May 2011
W-2 & 1099 Information

Small Business Blog

Brought to you by Steve Strauss

May 2011

Writing a Business Plan (1 of 2)

Whether you are new to business or have been around for the long-haul, you need a business plan.

Maybe you think that you do not, or don't want to take the time to create one. That is understandable. Writing a business plan is a lot of work. In it, you analyze what you are going to do and how you will to do it. You crunch the numbers and dissect the competition. You scrutinize risk and ponder reward. It takes a lot of thought and research.

So yes, business plans are work, and you may in fact be the only person who ever reads yours. But if you are going to create a great small business, or grow your existing business, then writing a business plan is vital.

Here's an analogy: A pilot would never fly from Seattle to Miami without a detailed, well-researched flight plan. His flight plan helps him figure out how he will get to where he wants to go. It tells him how much fuel he will need, important landmarks to look for, and how long it will take to get there. It is his blueprint for a successful trip. Well, your business plan is your version of a flight plan. It is your blueprint for a success trip. Creating a business plan forces you to carefully think through your business. It will detail how much money you need to either get started or grow. It will explain how you will deal with the competition. It will help you think through everything you need to do to hire and keep great employees.

Writing it will also sharpen your marketing ideas, help you understand projected costs and sales, and much more. By analyzing your business, both the things you know well and some you do not, creating a business plan forces you to really figure out what you are getting into and what it will take to succeed. It is your roadmap for a prosperous journey.

Creating and using a business plan also:

  • Helps you avoid pie-in-the-sky projections.
  • Allows an investor or lender to analyze whether your proposed business is worth their investment dollars.
  • Helps you identify your market and competition.
  • Allows you to understand your business better.

And keep this in mind as well: Because the plan projects where the company expects to be for the next few years and how it plans to get there, a business plan also serves as an important tool for established businesses. It lets them know whether they are on or off course. Smart businesses create, use, and revise business plans as necessary.

There are two major downsides to not having a business plan. First, without one, your enterprise will be a gamble. It may succeed, it may fail. Who knows? Certainly not you without one. So a well-researched business plan reduces the risk of failure. Second, without a plan, you will never attract an investor. If you require outside funding to get your business started, your investor will want to see your business plan. Whether it is a bank, the SBA, an angel investor, or a venture capital firm, a business plan is a prerequisite for getting funded.

In my next blog, I explain what you should include in your business plan.

Writing a Business Plan (2 of 2)

Generally speaking, here is what you will find in a typical business plan, though not necessarily in this exact order:

  • Title Page: On the title page should be the name of the business, your logo if you have one, the owner's name, the business address and phone number, e-mail addresses, and the business website if you have one.
  • Executive Summary: The executive summary is probably the single most important part of your business plan. It is the "greatest hits" of the plan, and is vital because it is what investors key-in on. The executive summary describes the highlights of the plan. Even though your entire business will be described in detail later in the plan, a crisp, three or four page introduction captures the immediate attention of the potential investor or lender.
  • Business Description: Here you describe exactly what your business is going to be and how you see it growing. This section includes a description of the products or services you will be selling, your market niche, and so on.
  • Management: It is hard to underestimate just how important your management team is to potential investors. Banks and other lenders take seriously the background and experience of the team you have assembled.
  • Industry Description: This section is where you include background research. You can get this information from trade associations and magazines, websites and books; interviews and meetings are also helpful. Discuss macro-economic trends and other relevant economic indicators.
  • Competition: Include all pertinent information about your competition, including the length of time they have been in business, where they are located and their average annual sales. How will you beat the competition?
  • Marketing Strategy: How will you position your goods or services in the market? Are you going to cater to an upscale clientele, other businesses, or whom? What will your pricing strategy be? How will you promote your business? What sort of advertising and marketing do you propose?
  • Sales Forecast: You need to figure out how much you can expect to sell in the next few years. Your sales forecast will contain:
    • Monthly forecast for coming year, both in dollars and units sold.
    • Annual forecast for the following two-to-four years, both in dollars and units sold, and
    • The assumptions upon which you base your forecasts.
  • Financial Analysis: Here you explain how much it will cost to get your business up and running, and how much it will cost to keep it going. You will also explain how much money you are asking for and how it will be spent. The basis of this section are several financial spreadsheets – balance sheets, profit and loss statements, and cash-flow projections.

This financial analysis is often the most difficult part of a business plan for small businesspeople. It is easy to wax poetic about your great idea and how it will make the gang rich. But actually putting real numbers to those projections is hard work. Even so, you have to do it. You have to crunch some realistic numbers to go along with your realistic plan.

Where do you get all of this information? Check out suppliers, trade associations, chambers of commerce, websites, and trade publications.

