It is a written document that describes business, its objectives, its strategies, its market, its operations and its key financial objectives. If you are running a business it is essential to have a realistic, working business plan which is constantly reviewed and updated.
It should paint a very clear picture of what your business is all about i.e. its goals and aspirations and how it intends to achieve them, its products and services and what is unique and competitive about them, its management team and what qualities they possess and its position in its market and its plans to develop that position further.
Not only is this an essential document for the business owner(s) it is an essential tool in the quest to obtain financial backing or support for a business. A high quality business plan can make a huge difference to your chances of success.
SO WHAT ARE THE KEY INGREDIENTS OF A BUSINESS PLAN
EXECUTIVE SUMMARY
The executive summary of a business plan is designed to attract interest. If, after reading the executive summary, an investor understands what the business is about and is keen to know more it has done its job.
This should be a synopsis of the key points of the whole plan highlighting the main features under each heading. Its whole purpose is to attract interest and it should give the reader a very clear idea of what the business is about, what products or services it delivers, their quality and competitiveness and what the business is planning to achieve in its chosen market place.
If your business has a mission statement this is the place to include it. The executive summary should be concise, no more than two pages long, and it should be interesting. It is probably best to write this section of the plan after you have completed the rest.
THE BUSINESS, ITS PRODUCTS AND SERVICES
This part of the plan sets out the vision for your business in terms of the products and services it offers. It should include what your business does, what it has to offer and what market it is operating in and why. If your business has a USP (unique selling point) which gives it a competitive edge in the market, this section of the plan should clearly describe what the USP is.
Start with an overview of your business which should include:
When your business started and the progress made to date
The type of business and the sector it is in
Any relevant history e.g. if the business has been acquired who owned it originally, what was achieved and why it was sold
Its current legal structure e.g. partnership, LLP or limited company
Your vision for the future
Then describe your products & services as simply as possible including:
What makes them different
What benefits they offer
Why customers would buy them
How you plan to develop them further
Whether you hold any patents, trademarks or design rights
The key features of your industry or sector
Avoid jargon. It is a good idea to get someone who doesn’t know or understand your product or service to read this part of the plan to ensure that they understand it.
YOUR MARKETS AND COMPETITORS
In this section you should define your market, your position within it and outline who your competitors are. In order to do this you will need to refer to any market research you have carried out and will need to demonstrate a full knowledge of the market place within which your business operates including any trends or drivers.
You should also be able to show that you have a good awareness of your competitors, their respective strengths and weaknesses and that you have robust plans to grow your business in a competitive market. Your plan should be very clear in terms of your strategy to achieve this.
Key areas to cover include:
Your market (its size, potential and key drivers)
Your target market (who are your customers and potential customers and what attracts them to your business?)
Your competitors (who they are, what share of the market they have, competitor threats and how your business will deal with them)
The future (potential changes in the market place and how you expect both your business and your competitors to react to them)
Be realistic - passion and enthusiasm can often cloud the reality of the market place. Your plan needs to demonstrate that you know the market well and that you have a clear strategy to ensure that your business will succeed in a highly competitive environment.
MARKETING AND SALES
This section should describe the specific activities you intend to use to promote and sell your products and services. This is often the weak link in a business plan. This is because many entrepreneurs are unable to demonstrate clearly how they will be able to get their products and services to market.
Key areas to cover are:
How your products or services are being positioned in the market place.
What features of your products or services are attractive to existing & potential customers and why?
How you expect to maximise sales from any competitive edge your business has.
What is your pricing policy and how it compares with the competition?
How will you effectively promote your businesses’ products & services?
How will you get your message across to your target customers and what channels will you use?
Which sales method do you think is most successful in the type of market you are in e.g. selling by phone, direct marketing, promotions, internet etc.
Preferably you should be able to demonstrate that you have undertaken a considerable amount of market research to determine which products and services your customers want and what they are prepared to pay for them.
MANAGEMENT TEAM’S SKILLS
This section should cover the key skills of both yourself and your management team including preferably a structure chart showing who is responsible for what e.g. production, sales and marketing, financial management etc.
It should identify the strengths and weaknesses of your management team and how you plan to deal with any weaknesses. The quality of your management team is often a key factor in being able to secure external funding. Nobody will invest in a project if they do not feel that there is a sufficiently strong team in place to see the business plan through. It is important to demonstrate in this area of the plan that there is the right balance of skills, drive and experience within your business to succeed.
Key areas to be covered are:
Who are the key people in the business and what is their background, skills and experience? Describe where business is to be outsourced, to whom and why Include details of external advisers used to compensate for any skills gaps which exist internally e.g. a consultant, accountant, mentor or even family support. Your plan should also outline any recruitment or training plans including timescales and costs. It should also cover the level of enthusiasm and commitment within the workforce of your business.
BUSINESS OPERATIONS
This section should cover the operational capabilities of your business in terms of location, product production and/or service delivery, management information systems and information technology. If the business operates in a regulatory environment, which most do, its capacity to achieve the required operational, quality control and compliance standards is vital.
Failure to deliver operationally will undoubtedly result in customer dissatisfaction leading to loss of future business so this is a very important area.
Key areas to be covered are:
Does the business own its own premises or are they rented?
Why was the current business location chosen and how does it fit in with the current & future needs of both the business and its market?
Do the current premises offer sufficient flexibility to cope with business expansion?
