Business Plan for Small Manufacturers

Summary

In building a pathway to profit you need to consider the following questions: What business am I in? What goods do I sell? Where is my market? Who will buy? Who is my competition? What is my sales strategy? What merchandising methods will I use? How much money is needed to operate my company? How will I get the work done? What management controls are needed? How can they be carried out? When should I revise my plan? Where can I go for help?

No one can answer such questions for you. As the owner-manager you have to answer them and draw up your business plan. The pages of this publication are a combination of text and workspaces so you can write in the information you gather in developing your business plan—a logical progression from a common sense starting point to a common sense ending point.

A Note on Using this Publication
It takes time and energy and patience to draw up a satisfactory business plan. Use this publication to get your ideas and the supporting facts down on paper. And, above all, make changes in your plan on these pages as that plan unfolds and you see the need for changes.

Bear in mind that anything you leave out of the picture will create an additional cost, or drain on your money, when it unexpectedly crops up later on. If you leave out or ignore enough items, your business is headed for disaster.

Keep in mind, too, that your final goal is to put your plan into action. More will be said about this step near the end of this publication.

What's in this for Me?
Time was when an individual could start a small business and prosper provided you were strong enough to work long hours and had the knack for selling more than the raw materials or product cost. Small stores, grist mills, livery stables, and blacksmith shops sprang up in many crossroad communities as Canadians applied their energy and native intelligence to settling the continent. Today this native intelligence is still important. But by itself the common sense for which Canadians are famous will not insure success in a small business. Technology, the marketplace, and even people themselves have become more complicated than they were 100, or even 25, years ago.

Common sense must be combined with new techniques in order to succeed in the space age. Just as one would not think of launching a manned space capsule without a flight plan, so one should not think of launching a new small manufacturing business without a business plan.

A business plan is an exciting tool that you can use to plot a "course" for your company. Such a plan is a logical progression from a common sense starting point to a common sense ending point.

To build a business plan for your company, an owner-manager needs only to think and react as a manager to questions such as: What product is to be manufactured? How can it best be made? What will it cost me? Who will buy the product? What profit can I make?

Why Am I in Business?

If you are like most business people, you're in business to make money and to be your own boss. But, few business people would be able to say that those are the only reasons. The money that you will make from your business will seldom seem like enough for all the long hours, hard work, and responsibility that go along with being the boss.

Then, why do so many stay in business?

This is hardly the time for philosophy. If you're starting or expanding a business, you have enough to think about. But, whether or not you even think about it, the way you operate your business will reflect your "business philosophy."

Consider this. An owner-manager inspects a production run and finds a minor defect. Even though in nine out of ten cases the user of the product would not notice the defect, the owner decides to scrap the entire run.

What does this tell you? It shows that he (or she) gets an important reward from doing what is the right thing - in this case, providing a quality product.

The purpose of this section is not to play down the importance of making a profit. Profits are important.

They will keep your business going and attract additional capital into your business. But you should be aware that there are other rewards and responsibilities associated with having your own business.

In your planning, you might give some thought to your responsibilities to employees, community, stockholders, customers, product, and profit. Jot these down. Later when you've lined up your management team, discuss this subject with them. This type of group thinking will help everyone, including yourself understand the basic purposes for each day's work.

Even though you may not advertise it through your market, the way you operate your business will reflect your business philosophy.

What Business Am I in?

In making your business plan, the next question to consider is: What business am I really in? At first reading, this question may seem silly. "If there is one thing I know," you say to yourself, "it is what business I'm in." But hold on. Some owner-managers go broke and others waste their savings because they are confused about the business they are really in.

The experience of an old line manufacturing company provides an example of dealing with the question: What business am I really in? In the early years of this century, the founder of the company had no trouble answering the questions. As he put it, "I make and sell metal trash cans."This answer held true for his son until the mid-1950's when sales began to drop off. After much thought, the son decided he was in the container business.

Based on this answer, the company dropped several of its lines of metal trash cans, modified other lines, and introduced new products, such as shipping cartons used by other manufacturers and government agencies.

What business am I in? (Write your answer here)

Asking questions like: What does your product do for your customer? Why? When? Where? How? What doesn't it do? What should it do later but doesn't do now? These can lead to the ultimate conclusion of what business you're in and possibly direct you to new lines of products or enterprises.

Marketing

When you have decided what business you're really in, you have just made your first marketing decision. Now you must face other marketing considerations.

