The business plan

 

 

The personal computer has revolutionized the business plan.

  • It gives you the power to manipulate numbers in very large quantities. A one-person business can deliver the kind of multiple financial projections that only a mega corporation could do 25 years ago. A small business can contemplate several different scenarios with ease; it can easily do a sensitivity analysis to find which assumptions have a big impact on the bottom line or on cash flow; it can do all this in a presentation so professional, you can hardly believe you did it yourself.
  • It enables you to build a whole series of versions of the plan, each adapted to the special interests of the intended target. You should never tell different stories to different people, but you may want to omit some details to some people. By using the computer, you use your material consistently, plunking in blocks of type or numbers from the master version into your limited versions.
  • It enables you to update your plan easily and cleanly. As you discover that certain of your assumptions are off the mark, you can change those assumptions in your plan and print out a new version. Be sure you date them.

This very power has had the inevitable counter-effect. The people for whom the plans are intended have become much more sceptical about them. They know that you can roll off something very professional with little or no thought. So they look for clues as to how much preparation and thought has gone into them. It’s a more subtle game, now.

Definition of a business plan

The business plan is the vehicle for communications between the person promoting the business’s vision and people whose co-operation is required to achieve that vision.

Therefore, it must be dynamic and flexible. It need not be written, but few are effective if they are not written. It can be tailored to individual needs and must be as specific as it needs to be for each targeted audience.

We can explore the nature and possibilities of a business plan using the tools of a police investigator. Who, what, where, why and when.

But we have to adjust it a little! I do not anticipate you or your fellow students will break down doors to find out about where to do a business plan. So we will drop Where and substitute How.

  • Who is it for?
  • What is it, anyway?
  • Why do we need a business plan?
  • When should we prepare one?
  • How do you prepare one?

Finally, we must add If. Does a business need a plan, really? We’ll start with that question first.

If

We’ll start with the story of Michael Cowpland. He burst onto the Canadian scene when he founded Mitel with Terry Matthews. He was a poster boy for entrepreneurial flexibility then. He worked out his business plan on the back of an envelope and the two partners grew the company to sales of $350 million. Then, in his own words, he took his eye off the ball. Mitel dug itself into a deep hole and was taken over by British Telecom.

From the moment he went on his own, he ran like a hare, dodging bullets and leaping over high fences. He started with laser printers, then he refined the product to produce “dumb” laser printers that functioned with multiple PCs. That didn’t turn out well, so he leapt into desktop publishing, which took him into large storage disks. These two didn’t take off as he expected either, but the next one did – Corel Draw, which now has sales of about $50 million.

Mike told me once, in another context: “Always throw out your first attempt at a product when you start a new company – but never tell the employees. Only the top guy must know the product they’re all busting a gut for will almost certainly be canned in its entirety.”

What does that say about planning? He planned every step  of the way – probably more thoroughly after Mitel – but plans can take many shapes. In my survey of 100 entrepreneurs across Canada, I asked every one of them how they planned. Only 4% said they did not plan. The rest of them had any one of four approaches to planning.

 

Planning type Distribution of entrepreneurs Percent that have a time frame Percent that are written
Project plans 24% 38% 50%
Goal setting 8% 88% 17%
Direction setting 11% 45% 28%
Full-scale plans 53% 91% 98%
No plan at all 4% 0% 0%
Average   70% 65%

 

Bankers and investors won’t look at you without one now. If you start a business with no debt, you don’t need the approval of a banker but, if most of the people who drop the idea of doing a plan grow more slowly or fail. The challenge today is not “if”. The focus is on the other detective clues.

What

There are countless models and templates for business plans that are available in books and in classrooms. CompuServe has whole groups of them.

In all of them, the main ingredients include:

  • A one or two-page summary
  • A description of the business (including an industry overview, growth prospects, profit margins, rates of new entries and failures, and, of course, production costing and competitiveness of the business)
  • Strategy
  • A marketing plan (including a review of the competition, pricing and a depiction of the competitive edge). There are exceptions but they are rare. American Barrick, for example, doesn’t need a business plan because everyone sells their gold at the same price.
  • Financial projections
  • Cash flow projections
  • A statement of capital structure and financial needs.
  • Biographies of the owner or owners and their principal employees. Plus references.

Most of these topics are self-evident. They usually demand a significant amount of time and effort to gather all the details but the requirements are obvious. With one exception – strategy, which can be a nebulous subject. But a good way to start is to ask a lot of questions. Courtesy of the FBDB, the overall issues facing a growing company include:

  • Is the business performing to its potential?
  • Is it missing key opportunities?
  • Is it well positioned versus its market and its clients?
  • Is it well positioned versus its competition?
  • Does it know where it stands and where it’s heading?
  • Does it have specific action plans?
  • Is it organized to achieve its strategic objectives?

