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In this section you will describe the current state of your product or
service and your plan for
completing its development. This is also where you familiarize
your reader with how your product is created or your service
delivered.
This section must include details of development costs, location and
labor requirements. After furnishing
this information, you will be asked to generate some financial forms,
including operating expenses, cost of goods, and cash flow.
Development Status
Describe the current status of your product or service and what remains to be done to make your product or service ready to be marketed. Include a schedule detailing when this work will be completed. Consider using a traditional outline to create a product development schedule, or modify the launch plan you have created for internal use and provide a simplified version here. Readers of your plan, especially potential investors, will scrutinize your development plan to determine if you have thoroughly thought through all facets of the development of your product or service.
Tips
- Include obtaining a patent/trademark/or copyright, or other steps that are important to the development of your business.
- If your business plan is for a service company, there is still a strong need for a development status section. Service companies have to set up offices, make plans for fielding calls, get stationery and business cards, conduct market research, gather references, and do a sample mailing of sales pieces, among other things.
- Venture capitalists and other lenders often focus on a few industries and will be well acquainted with the development procedure for a product or service like yours. For this reason, be sure to create a high-quality, detailed plan.
- Turn to an industry association for help with the development process of a product or service like yours if you are early in the development cycle and are not confident that you are familiar with all stages.
- Look in the library for books of sample business plans and check your development status section against the ones in these books.
Production Process
An investor will only provide money for a business he or she understands, so walk the reader
through the stages of product production from the inception of the idea to when it can be
sold. With a service company, describe the process of delivering the service. A company that
helps its customers determine Web strategy, for example, would describe the process of
finding out about client objectives, researching current offerings on the Web, and
presenting a solution. If you were starting a winery, your production process section would
describe the harvesting, fermenting, and bottling processes.
Make or Buy
Part of your production process discussion will be a justification of the make or buy
strategy for production components. Make or buy strategy focuses on whether you will create
all components necessary for the production of your product or service in-house, or buy a
service or a product to add to yours. If you are starting a consulting business, you might
state in your plan that paying for the services of an administrative assistant (buy), will
increase profits by enabling the company principals to spend more time on money-generating
activities. A pillow production company, would discuss spikes in production and the cost
savings incurred in subcontracting sewing (buy) rather than keeping the sewing (make)
in-house.
Location, Location, Location
Also discuss geographic location for the production of your product or service. Justify this
decision as well, by talking about savings in rent or lease, convenience to suppliers,
labor, materials, or other factors important to your business.
Tips
- Be sure to justify your make or buy strategy by explaining why your approach will
lead your business to greater profits.
- Avoid the common mistake of skipping the make or buy section and justification simply
because you are starting or running a service business. If you are starting a consulting
business, make a case for why assistants and other support staff will increase profits.
- Do not forget to justify your choice of location. Some commonly-overlooked location
benefits include proximity to transportation, and availability of skilled, affordable
labor.
- If you choose to locate your business in a home office, discuss the cost-savings of this
choice of office. Also assure readers that a home office location will not be negatively
perceived in your industry.
Cost of Development
Present and discuss a design and development budget. This budget should include the cost of the design of a prototype as well as the expense to take it into production. Be sure to include labor, materials, consulting fees, and the cost of professionals such as attorneys. While the cost of production section may be more readily apparent to product companies, this section is important for all businesses. Service businesses have expenses such as consulting services, training for principals, and preparation of materials, among many other things.
Tips
- Design and development costs are often underestimated. Contact a trade group to find out about average industry costs for developing products similar to yours.
- When charting costs, provide a contingency plan for what will happen to costs if problems such as delays, a failure to meet industry standards, mistakes, etc. occur.
- Be sure to include the cost of patents and other elements necessary to the production of your product or service.
Labor Requirements
Your management team is outlined in the management section. This section provides details of other labor you will need to start up and run your business. Address how many people you require and what skills they need to possess. Be sure to cover the following issues:
- Is there sufficient local labor? If not, how will you recruit.
- Is labor trained? If not, how will you train them.
- Cost of labor, current and future.
- Plans for ongoing training.
Expenses and Capital Requirements
You must also create three financial forms that will build a foundation for the Financials section of your plan: operating expenses, capital requirements, and cost of goods. Generate spreadsheets for the year in which you establish your business as well as projections for two years after. You may require the help of an accountant or someone familiar with the cost of doing business in your industry and chosen business.
- Operating Expenses
By creating a financial form called Operating Expenses, you pull together the expenses incurred in running your business. Expense categories include: marketing, sales, and overhead. Overhead includes fixed expenses such as administrative costs and other expenses that remain constant regardless of how much business your company does. Overhead also includes variable expenses, such as travel, equipment leases, and supplies.
- Capital Requirements
This form details the amount of money you will need to procure the equipment used to start up and continue operations of your business. Capital Requirements also includes depreciation details of all purchased equipment. To determine your capital requirements, think about anything in your business that will require capital. For a diaper delivery service this might be a van, washing machines and dryers, irons and ironing boards, and supplies. Manufacturing companies obviously require more equipment for production. This equipment can fall into three categories: testing, assembly, and packaging.
- Cost of Goods
For a manufacturing company, the cost of goods is the cost incurred in the manufacturing of the product. For a retail or wholesale business, the cost of goods (sometimes called the cost of sales) is the purchase of inventory. To generate a Cost of Goods table, you need to know the total number of units you will sell for a year as well as what other inventory you have on hand, and at what stage of production those units exist. For a manufacturing company, the cost of goods table will include materials, labor, and overhead related specifically to product manufacturing.
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