Successful marketing starts with you, the owner-manager. You have to know your product, your market, your customers, and your competition.

Before you plan production, you have to decide who your market is, where it is, why they will buy your product, whether it is a growth or static market, if there are any seasonal aspects of the market, and what percentage of the market you will shoot for in the first, second, and third year of operation. Your production goals and plans must be based on and be responsive to this kind of fact finding (market feasibility and research).

The narrative and work blocks that follow are designed to help you work out a marketing plan. Your objective is to determine what needs to be done to bring in sales dollars.

In some directories, marketing information is listed according to the North American Industry Classification (NAIC) of the product and industry. The NAIC classifies firms by the type of activity they're engaged in, and it is used to promote the uniformity and comparability of statistical data relating to market research. When you begin your market research, you may find it useful to have already classified your products according to this code. The North American Industry Classification System is available for sale in paper version and CD-ROM. Prices are approximately $45 for paper version (catalogue number 12-501-XPE for English and 12-501-XPF for French) and $100 for CD-ROM (catalogue number 12-501-XCE for English and 12-501-XCF for French). Please be advised that prices are subject to change. For more information contact:

Market Area

Where and to whom are you going to sell your product? Describe the market area you will serve in terms of geography and customer profile:

Who Are Your Competitors?

List your principal competitors selling in your market area, estimate their percentage of market penetration and dollar sales in that market, and estimate their potential loss of sales as a result of your entry into the market.

How Do You Rate Your Competition?

Try to find out the strengths and weaknesses of each competitor. Then write your opinion of each of your principal competitors, their principal products, facilities, marketing characteristics, and new product development or adaptability to changing market conditions.

Have any of your competitors recently closed operations or have they withdrawn from your market area? (State reasons if you know them):

Advantages Over Competitors

On what basis will you be able to capture your projected share of the market? Below is a list of characteristics which may indicate the advantages your product(s) enjoy over those offered by competitors. Indicate those advantages by placing a check in the proper space. If there is more than one competitor, you may want to make more than one checklist. Attach these to the worksheet.

Analyze each characteristic. For example, a higher price may not be a disadvantage if the product is of higher quality than your competitor's. You may want to make a more detailed analysis than is presented here. If you wish to spell out the specifics of each characteristic and explain where your product is disadvantaged and how this will be overcome, attach it to this worksheet. Also, the unique characteristics of your product can be the basis for advertising and sales promotion.
Remember the more extensive your planning, the more your business plan will help you.

What, if anything, is unique about your product?

Distribution

How will you get your product to the ultimate consumer? Will you sell it directly through your own sales organization or indirectly through manufacturer's agents, brokers, wholesalers, and so on. (Use the blank to write a brief statement of your method of distribution and manner of sales):

What will this method of distribution cost you?

Do you plan to use special marketing, sales or merchandising techniques? Describe them here:

List your customers by name, the total amount they buy from you, and the amount they spend for each of your products.

         
Market Trends

What has been the sales trend in your market area for your principal product(s) over the last 5 years? What do you expect it to be 5 years from now? You should indicate the source of your data and the basis of your projections.* Industry and product statistics are usually indicated in dollars. Units, such as numbers of customers, numbers of items sold, etc., may be used, but also relate your sales to dollars.

List the name and address of trade associations which service your industry and indicate whether or not you are a member.

List the name and address of other organizations, governmental agencies, industry associations, etc., from which you intend to obtain management, technical, economic, or other types of information and assistance.

Share of the Market

What percentage of total sales in y-3our market area do you expect to obtain for your products after your facility is in full operation?
       

Sales Volume

What sales volume do you expect to reach with your products?

*This is a marketing research problem. It will require you to do some digging in order to come up with a market projection. Trade associations will probably be your most helpful source of information. Statistics Canada publishes a great deal of useful statistics.

Production

Production is the work that goes on in a factory that results in a product. In making your business plan, you have to consider all the activities that are involved in turning raw materials into finished products. The work blocks which follow are designed to help you determine what production facilities and equipment you need.

Manufacturing Operations

List the basic operations, for example, cut and sew, machine and assemble, etc., which are needed in order to make your product.

Raw Materials

What raw materials or components will you need, and where will you get them?

What amount of raw materials and/or components will you need to stock?

Are there any special considerations concerning the storage requirements of your raw material? For example, will you use chemicals which can only be stored for a short time before they lose their potency?

