The starting point: make a business plan
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.
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:
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.
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.
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?
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?
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.
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.
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.
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:
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.
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.
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.
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:
What will be your customer service and credit policies? For more on pricing, see Chapter 7.
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?'
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.
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:
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.
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.
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:
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:
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:
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.
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.
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 4.3 Template of a balance sheet.
Table 4.4 Template for start-up expenses.
Table 4.5 Illustrates a checklist when finding 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?