Step 1 for the new entrepreneur is drawing up a business plan
Neil Balter's first business plan was outdated in a year. His company, California Closets, took only one year to reach its three-year sales goal. He found that building neat, compartmentalized grids of shelves, rods, and racks into people's closets was a very lucrative enterprise.
Mr. Balter and David Seigel, his business professor at Pierce Community College in Woodland Hills, Calif., credit the business plan with helping the company (now seven years old) grow to its current $15 million worth of sales.
The plan allowed California Closets to organize closets far beyond Woodland Hills. Fifty-three franchisees across the United States, Canada, and Australia now act as individually owned ``branches,'' Professor Seigel says. From the time the company began franchising three years ago under the name ``Creative Closets,'' it really took off.
Balter felt the business plan gave him something to aim for. ``You've got to have a plan because you've got to have a goal,'' he says. And having that goal enabled him to measure his progress -- gave him a boost toward a successful business.
Experts advise small businesses to start with a plan, not just to draw one up when they need to ask for money. The process of putting everything down in writing often highlights possible problems, letting the entrepreneur make contingency plans to handle such problems, or avoid them altogether. And the more details that are decided beforehand, the fewer decisions will come up to throw off the young business in the heat of battle.
For example, when Jessica Lipnack started sending out direct mail to solicit members for her networking directory business, she knew exactly what to do. She knew the two-color direct-mail package would include a letter, brochure, order form, and business-reply envelope. All the tiny little decisions that could have slowed her down were already there in her business plan.
``We really used it to figure out what our business was going to be,'' says Ms. Lipnack, president of Networking Institute Inc. in West Newton, Mass.
Comparing projections from the business plan with actual income and outgo helped pinpoint the accuracy of her plans, she says.
And of course most official financing sources -- banks and venture-capital firms -- won't even consider your request for money without a complete, concise plan.
OK, ready to write? Here are the topics your plan should cover:
Title page: Include the name of your business, owner(s) of the business, the business address and phone number.
Summary or purpose paragraph: What kind of business are you starting? Include the legal form of operation (sole proprietorship, partnership, or corporation), goals of the business plan, how they will be put into action, and their effect on the business.
If you will be using the plan to ask someone for money, tell how much money you want, what you will use it for, and how much money you have personally invested in your business. Detail a repayment schedule and include estimates or quotations on what you will purchase with the loan money.
Table of contents: Prepare it last, but include it after the summary page.
Main officers in your company: Provide a biographical sketch of each one, including any management experience or specific technical knowledge that could contribute significantly to your business.
Description of your business: Tell what the business will do and when it will start. Include here your market and competition analysis, location analysis, and how the money you are borrowing will help the company.
Which specific groups of individuals or kinds of companies will buy your product? What specific needs of your customers will it fulfill? How is your product better or less expensive than your competitors'?
``Is your market a large and growing one?'' asks Leonard E. Smollen, executive vice-president of Venture Founders Corporation, a venture-capital firm in Waltham, Mass. In such a market a business can make a mistake and still come out all right, he adds.
Find out from the chamber of commerce, US government publications, census reports, your librarian, industry trade associations, suppliers, or nondirect competitors how large your market is (in dollars).
Financial: List your assets, liabilities, and net worth on a balance sheet. Use personal data if this is a new business. Project your profits and losses for the next three years and find your break-even month.
Estimate future income and expenses month by month for the first year and quarterly for the next two in a cash-flow statement, including loan payments. Calculate how many unit you will need to sell to cover expenses.
Other information: Any other information that relates to your business goes here. Your personal r'esum'e, credit reports, letters of recommendation, and purchase orders by potential customers could be included.
The amount of time it takes to draw up a business plan varies widely, of course, with the complexity of the business and the research and writing abilities of the entrepreneur. For most, it is a task of two months or more.
And drafting the plan ``is only half the battle,'' says Al Zimmerman of the Service Corps of Retired Executives, a free counseling service of the Small Business Administration. The other half is to compare actual results with the plan on a monthly basis and correct any off-course drift as it happens.
Although there are services that will prepare a plan for you, experts advise against this. ``I want to see business plans developed by the entrepreneur,'' says Mr. Smollen. He says he can tell during the first half hour of a presentation to his venture-capital firm if an entrepreneur doesn't know his own plan.
Prepare the plan carefully. A sloppy one won't get past the first cut at venture-capital firms and may damage future chances of a more professional one later.
The third of an occasional column detailing a step-by-step process for going into business for yourself. The first two ran April 23 and 30. Next: Keeping an eye on that all-important cash flow.