Quick Business Plan
Recent research in the U.S. studied the differences between those companies which considered themselves lucky and those which thought themselves unlucky. The main differences between the two were that lucky companies had business plans producing more highly skilled staff.
Companies which understand what is happening in the market and are able to deal with the changes are luckier than those that cannot. This suggests that companies manufacture their own luck through effective monitoring and personnel development, both key parts of business planning.
Bank research revealed that only 20 per cent of start up companies survived two years which approached the bank direct, compared with 92 per cent completing a structured training and support programme with help in completing a detailed business plan.
Detailed support at the early stage of the business formation process can greatly reduce the potential for business failure
Business Plan - Executive Summary
The Executive Summary must capture the essence of your proposed business venture. Try to keep the summary as brief as possible. Whether you are preparing this proposal for a venture capitalist, banker, or your boss, it is imperative that your summary be of the highest quality. These individuals are flooded with requests for assistance. Since the summary is a distillation of your plan, you might want to complete this section after you complete the rest of your business plan. Or write the summary first, then create the business plan and then go back to the summary, improve it and insure its consistency with the rest of your plan.
Since your objective is to lure the reader to want more information, your summary should have the following elements:
- It should be concise - you have one or two minutes to tell someone about your business.
- It should be exciting
- It should communicate how your business concept is unique
No matter how long you spent developing and honing your business plan, the reader of the plan will only spend five minutes reading it! It’s important to make those five minutes work to your favor. You may have the most meticulous and well-crafted business plan imaginable - in the end, however, the best plan is the one that entices the reader.
Surprisingly, many business plans neglect to include their formal name, address and principal contact. Please insure that you leave a number that is attended. If the business plan recipient can’t reach you in one or two attempts, they will move on to the next proposal. Make sure this information is on your proposal - there is a prominent location on the front cover to put this information. Feel free to repeat the information in the Executive Summary.
Type of Business
This section answers the question - What business am I in - a non-trivial question. Deciding what business you are in is probably the most important decision you will have to make. If you know it, include the SIC code that describes your business. Indicate whether the business is a start-up or an existing business.
Exploring the Elements of a Simple Business Plan
Small Business Secrets Course
Business Plan - Business Summary
Here, you can briefly describe the history of the company. Is this a startup? An expansion of an existing business? A division of a larger business that is launching a new product or service? Is the business a sole proprietorship, partnership, or corporation? If your business is a going concern, briefly describe the company’s historical performance. If the company is introducing a new web site or if the web site is a critical component of the business (retailing, business-to-business, virtual community, etc.), briefly describe the web site and any significant future plans for that web site.
Clearly state the sales and profitability objectives and the underlying ways that you will meet these objectives. Perhaps a chart from the Business Plan Excel workbook would visually describe your goals. It is within this section that you can summarize sales and profitability objectives for the five year planning period. Financial goals could be cash flow related, described by financial ratios, by growth rates of sales, assets, cash flow, and profits, or by cost and expense relationships.
Perhaps the biggest keys to success of any business are the people who run it. Be sure to summarize the expertise of the management in this particular business. Since poor management is a key contributor to business failure, describe why the cards are stacked in your favor.
Products and Services
Describe the product or service you are offering and clearly state why the product is unique. If the product is not unique, be sure to explain why it will succeed over existing products.
Funds Requested (optional)
If you are writing this proposal to an audience from which you are requesting funds, be specific in your request. Select a number and explain why that amount is needed. Also state whether the money you are raising is in the form of equity or debt. When you send the proposal to organizations, you can save valuable time by understanding which types of investments they make. Some investment companies do not make any equity investments while others specialize in this investment.
If you are seeking debt financing, be prepared to discuss whether collateral is available. If you are seeking an equity investment, be prepared to discuss the percentage ownership position.
Here are some additional questions to consider when writing this section:
- What is the total amount of funds needed by your business? Is it needed immediately or over the next two to five years?
