Google search “business plan” and you’ll find many articles that describe what to put in your business plan. Some folks say a business plan should be 40 pages long, others suggest you don’t really need one (see “Do You Really Need a Business Plan?”).
In my opinion, the goal of writing a business plan is to put all your thoughts down on paper so that you hold yourself accountable for following through. It’s also helpful to identify, early on, what gaps you may have that you need to address. A business plan can also be valuable if you need to get investors onboard or have other co-founders working with you so everyone’s aligned on the company’s goals.
Since I was starting my business alone with my own money and was going in with several years of experience under my belt, I already had a pretty clear picture and therefore did not bother writing down a formal business plan. I knew there was a proven market for the products I wanted to create and sell. I also knew who my competitors were and had a strategy to get my target customers to buy my products. If, unlike me, you don’t have prior experience with your business idea/product, I recommend that you do consider creating a business plan. I recently came across “The One Page Ecommerce Business Plan” from A Better Lemonade Stand’s website, and it seems to cover what I had already thought about when I was getting ready to launch my own business.
So, even though I didn’t write down a business plan when starting my own business, I did take time to ask myself 3 key questions. When I realized I had strong answers to all of them, I knew I was ready to execute on launching my online business:
1) Do your product’s profit margins exist?
Before starting your own company selling products, make sure you know how much your margins will be by researching how much it’ll cost you to manufacture your products vs how much you can sell it for.
There are tons of articles out there about profit margins so do your research, otherwise your company will not make enough money to be sustainable. Here’s one article about How to Set Healthy Ecommerce Margins.
In addition to the profit margins per product, you’ll also want to make sure you have enough of a profit margin left over to support your other operating expenses, such as marketing and office supplies. If you choose to hire employees and/or pay yourself a salary, these expenses will also eat into your product profit margins. The exact amounts will of course depend on the business model, but you will want to have a good sense of these costs while formulating your plans.
2) Where will your investment come from and will it last your business at least 6 months?
Make sure you have enough funds to cover 2 types of costs for the first 6 months of running your business:
Upfront Costs: this is what will cover the very basics of starting your company. For me, this included buying myself a laptop, paying the fees associated with setting up the LLC, and a year of paying for my ecommerce website’s domain/hosting.
Recurring Costs: think about what your recurring costs are, and how much they’d add up to. For me, this included paying my suppliers for my products (initial batches of inventory), R&D (to order samples of my new products for testing & quality assurance), inventory storage fees (I looked up how much it would cost to rent a small storage unit as my wife was against having my inventory in our small 1 bedroom apartment), advertising costs (I use AdWords), gas/office expenses (printer, tape, labels), business-related travels (I attended an industry trade show to find and network with suppliers).
Once you’ve tallied up your estimated total costs, make sure you have at least 6 months worth of initial funds invested in your business before you launch. The idea here is that you should not expect to bring in any significant revenue during the first 6 months. Of course it’ll be great if you start making sales before the 6 month mark, but you should make sure your business can remain afloat for at least an initial 6 month period.
As a simple example, let’s say you’ve calculated your up-front costs to be $2000, and your monthly recurring costs to be $1000. To last the first 6 months, you’ll need at least $8000 invested in the business initially.
6 months is a rough recommendation, and it’ll depend on each business type and situation. In general, however, 6 months is a long enough time to determine if meaningful sales can be made, and whether or not your business idea is viable. You may choose to extend this to a longer period, but that would mean a higher investment amount needed. Or, if you’re short on investment funds, you may choose to only give yourself 3 months – but of course that makes it that much more difficult to prove your business in that short of a timeframe.
In my case, I did not make any meaningful sales for the first three months, as I was working on building out the ecommerce site and was waiting on manufacturing. I finally started to make $5k/month in the fifth month of running my business.
Finally, do you have a plan for reliably acquiring the cash needed to invest in your business? Whether it’s your own savings, friends, family or even an interest-free credit card, be sure that you have a concrete plan in place before launching your business.
Knowing when to quit
Entrepreneurs don’t want to hear the word “quit”, but if you’re unable to make meaningful sales within your first 6 months (ideally, enough sales to make your business profitable), you may want to consider quitting. Don’t want to give up? I’d advise reinvesting (either your own money or other investor’s money) only if your business is showing growth and getting close to being profitable. Otherwise, it may be time to hit that pause button and re-evaluate your business.
3) How will your business operate at each stage of its growth?
When preparing to start my online business, I mentally planned out how my business operations would look at each stage (for instance: the first month, the sixth month, the first year, the fifth year, etc).
What this means is that I was mentally preparing to modify how I’d operate as my company grows and scales. For example, as I double the number of orders, my customer inquiries will also increase…how would I be able to handle all the customer inquiries? (short answer: I created a FAQ page on my website, developed canned responses so that I could quickly respond to customer inquiries, and am currently not officially offering phone support until I’m able and willing to hire help). Also, I’d start by packing orders myself, but as the quantity of orders grows, how would I be able to handle fulfillment? (short answer: I began outsourcing fulfillment to Amazon’s FBA service).
I can go into detail about how I dealt with my business operations as my company grew over the last year and a half, but the point here (before you do anything) is to think ahead and envision how your operations would change at each stage and whether you’d be able to handle it. Ask yourself: will your company be sustainable as it doubles, triples, quadruples in size? Or will you end up with hundreds of customer orders and inquiries, but no man power/strategy to deal with them? Of course this is a great problem to have, but not a great experience for your customers if you don’t have a plan!
Also consider the fact that as your business grows, the difficulty in making changes to your process also increases. For example, I’ve moved my inventory from various facilities several times – the first time, I was able to fit everything in my car. The second time, I needed to rent a U-Haul. The third time, I had to palletized my inventory and hire a trucker.
And that’s it! Setting up and launching your own online business can be daunting, and you may feel overwhelmed in the beginning as you’re putting together (whether in writing or mentally) your business plan. But it doesn’t have to be so hard – in my experience, as long as you ask yourself the three questions shared above and have solid answers to all of them, you’re in pretty good shape!
If you’re someone who has already launched and successfully grown your company without ever having a formal business plan (like me), what were the most critical questions you asked yourself? Have I missed anything here? Comment below!
