Business Plan PDF

Chapter 1 The purpose of a business plan This chapter looks at what a business plan is and why you need one. It also looks at the different audiences for a business plan and how this affects what you need to include. Finally, it touches on the need for passion in your business plan, to make your rea...

Chapter 1 The purpose of a business plan This chapter looks at what a business plan is and why you need one. It also looks at the different audiences for a business plan and how this affects what you need to include. Finally, it touches on the need for passion in your business plan, to make your readers as excited as you are. 7 Successful Business Plans final2.indd 7 19/6/09 17:32:18 SUCCESSFUL BUSINESS PLANS What is a business plan? A common definition of a business plan describes it as: an explanation of business goals, why you think you can achieve these goals, and how you plan to reach them. This is a fairly general statement and covers many elements, which range from sketchy outline ideas that are mapped out on the back of an envelope to a lengthy encyclopaedia of a document that nobody ever has enough time or inclination to read. What makes a business plan useful? We have looked at literally hundreds if not thousands of business plans over the years, written by people looking to start or grow their own business. What is clear is that there is no such thing as a standard business plan. However, in essence they should all cover the same ground and, as set out in any good business plan guide, will feature a consistent set of chapter or section headings, not least because these will be familiar to your audience. These will set out what the business is aiming to sell, who to, and where and how its customers can be found and reached. It will also cover who else is trying to sell to them, what resource (typically money and people) you will need and how much profit the business can ultimately make from its trading activities over the next three years. As straightforward as these topics sound, it is the strength of the underlying content that sets one business plan apart from another. Strong content will enable it to be used as a viable business plan that is ready for execution. If the content is not useful enough, the business plan will become merely a collection of unjustified, ill-thought-through statements that lack any weight or substance and so represent nothing more than a plan of ideas rather than action. A good business plan is a document written using researched statements to give weight to all aspects of an entrepreneur’s aspirations for his business, enabling those ideas to become reality. 8 Successful Business Plans final2.indd 8 19/6/09 17:32:20 THE PURPOSE OF A BUSINESS PLAN The business plan is therefore a means to an end – a platform for the management or owner, which forces them to think through all the relevant aspects of their business. Whilst the business plan alone cannot secure success for the business, we can confidently endorse the over-used maxim that ‘failing to plan is planning to fail’. Why do you need a business plan? The first question from a potential client is frequently: ‘Can you write a business plan for me?’ and we always answer: ‘Why do you need one?’ and ‘Who is going to read it?’ Without the answers to these questions, it is impossible to write an appropriate plan. A plan that takes no account of its audience will be a waste of effort. Business success does not depend on the existence of a plan, but the lack of one will make failure more likely. Working out what your business plan is for is the first step to creating a useful business plan. The purpose of your business plan First of all then, you need to assess what a business plan will do for you. Do you think that it will help you get your business to where you want it to be, or do you anticipate that preparing a business plan will be a time wasting exercise, which is nothing but a distraction from your day-to-day tasks? ‘Haven’t I got enough to do?’ you may ask yourself. We are all busier now than ever, but remember: being busy and being productive are two very different things. Many business owners spend their day running round in circles, fighting fires, without any idea about what they should 9 Successful Business Plans final2.indd 9 19/6/09 17:32:23 SUCCESSFUL BUSINESS PLANS be doing in order to make a difference to their business. Having a well thought-through business plan, which sets out your vision and goals for the business, will force you to work out how to reach the point you want to get to. Ideally, you will also have included an action plan with attainable timeframes that tells you what you should be doing and when. By writing a useful business plan, you will be in control of your business rather than it being in control of you! You will have identified what you need to do in an orderly and structured way in order to get your business to the next stage of its life. Without a business plan you risk finding yourself responding to situations that arise in the business or in the market, instead of leading the business forward as a focused entrepreneur. Action point Work out who will read your business plan and what the purpose of your business plan is for your particular business. Questions you need to consider OK, so you can now see the benefit of providing a focused road map for your business and you have taken on board the fact that you need a business plan – after all, your bank has been asking you for one for the past three months! Whilst the hours that you need to spend drafting it may feel wasted, rest assured you will benefit from actually taking time out from the day-to-day operations to think about your business. No matter how much you may resent the time you spend locked away thinking through the various components of your business plan, it is a golden opportunity to take a step back from your business and consider it impartially. So, perhaps for the first time, you need to reason with yourself about what you want from your business and