Young Upstarts

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Why Your Tiny Startup Needs A Business Plan

by Bob Adams, serial entrepreneur and founder of BusinessTown.com

Business-Plan

You might be thinking that a business plan doesn’t make any sense for your small new enterprise. After all you are not planning on trying to get even a bank loan, let alone venture capital. Isn’t that what business plans are really for anyway: raising money?

No, the best purpose of a business plan is to help you and your team (if you have one) develop, refine and update your plan for the business. A business plan gives you one place where you can coalesce your key thoughts and decisions. A good business plan forces you to think through the most important considerations in running a business by answering questions such as: What is your target market segment? How are you going to be different than you competitors? What is the benefit of using your product or service instead of your competitors’? What is the nature of competition?

A good example of a business plan for a small startup is the plan that I wrote for Bob’s Rent-A-Bike, a summer bicycle rental business that I started after my freshman year at college. The centerpiece of this plan is the unique strategy that I adopted for this business. I found out the hard way that being a small, new, undercapitalized startup that I couldn’t compete head to head with the established firms and that copying their strategy didn’t work for me. So instead I developed a very different approach to doing business and meeting the needs of my customers.

To use a business plan to really move your business ahead or to start it out on the right foot, you have to think deeply about key aspects of your plan. You want to think about: Who are the potential customers for your business? Are there any logical ways that the customers can be segmented? Is there a customer need that is being unmet or met poorly by the current competitors? Can you come up with a new strategy or differentiation for your business that would have a strong benefit to your customers?

Too often I find that businesses try to compete more or less head to head with their competitors. They say something like “Our products will be better!” or “We will offer superior customer service.” Or “We will work harder.”

Instead, I think you are much better off if you try to be different instead of better. This way you are not competing head to head against all the other firms. There are usually different segments of customers in the same marketplace who want different versions of the product or service. Find out how the existing players are addressing needs of customers currently, and try to find your own defensible niche.

Then once you have your business concept developed in your plan, move on to planning out your product or service execution. How are you going to deliver the goods or services?

Then think about how you are going to market your business. Chances are that what you initially think will work in marketing won’t work as well as you envision. But what is your overall marketing strategy? What marketing methods are you going to try initially?

Then you need to develop your financials and tie them into the rest of your plan. Are you going to offer a premium product and price it accordingly? Or are you going to be at the low end of the market and do everything possible to be the low-cost producer to be able to make a good profit while underpricing the competition? This should all tie together in a cohesive way.

Finally, you will want to make up your projections. It’s hard to say what sales level you will achieve in a new business, so maybe you have 3 sets of projections: good case, base case and weak case. That way if the sales turn out better than expected you will have a plan to grow the business quickly, whereas if sales are weaker than expected then you will have a plan to keep a tight lid on costs.

And of course, you will need to project out cash flow. Estimate your startup costs as carefully as you can, but have a contingency built in for overruns and surprises. Then project your income and costs after the business gets going. When will be your point of maximum financial need and how much will it be?

I know it’s a lot of work to create a business plan even for a small business. But my experience has taught me that it is a crucial step in building a great business of any size.

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