A very successful client of mine was considering expanding by creating a stand-alone employment agency. The business was related only tangentially to their current work, and reaction among some decision-makers in the company was mixed: some loved it, and some hated it. Still, the owner was unfazed by the doubters. He noted that currently, the company needed to hire many types of workers regularly, and had a good deal of experience in cultivating personal and professional relationships with a variety of part-time workers and independent contractors. I said “Ok, you’re pretty confident. Let’s make a preliminary business plan and see how things look.”
The initial steps involved clarifying the concept, the business model, the marketing strategy and other important elements. Things hit a wall when we got to the financial component of the business plan. We identified every source of revenue and every expense for at least the first year, and what specific amounts we could expect for each, based on market research, experience and common sense. Item by item, we meticulously developed and double-checked estimates. The results were not good.
It turned out, in order to break even–the most rudimentary goal for any new venture–the company would need to meet very unrealistic revenue goals. This was in large part because of the steep costs required by doing the project at the right size and level of quality demanded by my client. The biggest culprits were labor, office and travel expenses. And all of this was before taxes. There was really no way around these outlays for the kind of quality and the size of the enterprise required by my client.
One person involved in the discussion remarked there weren’t enough jobs available in the entire city to produce the needed total revenue! There was unquestionably a market for the kind of employment agency envisioned, but it was dominated by a dozen or so massive players, who feasted on the best and most lucrative opportunities. On the lower end were a vast number of small-time, barely profitable operations, who suffered from little to no name recognition, very low barriers to entry, and a significant number of fly-by-night fraudsters (who made potential clients hesitant to deal with little-known firms).
When it became clear that my client did not have the resources to fund this project, it was shelved. A bad decision was avoided, and the firm was able to refocus on what it did best. Sometimes the best action to take is no action at all. Making the effort to develop a business plan allowed my client to clearly see what the proposal required and what could be expected. A business plan will help you to better focus your efforts, better understand your market, and what it will take for your enterprise to succeed.
