What is your good idea? What business do you want to be in? It’s time to look at the specifics. Let’s say you want to open a restaurant. What will you serve? What will your sample menu look like? What equipment will you need? Note that including french fries means you’ll have to install french-fryers, grease traps in the sewer line, hoods, and fire extinguishing systems. On the other hand, by not serving fried foods you will save a lot of money in the kitchen, but maybe you’ll go broke when all the grease addicts go next door.
Or suppose you want to sell DVDs, games, or digital cameras. Do you plan to have a service department? If so, will you make house calls, or only accept repairs at your store? What sort of security system will you install to protect your inventory? What about selling component sound systems or home entertainment centers? What about competition from nearby retailers?
Answers to these types of questions will be crucial to the success of your venture and to writing your business plan. Let me tell you from hard, personal experience that you need a written document—even if you’re sure you know exactly what your business will do. With this foundation document to refer to, you are less likely to forget your good plans and resolutions in the heat of getting your business underway. Any changes you later make can be made both consciously and with consideration. To write a complete description of your proposed business, simply follow the suggestions on the next few pages.
Identify Your Type of Business
Find the business category listed below that most closely matches your business. You’ll use the description that follows as a reference when you describe your own business.
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Each of the business categories requires different skills to run efficiently. Many small businesses involve one or two types of business in the same endeavor. But if your idea will involve you in several types of business, it may be too complicated for you to run efficiently. As a general rule, small businesses work best when their owners know exactly what they are about and strive for simplicity.
• Retail. Retail businesses buy merchandise from a variety of wholesalers and sell it directly to consumers. Some retailers provide service and repair facilities, while most do not. Most retailers just take in the goods and mark up the price, sometimes doubling their purchase price to arrive at a sales price. Supermarkets, mail order catalog merchants, online stores (e-tailers), computer stores, dress shops, department stores, and convenience marts are retailers.
• Wholesale. Wholesalers buy merchandise from manufacturers or brokers and resell the goods to retailers. Normally, a wholesaler maintains an inventory of a number of lines. A wholesaler normally does not sell to consumers, in order to avoid competing with his retailer customers.
Wholesalers usually offer delivery service and credit to customers. This type of business is characterized by low gross profit margins (sometimes varying between 15% and 33% of the wholesaler’s selling price) and high inventory investment. Wholesalers typically buy in large lots and sell in smaller lots. Like retailers, they seldom make any changes to the products. Most wholesalers aren’t well known to the general public.
• Service. People with a particular skill sell it to consumers or to other businesses, depending on the skill. The end product of a service business is normally some sort of advice or the completion of a task. Occasionally, a service business sells products as an ancillary function. For example, a baby diaper cleaning service may also sell diapers and baby accessories. Service business customers normally come from repeats and referrals. It’s common to have to meet state licensing requirements
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Hairdressers, carpet cleaners, consultants, housecleaners, accountants, building contractors, and architects are examples of service businesses.
• Manufacturing. Manufacturers assemble components or process raw materials into products usable by consumers or other businesses. This type of business ranges from an artisan who makes craft items to Toyota. The most difficult part of the manufacturing business is to find a product, or even better, a series of products, that have acceptance in the marketplace and generate a steady sales volume. Or, as one businessperson put it: “Production without sales is scrap.”
• Project development. Developers create and finish a saleable commodity by assembling resources for a one-time project. Normally, the developer knows the market value of the finished product before she begins work. When the project is complete, the developer sells her interest in the project, normally directly to the user or consumer.
To understand project developers, consider a woman building a single-family house on speculation. She buys the lot, secures permits, hires a contractor, gets a loan, builds a house, and sells it. She is then ready to go on to another project. Other examples of project developers include someone who buys, restores, and sells antique cars and someone who purchases dilapidated buildings at a bargain price fixes them up and sells them.
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Software development note: Software development differs from software production and sales in that software developers create a product that another entity produces and markets. For example, Fred Jones creates a bookkeeping program for employment agencies in his own time. Then he sells or licenses production and marketing rights to the Acme Programs Co. for $1,000 cash and 5% of future sales. Fred is the project developer and Acme is the manufacturer. If Fred also produces copies and markets them himself, he acts as both developer and manufacturer.
TiP
Software development note: Software development differs from software production and sales in that software developers create a product that another entity produces and markets. For example, Fred Jones creates a bookkeeping program for employment agencies in his own time. Then he sells or licenses production and marketing rights to the Acme Programs Co. for $1,000 cash and 5% of future sales. Fred is the project developer and Acme is the manufacturer. If Fred also produces copies and markets them himself, he acts as both developer and manufacturer.
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