Key success factors
The overall market
Changes in the market
Target market and customers
Customer buying decisions
Nature of competition
Changes in the industry
Threats and risks
Key competitive capabilities
Key competitive weaknesses
Positioning of products/services
Competitive evaluation of products/services
Marketing and sales
Human resources plan
Creating the financials of the business plan
Assumptions and comments
Starting balance sheet
Cash flow projection
Balance sheet projection
Ratios and analyses
Making It All Add Up: The Financial Section of a Business Plan
Financial issues tend to be unpopular among entrepreneurs. Some find the subject tedious. Others find it intimidating. The result is that many entrepreneurs do nothing. Finances in many businesses become the state of the checkbook each morning. If there's cash, the business is still around and if there's no cash, the business has major problems.
One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. That's because a business plan isn't complete until entrepreneurs can demonstrate that all the wonderful plans concerning strategy, markets, products, and sales will actually come together to create a business that will be self-sustaining over the short term and profitable over the long term. Note that the financial section of the business plan is done last, after you've had a chance to make your marketing, production, and selling plans. Here is where you attach precise dollar figures to those plans and determine how those figures add up in the context of several different financial statements.
The financial section of the business plan should consist of three types of standard financial statements:
1. Cash flow statement
2. Income statement (sometimes referred to as profit/loss statement)
3. Balance sheet
Before discussing these statements in more detail, a few points need to be made about financial statements in general.
Make them conventional.
It's one thing to be creative in analyzing the market or coming up with sales approaches, but the financial statements should be done according to what financial types refer to as "generally accepted accounting principles." Bankers and investors examine dozens of financial statements every day and are accustomed to seeing expenses, margins, taxes, and other items identified in their customary ways and in their customary order. The tried-and-true not only makes them feel comfortable but also enables them to review the financial state of the company quickly and easily. If they see financial statements at odds with what's customary, they are likely to be skeptical about the expertise of the entrepreneurs and the state of the business, which is not a good way to win friends and influence people.
Sophisticated investors who become interested in your business will use your financial projections to calculate the potential future value of the company. Companies tend to be valued on the basis of some combination and/or multiple of sales, profits, and asset value. Investors who are confident in the numbers they see in the financial projections will attempt to calculate a company's value in the future to determine what an investment today might lead to. If they're convinced they can get the appreciation they want, they may invest.
Generally speaking, the business plan should provide detailed financial results for the previous three years. It should use those results to develop projected financial statements for the upcoming three to five years -- as I've mentioned earlier, there must be a connection between what happened in the past and what you project for the future. If sales have been rising at 10% annually for the previous three years, you can't project them to rise at 50% annually for the upcoming three years without some fairly compelling reasons.
Cover the past and the future.
One obvious question concerns how to handle the start-up company, which has no previous financial history. Start-up entrepreneurs can make only financial projections, which they must be able to justify. Bankers and investors ordinarily assume that a start-up company's projections are wildly optimistic; the standard preamble that your numbers are "conservative" doesn't go far enough in providing reassurance. Ideally, you've done some test marketing and/or have hard experience with a comparable business to provide some basis for your projections.
Explain your assumptions.
At some point in the financial section of your business plan you need to explain the assumptions that underlie your projections. That is, how did you arrive at your estimate of general and administrative expenses? Have you worked out a commission structure with your sales reps or are you just estimating the sales costs? And how much of your sales increases come from expanding volume and how much from price increases?
One way to ease the concerns of outsiders worried about your projections being overly optimistic is to provide several potential outcomes. The first would be your expected projections; the second, a "worst-case" scenario -- if there's an industry recession, here's how your financial situation would be affected. Third, you may want to include a "best-case" scenario -- how things would work if everything went your way. The best-case numbers may look impressive, but they won't carry much weight with experienced investors.
In this day and age of easy-to-use computer spreadsheet programs (e.g., Lotus, Excel), the task of putting together financial projections is much less time consuming than it was in the days of adding machines. As a result, it's possible to assemble financial statements that go into excruciating detail -- more than what bankers or investors want to see and more than what is truly necessary. Some professional investors refer to the page upon page of financial statements that weigh down some business plans as "spreadsheetitis."
