5 minute read
Format of this article:
- Gather your data
- Find funding
- The 2, 5, 10 year plans
- Find team leaders
- Hold regular meetings
- Determine your range
- Bring everyone in
- Choose software
- Expect the unexpected
- Hire a CPA
Setting up a business plan isn’t difficult, but it is tedious. What I mean is, everything in life, done in step by step format, is easy. Yet the steps become boring when performing them over and over again. Look at the job of a chef, it’s like a sweet life to cook and prepare interesting dishes. Until you do it every evening, every day, every week, every month, every…I think you get the point. This is why many hire a professional bore like me for business stuff. We love the slow pace. Though, if you’ve decided to go it alone, not to worry, this article is going to bring things into focus. I’ll try to use bite sized pieces of useful information that will help design your path to ultimate success.
Setting up a business plan follows the Art of War by Sun Tzu. Get a copy and never let it out of your sight. Read it like it was your own personal copy of the Torah. Let it get dog-eared and worn from the times you’ve perused it. I go back to my copy all the time. It’s not just about war or business or government, it’s about life. The whole thing is around 70 easy to read pages but is a wealth of knowledge. I now present to you, Sun Tzu’s Way of Setting up a Business Plan: as interpreted by Ernie Tomkiewicz, CPA.
Step one: Gather Your Data (Sun Tzu: Energy)
“Energy may be likened to the bending of a crossbow” according to Sun Tzu. This preparation for attack is the gathering of your data. The first step to any good plan is to have the information that will be used to set things up. Whether your business is in development stage or ten years aged, clean data is good data. Clean data is the information that is usable and has been scrubbed for errors. If you’ve been in business for a while, use system information once examined by the accounting staff. That should be ready for use in creating step two of planning: building financials. In a new start-up, you may have to do more prep. A new business needs to expound upon what little information they have. As well, the information needs extra care. Let’s look at both types.
In an established business you tend to have data all around you. But what data is useful? When planning for the future you’ll need information relating to historic sales and costs to develop a prospective income statement. Patterns over time can be used to project outward a good faith estimate of future sales, i.e. your budget. As well your past investments in property, inventory, equipment and vehicles will help you build a balance sheet. You will base future purchases of long-term assets by determining what you should need. Your delivery trucks only last so long and the drill press has a determinable life expectancy. Once these two financial statements are finished you can predict your future cash flow and determine how best to use what you have in excess. The key is to plan a buffer, not over-extend yourself.
In this situation you will be preparing the same type of financials as mentioned above. The difference is that you have to do far more investigation, planning and data gathering. Without a track record of sales and expenses you need to get creative. Many websites offer comparable information on businesses in various sectors. You can search by revenue, output, capital holdings, etc. The opportunities are endless. Make use of these resources and others. In my work I use various websites to make same size comparisons to compare statistics and other factors when performing financial statement reviews and audits. Once you determine the realistic vision of your company’s future, you can begin. By formatting this information you will be able to design right-sized financials that you can use to project your future. Often these can be used to garner investors or secure financing. The choice is yours.
Step two: Find Funding (Sun Tzu: Energy)
You should always gather resources, and accesses to them. Then you store these assets for use later. “the control of a large force is the same principle as the control of a few men” (Sun Tzu). Your financial statements tell a story, the story of your built-up energy, that’s your balance sheet. The income statement is your potential energy. The cash flow statement is your ability to utilize energy. Size means nothing, your financials tell the story. Many is the business that was large, overly leveraged with debt, thus failed. Just as much there are the small lean companies with low debt that swim in their own cash flow. The better your built-up energy looks on paper, the easier it will be to secure financing. This is something both new and established businesses need. But what are investors looking for in your financials?
There are many points lenders and investors consider when deciding on your value and worthiness as a company. Some are non-financial like the staff, customer base or manufacturing processes. However, the lion-share of what is considered are the financially driven aspects. I’m going to focus on three basic areas and not turn this into a protracted “Ramsey-esque” blather-fest. Cash flow shows if you can remain solvent and competitive when changes happen. Do you have the cash to survive an unexpected crisis and still buy inventory? Debt to equity concerns your ability to pay bills and not become swamped by interest payments. Is Section 179 keeping you afloat tax wise, but burying you in interest? Expense ratios let everyone know how well you are operating on a daily basis. It’s easier to save a dollar than to earn another one.
