As much as people have been told how important it is to write a good business plan, many just don’t want to put in the time and effort.
Sure, certain businesses have started off with a back-of-the-envelope set of ideas, but most of these fail. Bill Litchman, SCORE instructor and retired business consultant, says, “A plan is essential if a person wants their business to be a success. The more formal the plan, the better the chance of achieving and maximizing success.”
Litchman will speak on business planning and sources of financing at a SCORE seminar on Wednesday, July 11, from 6:30 to 8:45 p.m., at the East Brunswick Public Library, 2 Civic Center, East Brunswick. Carmen Morris, an expert in sales and real estate, will also speak, about the art of closing a sale. Cost: $25. To register, go to www.scoreprinceton.org. For more information, call 609-393-0505 or E-mail firstname.lastname@example.org.
The structure of a business plan, says Litchman, has not changed an iota in decades, and he shares its basic elements:
Understand your product or service and capture it in writing. Although this sounds trivial, when people try to write down what they plan to sell, many are uncertain, vague, or may simply have too many products and services in mind — which is equally deadly for business success.
“If you have too complicated a set of products and services, you are not going to get off the ground — you don’t have enough money,” says Litchman, who points to all the separate work that must be done for each product or service.
Understand your target market. First a target market does not and cannot mean everyone under the sun, says Litchman. He had one client who wanted to sell beauty products and refused to narrow her universe.
Their conversation went something like this:
Litchman: Who is your target market?
Client: All females.
Litchman: What is the age range?
Client: Well, everyone.
Litchman: Does that include two-month-olds and 98-year-olds?
Client: Basically, yes.
Litchman: What is the household income range of the target market?
As the conversation continued, Litchman told her that her idea simply was not going to work. First of all, the inventory that would be necessary to appeal to clients ranging from a 50-year-old wealthy matron to a 15-year-old girl from the inner city would be much too large to support.
Further, promotion to each marketing segment would have to be entirely different. “Each group has a different mechanism to which they respond and means a different promotional strategy you have to have — which increases your costs enormously,” Litchman says.
On the flip side, he suggests, if you have too small a range, you may not have enough customers to justify your business.
Turning for a moment to defining a business versus a consumer target market, Litchman suggests using the North American Industry Classification System, or NAICS, codes used by federal statistical agencies to answer the question, “What types of companies are most likely to want to buy the products and services you are selling?”
An entrepreneur must also decide whether its offerings are better suited to very large, medium, or small companies and what its target area will be geographically.
Specify who your competition is. “The phrase I hate to hear most is ‘I don’t have any competition’ — that is never, ever true,” says Litchman. Another company may be offering something similar or offering the same product in a different form or a different way, but it is still competition.
Differentiate yourself from your competition. “It is important that you know the competition and understand what makes you different from the competition and do everything in your power to be one step ahead of the competition,” Litchman says.
One of his clients, for example, wanted to open a casual fast food restaurant with good food, similar to Panera; but to differentiate himself he offered several unique twists, the most important being that crepes would be the basis of his whole operation.
“This clearly differentiates them in the marketplace, so that when they promote themselves, they have a unique brand they can create and portray,” he says.
Devise a promotional strategy. Promotion is more an art than a science, and what works well for one product or service may not work well for another, but the goal of promotion is simple.
“You have to give potential customers a reason why they should buy from you rather than your competition — that you solve a problem the customer has and they have a valid reason for wanting to spend their money with you rather than with anyone else,” says Litchman.
Some strategies you try will work and some won’t, so it is worthwhile to incorporate different elements in your plan. He suggests that for businesses just starting out, advertisements in a newspaper or on television are usually not cost effective, but when they grow, that’s a different matter.
Other approaches are websites, blogs, public relations, and trade shows, not necessarily by having a booth but by using them for networking. The cosmetics company Carol’s Daughter actually got its start in a flea market.
Whatever promotional strategy you use, says Litchman, you need to monitor what is going on constantly, and if something is not working, get rid of it. He emphasizes that even if it doesn’t cost dollars, it costs time that could be better spent somewhere else. On the other hand, if a strategy works, then a business should expand its use.
Project your costs. Whether the business plan is for a startup or for an existing business trying to launch a new product or go to the next level, there will be a series of startup costs. “You have to know and understand what those are and then move into financial projections,” says Litchman.
Any potential source of external funding will need to see financial statements including an income statement, balance sheet, and cash flow sources and uses of funds. A larger company may also need to include information on staffing levels, equipment purchase, and loan repayment schedules.
SCORE has an Excel tool that produces the three primary financial statements; the business just has to provide the following: startup costs; number of employees and how much they will be paid, whether the business will be funded with cash or through a loan, sales projections, and operating costs. Then the model will produce the required statements. If the business changes any of the initial inputs, for example, raising the product price, then the financial statements are automatically recalculated.
Usually a 10-page business plan, where three of those pages are for the mandatory financial statements, works well. An appendix may be added with the bio of the entrepreneur and, for a restaurant, a menu.
Litchman grew up in Malden, a suburb of Boston, and his father owned what was then called a five and dime store. His mother was primarily a homemaker.
With an electrical engineering degree from Tufts University and graduate work at the Polytechnic Institute of Brooklyn, he got a position at ITT, where he spent the first 20 years of his career.
“I chose ITT because I wasn’t sure I wanted to be an engineer all my life, and I thought it would offer me more potential, and I wanted to be in the New York area,” he says.
At ITT he learned about the critical importance of business plans. “Every unit, no matter how big or small, 2 billion or 500,000, had to do a business plan every year, and people’s bonuses depended on how well they did relative to their business plan,” he says.
Litchman attributes increases in ITT’s quarterly income and profits during his tenure at the company to these business plans, which ITT employees took quite seriously.
After leaving ITT, he started Argo Communications, a developmental telecommunications company, and wrote a business plan that raised its first $50 million.
After about five years as president and chief executive officer of Argo, he became technical director at U.S. West, one of the Baby Bells. Eventually he got “promoted” to a position in Denver and had to commute back and forth, so he moved to Test Technology, a small telecommunications service company in South Jersey.
In 1993, he became an independent consultant. His work, mostly strategic planning, was almost all international and largely for telephone companies. He worked eight years for a telephone company in Mozambique, where he did technical consulting as well as strategic planning.
For eight years he has been working with SCORE. “I’ve learned a lot, and almost 99 percent of my clients have nothing to do with telecomm and high technology — but that’s fine.”
To reemphasize the power and importance of a business plan, Litchman quotes Jeff Bezos, founder of Amazon, who writes in the forward to the book “Bankable Business Plans” what writing a business plan did for him: “The process of writing down my thoughts improved my thinking, and helped me practice mentally and visually what we were going to do.”
It worked for him, and Litchman is pretty certain that it will work for anyone who takes the time to think through what his or her business idea entails and then writes it down.