One venture capitalist told me of a technique he uses with entrepreneurs who present what he considers to be excessive tabulations. "How did you come up with line 18 on page 24?" he asks. "The computer came up with that," is the typical response. To which the venture capitalist responds, "Is the computer going to be running the business?"
Consider several scenarios.
Just as the prose should be concise and to the point, so should the financial statements.
All smaller companies should have an accountant involved at least in tax preparation. Ask this accountant, or another accountant with whom you may have a relationship, to review your financial statements. Indeed, if you consult your accountant for business advice, you may want to get him or her involved in the financial planning process early.
Parts of the financial statements, particularly the balance sheet, can involve technical issues such as how assets and liabilities should be classified. Moreover, an accountant can help you assess how a banker might view your financial statements.
Bankers tend to use ratios from the balance sheet -- such as assets to liabilities and debt to equity -- in assessing the creditworthiness of businesses. The ratios they consider satisfactory can vary from industry to industry. If your ratios are out of line with the bankers' viewpoint, an accountant can suggest steps you can take to adjust these ratios.
Cover All the Bases in Your Business Description
How to Describe Your Business
When writing a convincing business plan, an important task is to clearly and exhaustively describe your business and exactly what it will involve. Let's say you want to open a restaurant. What will you serve? What will your sample menu look like? What equipment will you need? Note that serving french fries means you'll have to install deep fryers, grease traps in the sewer line, hoods, and fire extinguishing systems. On the other hand, by not serving fried foods you will save a lot of money in the kitchen, but maybe you'll go broke when all the grease addicts go next door.
Or suppose you want to sell VCRs, video games, or video camera equipment. Do you plan to have a service department? If so, will you make house calls or only accept repairs at your store? What sort of security system will you install to protect your inventory? What about selling component sound systems or home entertainment centers? What about competition from nearby retailers?
Answers to these types of questions will be crucial to the success of your venture and to writing your business plan. Long experience tells that you need a written document -- even if you're sure you know exactly what your business will do.
With this foundation document to refer to, you are less likely to forget your good plans and resolutions in the heat of getting your business under way. Any changes you later make can be made both consciously and with consideration.
To write a complete description of your proposed business, follow a few simple suggestions.
Identify Your Type of Business
Find the business category listed below that most closely matches your business. You'll use the description that follows as a reference when you describe your own business.
Retail. Retail businesses buy merchandise from a variety of wholesalers and sell it directly to consumers. Supermarkets, mail-order catalog merchants, computer stores, dress shops, department stores, and convenience marts are retailers.
Wholesale. Wholesalers buy merchandise from manufacturers or brokers and resell the goods to retailers.
Service. People with a particular skill sell it to consumers or to other businesses, depending on the skill.
Manufacturing. Manufacturers assemble components or process raw materials into products for consumers or other businesses.
Project development. Developers create and finish a salable commodity by assembling resources for a one-time project.
Write a Problem Statement
Successful businesses share a common attribute: They do something useful for their customers. One way to determine what is useful for your customers is to identify and describe the problem that your business will solve. For example, a window washing service solves customers' twin problems of wanting clean windows but lacking either the time or physical ability to clean windows themselves. If you accurately understand your customers' problems and needs, your business will have a better chance of success.
For example, here's a problem faced by a customer of a stand selling pizza by the slice: "I'm hungry and I don't have much time or money, but I'm tired of hamburgers and want a change of pace. Also, I'd like to be able to specify the exact ingredients I want in my meal. And it would be really swell to have a glass of wine or beer with the meal."
Now, think about your customers for a minute. What is the problem that you solve for them? Take a sheet of blank paper or open a computer file, and write out your description of the problem your business solves for its customers. This statement will become part of your completed business plan.