Setting up a business plan is generally easier when you have access to cash. Actually, most of life is easier in that case. Your cash flow statement tells the story of how much of the money entering the business, stays with the business. The more cash you keep, the more that can be used for capital investments, disbursed as dividends, invested for return or used to expand. These are all things potential investors crave in an investment. In general, if your cash from operations is greater than your net income, you have better quality earnings. This is due to items like depreciation. Depreciation is a non-cash expense. This means that while you show depreciation expense on your income statement, there is zero cash outlay. Similarly, when you collect on old receivables, revenue from prior years, it increases cash that doesn’t show up on the income statement.
Investors also want to see where and how your cash flow is being spent. This becomes evident in the investment and financing sections. The investment section holds your purchases and sales of property, equipment and depreciable assets, among other things. Is your business being kept afloat by selling off capital assets? If it is investors will spot that activity quick and your prospects will become dim. The cash flows from financing can also que individuals to your decision making. Are you taking on increased debt to finance day to day operations? This will be evident from your cash flow statement. There are a multitude of things a cash flow statement will highlight to lenders and investors. Your best bet isn’t to try and hide or disguise information, spend your time running a better shop. The world is full of cash, retain some for your business.
Debt to Equity
How you finance a new building or inventory will affect your debt to equity ratio. Long-term loans, auto financing and lines of credit all move in the same direction. What’s the perfect debt to equity ratio? It’s different for every business. Construction companies tend to hang onto a lot of debt. They have an equipment heavy business and a low profit margin. This is why the construction industry has many failures. Carrying heavy debt with a slim margin doesn’t leave much safety room when the economy has a minor downturn. Alternatively, internet heavy companies will usually carry less debt. The perfect mix of debt to equity will probably never be achieved because who is to say any mix is best? You should try to match or do better than your peers. When setting up a business plan for a small business, lean is better.
How you spend money is as important as your excess cash balance. This is because it affects your cash flow. The less you spend on day to day expenses, the more you have for other purposes. Look at your sales budget. If you’re spending at a rate higher than your competitors yet earning the same, you’re wasting money. Are your office expenses 15% higher than last year? Is that good or bad? Do you know? Expenses suffer from creep. When left alone you will notice that expenses always rise. Not just from inflation or vendor price increases, but from neglect. Take your cellphone bill. Over time, plans change. As this happens the cell company moves you to a plan that is most profitable. Keep attentive for this creep. Upgrades can save maintenance expense and cash. Take control of your expense ratios.
Step Three: Where Are You in 2, 5 and 10 Years (Sun Tzu: The Army on the March)
“He who exercises no forethought, is sure to be captured by them (opponents)” (Sun Tzu). This saying could also apply to time. If you do not exercise forethought, time will own you and you will have not made good progress. The vision you hold for your company should be expressible in varying time lengths or goals. Part of your business plan should be directives aimed at short (2 year), medium (5 Year) and long (10 year) term goals. Without these objectives you will have no way to gauge your performance or motive yourself and others. The world of business has changed from, get it done, to motivate people to get it done. The days of employees being primed to win on their own are over. Now, more than ever, managers have to be good motivators. Objectives and motivation go hand in hand.
Two-year goals should pertain to getting things running and gaining market share. During the first two years you should be trying to put a team together. This takes time and trial with error. A team does not build itself overnight. It grows from interactions that either form relationships or repel them, like magnets. You will also be focused on aligning your processes. Whether you’re a manufacturer or a convenience store, how you move materials/product is crucial. Finding the best way takes time, input and some failure, in order to succeed. Also, in the beginning you will need to learn your market and how to best get its attention. Just because one of your employees has a degree in marketing, it doesn’t mean they can nail it with your product overnight. Time and patience will help you survive into year three.
5 Year Goals
Midterm objectives in setting up a business plan are slightly different from short-range. Once you hit year three you sigh a breath of relief because you’re one of the 67% that made it this far. While some put the odds of survival at 20% (80% failure rate), I think that’s a rather liberal figure. Now is the time frame to focus on streamlining your processes. You should already have a schematic of your production/sales flow. Let’s make you lean! Cut costs, cut time spent, cut waste. Look at any and all processes for restructure. Sound daunting? It’s not, but it is necessary. Only 50% of businesses make it past year five so, get lean or go home.
