Finance & Grow Your New Business. Angie Mohr
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What do you want from your business? Money? Status? Security? We look at the various goals of entrepreneurs and how to align your plan with your goals.
Introduction
We have spent considerable time so far discussing the personal side of your financial life because it forms a critical pillar to the success of your business. In this chapter, we begin to look at your business goals and how to set up your initial business plan.
By this point, you have considered what type of business you want to start and why you want to be an entrepreneur (Chapter 1). You have also thought about which opportunity will be best for you: Starting a business from scratch or buying an existing business (Chapter 3).
Now, you will need to start planning your business, including what your projected cash flows will be, when you will start to turn a profit, and how you will get out of your business when you’re ready to do other things.
We will start by talking about money.
Chasing the Almighty Buck
Money may not be the only reason that you have decided to start up a small business. In fact, entrepreneurs tend to have an inborn need to create and build empires that reflect who they are and that can be passed on to future generations. But starting and managing a business is a risky venture and with risk comes the opportunity for reward.
Conventional wisdom says that you should sacrifice short-term monetary rewards for long-term gain. Many small-business owners not only do not think about getting a return on the money they have invested into their business, they don’t even take a salary for the labor they invest. “I’ll start taking a salary later when the business can afford it,” is a refrain I frequently hear from small-business owners just starting out.
The danger of this thinking is that you may simply be subsidizing a business that cannot survive without you working and investing for free. The only successful business model is one that is able to pay all of its expenses as well as provide a return to its investors. Think about how long Microsoft would last if it couldn’t pay its managers or pay dividends on its shares. Likewise, for your business to be successful, it will ultimately have to pay a manager, whether it’s you or someone that you hire for the position.
Plan your remuneration right from the beginning. You know how much you will need from the business to pay your current expenses and you know how much you will have to set aside every year to fund your retirement (see Chapter 4). This is the minimum remuneration that you will need to plan for. If your business will not have access to the external financing necessary to pay you as the manager, make sure that you know how long it will be before it is able to do so. For example, it is easier to forgo a salary if you know that, in six months, the business will start paying you one. This will also help with your own personal financial planning.
The bottom line is, even if money is not your primary motivation for starting your business, plan for profits and build your business model around profitability. Not only will it make your life more comfortable now, but it will increase the value of your business when it comes time to sell it or pass it on to the next generation (we’ll talk more about exiting your business later in the chapter).
Case Study
Craig’s next job was to work on the presentation to the investors. He and his partner, Gordon, had decided on the name EarthPower for their new company but had not been able to agree on much else. He quickly realized that, not only did he have to figure out how to present the company to outsiders, but he also had to figure out what the company would look like so that he could work on the strategic plan.
Craig and Gordon booked off an entire day to work on the vision for the company. Once they started to discuss the products and services that they would offer their customers, Craig realized they had entirely different visions for the company. Craig called Vivian that afternoon for her advice and she recommended that the partners engage in a mediated visioning session.
“What’s that?” Craig asked, perplexed.
“A visioning session will help the two of you to come to a consensus as to what the business will look like and what products and services it will offer. Determining that upfront will help to deflect problems down the road. You both will have a good handle on what the business is and does.”
“But what does ‘mediated’ mean?” Craig asked.
“Mediated means that a third party — in this case, me — will be a participant in the talks and will help to balance out both views. You can imagine what would happen in an unmediated discussion if one partner always puts forward his opinion without ever letting the other partner speak. It’s not very effective. Once we’ve had the visioning session, we’ll start on the business plan.”
Craig rubbed his forehead. This was starting to sound like real work.
What Is the Purpose of Your Business?
The first step in planning your new business is to define what your business actually is. What will it provide to its customers? For example, if you want to open a hair salon, you must first define the range of services it will provide. Will it simply provide haircuts? Or will it be a full-service spa with high-end services like massage and facials?
The next planning step is to define your market. Who will your customers be? This will help you to target your marketing and promotions to be able to get at your potential customer base. This planning step will require some analysis. You need to make sure that the people you are targeting would really purchase your product or service. For example, if you have a car dealership that sells bmws, you would more likely target wealthy business owners than penniless students. This may be a new concept for you if you have never run a business before and you may feel uncomfortable making generalizations about people based on their income or social stature. But you are simply trying to identify the group of consumers who are most likely to be interested in what you have to sell.
The third planning step is to identify where you want to be in your industry. If you are a massage therapist, do you want to be the least expensive? Be the most knowledgeable? Have the most flexible hours? This information will translate into your vision statement for your business: An all-encompassing statement about what your business stands for and what its mandate is. We will address developing a vision statement for your business in Part 2 of this book.
Once you have decided on the overall direction of your new business, it’s time to start the detailed planning process.
The Business Plan
Every small-business owner is told to write a business plan before starting a small business. But what is a business plan really and who is it for?
Many small-business owners prepare a business plan solely because their bank demands that they do. They find a template online and fill in the blanks. Once the bank has reviewed it (or tucked it into a file without looking at it, as is often the case), the business owner never looks at it again and it collects dust on a shelf.
A business plan should, however, be a living, breathing, ever-changing document. It is the guidebook for your business to follow. It is to your business what the Constitution is to the United States: A set of guiding principles and the road map to get there. Remember, though, that the road map for your business will be constantly changing as you meet challenges in your business’s operating environment and as you make changes to take advantage of new opportunities in the market. You will frequently review and update your business plan and compare your actual results to your plans.
The primary user of the business plan should be you, the owner. However, there will be many other potential users of your business plan, including:
• Lenders. They will want to make sure that they are lending money to a solid enterprise that has a probability of success.
•