These can be assessed by looking at whether the business is suffering from any strategic challenges:

  • Increased competition
  • Declining market share
  • Lack of new product development
  • Low product quality
  • Risk of new competitors entering the market
  • Risk of substitute products
  • Government regulation or deregulation
  • Lack of consensus between management and team members
  • Vulnerability caused by new technologies
  • A squeeze from customers or suppliers
  • Vulnerability caused by high capital intensity or a precarious financial situation

Then we look at whether the business is suffering from any operational problems:

  • Low productivity
  • Low sales
  • Poor marketing
  • High production costs
  • High labour costs
  • Low morale
  • High inventories
  • Credit or equity shortage
  • Inadequate financial structure
  • Reduced profits
  • Managerial problems

Who

The most important person in the preparation of the plan is the owner or the chief executive officer. A business plan that is a bunch of numbers and CVs prepared by the secretary or the junior financial clerk will never have any impact at all, no matter how beautifully it’s prepared. A business plan is a personal document, in which the people on whom its success depends have invested a lot of their own time and commitment. If the top person hasn’t put a bit of their own soul into the plan, no-one else will.

The top person cannot do it all alone, however. That means that anyone who has a clear area of responsibility has to contribute their profit centre or cost centre to the consolidated picture. I believe that the final plan should be the sum of many subsidiary plans. And each subsidiary plan is a personal document embodying the aspirations and competencies of the person who is leading that part of the organization. They, in turn, will have consulted and discussed their plan with the people they work with, so that they too can buy into the process.

It’s an iterative process. Plans are formulated then discussed at several levels. Then they are reformulated to take into account the feedback received, then discussed again. Until there is a degree of consensus. Plans cannot be imposed from above. They can be sold from above, but the key people in the organization have to buy into them of their own free will. It’s a big negotiating session.

How

The single most important part of any business plan is the assumptions underlying the financial projections. You can produce any result you like by changing a few assumptions and the people who read your plan will know that. So, there are a few cardinal rules to follow in preparing a plan:

Identify ahead of time all the major assumptions you will have to make. For example, the prime rate and loan rate at the banks, industry sales growth, market penetration, prices, costs of principal supplies, number of employees and their salaries, cyclical variations during the year, average age of payables and receivables, etc. These assumptions should then be listed at the top of your spreadsheet. Subsequent lines should use the cell addresses for these assumptions, so that you can change your entire plan by changing a single cell containing an assumption. As you build your plan, you will discover assumptions you didn’t think of at the start. Don’t take short cuts – put it into the system, because you are building a system and you’ll pay for it if you don’t respect it.

You should also build in some of the key ratios – like return on capital or liquidity ratios. Of course, a cash flow forecast is absolutely essential – and it is in fact quite easy to do once you have the rest done.

With this base, you can now start the fun part! You can develop a sensitivity analysis by changing an assumption and seeing the effect it has on the bottom line or the cash flow. Sometimes you will want to develop a number of scenarios that embed a range of assumptions for the key assumptions. You will be amazed at how little difference some assumptions make; and you will be awestruck at the power of other assumptions. The average age of receivables and payables has an enormous effect on cash flow. A conservative assumption on payables and receivables can double your working capital requirements. You may not want to be that conservative, but you should know the consequences of poor assumptions!

In the end, you will come out with a reasonable bottom line. It will be in line with the industry, in line with the expectations of your investors and so on. That’s the way business plans have to come out! If you put in an obscene profit, you’ll be laughed at; if you put in too little profit, no-one will read any further. In effect, the final business plan is a game. You know it is meaningless because it’s impossible to be sure about so many key variables. Given all this, however, it is critical to be absolutely sure that you can justify the sensitive assumptions. You should be as conservative as you dare with these assumptions. You don’t have to tell everyone which ones are the most sensitive! But you had better be sure of it yourself.

In case you’re thinking that the whole exercise is a waste of time and a sham, I would remind you that a business plan is a process, a dynamic vehicle for communicating that changes continuously, as circumstances change.

If you don’t know where you’re going, all roads lead there.

No matter how variable the final result, you should resist the temptation to use very rough calculations. I have met some experienced entrepreneurs who can use the back of an envelope to calculate right on the nose what their business will do. But they operate on the foundation of a series of critical ratios that they have absorbed into their bones over the years. The rest of us can never have that capability without the years on the job.

