How to Write a Practical Business
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
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
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
• 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
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
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
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
• 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
• 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
• How many target leads converted to design
• How many design contracts converted to construction
• What percentage of total inquiries were target
• How many total inquiries were needed to yield each
Then, based on your analysis of last year, project next year's
• 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
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
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
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
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
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.
Gross Margin and Pricing
The sales goals you set will tell you how much money will be
available for operating expenses, net profit, and owner income,
but you also need to know your company's gross margin
Once again, actual past performance becomes the basis for
future projections. You can learn last year's actual gross
margin from your year-end profit-and-loss statement. The gross
margin is calculated by subtracting all direct costs — or
cost of goods sold (COGS) — from total sales.
It helps to consider this figure both in dollars and as a
percentage of sales.
For example, if total remodeling sales amounted to $679,542,
and your direct costs were $489,270, your gross margin was
$190,272, or 28 percent of sales.
If you expect to sell at the same prices and produce at the
same level of efficiency, it is reasonable to use a 28 percent
gross margin as your benchmark in setting next year's
To assess whether your targeted gross margin will be adequate,
you need to project operating expenses and net profit. Begin by
reviewing last year's actual operating expenses and net profit
as shown in your year-end profit and loss statement. Examine
each line item of operating expense.
• Is it likely to change? Up or down? Why?
• Will you incur new operating expenses next year? By,
say, opening a new office or hiring a bookkeeper?
Answer these questions and thoughtfully estimate next year's
Once you've made a reasonable projection of operating expenses,
decide on your net profit goal.
Let's assume for simplicity's sake that you decide on a net
profit goal of 5 percent.
Given your sales projections, your gross margin goal of 28
percent, and your projected operating expenses, will you be
able to achieve a 5 percent net profit? Or does one of the
variables need to be changed?
You might realize that you need to increase prices —
which is preferable to increasing sales volume at the same
margin — or possibly hold the line on your operating
Remember, there are only two ways to increase your gross
margin: by raising your prices or by lowering your direct
costs. Unless you are ready and able to do one of these two
things, use your actual gross margin percentage from last year
to predict your gross margin for next year.
Your gross margin goal informs your pricing policies.
Typically, to allow for slippage, your projects should be
priced to achieve a gross margin several percentage points
higher than your company target.
That means if your company target GM is 28 percent, you should
be pricing individual projects at a 31 percent or 32 percent
The most straightforward way to write a company budget is to
mimic the format of your P&L statements. The budget is
simply a projected statement rather than a historical one.
Instead of actual sales, you insert your sales goals.
Using your projected GM percentage, you can calculate both
direct costs (COGS) and GM dollars. Subtracting the projected
operating expenses from the gross margin will give you the
projected net profit figure.
It's helpful to write an annual budget and then break it down
into monthly averages. You can then create a spreadsheet
comparing each month's actual performance with the budgeted
amounts. Information from this budget tracking report is an
invaluable management tool that can help you spot potential
problems and take corrective steps before they become
The final issue you need to address in your business plan
concerns field staff: What will be required to produce those
sales? To answer this question, you must analyze past
productivity and set productivity goals.
Productivity can be objectively measured by dividing the total
value of work completed in a specific time period (a month or
week, for example) by a relevant unit, such as lead carpenters
or direct-labor hours (DLH).
If your P&L sales figure from last year was $679,542 and
you employed two lead carpenters, your output per lead
carpenter was $339,771. If your total direct-labor hours
amounted to 4,432, your output per DLH was $153.33.
Calculate your last year's actual productivity rate. Use that
figure as a starting point for setting objective goals for next
year. Remember that productivity can be greatly influenced by a
variety of factors. Raising your prices will increase
output/direct-labor hours (OP/DLH); using a higher percentage
of subcontractors will increase OP/DLH; employing better
management and scheduling will increase OP/DLH.
There is no "right" productivity figure across the remodeling
industry. The correct figure for you will depend on a mix of
factors unique to your company.
Calculating your actual historical productivity rate enables
you to predict how many direct-labor hours or lead carpenters
you will need to produce your projected volume of work next
year. It also gives you a benchmark for working to increase
your productivity and measuring the results of your
For illustration purposes, let's say you set a productivity
goal of $185 per DLH. If your sales goal is $824,000, you will
need a total of 4,454 direct-labor hours. Assuming a full-time
field-staff person works 2,000 hours in a year (40 hours a week
for 50 weeks), you will need 2.23 people.
Establishing accurate productivity benchmarks has many
benefits. These benchmarks help you schedule projects,
anticipate needed staffing changes, and identify individual
performance that either exceeds or falls short of company
The first time you write a business plan, you'll most likely
need to rely on educated guesses for much of your benchmark
data. But as you track actual progress in key areas on a
monthly basis, you'll build a company database that will allow
you to make accurate predictions and better decisions with
every planning cycle.
The numbers in your plan have power only if you know what lies
behind them and believe in them. Goals plucked from the air
cannot pull you forward. Your plan will be an effective map if
you visualize the reality behind each goal and thoughtfully
As with any endeavor, the most difficult business plan to write
is the first one. Once you've done it once and have used
monthly reports to track progress in key areas, successive
plans will become much easier. Instead of facing roadblocks
that seem impossibly congested, you will be able to identify
and follow the best avenues for your business, creating a
practical map that takes you where you want to go.
