My aim here is to provide some insight into what makes business plans fundable.
My views are based on experiences over the years when I have been asked to review business plans. I have also been asked to write
business plans – this I do not do. The reason for not wanting to do business plans is that the most important person involved - the owner - should do it themselves.
Sadly, the main reason that people want business plans prepared is that they have been asked for one – usually by a bank. What makes this so sad is the total ignorance people display of the need to plan ahead – and this when they will often be asked to put all of their assets on the line.
The views I put forward below apply to businesses. You will see that they consist mainly of questions that need to be answered.
What is a business? A business is something you can sell.
If you’re a one-person consulting practice this is not something you can sell. If you’re an electrician with one vehicle and a helper this is not something you can sell. If you’re an electrician who has built up to having 20 electricians working for you, fleet of vehicles, a well known name and an established base of customers this is something you can sell.
So businesses therefore are concerns that are saleable.
What should appear in your business plan – and what do you personally need to demonstrate when dealing with funders?
- A one or two sentence statement of your vision for your business.
- A clear statement of your unique offer. What makes it different, what makes it better than current solutions on offer by competitors?
You also need to demonstrate a good knowledge of the overall market and a clearly defined target market segment.
- Who are your potential customers?
- Why they would want, need or desire your products?
- Where are they situated?
You also need to need to clearly explain how you will market your products.
- What will your pricing be?
- What will your marketing message be?
- How will you get the message out?
- What does your target demographic read, watch or listen to frequently?
- What steps will you take to direct potential customers to you website?
- Do you have a Social Media plan?
You also need to show what the demand for you product will be and how you arrived at your potential sales figures. You also need to give details of the competition - remember that competition can take the form of substitute products. You need to clearly demonstrate a comprehensive knowledge of the domain in which your business will be operating.
- What is your estimate of the total demand for your type of product in the market?
- Is your target market local, province wide, national or the whole of Southern Africa?
- How long will it take for you to reach a break-even sales level and then how long it will take to reach a level of profitability that will make your investment, and that of others, worthwhile?
- Who will the competition be? How will they react to you entry into the market?
- Are they likely to engage in a short-term price-war to prevent you from gaining traction in the market?
- Is the market already close to saturation?
- Is the demand for products booming or in decline?
Who and what you are as a person will also be closely examined by funders – be they potential investors or banks. These are the things that will be looked at by them:
- Integrity – in this regard your total story needs to gel. If you are not totally open and people see gaps in your story they may conclude that you are not being honest with them.
- Passion – you need to convey an enthusiasm which is infectious.
- Experience – do you have the relevant knowledge of the product (and the uses to which they will be put), do you know the market (potential customers and prices). Have you held a management position that will enable you to run the business?
- Knowledge of the domain in which your business will be operating – see above.
- Skills – apart from management skills what are your other skills. Are you a ‘techie’ who will need a good marketer to get the products out there – or are you a sales person that needs the support of ‘techies?
- Leadership – while you may have invented ‘the better mousetrap’ to you have the leadership skills to lead the team that will help you grow the business.
- Commitment – are you totally committed to making the business succeed? Is this demonstrated by your having the willingness to put all the money you have into the capital of the business. If it is a loan you require are you willing (and will your spouse) be willing to sign personal guarantees that could lead to your losing all of you personal assets in the event of the business failing.
- Vision – Do you have a clear vision for, not only your business, but also the industry within which it will operate?
- Realism – Is your vision tempered by realism - particularly as far as your sales and cash-flow forecasts are concerned.
- ‘Coachability’ – Investors in smaller businesses often want to participate in the overall guidance of the business. They can often play a valuable role in making introductions to useful contacts and giving the benefit of their experience and business acumen. If you come across as an arrogant know it all they may shy away from investing. After all, the key thing they are investing in is you.
You can’t do everything and certainly can’t grow a sustainable business on your own.
A carefully selected team is crucial to the success of a business. In choosing the team make sure that if you regards yourself as an A you get A+ people on you team. You need to be the stupidest person on the room. Managing by asking questions is the best way to manage. No family members should be part of the team or ever be employed by your business – none ever even if they’re students who need a vac job.
Never be hasty in making team members shareholders or even directors - marital divorces can be a traumatic processes but business ‘divorces’ can be as bad and often lead to the collapse of businesses.
- Accounting and finance: Do not get your spouse to ‘do your books” at home - or any other family member for that matter. Do not engage the services of some small bookkeeping service. You need more than a bookkeeper. Engage the services of a well known firm of auditors who have a small-business department. They can also do the audit which will give more credibility to your financial statements should you at some time in the future need to raise more funding.
