A client of mine is starting a new retail business, and she's finding that setting up the operations is pretty expensive. The building needs extensive renovations, and the basic equipment isn't cheap. Then there are the product and staffing costs.
Even savvy entrepreneurs sometimes skip drawing up business plans because it forces them to make tough choices early on. And it's true that the reality of getting your business off the ground will inevitably differ from your expectations—sometimes considerably. But if you don’t draw up an adequate roadmap, the only choice you may find yourself faced with is which day of the week to hold your "going out of business" sale.
The good news is that this doesn't have to be a really onerous process. So even if you don’t write out a highly detailed plan, you should at least use this seven-step formula to sketch out the fundamentals and make sure the basic business logic is sound—it won't take you very long at all:
- Document your business assumptions—investment space and equipment, hours of operation, staffing, wages and salaries, benefits, taxes, insurance, rent, etc. Tally it all up.
- Break those expenses and investments down into per unit, per hour, and/or per customer costs.
- Determine the average dollar-value of sale.
- Calculate the number of sales needed to cover your costs (this is your breakeven).
- Evaluate your capacity to achieve that sales volume.
- Set a profit goal and determine what additional sales volumes you'll need in order to hit it.
- Revise your operating and financial assumptions basted on that target and recalculate your numbers. Repeat until you have a viable business plan.
Sound a little too abstract? No problem—here's how it worked for my client's business.
First, she initially expected the time between making the initial investment of funds to reaching opening day would be six months if things go perfectly. So let’s assume nine months to be conservative. I’ve been encouraging her to spend time developing a business plan that includes an understanding of the day-to-day costs, including inventory, labor, number of clients that can be served per hour, etc.
Initially, she said told me doesn’t want to "waste time" (her words) on a business plan. She's confident she can figure it out when she gets the doors open. So in the meantime, I’ve been doing some rough calculations on my own.
Her daily operating costs with a planned staff of eight people and the product offering she's described will be $960 for labor, $1,440 for inventory, plus the fixed overhead associated with rent, utilities, insurance, etc., which comes to another $530. That means that every day she's open will cost her $2,930.
This doesn’t include allocating the cost of her nine-month investment ($1,815 per day), nor does it include marketing, promotions, and other costs, which will add up to about $100 a day. Her total daily expenses, in other words, are $7,810.
Working with that figure as our baseline, let’s add 10% for things she hasn’t thought of: permits, sales and use tax, property taxes, and so on. The number for breaking even (just covering costs) is now $8,591 a day. That’s a pretty big number, isn’t it?
How many customers does she need? Based on her plan for an average sale of $15, she will need 573 customers each day to cover these costs. Her store capacity is 20 people. Serving 20 people per hour, she'd to be open 28.6 hours a day. You get the point: She's doomed before she begins, which is something she'd be able to anticipate simply by taking a short amount of time to draw up a business plan like this one.
But because my client is still planning phase, she has options to fix this: She can devote more space to customers (increased capacity) and less to the back office. She can simplify the product offering (decreasing product costs) or reduce investment costs and open more quickly. Do any of those things and the numbers begin to change—in some cases with a cascading effect: With a more limited product offering, staffing needs might change, translating into lower labor costs.
It's easier and less costly to work through your operating and financial assumptions on paper, before you "get there." A little back-of-the-envelope math can help you map out operating decisions before you're faced with actually making them—and suffering the fallout. This is true not just for businesses that have yet to open their doors but also for existing companies that want to grow, improve profits, or move into new markets.
A business plan is far from a meaningless or strictly theoretical exercise. It's not about getting a written document (although having a written plan can be helpful for communicating your vision and getting funding)—it’s about the process of thinking through your choices and checking your assumptions, all before they check your progress when it's too late.
Lea Strickland is a business management advisor and the CEO of F.O.C.U.S. Resources, a consulting firm based in North Carolina. Lea is the creator of the C.O.R.E. Business System and the author of several books on business growth including, 10 Minute Success: Goals, Out of the Cubicle and Into Business.