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What goes into developing an operational Plan?
All of the components that allow your business to create value.
The operations portion of the business plan serves two purposes:
- Allow you to take a holistic approach to your business, and
- Provide interested third parties with a description of your business.
The operational plan outlines the particular components that allow your business to create value. Below, we discuss the primary components of the business operations plan, including: a description of the product produced, the business location, personnel, inventory, suppliers, payment processing (credit policies and accounts receivable/payable).
You will describe each of these sections in detail to the extent that it is relevant or applicable to your business. You will need to outline where are you in the creation of your business. Specifically, what steps have you taken to put your business in motion? Now, what do you have left to accomplish?
Product or Service Development
How do you plan to make your product or carry out your service? Start with an outline of the process for delivering value to your customers. You will need to account for the necessary production activity at each stage. Outline the day-to-day activity necessary to carry out your business.
- Production Process/How Services Carried Out: Here you should outline the process of manufacturing your product. If you provide a service, you should outline all of the moving parts and individuals necessary to carry out the service. Provide a generally checklist or flowchart for delivering value.
- Production Timeline: Explain how long it takes to produce a unit, and when you’ll be able to start producing your product or service. Include factors that may affect the time frame of production and how you’ll deal with potential problems, such as rush orders.
- Production Feasibility: You will want to give an overview of any research or testing you have done to prove the feasibility of producing your product in accordance with your operational plans. This could include Market Research, Questionnaires, Competitor Process Analysis, Beta Testing, etc.
- Vulnerability: You should identify any potential problems that could arise in the production process. How will you handle any such issues? What would be the effect on the business?
- Quality Control: How will you maintain oversight of the production or service provision process? Develop a plan for supervision of the process.
- Customer Service: What is your plan for customer service? This includes sales communication, return products, and customer follow-up.
Equipment and Other Assets
- Necessary Equipment: What equipment do you need to carry out the basic operations?
- Current Assets: You may already have some of the necessary equipment to carry out operations. Identify these assets and explain what asset requirements they fulfill.
- Equipment Priority: Some equipment is may be desirable but not a necessity. Ascribe a level of priority to obtaining it. The priority should be higher depending upon the likelihood of the equipment to increase production or efficiency. It may also be helpful to outline the equipment output, required maintenance/repair, and expected life.
- Equipment Pricing: Outline a projected cost for purchasing (new or used) and renting the necessary equipment. You need to explain your rationale for your decision.
- Equipment Financing: Explain any financing arrangements. Make a list of your assets, such as land, buildings, inventory, furniture, equipment, and vehicles. Include legal descriptions and the worth of each asset.
Are there any special requirements or situational factors necessary for carrying on your business? In this section, you will list any requirements that are unique to your business and would fall outside general expect ions. This could include special assets, economic conditions, legal conditions, etc.
What qualities do you need in a location?
- Physical Buildings: Describe the type of location you’ll have. You may have multiple locations or locations designed with specific purposes, such as manufacturing, administrative office, and sales locations. If it’s applicable, your plan should include:
- Drawings of the building, copies of lease agreements, and/or recent real estate appraisals.
- What is the expected value of the land or buildings required for your business operations?
- Explain the significance of each physical location to your business.
- Physical Building Requirements: Give specifics, such as a breakdown of cost per square-foot, materials, design, interior layout, parking, etc.
- Amount of Space: Explain the use of space. Have a plan for space demands with the expected growth.
- Type of Building: Justify your decision to rent vs. buy, and a class of facility.
- Zoning: Make certain the anticipated activity meets the applicable zoning requirements. If not, explain a plan to request a variance or petition the municipality for re-zoning.
- Power and other utilities: What will be your specific power needs. Have estimates for the cost of power and the resources/regulatory approvals necessary to obtain such funding. A strong plan will discuss preliminary data and on-going discussions with the available utility providers.
- Access: What type of access do you need for your location? Detail how customers, employees, logistics personnel, etc., will access your business. Ex. Do you need easy walk‐in access? Is it convenient for customers and suppliers?
