Analyzing business plans pt.1

I get a lot of business plans that people send me for review. On one hand, it’s gratifying that they trust me enough to expose themselves. On the other hand, unless they’ve hired me to analyze their plan for deficiencies, I am reluctant to say anything because I usually don’t have many good things to say (and it takes a long time and I’m not getting paid to do it). In today’s post, I’ll analyze some facets of a recent plan I got. The things I’m covering are the kinds of things I see popping up in plans these days or are things I usually see in plans that need to be corrected. Also, if you’d like me to kick the tires on some elements of your plan, feel free to submit them. Of course, you won’t be identified anymore than anyone could identify the authors of today’s plan. All of your proprietary details will be kept strictly confidential.

Business Goals and Objectives Short-term goals:

  • Deliver 4 unique collections per year
  • Generate sales of $125K
  • Increase exposure and market share to fashion-conscious customers in metropolitan areas.
  • Establish 30 and 45 day credit terms with suppliers

While the plan’s author doesn’t define the span of what constitutes “short term”, these goals aren’t too bad -with the exception of the credit terms. If you’ve got all your ducks in a row, these goals are fine, excepting the credit terms. Now, I doubt the plan’s author will see that last goal as a stumbling block -and it shouldn’t be- but it’s typical that you’ll need to be a supplier’s customer for at least a year before they’ll extend 30 day terms. 45 day terms are so rare as to be unheard of. Now, if you’re going great guns and buying lots of fabrics from the same people repeatedly and you’re not a pain in the butt customer, it’s possible that they’ll extend 30 day terms within 6 months. There’s always exceptions but these are the general rules.

The sales figures of $125K are doable but the introduction of 4 collections a year will be a tight stretch. If you have a solid team -meaning one of the principals is an experienced designer/pattern maker- I might consider it. Still, producing 4 collections a year and only generating $125K from it doesn’t sound like a good ROI . Not by a long shot. The goal of “increasing exposure and market share among consumers” makes me a little nervous because this is usually something I read in the plans of people who really intend to become brands rather than manufacturers. I get nervous because these people usually want to spend disproportionate amounts on advertising and promotion rather than investing in their education and learning production well. You must have a solid product before you spend money pushing it. I realize a lot of big companies don’t do that but they’re just labels or brands -not manufacturers- and that’s not what I do. If you want to be a marketing company, that’s just marvy -really- but don’t send me your business plan. I don’t know anything about it so I can’t make it work for you.

Mid-term goals:

  • Reduce the cost of goods sold by 10%, while maintaining the high product quality
  • Introduce 5 new products into the product mix
  • Establish Annual Growth of 25%
  • Open a flagship store within our primary metropolitan region

Okay, it’s in the introduction of the mid-term goals where things get sticky. First of all, I get nervous when I read blanket pronouncements regarding goal reductions in the cost of producing goods, particularly with goals as high as 10%. This usually means that the designer thinks their greatest ability for cost containment lies within the production phase. If you’ve read the book (the whole thing but mostly pgs 195-212) you know this is false. Your greatest ability to control costs is leveraged from the start up phase. Still, most people share the common misconception that they will have gained some leverage with their contractor for price reductions, if nothing due to greater economies of scale but this is rarely the case. Not to say you can’t reduce costs through economies of scale but it’s rarely this dramatic. Moreover, the savings end up getting eaten by something else that you hadn’t been spending money on but now need to.

Introducing 5 new products into the mix is doable, provided one means styles rather than profoundly distinct product types. In other words, you can add five dresses if you’re making dresses but you can’t add a bra, a pair of shoes, hats, sweaters and outerwear and expect to have a good result. That’s just not tenable (see pgs 48-49).

Now, actually realizing an annual growth rate of 25% is laudable -at the outset- but rare. If you’re going to make a go of this, it’s more typical that growth is higher than that. I know from polling amongst all of you that growth rates of 100% or more is closer to being typical. If that’s not right, correct me but I think it is. You don’t have to go hog wild and say your growth rate was closer to 300 or 400 percent because I know that but if I put that here, people will think I’m lying. The fact is, if you know what you’re doing and price it well, you can make a lot of money in this business. But again, therein lies the problem. The whole reason that most of you are on this website in the first place is because you’ve been taken by surprise by the growth in your businesses and are often strapped (time, money up front etc) to meet demand. It’s growth that is the undoing of most DE businesses, not lack of sales. So, while I agree that a 25% goal of increased sales is just dandy, you must be prepared for one of two eventualities. The first is, if you only want to grow that much, you must establish strict production goals that you won’t be tempted to exceed. Second, if you’re willing to grow beyond the 25%, you must manage it carefully.

The idea of opening a store -flagship or otherwise- should be stricken from every DE plan. I take a hard line on this. This goal doesn’t belong here much less belong under “mid-term goals” (an undefined period of time). First, you need to get manufacturing under your belt. Once you’ve become confident and competent at that -it’ll take more years than you think it will- then maybe you can think about retail. If you do later consider retail, that whole thing needs to be in it’s own plan, it deserves more respect than to be stuck in as the tail end of a bullet point list. Retail just isn’t that easy. On a personal level, I think that manufacturers insult retailers by thinking they can replace them so readily. Retailers are guilty of the same kind of thinking too. The point is, you can’t be at the mill and the store at the same time. Now everybody thinks they are the exception to the rule but it rarely works that way. The only exceptions I’ll support are retailers who already have established concerns and who want to add a few styles they’ve designed into their own outlets. That’s it .

Next in the series, I’ll analyze long term goals.