Equipment

List the equipment needed to perform the manufacturing operations. Indicate whether you will rent or buy the equipment and the cost to you.

Your equipment facilities, and method of operation must comply with Occupational Health and Safety.

Labour Skills

List the labour skills needed to run the equipment.

List the indirect labour, for example, material handlers, stockmen, janitors, and so on, that is needed to keep the plant operating.

If persons with these skills are not already on your payroll, where will you get them?

Space

How much space will you need to make the product? Include restrooms, storage for raw materials and for finished products, and employee parking facilities if appropriate. Are there any local ordinances you must comply with?

Overhead.  List the overhead items which will be needed in addition to indirect labour and include their cost.

Examples are: tools, supplies, utilities, office help, telephone, payroll taxes, holidays, vacations, and salaries for your key people (sales manager, plant manager, and foreman).

How Much Money Is Needed?

Money is a tool you can use to make your plan work. Money is also a measuring device. You will measure your plan in terms of dollars; and outsiders, such as bankers and other lenders, will do the same.

When you determine how much money is needed to start (or expand) your business, you can decide whether or not to move ahead. If the cost is greater than the profits that the business will make, there are two things to consider. First, many businesses do not show a profit until the second or third year of operation. If this looks like the case with your business, you will need the plans and financial reserves to carry you through this period. On the other hand, maybe you would be better off putting your money into stocks, bonds, or other reliable investments rather than taking on the time consuming job of managing a small business.

Like most businesses, your new business or expansion will require a loan. The burden of proof in borrowing money is upon the borrower. You have to show the banker or other lender how the borrowed money will be spent. Even more important, the lender needs to know how and when you will repay the loan.

To determine whether or not your plan is economically feasible, you need to pull together three sets of figures:

• Expected sales and expense figures for 12 months.
• Cash flow figures for 12 months.
• Current balance sheet figures.

Then visit your banker. Remember, your banker or lender is your friend, not your enemy. So, meet regularly. Share with your banker all the information and data you possess. If the lender is ready to help you, he (or she) needs to know not only your strengths but also your weaknesses.

Expected Sales and Expenses Figures

To determine whether or not your business can make its way in the marketplace, you should estimate your sales and expenses for 12 months.

Cash Flow Figures

Estimates of future sales will not pay an owner-manager's bills. Cash must flow into the business at proper times if bills are to be paid and a profit realized at the end of the year. To determine whether your projected sales and expense figures are realistic, you should prepare a cash flow forecast for the 12 months covered by your estimates of sales and expenses.

Current Balance Sheet Figures

A balance sheet shows the financial conditions of a business as of a certain date. It lists what a business has, what it owes, and the investment of the owner. A balance sheet enables you to see at a glance your assets and liabilities.

Getting the Work Done

Your manufacturing business is only part way home when you have planned your marketing and production. Organization is needed if your plant is to produce what you expect it to produce.

In most situations, you as the owner-manager probably cannot do all the work yourself. In order for your operation to run smoothly, you will have to delegate work, responsibility, and authority. A tool that may be helpful when dispersing this responsibility is the organization chart. It shows at a glance who is responsible for the major activities of a business. Keep in mind no matter how your operation is organized, it is important that you stay in control of the financial management.

It is important that you recognize your weaknesses early on. There are many professionals out there who are qualified to handle your business concerns. Depending on your situation, you may consider hiring a consultant on an as-needed basis, hiring permanent personnel, or obtaining a company lawyer and/or an accountant.

Making Your Plan Work

To make your business plan work you will need continuous feedback. For example, the year end profit and loss (income) statement shows whether your business made a profit or loss over the past 12 months.

While this document provides valuable information, it is only received once a year. In today's fast pace business world you can no longer wait 12 months to get the score. Feedback must be received at frequent intervals. One way in which a company can obtain these updates is to produce profit/loss statements at the end of each month or at the end of each quarter. Once this information is received, however, it is up to management to ensure that cashflow projections and financial decisions are updated.

The management control system that provides your key employees with current information should be set up to ensure that deviations from approved policies, procedures, and/or practices are corrected in time. The management control system should provide precise information on inventory, production, quality, sales, collection of accounts receivable, and disbursements. The simpler the system, the better.

