Your business plan is crucial

A business plan is essential for your enterprise. Whether your business is starting up or established, the business plan is the roadmap for future development. It is a key document when you are looking for business funding - whether applying for a simple overdraft or looking for new investment or capital.

This guide explains how to present your business plan to a variety of people, including potential investors, shareholders and your bank.

The business plan helps a variety of people, including potential investors, shareholders and your bank to understand your vision and goals for the business, how you are going to spend the invested or borrowed money, and how this will benefit the business and potential funding providers. It is the first source of information that most providers of funding see about a start-up company and is crucial in getting their attention and interest. This guide sets out the key elements that they will be looking for.

The elements

Potential investors and lenders will examine your business plan closely to determine whether to risk their money.

There is no standard format but most plans include:

• An executive summary highlighting the main points - to catch people’s attention.
• Details of key personnel with an organisational chart showing individual responsibilities.
• Details of competitors and how your product or service fits into the market - eg who your potential customers are and why you think they will buy your product or service.
• Your marketing plan - how you are going to get your product or service in front of potential customers, together with any assumptions made when setting your targets.
• Financial information - eg key ratios. These can be used to compare your business’ performance against industry benchmarks. It’s also a good idea to give details of any major expenditure you’ve made on long-term assets and explain the reasons behind any changes in working capital items, such as stock, debtors and creditors. Remember to include balance sheet and profit and loss account details. Many lenders ask for three years’ financial information. If this is not available, supply details about trading to date.
• How you will manage credit, expenditure, stock planning and control, and debtors and creditors.

When seeking funding, include:

• A cashflow forecast indicating the amount of funding you need and why. For a start up include estimates of how much finance you will need for two to three years or until you start to make a profit. Indicate contingency funds that might be needed for rough patches. This is usually between 10 and 20 per cent of the total funding requirement.
• Financial forecasts for a three to five year period. Try to present this information in the same way as historical financial information, so that straightforward comparisons can be made.
• How a loan will be repaid, how investors can get their money back, and when.

Target audience

A business plan serves a number of purposes and you may have to modify information depending on your target audience.

Your bank will be interested in:

• how you intend to repay a loan or overdraft
• what you are going to do with the money
• how the loan will help the business to grow
• what other loan or debt commitments you have

Most lenders operate a credit-scoring system. Make sure you give up-to-date and relevant information. A good relationship with your bank manager will not influence the credit score - the manager may have discretion to negotiate terms but not to change the decision itself.

Tell potential investors about:

• what you are going to do with the money
• when and how you are going to pay it back
• the expected return
• your other sources of funding
• your management’s track record

Include a detailed forecast of your profits and cashflow.

Indicate to shareholders:

• the prospects for the share price
• how they may be able to sell their shares
• what dividend they can expect on their shares
• your management’s track record
• what say they might have in the business

Demonstrate how they can exit with positive returns within three to five years.

Many businesses with growth potential fail to raise funds because they lack investment readiness, ie they do not understand the expectations of investors, cannot turn proposals into attractive opportunities or are unaware of financing sources.

Common reasons why business plans and loan applications fail include:

• a weak management team
• a flawed marketing plan
• unrealistic forecasts
• incomplete and poor presentations

Commitment to the business

If you want to attract outside funding, it is important to invest your own money in your business. If you are not prepared to risk your own capital a lender is unlikely to want to risk theirs. If you are looking for funds, the business plan needs to show the extent to which you are committing your own resources. It should list all the cash and assets that you have put into the business. You can demonstrate strong commitment to your business by:

• reinvesting profits from the business rather than taking dividends yourself
• putting in more cash of your own
• using personal borrowings (eg a mortgage) and guarantees to raise funds
• finding funds from family, friends and existing investors

It is always helpful to detail the backing you already have from banks and other investors - especially independent investors. Remember that money attracts money. The more backers you have, the easier it is to attract new ones.

