You’re an optimist. All business owners are, and need to be, since starting a business is difficult. But hopefully your business plan tempers this optimism and provides a safety net if your plans do not work out as anticipated.
Obviously, your business plan shouldn’t assume that your company will fail. But if you don’t have the occasional setback, you might be playing it too safe—and your business plan should reflect that.
When you start advertising a product or service, you don’t know for sure if your marketing dollars will reach the right customers. You can hold a sale that turns out to be less profitable, choose a shipping service that loses your products, or hire an employee who steals from you. If you are building a technology product, it often takes longer than anticipated. My rule of thumb, and one often used by angel investors, is 2X2X—things take twice as long and achieve half the anticipated results.
So a good business plan assumes some downs along with your ups. That’s where your emergency hatch comes in. You need to plan for the occasional shortfall so you can quickly recover financially as well as operationally.
How do you create your emergency hatch? Your business plan should include these three items.
More money. Increase your expenditure budget by at least 10 percent. For example, if your business plan assumes you’ll spend $100,000 in startup costs, your budget should be at least $110,000. Likewise, if you plan on a $10,000 marketing campaign, make it $11,000. You can leave your expenditure line items as you have them and just add a new “contingency” line item at the bottom of your list. And reduce your sales forecast by 10% to 25% to account for not obtaining customers as large and as fast as anticipated. Again, this adjustment can be a line item itself.
Even if you plan down to the penny, it is still a forecast and somewhere you’re going to spend more money or earn less than you expect. Maybe supplies or inventory cost more than you expect, especially if you didn’t factor in taxes, shipping fees or insurance. Or clients are holding onto invoices longer than you assumed they would, and you need more money to maintain your cash flow.
More time. Clients may take longer to pay you, it may take longer for your marketing plan to make a difference and for customers to find you, inventory shipments may not arrive when you expected, or developers take longer to design and build a product.
If your business plan has you turning a profit in six months and paying your lender back every month thereafter, do yourself a favor and build in more time. You are dependent on many people and companies outside your direct control, and they might not all meet your schedule.
Backup plans. You can’t plan for every possible scenario, but you should think about some common scenarios where something might go different than planned.
Maybe your inventory is perishable—that is, you sell flowers or you have a restaurant. What would happen if your freezer died, or the power went out for a long period of time? Would you lose everything or be able to save your inventory? Do you have friendly competitors that would let you store your perishables with them? Do you need a backup generator? Are you at least insured for those types of problems?
Writing the Emergency Hatch Into Your Business Plan
A couple items you’ll want to include in your plan are:
Emergency contacts. If a blizzard or flood takes over your community, you want to be able to reach your employees and customers. What about suppliers or vendors? Do you have cellphone numbers or emails for them, in a convenient spot, even if you have no power? Is it all in your cellphone? Also, do you have a backup plan in case you lose your cellphone?
A written plan for several common, if hopefully unlikely, scenarios. What are the various steps you’ll need to take to get your business running again if your company is flooded, or you lose your biggest client, or the economy blows up and companies start paying you 90 days out instead of the usual 30?
Although this may seem like a waste of time and energy to look at what could go wrong, if you do plan for some worst-case scenarios, you’re going to end up understanding your business really well.
- Make sure that your business plan is realistic and assumes that some problems are going to occur.
- Budget for more time and money.
- Analyze your business for how things might go wrong, and in the process, learn more about how your company works.
- Update your business plan to include plans on what to do if things go wrong, and how that may affect your bottom line.
- Go back to your budget and look to see if you’ll be covered if you have some setbacks, and how to generate more income.
- Consider talking to your insurance agent to see what extra coverage you may need.