Describe Your Business Operations
Next, describe how your business will solve your customers' problem. Take your time and do a thorough job. It's very likely that the first time you attempt this task, questions will occur to you that you didn't consider previously. If so, figure out a good answer and rewrite your description. The important thing is not how long it takes to do this, but that you end up with a realistic, well-thought-out business description. After all, it's cheaper to answer questions and solve problems on paper than it is with real money.
Your business description should explain exactly what you will provide for the customer as well as what you'll exclude. Each of the choices you make in your business description will affect the amount of money you'll need to start or expand and how much sales revenue you can expect.
Consider the following series of questions when writing your business description. These questions apply to most small businesses. Feel free to skip any questions that don't pertain to you.
1. What problem do I solve for my customers? (You answered this question in detail above.)
2. Who is my typical (target) customer?
3. How will I communicate with my target customer?
4. What products and/or services will I provide? Are there any products or services my customers may expect me to provide that I don't plan to provide?
5. Where will my business be located?
6. Where will I buy the products I need?
7. What hours will I operate?
8. Who will work for me, and how will they be paid?
9. Who will handle critical tasks such as selling, ordering, bookkeeping, marketing, and shipping?
10. How will I advertise and promote my business?
11. What are the competition's strengths and weaknesses?
12. How am I different from the competition as seen through the eyes of my customers? (Make sure that you answer this question from a customer's perspective and not from an owner's point of view.)
To sum up, writing a precise description of your business is an essential part of the business planning process. Make sure you've considered as many details of your opera
Personnel and Business Plans: Making the Most of Your Management Team
Summarize Your Management Chapter
Like the other chapters, the management chapter starts with a good summary. You may want to use that summary as part of a summary memo or loan application document, so cover the main points. Consider what you’d say about your management if you only had one or two paragraphs to say it.
Make sure you cover the basic information first. That would include how many employees the company has, how many managers, and how many of the managers are founders. Is your team complete, or are there gaps still to be filled? Is your organizational structure sound, with job descriptions and logical responsibilities for all the key members?
Particularly with start-up companies, you may not have the complete team as you write the plan. In that case, be sure to point out the gaps and weaknesses and how you intend to fill them.
Explain Your Organizational Structure
The organizational structure of a company is what you frequently see as an organizational chart, also known as an “org chart.” If you have access to a graphic of an organizational chart (from a drawing program, or one of the specialized organizational charting software packages available), that works really well. If not, you can just use the text to describe the organizational structure in words, without a chart.
Make sure you explain how job descriptions work and how the main company functions are divided up. Are your organizational lines drawn clearly? Is the authority properly distributed? Do you have jobs that include responsibility without authority? Do your resources seem in line with your organizational needs?
|| List Team Members and Their Backgrounds
List the most important members of the management team. Include summaries of their backgrounds and experience, using them like brief résumés. Describe their functions within the company. Résumés should be attached to the back of a plan.
Discuss Your Management Gaps
You may have obvious gaps in management, especially in start-up companies, but even in more established companies. For example, a manufacturing company without a production manager has some explaining to do, and a computer company without service has some problems. It is far better to define and identify a weakness than to pretend it doesn’t exist. Specify where the team is weak because of gaps in coverage of key management functions. How will these weaknesses be corrected? How will the more important gaps be filled?
Other Management Team Considerations
Applicability depends on your company. Some questions that should be answered include: Do any managers or employees have “non-compete” agreements? Who is on your board of directors? What do the members contribute to the business? Who are your major stockholders? What is their role in management?
Predicting the future is never easy. But by following these dos and don'ts for financial projections, you can avoid some common mistakes
It doesn't matter whether you're applying for your first bank loan or your fifth, or whether you're seeking venture capital or debt financing. Sooner or later, you'll have to prepare a set of financial projections. Lenders will look for a strong likelihood of repayment; investors will calculate what they think is the value of your company.
In my past 10 years both as a banker and as a financial consultant, I've seen many entrepreneurs -- despite the best intentions -- make mistakes on their projections. The good news is that the most common mistakes are easily preventable if you know what to look for. Here are my top dos and don'ts:
With assets, focus on cash and investments, accounts receivable, inventory, the major categories of fixed assets (including capital-lease assets), and any amounts due from shareholders or affiliated companies. Also, be sure to include any other assets that you consider material, such as patents or licenses.
