business plan notebook on wood table with cup of coffee

“To Business Plan or not to Plan…that is the question.”

For those of you with a short attention span or those that are too impatient to thoroughly read articles, bottom line…develop a thorough business plan.  If you are considering starting a business, starting a new division, or starting a new product line I highly recommend that you develop a comprehensive business plan before you spend one dime on anything else.

For the sake of expediency and prioritization, I will list the top five consequences (in order of devastation) of not developing a comprehensive business plan.  

1. Bankruptcy – Plain and simple, diving headfirst into a business venture without thoroughly researching the initial capital and start-up costs, the realistic market capture of your product or service, or a realistic profit margin can very likely cause you to be plunged into bankruptcy.  Many people race down to their local bank, somehow secure a business loan and race headfirst into a business venture that is sure to fail.  Many of these individuals also do not realize that they are personally on the hook for that loan and soon find the bank foreclosing on their home, autos, and various other personal assets to pay off the loan.

2. Ball and Chain Syndrome – While lack of a solid business plan may or may not land you into bankruptcy proceedings, you may end up being “married” to an unfavorable business venture.  Revenues generated may be barely enough to cover payroll and overhead, with just enough to cover the debt service on your loan. 

While you may not be necessarily losing money, the only winner in this scenario is your bank (or private lender).  Walking away from the business would lead to bankruptcy (and ruined credit), so the only scenario is to serve your master (the bank) until the loan is paid off.

3. Quality of Life – This scenario assumes a modest profit is generated, even after making monthly loan payments.  However, the non-stop 60 to 70 hour work weeks to maintain this modest profit may be leading to serious quality of life and health issues: substantial weight gain (or loss), lack of family time, depression, anxiety, high blood pressure, chemical abuse…..the list goes on.

4. Missed Opportunity – As the list moves towards the less severe outcomes, this scenario entails a situation where the business is moderately to reasonably successful but misses out on an opportunity to achieve substantial or hyper success.  More specifically, lack of a good business plan may cause the owner to focus all resources on a product line or market that is much less profitable than alternative ones.  Shifting to the more profitable products or markets would be so expensive and time-consuming as to cause the business substantial short-term losses that the owner cannot afford.

5. Delayed Success – Under this scenario, the business eventually becomes successful and very profitable but only after many hard lessons and delayed results.  A comprehensive and well thought out business plan may have shown the prospective business owner that teaming up with an established strategic partner would have provided instant, substantial profits to the venture which the owner could have leveraged to pursue additional profitable markets much more quickly.

Ok, so now that I’ve scared you to death regarding all of the bad things that can happen if you don’t draft a well thought out business plan, let’s migrate towards the positive elements of a proper business plan.

So what is a “business plan” and how will it help you?

The simplest way to explain how a business plan works and why it is important is to use analogies.  For the sports crowd, a business plan is tantamount to a Bill Belichik (New England Patriots head coach) game plan.

Bill Belichik is known as the most prolific game planner in NFL history.  If you have a great run defense Belichik exploits the pass.  If your defense is soft up front, he’ll run the ball down your throat.  If Bill Belichik wrote business plans for a living, he would land billions in debt and equity financing.  For the artsy crowd, a business plan is similar to a musical composition.  Each note of each instrument is meticulously planned and documented in synchrony and harmony on paper (the musical composition) before it is ultimately performed.  The composer knows beforehand how the song/composition will play out.

In its simplest form, a business plan is an attempt to not only see into the future but predict the future based upon researched data and assumptions.  The primary target audience of business plans are lenders and investors.

Every business, every new product line or division needs capital (a synonym for money) to get started and flourish.  Experienced lenders and investors want to see your “grand scheme” on paper before they decide whether to invest or lend.  In essence, your business plan will pull back the curtain and give them a glimpse into the future and, theoretically convince them that their loan or investment will be paid back with an appropriate return on investment.

Professionalism – It is paramount for any business owner seeking financing to exude professionalism during this process.  A well written, well researched, and thoroughly supported business plan can go a long ways towards achieving this goal.  In the finance industry the phrase “raising the comfort level” is often used. 

