What is a business plan and why is it an essential first step for a start-up firm? I found what I think are two very good definitions of a business plan and its purpose. These definitions can be found on the web and in several books. An excellent example of one of these books is “The Complete Idiots Guide to Starting Your Own Business.” The United States Small Business Association is an excellent beginning source website. This website states “A business plan precisely defines your business, identifies your goals, and serves as your firms resume” (“Business Plan Basics”, 2003 ¶ 1). The Complete Idiots Guide to Starting Your Own Business, Fourth Edition states, “A business plan is just a simulation. It is a way of predicting the future success of a business idea” (Paulson, 2003). Why is it an important first step for a start up-up firm? A business plan serves several important functions to someone who is thinking of starting a business. A business plan will make you look at several things you might not have thought of if you try to start a business without one (Paulson, 2003 p. 35).
They are as follows:
1. Why do I want to
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2. A business plan will make me look to see if what I want to do is the correct business for me (“Business Plan Basics”, ¶ 5). You will be forced to ask yourself such questions as: a. What do I like to do with my time? Is this the kind of business that I want to invest all of the time that will be required? b. Do I have the correct technical skills to do this job? c. Do others think I am good at what I want to do? If not, what am I good at? d. Is my family willing to support me in this business? e. Do I have enough time available to run a successful business? f. Do I have any personal hobbies or things that I enjoy doing that I can market?
3. Identify where your place is in the business world (Paulson, 2003, p. 35). To do this you must: a. Find out what kind of business you are interested in. b. Find out what kind of product you can sell or what kind of service you can provide for a profit. c. Is what I want to do a practical idea? d. Is my business one that will provide a needed service or product? e. Do I have any competitors? If so, are they strong? f. How is my business better than my competitors? g. How can I make customers want to utilize my business?
4. In my business plan I also have to ask myself the following questions (“Writing the Plan,” 2003, ¶ 3): a. What skills and experience will I bring to the business? b. What kind of legal structure will I utilize? c. How will I keep records for my business? d. What kind of insurance do I need for the company? e. What kind of equipment and supplies are necessary? f. How will I pay myself? g. Do I have the funds necessary to open this business? h. Will I need to look for financing? i. Where will I put my business? j. What will I call my business? In other words, a business plan is essential because it makes you write down your goals and what ideas you have about your business in an orderly manner. It is a way of showing what goals you have with your business.
A good, organized business plan shows you are truly committed to making your business work (“Business Plan Basics,” 2003, ¶ 2). This will give a good impression to any potential investors you might need for money, suppliers of products, or equipment you may need. This will also show any potential employees you may require that your business is one they want to be employed by. A good business plan is a wonderful blueprint to reaching your goals (“Business Plan Basics,” 2003, ¶ 1). It is also a valid yardstick that you can refer to as a means of measuring the progress of your business. This yardstick can also be used by employees to help them understand the direction the business is going and the ultimate goal of the business.
This helps you and your employee stay on track and ensures you do not let less important activities get in the way of progress. A good business plan also reinforces to you that your idea of starting a business was a good one (Paulson, 2003, p. 20). What are some of the sources for financing that these web sites recommend for funding (Schwab, 1997)? Some of the recommended sources for financing are: (Paulson, 2003, p. 59 – 67) a. Personal savings: This is the primary source for funding a business. The advantage of this method of funding is that you are utilizing your own funds and will not have to pay loans and interest. The disadvantage is that if the business fails you may lose everything. b. Friends and relatives: Often you can get low interest or even interest free loans in this manner.
The advantage is the low pay back rate of principle and interest. The disadvantage is that friends and relatives may try to have a say in how the business is run. Also on occasion friends and families have disagreements. These feuds may lead to legal action and force you to liquidate your company or obtain other funding to pay off these loans. c. Banks and credit unions: This is the most common form of loan. Banks and credit unions usually provide a loan if you can show your business plan is sound and the potential for profit is good. These types of loans can be very secure as often a line of credit can be established for further funding if needed. The disadvantage is the structured requirement for pay back. Failure to make payments can lead to bank foreclosure of your business and seizure of your assets. d. Angel investors: These investors will loan money for equity of part ownership in your business. Angel investors are a good source of start up funds if they feel your business is worth investing in. One of the problems of Angel Investors is they invest smaller amounts of capitol than venture capital firms. You should remember that any firm investing their money expects a return on their investment and may want a say in your business. e. Venture capital firms: Loans can be obtained from the SBA’s “Small Business Investment Company” program. There is a listing of SBA approved lenders on their web site.
The upside of Venture capitol investors is they are willing to place a larger amount of funding into a business than Angel Investors. The downside of these firms is the more they invest the more say they want in your business. Remember both of these kinds of investment firms are interested in obtaining equity and part ownership in your company. f. You can also receive loans from the SBA Micro lender program. There is a listing by state of these lenders on the SBA web site. Micro lenders are an excellent means of obtaining business loans that banks feel are too small to profitable for them. The Micro Lender system is controlled by the SBA who has an on line listing for certified agencies. The downfall is the short period of the loam maturity.
Most of these loan periods do not exceed 37 months. g. Grants: The SBA has a grant program. Grants are different than loans in that you do not have to repay them. See the SBA web site for instructions on how to apply for grants. The downfall of grants is the difficulty of writing the grant request. There is no guarantee your business will receive funding from a grant request. As you can see, there are several different ways you can obtain the needed financing to open your business. Chapter 4 of “The Complete Idiot’s Guide to Starting Your Own Business” gives outstanding instruction on the methods of funding. It is well worth the price of the book to read this chapter (Paulson, 2003, p. 59 – 67).