Business Plans; Part 1- What to Know
If you had an idea that would change the world, or at the very least change the way certain aspects of business or civilization were conducted – say with a new scientific or technological breakthrough –, and the concept had some valid basis, like a theoretical formula or successful test, for example, then you might be able to raise development capital with nothing more than that idea written on a napkin.
Anything less however, is going to require a business plan, or, at the minimum an executive summary.
Which [of the two] you would require to pursue fundraising for your project/ business is directly relevant to the type of project/business you’re trying to develop, and the type of funding source you plan to approach.
But for the purpose of this article let’s refer to both collectively as the “plan.”
WHY DO I NEED A BUSINESS PLAN?
Many first time startups are so in love with their idea [of what their business idea can be] that they want to jump past all the preliminaries and get right to the project launch. But that is like a thoroughbred race horse skipping all its training and going directly to the starting gate.
Investors are investing in you as much as they are your project/business idea. And they need to feel comfortable that you have the drive, focus, organizational and management skills needed to perform the task: if the idea is great but it lacks the management required, the business project will fail. The business plan is just their way of knowing that the jockey and the horse have spent some time going through their workout.
I launched my first startup in 1982 with four thousand dollars ($4,000) that I borrowed from a friend of my mother’s. The first month my company generated ten thousand dollars ($10,000) in gross revenue and we broke even after expenses. By the twelfth month we were generating one hundred and twenty thousand dollars per month ($120,000) with a retained gross profit (GP) of twenty-three percent (23%).
By the start of our third year I had a vendor (a local trucking company) that we would contract to make freight pickups or deliveries in the New York metropolitan area on our behalf. They in turn had their own clients that hired them for local work but who also had long distance work, and that long distance work they would contract to us. It was a good collaboration until they got into financial trouble and owed my company fifty thousand dollars ($50,000).
They offered me the opportunity to take over their operations in exchange for the debt they owed, if they could retain a percentage of any future profits I would generate from that operation, while they continued to operate their warehousing business and also continue sales efforts for the combined operations.
It seemed like a good opportunity, but I knew that I would need additional capital to fund the cash flow requirements of this additional operation. But even with my company having been in business for several years — with continually climbing revenues and profits — the would-be investment group I approached wanted to see a business plan.
I argued – politely — that this was not a startup, and suggested that rather than reading a business plan “just come review my records and see the operation: I don’t need to explain my plan, its already working!”
This was my first experience with capital investors, and my first lesson in understanding how they think: they only care about what they care about, and you’re time line needs are of no concern to them. If they can make money with you they might, but don’t need your deal to make money. Thus, your only real value to them is that by needing them it seems to inflate their egos.
So for those of you just starting out, hear what I’m telling you, you NEED a well thought out, well written, clear and concise plan. This is crucial. No matter how much a potential investor loves your idea, they are still going to want to take home something to read so that they can digest it, maybe discuss it with others, and come back to it again for another read. And for some, they just want to see you jump through that hoop to know that you are capable!
WHAT A GOOD PLAN INCLUDES and WHAT IT PROVIDES
As a startup, the “plan” not only provides the how, why and when of the business proposition, but it also serves to show the investor things about you: that you’re a doer in the practical sense, committed to the project; not just a thinker with ideas — you took the time to write this plan!
Ideas are great, but it is the doers that will actually run the business, and a well crafted plan will portray you as someone who is well thought out, organized and capable of executing the plan.
You can either contract someone to write a plan for you, or write it yourself. If you decide to contract a writer, check their credentials:
1. have they written plans that in fact have resulted in raising investor money?
2. have they written plans in your industry?
3. do they have practical knowledge in your industry to accurately interpret what you’re saying and be able to get that message across through the plan?
These are the types of questions you should be asking: you’re hiring them for a job!
When I have advised people in the past (or written the plan for them), it was most important to zero in on the “why” a business project will work. Of course you have to explain how, but anyone who reads a book can learn how a particular industry works. Whether it’s a record label, transportation company, publishing company, manufacturer or a local café, the startups that succeed usually do so because they either have (a) some specific knowledge about the inner workings of their industry, (b) specific insight to the demographic they are targeting, (c) recognize a void that is missing in the marketplace, (d) have hard-to-obtain access to services, products or distribution channels, or (e) all of the above.
Such knowledge or access is “why” they can compete and be successful, and it is this that you must present as a part of any plan.
When raising money from strangers you must also be aware that you’re wading into legal waters: don’t state anything as fact if it isn’t. If you THINK you can achieve something, then use words like INTEND and HOPE, and EXPECT rather than WILL.
In fact you should make full disclosure up front that this plan is forward looking, and state clearly that elements of your business project proposal are projections, and not absolutes.
Here is an example: Forward-Looking Information
Certain statements in this document are forward-looking in nature and relate to trends and events that may affect the Company’s future financial position and operating results. The words “expect” “anticipate” and similar words or expressions are to identify forward-looking statements. These statements speak only as of the date of the document; those statements are based on current expectations, are inherently uncertain and should be viewed with caution. Actual results may differ materially from the forward-looking statements as a result of many factors, including changes in economic conditions and other unanticipated events and conditions. It is not possible to foresee or to identify all such factors. The Company makes no commitment to update any forward-looking statement or to disclose any facts, events or circumstances after the date of this document that may affect the accuracy of any forward-looking statement.
A good plan will state right up front that there are risk factors inherent with any early stage or startup business, and as such that he/she (the investor) should be able to bare a partial or full loss of their investment. It is often an urge for first time startups to avoid any negative risks and oversell the upside. Refrain from doing so. If the idea has merit a potential investor will see it despite you telling them over and over that the plan has risks, but by you putting these warnings out there it will speak to your character and integrity as someone that that investor can feel comfortable with.
Furthermore, beyond stating the inherent risks to the investor of any new business endeavor, you must identify the risks of the business itself. Therefore, towards proper disclosure, balance any and all potential statements (i.e. we intend to earn X dollars, we intend to enter into a contract with ….) with “but no assurance can be given that we be able to … realize such earnings, or successfully finalize any such contract on terms agreeable to both parties. These type of balancing statement should follow projected sales figures, contracts, and market share penetration statements, to name a few.
Identifying risks can serve to show a potential investor that you’re a realist and that you understand that while you believe that your business idea is not only valid, but should be successful, that you also recognize that nothing goes one hundred percent according to plan, and that you have backup plans if such a circumstance arises.
By inserting contingencies into your plan, you’re essentially showing an investor that things might go wrong, but that you have looked beyond the rainbow of success to see what pitfalls may present themselves along the way, that you’ve considered how to avoid such pitfalls, yet also made contingency plans of how to climb out of the pit if you end up in it.
How To Construct a Good Plan, click to continue to Part II
Written by Brie Austin, A columnist and reporter for a variety of magazines in the areas of music, lifestyle, nightlife, travel and business, a technical writer for business documents and websites, and co-author of I’d Do It Again.