The journey of entrepreneurship begins with a single step, but the ones that follow often determine how successful your small business will be. One person who knows that path well is David Albright. David is an active SCORE business mentor with extensive experience in the consumer products industry including being President of Pepperidge Farm, Inc.; Godiva Chocolatier Worldwide; and Glacial Confections, a start-up venture.
Here, David shares his thoughts on that most important of all small business tools—the business plan—and other aspects of starting a new enterprise on the right track.
There are many good reasons for writing a business plan. What to you are the most important ones?
- Creating a blueprint for growth. Tie your aspirations – your sales and earnings goals – to a set of pragmatic action plan priorities. Otherwise, everything looks urgent. You risk spreading your limited time and money over everything, and risk achieving nothing.
- Aligning the organization. If you’re not clear on your objectives and priorities, how can you expect your team to be? The business planning process is a great opportunity to engage your key people, reinforce their critical roles and accountabilities, and align them accordingly.
- Tracking progress and adjusting as needed. Because we don’t control external factors like customers, competitors, and the economy, the business plan is about being adaptable, revising the “how” rather than the objective. Clear objectives and priorities broken down by month enable you to face reality, and adjust as necessary.
Similarly, are there advantages to having a good business plan that are often overlooked or not immediately obvious?
- Providing guidance for day-to-day execution. Too many small business owners view a business plan like a “term paper” – do it once and put it in a binder on the shelf. The real focus should be executing the plan, measuring your progress, and making adjustments to stay on track. The business plan kicks off a “process.” It’s not a one-off event.
- Making a “no/go no” decision. The structure of a typical business plan forces a potential business owner to think through all phases of a business – sales and marketing, operations, management, and financials – and enables you to make your “go/no go” decision regarding starting a business in a fact-based way. After going through the plan process, hopefully with a SCORE mentor as a sounding board, you will have a far more realistic view of what it will take to succeed.
- Providing guidance for investment decisions. Deciding how to invest your time and money is daunting for any company, large or small. But, you have to say “no” most of the time in order to say “yes with commitment” to fewer, bigger ideas. A business plan with clear priorities will help you make informed choices.
All parts of a business plan are important, of course, but what makes the Marketing Positioning area particularly critical?
Marketing Positioning asks a very basic question: Why should your ideal prospects buy from you rather than any of your competitors? There are three critical building blocks that, combined, will define your business “niche”:
- Target market. No market is homogeneous or one-dimensional. It’s a combination of many sub-segments, like pieces of a pie. Clearly define your target customers by demographics, geography, customer benefits, distribution channel, etc., so that you know where to focus sales and marketing efforts.
- Competitive set. You don’t compete with everyone; you compete with those companies appealing to the same customer segments you are.
- Competitive advantage. This is the “promise” that you make to your customers. One of the truisms of competitive advantage is that customers don’t buy product features or attributes; they buy benefits. So what do YOU promise current and prospective customers that your company does best? Is it best quality? Best customer service? Whatever customer benefit you say you stand for, it’s got to be an obsession in your company. It’s what you build your company around.
Another aspect that often doesn’t receive sufficient consideration is Operations. Why is this area important?
Operations is the engine room of your business - a kind of crossroads where execution meets promise. When businesses are started in industries in which the owner has no significant experience, it tends to be in the Operations area that some of the problems become most acute. For example:
- Production, logistics, inventory, and supplier management. For a product-based business, these areas demand experience because they devour cash.
- Customer service. This spans every customer touchpoint – how your company answers the phone, invoicing, etc. – as well as delivering products or projects on time.
- Billing & Accounts Receivable. Even if you do outstanding work, your chances of staying in business are slim without a tight process for both billing and receivables.
- Office space/retail location. Your first priority is identifying where your customers hang out and buy, then try to negotiate the cheapest rent. The sequence is important. Cheap rent can be the most expensive mistake a retailer makes if it’s not tied to a location that appeals to your prime customers.
The prospect of investing time and effort to thoroughly research a business plan can be intimidating sometimes. What can one do to make the process less frustrating?
You need an informed sounding board of advisors experienced in the market in which you compete. SCORE is an obvious candidate because it is a national organization of executives who provide free and confidential mentoring for small businesses. Chances are that they will have mentors with the relevant experience to provide valuable guidance.
Also look to your local business librarian. Libraries have databases that few can afford to buy for themselves. The business librarian can also point you to the relevant market research resources that will help you quickly zero in on the critical information.
What are some guidelines for choosing the most appropriate legal structure for a small business (e.g., sole proprietor vs LLC vs S/C Corporation)?
