Five Reasons Why You Need a Business Plan

Author:
Publish date:
Social count:
0

Conscientious horse people run down multiple checklists before they pull out of the driveway to haul horses across three or four or more states to a major show. They have one for the truck, one for the trailer. They have another for tack, another for show clothing. They’ll make sure they have every grooming item, a medical kit, trunks to store it all in and drapes to decorate the aisle. They’ll know in advance if they have to carry feed and bedding or buy it on site. They plan their driving route, know the rest stops along the way, and know where to find the diesel for their truck. They plan to arrive with enough time to settle their horses and do a warmup ride to work out the travel kinks before their first class. They know from experience that planning means a smooth, successful trip.

Eager to make their passion their profession, however, those same sane, conscientious folks often jump into an equestrian business without doing the math to figure out whether they can get from where they are to where they want to be. More often than not, any “plan” they may have when they start out is based more on wishful thinking and untested assumptions than it is on solid research.

Equine business consultant and author Lisa Derby Oden of New Ipswich, N.H., says that she is contacted regularly by people earning a good living but miserable in their jobs. “People picture that they can make a change and earn the kind of dollars they are earning now. They don’t understand that the horse industry is not a high growth industry. It is a lifestyle industry.”

Oden notes that there are a lot of misconceptions about the horse industry and a business plan can help equine business wannabees test their assumptions before they invest their money or quit their day job. “A business plan is the key,” she says, “because it fosters strategic thinking.”

For the business that is just starting up, a business plan is the road map that can get them to their defined goal. By making initial assumptions and then testing them on paper, entrepreneurs can avoid making expensive real-world mistakes that could sink their business entirely. Those already in business who have never written a formal business plan will find that the process can help them make their existing business more efficient and profitable. Or it may inspire them to completely reinvent their business and go off in a new direction (see “Turnaround at Salko Farm” in the June 2001 Stable Management).

Here are five good reasons why it is well worth your time and money to write a business plan:

1. You Need to Figure Out if You Can Make Money

Yes, you love horses. But you also love to eat, have a roof over your head and have some cash in your wallet to spend. You may want to offer customers a service or product you love giving or making. A crucial question, however, is whether the customers you want to sell to want what you are offering. And then you have to ask whether there are enough of those customers to sustain your business over time. Finally, you have to take a careful look at all of your business costs and set a price that allows you to make a profit and stay in business. If you don’t plan to make a profit, you won’t.

Kim Keppick of Rein-Aid Productions in Middleburg, Va., admits she could not be where she is now without a business plan. Keppick spent two years testing a prototype of her patented design and the response gave her the confidence that there was a market for a device that allowed elastic contact with the horse’s mouth in a humane way.

A business client helped Keppick develop spreadsheets that, in turn, helped her price the Rein-Aid properly. “Allocating money to marketing was my biggest shock,” she says. If she hadn’t submitted to the discipline of developing her cost spreadsheets, she notes, she would have underpriced her product and that would have left her with no money for marketing. Without marketing, she says, “I wouldn’t still be here.”

Before Beverly Barney of Ithaka Bridge Farm in Nottingham, N.H., packed her bags and spent her money to become a John Lyons certified trainer, she developed her own market survey. Barney printed a short yes-no questionnaire asking people if they would be interested in working with someone certified by Lyons. She left piles of the surveys at the checkout counters at local feed and tack stores along with drop boxes where customers could deposit them.

The response to her survey gave Barney confidence that enough people wanted her services to justify the costs of training and marketing. She backed her survey up with statistics about the number of horses in New Hampshire and other New England states including how many were show horses and how many were pleasure mounts. “I left a courthouse job with the state after 16 years to become a horse trainer,” she says, “so it had to work.”

2. You’re not Superman or Wonder Woman.

You may be the world’s greatest trainer or riding instructor but you can’t train, give lessons, do all of the marketing, all of the bookkeeping, and still find time to clean 20 stalls, feed horses, tack horses up and be there for the vet and farrier. Whew!

“You need to delegate so you won’t overwhelm yourself,” Barney says. Look at your personal strengths and look at the things that take you the longest to do, she says, either because you don’t like them or you simply have no expertise in those areas. Barney realized that she knew nothing about buying ads or promotion techniques. So she contacted Oden. “Lisa has helped me with the workload, putting me places I wouldn’t have gone myself,” she says. “It would be hard to keep up without her.”

Depending on the type of business, you are going to need the services of others such as bookkeepers, accountants, lawyers, vets, farriers, and others. Your business plan can not only help you understand where to make the best use of your time, but also give you a realistic idea of the cost of buying other people’s time and expertise.

3. You Need Other People’s Money

There’s another thing many businesses need from other people—their money. A business plan is an essential document if you are looking for a business loan, whether you are talking to your friendly local banker, a friend or relative with deep pockets, or wondering if this business is the best way to invest your personal savings.

Oden notes that many people come to her with great vision statements and, sometimes, a marketing plan. “But there are no financials,” she says. People have often not even taken a look at how big the market for their services may be. They have no idea if they can actually make money. “If you’re looking for financing from a bank, you need to have numbers to show the banker,” she says.