- Construction: Will you build or rent a building? You should explain the benefits of one over the other. This justification should include a cost/benefit analysis of each option.
- Costs: Determine a preliminary figure for costs associated with building/occupying the intended location. Examples of expenses include: rent/mortgage, maintenance, utilities, property taxes, insurance, construction/remodeling, etc. These numbers will become part of your financial plan.
- Hours of Operation: Indicate and give a justification for your intended hours of operation. Does your location support these hours of operation? Does it conflict with other local or resident businesses?
In this section, you provide an overview of the key personnel involved in the business and the types of positions that will be necessary. Basically, you are going to tell who will do what. Describe whether you intend to hire new personnel or contract with independent contractors to carry out business functions. You will need to account for the personnel requirements as the business grows.
- Startup Team: Who is part of your startup team? What will be their primary area of responsibility? Describe what you understand their role and duties to be and explain how they are qualified or competent for these duties.
- Types of Personnel: Give a general description of the main employees or positions that you will need to fill. This includes skilled, unskilled, and professionals. As part of this process, your will outline who performs the specific tasks at each stage of operations. Some of these positions may be filled by independent contractors who render services on a fee basis. If so, document the nature of these anticipated relationships. At first, there will only be a few positions. Try to determine the types of personnel that will be needed as the business grows.
- Number of employees: Construct a timeline depicting the growth in personnel in accordance with the projected business growth.
- Procedural Protocol: Begin by describing the procedures necessary to effectively carry out each position or function of the business. This is necessary to maintain operational stability as well as consistency in operations. This could include procedural steps or written manuals for carrying out individual stages of the operations.
- Methods for Recruiting Employees: This is most important for professional service or high-tech companies. You will need to have a plan for recruiting new service providers and skilled professionals. This will first require establishing job descriptions and desired employee skills. Note: A good place to start is documented any established relationship with local universities with technical programs and professional schools.
- Personnel Training: How will you conduct the training? What will be your plan for preparing new employees? Do you have a continuation plan in the event you lose a key employee? Be careful not to place too much operational importance on any single individual without developing a training plan for replacements.
- Compensation: Along with the description of personnel and timeline for employment, you will want to associate an estimated cost at each period in time. As such, you will need to devise a projected compensation structure for employees. It is important to develop a realistic plan that fits the companies revenue projections and incentivizes the employee to perform and remain with the business. The startup team or key leadership compensation (including benefits and equity options) is often the most difficult to structure.
Inventory & Materials
In this section, you explain where you are going to receive your inventory or the materials necessary to produce your product or carry out your service. You should indicate your suppliers or manufacturers and outline the nature or terms of your agreement.
- Inventory: What type of inventory (finished product, supplies, raw materials, etc.) will you keep on hand and where will you get it?
- Cost/Value of Inventory: You will need to use the projections for the cost of inventory in your financial projections. A key provision in the pre-money valuation (pre-equity funding) of your business will be an accurate assessment of the value of assets, including inventory.
- Inventory Turn-Over: At what rate will you need to restock your inventory? This is an important figure used in assessing the sales strength of the business. You will want to make a special note about how the inventory turn-over compares to industry averages.
- Special Inventory Requirements: You will also want to outline a plan for dealing with inventory requirements seasonally. This includes a plan for lead-time ordering.
- Inventory Control: You will have to establish a plan for monitoring and controlling inventory. This should be incorporated into an employee/personnel description.
All of the above information will be combined as an estimate of production costs to include in your financials. You may want to maintain separate figures regarding the cost of goods and the cost of labor. You may also want to create a third category of production costs for non-recurring, incidental costs associated with operations.
Now is the place to provide detailed information about the companies/individuals who will supply you with the inventory/materials outlined above.
- Supplier Background: You should include background information on the supplier. This lends credibility to the stability/dependability of their service.
- Inventory Details: Attribute the type, amount, and cost of inventory supplied by each supplier. This should include a description of any anticipated fluctuations in the requirements or costs of the inventory. For example, you will want to outline the spikes in seasonal cost.
