Starting a New Business Requires Planning in All Areas

Last year, I was approached by a small group of people who had recently quit their jobs at a company that manufactured commercial food processing equipment. They became disillusioned with their employer due to a lack of efficiency in production, marketing, and a general atmosphere of disorganization. The leader of the group felt they could "build a better mousetrap" if they went out on their own.

Each member of the group was adept in the operational side of the business. They enjoyed good relationships with the company's customers, who were also frustrated by missed deadlines, broken promises, and even incomplete orders. The group leader covertly talked to some of these customers (medium to large sized food manufacturers) about buying from their new company.

Several firms seemed excited about the prospect and made verbal commitments to buy equipment from them. Needless to say, the group of four wanted to move forward with forming a new manufacturing company. Now they needed start up financing.

Although these people knew the business from the operational end, they were all lacking in several key areas. None of the group understood accounting, cost structures, cash flow, or anything related to finance. This posed serious problems for me, whom they counted on to get them the money they needed to get going. To make a long story short, I worked with them as best I could, but became frustrated quickly when we tried to put together a business plan and accompanying schedules to give to the lender.

I depended on them to give me relevant information relating to their business because I knew nothing about the industry. Unfortunately, they simply didn't know as much as they should about the administrative and financial segments of the business, and it showed. They were turned down from two leasing companies, and were then rejected for an SBA loan. Despite the difficulties, they still would have gotten the SBA loan if the potential customers had signed off on buying commitments, but they didn't.

The moral of this story is to have your ducks in a row for all aspects of your business. What would have happened if they had gotten financing? Unless they would have hired some top flight in-house financial officer, I think they would have ended up in deep trouble.

Some helpful tips for developing a business plan:

1. Be conservative with your sales projections. It's easy to get caught up in the glamor of lofty sales forecasts, but you should assume it's not going to be rosy the first few years. Make sure you have a solid basis for your projections.

2. Don't view it as a mere formality to get a bank loan. Look at it as a blueprint for the life of your business. Writing an effective business plan means doing a lot of soul searching and research. What market entry challenges will we have? What is the most effective means of marketing our products? Which suppliers provide the best value for our raw materials? The answers to these questions (and many more)must be well thought out.

3. Carefully analyze the strengths and weaknesses of your management team. Part of the business plan involves giving biographies of the main players. Writing this section should disclose if the main parts of your business are in good hands: sales, marketing, accounting & finance, administration, and operations. If you find you are lacking in any of these areas, start looking for the people you need.

4. Don't wait until the last minute to start writing. Schedule plenty of real work hours over the course of several weeks. The main reason is because of this: if you tell a loan officer or investor in person about your idea, he/she will say "Sounds interesting! Send me a business plan tomorrow." In other words, they'll already expect it to be done. You obviously won't be able to crank out a 40-page document overnight, complete with research and financial analysis.

5. Before you send your business plan to anyone, proofread the executive summary carefully. You will probably not get the financing if you have typos in the executive summary. The fewer mistakes you have, the more professional you'll look.

You've probably read statistics regarding the failure rate of new businesses. No one can say for sure how many failures occurred because the key players didn't do their homework up front, but my guess it is a majority. Don't let it happen to you!