People would think that anyone starting a new business would have a business plan, or even more importantly anyone running a growing firm certainly would have one. Surprisingly, many people start their business without a plan to help their business succeed and be more profitable.
According to Census.gov, in New Jersey a total of 230,281 employer establishments were open for business in 2013. However, three years later many of those businesses might be closed due to rushing into it without a strategy in place.
It’s a fact that most new businesses fail within the first 12 to 18 months after starting. The most common mistake is not developing a business plan before they start-up. Even more basic is not developing a break-even analysis for the first year of operations. Growing firms also falter and fail due to not maintaining and updating their initial business plans for changing market conditions.
The majority of founders of new businesses are entrepreneurial techies of one kind or another. Entrepreneurs are visionaries convinced that they have an idea that will change the world for the better. Unfortunately, the great majority have never taken any business courses on accounting, marketing or management.
The consequence of this is that they lack the fundamental knowledge of what it takes to start and manage a business and make a profit. Typical entrepreneurs are long on ideas, but notoriously short on cash. Most of the money that they have invested usually gets spent on getting ready to do business before there are even any customers.
There are two phases to any new business: getting ready to do business and then opening the door. This is why developing a break-even analysis is so important. Even just developing a new app takes time and money. It takes time to develop and test the app. It will also take additional time and money to market the app to potential users.
For example, take something as simple as opening a pizzeria. The first thing that has to be taken into consideration is the cost of getting ready to make pizzas. Then, you must obtain the rental of a space, purchase and installation of equipment. It will all start adding up, you can’t have a pizzeria without furniture, utilities, insurance, menus, storefront signage, initial employees’ salaries, etc.
Soon after, once you open the door for business, you incur variable costs for all the ingredients for making various different food items on the menu. The additional essentials you need for your pizzeria would be packaging (bags/boxes), some advertising, promotions, other employees, taxes on sales and various other expenses depending on where you open your business.
All of the fixed and variable costs have to be estimated before you sell one slice of pizza. They should be developed into a monthly budget so that you can measure what the actual costs are compared to what you budgeted.
Now comes the hard part: calculating what you have to sell. This calculation includes the number of pizzas you will need to sell every day and every week to cover the fixed and variable costs just to break-even. How many customers are needed to reach that number? Are there enough customers in the area of your shop to achieve your estimates?
You would also have to consider, what about competitors and are the other pizzerias close by? What is better about your pizza? Why would customers choose yours over theirs? What kind of advertising and promotions do you have to develop to attract customers? What about discounts, sales, coupons, etc.?
Once you calculate how many pizzas, at set prices, you need to sell to cover your fixed and variable costs every day and every week, you now have a projected break-even. These sales estimates need to be added to your budget. Looking at all of these numbers before you start should shock you into reality. The real question is: Are these sales levels achievable?
As you start selling your pizzas and begin to acquire the costs of operating your business, record the actual sales and expenses. After that is complete, compare them to what you estimated you would sell and your budgeted expenses. Take into account every day, week and month. This comparison will quickly reveal whether or not you are going to break-even, make money or lose money. More importantly, it will allow you to manage your business better. The next step would be to determine if and when you will achieve a return on your investment (ROI), if at all.
As you can see from this simple explanation, new business owners need to develop a plan before opening doors to the public. It is not only an educational process for any entrepreneur, but it is essential to determine if investing your money, and those who have loaned you their money, will result in getting the money back—and additionally generating a return on the investment.
It is an inexpensive exercise that can be done on paper or computer. Without a doubt, having a prepared business plan can save you from yourself in the long-run. It is a much needed lesson that all entrepreneurs should practice before they invest their money and the money of others into a start-up that, on paper, cannot justify generating a return on such an investment.
There are many software programs available today to guide any entrepreneur and founders of growing firms on how to develop a business plan. There is an old business saying: “Nobody plans to fail…they just fail to plan.”