4. You Want to Avoid Legal Problems.

Equine tax expert Patrick J. Hurley of Patrick J. Hurley Associates in Yorba Linda, Calif., says that using the same checkbook for both personal and business expenses is the single dumbest thing he sees horse business owners doing. Separate checking accounts is just one of the basic things an equine business must do in order to pass the Internal Revenue Service’s nine Section 1.183-2(b) tests for determining whether they have a hobby business or a real business. If you don’t know what those nine tests are, you could find yourself facing fines and penalties that take your business under (see Hurley’s “Business Plan Checklist for Section 183 Issues” in the tax section at HorseCity.com or go to www.horsecouncil.org).

The IRS isn’t the only legal beagle that may come sniffing around to see if you’re minding the store properly. Before you hang out your shingle, you need to research the local, state and federal laws that apply to your specific business. These may include zoning regulations, licensing requirements, and state and federal employment laws. For example, Hurley points out that if you pay for any business service provided by your trainer, vet, farrier or anyone else over $600 in a calendar year, the IRS says you must provide them with a Form 1099 Miscellaneous Income by January 31 of the following year.

If you have employees, you need to be aware of both the state and federal requirements that apply, including minimum wages, unemployment compensation payments and immigration regulations.

Where there are horses, there is liability. You need to understand and be sure that you comply to the letter with your state’s equine liability laws. Your business will need adequate insurance to protect it from lawsuits. A lawyer can help you decide what form of business—sole proprietor, partnership, limited liability corporation or other corporate structure—best suits your situation. He or she can also protect your business by writing or vetting any contracts you use.

5. You Want Your Business to Last

Some people don’t think about writing a business plan until their business is already failing. While a business plan might help you salvage a floundering enterprise, writing one before you even start is a better way to ensure your business’s longevity.

A business plan should project your assumptions about the business for at least five years into the future. At about the three-year mark, says Oden, you should be reviewing what you’ve done, what’s working and what’s not. “This should be a flexible document,” she says, “it’s not carved in stone. You’ll learn new things as you go along, so you have to adapt.”

Keppick started selling her Rein-Aid in 1999. This year she’s taken a hard look at her original plan and studied what has worked out as planned—and what has not. One thing that was not in the plan, she notes, is the current recession. People are simply not buying add-on or impulse items like they were before 9/11 and stock market gyrations shook their confidence. Her plan revisions include looking for more ways to cut costs, such as finding new suppliers or reducing office overhead. The one thing she knows she will not cut is her marketing.

At any point in time, your business plan can help you review what you’ve done to see what has worked or figure out where the chokepoints are in your cash flow. “People think you write your business plan, do it once, and then it’s done,” says Oden. “The process doesn’t stop after the first one.”

The Sum of Its Parts

A well-researched and written business plan can seem daunting. “A lot of people contact me about planning and few follow through,” says Lisa Derby Oden. “It’s too overwhelming.” That, she says, was part of her motivation for writing her two fill-in-the blank workbooks (see sidebar on Planning Resources).

One way to make the process less intimidating is to break the plan down into its component parts and work on them one at a time. Realize that the first draft will never be perfect. As you write one part, you realize that you need to make changes in some of other parts. Think of your plan as a work that will constantly be in progress throughout the life of your business, rather than a finished product.

While the templates you will find on the Internet or in business books may suggest slightly different ways to organize it, a typical business plan includes the following information. While some experts advise starting with your mission statement, it really doesn’t matter which part of the plan you start with. Work section by section, keeping track of the information you gather in a notebook, a word processing program, a planning template you pull off the Internet (see sidebar on Planning Resources) or one of the business planning software programs such as Business Plan Pro (Palo Alto Software).

Mission Statement. Some planning templates call this plan opener an “executive summary.” It is a succinct overview of what you plan to do, why you want to do it, why you are the best person to do it, and why you think other people will want enough of your goods or services for you to make a profit.

Product or Service. What service or product do you intend to sell and what is special or unique about it?

Business Assets. Maybe you’ve decided to buy someone else’s existing business. Maybe you want to take your private eight-stall barn public and turn it into a boarding facility. Somewhere near the start of your plan you’ll describe the assets your business will start with and any productive history they have.

Horse Industry. The horse industry has seasonal fluctuations. Mares do not get pregnant 100 percent of the time when they are bred. Injuries can sideline any horse. You need to describe the realities that may affect your business’s bottom line so that the non-horse person (such as your accountant, insurance agent, lawyer, or banker) reading your plan understands the environment your business will operate in.

Management Team. Think of this section of the plan as your resume. Describe your qualifications and experience in the horse industry and in business. If other people will be involved in your business, as employees or contractors, include their background, too. Include the credentials of any riding instructors or trainers you plan to hire or contract with. List both horse and business experts you will consult for advice including your vet, farrier, accountant, etc.

Target Market. Describe your target customers. Include whatever statistics you can gather on the size of this customer base, their spending habits, how their numbers are growing or changing, and what percentage of them you feel will want your product or service.

