Business Plans for Service Companies
Developing a business plan for a service-based business is generally quite different than that of developing one specific for a product that is going to be for products sold either on a retail level or a wholesale basis. Service based businesses always generate extremely high gross margins from the revenues given that it is underlying labor that is being sold to the customer or end user. As it relates to raising capital for a service based business, most banks and financial institutions are willing to extend a working capital one credit that will finance the underlying operating expenses until the business develops a customer base is able to remain profitable and cash flow positive. However, it should be noted that individual entrepreneurs that do provide services to the general public will still be required to have a very strong credit score or a significant amount of collateral that can be used in conjunction with the working capital one credit. Most
service based businesses have very low start up costs and these can range anywhere from $10,000 all the way to $200,000 depending on whether or not vehicles and other equipment are used in the conjunction of rendering services.
For instance, a plumbing based business – which is a service business – is going to be required to have a truck or van as well as some equipment in order to provide the services to the general public. Another example of a service-based business would be a small law practice in which almost no equipment is necessary outside a desk and a computer. As such, when an entrepreneur is developing this type of business plan a special focus should be paid to how much equipment is going to be needed. Typically, a working capital line of credit should be available to finance approximately six months to nine months of underlying operating expenses. While this can be a significant undertaking, the benefit of using a working capital line of credit is that it can be drawn down as needed rather than receiving a one lump sum loan. This will allow the business to have a greater control of the interest expense associated with the revolving credit line.
Much like any other business plan, one that is specific for a service based company needs to include a profit and loss statement, cash flow analysis, balance sheet, breakeven analysis, and business ratios page. Within the business plan as well – a special focus easy paid to the demographics that we targeted as it relates to specific services. A demographic analysis should include a examination of annual household income, median family income, population density, gender, age, and other relevant psychographics and statistics that are specific to the type of service being rendered. For instance, a performance automotive tuning specialist is going to have a set of demographics that are among people that are a younger age where a home healthcare agency is going to focus specifically on people that are older for the most part. It is very important to develop a laser focused demographic profile as it will come to be used when the marketing plan is being
Given the low barriers to entry for most service based businesses, a very comprehensive marketing plan is going to be needed so that customers can be properly targeted at all times. Many entrepreneurs when developing their marketing plans and marketing materials to have trouble properly disseminating their message within their websites and sales literature. As such, an advertising agency can be hired to assist with the development of these marketing materials. While this does contribute to a much higher upfront expense the benefits can be substantial. Foremost, there are a lot less likely to be a number of mistakes made when a third party is developing an advertisement. Two, these businesses often have established connections with newspapers, public relations firms, online marketing agencies, and related entities that can assist the owner with distributing their advertisements to the general public. As most of these firms like having ongoing
relationships with their advertisers, they may be able to provide you with a modest discount at the onset of operations. Many periodicals – especially with the substantial amount of competition these days – are willing to provide some level of discount two new businesses that are looking to establish their operations. In the long run, these relationships can be an invaluable source of revenue for a number of different businesses. One of the nice things out owning a service based businesses that can be readily expanded or contracted at any given time.
Given that they can simply expand by hiring additional service personnel that can render a greater number of services. One of the common issues that needs to be dealt with a service-based business is of course human resources. It is imperative that the owner of this type of business have an expansive employee handbook that clearly spells out the roles and responsibilities of each job. Additionally, this employee handbook should have some documentation regarding dispute resolution especially as it relates to unfair employment practices. Many attorneys maintain this type of documentation as a boilerplate template so that a new small business can quickly get the employee handbook they need without a tremendous amount of undue expense.
Of course, when developing a business plan so specific for a service-based business a certified public accountant should assist the individual owner with ensuring that the financial statements within the document are reasonable and in in-line with GAAP or generally accepted accounting principles. This is especially important if the entrepreneur is going to be seeking a loan or a revolving line of credit from a financial institution. For some service based businesses, they are very strong candidates for an equity investment from a small private investor. Typically, most larger investment firms like venture capital groups in private equity groups typically stay away from smaller service based businesses and as they have a very unique way of operating. This is especially true if the service based businesses is technology focused.
In closing, service based businesses are great for people that have highly specific skills or have received a significant amount of educational training for a specific profession. The barriers to entry can be considered to be extremely high especially among professional services such as physicians, attorneys, dentists, and certified public accountants. Trades people also have very high barriers to entry given the extensive amounts of experience and licensure required to operate independently.