Basics of Business Plans

The Business Plan

Introduction

A business plan is a complete description of a business and its plans for a period, usually between one to three years and in some cases beyond a five year period. For an existing business, it tries to explain what the business does while for a new business, it will address what the business plans to do when it becomes operational.

Apart from explaining what the business will do, a typical business plan will also try to answer some general questions such as:

• The nature of the product/service, who will buy the product and/or service and why?
• How viable is the business? This is done with the assistance of the financial forecast which highlights details of funds required to develop the business, the utilisation of the funds, the projected revenue/ expenses etc.;
• Who are the promoters of the business? This is done to ascertain competence and commitment of the promoters.

All over the world, people dream of owning their own businesses, usually for different reasons. While some dream of running their own business purely from the point of being financially free, others are motivated by factors such as being their own boss, avenue to greatness, fame and wealth. For some other people, it is purely to leave a legacy for their children or to create a value / contribution to the society at large through their unique product/service offering.

Whatever your reasons for starting a business, you need to be adequately prepared for the challenges ahead as venturing into a business without adequate preparations will lead to serious and unexpected challenges. These challenges may end up pushing the entrepreneur out of business.

A lot of entrepreneurs often start off with paid employment before venturing out. It is good to note that Entrepreneurship is totally different from the regular paid employment where one is expected to work for some hours and get paid at the end of a payment cycle (weekly or monthly). Venturing into entrepreneurship without adequate planning often leads to strained relationship among family members as it often leads to changes in lifestyles, different work schedule and family/societal expectations.

Consider a man working for a top class organization. It will not be unusual for him to have a family paid vacation, first class travels for all official trips etc. However, he may not enjoy such perks at the beginning of his venture into entrepreneurship. Also while in an organised paid employment, he might be lucky to have every class of support staff to assist him in his functions ranging from the office assistants, cleaners, administrative support services, human resources etc. who ensure that all he does is just to concentrate on his core job functions/ competence. Most of these support services may disappear the moment he steps out into entrepreneurship as he may end up doing most of the work at the initial stage till the business is able to pay the salaries of such support staff.

The Business plan simply directs the thoughts of the entrepreneur / business promoter into a whole lot of possibilities. It helps to plan in advance thereby predicting foreseeable obstacles and how to avoid them and at the same time being aware of those challenges which cannot be avoided.

Business Plan Basics

No matter how good and profitable a business venture is deemed to be, the only way to prove to third parties, potential investors and other providers of capital that you understand all about the business venture is through a well thought out and documented report which we will call a Business Plan. If it is not documented, it becomes difficult for a third party to see what the entrepreneur is seeing.

The size of a business plan has nothing to do with the contents of the plan. A business plan need not be voluminous; all that is expected of a business plan is for it to be clear, concise and realistic. It serves as a basic marketing tool which potential investors and providers of capital will review before extending an invitation for further discussion.

Considering that various users of business plan have different expectations, a basic business plan will definitely earn you an invitation. It is at the point of discussion that you have to convince them that you can convert the plan into action. It is almost impossible for an entrepreneur / business promoter to get the required funding just by submitting a business plan – no matter how good the plan is. What the plan does is for the entrepreneur to get his best foot at the door. From that point, both the entrepreneur and the providers of capital will now settle down to real business with great passion and enthusiasm and the discussion will flow from business operations, through branding, pricing strategies, customer acquisition, risk management etc. The essence of the discussion will be to harmonise the expectations of each party and agree on a common assumption and objective.

The success of the business venture at this point is no more dependent on the plan but the ability of all stakeholders to move in the same direction with the same objective. Adjustments to the business plan will be made at this point in line with the realities on ground to the extent that all the assumptions (business and financials) may be altered to ensure the success of the business.

Why write a business plan?

It is a known fact that not everyone who starts and runs a successful business venture starts with a business plan, but it will definitely make a difference if there is a business plan which will guide the business promoter/entrepreneur.

For every business venture that may require additional funding from third parties such as banks/financial institutions, venture capitalists, private equity investors etc., it is always wise and advisable to develop a comprehensive business plan with sound business reasoning.

If you are already running a business venture and would require additional funding, the banks may or may not require a business plan from you but the application process will definitely be given a more positive response if there is one.

Just like a business plan which serves different purpose to different people, the reasons for writing business plans varies and could be for any of the reasons listed below:

• Funding / Financing purposes – debt/equity
• Preparing for growth – either for a new business or in search of new customers
• Feasibility for a new business idea / project
• Anticipating change
• To solve an existing business problem
• Developing a better understanding of an existing business
• Create regular business review and course correction
• Define agreements between partners
• Set a value on a business for sale or legal purposes
• Communicating with the management team.