During years 3-5 look at your vendors and tighten the screws on them. Get aggressive on demanding better terms with discounts for early payment. Discounts matter and save you big dollars on Line-of-Credit (LOC) interest. Next, go over your receivables and start offering discounts for early payment. This increases your cash flow and lessens your need for credit. Don’t give away the store, just motivate people to pay with “carrot and stick” tactics. This is also the time to look at how you perform basic functions. If you perform in-house payroll, is it worth it? Maybe farming it out is better. Are you tracking time with a wall mounted clock? Why? Get an app on your employee’s phones and let the app babysit them. It can also track where they are to keep them focused and help logistically. The key is to question everything.
10 Year Goals
If you make it this far you’re one of the elites in business. Only 40% of businesses survive into year eleven. What should your long-range plans be? In addition to the same stuff you’ve been doing for the first five years, add in growth. When setting up a business plan for growth over time, it’s all about financing and investors. Your long-range scenario should be focused on getting loans and long term debt set up, and how to pay for it. You also should have a plan to bring in investors. My view has always been, “I don’t want all the money, I want my share and others can have some too”. It’s a big enough pie not to be a miser. Consider the up and down sides of bring outsiders to the inside. Look at it this way, more people, more ideas, more potential.
Step Four: Determine the Team Leaders (Sun Tzu Waging War)
Part of setting up a business plan is in determining who to put your trust in. “The leader of armies is the arbiter of peoples fate” (Sun Tzu). Do not tread lightly when putting a person in charge of others. Good leaders can be trained, great leaders are born with it. Instinct, problem solving, timing, approach and luck are only found together in rare individuals. Over a period, you will learn who possesses only parts and use them in mid-level management. The few that have most or all, will be your true leaders. A leader of many is an enforcer, a friend, a partner and a confidante. Having a strong hand and being receptive at the same time gain you respect. This respect is translated into employee motivation. Leaders came up through the ranks, if they have never been in the employees’ position, they will not be respected.
Advantage is about taking control and controlling people, resources and your path to success. Advantage could be your control of the high ground in war, or your control of resources in business. Your greatest resources are the people you put in place to lead your business. But if you let them set the tone, you will fail. Every manager, executive or worker should have the respect and attention of those below them. These leaders should also be keen to the knowledge of those above them. This constant flow of knowledge and experience should be embraced. Any breakdown in the system will be the weak link in the chain and should be cut out. Sound harsh? Maybe, but success demands adherence to harsh realities. Remember, this is win or go home. Home means you go back to working for someone else. Don’t be that guy.
Step Five: Design Meeting Plans; Weekly, Monthly, Quarterly, Yearly (Sun Tzu: Tactical Dispositions)
I’ve seen too many companies that allow the employees, managers and executives to determine the meeting schedule. Bad idea. “The skillful fighter puts himself into a position which makes defeat impossible” (Sun Tzu). The way that you assuredly gain the upper hand; get everyone on the same page. I worked at a company that “wanted” to have weekly meetings with project managers, production mangers and others. They tried to decide on a day of the week, but they could never get past 75% agreement. Here’s my take on this situation; you don’t ask, you tell people when the meetings will be. Demand their presence, be it in person, on the phone, Skype, or Gotomeeting. No BS, no excuses, make it happen. Excuses are for losers in the 33% of first two-year failures. If you want to be a distant memory in the business, let the inmates run the asylum.
Step Six: Determine your Range. (Sun Tzu: Maneuvering)
Setting up a business plan pertains to territory. Where do you travel for new work? 10 miles, 1000 miles, 10 feet? “If you march fifty to outmaneuver the enemy, only half your force will reach the goal” (Sun Tzu). How you expend your resources today will affect how much energy you have for the proceeding campaigns. If you over-reach in year two, will you have resources to develop new markets in year three? I’ve always loved the “wide-net” theory but sometimes, less is more. Is saturation in a small territory better than lightly soaking a large swath? It depends on your product/service. You need to consider whether you can handle the work load. Can you find enough employees? Do you have the cash to service areas off the beaten trail even if it takes time to develop them? Half your energy is spent on the hunt.
