WRITING AN EFFECTIVE BUSINESS PLAN - PART 5

by: Cary Christian

In previous articles we discussed the following sections of your business plan:

Executive Summary
Business Description
Industry Analysis
Market Analysis
Products and Services
Marketing and Sales Strategy

We're going to finish up this series on writing an effective business plan this week. We'll close out discussing operations, management, funding and financial forecasts.


OPERATIONS

The readers of your business plan are going to want to know how your business operates on a day-to-day basis.

Purchasing is a good place to start. Describe how you purchase raw materials or finished goods from your vendors. If you have sweetheart deals with some of your vendors, describe them. Provide a summary of your warehousing requirements and capabilities. If you have drop ship or just-in-time capabilities with any vendors, describe those relationships as well.

If you manufacture products, you will need to fully describe your manufacturing processes. Emphasize any advanced processes that you believe significantly reduce your cost of goods or increase quality and provide you with the ability to compete more aggressively based on price and/or quality.

You will want to revisit your sales methodology in this section. You can refer back to your detailed discussion from the previous section, but be sure to describe the sales process here with emphasis on how it integrates with all of your other operational processes.

For example, when your sales process kicks off and ultimately results in a sale, how is the sale processed from your existing inventory or through your drop shipper? How quickly can the products be delivered to the customer? How do you handle out-of-stock situations?

If you sell services, you will need to thoroughly describe your service delivery methodology. For example, who is assigned responsibility for managing the new client? How are personnel assigned to client projects? How do you track progress on the project? How do you handle billing for services? Who deals with customer or client complaints?

Are you responsible for warranties on your products? If so, you need to address this area in detail. Warranty services can represent a tremendous potential liability and the reader is going to be interested in how you minimize your risk. They are going to want to know how large the potential liability can be based on historical data, so do your research in this area. If your vendors are participating with you in the provision of warranty services, explain the extent of their participation and how that helps reduce your risk.

Provide an overview of your support departments, such as accounting, finance, and human resources. The reader of the business plan is probably more interested in operations that directly affect sales, but they are going to want to know that you have the basics covered as well. A company that has problems in these support areas will likely see those problems affect sales at some point.

You will also want to tell the reader about your service areas, if applicable, and the resources you have available to properly service the areas you deem your target market.


MANAGEMENT

Ah, now here's a section that can make or break you with venture capitalists or other private equity funding sources! Your banker already knows you and does business with you, so chances are he's already very familiar with your management structure. But most equity providers don't know you from Adam. How do they get comfortable enough with you to invest their money in your business?

In this section you are going to provide information on yourself and all of your top executives. Your emphasis will be on relevant experience in your specific industry. For example, if you have worked in progressively responsible positions in your industry for 30 years, and this experience is verifiable and favorable, you will most likely pass with flying colors. Hopefully the majority of your executives have this type of resume. But this is not always the case. In fact, it is USUALLY not the case.

If you have been running this business successfully for awhile, your prior experience is going to be less important. You will be able to point to current, verifiable accomplishments that your executive team is responsible for that will mean far more. If you are a startup, be prepared to justify your team's ability to run this type of business.

Prior successful experiences in running other businesses in other industries can substitute for experience in your newly chosen industry IF you have done a good job of demonstrating your knowledge and understanding of this industry in the previous sections.

If your management team is light on experience all the way around, don't give up. You can always create an "advisory board" for your business that is composed of individuals who DO have experience in your industry. These people do not have to be owners, shareholders, partners, or participants on your regular board of directors. They are strictly an advisory group that brings expertise to your business that you do not have internally.

You may have to pay these people to participate on your advisory board or provide them with other incentives. You can also ask your major vendors to provide you with a participant. If you are a large enough customer, or have the potential to be, they will probably be happy to do so. The important thing is to select people whose experience level will impress the reader of your business plan and help make up for a lack of direct industry experience on your internal team.