Identifying liabilities is straightforward. You should have one line item for all accrued expenses and a line item for each of the following: accounts payable, a revolving line of credit, term loans, capital leases, amounts due to related parties, dividends payable, and income taxes payable. Finally, if your business has deferred revenue (meaning that you collect cash from your customers before having actually earned it), add a line for it in liabilities as well.
Don't provide only an income statement; include a balance sheet and a cash-flow statement, too. It's understandable that you're focused on sales and net income, but your banker or investors will also want to know how much money you intend to leave in the business as retained earnings and how much additional debt or equity financing you'll need -- if any -- to grow your company.
Do provide monthly data for the upcoming year and annual data for succeeding years. Many entrepreneurs prepare projections using only monthly data or only annual data for the entire three- or five-year period. Don't. Use monthly data for the first year. After that, use annual data. The financial results of your first year will probably end up being different from your projections, so there's no point in thinking that you can accurately forecast monthly results for the years after that. This is an instance where less is more.
Don't provide more than three years' worth of projections unless your lender or investor has asked for them. This is an extension of the less-is-more concept. Let's face it: it's a stretch to accurately forecast your company's sales or net income for even three years out. Only in cases in which you're looking for long-term financing for equipment or real estate is it likely that your banker will want longer-term projections.
Don't provide more than two scenarios in your projections. Loan officers and investors are already drowning in paperwork, so do what you can to make their lives simpler. We've all seen projections with the following three scenarios: base (or likely) case, worst case, and best case. I've also seen super case and break-even case. My advice is to prepare just the base case and the break-even case. The base case should show what you realistically expect the business to do; the break-even case should show how low sales could go before the business begins to lose money.
Do ensure that the numbers reconcile. Everybody knows that assets must equal liabilities plus equity. But all too often entrepreneurs will simply plug a figure into the equity slot to make things settle up. That's wrong. If your bank is doing its homework, your banker will check the math. If the equity numbers don't add up from one period to the next, you'll be asked to explain. Even though everyone makes mistakes, that's one you want to avoid because it makes you look sloppy. Also, if after the mistake is corrected your company has a smaller net worth than you originally presented, your banker or investor may think you were being intentionally misleading. Not good.
Don't be too optimistic about sales growth or gross and operating profit margins. All bankers and investors want to do business with ambitious entrepreneurs, but there's a big difference between a realistic business plan and fantasy. While it's true that companies that have low revenues can grow their sales quickly in percentage terms, it may not be realistic to assume, for example, that your business can double in size every year. That rate of growth would turn a $500,000 company into a nearly $16-million business in only five years. And although that can happen, it is definitely not the norm. Also, entrepreneurs often try to convince lenders that as their company grows it will achieve economies of scale, and gross and operating profit margins will improve. In fact, as the business grows and increases its fixed costs, its operating profit margins are likely to suffer in the short run. If you insist that the economies can be achieved quickly, you will need to explain your position.
Do account for reasonable interest expense on the income statement if you have debt on your balance sheet. That sounds simpleminded, but you'd be surprised to learn how many people forget to do it. If you expect to have an average loan balance outstanding of, say, $500,000 over the year, and your forecasted average interest rate is 9%, you need to budget $45,000 for annual interest expense. Don't budget less than a realistic amount; this is one line item where you're always better off coming in under budget.
Don't include every individual line item for each expense, asset, and liability figure. Although your banker or investor will probably be interested in knowing details about sales from major product or service lines, as well as the direct cost of sales associated with them, keep to the basics in other categories. With operating expenses, those would be salaries and payroll taxes, lease and rental expenses, depreciation, amortization, and any other kind of expense that consumes more than 10% of revenues. Also, don't forget to distinguish the owners' compensation from that of non-owners, particularly if you and your co-owners are drawing above-market salaries as a means of reducing business income taxes.
