In January, we surfed across some of the salient issues of small business accounting as applied to contract engineers. Along the way, we briefly touched on the need for a business plan. This month, we'll reexamine that concept and attempt to explain its fundamental importance in the startup and operation of a contract engineering business.
So, why do we need a business plan? Well, to begin with, most reputable lending institutions require submission of such a plan as a prerequisite of the business loan application process. Obviously, the lender wants to know whether the applicant has thoroughly thought through the financial parameters of any proposal. Required or not, the assembly of a business plan is a practical exercise that influences day-to-day operation and fiscal decision making. Since every business has finite amounts of available labor, equipment and capital, the plan serves as a road map for the most efficient allocation of those resources in a way that maximizes profit on each sale. Furthermore, a good plan reduces uncertainty, allowing you to focus on task execution whilie minimizing worry about the big picture.
Goals and decisions
Drafting a business plan needn't be complex, but it should reflect realistic assumptions and goals. Thus, it's best to set passion aside and conduct the planning process through the application of logic, math and factual data.
To begin formulating your plan, first determine the specific goal of the business. For example, let's say the goal is to provide a steady income for you and your family until retirement. This means that from day one, you will have to factor in your expected salary, along with tax-deferred investment contributions, as an expense. Perhaps the goal is to aggressively build the business, foregoing near-term income for growth. Here, you may want to take only a limited draw from the business while reinvesting in added employees and equipment needed in order to boost productivity and expand the client base. In either case, the goal will help establish priorities for the allocation of resources.
Once the goals have been identified, there are specific questions to address. What services will you be offering, and how much can you reasonably expect to charge for them? How much demand exists for your service, and how is it likely to change over time? How much capital and equipment are you going to need? These issues require basic research, and should be answered thoughtfully. As you proceed, you're likely to discover that planning is an evolutionary process during which many new questions emerge as you answer existing ones. This is beneficial, because it forces you to build detail into your vision as it crystallizes it into an executable plan.
Every business plan contains three essential elements. First on the list is the market plan. It is here that issues of services to be offered and the potential demand for those services are given detailed consideration. As a broadcast engineer, for example, are you going to offer measurement and certification services? If so, this may significantly affect the amount of capital you'll need to invest in things like field strength meters, spectrum analyzers and the like. Thus, demand for these services and what you can competitively charge for them should be based on factual research, not intuition. Call providers of similar services in your market or a comparable one to find out what they charge, then check with potential clients to establish both demand and the prospects for profitable competition. While it may seem desirable to offer a broad range of services, stick to what you know and do best; otherwise, productivity, reputation and profitability may suffer.
Promotion is an important facet of the market plan. Broadcast engineering is different than retailing in that the potential customer base is fairly specific. Though this might suggest that personal visits and phone calls are more effective in establishing and building business relationships than direct mail advertising, this doesn't mean there isn't a place for both. Don't assume that word-of-mouth is going to sustain your business. Effective marketing is fundamental to success and will be explored in an upcoming issue.
The second essential component is the financial plan, where you will establish the projected operating budget including working capital, capital expenditures (equipment), operating expenses (salary or draw, debt service and overhead) and gross revenue. Be thorough and conservative in your projections. High initial capital expenditures may be reduced somewhat by leasing vehicles or equipment, but you will ultimately pay more for them over the life of the asset. Still, leasing offers flexibility in terms of upgrading, so it can be a useful option in some cases.
Remember that many ultimately successful businesses lose money during startup and early operation. This is not a crisis if you've projected and planned for it. Experts point out that along with poor planning, under-capitalization is the single biggest factor behind the majority of small businesses failures. It takes money to make money, so be sure you have everything you need before you leave the starting gate.
Essential Elements of a Good Business Plan
|Determine a market plan
||Design a financial plan
||Develop a contingency plan
|Decide services offered
Assess demand for your services
Plan a marketing strategy
|Plan coping strategies
Expect the unexpected
Consider long-term contracts
The last piece of the puzzle is the contingency plan. Simply put, this is a “what if…” exercise, allowing you to develop coping strategies for problems that may develop. For example, if you are going to run a one-man (or woman) operation, who will service your accounts if you are ill or temporarily disabled? Or… what if a large group that handles engineering functions in-house buys out several key clients? While you may not be able to control these circumstances, you can certainly be proactive in developing a plan to cope with them. In the first example, this could be accomplished by securing a prior agreement with another engineer to handle your accounts on a temporary basis in exchange for the like. In the example involving ownership changes, longer-term contracts might buy you time needed to develop new business to replace that which is going away. In each case, think it through, and be creative.
Finally, be mindful of the value of your local library as an educational resource. There, you'll find many excellent volumes that treat this subject in the greater detail it deserves. So set your goals, do the research and get to work on a business plan that works for you.
Mark Krieger, BE Radio&s consultant on contract engineering, can be reached at email@example.com. He is based in Cleveland.