Chapter 4: The starting point: make a business plan – Information Consulting

4

The starting point: make a business plan

Abstract:

Aiming to secure your success, a detailed business plan may help you. Later on, it will help you to evaluate your success. The business plan contains the company description, lists the services – from your perspective and also from the clients' – assesses the internal and external circumstances, describes the targeted clients and the business sector, reviews the marketing issues. The financial plan maps the sales, funding and fees. The chapter also contains tables of balance sheets, start-up expenses, possible partners and competitors. An accounting policy and credit policy will also help your business.

Key words

business plan

financial plan

marketing plan

accounting

The real value of creating a business plan is not in having the finished product in hand; rather, the value lies in the process of researching and thinking about your business in a systematic way. The act of planning helps you to think things through thoroughly, study and research if you are not sure of the facts, and look at your ideas critically. It takes time now, but avoids costly, perhaps disastrous, mistakes later.

Regarding the executive summary – make it two pages or fewer. Include everything that you would cover in a five-minute interview. Make it enthusiastic, professional, complete and concise. Explain the fundamentals of the proposed business:

 What will your service be?

 Who will your customers be?

 What do you think the future holds for your business and your industry?

If applying for a loan, state clearly how much you want, precisely how you are going to use it and how the money will make your business more profitable, thereby ensuring repayment.

The summary might also be used as a starting point for the elevator (lift) speech (see Chapter 6).

The reason for documenting motivations is simple: if the move to set up an information consulting practice is an escape from an unpleasant work situation, the challenges ahead may end up overwhelming you. If, on the other hand, you have strong positive reasons for making the jump, you will have a greater likelihood of meeting the new challenges successfully.

In speaking with other consultants to get the benefit of their experience, you may get a slightly rosy picture because they choose not to dwell on fears and insecurities, focusing instead on successes and achievements. By the same token, you may get an exaggerated warning from someone who has had a negative experience as a consultant. The key is to be aware of the realities and incorporate that awareness in your deliberations.

While setting up shop, the exercise of writing a business plan can sometimes shed light on a number of areas needing further research. The business plan need not be complicated, but it should address the topics below.

General company description

What business will you be in? What will you do? The subheadings may be:

 Mission statement. Many companies have a brief mission statement, usually 30 words or fewer, explaining their reason for being and their guiding principles. If you want to draft a mission statement, this is a good place to put it in the plan.

 Company goals and objectives. Goals are destinations – where you want your business to be. Objectives are progress markers along the way to goal achievement. For example, a goal might be to have a healthy, successful company that is a leader in customer service and that has a loyal customer following. Objectives might be annual sales targets and some specific measures of customer satisfaction.

 Business philosophy. What is important to you in business?

 Target group. To whom will you market your products? Describe your customer base. Is it a growth industry? What changes do you foresee in the industry, short term and long term? How will your company be poised to take advantage of them?

 Core competencies. Describe your most important company strengths. What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills and strengths do you personally bring to this new venture?

 Legal form of ownership. Sole proprietor, partnership, corporation, limited liability corporation?

Products and services, their features and benefits

Describe in depth your products or services. What factors will give you competitive advantages or disadvantages? Examples include level of quality or unique or proprietary features. What are the pricing, fee or leasing structures of your products or services?

List all of your major products or services. For each product or service:

 Describe the most important features. What is special about it?

 Describe the benefits. That is, what will the product do for the customer?

Note the difference between features and benefits, and think about them. For example, a house that gives shelter and lasts a long time is made with certain materials and to a certain design; those are its features. Its benefits include pride of ownership, financial security, providing for the family and inclusion in a neighbourhood. You build features into your product so that you can sell the benefits.

What after-sale services will you give? Some examples are delivery, warranty, service contracts, support, follow-up and refund policy.

Economics

Facts about your customer base:

 What is the total size of your market?

 What percent share of the market will you have? This is important if you think you will be a major factor in the market.

 What is the current demand in the target market?

 Trends in target market – growth trends, trends in consumer preferences and trends in product development.

 Growth potential and opportunity for a business of your size.

 What barriers to entry do you face in entering this market with your new company? Some typical barriers are:

– high capital costs;

– high production costs;

– high marketing costs;

– consumer acceptance and brand recognition;

– training and skills;

– unique technology and patents;

– unions;

– shipping costs;

– tariff barriers and quotas.

 And of course, how will you overcome the barriers?

 How could the following affect your company?

– change in technology;

– change in government regulations;

– change in the economy;

– change in your industry.

