A Business Plan for Business Finance

The business plan is increasingly playing a crucial role when it comes to securing small business finance. Not only with banks, where it is now mostly compulsory to have a business plan if you are hoping to apply for business finance, but also with venture capital firms and angel investors.

Today in order to get your new business going, your business plans are essential at this stage of setting up your business. In it you will already have scoped out what your money needs are and how you plan to raise the startup capital, and you'll be using it to persuade potential investors and lenders of the benefits of funding your new business.

Your financial calculations in your business plans therefore need to be thorough and accurate and presented with confidence. Everyone expects that they'll be able to stick to their business plans and only need to borrow the absolute minimum, but more often than not something unexpected crops up to throw a wrench in the works. It therefore makes good business sense to include a contingency element in the amount of startup capital you request. It's better to do that now and have the extra cash as a safeguard than it is to have to return to your lender or investor not far down the line to ask for more money.

If it wasn't in your original business plans they are likely to be concerned about your financial ability and your request may be rejected. Many people wonder how much startup capital they should request. You want to keep costs to a minimum and invest your money wisely in your new business, while still having the security of a little extra for backup if required. What startup capital you borrow should give you a realistic challenge for your new business but should not be too risky. And back up your calculation with evidence in your business plans, since it has to be credible.

With numerous organisations in South Africa now supporting the use of business plan software in order to get the business plan right, the issue is hard to ignore. Organisations such as Investors Network and the SA Venture Capital Association are all throwing their weight behind effectively constructed and well researched business plans to ensure that not only the business is successful in finding the finance it needs but also that it is able to start successfully.

Business planning - case evidence and examples

Business plans are certainly not a one size fits all. If you are a serial entrepreneur like myself you may have learned this along the way. Whether you have used strategic planning in the organizational context, perhaps through using a business plan template or two to ensure you get the finer details spot on, a formal business plan when seeking business finance from a bank or investor - perhaps using the least business plan software to ensure you cover the requirements of said investors or banks, a very flexible and practical plan to support you with your small business or simply a to do list for your day to day running of the business, perhaps with a few mind maps and strategies with which to cope. BUsiness planning however you see it really needs to be seen as a crucial aspect of achieving dreams goals or objectives. This is perhaps better shown in tow simple cases, looking at just how business planning can be used.


Case Study #1: Skip the formal document
Reece Pacheco and his fellow co-founders started the game-film editing and sharing service Homefield in 2007. When they started to court investors, they were regularly told to send their business plan. Reece spent a lot of time and energy creating a traditional one. It was difficult because, as he says, "early on, we didn't know everything we needed to know." In two weeks what he'd written was no longer relevant. He also found that the investors and partners most intrigued by Homefield didn't care about the plan. They just wanted to hear his story and why he was passionate about the business. In fact, those that were less interested were more likely to request a plan.

Reece decided that a traditional plan wasn't practical. "The web moves too fast. Most businesses move too fast he explains. "Investors' attention spans have gotten shorter and shorter." And the customers Homefield has secured are much better proof of their company's viability than any five-year projections. So Reece now uses a six-page PowerPoint deck that is flexible and easy to update. The aim is to "build relationships," to convince partners and investors that he and his colleagues are the right people to execute on their unique idea. And so far, it's worked.

Case Study #2: Tell a compelling story
Jenny Machida joined the founding team of Sevident in December 2009 as the Chief Business Officer. Sevident is a start-up focused on developing a rapid diagnostic platform for infectious disease. Like many other businesses, their value lies in the flexibility of the technology they offer, so it's critical to convey its various applications. The challenge is to show that in a business plan without sounding unfocused.

The team started off by describing the business in presentation form. They had PowerPoint decks and one- and two-page executive summaries but hadn't developed a formal business plan because no potential partners, customers, or funders had asked for one. "You don't need a plan until you have an audience for it," Jenny says.

