Becoming an entrepreneur easier than ever before—technology is shrinking the world, opening markets, and making it possible for many people to strike out on their own in the field of their dreams.
Yet, many who feel the tug of inspiration are afraid to take the leap. Don’t be one of those people who look back and regrets not starting their own business. Take control of your life, and your dreams. There are countless great reasons for starting your own business, and I’ve gathered information’s compelling here—but whatever your reasons, don’t hold back. It’s time to start taking steps to take control of your own life, and there’s absolutely no better way to do that than to take ultimate control of your career, through starting your own business.
Across the country and around the world, legions of people are abandoning their dependence on big business and seeking independence through their own enterprises. Every month, about 1 million Americans go through some type of job change or loss, and increasingly they are deciding to start their own businesses.
In a report titled Work, Entrepreneurship and Opportunity in 21st Century America, the U.S. Chamber of Commerce said, “Millions of Americans are embracing entrepreneurship by running their own small businesses, through independent contracting or direct selling.” The report also cited a recent Gallup poll finding that 61 percent of Americans now say they prefer to be their own bosses.
6 Benefits of Entrepreneurship
1. Job Security. Only a generation or two ago, going into business for yourself was considered risky, and the safest route was to get a good job in a large firm. Now, working for a traditional corporation has become the risky option. Working for yourself has become the new job security. “If I’m working for someone else, I’m trading time for money, but I’m not building any equity,” says Duncan MacPherson, co-founder and co-CEO of Pareto Systems, a consulting firm. “As an entrepreneur, I’m the master of my own destiny.
2. Freedom. People love the benefits of working for themselves and enjoy the freedom they gain from designing their own prosperity. You get to choose when you work, how you work and with whom you work. Best of all, you don’t have to make the agonizing choice between time for family and time for business.
3. Flexibility. It doesn’t matter if you’re in a big city or small town. Entrepreneurship is an equal-opportunity employer. E-mail, cheap teleconferencing and a new generation of Web tools make it possible to run a fully competitive business from a home desktop. As a home-based businessperson, you can expand your business to Chicago, San Francisco, Hong Kong and London—and still make the soccer game.
4. Make More Money. There is far greater opportunity to make money by building your own business than by working for someone else’s. “Everyone has heard the phrase, ‘The American Dream.’ I look at it as ‘The American Reality,’ ” says Jeffrey Gitomer, best-selling author of the Little Red Book of Selling and the Little Gold Book of YES! Attitude. “When you’re in business for yourself, you write your own history, you write your own success story, you write your own legacy and most important, you write your own paycheck. Being in business for yourself gives you the opportunity to work your heart out for something you love.”
5. A Life of Greater Impact. In the Decipher study, 84 percent of respondents said they would be more passionate about their work if they owned their own business. The No. 1 reason they gave for wanting to work for themselves: “to be more passionate about my work life.”
6. A Second Career. The nation’s 78 million baby boomers are just starting to reach retirement age, yet they’re realizing that they can’t afford to retire. What’s more, they don’t want to. Dr. Mary Furlong, author of Turning Silver into Gold, says, “Boomers are looking for ways to give back. They are taking the reins of their own futures and redefining their lives. They want work that reflects their values and identity; they want to make a difference.” A landmark study by MetLife Foundation and Civic Ventures found that 50 percent of Americans in their 50s and 60s want to do work “that matters.”
Taking the Plunge
“Leaving the rat race is not as daunting as it may seem,” says author Dan Clements in his guide to worklife balance, Escape 101. “You’ll look back in later years and marvel at how easy it was and how much you gained for so little cost.”
So what does it take? First, let’s look at what it doesn’t take. You don’t need an MBA or high-powered business background, and you don’t need to be rich or to take a second mortgage on your home. Some self-owned business opportunities require expertise, such as consulting, or can take significant capital investment and possibly training, such as real estate investing and franchises; some can be started on a shoestring and prove quite lucrative, including direct selling and online opportunities. Many of the greatest entrepreneurs of our time began with no advanced degrees and hardly any startup capital.
But make no mistake about it: What you save in cash capital you will make up for in sweat equity and passion. The major investment in most self-owned businesses is investment of one’s self in the form of time, focus and persistence. You don’t need to be a genius at negotiation or a whiz at numbers. You need a burning desire and determination fueled by a strong dose of passion!
What is Talent Management?