Competition. Every business has competition. You need to understand who your competitors are and be able to describe what differentiates your product or service from theirs. A business plan for a breeding farm might include a list of recent sales prices for comparable horses. It might include comparable real estate prices if your plan is to run your farm for 10 or 15 years, then sell it on your retirement. A plan for a training or boarding facility would include a survey of competitor’s rates.

Operating Plan. Your lesson business may be cyclical. Boarders may flock to your indoor for the winter and leave come summer. Here’s where you describe the structure of your business and how you plan to run it on a day-to-day, week-to-week, month-to-month basis.

Marketing Strategy. Every business needs to have a strategy for reaching new customers and retaining old ones. Your plan might include advertising, showing, a website, direct mail or one of many other promotional techniques.

Financial Projections. This is the part of a business plan that most people find the hardest. You need to create spreadsheets that project your income and costs on a monthly basis in order to show that your operating plan does, indeed, have a chance of generating profits. Creating accurate financial statements is critical to pricing your product or services correctly. They also become a benchmark you can use to make sure business growth stays on track or to keep costs from eating up your cash flow. Business plans typically project five to ten years into the future. Business owners feel that three-year projections can be relatively accurate and that anything after that is wishful thinking. But bankers will want to see the larger timeframe anyway.

Funding. Here’s where you put down the dollar figure for the money you need to start up. Your financial statements will be used to justify this amount to a loan committee.

Growth Projections. Every business evolves, changes, and, with luck, grows over time. You need to think ahead about how the products or services you offer might change as you reach different sales goals. For example, in order to keep debt service from depressing your bottom line, you might put in a new outdoor arena when you first start. Then, after you’ve met the five-year goal you set for income, you might add an indoor arena. —BK

Planning Resources

There are no fill-in-the-blank business plans that work neatly for equestrian enterprises. Businesses such as boarding or training stables can be classified as “service” businesses. Unlike other service businesses, however, they involve living capital investments that don’t fit into any template. Those manufacturing or selling equine goods don’t have it much easier. Defining their target market and finding demographics that support their projections about product demand can be difficult.

Another problem is that most consultants who help entrepreneurs with their business plans are clueless about the horse industry. With no knowledge of the industry’s quirks, they can make assumptions that would spell disaster. Equine business author and consultant Lisa Derby Oden recalls one planning consultant who, unable to find any other numbers, created a business plan for a boarding stable using a day care center template.

So, equine entrepreneurs have to pick and choose pieces from available templates that most closely fit their individual situation. They have to tweak their plan so that it accurately reflects the realities of the horse industry, of the breed or sport or geographic region that is the focus of their business. And they need to run their plan by someone knowledgeable about the horse industry and objective enough to give them useful feedback.

Here are some places to start:

Websites

http://sbdcnet.utsa.edu—national clearinghouse for state Small Business Development Centers; can find your state center; business plan templates; information on state demographics. For example, you can go to “business plans” and follow the agricultural links to find a Penn State plan for a horse boarding business.

http://www.irs.gov/businesses—scroll down to Market Segment Specialization Program and click through to “Farm Hobby Losses” to get an idea of the type of questions an auditor may ask you some day.

www.score.org—national site for the Service Corps of Retired Executives which offers free business consulting help.

www.business.gov—my favorite portal into the government’s stuff for small businesses—has business plan templates and links to the Small Business Administration site and lots more helpful places.

www.bankrate.com—click on “calculators” then “small business” for help with your financial statements.

www.startupjournal.com—this is the Wall Street Journal’s site for small businesses—if you click on “Running a Business,” you’ll find a rudimentary business plan template.

www.workingsolo.com—click on “resources” and then on “startup.”

www.smartbiz.com—lots of articles and links to other sites useful for people just starting up in business.

www.toolkit.cch.com—run by PaloAlto Software, sellers of Business Plan Pro software which has one horse business example and some step-by-step tutorials.

www.inc.com—articles on business planning, running a one-person business, marketing and more.

http://www.aphis.usda.gov/vs/ceah/cahm—a USDA site with some horse demographics.

www.horsecouncil.org—can provide help with tax issues and demographics; their Horse Industry Directory is a top industry reference.

www.statehorsecouncils.org—use this site when geography figures into the demographics you need.

www.inside.com—a site for keeping track of national trends that may affect the horse industry.

www.usda.gov/nass—contains agricultural census information.

www.nolo.com—offers a wide range of self-help information and products for small businesses.

www.legalalertnews.com—contains tax advice for horse businesses.

Books

• “Growing Your Horse Business” by Lisa Derby Oden (Blue Ribbon Consulting)

• “Bang For Your Buck: Making Sense of Marketing for Your Horse Business” by Lisa Derby Oden (Blue Ribbon Consulting)

• “Starting and Running Your Own Horse Business” by Mary Ashby McDonald (Storey Publishing)

• “Complete Guide for Horse Business Success” by Janet E. English, C.P.A. (Equine Research)

• “The Horse Equestrian Business” by Julie Brega (J.A. Allen)

• “Running a Stable As a Business” by Janet W. McDonald (J.A. Allen)

• “Equi-Marketing” by Tracy D. Dowson (Pica Publishing)

• “When Horses Are What You Do” by Thomas F. Soderberg