Anatomy of a Business Plan
The Step-by-Step Guide to Building Your Business and Securing Your Company's Future
By Linda Pinson
Out Of Your Mind ... And Into The Marketplace Copyright © 2014 Linda Pinson
All rights reserved.
Business Plan Considerations
A well-written business plan will provide a pathway to profit for any new or existing business. Your business plan will also provide the documentation that a lender or investor requires if you find it necessary to seek outside funding sources for your business.
This chapter is designed to give you some background information and guidelines to consider prior to writing your business plan.
Why do you need a business plan? If you need access to additional capital, what does the lender or investor want to know? What are the key words that make your plan more effective? How do you develop an Exit Strategy? Where do the numbers come from in your financial plan? What is different about a business plan for a nonprofit organization? These questions will be addressed on the following pages.
[check] Why Do You Need a Business Plan?
[check] What Do Lenders and/or Investors Look For?
[check] The "Key" to Effective Writing
[check] Developing an Exit Strategy
[check] Developing Financial Assumptions
[check] Guide to Using this Book for a Nonprofit Plan
[check] Bonus: Steps to E-tailing
Why Do You Need a Business Plan?
Every business will benefit from the preparation of a carefully written business plan. There are two main benefits and an additional one if you do business internationally.
1. To serve as a guide for your business
The most important reason for writing a business plan is to develop a guide that you will follow throughout the lifetime of your business. The business plan is a blueprint of your business and will provide you with the tools to analyze your business and implement changes that will make your business more profitable. It will provide detailed information on all aspects of your company's past and current operations, as well as its projections for the next few years. Of course, new business owners have no history and will base the information in their plans on projections developed through current research of the industry. To be of value, your plan must be kept up-to-date. While plans presented to lenders must be bound, you may choose to keep your working copy of the plan in a loose-leaf binder. Then you may add current financial statements, updated rate sheets, recent marketing information, and other data as they become available.
2. As documentation for financing
A business plan is a requirement if you are planning to seek financing. If you are seeking capital, the business plan details how the desired investment or loan will further the company's goals and increase its profits. Every lender wants to know how you will maintain your cash flow and repay the loan (with interest) on a timely basis. Every investor also wants to know how his investment will improve the overall net worth of the company and help him to achieve his desired return on investment. You will have to detail how the money will be used and back up your figures with solid information such as market research, timing, estimates, etc. Lenders and investors have access to statistics that are considered normal for various industries, so be sure that your projections are reasonable.
3. To work in foreign markets
If you do business internationally, a business plan provides a standard means of evaluating your business potential in a foreign marketplace. More than ever before, world trade is essential to the health of the American economy and to the growth of most U.S. companies. No business today can afford to overlook the potential of international commerce brought about by changes in communications, technology, and transportation. The development of a business plan will demonstrate ways in which your business can compete in this global economy.
Take the time to write a clear, concise and winning business plan. The success of your business depends on it! One of the principal reasons for business failure is lack of planning. I firmly believe in the often repeated quotation:
"The business that fails to plan, plans to fail."
What Do Lenders and Investors Look For?
If you are looking for lenders or investors to provide debt or equity capital for your company, it is to your advantage to understand the elements that each would most want to see in a well-written business plan. If you are seeking debt capital from a traditional lender (banker), you will have to prove that you can repay the loan with interest. You will present your business plan to the loan officer who will in turn prepare the loan package and present it to the bank's loan committee for approval. Investors (or venture capitalists) become equity (ownership) partners in your company and have different expectations. They want to know that the money they are investing in your company will result in a specified return on the investment. You can increase your chances of success with lenders and investors by considering the following:
1. What is your credit history?
Whether it's a credit card, a car loan, a personal loan or a mortgage – lenders will want to know your credit risk level and will look at your credit score. The most widely used credit scores are FICO scores developed by Fair, Isaac based solely on information in consumer credit reports maintained at the credit reporting agencies. A FICO score considers payment history (tradelines and derogatory references), amounts owed, length of credit history, new credit and types of credit in use. Your credit influences the credit that's available to you, and the terms (interest rate, etc.) that lenders offer you. FICO scores are utilized by lenders to make millions of credit decisions every year. More information on credit scoring can be found online at www.myfico.com
In short, you will need to provide a credit history that demonstrates that you are a good risk. A past bankruptcy or a history of late payments will serve as a "red flag" and send out a warning signal that you may be a bad risk. Existing businesses will submit business financial history statements, copies of profit & loss statements, balance sheets and tax returns for previous years. If you are a new business, your personal financial history will be examined. The owners of your company will probably be required to submit personal balance sheets listing their assets. Copies of personal tax returns may also be requested. Lenders and investors frequently determine character based on prior business and/or personal financial performance.
2. What collateral do you have?
What assets do you have — and what are you willing to risk for the success of your business? You may be asked to use your home and other liquid assets such as CDs or other investments that qualify as collateral. Evaluation of collateral is generally at liquidation rate and the lender will establish the order of his right to claim and sell the collateral and the personal assets of guarantors or borrowers. The amount and type of collateral you provide shows your commitment to your company and removes risk on the part of the investor (your new equity partner) or the lender (the bank, etc. that is granting your loan request).
3. Can you meet the lender's or investor's financial goals?
Lenders and investors want to know that you appreciate their needs and that you have given consideration to your company's ability to fulfill their financial goals.
a. If you are seeking a lender
Your lender (banker) wants to know that your company can repay the loan plus interest and, for the period of the loan, maintain a positive cash flow that will allow you to continue to operate your business.