- What part of this financing is being sought from the investors or lending institution that will receive this business plan (including the amount, terms, and any related security agreement)?
- For equity financing, what percentage of the company are you willing to give up and what is the proposed return on investment and anticipated method of taking out the investor (e.g., buy-back, public offering, sale)?
- For debt financing, what is your company’s proposed interest rate and repayment schedule?
Use of proceeds (optional)
Be as specific as possible on how the proceeds will be spent. Include a chart or table to describe this if you wish.
If you are requesting funds to grow your business, your investor will want to understand how you are planning your exit strategy. Most investors want to realize a gain over a medium term horizon. Don’t underestimate the time it will take to either take the company public or sell the business. Most investors should be willing to wait for a three-year period before their investment can be realized. .
The first part of a business plan should clearly define the Identification of Market Opportunity. Be prepared to discuss the total dollar volume of the market, the rate that the market is growing and the overall demand for the product or service that you are offering.
Give a brief history of the company’s business to date, when your product or service was introduced, and the key milestones that you have met. Be sure to keep this section brief, since your investor is primarily concerned about the future, not the past. Some of the information you might include in this section could be:
- The firm’s date of origin.
- The names of the founders.
- A summary of the major milestones achieved or the stages of the life cycle through which the firm may have passed.
- The major episodes or stages of development in the firm’s past.
- A brief description of any significant changes the business has undergone or challenges that the company has faced up to.
- Other developmental indicators such as sales levels, net worth, market share, assets, and company valuation.
- Company mission statement.
Business Plan - Growth and Financial Objectives
The objectives in your business plan can begin with a short list of what you hope to achieve in the next year or so and those significant goals that you would like to achieve in later planning periods. Objectives will vary according to your mission statement and where your company is in the life cycle. For example, a start-up company might want to set a short-term objective of profitability (to be profitable by year-end) or may take a longer-term view and simply look to build a competitive business model by the end of year one.
State your growth and financial objectives as clearly as possible. You can start with the sales chart for the five-year period and follow that up with the sales table broken down by product line. Then you might want to explain how you plan to keep certain financial metrics and use the Financial Highlights table to clearly portray your goals.
Follow this up with a sales table broken down by product line.
Then you might want to explain how you plan to keep certain financial metrics and use a Financial Highlights table to clearly portray your goals.
Legal Structure and Ownership
Describe how the company is legally organized. This is a decision that is best made in the early stages of the company. The decision to establish your company as a sole proprietorship, a partnership or a corporation that will issue stock is an important one. You may want to consult with an attorney and/or accountant before doing this.
Company Location and Facilities
State where the company conducts its business and what real estate the company owns or leases. Be sure to address the issues regarding your future space requirements and how this might determine your need to expand or move.
Plans for Financing the Business
Investors prefer to see a defined financing proposal which shows the capital needs of the venture and the proposed equity or debt agreement. The financing proposal may refer to the Start-Up Costs that are attached in the appendix if it is a start-up. If the company is a start-up, or an ongoing concern, be sure to detail the use of the proceeds from the financing. What collateral or personal guarantees will be offered for an equity or debt investment?
Your bank or other financial institution will expect a company that applies for funding to complete monthly management accounts and maintain a fairly detailed cash flow forecast. Figures can be approximate.
You should have two cash flow forecasts: one that covers the next twelve months and, another showing the actual figures for the past twelve months (cash flow 'statement'). The cash flow form with this package is for 'ball park' figures. Applications such as Microsoft Excel, MS Office and MS Works have detailed and simple cash flow forms.
It is important for the business owner to concentrate on core activity: be it sales, production, marketing etc. There is a clear line between a business owner who is fully aware and in control of the company's financial position, but concentrates on core activities: and the owner who spends too much time learning, updating, and monopolizing the accounting software package, to the detriment of the company's business.