Product

In the products and services section, you described your products and services as you see them. Now describe them from your customers' point of view.

Clients

Identify your targeted clients, their characteristics and their geographic locations. The description will be completely different depending on whether you plan to sell to other businesses or directly to clients. You may have more than one client group. Identify the most important groups. Then, for each client group, construct what is called a demographic profile.

For business customers, the demographic factors might be:

 industry (or portion of a client base);

 location;

 size of firm;

 quality, technology and price preferences;

 other (specific to your industry).

The outlook for the targeted business sector

If a consulting practice will focus primarily on a particular sector or industry, an existing familiarity with that sector can help by giving you ready access to the standard information sources covering the economic outlook, projected spending, etc. If the focus is broader, you may find it more challenging to gather up the indicators for the potential market.

If you have the opportunity to plan for your debut as a consultant while still employed, count yourself lucky to have a longer timeframe in which to carry out the preparations and line up the first assignments.

Taking a previous employer's business into a new consulting practice is, of course, questionable. However, perhaps a current or previous employer's customers might be interested in non-competing services you offer. In some cases, a moratorium is agreed upon so that after a certain time, a former employee may approach the employer's customers. Another scenario could see a previous employer offering value-added services to customers via a subcontract to the consultant.

In all cases, try to discuss your plans – once you have decided to leave your employment – with the employer. That way you can see what mutually beneficial arrangements can be worked out and avoid charges of unethical practice. In complex cases, you might even seek legal advice to prevent complications.

Competition

Before writing a plan it is an absolute must to see and find out how similar consultants are doing. It is advisable to speak with others who already know the turf you intend to enter. The price of a latte is a small investment for the gold mine of insight you could get from those willing to share their experiences. Bring along a list of questions and take notes:

 What prompted you to set out on your own?

 What steps did you take to get started?

 How did you find your first clients?

 How did you then, and how do you now, continue to find clients?

 What were your initial and what are your current rates?

 Do you have to turn away business or is it slow?

 Are there cyclical variations in the workload, and if so why?

 What is your view of the outlook for your practice and why?

 Are there professional or trade associations you recommend joining?

 Looking back, what would you do differently?

Don't be surprised if you come away with new questions. For example, what could be the reason for a downturn in business your interviewee noted? Why do they avoid certain types of assignments?

Of course, you may reasonably ask, 'Wouldn't established consultants hesitate to share their insights with potential new competitors?' Indeed, those concerned about new competition may choose not to be available for an interview, or if they do grant one, choose to be somewhat vague in their answers. Then again, perhaps they could want to know who is about to enter the profession. Our experience indicates that information consultants generally are open and accommodating when it comes to sharing their experience – for several reasons: new consultants just setting out could need valuable subcontractors; could refer assignments exceeding their current scope; and could become new sources of network connections. Overall, the information consulting community's members benefit from a culture of respect and cooperation that operates to everyone's ultimate advantage.

Now analyse each major competitor. In a few words, state how you think they compare:

 What products and companies will compete with you?

 Will they compete with you across the board, or just for certain products, certain customers, or in certain locations?

 Will you have important indirect competitors? (For example, video rental stores compete with theatres, although they are different types of business.)

 How will your products or services compare with the competition

Use the competitive analysis table (Table 4.1) to compare your company with your two most important competitors. In the first column are key competitive factors. Since these vary from one industry to another, you may want to customise the list of factors.

Table 4.1

Competitive analysis

In the column labelled 'Me', state how you honestly think you will stack up in customers' minds. Then check whether you think this factor will be a strength or a weakness. Sometimes it is hard to analyse our own weaknesses. Try to be very honest here. Better yet, get some disinterested strangers to assess you. This can be a real eye-opener. Remember that you cannot be all things to all people. In fact, trying to be causes many business failures, because efforts become scattered and diluted. You want an honest assessment of your firm's strong and weak points.

In the final column, estimate the importance of each competitive factor to the customer: 1 = critical; 5 = not very important.

Promotion

Your service exists only when it is known and bought by a prospective client. Think about ways of obtaining recognition:

 How will you get the word out to customers?

 In which channel of media, what message, how often? Why this mix and not some other?

 Have you identified low-cost methods to get the most out of your promotional budget?

 Will you use methods other than paid advertising, such as trade shows, catalogues, dealer incentives, word of mouth (how will you stimulate it?), and network of friends or professionals?

 What image do you want to project? How do you want customers to see you?

 Graphic image support includes things such as logo design, cards and letterhead, brochures, signage and interior design (if customers come to your place of business).

