general description) should be your marketing strategy. For new or existing businesses, market analysis is an important basis for the marketing plan and will help justify the sales forecast. Existing businesses will rely heavily on past performance as an indicator of the future. New businesses have a greater challenge – they will rely more on market research using libraries, trade associations, government statistics, surveys, competitor observations, etc. In all cases, make sure your market analysis is relevant to establishing the viability of your new business and the reasonableness of the sales forecast.

4. Location: Writing down the location of your business is very important. Locations with greater customer traffic usually cost more to buy or rent, but they require less spending for advertising to attract customers. This is especially true of retail businesses where traffic count and accessibility are critical.

If an online business, you need to go into detail how you will attract customers to your website. General statements like “I will use Face Book ads and email marketing” will contribute almost nothing to helping your cause unless you have detailed statistical analysis of tests you have conducted or of another similar business you have been associated with. If you do not have any data upon which you reference your estimates, it could show lack of proper thought to the remainder of your business plan.

5. Competitive Analysis: Business by nature is competitive, and few businesses are completely new. If there are no competitors, be careful; there may be no market for your products. Expand your concept of competition. If you plan to open the first roller skating rink in town, your competition will include movie theaters, malls, bowling alleys, etc.

6. Management and Operations: Because management problems are the leading cause of business failures, it is important to discuss management qualifications and structure. Resumes of the Principals should be included in supporting data. If your business will have few employees and rely heavily on outside professionals, list these key people and their qualifications. If you are seeking financing, include personal financial statements for all of the principals in the supporting data section.

7. Personnel: The success of any company depends on their ability to recruit, train and retain quality employees. The amount of emphasis in your plan for this section will depend on the number and type of employees required.

8. Projected Financial Statements: These statements are usually helpful, but not necessary. You will develop and describe your strategies for the business throughout your Business Plan. In the financial section, you will need to estimate the financial impact of those strategies by developing projected Income Statements, Balance Sheets, and Cash Flow Statements.

It is usually recommended that these projected statements be on a monthly basis for at least the first twelve months or until the business is projected to be profitable and stable. Activity displayed beyond the monthly detail may be in summary form (such as quarterly or annually). The forecast period for most business plans is two to four years.

9. Summary Section: This section is where you will be able to attach or explain any detail not applicable to the previous sections. This section should be used to provide the financial statements of the Principle’s involved in the business and any other data you think an investor would be interested in seeing.

The main thing to remember in this section is not to provide new data, but to explain in detail data that has already been provided and to provide the support for that data.

When you sit down to compile all of the elements of your business plan, make sure you have each section able to stand on its own merits. This means you should not reference other sections sending the reader (your potential investor) back and forth between sections.

Do not try to write your business plan in one sitting. As I mentioned in the beginning, for a traditional brick and mortar business, it could take in excess of 100 hours to compile all of the information needed into a comprehensive but yet understandable document. For online businesses, probably not that long. But your final product should be well thought out, well documented and easily understandable.

How to Get Financing For Your Small Business

In today’s hostile economic environment, access to capital is the primary differentiating factor between those businesses which have been able to expand and gain market share versus those that have experienced enormous drops in revenue. The reason many small businesses have seen their sales and cash flow drop dramatically, many to the point of closing their doors, while many large U.S. corporations have managed to increase sales, open new retail operations, and grow earnings per share is that a small business almost always relies exclusively on traditional commercial bank financing, such as SBA loans and unsecured lines of credit, while large publicly traded corporations have access to the public markets, such as the stock market or bond market, for access to capital.

Prior to the onset of the financial crises of 2008 and the ensuing Great Recession, many of the largest U.S. commercial banks were engaging in an easy money policy and openly lending to small businesses, whose owners had good credit scores and some industry experience. Many of these business loans consisted of unsecured commercial lines of credit and installment loans that required no collateral. These loans were almost always exclusively backed by a personal guaranty from the business owner. This is why good personal credit was all that was required to virtually guarantee a business loan approval.

During this period, thousands of small business owners used these business loans and lines of credit to access the capital they needed to fund working capital needs that included payroll expenses, equipment purchases, maintenance, repairs, marketing, tax obligations, and expansion opportunities. Easy access to these capital resources allowed many small businesses to flourish and to manage cash flow needs as they arose. Yet, many business owners grew overly optimistic and many made aggressive growth forecasts and took on increasingly risky bets.