Off the shelf' software has been available for many years. Some are 'child like' simple, most need a few days to pick up. Some (usually the expensive ones) give you far more than you need, or need to ever understand.
You need a package that allows you to achieve and maintain both your business goals and accounting standards.
The purpose of a 'Cash Flow Forecast' is to provide the business owner with projected figures (usually over a 12 month period) that are calculated to ensure (as a minimum) the survivability of the company, and ultimately the achievement of a planned and profitable target.
In the basic sense, cash flows into a company (through sales) and flows out (through expenses). Expenses come in two forms:
- Fixed Costs: Rent, Rates, Lease, Gas, Electric, Wages (support staff)
- Direct Costs: Materials, Direct Wages (actual labour force), Delivery, Post
Fixed costs (within reason) will not alter if you produce more items this week than you did last week: i.e. if the rent was $400 per week, this figure would not change due to your level of production.
However, the more items you produce, the more you have to pay through direct costs: i.e. more raw materials, possible overtime and delivery costs. It is arguable that extra production increases the fixed costs such as electricity etc. Where this occurs on a large scale, a company will adopt 'cost accounting' to define the amount of electricity etc. in the production of a single unit of goods. .
Management accounts are perceived as a time consuming task 'better left to the accountant' once a year. For most businesses this is a fallacy. Obtaining the necessary figures is more about practice than time or skill. You do not need 100% accurate figures. You get used to, and experienced at estimating some of the figures (at least twice a year you should ensure your figures are as accurate as possible).
Once you start building up a database of monthly information you will start to see trends. Trends are a business owner’s early warning system. When you have established trends you can identify anomalies when they happen, and not when they take a negative effect on your cash flow, sales, etc.
You can make strategic decisions such as stock levels, debtor, and creditor levels (cash to credit). You can manipulate current needs, in the knowledge of future trends.
The effect of such changes can drastically increase your cash flow and thereby reduce your overdraft and financing costs.
All businesses have to prepare a profit and loss (P&L) account as part of their annual accounts. However, this calculation is also a valuable part of your monthly management accounts. A P&L account shows exactly what has happened in your business in terms of income and expenditure during a specified period.
What does a profit and loss account cover?
A P&L account shows:
- The sales turnover for the period.
- Any other income.
- The expenditure for the period.
- The level of profit (or loss).
- How the profit has been divided.
Key terms in a profit and loss account
This figure shows the actual amount of sales for the period, excluding VAT. It does not reflect the cash received from customers, since some payments may still be outstanding. Indeed, businesses may not receive cash for their sales until 30 or 60 days (or sometimes even longer) after the sale is made. The sale is recorded immediately on the P&L account, although the cash is not available for use by the business until it is received.
Cost of sales
The costs of sales, sometimes known as 'direct costs', are those that can be directly attributable to the sales. The direct costs will vary depending on the level of production. In other words, they should reflect raw materials, direct labour and subcontract costs for the products or services actually sold during the period.
There may be stock purchased during the period that was not used; this will be shown on the balance sheet but not charged to the P&L account. Raw materials may also have been used which were bought in a previous period. The cost of those materials will be included in the direct costs. Materials purchased but not used will be shown in the stock figure on the balance sheet.
It is important to watch out for purchases of materials or subcontract work that have gone into sales made during the period, or are included in stock at the period end, but for which your business has not yet been billed. This applies to any costs incurred where invoices have not been received. Ideally, your business will not prepare its accounts until all bills have been received. However, when producing management accounts, an estimate of these costs may have to be made in order to give a profit figure that is as accurate as possible.
Expenditure on overheads, also known as 'fixed costs', is usually recorded immediately on the P&L account, but you may not actually pay for goods or services until well after they have been provided. This is known as 'accrued expenditure'. Some payments, however, may represent pre-payment. For example, rent or insurance paid in advance may partly relate to the current period and partly to the following period..
A strong Business Plan may not guarantee success; but it could certainly prevent failure!
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