Operating plan provides the focus, financial plan the funds

Q

I am new to this country and am taking a class in the evenings on how to start my own business. I understand that you need a tax ID number and that it’s a good idea to form a corporation or limited liability company (LLC) to protect myself from lawsuits. At what point in the process, though, should I prepare the business plan? Do I have to file that document anywhere?

A

Go to the small-business section of any major bookstore and you will see dozens, if not hundreds, of different books on how to prepare a business plan. You can’t blame anyone — not just recent immigrants, either — for thinking that a business plan is a legal requirement in this country, and that you shouldn’t even consider starting a business without first preparing a 100-page treatise with numbered sections, index tabs and the whole shebang.

Of course, business plans are not a legal requirement, and they don’t have to be filed with any government agency. There are two kinds: an operating business plan and a financial business plan. The operating business plan is a very informal document; it doesn’t even have to be in writing, although writing it down is good discipline and forces you to think about things you would otherwise overlook. Basically, the operating business plan has four parts:

1) A marketing plan that answers these questions: Who are my customers? What fears, passions and other emotions motivate them to buy things? How do my products or services key in to those fears, passions and other emotions (to use an MBA phrase, “What is the value proposition?”). How do I get the message across to my customers? This part always comes first, because without customers, you don’t have a business. You have a hobby.

2) A competitive strategy plan that answers these questions: Who (or what) are my competitors? How are my products or services better, faster, cheaper, more convenient than theirs? In other words, where am I stronger than they are? If you can’t beat the competition, your only choice is to join them, or quit.

3) A financial plan that answers these questions: What are the costs of running this business, and how many sales at what prices must I make in order to cover those costs and make a profit? What must I need to take out of the business in order to survive in the style to which I have become accustomed, and how long will it take me to get there? Will I have to borrow money to grow this business, and if so, when and how much?

4) A risk assessment plan that answers these questions: What are the risks of this business? Can I cover them with insurance? Will I need to form a legal entity to protect myself against my creditors? What legal documents will I need to use to make sure people don’t try to cheat me?

The time to prepare an operating business plan is after you get the idea for the business and well before you launch the business. You should keep it to yourself (and your business partners, if you have any), because the stuff in there could do you real damage if it were to get into the wrong hands.

Unlike the operating business plan, the financial business plan is a formal document that must be in writing. This is the business plan you will show to prospective investors, banks and other people when you are out looking for money to grow your business. This is the business plan all of the business plan books in your local bookstore are about, and make no mistake: It has to look a certain way or else these people will not take you or your business seriously.

Here’s a tip: If you are thinking about taking out a business loan from a local bank and need to write a financial business plan, don’t buy a book and try to figure it out yourself. Instead, visit your local chapter of SCORE (check out www.score.org to find the chapter nearest you). This is a national volunteer organization of retired business people who provide free advice to local small businesses.

In my experience, just about every SCORE chapter has a few retired bankers who will be too happy to help you prepare the financial business plan your local banks will want to see, walking you step by step through the process. They may even introduce you to some of their old buddies at the bank who specialize in business loans. Did I mention this is free?

One final point about business plans: Writing them can be an awful lot of fun, but you have to be prepared to cast them aside if a really good opportunity comes along that wasn’t in the plan. The problem with business plans is that they narrow your field of vision. Sometimes the best business opportunities are not straight ahead in your path but appear in the corner of your eye in a vague and hazy way, at an oblique angle to what you are currently doing. Sticking too closely to a business plan can be just as bad as not having a business plan at all.•

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author, and former host of the PBS television series “Money Hunt.” Opinions expressed are those of the author.

© 2019 Clifford R. Ennico

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