Running a business is challenging enough despite the additional complications that can come with unforeseen circumstances whether that be a pandemic or sudden need to pivot quickly. The Small Business Administration (SBA) has long noted that 80% of businesses survive the first year, but almost half of the businesses fail by year five. Why is this?
Why Many Small Businesses Fail
The reason that these small businesses fail, first and foremost, is directly related to lack of business planning. Over the past several years, Chase Law Group has worked with entrepreneurs and small business owners from the time they start to the time that they finish and we’ve seen a lot of inadequate business planning. What often happens is that an entrepreneur may come up with what they believe to be a wonderful idea, and whether it’s by execution or otherwise, they ultimately find that people just don’t want what they provide. Maybe there is no need or demand in the market for what the business provides or it’s not been researched enough.
Failing to Plan
It all comes down to business planning and analysis to know that you’re targeting the right audience, conveying what makes your business the best or different from the rest, as well as knowing if people want what your business provides. However, small business planning failures can also be directly linked to other reasons including:
- Capital – Not having enough capital is another potential pitfall, especially for those entrepreneurs and small business owners who are ‘bootstrapping’ their businesses, meaning personally financing often with a bare-bones minimum budget to run their business.
- Teams – Not having the right team or having loose business partnerships can lead to business failure. Oftentimes, people come together to run a business because they’re friends and they believe that they’ll be able to work together, but they often don’t think about their respective skill sets. We have found that what makes a good friend may not necessarily make a good business partner.
- Staffing – Not knowing when and how to hire independent contractors or employees and the legal implications of both.
- Competition – Not conducting a realistic competitive analysis is really critical because as entrepreneurs and small business owners we can get hit by competition that maybe we didn’t fully expect or prepare for.
- Pricing – Not having the right pricing structures in place to cover the capital expenses required to run the business is another potential for failure. In fact, what many new business owners and even established business owners often do is look at what their competition is charging and either reduce it or increase it. Sadly, businesses often try to undercut the competition on price and end up running at a deficit because it’s not enough to cover the costs of running and growing their business.
Roadmap to Business Success
In our experience, we have found that a startup business or even an established business can benefit from planning at any stage. An established business may not have put together an adequate business plan from the start, or maybe it’s in a growth phase and has another set of options to consider for growth, sale or exit. For any stage business, you should be looking at your business plan regularly. Your business plan is not something that you put together when you start your business, and then put on a shelf and not look at it again. The business plan is a roadmap to your business success. It is the foundation for creating a business that will survive the test of time, that will beat out those SBA statistics and will survive beyond year one, year three, year five, and beyond.
Create the Right Plan For You
Let’s look at the purpose of a business plan. It’s your personal roadmap for your business. But what do you need to have in your business plan? Many entrepreneurs and business owners get caught up in templates they find online which are usually very lengthy and have so many different categories that people just get stuck. It’s often referred to as the paralysis of analysis. Business owners get discouraged at this point because this planning isn’t truly material planning but it’s more based on trying to fit your business into somebody else’s template. It has to be your plan, one that you’re comfortable with, and one you can understand and want to revisit consistently.
Planning For Opportunities
Beyond being the roadmap for your business success, a business plan is often required for other purposes such as financing for your business. If you go to get money from a bank, they’re going to ask you for your business plan. Quite often that bank will provide you with a template or its criteria for what needs to be included in your plan to apply for financing and if you already have the heart of the business plan already documented, this will make the process a lot easier for you.
Another important purpose for the business plan is to provide to potential investors, if you’re seeking venture capital where people are looking to invest their dollars in your business. Whether it’s bank financing or investment capital, they will ask you for a thorough business plan. Keep in mind that while you may be at a stage in your business where you may not think that you will ever need bank financing or investors, we’ve seen entrepreneurs who are busy running the business and then unexpectedly, they either need more cash in order to keep up with business demand or someone approaches them to invest in or buy their company. You never know what opportunities may come and you’ll want to have a good foundation to be able to respond quickly.
What’s in a Plan
From a big picture perspective there are a number of areas to cover in a typical business plan. Let’s keep it simple:
- Executive Summary – Most business plans include an executive summary, which is the overview and shortened big picture description of your business.
- Market Analysis – Market analysis is another section of a traditional business plan. It shows that you’ve done some homework and looked into your competition to differentiate yourself from the rest and substantiate pricing or other advantages that your business offers.
- Organization and Management – This refers to how your organization is structured legally and who is running the operations and making business decisions.
- Product/Services – This identifies the core products or services your company offers today and/or will be offering and provides a brief description along with target customers and price ranges.
- Financial Projections – Here is where you’ll want to show an educated analysis of what you presume can be achieved through sales, showing revenue and expenses and the bottom line net profit over a one-to-three or five-year period.
- Appendix – The appendix is where you include supporting materials that you have used to demonstrate how you created your plan and to back up your assumptions. While some of your plan may be left up to your best educated guesses, it’s always good to have a baseline of relevant information to help you make those decisions about your business plan confidently and shows a bank or investor that you’ve done your due diligence.
Additional materials and an even more detailed business plan may be requested by investors or banks but this should give you a good place to start rather than creating a business plan at the last moment when you’re trying to get funding.
Putting the Plan Together
You want to be sure that your business plan is thoughtful, not rushed, and that you’re demonstrating that you’ve looked at reasonable and relative points in order to establish this roadmap for growth. Most investors and financial institutions look at numerous business plans for all types of companies, so they will likely see right through unusually high revenue and overreaching projections based on their experience. You should plan for big goals but also temper that with expectations based in reality.
Keep in mind when writing the components of your business plan, start with a mission or vision. This needs to be your personal statement, not mimicking what the latest guru or someone on the internet says. Why, how and what you do in running your business is going to be totally unique from someone else. Try not to get caught up in form over substance. Every entrepreneur and established business owner should think about why they’re in business in the first place, why they’re putting in the time and the money and the effort to have a business. Even if it’s been awhile since you’ve given this thought, it’s always a good time to take a moment to check in on the plan and if anything has changed in your mission and what your goals are for your business.
In our future posts, we’ll do a deeper dive into what to focus on when putting your business plan together. If you have any questions concerning how to approach the legal structure of your business or would like a consultation to navigate some of the planning questions you have, please contact us or call Chase Law Group at 310.545.7700.