Planning How the Venture Will Function
A credible business plan needs to discuss the operations of a business. The response "we'll think of something" is not a satisfactory answer for most people who may want to invest their time and/or money into your business at its outset. They need more clearly defined tactical plans to trust that your business will get off the ground.
From Concept to Cost Estimate
An operational plan answers how you are going to make your product, and each activity that is needed to make the product will have costs associated with it. After listing a method to generate your product, you will need to shop for quotes to estimate expenses.
Here are some of common expenses you will need to estimate:
1. Cost of goods sold (COGS). These are the expenses of direct labor and direct materials needed to make additional units of your product. Your COGS may be almost nothing if your business is publishing software for download online. It may be high if you are in the restaurant business and would include the price of ingredients, servers, cooks, bussers, and hygiene and cleaning products.
The direct materials costs can be estimated by asking suppliers directly for price lists. They can be roughly estimated as a percentage of sales by studying the financial statements of publicly traded companies.
Direct labor costs are harder to estimate. You may need to perform informational interviews with potential employees to understand their salary expectations. You can also get rough estimates for salary ranges from websites that survey employees and report averages by job title. Government labor agencies also report the results of survey data for different salaries.
The estimates you receive from these sources will be biased upwards. Survey respondents tend to round up and tend to be the better-paid, more satisfied people of a particular kind of job. People will also tend to raise wage expectations in informational interviews. Ultimately, the wages and salaries will be determined by what particular employees are willing to agree to, not survey averages.
Another factor that can cloud estimates in some countries is required payroll taxes.
You can determine a minimum wage by researching labor laws. You will not be able to pay less than legal minimum wages in your area.
2. Rent. Many businesses require a business space. Rent expense and common lease terms can be estimated by asking leasing agents for rough rates that currently prevail in the market.
3. Insurance. Many ventures should be insured. Insurance expense estimates can be quoted from insurance companies.
4. Utilities. These can be estimated from publications by utility companies, environmental organizations, and published survey responses.
5. Sales, general and administrative expenses. These expenses are mostly the salaries of sales people, administrators, accountants, receptionists, and other support staff. As was the case with direct labor costs, these expenses can be roughly estimated as a percentage of sales by studying the financial statements of publicly traded companies. They can also be estimated by informational interviews and survey results for compensation by job titles.
Employees and Departments
It is much harder to estimate how many employees you will need than how much each will cost. Your personnel will make the departments and systems in your new firm, and it is hard to predict how many people it will take to handle the workload.
As your business grows, different departments will take over responsibilities from the founders of the company. While there are some examples of businesses that have had success because of resourceful founders and "winging it," most of the time these businesses fail when their employees and entrepreneur are too exhausted to keep this up. The examples of businesses that have endured uncertain and disorganized early times have inevitably continued because over time they developed systems. Much like your body, a business is basically a collection of systems that work together to accomplish collective goals.
There are many aspects that your systems need to address. How are you going to find out who might want your product or service? How will you develop this prospect from being someone who knows absolutely nothing about your business or what it offers into being a paying customer? Unless you intend to handle absolutely every aspect of this yourself, it has to be systematized so you can train the employees you will eventually hire to do this with efficient consistency. You will need a sales department, and those sales people will need salaries.
This is only the beginning of your challenges as an entrepreneur. Once you know who wants what you have and you have gotten them salivating to place their orders, how are you going to turn your idea in its raw and barely defined state into a physical product or a repeatable service? This is where you need to have very carefully chosen and well-defined systems in place. Since you cannot possibly do everything yourself and will eventually not even be able to oversee everything yourself, you need to establish how managers under you are going to run every aspect of the operation. These people will handle manufacturing and order processing, and they will need salaries.
Eventually you will need to add support staff for payroll processing, accounting, and legal needs. These people will require salaries, too. These functions can also be outsourced, and outsourcing them is appropriate when you are starting out to cut costs.
The sizes of departments and systems within your organization will change over time. With few exceptions, most businesses undergo extensive changes over the years regarding how they do things. But no matter how much these businesses may change, there is always going to be the need to know who is intended to do what and in what order. Without departments and systems, you will not have a functional business.