Small-business Startup Guide—Part One: Creating the Business Plan

by Kimberly Grob, special to CalCPA.org

Editor's note: This is the first of a four-part series on starting a small business. The other articles discuss choosing the right legal structure, getting financingand dealing with taxes.

It's the American Dream: Own your own business. Make your own money. Be your own boss. And as a dream, the concept of entrepreneurship swells with hope and promise in the minds of would-be business owners. But when reality encroaches upon this dream, and the dreamer ends up working 14 hour days -- handling every task from answering phones to sweeping floors -- the golden promise of entrepreneurship begins to lose some of its luster.

Sadly, this chain of events is all too communityon for many small business owners. And for many budding entrepreneurs, the dream of business ownership begins to disintegrate long before the first customer ever walks in the door. This breakdown is silent and invisible; it happens without the entrepreneur's knowledge. It happens while the entrepreneur is writing the business plan.

The Living, Breathing Business Plan
The business plan is a crucial tool that will aid you in making the rest of your business startup decisions, such as determining your business' legal structure, choosing a financing option, and planning your accounting and finances. It'll also help you make many of the ongoing decisions that you'll encounter throughout the life of your business.

A typical business plan can be broken into several seemingly simple components, including:

• Introduction and overall goals of the business;
• Marketing, advertising and pricing strategies;
• Financial management strategies, including monthly operating budget, projected income statement and accounting procedures;
• Operations procedures, including personnel, office space and equipment; and
• Concluding summary of business goals and objectives.

But writing a successful business plan isn't nearly as simple as organizing your ideas under each of the above categories, choosing a nice font and presenting the document to potential financial backers. In fact, the breakdown of the small business dream begins to occur when entrepreneurs become too formulaic or hasty in their business plan writing and don't fully develop, investigate and test their ideas. Instead of developing pretty charts and graphs based on vague business dreams, entrepreneurs need to remember that the process requires good, hard thinking. And lots of it.

"Too many people are looking for cookbook solutions," says Howard Thomas, CPA and president of the Thomas Consulting Group, a firm that specializes in small business consulting in Los Gatos. "They view writing a business plan as a task to be performed, like something on a checklist." But a successful business plan isn't merely a document with a beginning, middle and end. It's a living, breathing part of the business. "The business plan shouldn't get filed away when the business opens," says Thomas. "Instead, it should be something that you're constantly working on. The business plan is your business."

The Golden Rules of Planning
Thomas gives his clients the following four rules for starting and growing a successful business, and each of these rules must be considered when writing a business plan.

Know your business. First, ask yourself what you want to get out of your business, and what type of business you're trying to put together. For instance: Are you just looking for a way to make a living? Are you primarily trying to make a lot of money? Are you designing a mom-and-pop company or the next Microsoft? "It's critical that you define where you want to be and when you want to be there," says Howard.

Understand the market in which your business operates. Before you write a business plan, you have to find a customer. "For there to be a business, there has to be a customer," says Thomas. These customers should be people you can talk with; people who are willing to consider you as a vendor. "The customer will teach you everything you need to know," he explains. And they will, in effect, help you write your business plan. They will tell you how they should be sold to, what your product should look like, and how you should price it. And if you're a smart entrepreneur, you'll listen carefully to what they say.

Remember that the world is constantly changing. Thomas reminds clients to look at all the alternatives our changing world presents. For instance, an online catalog is one relatively new option to a retail store that entrepreneurs should consider. "Paying rent is no guarantee that anyone will walk in the door," says Thomas.

Never believe anything until it's tested with communityon sense. When considering the marketing and operations sections of a business plan, Thomas asks clients a seemingly simple question: Have you sold one yet? Usually, they scratch their heads and say no. This, explains Thomas, creates a dangerous void of communityon sense in the business plan. "You need someone to write a check for what you have to offer," says Thomas. "It's the wisest thing you can do while creating your business plan. Reality is based on action, and your business plan has to evolve from action. Otherwise it doesn't go anywhere; it doesn't have any communityon sense."

The Exit Strategy Tool
A good business plan also allows space for the entrepreneur to think. It allows the business to be built into the entrepreneur's life rather than taking over his or her life. "The trick for the entrepreneur is to not always be doing," says Thomas. Business owners who get sucked into too many routine business matters, such as answering phones and waiting on customers all day, lose sight of the big picture and are unable to re-energize themselves and their business plans. "The plan becomes disconnected from the reality of doing all the labor," says Thomas. "The daily routine drives out all possibility of thinking about who the customers are." Michael Gerber, author of The E Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It,(Harperbusiness, 1995), puts it this way. Entrepreneurs need to work on their businesses, not in their businesses.

Because most entrepreneurs do not want to be enslaved to their businesses, a good business plan is also what Thomas calls an "exit strategy tool." Even in the earliest planning stages, entrepreneurs should think about designing the business as something that they will be able to sell some day. "When creating the business plan," he says, "think of it as writing the blurb that the realtor will use to sell your house."

In this way, the business plan doesn't just create a business. It creates a future. And a retirement. And your own well-planned and well-executed American Dream.

A business plan outline and more detailed assistance on developing a sound business plan can be found on the federal Small Business Administration's Web site, www.sba.gov.