Business Plan for Retailers
Summary
A good business plan gives the small retail firm a
pathway to profit. This publication is designed to
help an owner-manager work up a sound business plan.
To profit in business, you need to consider the following
questions:
What business am I in?
What goods do I sell?
Where is my market?
Who will buy?
Who is my competition?
What is my sales strategy?
What merchandising methods will I use?
How much money is needed to operate my store?
How will I get the work done?
What management controls are needed?
How can they be carried out?
When should I revise my plan?
Where can I go for help?
As the owner-manager, you have to answer these questions to
draw up your business plan. The pages of this publication
are a combination of text and suggested analysis so that you
can organize the information you gather for research to
develop your plan, giving you a progression from a common
sense starting point to a profitable ending point.
What Is a Business Plan?
The success of your business depends largely upon the
decisions you make. A business plan allocates
resources and measures the results of your actions, helping
you set realistic goals and make logical decisions.
You may be thinking, "Why should I spend my time drawing up
a business plan? What's in it for me?" If you've never
worked out a plan, you are right in wanting to hear about
the possible benefits before you do the work. Remember first
that the lack of planning leaves you poorly equipped to
anticipate future decisions and actions you must make or
take to run your business successfully.
A business plan:
Gives you a path to follow. A plan with goals and action
steps allows you to guide your business through turbulent
often unforeseen economic conditions.
A plan shows your banker the condition and direction of
your business so that your business can be more favourably
considered for a loan because of the banker's insight into
your situation.
A plan can tell your sales personnel, suppliers, and
others about your operations and goals.
A plan can help you develop as a manager. It can give you
practice in thinking and figuring out problems about
competitive conditions, promotional opportunities and
situations that are good or bad for your business. Such
practice over a period of time can help increase an
owner-manager's ability to make judgements.
A sound plan tells you what to do and how to do it to
achieve the goals you have set for your business.
What Business Am I in?
In making your business plan, the first question to
consider is: What business am I really in? At the first
reading, this question may seem silly. "If there is one
thing I know," you say to yourself, "it is what business I'm
in." Hold on and think. Some owner-managers have gone broke
and others have wasted their savings because they did not
define their business in detail. Actually they were confused
about what business they were in.
Look at an example. Mr. Jet on the East Coast maintained a
dock and sold and rented boats. He thought he was in the
marina business. But when he got into trouble and asked for
outside help, he learned that he was not necessarily in the
marina business. He was in several businesses. He was in the
restaurant business with a dockside cafe, serving meals to
boating parties. He was in the real estate business, buying
and selling lots. He was in the boat repair business, buying
parts and hiring a mechanic as demand arose. Mr. Jet was
trying to be too many things and couldn't decide which
venture to put money into and how much return to expect.
What slim resources he had were fragmented.
Before he could make a profit on his sales and a return on
his investment, Mr. Jet had to decide what business he
really was in and concentrate on it. After much study, he
realized that he should stick to the marina format, buying,
selling, and servicing boats.
Decide what business you are in and write it downdefine
your business. To help you decide, think of answers to
questions like:
What do you buy?
What do you sell?
Which of your lines of goods yields the greatest profit?
What do people ask you for?
What is it that you are trying to do better or more of or
differently from your competitors?
Write it down in detail.
Marketing
When you have decided what business you are in, you are
ready to consider another important part of your business
plan. Marketing. Successful marketing starts with the
owner-manager. You have to know the merchandise you sell and
the wishes and wants of your customers you can appeal to.
The objective is to move the stock off the shelves and
display racks at the right price and bring in sales dollars.
The text and suggested working papers that follow are
designed to help you work out a marketing plan for your
store.
Determining the Sales Potential
In retail business, your sales potential depends on
location. Like a tree, a store has to draw its nourishment
from the area around it. The following questions should help
you to work through the problem of selecting a profitable
location.
In what part of the city or town will you locate?
In the downtown business section?
In the area right next to the downtown business area?
In a residential section of the town?
On the highway outside of town?
In the suburbs?
In a suburban shopping centre?
On a worksheet, write where you plan to locate and give your
reasons why you chose that particular location.
Now consider these questions that will help you narrow down
a place in your location area.
What is the competition in the area you have picked?
How many of the stores look prosperous?
How many look as though they are barely getting by?
How many similar stores went out of business in this area
last year?
How many new stores opened up last year?
What price line does the competition carry?
Which store or stores in the area will be your biggest
competitor(s)?
Again, write down the reasons for your opinions. Also write
out an analysis of the area's economic base and give the
reason for your opinion. Is the area in which you plan to
locate supported by a strong economic base? For example, are
nearby industries working full time? Only part time? Did any
industries go out of business in the past several months?