Because your commitment and track record in meeting your obligations are so important, lenders and investors will want to know your personal credit history. Credit references will be taken up for sole traders and each partner in a partnership. A credit reference agency will discover if you, or any partner or co-director of the business, have a poor credit history or county court judgments. If you have poor credit rating, use the notes supporting the business plan to state the facts and give your own version of how the poor credit history arose. This is much better than having the new investor find out without any explanation. You should also state what you are doing to repair your credit history.

Key considerations

Your business plan is a tool you can use to attract new funds or use as a strategy document. Give yourself the best chance of success by following these suggestions.

Before presenting the plan ensure that you:

• check that the help you are applying for is still available - you may no longer qualify
• back up any assumptions in the plan with thorough research
• find out your own credit rating by applying to Experian or Equifax for your credit file - a small charge is payable
• get someone to read the plan to spot spelling and typing errors, and to ensure that it makes logical sense

Write your plan in a way that demonstrates your commitment to the business. Give it a professional feel by limiting the use of graphics, colours and font types. Above all, make sure that your plan is always honest and realistic.

Things to avoid:

• Being overly ambitious - make sure you can justify any assumptions or projections.
• Ignoring financial difficulties - warn your bank or lender if you anticipate that you may not be able to meet a repayment. There is every chance you will be able to come to some arrangement.
• Failing to devise and implement effective cashflow arrangements, eg. have clear procedures for chasing up any accounts receivable.

Once you have presented the plan, ensure you review and revise it as your business grows. If you are refused investment or a loan, take the criticism on board and consider how you might improve the plan.

Tags: business plan

Making a budget for a home business start-up is more of an art than it is a science. No matter how exactly you think you’ve pinned down all your expenses, it’s guaranteed that more will appear that you either didn’t think of or just couldn’t have predicted. That’s why you need to make sure that you always plan for every possible expense.

Things Break

Remember that any equipment you buy can go wrong, no matter how expensive or high-quality it was (this is especially true of anything IT-related!) When things break, you probably won’t need to buy a new one, but you’ll at least have to wait for the manufacturer to replace what broke. This can lead to days of lost or less-efficient business, and cost you money. Budget for equipment failures.

People are Unpredictable

When you hire staff, you have no way of knowing that they aren’t going to let you down. You might have worked out that it takes $200 to train one new staff member, but what do you do when that newly-trained staff member quits and moves to France after three weeks at the job? You’ve got no choice but to train someone else and take the loss. Budget for staff turnover.

The World is Against You

Or at least it can sometimes feel that way. Just when you’ve got everything perfect, someone sets up a little construction site next door, and drives your business away. Or maybe it rains for a few weeks, meaning that there’s just no demand for your bouncy castle hire business. Whatever, you need to budget for times when you’ve got no customers – and make sure you have something else to be getting on with in the meantime.

Customers are Out to Get You

‘The customer is always right’, right? Well, yes, but their ‘rightness’ can sure cost you a lot of money. You have to be prepared to take huge losses to pay off complaining customers. Remember that one unhappy customer can undo hundreds of dollars worth of marketing efforts – once you make a customer unhappy, your options are to take a loss fixing the situation or to take an even bigger loss when they tell everyone how you didn’t. The only way to avoid this expense is to please all of the people all of the time, which just isn’t possible. Budget for unhappy customers.

Competitors Kick You When You’re Down

If one of your competitors spots a good opportunity to take some business from you, they won’t hesitate. You need to have a ‘war chest’ ready to make aggressive offers and marketing efforts, and be prepared to get into a full-scale price and advertising war with the competition. It’s massively frustrating to be in a position where your rivals are getting all your business simply because you already used up your marketing money for this month. Budget for war.

Double Your Budget

Whatever happens, remember that under-budgeting is the worst mistake you can make. It’s known as ‘under-capitalization’, and is generally thought of as one of the quickest ways to kill a business – anyone who might be willing to give you finance will just think you’re a fool if you’ve under-capitalized your business, and might even refuse to lend to you.