FUNDING INFORMATION

Now we've made it to the fun part! There are really two short parts to this section:

1. How much you need, and
2. How you're going to use it.

The amount of equity or borrowing you need should tie directly to your cash flow statement that will be included in the financial forecast. Since the financial forecasts will provide all the detail information the reader will require, this section can be very short. Start it with a statement of how much you need and then provide a table that summarizes the use of cash from your cash flow statement.

Do not present all the categories reflected in your detail cash flow statement. You'll need to analyze the statement and select the main uses of cash that cause you to have negative cash flow. For example, it might look something like this:

FINANCIAL FORECASTS

Your financial forecasts need to be very detailed and thorough. This is not an easy task.

Your forecasts will culminate in three high level schedules: an accrual basis income statement, a balance sheet and a cash flow statement prepared in the same format as your income statement. If your business is a simple business and you use the cash basis of accounting, your income statement will be very similar to your cash flow statement, but the two are NOT exactly the same.

For example, a cash basis income statement will reflect depreciation expense and capital expenditures will be capitalized rather than expensed just like in an accrual basis income statement. The cash flow statement does not reflect depreciation expense as an outflow of cash since depreciation is a non-cash item, but it will reflect the funds expended to purchase capital assets as a cash outflow.

You should include a variety of schedules that support these three main statements that serve to fully lay out all the assumptions made in your forecasting efforts. For example, there will be a schedule that lays out all of your sales assumptions and computes your sales for each period in the forecasts. Only the bottom line sales number carries forward to your income statement. You will have similar schedules for Cost of Goods Sold, Operating Expenses, Sales and Marketing Expenses, Capital Expenditures, Depreciation, Loan Amortization, and any other category of income or expense reflected on your income statement. Be sure to build the support schedules down to the lowest variables possible.

If you have line items on your forecasted balance sheet and cash flow statement that require, or would benefit from, supporting statements, provide those also.

Of course, you must make sure that your income statement, balance sheet and cash flow statement all tie in to each other as well as to the supporting statements. Nothing will make you look more amateurish than providing statements that do not tie to each other internally and externally.

We like to include the financial forecasts directly in the business plan along with explanations of the assumptions used in its preparation. For example, if we prepared our business plan in Word and our financial forecasts in Excel, we would imbed the Excel schedules in our Word document and provide appropriate discussions of the assumptions between the schedules.

We would also include the complete set of financial projections as an exhibit to the business plan so the reader could browse it without the verbiage if they so desire.

If you set up your financial forecast properly using spreadsheet or specialized forecasting software, you can test the effect of changes in assumptions on your cash requirements. This is important to do. You want to know which assumptions are particularly sensitive to changes for several reasons. Your readers may want to know, and if they do, they're not going to be impressed if you don't know. You also want to know so you can be sure you are asking for enough money if your assumptions prove to be optimistic. From an operational standpoint, this type of analysis can also help you identify ways to minimize risk.

You may want to include sensitivity analysis within your forecast package. If you find your results are not terribly sensitive absent major swings in the assumptions you have made, it is good to be able to show this.

If you are going for a large amount of capital or a large loan, you might need to consider having your forecasts reviewed by your CPA and include the Accountant's Review Report or Accountant's Compilation Report as part of your business plan. Some lenders or venture capitalists might require this.

If you are preparing a business plan for an existing business, you will also need to include historical financial statements, probably as an exhibit to the business plan. Banks and VCs might require either reviewed or audited statements.


WRAP-UP

We've based most of this series on preparing a business plan on the scenario where you're attempting to raise funding for your business either through debt or equity. This is the most common reason people prepare a business plan. But business plans are useful for other purposes as well.

Every business should have a business plan, meticulously prepared and in writing. The preparation of a business plan forces you to think about every aspect of your business. This can only be good. The process will help you identify potential weaknesses in your business processes and strengths you should be taking advantage of.

If you run a very small or a home-based business, the preparation of a business plan is no less important. Run your small business as if it were a larger business and it might make growing your business just that much easier. Your forecasted financial information might not be as sophisticated, but you can certainly put the same amount of effort into defining your target market and determining how best to market to it. A business is a business and must be run like one regardless of its size.


Copyright (c) 2002