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 we will be interested in partnering with them. I can’t tell you how many times somebody has offered me a piece of the business in exchange for services. Some entrepreneurs envision shopping the plan around to enough parties that they can staff the project (there are some real slick operators with impressive credentials doing this). A business plan is not a lure so don’t use them that way. The reason they don’t work as lures is because most of the time, plans are things that a business developer can figure out how to do on their own so there’s no reason for them to partner with you. Now if you had tooling, prototypes and samples, I could see it, that’d be an asset but if you don’t have protos and samples, nobody needs you. Therefore, nobody -I repeat- nobody is going to give you money to make prototypes and samples no matter how good your idea is. So, call me despotic and hard headed, I wouldn’t bother somebody with a business plan until you had proofs of tangible investment in your own idea. Besides, nobody will really know what you’re describing anyway.

[climbs down from soapbox]

In continuation of analyzing a business plan -see the complete list of entries at close- as needed. Below are the mission statement and keys of success. I’m going to refrain from commenting on these because the issues they raise will be discussed more appropriately elsewhere. Well, other than to say that I’d describe the difference between haute couture and urban fashion as a chasm, not a gap.

Mission: The label’s mission is to produce edgy designer clothing, bridging the gap between urban fashion and haute couture. Created with the trend setter in mind, we will thrive by delivering quality products and innovative fashion trends to meet the needs of the individual mind.

Keys to Success
* Recruitment of highly skilled designers with an eye for upcoming trends.
* Improvement of retail sales margins through the reduction of per unit costs.
* Ability to offer collections on a quarterly basis
* Establishing a reputable brand name through networking with fashion related buyers, boutiques, retailers and press.

It’s not until you get to the subheading of Products and Price that you realize there are some real problems with this plan.

Products and Price: During the first year of operations our product offering will consist of designer Jeans, eveningwear, outerwear, and T-shirts. Our products will fall within the price range of $30-$100.

The big problem is the variety of product types. This is too many. You cannot, cannot get the design, patterning, sourcing, marketing, selling and production down for multiple styles in four different product categories in your first year. It’s impossible. At the very least you will need four different kinds of contractors and supply sources to say nothing of having to provide the marketing and sales support that a line like that would need. You can’t sell eveningwear and t-shirts in the same market. I’ve never, in my life, seen a manufacturer that made jeans, t-shirts and evening dresses in the same plant. It is an enormous challenge just to manage one kind of product, much less four different kinds. The complexity boggles the mind. Now, whenever I tell anyone this, they just don’t get it. They think that if they have enough money, they can get it done. You can’t hire your way into producing four lines.

If birthing a design business is like being pregnant for nine months and having a baby, trying to produce four different product lines would be like being pregnant with quadruplets but having to be at your best and on your game, and not flat on your back for the last 4 months, like you would be in real life. You can’t hire your way out of the problem -even if you could get the money- because that would be like trying to hire 9 women to produce a baby in a month. Or rather, four babies in a month. You can’t spend your way out of it. You don’t have the infrastructure or experience. This would be an enormous challenge for an existing venture, much less a start up.

There is another problem with the section too but that won’t become evident until we get to the spreadsheet portion -the costing- for the line. Briefly, the product line described as “eveningwear” is wholesaling for $20 so I can only imagine that the author’s definition of “eveningwear” is a lot different than mine. Eveningwear sells for a lot more than $20.

Next section is a blurb of ownership (not reproduced); the venture is privately held but planning to go public.

Next the author describes his location and distribution (not reproduced). I have a question for all of you, is it okay these days to say that you’re home based? Personally, I would have omitted the whole paragraph.

Next the author presents his credentials the summary of which is that he’s no dumb bunny. He’s got a advanced degree, one year in finance, six years in sales, mostly in organizing social events. He also includes the credentials of a partner. She has a degree in visual arts and is pursuing another in business administration. Her qualifications are listed as a successful modeling career and a love of fashion. Note to the author: watch the resume padding. These days, if somebody is that successful, I should be able to find them on Google -and I can find the names of my cats on Google.

Next is the Organizational Structure. The key duties and responsibilities of each partner are listed as follows:

Organizational Structure: Owner will be responsible for business operations, finances, and promotions functions. His duties will include:

  • The oversight of manufacturing operations, production schedules and targets
  • The implementation of plans for efficient use of materials, and labor
  • The financial performance analysis such as, billing, budget, payroll, accounts payable/receivable, and taxes.
  • The execution promotional retail incentives

Owner’s partner will be responsible for marketing, advertising, and public relations. Her duties will include:

  • The forecast of product demand for our company and its competitors
  • The identification of emerging trends to utilize potential markets
  • The development of pricing strategies
  • The assessment and execution of advertisement channel
  • The implementation of publicity programs to our target audience.