If the loan is to increase assets, any asset that you want to finance must last at least as long as the loan period. For example, you cannot get a five-year, $25,000 loan on a piece of electronic equipment that is expected to become obsolete within two years of the date of purchase. The asset should generate the repayment of funds. Show in your financial projections that the object of the loan will increase sales, increase efficiency, or cut costs and will, in turn, generate added revenue for repayment of the loan plus interest. If the loan is for working capital, show how the loan plus interest can be repaid through cash (liquidity), generally during the next year's full operating cycle.
b. If you are seeking an investor
Venture capitalists and other equity investors will frequently require that you provide them with an exit strategy. They will want to know where the business is ultimately heading. The venture capitalist firm is most concerned that the company has a high profit potential, that it is competitive, sustainable, and that it is something that they understand. They will want to see a financial plan that shows how the company will move toward its goals and produce the desired profit to be distributed to them under a predetermined agreement. As equity partners, investors have a say in how the company is operated. They will want to see a strong management team and will be the hardest to satisfy because they are putting their own funds at risk.
4. Is there a demand for your product or service?
Be prepared to show evidence that your product or service is well-received by your target market (your customers) and that the demand will be sustainable. You can demonstrate demand through a favorable sales history, accounts receivable information, or purchase orders. If you are a new service company or a business with a new product, show customer acceptance through test market results, questionnaire and survey data, and testimonials. To be valid, the responses must come from your target market and not from friends and family. Test market your product and get some evaluations. Ask people who have tried your products or utilized your services to write testimonial letters.
5. Do you have an experienced management team?
Business failure is, more often than not, due to management problems. It is a well-known fact that, in the 1990s, many technology companies went under – in spite of their state-of-the-art development skills – because they were sorely lacking when it came to management. Lenders and investors will undoubtedly take a close look at qualifications of the people who are running the business. Industry expertise is a definite plus, but management experience may be the defining factor for achieving profitability.
6. Have you established a proprietary position?
This means that you have secured your position in the market in some manner. It is important that there is something unique about your business and that you have protected this uniqueness in some way. This may be through copyright, trademark or patent. If you are located in a mall or shopping center, proprietary position might be established by working with the management to limit direct competition within a given radius of your store.
7. Are your projections realistic?
Lenders and investors will measure your projections against current industry standards available to them through various sources. Base your figures on your current market share. Explain your opportunities for growth and demonstrate how you plan to make use of these opportunities. Each industry has its range of accepted financial results and market approaches. The most common error is overstating revenues and understating expenses. Projections that are outside of industry standards will quickly kill the perceived credibility of your business plan. Examine the annual reports of public companies in your field. Read trade journals, business publications, and government and industry reports to determine trends in your business area. Work out a realistic timetable for achieving your goals. Remember that lenders and investors judge your plan and goals in terms of your industry's practices and trends.
8. Do you have a strong marketing plan?
When a lender or an investor is reviewing your business plan, one of the primary areas of focus will be your marketing plan. As you write your marketing plan, you will learn that much of the emphasis is placed on the development of a highly targeted market that can be effectively served by your business — customers who need what you have to offer and who will choose you over your competitors and pay you to solve their problems and fill their needs.
The lender will make an assessment regarding the logic of your marketing plan and will decide whether or not it is probable that, during the term of your loan, you will be able to sell to those customers in a volume that is sufficient to repay your loan plus interest.
An investor (or venture capitalist) will not be looking at your marketing plan solely in terms of your current plans. As a potential equity partner, he or she will also focus on your long-term marketing goals, making a determination as to whether or not it is likely that the company can continue to increase its market share accordingly and generate the desired return on investment.
The Key to Effective Writing
The text of the business plan must be concise and yet must contain as much information as possible. This sounds like a contradiction, but you can solve this dilemma by using the key word approach. Write the following key words on a card and keep it in front of you while you are writing:
Benefit to the Customer?
Answer all of the questions asked by the key words in one paragraph at the beginning of each section of your business plan. Then expand on that thesis statement by telling more about each item in the text that follows. Stress any uniqueness and benefit to the customer that may pertain to the section in which you are writing. Examples will be given in the following chapters to give you guidance. Keep in mind, if you are seeking financing, that the lender's or investor's time is limited and that your plan is not the only one being reviewed. Often the first paragraph following a heading will be the only area read, so it is important to include as much pertinent and concise information as possible.
Effective Use of Your Time
There is no set length to a business plan. The average length seems to be 30 to 40 pages. Break the plan down into sections. Set up blocks of time for work with target dates for completion. You may find it effective to spend some time at the library where you will not be interrupted by telephones or other distractions. An added bonus is that the reference material you need is close at hand either on the shelves or via the Internet. It takes discipline, time, and privacy to write an effective business plan.
You will find it time-saving to compile your list of Supporting Documents while writing the text. For example, while writing about the legal structure of your business, you will realize the need to include a copy of your partnership agreement. Write "partnership agreement" on your list of Supporting Documents. When it comes time to compile that section of your plan, you will already have a listing of necessary documents. As you go along, request any information you do not have, such as credit reports. If you gather the necessary documents in this manner, the materials you need for the Supporting Documents Section will be available when you are ready to assemble it. Remember that you do not need to include copies of all supporting documents in every copy of your business plan. If a potential lender or investor needs additional information, you can provide copies on demand. (Continues...)
Excerpted from Anatomy of a Business Plan by Linda Pinson. Copyright © 2014 Linda Pinson. Excerpted by permission of Out Of Your Mind ... And Into The Marketplace.
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