Richard Steven is president of Fulcra
Consulting, which specializes in helping contractors write
their own business plans. He has offices in St. Paul, Minn.,
A bookkeeper tells me, "He flies through here and drops some
scribbled instructions on my desk, then gets annoyed when what
I do isn't what he was looking for. How can I do my job
correctly without getting the details I need? Maybe I should
find a different job."
A lead man confides, "I go in to talk about a concern I have
and he seems to listen, and I feel good about it at the time
— but then afterwards I'm not sure that anything concrete
Personality idiosyncrasies? Unprofessionalism? Lack of
consideration? Not necessarily. Often such comments (and the
actions that provoke them) are due to differences in
personality styles. There are many systems for classifying
styles, and they can be divided into two camps: those that sort
people according to inner states (Jungian psychology, for
example), and those that sort people according to their
The behavioral classifications are easier to understand because
they're based on what you see people doing. Among this group
are several models, but the one I like best is described in
People Styles at Work, by Robert and Dorothy Grover
The book is short and easy to read, and contains a simple
18-question "Behavioral Inventory." The authors identify four
personality styles based on a grid in which the X axis
describes degree of Assertiveness (to what extent your actions
are seen by others as forceful) and the Y axis describes degree
of Responsiveness (to what extent you are perceived to show
your feelings or to be aware of others' feelings).
Each person falls primarily into one of four boxes: high
assertiveness and high responsiveness (Expressives), high
assertiveness and low responsiveness (Drivers), low
assertiveness and high responsiveness (Amiables), and low
assertiveness and low responsiveness (Analyticals).
I am an Expressive: My voice is loud, my gestures are sweeping,
I am very people-oriented, I offer opinions easily and
confidently. My facial expression is open; strangers on the
street tell me their problems.
My Driver husband, Ed, is quiet, structured, logical. He
struggles with small talk but speaks easily and authoritatively
within his areas of strength. His face is less expressive, but
people who know him confide in him readily.
My soft-spoken Amiable aunt goes along with everybody in order
to make people feel good, and she would never dream of
criticizing folks to their face for fear of hurting their
feelings. Her expression is animated, she maintains constant
eye contact, she's methodical and detail-oriented, and she's
skilled at picking up on others' moods. Everybody tells her
about his or her problems.
An Analytical for whom my husband worked lacked social skills
to the extent that he was unable to engage in conversation
unless it was argumentative. He preferred to work alone on
challenging problems, was extremely systematic, and had almost
no facial expression. Nobody would ever bother to tell him
about his or her problems.
It's not hard to figure out that an Expressive would probably
be a more effective motivational speaker than an Analytical,
and that an Amiable would probably make a better
customer-service representative than a Driver.
It's important to note that although the Boltons identify four
types for purposes of discussion, the grid is meant to
represent a continuum of traits: Each individual will of course
have components and behaviors from each of the four boxes. The
labels are for identifying each individual's primary or most
often displayed behaviors.
The bookkeeper in the opening paragraph of this story is an
Amiable. She's detail-oriented; she wants to do a good job, to
have the boss appreciate her work, and to retain her place
within the group. But fear of displeasing the boss and
frustration with his avoidance of detailed instructions are
making her consider leaving.
The lead man is an Analytical. He has carefully noted things
that could be improved and enters into conversation with a list
of questions, grievances, and suggestions to be covered. He is
focused and results-oriented.
The boss in both cases is an Expressive with a relatively low
logic component. He is charismatic, flamboyant, and impatient;
he wants simple, fast solutions. He frustrates the bookkeeper
because he's not highly structured and detail-oriented, and it
would never occur to him that somebody else needs those
He fails to provide the lead man with what he wants, too
— a detailed plan for improvement and the discipline and
attention required to follow through. He's seeing bigger
pictures and instinctively says what needs to be said to win
back the lead man's loyalty. This is not a deliberate avoidance
technique; he's simply behaving in a way that feels natural to
him and that takes care of the situation to his satisfaction.
And this is why the lead man feels good during the meeting and
only later realizes that, feelings aside, no tangible changes
have been made.
A Word to the Wise
When dealing with people whose style occupies a vastly
different position on the grid than yours, it's important to
keep several principles in mind.
First, be aware of your own style and its accompanying
mannerisms and needs. Second, consider the other person's
position on the grid and acknowledge that his or her mannerisms
and needs may be different than yours. And third, modify your
behavior and expectations somewhat to allow the other person's
needs to be met. Accept that you may want to speak more slowly
and softly to an Amiable than to an Expressive, and that you
may want to stick to an agenda and reduce small talk when
dealing with an Analytical.
This isn't manipulating or giving in; it's acknowledging that
our perceptions of — and expectations for — other
people's behavior and needs are based on our own, and that
everybody's style is equally valid.Melanie Hodgdonis a business systems
consultant for builders. She lives in Bristol, Maine.