But, they decided to create a formal plan because they assumed potential funders would need one further along in the process. The document they use now, which is roughly 30 pages including data and financials, extends directly from the earlier presentation materials and is regularly updated as the business evolves.

Rather than explaining all the potential applications of their technology, they now tell a concrete story about how they will use the first application. The plan is still flexible in the way it describes the company's operations and how they will play in various markets. "We've made a deliberate choice to foreground the capability of the technology itself," Jenny explained, rather than focus exclusively on a specific market opportunity. The plan demonstrates that they have thought of all of the various options for how the business may develop without laying out exhaustive and low-probability contingency plans. "Everyone knows that there's uncertainty to a new business but you still need to tell a compelling story of how you're going to knock down risk," Jenny says. Sevident is now in active diligence with several venture capital firms.

Both cases show some of the varied uses and options for the business plan, not just the must do and wish I did not have to versions. This really can and should be a key element of succeeding with your business.

Scenario planning for start-ups

With start-up companies especially often seeing business planning more as a chore, large organizations around the world recognize it as a key tool thought which to prepare them selves for the opportunity and challenges that the future may hold. A business plan strategy that has been used with varied success for decades now is that of scenario planning.The scenarios relate closely to key elements of the strategy such as the competition,technology, or geography. The approach is then to develop a “resilient” strategy that can deal with wide variations in business conditions.For instance, each scenario is analysed to determine the optimal setting for each element (What would be the best marketing strategy for Scenario A? For B?) The most resilient option for each strategy element is chosen for each of the scenario-specific settings. 

The resilient options are integrated into an overall, co-ordinated business strategy, takeing all scenarios at face value without judging probabilities.This approach makes maximum use of scenarios in strategy development. It provides management with the maximum feasible range of choice and forces careful evaluation of these options against differing assumptions about the future. But it requires effort and patience; and it works best when the decisions -makers participate directly in the scenario process. An example of this approach is the work that United Distillers (now Diageo) has carried out a number of scenario development exercises to assess the future of markets such as India,

South Africa and Turkey and hence the potential for and possible direction of business.

Scenario planning is regularly used at US-based clothing specialist Levi-Strauss by senior management who sit on cross-functional committees at headquarters level. Scenarios have been used to heighten awareness of the challenges facing the business, and to develop strategy in relevant areas such as the environment. They have been used to help thinking in the context of challenges, such as what would happen if cotton no longer existed, or what would be the impact of the deregulation of the cotton industry in the US.Erste Allgemeine Versicherung, an insurance company based in Austria, first used scenarios in 1988. The main areas considered were politics, economics, the insurance industry structure and changes, technology and demographics. The objective was to look at the business environment and how other competitors might develop. As a result of the scenario process, the company anticipated the fall of the Berlin Wall and the opening up of Eastern Europe before it happened. This was identified as part of one of the scenarios in 1988. This enabled the company to be ready to move into Eastern Europe and therefore be one of the first companies to set up in Hungary. Companies were also founded in the Czech Republic,Slovakia and Slovenia.

BA used this approach to develop strategy, taking each scenario through to a full numerical plan. With hindsight, they thought that the last stage – the full numerical plan - had been more work than warranted by the benefit. This seems to be a consensus, that the best use is staying at the descriptive level, to avoid a focus on the detail of the model rather than exploring the underlying assumptions.Strategy Evaluation This method of connecting scenarios to planning uses scenarios as ”test beds” to evaluate the viability of an existing strategy or compare proposed strategies. It is often the best first use of scenarios in a company’s strategic-planning system. The strategy may have derived from a set of implicit or default assumptions or a single- point forecast – the approach identifies quickly “bottom-line” issues and provides senior managers with immediate evidence of scenarios’ utility.It is often used in “management game” mode, where a business unit is played against a competitor under each scenario. This allows the management to assess the likely success of the business in the diverse conditions of the scenarios. In particular, it homes in on opportunities that the strategy addresses and those that it misses, threats/risks that the analysis has foreseen or overlooked, and factors affecting competitive success or failure. This approach normally highlights the options for changes in strategy and the need for contingency planning.For instance, in 1995, ICL’s manufacturing division had been trading as D2D for several years and increasing the amount of work done by the division for organisations outside ICL. D2D’s business plans needed to cover a range of external business conditions and customers. We applied the test bed of our IT industry scenarios to the plans, and realised that the plans were based on a set of default assumptions closely aligned to one scenario. When we ran the plans through the wind test of the other scenario, we found that a number of the operational and business characteristics that D2D had assumed to have very high value were of less interest to the customers in this scenario. The analysis helped us to decide to sell D2D to Celestica, a global contract manufacturing company, in December 1996.Sensitivity/Risk Assessment   Scenarios can be used in two rather different ways to assess risk. One way is to Identify key