As a result, many ambitious business owners began to expand their business operations and borrowed heavily from small business loans and lines of credit, with the anticipation of being able to pay back these heavy debt loads through future growth and increased profits. As long as banks maintained this ‘easy money’ policy, asset values continued to rise, consumers continued to spend, and business owners continued to expand through the use of increased leverage. But, eventually, this party, would come to an abrupt ending.

When the financial crisis of 2008 began with the sudden collapse of Lehman Brothers, one of the oldest and most renowned banking institutions on Wall Street, a financial panic and contagion spread throughout the credit markets. The ensuing freeze of the credit markets caused the gears of the U.S. financial system to come to a grinding halt. Banks stopped lending overnight and the sudden lack of easy money which had caused asset values, especially home prices, to increase in recent years, now cause those very same asset values to plummet. As asset values imploded, commercial bank balance sheets deteriorated and stock prices collapsed. The days of easy money had ended. The party was officially over.

In the aftermath of the financial crisis, the Great Recession that followed created a vacuum in the capital markets. The very same commercial banks that had freely and easily lent money to small businesses and small business owners, now suffered from a lack of capital on their balance sheets – one that threatened their very own existence. Almost overnight, many commercial banks closed off further access to business lines of credit and called due the outstanding balances on business loans. Small businesses, which relied on the working capital from these business lines of credit, could no longer meet their cash flow needs and debt obligations. Unable to cope with a sudden and dramatic drop in sales and revenue, many small businesses failed.

Since many of these same small businesses were responsible for having created millions of jobs, every time one of these enterprises failed the unemployment rate increased. As the financial crisis deepened, commercial banks went into a tailspin that eventually threatened the collapse of the entire financial system. Although Congress and Federal Reserve Bank led a tax payer funded bailout of the entire banking system, the damage had been done. Hundreds of billions of dollars were injected into the banking system to prop up the balance sheets of what were effectively defunct institutions. Yet, during this process, no provision was ever made that required these banks to loan money out to consumers or private businesses.

Instead of using a portion of these taxpayer funds to support small businesses and avert unnecessary business failures and increased unemployment, commercial banks chose to continue to deny access to capital to thousands of small businesses and small business owners. Even after receiving a historic taxpayer funded bailout, the commercial banks embraced an ‘every man for himself’ attitude and continue to cut off access to business lines of credit and commercial loans, regardless of the credit history or timely payments on such lines and loans. Small business bankruptcies skyrocketed and high unemployment persisted.

During this same period, when small businesses were being choked into non-existence, as a result of the lack of capital which was created by commercial banks, large publicly-traded corporations managed to survive and even grow their businesses. They were mainly able to do so by issuing debt, through the bond markets, or raising equity, by issuing shares through the equity markets. While large public companies were raising hundreds of millions of dollars in fresh capital, thousands of small businesses were being put under by banks that closed off existing commercial lines of credit and refused to issue new small business loans.

Even now, in mid 2012, more than four years since the onset of the financial crisis, the vast majority of small businesses have no means of access to capital. Commercial banks continue to refuse to lend on an unsecured basis to almost all small businesses. To even have a minute chance of being approved for a small business loan or business line of credit, a small business must possess tangible collateral that a bank could easily sell for an amount equal to the value of the business loan or line of credit. Any small business without collateral has virtually no chance at attaining a loan approval, even through the SBA, without significant collateral such as equipment or inventory.

When a small business cannot demonstrate collateral to provide security for the small business loan, the commercial bank will ask for the small business owner to secure the loan with his or her own personal assets or equity, such as equity in a house or cash in a checking, savings, or retirement account, such as a 401k or IRA. This latter situation places the personal assets of the owner at risk in the event of a small business failure. Additionally, virtually all small business loans will require the business owner to have excellent personal credit and FICO scores, as well as require a personal guaranty. Finally, multiple years of financial statements, including tax returns for the business, demonstrated sustained profitability will be required in just about every small business loan application.

A failure or lack of ability to provide any of these stringent requirements will often result in an immediate denial in the application for almost all small business loans or commercial lines of credit. In many instances, denials for business loans are being issued to applicants which have provided each of these requirements. Therefore, being able to qualify with good personal credit, collateral, and strong financial statements and tax returns still does not guarantee approval of a business loan request in the post financial crisis economic climate. Access to capital for small businesses and small business owners is more difficult than ever.

