It has been documented over and over by the US Small Business Administration, university researchers, and others that the vast majority of small business startups will fail in the first three years of their life. The statistics are downright scary. The odds are better at any game in Las Vegas. The most primary reasons are:
Miss-direction of available capital
Non-existent or insufficient business plan
Non-existent or insufficient finance plan
Failure to understand the industry or market
A prudent business plan when coupled with a prudent financial plan will reveal capital insufficiencies and how existing capital can be best used. Both the business plan and the financial plan need to reflect an understanding of the industry or market the new venture will find itself in. This means that investigation of the industry or market followed by thorough planning are the lynchpin or crucial element or precursor to the success of a new business.
Who should you seek to secure advice from? Everyone you can think of who might have some knowledge or insight about what you are planning to do. It would also be wise to make a list of what skills and knowledge you have and what skills and knowledge you do not have or need assistance with. This list then becomes a guide to who you must seek out for advice. Typically this list will include:
Attorney who is experienced and knowledgeable in organization of small businesses
Accountant who is likewise experienced and knowledgeable
Banker who has the capability of providing financing support
Insurance Agent who is familiar with the insurance needs of your small business
Beyond those, the nature of your business, its location, need for public access, equipment requirements, personnel requirements, real estate requirements, and others will dictate who you need to secure advice and information from.
When should the plan be started and what are its contents? The plan should be started ASAP even though many parts will take some time to complete and many parts will be modified as other parts are developed and information is obtained. It is an evolutionary process that certainly does consume productive time and personal resources. But short cuts in the development of a plan will usually lead to the undoing of the business as the statistics on new business success bear this out. There are many published and on line guides that offer excellent places to begin, but do not fall into the trap of following any particular model business plan where your business clearly diverges from what is offered.
A typical business plan will start out with a description of the business, its scope and what makes it unique. This is similar to the mission statement of a non-profit entity. What follows are sections devoted to the business:
Organization type (i.e. corporation, LLC, partnership, proprietorship, etc.)
Ownership and capital structure
Management needs, organization, and responsibilities
Marketing methods, costs and resources
Production means, methods and equipment if products are being made
Cash flow plan
Inventory management and controls
Sales operations and controls
Identification of competitors and their possible impact on the business
Emergency plan (in case the business fails)
Typically, the financial plan for a business will be focused on the financial aspects of the various elements in the business plan and then project the anticipate revenues, expenses and costs onto spreadsheets that project what the owners think the business can do if all of the parts of the business plan perform as planned over the next several years. It becomes the initial budget of the enterprise. A critical part of the financial plan is the cash flow plan as it projects when and how much cash will be produced from sales and other transactions, such as loans and equipment sales, and then apply the cash to the anticipated expenses to realize when and for how long the business will survive. The cash flow plan can be broken down into days, weeks and months so progress can be easily identified. Financial plans need to be actively used from day one. Divergences from the plans need to be carefully noted and when the differences become so great that a different business is emerging then the plans need to be updated and amended so that the modified plan becomes the map for the developing business. Keeping business and financial plans up to date can be burdensome but changes in the plan when compared to the original plan will give management important clues to how best to operate the business.
Since the likelihood of failure is so great (survival rate is between 20-30%), an emergency plan for the economic survival of yourself and your family is a must. With this kind of a gamble you must have some way of extricating yourself with the least possible damage and know when to trigger the plan. The emergency plan should include advance planning such as (i) placing the ownership of key family assets such as your home in the name of a spouse who has little or no ownership interest in the business; (ii) securing limitations on personal guarantees to lenders and fellow investors; (iii) preservation of cash; (iv) retaining personal security interests in selected business assets; (v) casualty insurance; (vi) life insurance on key employees; (vii) personal disability insurance (you are five times as likely to be disabled as die while operating your business); and (viii) bankruptcy and insolvency plan. The real point of an emergency plan is to have an exit strategy should the enterprise not develop as planned or other forces or events occur that make the business unlikely to survive. Many small businesses were destroyed by 9/11. Once the emergency has arisen it is too late to take steps that could only have been put in place early on.
All of the concentrated planning work done by the small business owner is of immense benefit because it provides for a thorough vetting of the business concept, its intimate workings, knowledge of the key parameters that indicate (i) the likelihood of success or failure, or (ii) the need to alter or fine tune the plan to increase the likelihood of success. This cannot be left to someone else.