Most entrepreneurs have a simple problem when it comes to business plans: they don’t have one.
A National Australia Bank survey last found that 80% of Victorian small businesses and 66% in New South Wales did not have a business plan. The worst place was South Australia: only 3% of businesses there had one.
There are many good reasons why entrepreneurs don’t bother to sit down and write a business plan. Entrepreneurs tend to be action oriented people and if you have to choose between selling to a customer and writing a plan, you follow the money.
Matt Hunt, an accountant with business services and taxation at boutique accounting firm Prosperity Advisers says some entrepreneurs can’t see the point.
“They think they know all that stuff in their head so they don’t need to have one,” Hunt says.
“So when they go for finance, they think they know it already and don’t need to write it down on paper.”
Hunt says it takes a good few days to knock a plan together, depending on the size and complexity of the business. And for entrepreneurs, the best time to do it is weekends. But who has the time? Even getting small business owners to do that, says Hunt, is a challenge.
“They think they have it all under control so why should they spend their weekends writing down what they already know?”
Michael Hutchens, managing director of BPM Financial Modelling says one reason why many entrepreneurs don’t have plans is that they don’t have the right skills. BPM is a specialist in developing business plans and its clients include JB Hi Fi and burger specialists Grill’d.
“You have tax advisors out there who are fantastic at tax, you get accounting and assurance advisors who are fantastic at accounting and you have investment bankers who are great at understanding the finance side of things, but you rarely have people coming together who have the full skills that can pull together working capital, tax, financial statements, valuations and running all the scenarios,” Hutchens says.
“Without an accurate model, you are basically doing back of the envelope numbers and saying based on that, I might last another three months. But with a proper model, you can realise working capital and debtors’ improvements and you can see you can bring cash in and you might have five or six months,” Hutchens says.
“Every company reaches a stage where they realise they are being limited by the fact that they can’t convey their growth strategies to third parties and the best way of doing that is by providing projections that are based on realistic assumptions.”
Business plans are important for a number of reasons.
First, the plan helps clarify whether the business is headed in the right direction. Is the market as fast as you thought? Do you have the right products? The right staff? Are the margins correct or do they need adjusting? There are a lot of hard questions here and many entrepreneurs might be blinded by love; so passionate about their product that they won’t ask these questions.
Asking the hard questions gives the owner the control and confidence to move ahead. With the questions answered, the plan has identified criteria to compare performance year on year. The plan also helps clarify what exactly the business is selling. And as every entrepreneur knows, you don’t get anywhere without self-belief and salesmanship.
A business plan sells others on the business. This is very important for attracting investors, arranging strategic alliances and partnerships, attracting key employees, obtaining big jobs and contracts and, most importantly, getting finance from the banks.
Andrew Fern, the operations manager at the Australian Institute for Commercialisation says a business plan is a must for anyone looking for capital. “Banks will feel a lot more comfortable if you walk in with a plan rather than turning up and saying I don’t have one but I need another 200K,” Fern says.
Business plans also ensure that everyone on staff are working to the same agenda. In large companies, staff can do things outside the plan but in small business, where there are limited resources and labour, you need everyone on the same page. And finally, a good plan keeps the business up-to-date. This puts it in a stronger position to weather economic storms, recessions and slowdowns and to hit the ground running when there is a recovery.
The best plans have 10 components:
- Executive summary
- Market analysis
- Company description
- Organisation and management
- Strategic analysis
- Marketing and sales management
- Service or product line
- The amount of funding needed to start or expand the business
Fern, who advises inventors coming into the Brisbane-based AIC, says there is a 10 piece template for business plans that incorporates all these components.
- Intellectual property strategy: Every company needs to know it has the freedom to operate and to offer products and services that are unique, allowing it to carve out a niche. Companies also need to know they are not infringing on the intellectual property of competitors.
- Product overview: This does much more than examine the item or service being sold. The company here identifies its mission statement, core competencies, the organisational values and its broad goals.
- Corporate structure: Fern says many entrepreneurs ignore this but it’s critical. Things can get ugly if a plan is not in place, identifying who owns what and who has the rights and if it just relies on handshake agreements. The plan needs to look at the spread of equity and identify who owns the shares and who has what rights. Having a shareholder agreement in place is essential. Does the company have a board? Who are the directors? “If you want external funding, you need to show you are serious, so this is important,” Fern says.
- Marketing: The plan needs to identify the product and service and who the competitors are. It also needs to examine the marketing plan. How will the product be taken to market? What are the marketing plan’s goals and objectives, strategic initiatives and tactics? Tactics are about the four Ps of marketing: price, product, promotion and place. So what sort of tactics will the company use to implement each initiative? What are the distribution channels? Will the company be working through dealers? Is it B2B? And what sort of sales force is in place?
- Financial modelling: This examines sales forecasts, start up expenses and projections. The best plans look five years ahead. The first two years is done on a month basis which means 24 sets of projections. After that, they should be annualised over the next three years. The financial modelling also needs to look at sensitivities and scenarios. What would happen, for example, if the sales price was 10% below the original figure? How would the financials look if the margins slipped from 20% to 15%? Fern says this is all part of normal business planning for the future. “You can’t be 100% sure of anything so everything has to be in ranges,” he says.
- Operational plan: This section looks at such issues as how the product is placed on the market, research and development needs, business systems and the supply chain. The level of complexity depends on the business but that should not be an excuse not to do it. “A lot of entrepreneurs put this on the back of an envelope,” Fern says. “You need to make sure you have a good handle on it.”
- Funding and investment: Where is the money going to come from? The plan needs to look at how the company deals with shareholders. This section has to look at the strategy that’s required to keep the cash coming in, something that’s absolutely critical for many start ups which run negative for the first few years. The reality is that most companies are debt funded so the plan must identify funding sources. That is the minimum expected by the banks.
- Potential partners: This part examines who the business might be working with once it is up and running. These could be distributors, or they could be licensees who rebrand the product. Either way, this part of the plan looks at how third parties will help spread the product through the market.
- Legal and compliance: Every business has to work its way through a jungle of laws and regulations, both here and overseas. A restaurant or café, for example, needs to look at food regulations. Electronic goods manufacturers need to know that all their products need a CE mark in Europe, showing regulatory compliance. A manufacturer of electric bikes here has to stick to a set wattage. It’s the same for every business. Whatever it is, the plan needs to identify the relevant laws and rules.
- The team: The plan looks at the current staffing levels and how this will drive the growth. Even if it is a team of one, the plan needs to look ahead at what changes will be required once the business reaches a certain point. When it reaches a certain level, more staff might be required. The company might be looking then at bringing in a chief financial officer or human resources manager. The plan has to identify when all this will happen.
The business plan also needs to be flexible. Nothing should be set in stone. A vendor might change, new customers might come in and the market could suddenly change. Experts say that it is important to update the plan regularly, at least once a quarter.
Fern says that while many entrepreneurs avoid doing a plan, it is the best way to keep things steady when the market changes. In any case, having a good idea is not enough and sometimes the best product doesn’t always win. “A lot of changes take place and having a plan is good because it gives you the scope to work through the issues,” Fern says.
Ref: Smart Company E-Newsletter 20 May 2010