Do include with your projections the assumptions that you used, and be able to explain and defend them. In addition to the income statement, balance sheet, and cash-flow statement, you should provide a one-page summary that explains your assumptions about revenue growth; cost of goods sold; operating expenses; interest expenses; turnover of accounts receivable, inventory, and accounts payable; capital expenditures; dividend policy; and income-tax rates. Also include any ancillary information that has an impact on the financial success of your business. Examples of that might be your projected employee head count and office or warehouse space requirements.
Filling In Your Plan: What to Say Where
Here is a brief overview of the contents of the written plan. Keep in mind that after the first two items, the titles of the subsequent sections can vary. But every business plan should cover the subjects addressed in this overview:
Cover page. On the cover page goes the name of your company, its address and phone number, and the chief executive's name. That may seem obvious, but it's amazing how many business plans don't have a cover page or have an incomplete one. Nothing will turn off a banker or investor faster than having to look up your telephone number in the phone book because you left it off the cover page. Moreover, if the plan is going to be distributed to several bankers or investors, you will want to number each plan prominently on the cover page -- to allow you to track the plans and to inhibit recipients from copying or widely passing around the plan. (You should also have recipients sign a nondisclosure statement.)
Table of contents. This should include a logical arrangement of the sections of your business plan, with page numbers. Once again, this is something that seems obvious, but many business plans are put together with content pages and no page numbers.
Executive summary. This is the heart of the business plan and is of vital importance to both the preparation and final effectiveness of the plan.
The company. The business plan must provide basic information about the company: its past, present, and future. That is, there should be information about the company's history or, if it's a start-up, about the evolution of the market and product concept. Information is necessary as well about the company's current status. And what is the company's future strategy? What are its goals, and what actions are required to achieve its goals?
The market. This is your assessment of the customer groups you've targeted, other customer groups you might pursue, the competition, and marketing efforts thus far. Is the market growing, how fast is it growing, and what evidence do you have that it is interested in your product or service?
The product/service. Here is where you describe your product or service and what makes it special and attractive. What are the components of the product/service? How much do you charge? What services don't you provide? What kind of warranty do you provide, and what are its particular provisions?
Sales and promotion. This is your assessment of how you intend to carry out your marketing plan -- how you'll reach your customers and sell to them. Do you have an in-house sales force, or will you use manufacturer's representatives, direct mail ,or contracted telemarketers to sell your product/service? What kind of public relations do you have planned? Will it be done internally, or will you hire a public relations firm?
Finances. Here is where you detail your past results, if there are any, and your expectations for the future. This section should include cash flow projections, profit-and-loss statements, and balance sheets. All the figures should be cast in traditional accounting format.
Keep in mind that the order of the subjects listed here is not random; they are given in order of importance. It is no accident that information about markets comes before information about products/services.
Segment the Target Market in Your Business Plan
The market segmentation concept is crucial to market assessment and market strategy. Divide the market into workable market segments -- age, income, product type, geography, buying patterns, customer needs, or other classifications. Define your terms, and define your market.
Segmentation can make a huge difference in understanding your market. For example, when a local computer store business defines its customer segments as “high-end home office” and “high-technology small business,” its segmentation says a lot about its customers. The segmentation helps the company plan focus on the different types of potential customers. When I was consulting for Apple Computer in the mid-1980s, we divided the markets into workable categories, including home, education, small business, large business, and all others. Some other groups in Apple also focused on government as a specific market segment. As you define the segment, you point toward an understanding of the market. In the 1970s, I knew a company that was selling candy bars through retail channels. They segmented the market in a way that defined a range of products as “oral satisfacters” (their term, not mine). That included candy, cookies, soft drinks, and bagged chips. The segmentation helped the marketers understand their real competition, which wasn’t just other candy bars, but also other products targeting the same customer money. That understanding of competition improved the marketing and sales programs.