Talent management is a systematic process designed for better utilizing employee skills for the benefit of the organization as a whole. Talent management is a valuable asset, especially when done properly. Usually, small to medium-sized firms struggle with managing talent due to factors related to business expansion. Ironically, missing the opportunity to recognize and utilize talent effectively is a perplexing issue for many organizations.
Although many companies define their own set of rules in identifying the factors associated with talent management, most talent management programs incorporate the following functions:
The idea is to identify the talent in each employee and work to improve it for the benefit of the organization. Furthermore, it’s important to keep in mind both the present and future talent needs of the business. As a part of the talent management process, each company recognizes potentially talented individuals that are potentially valuable to the organization, both now and in the future.
As an employee, you may have experienced this phenomenon. The top issue is to prioritize the need for employees with their potential set of skills to complete a particular task. For example, if your company needs experienced salespeople, the smart organization will assess their Behaviors, Motivators, and Emotional Intelligence prior to hiring them.
Similarly, each company should look into the level of talent (skills or attributes) each employee and/or applicant has, and analyzes them before making a final decision. The problem occurs when companies overlook employee talent at the expense of experience.
Talent Management Tools
As a manager, you need tools to identify, develop and deploy talent. At Clutch Consulting, that’s one area where we can help you. By partnering with us, you ultimately reduce the time, cost, and learning curve that come with identifying potential employees that are the right fit for the right job.
As a manager, you should know that employee talent is often wrongly recognized without the right assessment tools. In fact, many organizations suffer loses simply due to misidentifying employee talent. To reduce such mishaps, as a manager, you have the responsibility to identify the right talent of each individual.
At the end of the day, talent management is a vital component for any organization, and it isn’t only effective in the hiring process. For example, as a leader, you can give targeted training to employees who, in your view, may need it more than others based upon their individual skill levels. Trough the use of this strategy, you polish their skills and increase their performance in your organization both now and in the future.
WHAT IS TALENT?
A Talent (or gift, or aptitude) is the skill that someone naturally has to do something that is hard. It is an ability that someone is born with. People say they are “born with a talent”. It is a high degree of ability or of aptitude. Someone who has talent is able to do something without trying as hard as someone who does not have a talent. Someone who has talent is called talented. Talented people as rule have many talents, for music, dancing, acting, sports, or other skills, but often only in single direction or genre, unlike genius.
Even if someone has talent they still have to work very hard if they want to be very good at something. Some people become quite good at something even if they do not have much talent, but if they are willing to work very hard at the skill.
HOW TO DISCOVER TALENT
Do I have any talents?’ ’What if I’m not doing what’s right for me?’ ’What if I’m calling in life is completely different?’ questions of this kind run through the minds of thousands of people around the world regardless of their age.
If you’re one of those people, maybe it’s time to take a break and work out who it is you really are. It might sound difficult — and it is — but think about it logically and you’ll realize that the more you put it off, the longer you’ll be stuck in the same cycle of doubt and confusion about where you’re going in life.
To help you, here is a step-by-step guide to help you discover where your true talents lie.
Step 1: Recall all of your dreams
The first thing which you need to do is recall all of the real dreams you’ve had throughout your life — right back to childhood through to your school and college years, and finally as an adult. Write them down.
Step 2: Separate ’to have’ and ’to be’
Now that you’ve written down all your dreams, you need to separate them into two categories:
’To have’ dreams: those which involve you gaining possession of something you don’t have right now.
’To be’ dreams: those which involve you taking on some new role in life.
Now write out the ’to be’ dreams separately — we’re only going to work with them.
Step 3: What provoked a reaction in you?
Do you remember if you ever felt a quiver excitement when you looked on at someone else fulfilling a certain role in life? Do you want to be in their place? If so, write it down.
Step 4: What did you enjoy doing?
Note down any activities or hobbies which you have enjoyed doing in the past. What did you like doing when you were a child, or a teenager, and as an adult? What do you enjoy doing now?
Step 5: Get rid of what you don’t need
Look through all that you’ve written down so far. Think hard about each of your ’to be’ dreams, and see which ones still cause an emotional reaction in you — that feeling of excitement discussed in step 3. Now imagine yourself in those roles. What would you be doing at this moment if you were in that role? How do you feel?
Pay attention to how strong your emotional reaction is to imagining yourself in the various roles. Evaluate the strength of your reaction for each on a scale of 1 to 10.