It is important to be precise about the projections in a business plan. Not because it gives you a better idea about likely outcomes. Not because bankers want to see plans like this. It is important  to be precise because the plan must reflect all the important detail that governs a real business in the real world. The precision used to deal with that detail ensures that the effects of assumptions are not being distorted.

When

Everyone does them at startup nowadays, because it’s tough to get funds without them.

It’s actually much more important to do them as your company grows. It doesn’t have to be annually. The most important times to do a business plan are when you’re reflecting on the business, thinking of changing your approach, maybe adding new products or new customers. A business plan puts what you are doing in the context of what you could be doing. This doesn’t have to include all the elements of a formal plan – you might not need to do anything beyond a new set of financial projections.

Many people don’t really find time to do an update of their business plan when they most need it – so sometimes it’s better to update it annually as a matter of course. A good time to do it is with the financial statements for the yearend, or when you’re preparing your budget.

It’s important to note, however, that a business plan is a quite different animal from a budget. The budget is not a planning document, it’s a forecasting and measuring document. You do a budget to quantify your strategies at the beginning of the year and to see how you’re doing as the year progresses. The principal benefit of a budget is to alert you to the early-warning signals if something is not going right – or if it’s going too well. You should do a budget at least once a year, but it’s often useful to do one immediately if the environment changes significantly. All you have to do is change the numbers for the balance of the year.

Why

Bankers

  • The banker makes a decision just like every other investor – he or she is making a judgement of the entrepreneur, assessing their capability to pull it off. The bottom line is the excuse for turning down a project, never the reason for accepting it.
  • The top line is the heart of the plan. The revenue projections must have a solid justification, with lots of margin for error. It is critical to offer more than one scenario for revenue projections.
  • The justification for cost estimates are a dead giveaway for how well you know your costing. You cannot baffle brains with BS.
  • A one-page executive summary is essential. It’s a total myth to believe that bankers want a lot of justification. The average account manager has 120 accounts. A long, wordy plan guarantees it will not be read.

Investors

Investors won’t waste their time on ho-hum business strategies. They buy into an exciting concept that offers significant upside. You have to understand, however, that the excitement they see is seldom the excitement you see. They see your business idea in relation to their own interests and situation. A big financial pay-off is important to the venture capital industry, which is 100% in the business of investing for big gains. For informal investors, the money is second to the excitement and the peripheral opportunities, such as opportunities for their own businesses or testing a market they’ve been thinking of. That’s why the informal investors are by far the most important source of equity capital.

When you approach an investor, be sensitive to what creates excitement! The most important part of the plan is the description of the business, its vision. If you think this through properly, you will design your business to suit your backers. This is not a cop out; it is living with reality. Your goals must always reflect your stakeholders. If your current description isn’t creating excitement for your potential investors, should you be excited about it? Never be afraid to change it for the next person you see. It’s a dynamic document.

They are primarily interested in you. They want to be comfortable with you. So you must be prepared to be open with them, to share your concerns and your options. You must be open to their ideas and suggestions. If you don’t to trust them and have them trust you, don’t even approach them in the first place.

They are very interested in control. It’s best not to say what percentage of the business you are prepared to sell to raise the capital. That should be the last piece of the jig-saw to fall into place. If you aren’t dogmatic about who holds the controlling block, they won’t be either. But don’t be fooled – control is absolutely critical. Just don’t lay your cards on the table in writing in your business plan. When the issue comes up, you will find they don’t mind taking a minority interest as long as they can be sure they will be able to exercise majority control in the event things turn sour. So you must give them a clear route to control if you mess things up. It’s only fair.

Other

A business plan shared with your employees, your suppliers, stakeholders and even your customers allows them to buy into your vision. It’s a judgement call on how much you tell them. They may pass it on to your competitors, they may decide to become competitors themselves, or they may decide that they don’t like your ideas and stop supporting, supplying or working for you. These are real risks, but they should never be a core part of your thinking in putting together a plan. It is seldom wise to base decisions on all the bad things that might happen? If you believe your vision will precipitate bad responses, there may be something wrong with your vision! By sharing your vision, people usually find it easier to follow you, particularly if you allow them to influence the vision so that they feel they are a part of it. Once people are aware of where you want to go and have bought into it, their decisions will all be better because they understand the context.

By thinking of all your stakeholders, you are forced to focus on other opportunities – other products for customers, other customers for your products, new products from suppliers and so on. By drawing these people who are essential to the success of your business into the planning process, you encompass all their opportunities into your own.