In today’s business it’s easy to see segmentation in action. Consider the different tone, content, and media for ads that sell products to kids, compared with those that sell the same product to parents. Car companies change their advertising substantially from one type of program to another. Stand-up comedian Richard Klein used to joke about the beer company ads that changed the style of the music to match the audience. He complained that he kept getting the country music version, but he liked the blues version better. The company that did those ads used the styles of music to address different target customer groups.
In developing segmentation, consider what factors make a difference in the purchasing, media, and value patterns of your target groups. Does age matter in choice of restaurants, or are style and food preference more important? Is income level a key factor? Education? I suspect that some restaurants will sell more meals to college graduates than others. Is this because of education, age, or income levels? That depends on your business.
In your initial assessment you may have already developed your first basic market analysis worksheet for analyzing potential customers. It will help you define your market and understand your key market segments. As you complete your market analysis, look at your segmentation critically and strategically. Is this the best segmentation? Be sure to revise and polish your numbers.
Executive Summary As a Guiding Light
> There's no one right way to go about writing a plan. One of the most effective approaches I've discovered is to begin by writing an executive summary.
Certainly the most significant part of any business plan is its executive summary. So vital is a good executive summary to a business plan that I'm tempted to wax eloquent about its literary merit.
What is an executive summary? Probably the best way to begin defining it is to explain what it isn't.
The executive summary is not an abstract of the business plan.
The executive summary is not an introduction to the business plan.
The executive summary is not a preface.
The executive summary is not a random collection of highlights.
Rather, the executive summary is the business plan in miniature. The executive summary should stand alone, almost as a kind of business plan within the business plan. It should be logical, clear, interesting -- and exciting. A reader should be able to read through it in four or five minutes and understand what makes your business tick. After reading your executive summary, a reader should be prompted to say, "So that's what those people are up to."
The executive summary should be no more than two pages long. The farther it goes past that point, the less it qualifies as an effective executive summary.
If capturing an entire business in two pages or less sounds like a tall order, it is. In fact, it is probably the most difficult part of the plan to write.
That's because it's usually more difficult to write concisely than it is to write at length. I believe that problem stems from our schools, where students are typically encouraged to write reports that are as long as possible.
The executive summary should serve several purposes, both for you and for readers of the business plan. For you, it should accomplish the following:
1. Crystallize your thoughts.
Since the executive summary is the business plan in miniature, it contains the plan's highlights, its key points. To write an executive summary, focus on the issues that are most important to your business's success -- past and future -- and set aside those matters that are tangential.
2. Set priorities.
The executive summary, like the business plan, should be organized according to the items' order of importance. Writing it forces you to pick and choose from among the many points you want to make in the business plan and decide on their order of importance.
3. Provide the foundation of the full plan.
Once you've written a version of the executive summary, you've made the process of writing the plan much easier. Suddenly, you've provided yourself with a takeoff point for each section of the plan. The four or five sentences that summarize the means of making the product or providing the service give you the basis for that section of the plan. As we all know, it's much easier to begin writing with something on the page than it is to begin with a blank page.
For readers of your business plan, the executive summary is usually the first stop in the reading process. (This assumes that the executive summary is at the very beginning of the plan and that the reader goes from front to back. You can control the former, but not the latter. Some investors, for instance, turn first to the founders' résumés and others to the marketing section.) In any case, from the readers' perspective, your executive summary should have the following attributes:
1. Capture others' attention and imagination.
This is particularly important if you want your plan to help you get a bank loan or attract investment funds. But any reader should be intrigued with your executive summary. It intrigues readers most by conveying your commitment to -- and excitement about -- the business.
2. Make readers want to read more.
Because bankers, investors, and financial types have more business plans to read than they have time for, they have to decide easily and quickly which ones to analyze carefully. The executive summary helps them make that decision. Thus, if you hope to obtain financing from the plan, the executive summary has to keep the banker or investor interested. Otherwise, that person will not go further in the plan.
3. Convey the flavor of the rest of the plan.
Readers should have a good feeling about your business and what the rest of the plan will cover. The executive summary must succeed in capturing the enthusiasm and energy that resonate through the plan as a whole.