Step Seven: Bring Everyone in. (Sun Tzu: Laying Plans)
This was lightly hit upon in the last few points. But it really needs to be brought home now. If you do not include the staff in decisions, you will fail. “The moral law causes the people to be in complete accord with their ruler, so that they will follow him regardless of their lives” (Sun Tzu). Businesses that set a tone at the top, succeed. This is because the workers sense that upper management is held to the same standards that they are. In setting up a business plan, the reverse works as well. If you need to make rule, agenda or work procedure, work from the ground up. Put out questionnaires, surveys and ask the people what they think. This bottom-up strategy will gain support for your new rules, when they are developed.
Example, I run Corporation X and want to find and institute a better way to increase employee expense reporting and lower incidences of fraudulent activity. Do I set down an edict in black and white? Or, do I put out a questionnaire soliciting attitudes on reporting expenses. Then engage discussion about potential risk areas of letting employees self-report. Followed by implementing a new “test” app for reporting expenses. Then get feed back on the method. Last, integrating the new procedure in the group. Slow indoctrination works best for many business procedures. Get the people on board and they will walk on hot coals for you. Willingly or unwillingly, who cares as long as the job gets done.
Step Eight: Choose Your Software or Apps (Sun Tzu: Attack by Stratagem)
How you harness your resources will make or break you. “He will win who knows how to handle both superior and inferior forces” (Sun Tzu). The technology is all around you, it’s in your phone, your car, your very being (it will be soon). Do you know how to harness it? Control it? Choose the best way to use it? Can you use that same technology against a competitor? Unless you can answer all of these questions affirmatively, go back to step one: buy a copy of the Art of War by Sun Tzu. I’ve spent the last year and a half making software decisions. It’s not an enjoyable process. Trial and error and then some more trial is mind numbing. But, if done correctly it will lead you to the best product.
How often have you talked with colleagues who claim to have the “best” new app? Then for the following two weeks you listen to them incessantly whining about it? Welcome to reality. There are millions of apps and most suck noodles. Finding the one, or ones for you, takes time and patience. As apps go, you will spend some money in the trial and error process. Will you try to make do with an inferior product? Should you listen to the salesman and try stuff that fails miserably? Never try and create one that fills your need. These are the superior and inferior forces. In the end, time and trial will get you where you need to be. Rome wasn’t built in a day and a war is not won overnight. Take your time, track your progress and find what works best, not what “fits” for today.
Step Nine: Expect the UNEXPECTED! (Sun Tzu: Maneuvering)
People claim that the world of business changes fast, but does it really? “Ponder and deliberate before you make a move” (Sun Tzu). My feeling is that business doesn’t change fast, it’s more that managers and executives don’t know how to handle the stress of change. This creates the perception of speed. I worked in manufacturing environments over the years. This is a wonderful learning experience for everyone. All changes fast, people get stressed, bills need to be paid, money received, orders are coming in and going out at lightning’s pace. All of a sudden, product needs to be at a job site in thirty minutes. Do you buy it locally, put it on the truck leaving the plant that goes nearby or pull Butch out of the loader and have him drive it there? This environment screams stress, and learning opportunity.
Setting up a business plan has as much to do with the unexpected as it does with the mundane day to day. Get used to the unexpected. Embrace the unexpected! It’s not easy, but it will make you the conqueror of territory. Your budget should be dynamic, i.e. a flexible one. The flexible budget takes into account things that could change such as prices, volume, and other factors. While a flexible budget considers hard facts, like a price change, your flexible budget should go beyond that. Begin to anticipate change. The stock market doesn’t hold still. Your budgeting process should be rolling and dynamic like the stock market. Contracts are set in place to protect against change, but can you trust your supplier to stick to their word? If they fall through, do you know where to go? Always stay ahead of the curve or get swallowed by the competition.
Step Ten: Hire a CPA Adviser (Sun Tzu: The Use of Spies)
The name of this section is deceiving. What you will do is gain the advice of others. “Knowledge of the enemy’s disposition can only be obtained from other men” (Sun Tzu). Hiring a professional when setting up a business plan is actually a good first step not the last. If you wait until the end you may have already made some expensive mistakes. While mistakes are a valuable learning tool, the cost can be high. Gaining the insight of others in your process goes far beyond including the staff. You should be open to soliciting expert analysis of your plans.
The Bottom Line
This piece covered a good deal of territory. While it serves to help you gather an understanding of the items involved, there are still many other considerations. Look at your process as an ever learning and changing experience. The more you learn in the first plan, the less you need to learn going forward. As well, it all gets easier every day, week and month. Good luck.
Leave a Reply
You must be logged in to post a comment.