Step 6: Strike out the worst
Now cross out all those ’to be’ dreams which you gave the lowest evaluation to in the previous step. These are dreams which you can afford to give up on right now — it’s clear that they no longer mean as much to you as they did in the past and you don’t need them any longer.
Step 7: Group things together
So, now you have a list of your real, innate goals for life. At the moment they’re all jumbled together in a list. Look at the list carefully and ask yourself — which of my dreams can I group together? Which ones are interconnected or in essence very similar?
Step 8: Name each group
Look closely at each group you’ve put together and give a name to each one. Each name should say something about one of your innate talents which led to a number of interconnected dreams.
Step 9: Look for connections between the groups
We’re almost there! Now you just need to find out what it is that connects the different groups together. Write down the names of the groups in a list. Think about how the existence of one group supports the existence of another. This exercise nearly always shows that there are connections between the groups.
Step 10: Search for an outlet for your talents
Think about and then write down all of the possibilities for realizing your dreams in real life. What area of professional or your personal life are we talking about here? What kind of activities does it involve? Do your dreams and talents have a bearing on more than one area of activity or profession? The more ideas you come up with here the better.
Step 11: Define your life’s purpose
So, now that you’ve got your list of potential outlets for your dreams and talents, evaluate each scenario on a scale of 1 to 10 — from the least to the most attractive idea.
Now it should be clear what concrete direction you need to go in to achieve what really interests you. If you can get there, you can be certain that the achievement of this dream will bring you real happiness in life. Because of course, when you know where your true talents lie and you have the opportunity to realize them, you’ll feel more confident and enthusiastic.
Now that you understand why you need a business plan and you’ve spent some time doing your homework gathering the information you need to create one, it’s time to roll up your sleeves and get everything down on paper. The following pages will describe in detail the seven essential sections of a business plan: what you should include, what you shouldn’t include, how to work the numbers and additional resources you can turn to for help. With that in mind, jump right in.
Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. This is very important. All too often, what the business owner desires is buried on page eight. Clearly state what you’re asking for in the summary.
The business description usually begins with a short description of the industry. When describing the industry, discuss the present outlook as well as future possibilities. You should also provide information on all the various markets within the industry, including any new products or developments that will benefit or adversely affect your business.
Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales.
The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.
The purpose of the design and development plan section is to provide investors with a description of the product’s design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.
The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business.
Financial data is always at the back of the business plan, but that doesn’t mean it’s any less important than up-front material such as the business concept and the management team.
Financial Statements to Include
Financial data is always at the back of the business plan, but that doesn’t mean it’s any less important than up-front material such as the business concept and the management team. Astute investors look carefully at the charts, tables, formulas and spreadsheets in the financial section, because they know that this information is like the pulse, respiration rate and blood pressure in a human–it shows whether the patient is alive and what the odds are for continued survival.
Financial statements, like bad news, come in threes. The news in financial statements isn’t always bad, of course, but taken together it provides an accurate picture of a company’s current value, plus its ability to pay its bills today and earn a profit going forward.
The three common statements are a cash flow statement, an income statement and a balance sheet. Most entrepreneurs should provide them and leave it at that. But not all do. But this is a case of the more, the less merry. As a rule, stick with the big three: income, balance sheet and cash flow statements.
These three statements are interlinked, with changes in one necessarily altering the others, but they measure quite different aspects of a company’s financial health. It’s hard to say that one of these is more important than another. But of the three, the income statement may be the best place to start.
The income statement is a simple and straightforward report on the proposed business’s cash-generating ability. It’s a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result–which is either a profit or a loss.
For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It’s formed by listing your financial projections in the following manner:
- Income. Includes all the income generated by the business and its sources.
- Cost of goods. Includes all the costs related to the sale of products in inventory.
- Gross profit margin. The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
- Operating expenses. Includes all overhead and labor expenses associated with the operations of the business.
- Total expenses. The sum of all overhead and labor expenses required to operate the business.
- Net profit. The difference between gross profit margin and total expenses, the net income depicts the business’s debt and capital capabilities.
- Depreciation. Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
- Net profit before interest. The difference between net profit and depreciation.
- Interest. Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.
- Net profit before taxes. The difference between net profit before interest and interest.
- Taxes. Includes all taxes on the business.
- Profit after taxes. The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.