Entries in this series:
Analyzing business plans pt.1
Analyzing business plans pt.2
Analyzing business plans pt.3
Analyzing business plans pt.4
Analyzing business plans pt.5
Analyzing business plans pt.6

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  1. Eric H says:

    The idea of moving from manufacturing into retail is called vertical integration, and is usually done because there is something in that environment you need to control. In other words, people back into it, reluctantly, and for the purpose of economizing on something specific (like training sales people or customers) but not as a revenue stream for its own sake. If you can’t make money manufacturing and you think you’ll make up for it by mismanaging the retail outlet also, that seems like a recipe for “go broke fast”.


  2. Derrick Moses says:

    Hate to sound really stupid. However I was recently laid off and where I have always dreamed of opening a very small company with denim as the core. I find that I truly know nothing. I am inspired to the point of no return but I can’t get pass my lack of experience at 41. I thought I needed a get swift kick in the rear, but now I am thinking I just need advice or something. Does this make any sense?

  3. Kathleen says:

    Derrick, lack of experience at age 41 is not a problem. Regarding experience, most entrepreneurs never went to design school. Of the ones that have, I just wish you could see the tons of emails I get from them complaining that their educations did little to prepare them for the task. Design school prepares you to be an employee, not an employer -two entirely different things. I know that from where you are it doesn’t seem that way but hopefully others will chime in to back me up.

    Age is not a problem either. Most of the entrepreneurs who have become successful are your age or older. Now, more businesses are started by young people but they don’t last (it’s a question of time; it’s common to start several enterprises before hitting a winner). Older entrepreneurs tend to do better because 1) they’ve already tried previous ventures or have accumulated valuable work experience (even in other fields). Secondly, older entrepreneurs have accumulated capital in some form with which to fund their product development. Many younger entrepreneurs are struggling with the burdens of school loans and getting started out in life so their rescources are more limited.

    I agree you just need advice. The blog and the book are the logical first steps.

  4. Dave says:

    When just starting very high rates of growth 100% – 400% can be expected because you are starting from a lower point. It’s a lot easier to get 2X ~ 4X on $125K in sales than it would be on $1 million. Doable, just harder.
    The manufacturing business plan needs to address how the capacity to handle this growth will be achieved: extra shift, added machine capacity (capital and facility cost), farm out the work, etc. Oh and how will you finance this.
    Keep in close contact with your banker so you can show you’ll need a larger credit line to handle the increased volume. Keep this person informed about your success and that you are at or ahead of plan … even if you aren’t asking for money … yet! Build their confidence in you and you plans. They may even ask if you need more money for expansion. They want to make loans to good risks, so be a good client and keep that person informed.
    Also learn at what point/employee levels that various state and Federal laws will start to apply to you. When you hit these points there will be additional rules and reporting requirements on you. In that sense there is a “penalty” for growing. Also include in your cost expansions the costs of supervisors which you’ll need when you aren’t there and especially if you go multi-shift.
    Folks tend to over-estimate how much time a machine/worker actually is used during a shift. Let’s say you are working 10-12 hour shifts. In lean manufacturing you have to figure out what each step of the processes through-put is so everything matches up correctly in the right ratios. Let’s just take something easy like someone at a sewing machine. Estimate or observe (to get actuals) the following small little time eaters that add up:
    • Shift start time. How long from signing in until they actually start producing output? You may be able to require them to be at their work stations at start time but if they do any work they get paid from that point on. This is well settled labor law.
    • Start of shift briefing by lead, either as a group or individual. Very important at shift change-overs
    • Pre-start Operator maintenance time and equipment check time? If you aren’t doing this you are seriously messing up and will have high unscheduled equipment failures and costs which will ripple through you production line.
    • Work breaks: federal and state law required
    • Lunch breaks: federal and state laws required
    • Restroom breaks
    • Employee absent. Very ill but at work is less efficient – and spreads the cold Is there a trained back-up for every person, if not you are flirting with a single point failure that shuts everything down.
    • Set-up change for new garment style: new thread, attachments, familiarity, etc.
    • Awaiting next batch in queue
    • Clean up during work and end of shift clean up, etc.
    Basically these are all basic things whether you are Lean or not. But some items are really focused on in Lean operations (and is why automation is used so much). People unfamiliar with manufacturing process management forget to deduct all of this time from the production time available.
    But one you’ve reached your initial one shift capacity you may be able to double shift and maybe get a 90% bump in capacity. It won’t double, things that are easily available during the day aren’t at 03:30 and shift changeovers also eat up time.
    I absolutely agree that a retail store is a separate business and needs a separate business plan (in fact it should be formed as a separate legal entity. It requires separate skill sets. Don’t let one business drag the other down. Keep totally separate books, lines of credit, etc., you may at some point have to make a business decision to cut it lose.


  5. Analyzing business plans pt.2

    Based on the comments from visitors to part one of this series, I realize I should have I recommended that you read Factoring invoices: financing a fashion line and Financing fashion: 10 mistakes designers make as well as part one…

  6. Analyzing business plans pt.3

    Before I get into the content of part three, I want to make it clear that those of us who review a lot of plans, know that the primary reason that people send them to us, is that they hope…

  7. Analyzing business plans pt.4

    Catch up with parts one, two and three as needed; the next section of the plan that we come to is Industry Trends. Again, this is something you have to put in a traditional business plan but as I mentioned…

  8. Jovon says:

    I just had a general question relating to price of clothing and how much I should look to make and how much to pay my designer.

    I came into some extra money. My cousin has been sketching designs for about a year or year and a half now. Last year, I took a look at her filled to capacity 3 ring binder, and when I saw the designs my first words were “you need to be doing something with these.” Well, I decided to patent the name and begin the line with my extra change. My question is what percentage should she receive being the one who designs the clothes and my percentage being the C.E.O./founder of the clothing company.

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