Your current business plan
We have talked about business plans in past columns. When you are starting a new business or applying for a loan most entrepreneurs develop a business plan.
After that, however, many business plans find their way to the shelf, drawer, or electronic file, never to be seen again.
This is a shame because a current business plan is a working tool that should be kept up to date and used frequently. Not because it’s the thing to do but because it’s worth it.
It’s a guide that helps you evaluate how you are doing right now, helps evaluate new ideas, and helps you look to the future.
How can you best keep your business plan current?
First you must make it flexible and easily changed. This is done by making all your inputs variable and creating the numbers section of your business plan in a spreadsheet format. This way, by changing one or two variables at a time you can see the impact on your bottom line or future projections.
This can be done for cash flow analysis, P & L projections, impact of adding (or deleting) a new product, hiring more people etc. Analysts do this all the time. It’s called a “what-if” analysis. What if I change this value, what happens to my cash flow. What if fuel prices doubled or interest rates went up 25%. You could also analyze a specific cost element that is important to you business. What would the impact be on hiring a sales force (a cost) and increasing your revenue by 32%?
The spread sheet format of the business plan allows you to do this.
One of the most difficult tasks to perform in business is to forecast revenues. Entrepreneurs typically over-forecast revenues and under-forecast costs. By choosing a low (pessimistic), medium (realistic), and high (optimistic) revenue forecast, you can see the impact on your cash flow, P & L or capital requirements. You can make strategic decisions. For example, if a low forecast is a possibility (and they always are), perhaps you can design your operations to cut costs when this happens. Possibly you could lower labor costs or cut equipment costs by returning leased or rented items when not needed. Perhaps you could handle a high forecast by outsourcing, extra equipment rental, or temporary labor.
The up-to-date business plan on a spreadsheet will help.
Tinker with your business plan on paper before you make major decisions. Maybe the cost of more employees will be worth it. Perhaps a new piece of equipment may make your operation faster and result in lower unit costs. Maybe the capital cost is worth it. What if it lasts only 3 years instead of 5 years? Obsolescence is tough to determine these days, especially with high-tech items. Some only last a short while.
This analytical approach can help your decision on whether to enter new markets or come out with new products or services. Remember “what-if”.
Also by making your projections on a monthly basis, you can track how well you are doing after you have made some of these major decisions. In this way, if things aren’t working out you can do something about it before it’s too late. Your business plan becomes your short-term operating guide for your business.
Put a little effort into your business plan and keep it current. It will not only guide you through your week-to-week operations but is a must for evaluating major decisions and forecasting the future.
This article was written by Seattle SCORE Chapter member Fred Parkinson for the Kitsap Sun in Bremerton.