Both individuals will jointly manage sales. Their duties will involve assigning sales territories, setting goals, and establishing training programs.

To me, the two above paragraphs just sounded like a lot of goobly-gook but that’s just me. Marketing language just doesn’t mean anything to me. I can’t process it because it’s not hard or tangible enough. Reading the above is like word soup. Either that or I’m tempted to play Bullshit Bingo. No, really, it didn’t seem to me that the author is really saying anything of substance here. I gather there is a lot of redundancy and duplication of effort -mostly sales and marketing related- with very little emphasis on operations. In fact, tragically, this plan only spends 1 paragraph on manufacturing and that comes on the very last page. Actually, it is the ending paragraph of the document so I fear the author has commensurately designated it’s importance and significance. I hope not.

The next section of the document is an analysis of the industry, traditional in business plans.

Industry Overview: The “designer fashion” industry has emerged from two separate parts of the industry: couture and commercial fashion. Couture is the fabrication of highly fashionable, custom-made clothing, targeting the high socioeconomic sector of the community. Commercial fashion segment is the mass production of trendy clothing. These firms manage a mix of collections, focusing on different segments of the market. The success of these companies depends on understanding a particular sector of the market, and focusing on producing collections that address their needs; and maintaining brand awareness to retaining market position.

In real life, I just skip over the above. What does this mean? Then the plan proceeds to a section entitled “Industry Size” which is when things get sticky. This is when most plans get into projections and projections mean nothing. Really. Just because you can define the size of a given target market doesn’t mean they’re going to give their money to you. Clothes aren’t ipods, for example. You can extrapolate plus or minus, how many 13-17 year olds are going to buy an ipod but an ipod is not a size medium stretch velvet purple top with puffy sleeves. The only people who can attempt to forecast their market size for a new product line are ventures who already have presence and experience in the market. In other words, brands that already have name recognition on some level or in some way. Like Ralph Lauren adding a new label.They also have experience and infrastructure. In a traditional business plan I know you have to put something in this section but it would be hard to write something that didn’t look stupid so I don’t know what you should do. You have to put in something. I just don’t know what.

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. Dave says:

    My Plan includes a matrix of six indentifable retail competitors and includes their strengths and weaknesses and what my model could exploit and what it couldn’t in the niche I’m seeking to develop.

    I wanted it clear to me that the niche existed and what I could reasonably target or not target from the existing competitors.

    My competitive research was pretty basic: hours sitting where I and some supportive friends, at other locations, watched how many people went into a location: day, time, purchased something (obviously didn’t know value of pruchases but small, medium, large bag.) Repeated a number of times over a period of a year: weekdays, weekends, days and evenings. I also made notes on my impression of persons entering: age, sex, how dressed, how long they were there, with or without someone.

    This at least made for a reasonable SWAG -Scientifc Wild A** Guess.

    This method probably only relevanct to those seeking a retail site. For publicly traded companies I could get some idea as to sales per store – but my “surveys” did give me insight into the market, busy and slack times, as well as to who. I also did this for a few stores that sold items I thought might have similiar customer overlap.

    It basically just cost me some time, a sore tush, and effort … plus a few meals for the friends. But my plan’s notes do have supporting data, limited as it is for my assumptions.

  2. Andrea says:

    I have been very interested in this series of posts. As a self proclaimed business geek, I see a lot of flaws with this plan and mostly agree with Kathleens assessments. I think there is a disconnect happening here because the “industry” as it is presented to us as consumers are LLC’s, Corporations, etc with a big business models attached. You see this and think, “oh, this is how to do it”…and no one stops you (unless you come here, that is). In reality, if I was counseling this person, I would send the whole thing to the round file (no offense meant here, you should see my first plan!)

    The plan should be based around 3 concepts

    1) your product…first and foremost
    2) Marketing (how will you get the word out)
    2) Financials, financials, financials (funding, cash flow, projections, costing, costing and more costing)

    All the market research in the world may not help you have a better business until you’ve tested your product. Philosophically you need to think of a plan as a road map to get from point a to point b. If you want to know about how things are sold on the sales floor, get a job at a store for 3 months, you’ll be glad you did!

    It is clear to me that the author is not familiar with this industry at all, which is not bad, but the plan needs to reflect how these business owners intend to get the education required to succeed.