Are new industries scheduled to open in the next several
months? When you find a store building that seems to be what
you need, answer the following questions:
Is the neighbourhood starting to get run down?
Is the neighbourhood new and on the way up?
Are any super highways or throughways planned for the
neighbourhood?
Is street traffic fairly heavy all day?
Do pedestrians look like prospective customers?
How close is the building to bus lines and other
transportation?
Are there adequate parking spaces convenient to your
store?
Are the sidewalks in good repair (you may have to repair
them)?
Is the street lighting good?
Is your store on the sunny side of the street?
What is the occupancy history of this store building? Does
the store have a reputation for failures? (Have stores
opened and closed after a short time)?
Why have other businesses failed in this location?
What is the physical condition of the store?
What service does the landlord provide?
What are the terms of the lease?
How much rent must you pay each month?
Estimate the gross annual sales you expect in this location.
When you think you have finally solved the site location
question, ask your banker to recommend people who know most
about locations in your line of business. Contact these
people and listen to their advice and opinions, weigh what
they say, then decide.
Attracting Customers
When you have a location in mind, you should work
through another aspect of marketing. How will you attract
customers to your store? How will you pull business away
from your competition?
It is in working with this aspect of marketing that many
small retailers find competitive advantages. The ideas that
they develop are as good as and often better than those that
large companies develop. The work blocks that follow are
designed to help you think about image, pricing, customer
service policies, and advertising.
Image
A store has an image whether or not the owner is aware of
it. For example, throw some merchandise onto shelves and
onto display tables in a dirty, dimly lit store and you've
got an image. Shoppers think of it as a dirty, junky store
and avoid coming into it. Your image should be concrete
enough to promote in your advertising and other promotional
activities. Forexample, "home-style cooked" food might be
the image of a small restaurant.
Write out on a worksheet the image that you want shoppers
and customers to have of your store.
Pricing
Value received is the key to pricing. The only way a store
can have low prices is to sell low-priced merchandise. Thus,
what you do about the prices you charge depends on the lines
of merchandise you buy and sell. It depends also on what
your competition charges for these lines of merchandise.
Your answers to the following questions should help you to
decide what to do about pricing.
In what price ranges are your line of merchandise sold:
High ____ Medium ____ Low ____
Will you sell for cash only?
What services will you offer to justify your prices if they
are higher than your competitor's prices?
If you offer credit, will your price have to be higher than
if all sales are for cash? The credit costs have to come
from somewhere. Plan for them.
If you use credit card systems, what will it cost you? Will
you have to add to your prices to absorb this cost?
Customer Service Policies
The service you provide your customers may be free to them,
but you pay for it. For example, if you provide free
parking, you pay for your own parking lot or pick up your
part of the cost of a lot you share with other retailers.
Make a list of the services that your competitors offer and
estimate the cost of each service. How many of these
services will you have to provide just to be competitive?
Are there other services that would attract customers but
that competitors are not offering? If so, what are your
estimates of the cost of such services? Now list all the
services you plan to offer and the estimated costs. Total
this expense and figure out how you can include those added
costs in your prices without pricing your merchandise out of
the market.
Advertising
You probably know by now that I am not a fan of
advertising for small business. As I say:
Advertising is what you pay for; publicity is what you pray
for.
There are many resources on available at:
www.darrellberg-smith.com to help you save a
bundle for your marketing efforts. However if you must
advertise, there are lots of things you need to consider.
Advertising was saved until the last because you have to
have something to say before advertising can be effective.
When you have an image, price range, and customer services,
you are ready to tell prospective customers why they should
shop in your store.
When the money you can spend for advertising is limited, it
is vital that your advertising be on target. Before you
think about how much money you can afford for advertising,
take time to determine what jobs you want to do for your
store.
List the strong points of your store. List what makes your
store different from your competitors. List the facts about
your store and its merchandise that your advertising should
tell shoppers and prospective customers.
When you have these facts listed and in hand, you are ready
to think about the form your advertising should take and its
cost. Ask the local media (newspapers, radio and television,
and printers of direct mail pieces) for information about
the services and results they offer for your money.
How you spend advertising money is your decision, but don't
fall into the trap that snares many advertisers who have
little or no experience with advertising copy and media
selection. Advertising is a profession. Don't spend a lot of
money on advertising without getting professional advice on
what kind and how much advertising your store needs.
When you have a figure on what your advertising for the next
twelve months will cost, check it against what similar
stores spend. Advertising expense is one of the operating
ratios (expenses as a percentage of sales) that trade
associations and other organizations gather.