conditions in the future market/industry environment (such as size/growth of market, changes in regulatory climate, or a technological breakthrough) that would be necessary for a “go” decision on a particular project. The other is or to apply scenarios to a portfolio of projects and to use a technique such as a Market Attractiveness/Capabilities matrix to evaluate the comparative risk of the projects or businesses.Using scenarios to evaluate a specific decision (such as a major plant investment or new business development) is very useful if there is a very clear and specific “decision focus” that lends itself to a “go/no go” decision. For instance, a construction company uses the technique

for “back of the envelope” examinations of business propositions, and as part of its project portfolio management. In more complex cases, computer modelling (with scenarios providing assumptions) can be used to evaluate the strategy’s resilience or vulnerability to differences

in business conditions. So for instance 3M Telecommunications Systems Division has used scenarios, linked to payoff and risk assessment, to implement new strategies following deregulation.Hedging or contingency Planning

This fourth method starts with one particular view of the world – this may be the assumptions behind the current plan, or “the most probable” of several separately developed scenarios. Then a strategy and plan is developed to fit this scenario, maybe using a SWOT (strengths, weakness, opportunities, threats) analysis.The strategies & plans developed for one scenario are then tested against other scenarios to assess resilience and the need for modification, “hedging”, and contingency planning. In its step-by-step process, this addresses many key questions that scenario-based strategy should ask, and avoids the pitfall of focusing on only one scenario.Using probabilities attached to scenarios has been extensively used in France, with Michel Godet’s guidance, as described in (5). Probabilities are also part of the Batelle approach, and the CSM (Comprehensive Situation Mapping) tool, which has been used for instance to model

new banking competitors.Perhaps the issue is that large corporations have more at stake, or perhaps its more a case that these corporations realize what is at steak because of what they have achieved. Entrepreneurs to need to take the issue of planning more seriously. Yes of course we need to be flexible and responsive to what clients, the environment and competitors through at us and having a number of well researched and resourced options to our disposal is half the battle won.

What your business plan should include

With so much being written about what should a business plan include, you may be confused as to what exactly needs to be included. It really will depend on the purpose of the plan, the industry you find yourself in and what stage of your business you are busy with.

Your business plan should include a summary of what your business does, how it has developed and where you want it to go. In particular, it should cover your strategy for improving your existing sales and processes to achieve the growth you want.

You also need to make it clear what period the business plan covers - generally the next 12 months to two years.

The plan should include:

1. Your marketing aims and objectives, for example how many new customers you want to gain and the anticipated size of your customer base at the end of the period. To find out about marketing strategy, see our guide on how to create your marketing strategy.
2. Operational information such as where your business is based, who your suppliers are, and the premises and equipment needed.
3. Financial information, including profit and loss forecasts, cashflow forecasts, sales forecasts and audited accounts. See our guide on cashflow management: the basics.
4. A summary of the business objectives, including targets and dates.
5. If yours is an owner-managed business, you may wish to include an exit plan. This includes planning the timing of your departure and the circumstances, eg family succession, sale of the business, floating your business or closing it down. See our guide: consider your exit strategy when starting up.