Following the income statement is a short note analyzing the statement. The analysis statement should be very short, emphasizing key points within the income statement.
Cash Flow Statement
The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.
Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.
The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items that you’ll need to include in the cash-flow statement and the order in which they should appear are as follows:
- Cash sales. Income derived from sales paid for by cash.
- Receivables. Income derived from the collection of receivables.
- Other income. Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
- Total income. The sum of total cash, cash sales, receivables, and other income.
- Material/merchandise. The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.
- Production labor. The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
- Overhead. All fixed and variable expenses required for the production of the product and the operations of the business.
- Marketing/sales. All salaries, commissions, and other direct costs associated with the marketing and sales departments.
- R&D. All the labor expenses required to support the research and development operations of the business.
- G&A. All the labor expenses required to support the administrative functions of the business.
- Taxes. All taxes, except payroll, paid to the appropriate government institutions.
- Capital. The capital required to obtain any equipment elements that are needed for the generation of income.
- Loan payment. The total of all payments made to reduce any long-term debts.
- Total expenses. The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments.
- Cash flow. The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
- Cumulative cash flow. The difference between current cash flow and cash flow from the previous period.
As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan. Once again, the analysis statement doesn’t have to be long and should cover only key points derived from the cash-flow statement.
The Balance Sheet
The last financial statement you’ll need to develop is the balance sheet. Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan; however, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas:
To obtain financing for a new business, you may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, you’ll need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.
As mentioned, the balance sheet is divided into three sections. The top portion of the balance sheet lists your company’s assets. Assets are classified as current assets and long-term or fixed assets. Current assets are assets that will be converted to cash or will be used by the business in a year or less. Current assets include:
- Cash. The cash on hand at the time books are closed at the end of the fiscal year.
- Accounts receivable. The income derived from credit accounts. For the balance sheet, it’s the total amount of income to be received that is logged into the books at the close of the fiscal year.
- Inventory. This is derived from the cost of goods table. It’s the inventory of material used to manufacture a product not yet sold.
- Total current assets. The sum of cash, accounts receivable, inventory, and supplies.
Other assets that appear in the balance sheet are called long-term or fixed assets. They are called long-term because they are durable and will last more than one year. Examples of this type of asset include:
- Capital and plant. The book value of all capital equipment and property (if you own the land and building), less depreciation.
- Investment. All investments by the company that cannot be converted to cash in less than one year. For the most part, companies just starting out have not accumulated long-term investments.
- Miscellaneous assets. All other long-term assets that are not “capital and plant” or “investments.”
- Total long-term assets. The sum of capital and plant, investments, and miscellaneous assets.
- Total assets. The sum of total current assets and total long-term assets.
After the assets are listed, you need to account for the liabilities of your business. Like assets, liabilities are classified as current or long-term. If the debts are due in one year or less, they are classified as a current liabilities. If they are due in more than one year, they are long-term liabilities. Examples of current liabilities are as follows:
- Accounts payable. All expenses derived from purchasing items from regular creditors on an open account, which are due and payable.
- Accrued liabilities. All expenses incurred by the business which are required for operation but have not been paid at the time the books are closed. These expenses are usually the company’s overhead and salaries.
- Taxes. These are taxes that are still due and payable at the time the books are closed.
- Total current liabilities. The sum of accounts payable, accrued liabilities, and taxes.
Long-term liabilities include:
- Bonds payable. The total of all bonds at the end of the year that are due and payable over a period exceeding one year.
- Mortgage payable. Loans taken out for the purchase of real property that are repaid over a long-term period. The mortgage payable is that amount still due at the close of books for the year.
- Notes payable. The amount still owed on any long-term debts that will not be repaid during the current fiscal year.
- Total long-term liabilities. The sum of bonds payable, mortgage payable, and notes payable.
- Total liabilities. The sum of total current and long-term liabilities.
Once the liabilities have been listed, the final portion of the balance sheet-owner’s equity-needs to be calculated. The amount attributed to owner’s equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors when evaluating the company. Many times it determines the amount of capital they feel they can safely invest in the business.
In the business plan, you’ll need to create an analysis statement for the balance sheet just as you need to do for the income and cash flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.
The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. In fact, within the operations plan you’ll develop the next set of financial tables that will supply the foundation for the “Financial Components” section.