Are there any long term commitments to the present premises in terms of unexpired lease or long term loan?
What other locations are being considered?
Producing Goods and Services
Is production undertaken in-house or outsourced and why?
How modern are the facilities? Will they need updating? If so, what are the cost implications?
How does capacity compare with present and forecast demand?
Who are your main suppliers and how reliant is the business on them?
Management Information & IT Systems
What procedures are in place to ensure that stock is well controlled?
What systems are in place to ensure that quality control and compliance standards are met?
Are the systems fit for purpose and will they cope with any future expansion?
Is there a management accounting system in place and, if so, how effective is it?
Is IT a key area for your business? If so are the current systems adequate?
Whilst the above list is by no means exhaustive it covers the key areas. So many businesses lose orders or even fail because they have not got the systems, capacity or skills in place to deliver on their promises.
FINANCIAL FORECASTS
In the context of trying to secure 3rd party finance or investment into your business this is an absolutely key area in that these forecasts or financial projections will translate what you have said about your business into numbers. You will need to consider carefully:
How much capital you need to operate the business
How much external funding is needed
If there are any assets within the business which could generate additional cash
The amount of profit and cash likely to be generated by the business
How you manage the impact of a potential setback
Too many business plans predict stellar growth in a flat market without producing a great deal of substance to support the projections. Be realistic. Lenders and investors will see through over optimistic financial forecasts and will question hard the assumptions behind them. Your forecasts should generally include the following:
Profit and Loss Forecast: A statement of the anticipated trading position of the business at a future date based on the anticipated profit or loss. This is arrived at by taking total sales, net of VAT, and deducting both direct and indirect costs. A separate sales forecast is often produced to provide a breakdown of sales.
Cash Flow Forecast: A forecast of the projected cash position of the business into the future and will include items such as VAT which does not feature in the profit and loss account. Remember cash does not equal profit.
Forecast Balance Sheet: A snapshot of the overall financial position of the business in terms of assets & liabilities at each financial year end.
Financial forecasts will generally cover up to a 2 or 3 year period, sometimes longer, depending upon the business. Certainly projections covering the next 12 months are absolutely essential
Unless there is considerable in house expertise it is more than likely that outside help might be required in the production of these financial projections. Often this support is provided by the businesses accountant.
In conclusion the above are all the area that a good business plan should cover and if done well should attract a potential funder or investor who will have confidence that the management of the business have clearly thought through what they need to do to succeed in their chosen market place.
The next step is how to best present the plan to a lender or investor in order to secure the finance necessary to make the business plan happen. This is covered in the next section.
SELLING YOUR FUNDING PROPOSAL EFFECTIVELY
As a result of the Credit Crunch it is harder now to obtain the finance to grow your business than it has been for a very long time. Whilst banks will say that their doors are open to small businesses the reality is that there are fewer lenders in the market now and those willing and able to lend are adopting a very cautious approach. Basically the rules have changed as follows:
Debt finance is more difficult to come by and expensive to obtain.
There are less funds available to lend so only the better and more secure proposals will attract debt finance.
Debt funders traditionally require security but falling asset values have restricted the ability of business owners to secure debt.
Businesses are increasingly having to look for alternative funding sources (e.g. invoice discounting and asset finance) to generate cash.
Since money to fund businesses is now in limited supply it is important that your proposal stands out from others and attracts the funding you need.
Debt and equity funding have different characteristics as follows:
Debt Funding
Can be restrictive in that the amount of funding provided is often linked to the mount of shareholder’s capital in the business
There might need to provide security- banks rarely lend large sums on an unsecured basis
A lender’s focus is getting repaid from cash flow within the agreed term
Borrower retains 100% control over the business
Bank overdrafts can be flexible but essentially is short term lending
Equity Funding
Primarily for sizeable sums(£250K- £2M)
Business owners need to be prepared to relinquish a share of the business to the equity investor
An equity investor’s main focus is to get a high return on investment
Equity funders tend to take a medium term view
An equity investor will often provide expertise/support thus adding value to the business
If you are thinking about presenting your business proposal to either a bank or equity funder you do need to be aware of their respective different needs. Whilst there are commonalities between each of them , i.e. both will want to see a) a successful track record b) business owner’s commitment & contribution c) a good quality business plan and d) a quality management team in place, a bank lender will also want to see:
An ability to generate sufficient cash flow to repay debt Security to cover the debt with a margin
An equity investor is more interested in future value than an ability to repay specific debt and does not look to take specific security. Instead it is the investment in the business and the potential rewards arising from that which is the key concern. An equity investor therefore will want to see:
Generally a sizeable investment i.e. £250K - £2M
High growth/profit potential
A time specific commitment e.g. 5 years
An equity stake in the business
An exit route(i.e. how and when will the profit from the investment be realised?)
PREPARATION FOR YOUR LENDER / INVESTOR MEETING
Be aware of what lenders may be looking for in terms of risk (see CAMPARI Model – section) – have mitigating answers prepared Have sound knowledge of historic financials & forecasts. Lenders will expect you to know the headline figures i.e. sales turnover, gross & net profit figures Have a full proof contingency plan to deal with the “what happens if....” questions Know your businesses’ weaknesses & be prepared to discuss them If you are asking for equity funding be prepared to explain / discuss what the investor’s potential exit route might be Arrange to bring any key decision makers with you for the meeting
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Written by
Maurice Sardison
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