Buying a Franchise

Ray Kroc, the founder of the first franchise, McDonalds, once explained franchising in a simple sentence: "In business for yourself, but not by yourself."

Starting a business from scratch is akin to baking bread from scratch. It takes trial and error, and several bad batches, before you figure out what works. On the other hand, starting out by buying a franchise is like getting a good recipe right from the start. Because the franchisor has already baked some bad loaves and has learned how to avoid repeating those mistakes, because the trial and error stage has already been handled by someone else, and because you will be buying, among other things, that expertise and wisdom, buying a franchise greatly reduces the risk inherent in entrepreneurship.

That said, there are both pros and cons to buying a franchise. Let's consider each.

Pros: Maybe the best part of buying a franchise is that you are buying into a (hopefully) proven system. Here is how it is supposed to work: Say that somewhere some business owners created a successful business that they believed could be duplicated; that is, the reasons and methods for their success were things that could be systematized and taught. So the business owners reduced their success to a step-by-step plan. That system, that business model, is the franchise.

The idea is that if you do what they did, you will get the results that they got. A good franchise then is a systematic way of doing business whereby you agree to do things the franchisor's way and are being allowed to use their business name, logo, system, and so on. So the first benefit of franchising is that you theoretically reduce your risk of failing as you are buying a proven system.

The second good thing about buying a franchise is that you should get plenty of help. Whereas when you start a business from scratch you are on your own, when you start a franchise, the franchisor is there (or should be) to help you succeed. They offer expertise in a wide variety of areas. A good franchise system trains you to be a successful businessperson.

The last benefit of franchising is that you will get assistance with your advertising and marketing, and with the bigger franchise systems, you will get the benefit of their national advertising campaign.

Cons: While the benefits of buying a franchise are significant, the downsides should not be minimized. The first is that it can be is fairly expensive to buy a franchise. When you are buying a franchise, you are buying the franchisor's name, logo, goodwill, expertise, system, and training. That can be worth a lot, especially to a well-known franchise.

The second major drawback to franchising is that you will have less independence as a franchisee than you would as a regular entrepreneur. The system is the system, and you will agree in your franchise contract to run your business according to the system, even if you don't agree to it.

This brings me to the last shortcoming with franchising. You will be in an unequal relationship with the franchisor. The very nature of the business arrangement, as well as the contracts you sign, put the franchisor in the power position. This is difficult for many franchisees, especially when something does not go right. There have been many lawsuits by franchisees against franchisors whom the franchisees feel are overreaching and domineering. Then again, there are plenty of franchisors with whom it is easy to work.

The thing to take away is that there are good franchisors and bad franchisors. It is in your best interest to do plenty of research so that you can rest assured that the company you decide to partner-up with is a good one.

Employee Pay and Benefits Made Easy

One of the things I like best about working with my friends at Greatland is that they make dealing with the logistics of hiring employees so easy. Dealing with W-2s and 1099s can be complicated, but they make it easy.

Indeed, as a business owner or manager, understanding what is legally required when dealing with employees is not always easy. What do you have to pay? What time off is required? And then beyond that, what more need you do to stay competitive?

The fact is, people work for many reasons; compensation is just one. If you want to create and sustain a successful small business you need to take into account the many things people want out of work. From the noble (the desire to make a difference) to the mundane (to get health insurance) work means different things to different people. While pay will be the main way you compensate them for a job well done, it is by no means the only way.

So, just what is required? By law, you are required to give employees only certain benefits, although they are probably not what you think. You must

  • Pay them at least the prevailing minimum wage.
  • Provide worker's compensation insurance.
  • Withhold and match FICA taxes.
  • Pay unemployment taxes.
  • Have employees work no more than 40 hours a week, or pay overtime, unless they are exempt employees.
  • Give employees time off to serve in the military, on a jury, or to vote.

As indicated, according to the Fair Labor Standards Act, certain employees are exempt from overtime and minimum wage requirements. These employees are executive, administrative, professional, and outside sales employees who are compensated "on a salary basis" regardless of the number of days or hours worked. You are not required to give employees benefits such as

  • Bonuses
  • Health insurance
  • Paid vacations
  • Sick leave
  • Retirement plans
  • Stock options
  • Life insurance
  • Christmas, New Year's, or other legal holidays off

Of course, while you are not required to offer such benefits, if you want to create a place where people want to work, a place that engenders loyalty, you will want to provide some or all of the benefits listed above.

The quality of your benefits package is definitely something potential employees will consider carefully. And since the quality of the employees you attract has a direct impact on the quality of your business (and the quality of your bottom line), offering a full benefits package is an important criteria to consider, albeit an expensive one.

Bottom line: Understand what is legally required, decide what you can do over and above that, and then offer that.