The financial tables that you’ll develop within the operations plan include:
- The operating expense table
- The capital requirements table
- The cost of goods table
There are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.
The organizational structure of the company is an essential element within a business plan because it provides a basis from which to project operating expenses. This is critical to the formation of financial statements, which are heavily scrutinized by investors; therefore, the organizational structure has to be well-defined and based within a realistic framework given the parameters of the business.
Although every company will differ in its organizational structure, most can be divided into several broad areas that include:
- Marketing and sales (includes customer relations and service)
- Production (including quality assurance)
- Research and development
These are very broad classifications and it’s important to keep in mind that not every business can be divided in this manner. In fact, every business is different, and each one must be structured according to its own requirements and goals.
The four stages for organizing a business are:
2. Organize these tasks into departments that produce an efficient line of communications between staff and management.
3. Determine the type of personnel required to perform each task.
4. Establish the function of each task and how it will relate to the generation of revenue within the company.
Calculate Your Personnel Numbers
Once you’ve structured your business, however, you need to consider your overall goals and the number of personnel required to reach those goals. In order to determine the number of employees you’ll need to meet the goals you’ve set for your business, you’ll need to apply the following equation to each department listed in your organizational structure: C / S = P
In this equation, C represents the total number of customers, S represents the total number of customers that can be served by each employee, and P represents the personnel requirements. For instance, if the number of customers for first year sales is projected at 10,110 and one marketing employee is required for every 200 customers, you would need 51 employees within the marketing department: 10,110 / 200 = 51
Once you calculate the number of employees that you’ll need for your organization, you’ll need to determine the labor expense. The factors that need to be considered when calculating labor expense (LE) are the personnel requirements (P) for each department multiplied by the employee salary level (SL). Therefore, the equation would be: P * SL = LE
Using the marketing example from above, the labor expense for that department would be: 51 * $40,000 = $2,040,000
Calculate Overhead Expenses
Once the organization’s operations have been planned, the expenses associated with the operation of the business can be developed. These are usually referred to as overhead expenses. Overhead expenses refer to all non-labor expenses required to operate the business. Expenses can be divided into fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and variable or semivariable (those which change according to the amount of business).
Overhead expenses usually include the following:
- Maintenance and repair
- Equipment leases
- Advertising & promotion
- Packaging & shipping
- Payroll taxes and benefits
- Uncollectible receivables
- Professional services
- Loan payments
In order to develop the overhead expenses for the expense table used in this portion of the business plan, you need to multiply the number of employees by the expenses associated with each employee. Therefore, if NE represents the number of employees and EE is the expense per employee, the following equation can be used to calculate the sum of each overhead (OH) expense: OH = NE * EE
Develop a Capital Requirements Table
In addition to the expense table, you’ll also need to develop a capital requirements table that depicts the amount of money necessary to purchase the equipment you’ll use to establish and continue operations. It also illustrates the amount of depreciation your company will incur based on all equipment elements purchased with a lifetime of more than one year.
In order to generate the capital requirements table, you first have to establish the various elements within the business that will require capital investment. For service businesses, capital is usually tied to the various pieces of equipment used to service customers.
Capital for manufacturing companies, on the other hand, is based on the equipment required in order to produce the product. Manufacturing equipment usually falls into three categories: testing equipment, assembly equipment and packaging equipment.
With these capital elements in mind, you need to determine the number of units or customers, in terms of sales, that each equipment item can adequately handle. This is important because capital requirements are a product of income, which is produced through unit sales. In order to meet sales projections, a business usually has to invest money to increase production or supply better service. In the business plan, capital requirements are tied to projected sales as illustrated in the revenue model shown earlier in this chapter.
For instance, if the capital equipment required is capable of handling the needs of 10,000 customers at an average sale of $10 each, that would be $100,000 in sales, at which point additional capital will be required in order to purchase more equipment should the company grow beyond this point. This leads us to another factor within the capital requirements equation, and that is equipment cost.