- Legal. Find a firm of attorneys that has a commercial department. Get them to review your business plan to see if they see any potential problem areas. You would also need them to review the terms of any funding you receive particularly from investors who would become shareholders. How shareholders will be able to exit from the business at some stage in the future should be explicitly deal with and contractually agreed to. If you do need legal assistance in the future they would already know you and your business.
- Human Resource Management. Employing people can be a minefield. Make use of a consultant that can advise you on your employment agreements and also advise you if problems occur with staff including your management team.
- IT. If you aren’t running an IT business get outside help. Don’t let enthusiastic people in your business loose on your IT systems.
The Financial Plan
This will consist of three documents:
- Projected Income Statements
- Cash-flow forecasts
- Projected Balance Sheets
These should show the first year on a monthly basis, the second year on a quarterly basis and annual figures for the third year. These will be your business goals set out in financial formats. A narrative in the form of appendices should accompany these projected figures.
Broadly speaking Income Statements show: Sales – Cost of Sales = Gross Profit – Expenses = Net Profit before interest and tax – Interest = Net Profit before tax - tax = retained profit.
The narrative needs to explain how all of the numbers were arrived at. Entrepreneurs tend to be over enthusiastic about the top line (Sales) and underestimate the costs and expenses. If you do this you will lose credibility with potential investors or lenders.
This is the most crucial financial document you will prepare. It will be something that when your business begins operating you should look at every day. Cash-flow is the oxygen of the business – if it stops flowing, the business dies. And the crying starts.
In preparing the cash-flow forecast numbers from the Income Statement will be transferred to the Cash-flow forecast showing when the cash in respect of credit sales made will actually be received. It will also show when payments for goods purchased, expenses incurred, instalments on fixed assets (equipment, furniture and vehicles), interest on overdraft, and tax will need to be made.
Do not be over optimistic about receipts. A substantial sale made to a large company to which you have given 60-day terms could be extremely problematic if they pay you after 63 days. That is, after your month end which is when you really need the money salaries and rent. This is why you need you foster a close relationship with your bank. Give them your business plan even if you will not be initially be borrowing from them – you never know when you might need to. If you do have any very large payments due at a month end see you bank at the beginning of the month to alert them to the possibility that you may need short-term assistance over the month end.
If you have your financial projections prepared by someone else ensure that you understand them and can answer any questions that may be asked about them.
Projected Balance Sheets
These will be derived from the Projected Income Statements and Cash-Flow Forecasts and will show the future financial structure of you business.
I recommend that you add useful percentages and ratios to the bottom of each set of financial statements. On the Income Statement these could include:
- The Gross Profit as a percentage of sales
- The Net Profit as a percentage of Sales
- Any other useful percentages
On the Balance Sheet you could show:
- The Current Ratio i.e. the ratio between the Current Assets and Current Liabilities.
- The Debtors Days i.e. the number of days that, on average, you believe it will take your customers to pay you.
- Creditors Days i.e. the number of days, on average, you will take to pay your suppliers.
- Inventory Turnover i.e. how many times you are turning your inventory – this number needs to be as low as possible. Low inventory turnover incurs holding costs and reduces profits.
If you are not familiar with accounting and financial terminology you need to take steps that will help you understand them. It has been said that accounting is the language of business. You need to be financially literate. Read books or attend a ‘Finance for Non-Financial Managers’ workshop.
Starting a business can be exciting but at the same time very challenging. There are many potential pitfalls.
Show potential investors or lender that you have taken a professional approach.
In preparation for questions you should also do a SWOT analysis. If you’re not familiar with how to do this there are many examples on the web.
It would also be useful to examine where your business fits into the industry it is entering and any potential risks you may be facing by the forces acting on the industry. Have a look at Michael Porter’s ‘Five Forces”. See: http://www.quickmba.com/strategy/porter.shtml
If you are going to make a PowerPoint presentation to investors do not hand out the printed version of your Business Plan before the presentation – people will spend their time paging back and forth and distracting and distracting you. The font size you use in PowerPoint should not be less than 30 point. You don’t want to clutter each slide with detail. People will start reading and they can read faster than you can talk. You want your audience to focus on you and your words – and see your enthusiasm.
Remember that the most important person you are preparing your Business Plan is for yourself.
If you’re not already following me on Twitter I’m @Mel_BrooksSA