Most home businesses budget only a few thousand dollars for their expenses (if they even make a budget), thinking that they already have everything they need. People don’t realize how quickly little costs like having some business cards made or getting your suit dry-cleaned start to add up. This doesn’t apply for other kinds of business, but if you’re like 99% of home business starters, you really ought to double your budget. If you doubt me, start adding up all your ‘little’ expenses over a year, and see what happens.

Budgeting for every expense in your initial plans shows that you’re not the kind of person who thinks that everything’s going to go right for them just because they’re so great – instead, you’re a practical businessperson who knows that anything that could go wrong probably will, and you plan to make a profit anyway. There is a difference, after all, between arrogance and cool-headed determination, and it’s one that the people with the money want to see.

Tags: business plan

So you’ve reached that stage where you’re ready to get your home business started in every way except one: you need money. Whether it comes from a loan or from investors doesn’t really make too much difference, since there’s one thing that they all need to see before they’ll give you a cent. That thing is your business plan.

What’s a Business Plan?

Think of your business plan as being like a list of answers to questions that people might have about your home business. You will not get outside funding without one, because the people giving you the funding want to know that you’ve thought through what you’re doing. A business plan says to them “I’ve considered this from every angle, and here’s what I’ve come up with”.

But what should your business plan include?

1. What is Your Service? This is the first question every business plan should answer. Just what is it that you plan to do? Tell them which industry you’re going to be in, and why you’ve chosen it.
2. Who are Your Customers? Once you know what you do, the next thing you need to know is who you’re going to be doing it for, and so that’s the next thing that should be written on the business plan. You should also include your area here.
3. What Makes You Different? You need to say what the ‘key factors’ are that make your business different to other businesses in its sector. What is it that you’re planning to do to make the business succeed?
4. What are Your Expenses? Your start-up expenses include any equipment that you need before you can get up-and-running, while your day-to-day expenses are staff costs and supplies.

An Example:

Note that this is a very short and sweet business plan: in real life, each one of these sections would be closer to a page in length. That said, it is a bad idea to go into too much detail in your plan. You’re not trying to tell the reader everything, just the basics of the business and why they should give you money to help you build it. Always focus on profit.

The Catering & Cake Co.

1. Nature of Business: The business will be a home-based catering company, producing luxury food for special occasions such as birthdays and weddings. We will provide a comprehensive catering service, with a special line in cakes, which have a higher profit margin than other foods.
2. Target Market: Our catering business will be aimed at middle-market customers who want luxury catering but still care about the cost. To begin with, our target area is within a ten-mile radius of Any-town, to include the affluent area of Other-town.
3. Key Factors: We will use industrial-quality ingredients but provide bespoke-quality design and service. This will allow us to provide food that looks excellent and tastes acceptable, while keeping costs low.
4. Expenses: Since I will be using my kitchen for the business and making the food myself, there are only two real expenses: the one-off cost of a larger cooker, and then the day-to-day cost supplies. A suppliers’ letter listing prices is attached – enquiries with others in the catering industry have shown this supplier to be the best value for my business.

To finish it all off, you should include a breakdown of projected profit and loss per month for the first year of the business, in the form of a graph. You would work this out by working out a reasonable repayment of any one-off expenses and adding this repayment to the day-to-day expenses, before graphing day-to-day expenses against projected sales. Your business plan should show you making enough of a profit each month to live – if you doesn’t, then it will be considered unfeasible by anyone you show it to.

Find Real Business Plans

The best way to figure out the dos and don’ts of business plans is to find real ones – they’re out there on the Internet. Once you’ve seen a few, you can start to get some idea of how much work is going to be involved to write one of your own. Remember, until your business exists for real, the business plan is the only tool you have to show anyone how great it’s going to be.

Tags: business plan