If your estimated cost for advertising is substantially
higher than this average for your line of merchandise, take
a second look. No single expense item should get out of line
if you want to make a profit. Your task in determining how
much to spend for advertising comes down to the
question, "How much can I afford to spend and still do the
job that needs to be done?"
In-Store Sales Promotion
To complete your work on marketing, you need to think
about what you want to happen after prospects get inside
your store. Your goal is to move stock off your shelves and
displays at a profit and to satisfy your customers. You want
repeat customers and money in your cash register.
At this point, if you have decided to sell for cash only,
take a second look at your decision. Don't overlook the fact
that people like to buy on credit. Often a credit card, or
other system of credit and collections, is needed to attract
and hold customers. Customers will have more buying
confidence and be more comfortable in your store if they
know they can afford to buy. Credit makes this possible.
To encourage people to buy, self-service stores rely on
layout, attractive displays, signs and clearly marked prices
on the items offered for sale.
Other stores combine these techniques with personal selling.
List the display counters, racks, special equipment
(something peculiar to your business like a frozen food
display bin or a machine to measure and cut cloth), and
other fixtures. Figure the cost of all fixtures and
equipment by listing them on a worksheet as follows:
Type of Equipment Number x Unit Cost = Cost
Draw several layouts of your store and attach the layout
that suits you to the cost worksheet. Determine how many
signs you may need for a twelve month operation and estimate
that cost also.
If your store is a combination of self-service and personal
selling, how many sales persons and cashiers will you need?
Estimate, I will need ___ sales persons at $____ each week
(include payroll benefits in this salaries cost). In a year
salaries will cost $____.
Personal attention to customers is one strong point that a
small store can use as a competitive tool. You want to
emphasize in training employees that everyone has to pitch
in and get the job done. Customers are not interested in job
descriptions, but they are interested in being served
promptly and courteously. Nothing is more frustrating to a
customer than being ignored by an employee. Decide what
training you will give your sales people in the techniques
of how to greet customers, show merchandise, suggest other
items, and handle customer needs and complaints.
Buying
When buying merchandise for resale, you need to answer
questions such as:
Who sells the line to retailers? Is it sold by the
manufacturer directly or through wholesalers and
distributors?
What delivery service can you get and must you pay
shipping charges?
What are the terms of buying?
Can you get credit?
How quickly can the vendor deliver fill-in orders?
You should establish a source of supply on acceptable terms
for each line of merchandise and estimate a plan for
purchasing.
Stock Control
Often shoppers leave without buying because the store did
not have the items they wanted or the sizes and colours were
wrong. Stock control, combined with suppliers whose policies
on fill-in orders are favourable to you, provides a way to
reduce "walkouts".
The type of system you use to keep informed about your
stock, or inventory, depends on your line of merchandise and
the delivery dates provided by your suppliers.
Your stock control system should enable you to determine
what needs to be ordered on the basis of:
What is on hand?
What is on order?
What has been sold?
Some trade associations and suppliers provide systems to
members and customers; otherwise your accountant can set up
a system that is best for your business. Inventory control
is based upon either a perpetual or a periodic method of
accounting that involves cost considerations as well as
stock control. When you have decided what system you will
use to control stock, estimate its cost.
You may not need an extensive (and expensive) control system
because you do not need the detailed information such a
system collects. The system must justify its costs or you
will just waste money and time on a useless effort.
Stock Turn Over
When an owner-manager buys reasonably well, you can
expect to turn over stock several times a year. For example,
the stock in a small camera shop should turn over four times
to four and a half times a year. What is the average stock
turnover per year of your line of merchandise? How many
times do you expect your stock to turn over? List the
reasons for your estimate.
Behind-The-Scenes Work
In a retail store, behind-the-scenes work consists of the
receiving of merchandise, preparing it for display,
maintaining display counters and shelves, and keeping the
store clean and attractive to customers. The following
analytical list will help you decide what to do and the cost
of
those actions.
First list the equipment (for example a marking machine for
pricing, shelves, a cash register) you will need for:
receiving merchandise;
preparing merchandise for display;
maintaining display counters and shelves;
keeping the store clean.
Next list the supplies you will need for a year, for
example, brooms, price tags, and business forms.
Who will do the backroom work and cleaning that is needed to
make a smooth operation in a store? If you do it yourself,
how many hours a week will it take? Will you do these chores
after closing? If you use employees, what will they cost? On
a worksheet describe how you plan to handle these tasks. For
example:
Backroom work will be done by one employee during the
slack sales times of the day. I estimate that the employee
will spend___ hours per week on these tasks and will cost
$___ (number of hours times hourly wage) per week and $____
per year.