- Payment Terms: Outline the terms of performance of the supplier-purchaser relationship. What are the terms of payment? What are the terms of delivery?
- Back-Up Plan: It is important to have a back-up plan in the event you lose a supplier or the supplier is unable to meet for operational needs. This could include options of alternative suppliers. This avoids placing too much operational importance on third parties.
In this section, you will outline how you will be compensated for the goods you sell or services you provide.
- Issuing Credit: Are you planning on accepting in-house credit? You will want to look at industry standards and the payment policies of your competitors. Don’t forget, your payment policies can be a point of differentiation between you and those competitors. What will be the terms of payment for customers who purchase on account?
- Determining Who Can Purchase on Credit: You will have to have some established policies in place to determine who can purchase on credit and under what terms. Remember, you will have to comply with applicable laws prior to carrying out a background check. Also, extending credit could implicate fairness or anti-discrimination in lending laws.
- Terms of Credit: What will be the term of payment? If you extend credit you will need to decide on the terms of repayment and the interest, if any, attributable to giving the credit. What will be the rate of interest charged and penalties for late payment? Will there be a discount for early payment?
- Security Interests: Will you take a security interest in the goods sold? If so, do you have a standard documenting these transactions?
- Slow-Paying or Non-Paying Customers: You will need a policy for dealing with slow‐paying customers. What process will you establish for reminding, urging, and possibly threatening customers to render payment? You should outline an escalating plan for requesting payment, such as making a phone call, sending a letter, using a collection agency, and hiring a collection attorney.
- Credit Cards: If you accept commercial credit, do you have a service provider to process the payment?
- Costs of Extending Credit: Any time that you extend credit there will be a cost involved. The cost could be the risk of the purchaser not paying or it could be the cost of capital over the credit period. Regardless, you will need to build these costs into your financials. For example, there always needs to be some allowance for bad accounts.
Managing Your Accounts Payable
As part of the operations process, you may be in the role of a creditor to a servicer or supplier. You should develop a plan for payment of accounts owed. The key considerations in developing a payment plan include: maintaining positive relations with the supplier/servicer, optimizing the use of available cash.
If the supplier/servicer offers a discount for early payment then you should consider whether this option is in your best interest. If your business would greatly benefit from making a payment toward the end of the available period, then it may be worth extending the payment obligation out.
Establishing and maintaining operations will require the crossing of numerous legal hurdles. You should describe the anticipated legal issues in advance and outline a plan for addressing them. Below are some sample, but common, legal issues.
- Entity Selection and Formation: Outline your justification for choosing a given entity structure. Explanations should include: taxation, equity funding, and ownership and control.
- Business License, Professional Licenses, Inspections, and Zoning Requirements: Identify all of the licensing requirements for carrying on your business. This includes the licensing of your business, personnel, property, etc.
- Insurance and Bonding Requirements: Outline the requirement for bonding of professional insurance. You should indicate the plan for obtaining coverage, as well as the cost of such coverage.
- Permits: Certain business activities in specific places require special permits. You must conduct the necessary background research on the legal requirements and provide a synopsis of how you will handle those requirements.
- Workplace and Environmental Regulations: Outline a plan for the necessary workplace inspections and standards. These standards can drastically affect your construction plans and applicable costs. Environmental regulations include proper documentation and accountability for waste, waste and environmental surveys of the location, etc.
- Employment Laws: Develop a plan for legal compliance with all employment laws. This includes hiring/firing procedures, employee benefits (Health Insurance, etc.), worker’s compensation, affirmative action (if accept federal contracts), etc.
- Taxation: Federal tax registration, state tax registration, estimated tax payments, employee payroll withholdings, sales tax registration and withholding, property tax, etc.
- Protecting Intellectual Property: You will need to develop a plan for protecting and maintaining all applicable forms of intellectual property, including: trade secrets, trademarks, copyrights, and patents. In some cases, protecting your intellectual property can be very costly (such as patent filings). Account for these costs within the financials.
Conclusion: After working through this business plan section you will have a detailed operating plan and a comprehensive outline of what actions need to be taken next in developing the business.