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Business Plan Basics
Posted by B2B on: 2006-04-24 09:38:16
Business Plan Basics
by William Cate
The primary purpose of a business plan is to help the Company's Management reach their business objectives. It's the map to business success. The importance of a comprehensive business plan cannot be overemphasized. Much hinges on it. It helps you secure credit from suppliers. It is the basis for managing your operation and finances. It defines your Company's promotion and the marketing of your business. A Company without a business plan is like a ship without a rudder. It's very unlikely that either the ship or Company will ever reach their destination.
The secondary purpose of a business plan is to help raise the money needed by the Company to reach its business objectives. Anyone who risks money on a company without a business plan is almost certain of losing their risk capital.
Management must define its target investor market, before it can edit its business plan to appeal to those investors. There are three considerations that management must make before it starts to raise money with a business plan. 1. Is Management seeking a loan or an equity investment? If the Company is seeking a loan the business plan must emphasize the Company's ability to repay the loan. Also, it must show that the company owns or can pledge sufficient assets that can be used as collateral for the loan. 2. Where is the Company on the ladder to business success? If you are a Startup or Early Stage Company, the odds of you raising outside funds from professional sources is very slim. If you are a maturing company, you should have the assets or track record to find investors. 3. If you are seeking equity investors, you need to define your target investors. If you want to attract unsophisticated investors, your business plan should focus on sizzle and expectations. If you want to attract sophisticated equity investors, your business plan should focus on verifiable facts and probably be very close to the business plan that your management team is using to grow your company.
Clearly, the Company's Management Team should write the business plan for Management's use. A business plan targeting unsophisticated investors is best written by a professional business plan writer. It takes special skills to write effective sales literature and few business managers have had the time to develop these skills. If you are seeking professional money, it doesn't matter if it is a loan or equity investment. You and your management team are best served writing the business plan.
In very general terms, here is what sophisticated investors want to see in a business plan. You can select the order in which this information appears in your business plan.
1. You need a one, but no more than a two-page Executive Summary that clearly states what you have, what you want, what would be the result if you got what you wanted and what you are willing to give up to get what you want. The Executive Summary is the last section of your business plan that you should write. 2. You need a current and pro forma balance sheet, an income statement, a Profit and Loss Statement and a cash flow analysis. You should supply sufficient accounting data to allow the investor to run standard accounting evaluation formulas on your company's financial health. 3. You should clearly state the amount of money that you, your family and friends have invested in your business. If you are not seriously at risk in the venture, you won't find sophisticated investors willing to risk their money on your Company. 4. You need to define your costs of producing and delivering your produce or service and your profit margins. Your claims must be verifiable. 5. You should provide a one-page Industry Summary that relies on cited quotes from reputable sources like Industry publications. 6. You should supply a one-page summary of your Company that includes all addresses at which you have done business. You should include any present, past or potentially pending lawsuits with details and citations. 7. The biographies of your management team are crucial to the potential investor. Information should include any college degree or degrees held by the person. Include the name and address of the institution giving the degree, the year in which the degree was conferred and the team member's major in college. You should include all relevant work experience of each management team member, including the name and address of the company and the name of the person's supervisor cited as past work experience. 8. You need to supply contact information for your bank. If you use an attorney or auditor, you should supply their contact information. 9. You need to list with contact information the names of your primary suppliers. 10. If you have customers, you should list your primary customers with contact information. 11. You must provide proof that the investment will create cashflow. This can be anything from letters of existing customers saying that if you could supply more of your product or service they would buy it. It could be letters of interest from credible potential customers. A claim without proof that you can sell your product or service or more of your product or service without proof is not credible. 12. You need to explain why your product or service is better than that of your competitors. 13. You need to explain how you intend to expand your market with verifiable and credible statements. 14. You need to supply a detailed description of your funding requirements. 15. You need to supply a detailed financial statement and a financial statement analysis. 16. You should structure the potential investment into several phases with a clear statement of the funds needed and the expect result from the expenditure of those funds. You should state who would hold the unexpended funds (phased funds) until you have met the goals of each phase of your investment program. Phasing the investor's money limits the investor's risks to less than the total amount of money you need to achieve your business objectives. 17. You should have an appendix for your draft legal contract. 18. You should have an appendix for any information that makes your Company more credible than its competitors. Items like articles about your Company in trade journals or industry awards. 19. You can add additional information, but you should keep your business plan to 30-60 pages of concise and factual information that the investor can verify.
Expect that the potential investor will investigate every one of the claims in your business plan. If you've lied about anything and they find that lie, they won't fund your Company. The business plan review process is called "Due Diligence." You would be wise to determine who is expected to pay the costs of this Due Diligence review before you submit your business plan.
In the world of business finance, being specific is being credible. As far as possible avoid boilerplate. Write in simple declarative sentences. Make statements that you can easily verify. Keep in mind that sophisticated investors are reading your business plan with the goal of finding one major misstatement of material fact in it. If they find that lie, all of your efforts have been in vain. Odds are they will share their discovery of the misstatement with other sophisticated investors and the doors to risk capital will quickly close on your Company.
About the author:
William Cate is organizing an Asian Workshop on the topic of "How to Write a Business Plan that North American Investors Will Fund." If you are a financial publication, bank or financial service firm interesting in sponsoring this Workshop in your country, please contact him at Beowulfinvestments@Earthlink.net or visit his website at: [http://home.earthlink.net/~beowulfinvestments/]
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