It pertains to the perception and intuitive reaction of the prospective lender or investor towards the prospective investment or loan.  If the business plan is professional, logical, devoid of ridiculous hyperbole or unsupported assumptions, the lender/investor’s “comfort level” is raised which increases the chance of funding.

Major parts of a business plan

Executive Summary – While this section will be the first in your business plan, it will be the last one written.  The Executive Summary will, in essence, be the condensed version of the rest of the business plan.  Its purpose is to give the reader a brief glimpse of why they might lend, invest, or participate in your business or new product launch with very little detail to support your argument.  In a few pages or less, tell the reader about your company/product/idea and why it will be successful.  Briefly describe your company’s product or service, and the company’s management team and location.  Include a summary of the potential market for your product, the percentage of market share you anticipate capturing, and a condensed version of your financial projections.  You should end the executive summary with detailing the amount and timing of investment or loan you’re requesting, and the high-level terms and return your company is offering. 

Company Description – Start out with a brief history of the company (or of the product development if the business is a start-up), the nature of your business, and an overview of your products/services, customers, and suppliers.  Briefly summarize the company’s (or product’s) financial growth and market highlights.  Summarize the company’s short and long-term business goals and how the company plans to make a profit.

Market – In sum this section will describe the nature and size of the market for your product/service and the portion of that market that your company anticipates capturing each year.  If your seed capital budget allows for it, having a formal market study performed by a third-party professional market research firm can go a long ways towards raising the comfort level of your prospective lender/investor/strategic partner.  Investors are often wary of overly optimistic internally generated market projections and revenue forecasts.  Using a third-party firm can mitigate those concerns.

This market section should also include industry outlooks supported by statistics (i.e. where is the market for your product headed).  You should delineate major and direct competitors in your market and their respective strengths and weaknesses.

Management Team – This section describes the background, skills, and roles that key executives and management of the company will play in making the company, product, or idea successful.  Remember, smart money knows that companies and ideas live and die on the quality of the management team.  Be sure to position the management team in such a manner as to boost the confidence of the reader that these individuals (CFO, CEO, Marketing VP, Operating Officer…) are the ones that can execute the plan most effectively.  In other words, the horses you’ve assembled are proven winners!

Strategy and Implementation – This section delineates how you will promote your business or product to your customers and how you will enter the market.  You should provide a narrative on pricing, promotions, logistical details, production methods, supply chain method and other critical operating objectives.

Let the reader know how management intends to scale up production as demand grows including raw materials supply, acquisition of labor and technology.

Financial – This section will receive the most attention from bankers, investors, strategic partners as it indicates how profitable your product/service or idea will be.   If there’s past performance of the product you will include historical financial statements (income statements, balance sheets and cash flow statements) for the past three to five years.

You will then present prospective financial information, including projected income statements, balance sheets, cash flow statements and start-up and capital expenditure budgets.  It’s critical that an experienced CPA, CFO, or financial consultant assist you in preparing these statements and projections.  If the numbers don’t add up or if your assumptions are not realistic or are inconsistent, your credibility with the reader will collapse along with your prospect of raising financing.

Funding Request – The purpose of most business plans is to support the need for financing for your business, product launch or acquisition.  Every section of the business plan up to this point is essentially building the case for an investment in or loan to your business. 

This section needs to delineate three major points: how much you need to launch your brilliant idea, what the money will be used for, and finally, what’s in it for the investor/lender.  An investor will expect a return on his/her investment commensurate with the amount of risk to be taken.  Similarly, a lender will expect an interest rate comparable to the riskiness of the loan.  A lender will also want to know what collateral or security for the loan is available.  

Conclusion – So what did we learn!  Unbridled enthusiasm in the business world can be lethal.

Enthusiasm matched by well-researched facts, theories, and projections can be very lucrative.  Writing a business plan is about doing your homework, seeing into the future, and winning the battle before it’s even been fought.

Don’t be afraid of a business plan….be very afraid of flying blind.  Good Luck!

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