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Five Basics Of A Business Plan

Woodshop News
December, 2002

By Dave Donelson

A business plan is your map to the money. It tells you where you’re going to get it and how much of it you’re going to be able to keep. And just like any map, the more detail the plan has, the easier it makes it to get to your destination.

Do you need a business plan? Would you build a set of custom kitchen cabinets without blueprints? I’m sure you wouldn’t think of it. So why run a business without a plan? Unfortunately, it happens all the time, which may be the reason well over 500,000 businesses fail every year.

Most of the shop owners (and other business operators) I deal with really know their craft. They know what materials to use, which type of joinery works best in a given application, which finish to apply, and so on. They’re also pretty good business people. They understand controlling expenses, tracking labor and material, and pricing the product to make a profit. They work hard and are justifiably proud of the results.

Their business plans, though, all too often sound like “If I build it, they will come.” That may work in the movies, but it stands as much chance for success as a plan to build a mantle that doesn’t have the measurements of the fireplace.

Why Plan?

If you expect to run a profitable business, your shop needs a business plan for many of the same reasons you need a plan to remodel a house. It helps you focus on the important factors that contribute to success. It helps you make key decisions on everything from the types of work you look for to the number of employees (if any) that you hire. A sound business plan is also a must if you are looking for capital, whether it be from investors, banks, or even suppliers.

A concrete business plan identifies the customers, quantifies the sales they will produce, and analyzes how profitable those sales will be. It’s like a job estimate that begins at the end of the process (the sale to the customer) and works backward. It helps you determine how much material to order and how much labor to plan on, project the costs, and figure out whether the job will be profitable at the price quoted. Only, instead of doing it on a job-by-job basis like an estimate, the business plan does it for the shop as a whole over a period of time.

Plan Components

A business plan isn’t really about what kind of furniture you’re going to make or how much shop space you need. Those are elements of it, but they are so minor that they’re almost footnotes. There are five basic components:

Business Description – A short statement about why the business exists and what it hopes to accomplish. Generally, I believe that the more specific—and shorter—the better.

Marketing Plan – Answers the questions about how the business will be successful. Who is going to buy the product? Why? What need does it satisfy? How many potential customers for it are there? How often will they buy? What are their competitive alternatives? What price will they pay? How will they know about it? How will you get it to them?

  • Financial Plan – Shows the expected financial results of the marketing plan. How much income will be produced? What net worth will be generated? Who will receive that income (you or the bank)?
  • Cash Flow Plan – The step-by-step instructions for generating cash and keeping it. How will the working assets be acquired? When will operating cash be needed? How soon will profits appear? What happens until then?
  • Management Plan – Describes the shop owner or manager’s role in the business. Who will do what? What are their qualifications? How much training expense and time is required. How much time will be devoted to production, marketing, and administration? It also includes contingency plans for events like natural disasters, up- and downturns in the economy, and competitive changes?

This very brief description of each component is not at all complete but it should give you a flavor of what kind of information, hard data, guesstimates, and reasoning go into the business plan. Most of all, a good business plan needs to be grounded in reality, not wishes. I like to say that it should produce an optimistic outlook based on pessimistic expectations.

Preparing a good plan doesn’t happen over a lunch hour. It requires research and thought. Sound business plans can come in many forms, but they all have one thing in common: they are in writing. Whether you use one of the many good software packages available or fill up a loose-leaf binder with pencil-written notes, the act of writing it down forces you to give your plan the time and thought it deserves.

Who Needs It?

Many people think of a business plan as something that only a start-up needs. But that’s like saying that once I look at the blueprints and start remodeling my kitchen, I won’t find any little hidden surprises under the stove or behind the old cabinets. I may have built a hundred miles of custom cabinetry, but I know there are going to be surprises just as sure as a table saw makes sawdust. When a surprise occurs, I can turn to my plan, make the necessary adjustments, and—most importantly—trace the ripple effect those adjustments will have on the rest of the project. Having the blueprints saves me time and eliminates a bunch of errors. A good business plan works the same way.

A well thought-out business plan is also essential if the shop is to grow. Growth requires capital for things like more space, more machinery, more people, more material, more everything—that will hopefully lead to more profit. That capital may be available from the shop’s current revenue or the shop owner’s bank account, but most of the time it’s going to have to come from a loan, vendor credit, or even outside investors. Any one of these sources are going to require not just a financial history of the shop, but financial projections as well. Projections supported by the business plan.

But what if there aren’t any outsiders to deal with? Even if the money is coming out of the shop owner’s pocket, the decision to reach in there and get it should be based on a sound plan as well. Most good business people I know are justifiably stricter about spending their own money than they are about spending anybody else’s. That’s how they got that money in their pocket in the first place.

Plan Help

One final analogy: Preparing a sound business plan is a lot like installing kitchen cabinets—it’s usually a heck of a lot easier if there are two of you. Fortunately, there is a wealth of help available. The Small Business Administration is a starting point for information and connections to other resources. Look for a local SCORE chapter (Service Core of Retired Executives) or a SBDC (Small Business Development Council) through your Chamber of Commerce, community college, or public library. Your banker or accountant may be able to provide some direction, too.