Inventory Control

The purpose of controlling inventory is to provide maximum service to your customers as well as smooth production for yourself. Your goal should be to achieve a rapid turnover on your inventory. The fewer dollars tied up in raw materials and finished goods inventory, the better. In other words, the faster you regain your inventory investment through sold product, the faster you can reinvest your capital to meet additional consumer needs.

In setting up inventory controls, keep in mind that the cost of the inventory is not your only cost. There are inventory costs, such as the cost of purchasing, the cost of keeping inventory records, and the cost of receiving and storing raw materials.

Production

In preparing this business plan, you have estimated the cost figures for your manufacturing operation. Use these figures as the basis for standards against which you can measure your day-to-day operations to make sure that the clock does not nibble away at profits. These standards will help you to keep machine time, labour man-hours, process time, delay time, and down time within your projected cost figures. Periodic production reports will allow you to keep your finger on potential drains on your profits and should also provide feedback on your overhead expense.

Quality Control

Poorly made products can cause a company to lose customers. When a product fails to perform satisfactorily, shipments can be held up, inventory can increase, and a severe financial strain can result. Depending upon your type of production system checkpoints, reports, etc. within your quality control system must be detailed. In creating your quality control system, keep in mind that its purpose is to answer two questions: What needs to be done to ensure that work is done correctly the first time? Is there a need to do extensive quality control on raw materials? If your answer is yes to the second of these questions, keep in mind that this may be an added expense you must consider.

Sales

To keep on top of sales, you will need answers to questions, such as: How many sales were made? What was the dollar amount? What products were sold? At what price? What delivery dates were promised? What credit terms were given to customers?

It is also important that you set up an effective collection system for "accounts receivable", so that you don't tie up your capital in aging accounts.

Disbursements

Your management controls should provide information about what your company pays out. In checking on your bills, you do not want to be penny-wise and pound-foolish. You need to know that major items, (i.e. paying bills on time so you can get the supplier's discount), are being handled according to policy. Your review system should allow you the opportunity to make decisions on the use of your funds. This way, you can be on top of emergencies. Your system should also inform you that tax moneys, such as payroll income tax deductions, are set aside and paid out at the proper time.

Break-Even

Break-even analysis is a management control device which shows what level your sales must be in order to break-even on your costs with NO profit and NO loss.

When preparing the start-up or expansion of a manufacturing business, you should determine at what level sales must be in order to pay off the cost of production. By doing this you will have a better idea of how long it will be before you can expect a profit.

Profit depends on sales volume, selling price, and costs. So, to figure your break-even point, first separate your fixed costs, such as rent or depreciation allowance, from your variable costs per unit, such as direct labour and materials.

The formula is:

     
Keeping Your Plan Up-To-Date

The best made business plan gets out of date because conditions change. Sometimes the change is within your company. For example, several of your skilled operators quit their jobs. Sometimes the change is with customers. Their desires and tastes shift. For example, a new idea can sweep the country in 6 months and die overnight. Sometimes the change is technological as when new raw materials and components are put on the market.

In order to adjust a business plan to account for such changes, an owner-manager must:

• be alert to the changes that come about in your company, in your industry, in your market, and in your community;
• check your plan against these changes;
• determine what revisions, if any, are needed in your plan.

You must be able to delegate parts of this work. For example, you might assign your shop foreman the task of watching for technical changes as reported in trade journals for your industry. Or you might expect your sales manager to keep you abreast of significant changes that occur in your markets.

But you cannot delegate the hardest part of this work. You cannot delegate the decisions as to what revision will be made in your plan. As owner-manager you have to make those judgments on an on-going basis.

When judgments are wrong, cut your losses as soon as possible and learn from this experience. The mental anguish caused by wrong judgments is part of the price you pay for being your own boss. You get your rewards from the satisfaction and profits that result from correct judgments.

Sometimes, serious problems can be anticipated and a course of action planned. For example, what if sales are 25% lower than you anticipated, or costs are 10% higher? You have prepared what you consider a reasonable budget. It might be a good idea to prepare a problem budget, based on either lower sales, higher costs, or a combination of the two.

You will also have to exercise caution if your sales are higher than you anticipated. The growth in sales may only be temporary. Plan your expansion. New equipment and additional personnel could prove to be crippling if sales return to a previous lower level.

Keep in mind that few owner-managers are right 100% of the time. They can improve their "batting average" by operating with a business plan and by keeping that plan up to date.

Source: U.S. Small Business Administration
Prepared by: Saskatchewan Industry and Resources, Business and Co-operative Services