The purpose of a business plan is not the report that is produced; rather it is the process of preparing for the future. It allows the entrepreneur to develop a clear concept of the business or product, where to go and how to get there – more like a road map. It is good to highlight that a map does not take you to your destination; it only shows you the way to your destination with emphasis on some significant physical features such as rivers, mountains etc.

Writing a business plan is like running your business on paper – it can throw up issues, omissions, possible problems and weaknesses in the planning process. By implication, you have the opportunity of attacking any identified obstacle or problem by preparing for the inevitable, pre-empting the undesirable and controlling the controllable.

A well-articulated business plan simply transfers your thought to paper, makes it easier for the business promoter/entrepreneur to have a road map which ultimately will make it easier to raise adequate finance for the business and provide a basis to monitor the project or business based on plan.

A business plan serves the following functions when implemented:

• Planning – A well written business plan is a very good planning tool which ultimately will serve as a road map for the launch of your business, project or product.
• Monitoring and Control – With clear set assumptions, the plan serves as a basis to review actual performance against projections. The only way an entrepreneur can monitor the business performance / success is by comparing actual position with set benchmarks (projections). Where there are significant variations from expected performance, the entrepreneur can then ascertain the cause of the variation with the hope of resetting and redirecting the business towards the desired direction.
• Review of operations – Part of the monitoring process is a review of the business operations to ascertain if there is need to still continue with the initial plans or not.
• Benchmark for success – Performance measurement is only possible where targets have been set. With a well laid out plan, the entrepreneur can set timelines for achieving certain results and/or milestones.

Some business ventures that normally would require a business plan do not have one simply because the promoters of the business/ entrepreneurs believe in the myth that business plan is only for start-up companies that require external funding from investors and other providers of capital. Unfortunately, this is not true because part of the objective of a business plan is to assist the entrepreneur plan, monitor and control the business.

The reluctance to write a business plan is often based on various myths some of which are that:

• Business plan is strictly for start-up businesses only;
• Business plan is difficult to write and often a waste of time;
• You can run your business without a plan.

Sadly, many of the people who need a plan don’t know they need it. They get trapped by the myths of business planning

Users of Business Plans

Business plans could be written for different target audiences such as commercial and/or investment banks, venture capitalists, private equity firms etc. Each of these audiences have different expectations which is often influenced by factors such as the nature of businesses and funding pattern.

The expectations of some providers of business capital is discussed below:

Investors like Venture Capital Funds, Business Angels etc.

• These investors are typically discerning and have a good understanding of what they want. Being business men cum investors, they want good returns within the shortest period at the lowest risk.
• They are usually interested in the quality of management of the company as they clearly understand that business is not just about funding. They often make requests such as appointment as members of the Board of Directors, appointment of Chief Finance Officer etc., this is often to enhance the decision making process and guard against misuse or misappropriation of funds.

 Regular Financial Institutions such as Banks

• The banks are typically known to provide just debt (and rarely equity investment) to a company. Considering that they provide mainly debt, their primary concern will be on the source and timing of the repayment of both the principal loan amount and the interest charges thereon.
• Once the projected cash flow suggests that the principal and interest will be repaid in a timely manner, there is a likelihood that the bank may be willing to disburse the required fund.
• Banks also look out for good relationships for cross marketing activities. This is mainly to enable them offer a mixed product development.

Strategic Partners, Cooperation Partners

• These are organizations /institutions that are interested in mutually beneficial long term relationships. These set of investors are usually interested in long-term investment without loss of value, partly with regular payments of interests, dividends, license fees etc.
• They are more interested in stable relationships with a guarantee that their interests will be protected (e.g. synergies, access to raw materials or sales & distribution channels, etc.)

Public Authorities (Government Agents)

• These include various government agencies whose interest may not necessarily be financial. It may be to stabilise and support a particular business either due to the nature of its product/service, location or even just for political reasons.
• While financial reward may be important, it is usually not a deal breaker as investments may also be made for a project that may not exactly be financially rewarding (irrational investments).

Business Managers and Owners

• In a situation where business plan is prepared for business owners and managers, it is often for strategic planning, evaluation of new market opportunities, funding and in investment decisions.
• Organisations looking forward to expansion or possible investment options may also develop a business plan with this objective in mind.

In conclusion, it is good for the entrepreneur that apart from writing the business plan to raise funds, that he/she is the greatest beneficiary of the business plan. This is because the business plan becomes a working tool for the business to plan, monitor progress and control the undesirable issues that may come up in the course of running the business.

I strongly encourage the entrepreneur to view the business plan as an educational and working tool to understand the market, the business model and knowing how to put all the moving parts together when the business starts.

If you are considering writing a business plan for a new business venture or an already existing business plan, feel free to reach out to us via our email address info@businesscatalystslimited.com or simply by calling any of our representatives on + 234 817 908 6353