If you intend to present your business plan to an external audience such as investors or banks, you will also need to include:

1. your aims and objectives for each area of the business
2. details of the history of the business, including financial records from the last three years - if this isn't possible, provide details about trading to date
3. management's skills and qualifications
4. information about the product or service, its distinctiveness and where it fits into the marketplace

If you haven't already written one, you can use our interactive tool to create a business plan.

Business plan tips from a successful entrepreneur

Established in 2003 near Cape Town, Fenwick & sons produces decorative ironwork using traditional techniques combined with modern technology. A key challenge for Fenwick & sons has been to keep control of the business as growth accelerates. John explains how this has been achieved.

"Treat your business plan as a work in progress and review it often." We used  business plan services which really speeds up the process and adds to the efficiency in a big way
"Don't become complacent when things are going well, always worry positively about the future."
"Put formal processes in place from the start as informal processes of any kind can often break down, with potentially catastrophic consequences, when rapid growth puts them under pressure."

What I did

Review progress

"A good business plan is a must for any new or growing business since it gives targets to measure against. We had clear goals for our first year's trading, plus an ongoing strategy for steady growth in the first three years.

"However, after three months our sales were 200 per cent higher than we'd forecast. We also found that we were attracting more complex - and profitable - commissions than we'd expected. While this was obviously good news, it also raised questions about how we would cope in terms of staffing, production capacity and order scheduling."

Update the plan

"Thankfully, our original business plan was well researched and put together so we only needed time to review and update our original assumptions. The new profit and cash forecasts provided all the information we needed to help us manage our unexpected growth.

"For example, we brought forward the employment of another blacksmith as well as investment in new equipment. Originally we'd also planned for me to join Tim in the business part time after three years. Our rapid growth meant I joined after 16 months.

"These changes to our plan created a chain reaction. Doubling our capacity and freeing up Tim's time for business development soon led to even bigger and more lucrative contracts."

Control finances

"As we've grown, we've stuck to some basic financial principles and processes, such as proper cashflow forecasting, to prevent overtrading.

"We're very rigorous in our estimates, costing every last step of a job so we don't quote too low. We also have a policy of not offering reductions - we price a job fairly, and that's it. There's no point cutting prices to attract business if you can't cover your costs.

"Other methods we use to control cash are 'just in time' raw material ordering to save on storage costs, insisting on deposits from customers and making sure we get paid in full on time."

What I'd do differently

Target our marketing more carefully

"While we did some successful marketing early on, we should have refined it earlier to reach specific customers and sectors. It's all too tempting to stick with what you've got when you're growing quickly and time is at a premium."

Address work-life balance

"A new business can be all consuming, especially if it's growing quickly, and that's not healthy in the longer run. We should have included work-life balance issues, such as taking holidays, in the business plan. We do now!"

Plan and allocate business resources effectively

The business plan plays a key role in allocating resources throughout a business so that the objectives set in the plan can be met. A good business plan software program will almost certainly help you to do this so if your strengths lye elsewhere, it should not be a barrier to your success.

Once you have reviewed your progress to date and identified your strategy for growth, your existing business plan may look dated and may no longer reflect your business' position and future direction.

When you are reviewing your business plan to cover the next stages, it's important to be clear on how you will allocate your resources to make your strategy work.

For example, if a particular business unit or department has been given a target, the business plan should allocate sufficient resources to achieve it. These resources may already be available within the business or may be generated by future activity.

In practice this could mean recruiting more office staff, spending more on marketing or buying more supplies or equipment. You may want to provide funds through current cashflow, generating more profit or seeking external funding. In general, it is always better to fund future growth through revenue generation.

However, you should do some precise budgeting to decide on the right level of resourcing for a particular unit or department. It's important that resources are prioritised, so that areas of a business which are key to delivering the overall aims and objectives are adequately funded. If funding isn't available this may involve making cutbacks in other areas.