I will need ____ square feet of space for the backroom
operation. This space will cost $__ per square foot or a
total of$____ per month.
List and analyse all expense items in the same manner.
Examples are utilities, office help, insurance, telephone,
postage, accountant, payroll taxes, and licenses or other
local taxes. If you plan to hire others to help you manage,
analyse these salaries.
Put Your Plan into Dollars
At this point, take some time to think about what your
business plan means in terms of dollars. This section is
designed to help you put your plan into dollars.
The first question concerns the source of dollars. After
your initial capital investments in a small retail store,
the main source of money is sales. What sales volume do you
expect to do in the first twelve months?
Write your estimates here $_______ and justify your
estimate.
Start-up Costs
List the following estimated start-up costs:
Fixtures and equipment $____________
Starting inventory $____________
Decorating and remodelling $____________
Installation of equipment $____________
Deposits for utilities $____________
Legal and professional fees $____________
Licenses and permits $____________
Advertising for the opening $____________
Accounts receivable $____________
Other expenses $____________
Operating cash $____________
Total $____________
Expenses
In connection with annual sales volume you need to think
about expenses. If, for example, you plan to do sales
amounting to $100,000, what will it cost you to do this
amount of business? How much profit will you make? A
business must make a profit or close.
A suggested list of expenses to consider is as follows:
advertising;
bad debts;
delivery;
depreciation (other than real estate);
donations;
dues and subscriptions;
insurance;
interest
legal and accounting expenses;
occupancy expenses;
office supplies and postage;
payroll and other employee expenses;
supplies;
taxes (other than real estate and payroll);
telephone and fax;
travel, buying and entertainment;
Unclassified expenses.
Cash Forecast
A budget helps you to see the dollar amount of your expected
revenue and expenses each month. Then from month to month
the question is: Will sales bring in enough money to pay the
store's bills? The owner-manager must prepare for the
financial peaks and valleys of the business cycle. A cash
forecast is a management tool that can eliminate much of the
anxiety that can plague you if your sales go through lean
months.
Is additional money needed? Suppose at this point that your
business needs more money than can be generated by present
sales. What do you do? If your business has great potential
or is in good financial condition, as shown by its bank
balance sheet, you will borrow money (from a bank most
likely) to keep the business operating during start-up and
slow sales periods.
The loan can be repaid during the fat sales months when
sales are greater than expenses. Adequate working capital is
needed for success and survival: but cash on hand (or the
lack of it) is not necessarily an indication that the
business is in bad financial shape. A lender will look
at your balance sheet to see the business' Net Worth of
which cash and cash flow are only a part. The sample balance
sheet statement format shows a business' Net Worth
(financial position) at a given point in time, say as of the
close of business at the end of the month or at the end of
the year.
Even if you do not need to borrow money, you may want to
show your plan and balance sheet to your banker. It is never
too early to build good relations and credibility (trust)
with your banker. Let your banker know that you are a
manager who knows where you want to go rather than someone
who merely hopes to succeed.
Control and Feedback
To make your plan work you need feedback. For example, the
year-end profit and loss (income) statement shows whether
your business made a profit or took a loss for the past
twelve months.
Don't wait twelve months for the score. To keep your plan on
target you need readings at frequent intervals. An income
statement compiled at the end of each month or at the end of
each quarter is one type of frequent feedback. Also you must
set up management controls that help you insure that the
right things are done each day and week. Organization is
needed because you as the owner-manager cannot do all the
work. You must delegate work, responsibility, and authority.
The recordkeeping systems should be set up before the store
opens. After you're in business it is too late.
The control system that you set up should give you
information about stock, sales, receipts and disbursements.
The simpler the accounting control system, the better. Its
purpose is to give you current useful information. You need
facts that expose trouble spots. Outside advisers, such as
accountants, can help.
Stock Control
The purpose of controlling stock is to provide maximum
service to your customers. Your aim should be to achieve a
high turnover rate on your inventory. The fewer dollars you
tie up in stock, the better. In a small store, stock control
helps the owner-manager offer customers a balanced
assortment and enables you to determine what needs ordering
on the basis of:
What is on hand?
What is on order?
What has been sold?
When setting up inventory controls, keep in mind that the
cost of the stock is not your only cost. There are inventory
costs, such as the cost of purchasing, the cost of keeping
stock control records, and the cost of receiving and storing
stock.
Sales
In a small store, sales slips and cash register tapes
give the owner-manager feedback at the end of each day. To
keep on top of sales, you need answers to questions such as:
How many sales were made?