 Should you have a system to identify repeat customers and then systematically contact them?

 Promotional budget: how much will you spend on the items listed above? Before start-up? Ongoing?

Pricing

Explain your method or methods of setting prices. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin; customers may not care as much about price as you think; and large competitors can underprice you anyway. Usually you will do better to have average prices and compete on quality and service:

 Does your pricing strategy fit with what was revealed in your competitive analysis?

 Compare your prices with those of the competition. Are they higher, lower, the same? Why?

 How important is price as a competitive factor? Do your intended customers really make their purchase decisions mostly on price?

 What will be your customer service and credit policies? For more on pricing, see Chapter 7.

Distribution channels

The service of information professionals is proportional to customer demands. This fact requires that channels offer in-depth personal interactions, which offer deeper understanding of the scope and fosters trust among the parties. A standardised package of information does not require the above. One question that may arise is 'How do you sell your products or services?'

 direct (mail order, web, catalogue)

 your own salesforce

 agents

 independent representatives

 bidding on contracts.

Sales forecast

Now that you have described your products, services, customers, markets and marketing plans in detail, it's time to attach some numbers to your plan. Use a sales forecast spreadsheet to prepare a month-by-month projection. The forecast should be based on your historical sales, the marketing strategies that you have just described, your market research and industry data, if available.

You may want to do two forecasts: (1) a 'best guess', which is what you really expect, and (2) a 'worst case' low estimate that you are confident you can reach no matter what happens.

Remember to keep notes on your research and your assumptions as you build this sales forecast and all subsequent spreadsheets in the plan. This is critical if you are going to present it to funding sources.

There are stories of successful entrepreneurs who 'fell into' consulting in work they loved to do anyway. Nary a business plan in sight – it just happened. Perhaps you too will find associates and friends of friends standing in line for your services and offering to pay handsomely. It's more likely you need to do some homework to verify the existence of a market for your services.

You can never prove a future market exists, but you can hope to build a reasonable case '… based on the evidence you are so accustomed to unearth for others when they have research projects'. You want to demonstrate that you know the whereabouts of your future clients; that you know how to reach them; and that they are aware they need someone. The business plan includes answers to such questions as:

 What job titles would identify individuals needing your skills?

 What organisations employ such people?

 How many organisations of that type exist in the geographic area you can serve?

 How often do such organisations typically engage consultants?

 What is the typical size of consulting engagements in terms of fee and duration?

Even if you do not need a bank loan, try imagining yourself having to substantiate a viable plan to a banker. It can help sharpen your focus.

At present the marketplace appears large enough to sustain both approaches. The subsidised service from the public sector, while frequently undercutting the private sector, does not pose an active commercial threat. Indeed there would appear to be scope for cooperation as instances are emerging whereby public sector libraries enter into agreement with local private sector fee-based services who handle charged-for work on their behalf.

With many companies in the private sector choosing to offer comparatively sophisticated services in defined markets, there is little direct competition between the two types of service. Within the private sector the market is still too young for unfair competition to be a feature.

Identifying costs, funding and fees

The greatest difficulty for information consultancy services, as for all companies in the service sector, is to identify their direct costs in order to calculate the charges. The costs are broken down into fixed and variable costs.

The fixed costs are likely to include standard items, considered overhead costs that must be paid, such as:

 accommodation (letting of office space)

 utilities (heat, light, water, etc.)

 telecommunication (basic charges)

 insurance

 taxes

 staff salaries.

Fixed costs (overheads) can be direct (salaries) or indirect (rent). These overhead costs cannot be directed to any individual business activity. They do, however, form a significant element in the costs of the information consultancy services. You cannot avoid fixed costs.

Variable costs are those which you have control over. You can choose whether or not to incur specific costs. You can usually attribute a cost to a specific customer. For example, if you do a search for a client, you pass along the cost of that search to the client. Examples of variable costs include standard items such as:

 communications (telephone, fax, Internet)

 postage

 courier services

 online searching

 fees (membership dues, conference fees, subscription costs)

 travel costs

 secretarial services

 purchased material

 use of other fee-based information services.

The largest cost element in fee-based information services is staff time in providing the service. The questionnaire results from our study show that 'staff expertise' and 'quality of service' are highly rated by the providers of fee-based information services. This agrees with their recognition that they are charging for the skill and expertise of staff in sourcing and providing information – not for the information itself. The elements to be considered when costing staff times are:

 the unit (i.e. hourly, daily or weekly) cost of each member of staff

 the actual time spent on each task.