If you multiply the cost of equipment by the number of customers it can support in terms of sales, it would result in the capital requirements for that particular equipment element. Therefore, you can use an equation in which capital requirements (CR) equals sales (S) divided by number of customers (NC) supported by each equipment element, multiplied by the average sale (AS), which is then multiplied by the capital cost (CC) of the equipment element. Given these parameters, your equation would look like the following: CR = [(S / NC) * AS] * CC
The capital requirements table is formed by adding all your equipment elements to generate the total new capital for that year. During the first year, total new capital is also the total capital required. For each successive year thereafter, total capital (TC) required is the sum of total new capital (NC) plus total capital (PC) from the previous year, less depreciation (D), once again, from the previous year. Therefore, your equation to arrive at total capital for each year portrayed in the capital requirements model would be: TC = NC + PC – D
Keep in mind that depreciation is an expense that shows the decrease in value of the equipment throughout its effective lifetime. For many businesses, depreciation is based upon schedules that are tied to the lifetime of the equipment. Be careful when choosing the schedule that best fits your business. Depreciation is also the basis for a tax deduction as well as the flow of money for new capital. You may need to seek consultation from an expert in this area.
Create a Cost of Goods Table
The last table that needs to be generated in the operations and management section of your business plan is the cost of goods table. This table is used only for businesses where the product is placed into inventory. For a retail or wholesale business, cost of goods sold–or cost of sales–refers to the purchase of products for resale, i.e. the inventory. The products that are sold are logged into cost of goods as an expense of the sale, while those that aren’t sold remain in inventory.
For a manufacturing firm, cost of goods is the cost incurred by the company to manufacture its product. This usually consists of three elements:
As in retail, the merchandise that is sold is expensed as a cost of goods, while merchandise that isn’t sold is placed in inventory. Cost of goods has to be accounted for in the operations of a business. It is an important yardstick for measuring the firm’s profitability for the cash-flow statement and income statement.
In the income statement, the last stage of the manufacturing process is the item expensed as cost of goods, but it is important to document the inventory still in various stages of the manufacturing process because it represents assets to the company. This is important to determining cash flow and to generating the balance sheet.
That is what the cost of goods table does. It’s one of the most complicated tables you’ll have to develop for your business plan, but it’s an integral part of portraying the flow of inventory through your operations, the placement of assets within the company, and the rate at which your inventory turns.
In order to generate the cost of goods table, you need a little more information in addition to what your labor and material cost is per unit. You also need to know the total number of units sold for the year, the percentage of units which will be fully assembled, the percentage which will be partially assembled, and the percentage which will be in unassembled inventory. Much of these figures will depend on the capacity of your equipment as well as on the inventory control system you develop. Along with these factors, you also need to know at what stage the majority of the labor is performed.
What You’ll Cover in This Section
The purpose of the design and development plan section is to provide investors with a description of the product’s design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.
There are generally three areas you’ll cover in the development plan section:
- Product development
- Market development
- Organizational development
Each of these elements needs to be examined from the funding of the plan to the point where the business begins to experience a continuous income. Although these elements will differ in nature concerning their content, each will be based on structure and goals.
The first step in the development process is setting goals for the overall development plan. From your analysis of the market and competition, most of the product, market and organizational development goals will be readily apparent. Each goal you define should have certain characteristics. Your goals should be quantifiable in order to set up time lines, directed so they relate to the success of the business, consequential so they have impact upon the company, and feasible so that they aren’t beyond the bounds of actual completion.
Goals For Product Development
Goals for product development should center on the technical as well as the marketing aspects of the product so that you have a focused outline from which the development team can work. For example, a goal for product development of a microbrewed beer might be “Produce recipe for premium lager beer” or “Create packaging for premium lager beer.” In terms of market development, a goal might be, “Develop collateral marketing material.” Organizational goals would center on the acquisition of expertise in order to attain your product and market-development goals. This expertise usually needs to be present in areas of key assets that provide a competitive advantage. Without the necessary expertise, the chances of bringing a product successfully to market diminish.
With your goals set and expertise in place, you need to form a set of procedural tasks or work assignments for each area of the development plan. Procedures will have to be developed for product development, market development, and organization development. In some cases, product and organization can be combined if the list of procedures is short enough.
Procedures should include how resources will be allocated, who is in charge of accomplishing each goal, and how everything will interact. For example, to produce a recipe for a premium lager beer, you would need to do the following:
- Gather ingredients.
- Determine optimum malting process.
- Gauge mashing temperature.
- Boil wort and evaluate which hops provide the best flavor.
- Determine yeast amounts and fermentation period.
- Determine aging period.
- Carbonate the beer.
- Decide whether or not to pasteurize the beer.