What was the dollar amount?
What were the best selling products?
At what price?
What credit terms were given to customers?
Receipts
Break out your receipts into receivables (money still owed
such as a charge sale) and cash. You know how much credit
you have given, how much more you can give, and how much
cash you have with which to operate.
Disbursements
Your management controls should also give you information
about the dollars your company pays out. In checking on your
bills, you do not want to be penny-wise and pound-foolish.
You should pay bills on time to take advantage of supplier
discounts. Your review systems should also give you the
opportunity to make judgements on the use of funds. In this
manner, you can be on top of emergencies as well as routine
situations. Your system should also keep you aware that tax
monies, such as payroll income tax deductions, must be set
aside and paid out at the proper time.
Break-Even
Break-even analysis is a management control device that
approximates how much you must sell in order to cover your
costs with NO profit and NO loss. Profit comes after
break-even. Profit depends on sales volume, selling
price, and costs. Break-even analysis helps you to estimate
what a change in one or more of these factors will do to
your profit. To figure a break-even point, fixed costs (like
rent) must be separated from variable costs (like to cost of
goods sold.) The break-even formula is:
Break-even point = (in sales dollars) Total fixed costs / (1
- total variable costs / corresponding sales volume)
Sample break-even calculations: Bill Mason plans to open a
shoe store and estimates his fixed expenses at about $9,000
the first year. He estimates variable expenses of about $700
for every $1,000 of sales. How much mustthe store gross to
break-even?
BE Point = $9,000 / (1 - 700 / 1,000)
= $9,000 / (1 - .70)
= $9,000 / .30
= $30,000
Is Your Plan Workable?
Stop when you have worked out your break-even point. Whether
the break-even point looks realistic or way off base, it is
time to make sure that your plan is workable.
Take time to re-examine your plan before you back it with
money. If the plan is not workable, better to learn it now
than to realize six months down the road that you are
pouring money into a losing venture.
In reviewing your plan, look at the cost figures you drew up
when you broke down your expenses for the year (operating
ratios on the income statement). If any of your cost items
are too high or too low, change them. You can write your
changes above or below your original entries on
the worksheet. When you finish making your adjustments, you
will have a REVISED projected statement of sales and
expenses.
With your revised figures, work out a revised break-even
analysis. Whether the new break-even point looks good or
bad, take one more precaution. Show your plan to someone who
has not been involved in working out the details with you.
Get an impartial, knowledgeable second opinion. Your banker
or other advisor may see weaknesses that failed to appear as
you went over the plan details. These experts may see strong
points that your plan should emphasize.
Put Your Plan into Action
When your plan is as thorough and accurate as possible, you
are ready to put it into action. Keep in mind that action is
the difference between a plan and a dream. If a plan is not
acted upon, it is of no more value than a wishful dream. A
successful owner-manager does not stop after gathering
information and drawing up a business plan, as you have done
in working through this publication. USE the plan.
At this point, look back over your plan. Look for things
that must be done to put your plan into action. What needs
to be done will depend on your situation and goals. For
example, if your business plan calls for an increase in
sales, you may have to provide more funds for this
expansion.
Have you more money to put into this business? Do you borrow
from friends and relatives? From your bank? From your
suppliers, (through credit terms)? If you are starting a new
business, one action may be to get a loan for fixtures,
stock, employee salaries, and other expenses. Another
action will be to find and to hire capable employees.
Now make a list of things that must be done to put your plan
into action. Give each item a date so that it can be
done at the appropriate time. To put my plan into action, I
must:
Do (action)__________ by (date) __________ Etc.
Keep Your Plan Current
Once you put your plan into action, look out for changes.
They can cripple the best business no matter how well
planned. Stay on top of changing conditions and adjust your
business plan accordingly. Sometimes the change is within
your company. For example, several of your sales persons may
quit. Sometimes the change is with customers whose desires
and tastes shift and change or refuse to change. Sometimes
the change is technological as when products are created and
marketed.
In order to adjust your plan to account for such changes,
you, the owner-manager, must:
Be alert to the changes that come about in your line of
business, in your market and in your customers.
Check your plan against these changes.
Determine what revisions, if any, are needed in the
business plan.
The method you use to keep your plan current so that your
business can weather the changing forces of the market place
is up to you. Read trade and business papers and magazines
and review your plan periodically. Once each month or every
other month, go over your plan to see whether or not it
needs adjusting. Certainly you will have been in business
for a time. Make revisions and put them into action. You
must be constantly updating and improving. A good business
plan must evolve from experience and the best current
information. A good business plan is good business.
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