There are five basic forms of business organization which have different advantages and disadvantages. There is no “perfect” way to structure a business, but here are some general guidelines:
- Sole Proprietorship. Simple to set up, and simple to maintain and operate. But, you have unlimited personal liability for claims against the company.
- General Partnership. Also simple to set up, maintain, and operate, but a legal partnership agreement is strongly recommended. Here again, the major disadvantage is unlimited personal liability.
- Limited Liability Company (LLC). The most popular organizational form for small businesses. Low start-up costs, simple to operate, and owners have limited personal liability. This form of organization is widely recommended by SCORE.
- S-Corporation. More complicated to set up and maintain, though limited personal liability a key attribute. Fewer small businesses are using this option.
- C-Corporation. Very expensive to set up and maintain, and subject to “double taxation” – both the entity’s earnings and its dividends distributed to stockholders are taxed. Not recommended for small businesses.
For more on the pros and cons by entity, see Cliff Ennico’s article, “Demystifying the Business Organization.”
Running a business also means changes in one’s lifestyle. What should be done to prepare yourself and your family for an entrepreneur’s life?
Most people considering a start-up dream about what they’ll “get” from running their own business. However, it needs to be balanced with recognizing what they will have to “give up” as well - the sacrifices that one must make to become an entrepreneur, such as long hours, having many bosses (your customers and investors), and wearing many functional hats. Here are some suggestions to those preparing for an entrepreneur’s life:
- Get your personal finances under control. That includes credit card debt, credit rating, and 6-12 months of savings to cover living expenses, especially if your spouse does not have a steady income.
- Make sure you can afford health insurance for your family. This is particularly important if you’re losing corporate coverage.
- Build your support team. Spouse, family, friends, business colleagues, and mentors.
- Do a business plan. This will help you understand the cash flow implications of both “seed” capital and/or cash reserves requirements.
- Get a true sense of what it means to be an entrepreneur. Network with entrepreneurs, preferably in the industry you intend to enter. Shadow an entrepreneur or volunteer at an entrepreneurial company to see the reality.
Is there a danger of being overconfident about a small business’s prospects, especially if one has experience as an entrepreneur?
Too often, entrepreneurs with limited industry experience “don’t know what they don’t know.” That is why working on a business plan upfront will help drive insight and understanding. The process will give an entrepreneur a better-grounded view of the challenge – and opportunity – ahead.
What good habits should one develop before and during that critical first year?
- Know who your customers are and what they need. Get frequent customer feedback.
- Face reality by measuring your progress monthly. When you’re clear on your sales and earnings goals and your action plan priorities, you can time-frame them by month to create the success milestones every business requires. It allows you to identify problems early and adjust accordingly.
- Create a talented, accountable team. You cannot do everything yourself, both for competency and time reasons. You can hire resources full-time, part-time, on a retainer basis, or for specific projects. But in any case, your company cannot be greater than its people.
Does a small business always need an attorney or accountant when starting out?
Most small business people will need legal advice for a variety of issues– leases, contracts, trademark registration and protection, franchise purchase, and so on. Law, like all industries, is getting more and more specialized. So selecting the right lawyer for the right objective is key.
An accountant or bookkeeper is one of the most critical resources to tap early and ongoing. Getting a part-time bookkeeper to help set up your books (via QuickBooks or other software) and generate monthly financial documents is a critical part of running a fact-based business.
In addition, I would suggest business mentors such as those available through SCORE. A relationship with a local banker is also helpful as a critical source of funding and lines of credit as you build your business.
SCORE offers so many valuable resources to prospective entrepreneurs. Which ones do you feel are most important to someone just starting out?
The most valuable resource SCORE provides is free and confidential face-to-face mentoring. Entrepreneurs need a sounding board, someone with the relevant experience and judgment to guide them as they strive to build their company.
The other valuable resource we offer is the whole body of educational workshops and webinars targeted at start-ups and ongoing businesses. The opportunity to learn about every phase of running a business is a critical component for a small business owner’s continual learning and growth.
You’ve counseled all types of people as a SCORE mentor. Is there a certain “attitude” or personal trait that provides a greater chance of success?
I think client potential is an unusual combination of these attributes: business intelligence, humility, and an urgent commitment to get things done.
- Business intelligence doesn’t mean that they are fully developed business people; rather, they have common sense and a business perspective beyond their functional specialty.
- Humility and openness is not as rare but still not the rule. Some people come to us to confirm what they are doing rather than being open to new thinking and direction.
- Most refreshing and rewarding is the commitment to get things done and a sense of urgency to get them done quickly, as opposed to slow, incremental progress than doesn't have an end in sight.
Learn more about business planning in David's presentation, How to Develop a Business Plan in Six Easy Steps.