    One last thing I would like to comment on about this plan is the organizational structure:

    Finance is one area
    Product Development is another
    Promotions, Advertising, and Sales are all grouped together
    Pricing strategies belong with finance and product development
    Billing, taxes, payroll and other day to day accounting activities should belong to a bookkeeper and accountant(not because you can’t, but because it is not a good use of your time)

    That all said, I wish these DE’s the best of luck, and am looking forward to the next post!


  3. I have to disagree with andrea visavis the most important part of a business plan.

    The most important part are the people who are going to implement it. Are the competant? Can they profit from the transient opportunities of life?

    I personally believe that the market research is what makes it worth while to make the better widget. If you invent the best plantain peeler ever you’re still going to spend years trying to sell your product before somebody gets you featured in the new york times and you actually make some money. The market research helps you identify how much that marketing is going to cost you before you make a sale.

    I think that financial projections should focus, on high risk businesses like ours, on how much you’re going to bleed, and how long the bleeding can go on before you are cash flow positive.

  4. Kathleen says:

    The market research helps you identify how much that marketing is going to cost you before you make a sale.

    I think that financial projections should focus, on high risk businesses like ours, on how much you’re going to bleed, and how long the bleeding can go on before you are cash flow positive.

    I don’t agree with any of this. High risk? Sure, if you’re operating with a push model. Then everything is risky, guaranteed. But why do it that way?
    1. Why incur worry and expense with the research? Rather, make up some samples and show those around. Research or no research, if the product is solid, it’ll sell. You don’t have much money in it at this point. This bares pale comparison to mr plaintain.

    2. I don’t agree this is a high risk business. Rather, it’s quite the opposite. Now, if you’ve gone out and had a thousand or more produced in advance of orders, yeah, that’s a big risk, but who does it that way? You’re not supposed to because it’s risky. The smart way to do it is producing to order. If you cut to order, your only liability is immediate order size and that’s only a liability if somebody goes under.
    3. If you’re producing to order, you should be cash flow positive (at least on paper) right away. Now, if you want to make up oodles of something and have lots of inventory, yeah, that is risky. I don’t recommend anybody do it that way. Those people bleed from every orifice. I don’t agree at all that this is a high risk business, not if you know what you’re doing which is the point of the business plan series in the first place. If you’re looking for the *one deal* that’ll pay-off and make your mark, that’s dicey because the order may never come. In real life, most companies grow order by order, slowly. I think it’s better that way.

  5. I guess we disagree about the risk. It seems that many people doing business plans for their DE business intend to quit their jobs to run their DE businesses. That’s the definition of high risk to me.

    1) Why spend the time and money making a set of samples before you actually know if the market exists for your product? I fail to understand your point about the plantain guy…he has a significant market and has the only real tool for it.

    2) The guy with the plantain did exactly what you recommend: he made a model of it and tried to sell it. From beginning to when it turned into a real business, the plantain guy spent less than $15,000. That’s a lot less than a lot of the DE’s you’re talking about are planning to spend. Look, no offense intended, but when I took samples to stores, they were “like very nice, we’ll see you at a trade show.” I realize that fashion DE’s have it a bit easier, but I think that most –if not all stores– want to see production deliverables before they are willing to make an order.

    3) How can you be cash flow positive right away? Again, I disagree: there is no “on paper”, there is money in the bank and a lack therof. You buy your materials, pay for the production, and about a month later you get paid. That’s not cash flow positive, and that’s your best case scenario.

    Fashion DE’s compete in one of the most competitive businesses in the world. They compete with the largest companies in the world and the smallest. In my personal opinion, sitting in my office three blocks from FIT in New York, for somebody to say that being a fashion DE is not a high risk business is either lying to themselves or plain wrong.

    I think that Kathleen’s opinions and perspectives are elucidating, interesting and fun; I just disagree with her on this one.

  6. Kathleen says:

    Nobody said it wasn’t a risk but there are ways to mitigate risk. And who said they quit their jobs? That’s not risky, that’s insanity. Who does that? I don’t know any DEs doing that. Likewise, there’s such a thing as ROI; I don’t consider one month to be much of a lag. That’s standard. I mean, how’s that any different from paying a monthly light bill or mortgage -or getting a regular paycheck for that matter? Just as you pay monthly, you get monthly. One month is standard turn around. And actually, I advise DEs to get paid at delivery so they shouldn’t have to wait a month with unestablished accounts. Once accounts are proven, fine, extend 30 day terms.

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