The development of procedures provides a list of work assignments that need to be accomplished, but one thing it doesn’t provide are the stages of development that coordinate the work assignments within the overall development plan. To do this, you first need to amend the work assignments created in the procedures section so that all the individual work elements are accounted for in the development plan. The next stage involves setting deliverable dates for components as well as the finished product for testing purposes. There are primarily three steps you need to go through before the product is ready for final delivery:
- Preliminary product review. All the product’s features and specifications are checked.
- Critical product review. All the key elements of the product are checked and gauged against the development schedule to make sure everything is going according to plan.
- Final product review. All elements of the product are checked against goals to assure the integrity of the prototype.
Scheduling and Costs
This is one of the most important elements in the development plan. Scheduling includes all of the key work elements as well as the stages the product must pass through before customer delivery. It should also be tied to the development budget so that expenses can be tracked. But its main purpose is to establish time frames for completion of all work assignments and juxtapose them within the stages through which the product must pass. When producing the schedule, provide a column for each procedural task, how long it takes, start date and stop date. If you want to provide a number for each task, include a column in the schedule for the task number.
That leads us into a discussion of the development budget. When forming your development budget, you need to take into account all the expenses required to design the product and to take it from prototype to production.
Costs that should be included in the development budget include:
- Material. All raw materials used in the development of the product.
- Direct labor. All labor costs associated with the development of the product.
- Overhead. All overhead expenses required to operate the business during the development phase such as taxes, rent, phone, utilities, office supplies, etc.
- G&A costs. The salaries of executive and administrative personnel along with any other office support functions.
- Marketing & sales. The salaries of marketing personnel required to develop pre-promotional materials and plan the marketing campaign that should begin prior to delivery of the product.
- Professional services. Those costs associated with the consultation of outside experts such as accountants, lawyers, and business consultants.
- Miscellaneous Costs. Costs that are related to product development.
- Capital equipment. To determine the capital requirements for the development budget, you first have to establish what type of equipment you will need, whether you will acquire the equipment or use outside contractors, and finally, if you decide to acquire the equipment, whether you will lease or purchase it.
As we mentioned already, the company has to have the proper expertise in key areas to succeed; however, not every company will start a business with the expertise required in every key area. Therefore, the proper personnel have to be recruited, integrated into the development process, and managed so that everyone forms a team focused on the achievement of the development goals.
Before you begin recruiting, however, you should determine which areas within the development process will require the addition of personnel. This can be done by reviewing the goals of your development plan to establish key areas that need attention. After you have an idea of the positions that need to be filled, you should produce a job description and job specification.
Once you’ve hired the proper personnel, you need to integrate them into the development process by assigning tasks from the work assignments you’ve developed. Finally, the whole team needs to know what their role is within the company and how each interrelates with every position within the development team. In order to do this, you should develop an organizational chart for your development team.
Finally, the risks involved in developing the product should be assessed and a plan developed to address each one. The risks during the development stage will usually center on technical development of the product, marketing, personnel requirements, and financial problems. By identifying and addressing each of the perceived risks during the development period, you will allay some of your major fears concerning the project and those of investors as well.
Identify and Analyze Your Competition
The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.
The first step in a competitor analysis is to identify the current and potential competition. There are essentially two ways you can identify competitors. The first is to look at the market from the customer’s viewpoint and group all your competitors by the degree to which they contend for the buyer’s dollar. The second method is to group competitors according to their various competitive strategies so you understand what motivates them.
Once you’ve grouped your competitors, you can start to analyze their strategies and identify the areas where they’re most vulnerable. This can be done through an examination of your competitors’ weaknesses and strengths. A competitor’s strengths and weaknesses are usually based on the presence and absence of key assets and skills needed to compete in the market.
To determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book, Developing Business Strategies, suggests concentrating your efforts in four areas:
- The reasons behind successful as well as unsuccessful firms
- Prime customer motivators
- Major component costs
- Industry mobility barriers
According to theory, the performance of a company within a market is directly related to the possession of key assets and skills. Therefore, an analysis of strong performers should reveal the causes behind such a successful track record. This analysis, in conjunction with an examination of unsuccessful companies and the reasons behind their failure, should provide a good idea of just what key assets and skills are needed to be successful within a given industry and market segment.