As a result of this persistent capital vacuum, small businesses and small business owners have begun to seek out alternative sources of business capital and business loans. Many small business owners seeking cash flow for existing business operations or funds to finance expansion have discovered alternative business financing through the use of merchant credit card cash advance loans and small business installment loans offered by private investors. These merchant cash advance loans offer significant advantages to small businesses and small business owners when compared to traditional commercial bank loans.

Merchant cash advance loans, sometimes referred to as factoring loans, are based on the amount of average credit card volume a merchant or retail outlet, processes over a three to six month period. Any merchant or retail operator that accepts credit cards as payment from customers, including Visa, MasterCard, American Express, or Discover, is virtually guaranteed an approval for a merchant credit card advance. The total amount of cash advance that a merchant qualifies for is determined by this three to six month average and the funds are generally deposited in the business checking account of the small business within a seven to ten day period from the time of approval.

A set repayment amount is fixed and the repayment of the cash advance plus interest is predetermined at the time the advance is approved by the lender. For instance, if a merchant or retailer processes approximately $1,000 per day in credit cards from its customers, the monthly average of total credit cards processed equals $30,000. If the merchant qualifies for $30,000 for a cash advance and the factoring rate is 1.20, the total that would need to be repaid is $30,000 – plus 20% of $30,000 which equals $6,000 – for a total repayment amount of $36,000. Therefore, the merchant would receive a lump sum of $30,000 cash, deposited in the business checking account, and a total of $36,000 would need to be repaid.

The repayment is made by automatically deducting a pre-determined amount of each of the merchant’s daily future credit card sales – usually at a rate of 20% of total daily credit cards processed. Thus, the merchant does not have to write checks or send payments. The fixed percent is simply deducted from future credit sales until the total sum due of $36,000 is paid off. The advantage to this type of financing versus a commercial bank loan is that a merchant cash advance is not reported on the personal credit report of the business owner. This effectively separates the personal financial affairs of the small business owner from the financial affairs of the small business entity.

A second advantage to a merchant credit card cash advance is that an approval does not require a personal guaranty from the business owner. If the business is unable to repay the merchant cash advance loan in full, the business owner is not held personally responsible and cannot be forced to post personal collateral as security for the merchant advance. The owner removes the financial consequences that often accompany a commercial bank business loan that requires a personal guaranty and often forces business owners into personal bankruptcy in the even that their business venture fails and cannot repay the outstanding loan balance.

A third, and distinct advantage, is that a merchant credit card cash advance loan does not require any collateral as additional security for the loan. The future credit card receivables are the security for the cash advance repayment, thus no additional collateral requirements exist. Since the majority of small businesses do not have physical equipment or inventory that can be posted as collateral for a traditional bank loan, this type of financing is a phenomenal alternative for thousands of retail businesses, merchants, sole proprietorships, and online stores seeking access to capital. Such businesses would be denied automatically for a traditional business loan simply because of the lack of collateral to serve as added security for the bank or lender.

Finally, a merchant credit card advance loan approval does not depend upon the strong or perfect personal credit of the business owner. In fact, the business owner’s personal credit can be quite poor and have a low FICO score, and this will not disqualify the business from being approved for the cash advance. The business owner’s personal credit is usually checked only for the purpose of helping to determine that factoring rate at which the total loan repayment will be made. However, even a business owner with a recently discharged personal bankruptcy can qualify for a merchant credit card cash advance loan.

Since the cash funds being lent on merchant credit card advances is provided by a network of private investors, these lenders are not regulated or affected by the new capital requirements that have placed a constraint on the commercial banking industry. The merchant cash advance approvals are determined by internal underwriting guidelines developed by the private lenders in the network. Each loan application is reviewed and processed on a case-by-case basis and approvals are issued within 24 to 48 hours from receipt of a complete application, including the previous three to six months of merchant credit statements.

The merchant credit card advance industry is growing at a pace that is exponential as it fills a void once occupied by commercial banks. Merchant advance loans are the industry of the future in small business lending and private lenders and business owners alike are flocking to this still virtually unknown market. For more information on merchant credit card advance loans and business installment loans, go to http://www.MerchantMoneyMarket.com.