Q: One thing my partner and I have resolved to do this year is to run our business more professionally and less haphazardly. Although we have never had a business plan, it seems like it is time to start. Do you have any suggestions?
A: I don't blame you for being hesitant. Business plans are work. But you are also smart to consider creating one. Think of it this way: A pilot would never fly from Anchorage to New York without a well-researched flight plan detailing how he will get there, how much fuel he will need, landmarks to look out for, etc. The flight plan is his plan for knowing that he is on track and headed in the right direction.
A well-run business needs the same thing. Just as you wouldn't trust a pilot to fly your family somewhere without assurances that he planned the trip, so it should be with your business.
A business plan then is your flight plan for success. Creating one forces you to carefully think through your enterprise — from products, prices and income projections to advertising, marketing, and sales forecasts. By analyzing some things that you are probably uncomfortable with, you are forced to really understand how to get to where you want to go this year.
Other practical advantages of creating a business plan are these:
- It identifies the amount of financing that you will likely require in the upcoming years, when it will be needed, and how it will be allocated.
- It forces you to be realistic about your business and growth potential, and thus helps you avoid pie-in-the-sky projections.
- It enables a lender or investor to assess your business skills, plans, proposals, and path.
- It helps you to identify and better understand your customers, market, pricing strategy, and competition.
- By committing your plans to paper, your overall ability to manage the business will improve. You will know your business better. You will be able to look ahead and hopefully avoid problems before they arise.
Part of your plan will include a business budget. Most of us view budgets as a necessary evil at best and something to be avoided at worst. The traditional view is that a budget is a restrictive plan forcing you to deprive yourself of what you want.
The truth can be far different. A budget should be a guide, not a constraint. A reasonable, good budget is a business tool that allows you to allocate your money intelligently and thereby do what you most want with your available capital. Creating a financial plan lets you control your business' cash flow, instead of it controlling you.
Some of the things you should quantify in your budget include:
- The cost to produce your product
- Inventory costs
- Advertising costs
- The day-to-day costs of running the business
- Payroll and unemployment taxes
- Equipment needs for upcoming years
Putting hard numbers to areas like these will allow you to see exactly where you presently spend your money, where you want to spend it, and how much you have left over for other things.
By creating a business plan and a budget you will ensure that your business is going where you want to go and that you have marshaled the resources necessary to get there. It is really as simple as that.
Today's tip: If you own a business, you should have a living trust. A living trust is a legal vehicle that allows you to transfer your assets to those you love after you die privately, without lawyers, and without your decedents having to go to court.
The trust is a separate legal entity, like a corporation. You transfer legal title of your assets (like your business) to the trust and the trust then owns your assets. As part of the trust, you name your spouse or child as your successor to the trust and its assets. Then, when you die, since it is your trust and not you who owns your stuff, there is nothing to go to court over (called "probate.") And since your spouse or child is the successor (called a "beneficiary") of the trust, he or she will end up owning the business.
© 2010, Steven D. Strauss, www.MrAllBiz.com