Start-up expenses

You will have many start-up expenses before you even begin operating your business. It's important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them.

Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little 'padding' to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully thought out plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach we recommend.

Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 per cent of the total of all other start-up expenses.

Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts and terms of proposed loans. Also explain in detail how much will be contributed by each investor (if you have investors) and what percent ownership each will have:

 Service businesses sell intangible products. They are usually more flexible than other types of business, but they also have higher labour costs and generally very little in fixed assets.

 What are your prices?

 What methods are used to set prices?

 What quality control procedures will be used? Standard or accepted quality standards?

 How will you measure labour productivity?

 What percentage of work will be subcontracted to other firms? Will you make a profit on subcontracting?

 What are the credit, payment and collections policies and procedures?

 What is the strategy for keeping the client base?

Assuming you aren't independently wealthy, calculate the gross annual billing you need to reach and then decide if it is realistic. Will clients pay the daily rate you have to charge if 150 days in the year are billable? What happens if, say, only 100 days are billable?

The proportion of non-billable time invested in proposal writing, contract negotiation, administration, professional education, networking and business development activities can be considerable. Can you see yourself quoting the calculated rate to a prospective client? Is it comparable to the rates charged by similar consultants? Chances are the preliminary piece of maths will confirm you are well within the going rates. If not, rethink and research.

Managing your accounts receivable

If you do the consulting, who does the accounting? It would probably pay to hire an accountant to keep your filings in perfect order, to make sure office equipment is depreciated correctly, and to advise you what disbursements can and cannot be deducted as business expenses. They will be able to guide you as to what is acceptable and what looks like an irregularity; getting audited is well worth avoiding:

 Line of credit. Unless you have substantial financial resources, it is wise to take out a line of credit so that fluctuations in cash flow do not become a problem. Some banks offer special small business lines of credit (tied to a credit card) that may suit you perfectly. A good relationship with a bank manager is a great benefit (for example, should you want an increase in the line of credit, it helps if they know you and your business).

 Bank account and credit card. Your business bank account must bear the business name with a separate credit card for business-related expenses. The monthly statement is a convenient verification against a stack of receipts. In addition, using the credit card to pay automatically for telephone, Internet access, professional journal sub-scriptions and the like reduces the amount of time spent writing cheques or paying such bills online.

 The receipt and log routine. Meticulously document every work-related disbursement. Group bills, statements and receipts into categories as the accountant directs. (In addition, for tax deduction reasons, track costs associated with the residence in which you keep your home office.)

 Tracking time and invoicing clients. Some consultants issue only a dozen invoices in a year; others may send out a handful at the end of every month. A simple manual log may do the job for you, or you may prefer to use accounting software to keep track of client billings and receipts. If billing and tracking work exceeds a short afternoon, hiring the necessary help is a good idea.

Credit policies

Not all clients are able or have the willingness to pay for your service shortly after the delivery. Keep these key thoughts uppermost in your mind:

 Do you plan to sell on credit?

 Do you really need to sell on credit? Is it customary in your industry and expected by your clientele?

 If yes, what policies will you have about who gets credit and how much?

 How will you check the creditworthiness of new applicants?

 What terms will you offer your customers; that is, how much credit and when is payment due?

 Will you offer prompt payment discounts? (Hint: do this only if it is usual and customary in your industry.)

 Do you know what it will cost you to extend credit? Have you built the costs into your prices?

If you do extend credit, you should do an ageing at least monthly to track how much of your money is tied up in credit given to customers and to alert you to slow payment problems. A receivables ageing is illustrated in Table 4.2.

Table 4.2

Receivables ageing

You will need a policy for dealing with slow-paying customers:

 When do you make a phone call?

 When do you send a letter?

 When do you get your attorney to threaten?

Table 4.3 Template of a balance sheet.

Table 4.3

Balance Sheet

Table 4.4 Template for start-up expenses.

Table 4.4

Start-up expenses

Table 4.5 Illustrates a checklist when finding business partners.

Table 4.5

Illustrates a checklist when finding business partners. Business partners

You should also age your accounts payable, what you owe to your suppliers. This helps you plan whom to pay and when. Paying too early depletes your cash, but paying late can cost you valuable discounts and can damage your credit. (Hint: if you know you will be late making a payment, call the creditor before the due date.) Do your proposed vendors offer prompt payment discounts?

Chapter 4 checklist

 Make sure that you make a business plan – it will help you in the long run.

 Get advice and have the plan reviewed by an external party.