Through your competitor analysis, you will also have to create a marketing strategy that will generate an asset or skill competitors don’t have, which will provide you with a distinct and enduring competitive advantage. Since competitive advantages are developed from key assets and skills, you should sit down and put together a competitive strength grid. This is a scale that lists all your major competitors or strategic groups based upon their applicable assets and skills and how your own company fits on this scale.
Create a Competitive Strength Grid
To put together a competitive strength grid, list all the key assets and skills down the left margin of a piece of paper. Along the top, write down two column headers: “weakness” and “strength.” In each asset or skill category, place all the competitors that have weaknesses in that particular category under the weakness column, and all those that have strengths in that specific category in the strength column. After you’ve finished, you’ll be able to determine just where you stand in relation to the other firms competing in your industry.
Once you’ve established the key assets and skills necessary to succeed in this business and have defined your distinct competitive advantage, you need to communicate them in a strategic form that will attract market share as well as defend it. Competitive strategies usually fall into these five areas:
Many of the factors leading to the formation of a strategy should already have been highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve around establishing the point of entry in the product life cycle and an endurable competitive advantage. As we’ve already discussed, this involves defining the elements that will set your product or service apart from your competitors or strategic groups. You need to establish this competitive advantage clearly so the reader understands not only how you will accomplish your goals, but also why your strategy will work.
Define Your Market
Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and promotional strategies that will allow the company to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this will allow you to develop your own estimates for the future of your business.
Begin your market analysis by defining the market in terms of size, structure, growth prospects, trends and sales potential.
The total aggregate sales of your competitors will provide you with a fairly accurate estimate of the total potential market. Once the size of the market has been determined, the next step is to define the target market. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market–the total number of users within the sphere of the business’s influence. The segmentation factors can be geographic, customer attributes or product-oriented.
For instance, if the distribution of your product is confined to a specific geographic area, then you want to further define the target market to reflect the number of users or sales of that product within that geographic segment.
Once the target market has been detailed, it needs to be further defined to determine the total feasible market. This can be done in several ways, but most professional planners will delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market. In the case of a microbrewery that plans to brew a premium lager beer, the total feasible market could be defined by determining how many drinkers of premium pilsner beers there are in the target market.
It’s important to understand that the total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.
Projecting Market Share
Arriving at a projection of the market share for a business plan is very much a subjective estimate. It’s based on not only an analysis of the market but on highly targeted and competitive distribution, pricing and promotional strategies. For instance, even though there may be a sizable number of premium pilsner drinkers to form the total feasible market, you need to be able to reach them through your distribution network at a price point that’s competitive, and then you have to let them know it’s available and where they can buy it. How effectively you can achieve your distribution, pricing and promotional goals determines the extent to which you will be able to garner market share.
For a business plan, you must be able to estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, you’ll need to consider two factors:
- Industry growth which will increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
- Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where you have five distinct stages: early pioneer users, early users, early majority users, late majority users and late users. Using conversion rates, market growth will continue to increase your market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.
Defining the market is but one step in your analysis. With the information you’ve gained through market research, you need to develop strategies that will allow you to fulfill your objectives.
The business description usually begins with a short description of the industry. When describing the industry, discuss the present outlook as well as future possibilities. You should also provide information on all the various markets within the industry, including any new products or developments that will benefit or adversely affect your business. Base all of your observations on reliable data and be sure to footnote sources of information as appropriate. This is important if you’re seeking funding; the investor will want to know just how dependable your information is, and won’t risk money on assumptions or conjecture.
When describing your business, the first thing you need to concentrate on is its structure. By structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or service-oriented. Also state whether the business is new or already established.
In addition to structure, legal form should be reiterated once again. Detail whether the business is a sole proprietorship, partnership or corporation, who its principals are, and what they will bring to the business.
You should also mention who you will sell to, how the product will be distributed, and the business’s support systems. Support may come in the form of advertising, promotions and customer service.
Once you’ve described the business, you need to describe the products or services you intend to market. The product description statement should be complete enough to give the reader a clear idea of your intentions. You may want to emphasize any unique features or variations from concepts that can typically be found in the industry.
Be specific in showing how you will give your business a competitive edge. For example, your business will be better because you will supply a full line of products; competitor A doesn’t have a full line. You’re going to provide service after the sale; competitor B doesn’t support anything he sells. Your merchandise will be of higher quality. You’ll give a money-back guarantee. Competitor C has the reputation for selling the best French fries in town; you’re going to sell the best Thousand Island dressing.