How to Write a Practical Business Plan
A business plan is like a map. It can help you find the most direct route to your destination and avoid costly detours and delays. Yet most owners of remodeling companies have never written one. For them, the process seems daunting and the actual benefits uncertain.
I'm going to demystify the process of writing a business plan and show you how to make yours a practical management tool. One of the first steps toward effective management is accurate measurement. A good business plan makes your ideas measurable and helps you manage your business better and achieve your goals.
What Can a Business Plan Do for You?
The practical value of a map depends on where you want to go. Not every business needs a business plan. If you want to maintain your business much as it is now, you need to invest time and energy in improving specific areas rather than in creating an overall map. To put it another way, you don't need a map if you're going to cruise familiar roads in a familiar neighborhood.
But if you want to make a change in your business and go someplace new, a practical business plan is a vital guide. Your plan will show you the way to reach your goal and help you predict what resources you'll need to get there. It will flag potential roadblocks or hazards and tell you when you need new strategies to avoid delays.
With a practical plan, you will always know where you are, how far you've come toward your goal, and just how far you still have to go.
Ingredients of a Practical Business Plan
A practical business plan — as opposed to one that gathers dust — consists of clear goals and effective tracking systems. Understanding these basic elements and how they fit together will enable you to create an effective map that can guide your business from where it is now to where you want it to be.
A practical business plan addresses the following issues:
• Sales goals and a tracking system for contracts signed
• Conversion rates and a tracking system for monitoring inquiries and leads
• Sales time needs and a time-tracking system
• Gross margin and pricing policies
• Company budget and a budget-tracking system
• Productivity goals and a productivity-tracking system
Since a business is a financial enterprise, a business plan is really a financial plan. It starts with sales: How many contracts can you expect to sign and at what gross margin?
Of course, if you sell more than you can produce, your "success" will be short and not very sweet. Adequate production capacity is essential to setting meaningful sales goals, just as a reliable vehicle is essential to a successful road trip.
In other words, the best business plan is useless unless you have the resources to execute it. Indeed, one advantage of going through the process of writing a plan is that doing so gives you advance notice of just what resources you'll need to make the plan work.
To set sales goals, start by analyzing last year's actual construction contracts. Group them into three to six logical categories, such as kitchens, baths, lower levels, additions, general. Sort the contracts into these categories, listing the number of contracts, the total value signed, and the average contract value per category. Add the categories together to get a company total for contracts signed.
Using this breakdown of last year's actual sales as a reference point, make a parallel list of reasonable goals for next year: number of projects by category, average value per project, total value per category. This sounds simple, but it often takes considerable thought.
Let's say you remodeled four kitchens last year at an average price of $43,209.
• How many do you think you can do/want to do/will do next year?
• How many are in the pipeline now?
• What factors might affect the average value?
These goals become the foundation of your business plan, and the more thoughtfully you visualize and set them, the more powerful your plan will be.
After setting initial sales goals, do a reality check against last year's actual performance.
• Are projected changes reasonable?
• If you completed three kitchens last year, can you really do 40 next year?
• What will make that increase possible?
When the sales goals truly seem reasonable and achievable, tentatively adopt them and move to the next step.
Conversion Rates and Leads Needed
Now you need to analyze conversion rates and determine how many leads you will need to meet your sales goals.
This stage involves a series of questions.
• How many times will the phone need to ring for you to sell the number of contracts you have set as a goal? Again, this question is best answered in relation to last year's actual performance: How many inquiries did you field last year?
• Of those inquiries, how many were target leads? If this data wasn't recorded, make your clear-eyed best guess.
• How many design contracts did you sell?
• How many construction contracts?
Using those figures, calculate last year's conversion rates.
• How many target leads converted to design contracts?
• How many design contracts converted to construction contracts?
• What percentage of total inquiries were target leads?
• How many total inquiries were needed to yield each construction contract?
Then, based on your analysis of last year, project next year's conversion rates.
• Are the rates themselves likely to change? Why?
• Will your new marketing company produce a higher ratio of target leads to total inquiries?
• Will improved sales techniques convert a higher number of target clients to construction contracts?
State your assumptions for future reference, then calculate how many leads you need to sell the number of contracts you have set as next year's goal.
• Does it sound possible? Realistic?
• Do the goals need to be changed?
Now you know how many inquiries and leads you need, and you have the basis for planning your marketing activities and budget.
The act of writing a business plan forces you to look analytically at your company's past performance in order to set reachable goals for the future. And if you don't have tracking systems in place, writing a plan will force you to create them.
Sales Time Required
How many sales hours it will take to meet projections is a crucial and easily overlooked issue, especially when the company owner wears many hats and handles all the sales.
Begin with this question: How much time was spent on the selling process last year?
Make sure your answer includes the early stages of talking with prospective clients, before a preliminary contract, as well as any salesperson time spent in the "design" process after a preliminary contract. In addition, add all salesperson time spent finalizing specifications or maintaining a good client relationship after the construction contract has been signed.
If you don't have those hours recorded, don't despair. You're not alone. Use your best guess and vow to begin tracking your time so you have accurate figures for next year's plan. In my experience, an owner/
salesperson often underestimates time spent in the selling process.
Next, divide the total number of hours spent selling by the number of contracts sold last year to get an average number of sales hours per contract.
You now have a historically accurate (to the extent that your data is accurate) benchmark to use for planning.
For example, if last year you sold 26 contracts in a total of 962 hours, you averaged 37 selling hours per contract. Let's say you plan to sell 33 contracts next year. Assuming you sell as efficiently as last year, you will need 1,221 sales hours, an increase of 259 hours.
So where will the additional hours come from? Will you delegate some of your other activities? Will you hire an estimator or an assistant? Will you sleep less and skip your vacation? Or will you sharpen your sales skills to reduce the average number of hours per contract?
You need to either set a realistic strategy for selling the projected contracts or revise your projections downward to a realistic level.
It's important to articulate your projection of the number of sales hours you will need next year. Such calculations often become the basis for rearranging roles and responsibilities within a company or for deciding to hire additional help. They also provide benchmarks for objectively assessing performance and making investments that increase efficiency.