how you are going to get there. Although you may already know that you are going 10 Successful Business Plans final2.indd 10 19/6/09 17:32:27 THE PURPOSE OF A BUSINESS PLAN to make widgets for the next ‘must-have’ mobile phone, have you thought about who your customer is? Is it the mobile phone user or perhaps the mobile phone manufacturer? Why would they buy what you are offering? Are they likely to buy it from you when there are other people trying to sell them the same type of product? It is only when you take time out to identify who else is trying to sell to your target customers, and at what price, that you start to be able to work out how you can differentiate your business rather than just keep on banging the same drum that you would have done without having gone through the business plan exercise. Hopefully, the benefits of having the plan are gradually becoming clearer and you are beginning to realise that this work of art that you are starting to create may well have some use after all…working out what you didn’t know you didn’t know! Throughout the rest of this book we will guide you through the mechanics of answering these questions, so that your business plan becomes an essential tool for your business. Why templates are not enough Many people mistakenly believe that there is a standard format and tone for a business plan. Sample business plans can be sourced easily enough and are often personalised only by changing the name of the business and its location, in anticipation that one size fits all. This trend has grown with the increased availability of free templates, which are in reality no better than a spreadsheet which provides formulae but no substance or answers. The style, substance and tone of a business plan are at least as important as the generally recognised template format. Content needs to be tailored to your needs and only tools relevant to your business should be used. Unfortunately, meaningless mission statements and irrelevant SWOT (Strengths, Weaknesses, Opportunities and Threats) analyses are still prevalent 11 Successful Business Plans final2.indd 11 19/6/09 17:32:29 SUCCESSFUL BUSINESS PLANS and often gratuitously inserted by a writer to be able to tick a box in the document’s contents. Of course, a mission statement may well give a reader a general view of where the business is heading, and a Five Forces diagram (which used to be a key but overused component of market analysis) built into an overall analysis of the competitive pressures on your business could be useful in some circumstances. Similarly a SWOT analysis, as an integral part of your discussion about how you recognise and intend to meet the challenges your business faces, will be helpful. (See chapter 11 for more on SWOT analysis.) However, it is the use of these tools by themselves, based on templates found in generic business plan books or software, that weaken rather than strengthen the overall plan. Your business plan must be tailored to the needs of your business and the questions your audience will have – one size does not fit all! A successful business plan presents a story and, just like any story, must have a flow to it, a traditional beginning, middle and end. Each section of the plan must reflect the other sections rather than there being a collection of isolated statements. It should present a picture that is comprehensive and comprehensible, the purpose and ambition being clear at every stage, drawing conclusions from each set of statements to give the document credibility and focus. Who is the audience? So, when writing a plan you need to start by working out who it is for. There are many reasons for writing a plan, and each one requires a different approach. For example: 12 Successful Business Plans final2.indd 12 19/6/09 17:32:33 THE PURPOSE OF A BUSINESS PLAN Getting a loan from a bank. Raising money from a business angel or venture capital investor. As a strategic road map for the business to provide an action plan for management which they can share with everyone else in the business. As a year-end plan for the boss to show where the business is heading. As an aid to selling the business. Each of these audiences is seeking different information from the plan, and so it would be absurd – and unproductive – for them all to be written in the same way. Let’s take a look at the different kinds of information you should include for your intended audience. Action point Having identified who will read your business plan earlier, you now need to research the needs of that audience – what are their key requirements and how can you meet these with your business? Business plans for a bank manager The bank manager wants to see two key answers in the plan, quite apart from a sound business proposition and credible management: Security for the debt, ie how and when is the capital going to be repaid. Evidence of the business’ ability to service the debt by paying interest. The business plan must focus, therefore, on how the business will meet these two needs. (Both of these key answers will be covered in more detail later in chapters 4 and 9). In an early-stage business these two requirements are usually hard to demonstrate. Very few early-stage businesses generate 13 Successful Business Plans final2.indd 13 19/6/09 17:32:36 SUCCESSFUL BUSINESS PLANS cash quickly. Very few start-up entrepreneurs are fortunate enough to have access to security for the debt they seek. If the debt is required for fixed assets, eg capital equipment for manufacturing, there may be sufficient security in the equipment alone. For those who are seeking debt for day-to-day working capital, eg to finance customers’ extended payments and general costs, but have no security, the Enterprise Finance Guarantee (EFG) may be ideal. Details of this scheme can be found at the Department for Business, Enterprise and Regulatory Reform (BERR) website: http://www.berr.gov.uk. See more detail in chapter 10 under Sources of Finance. The EFG has replaced and extended the Small Firms Loan Guarantee Scheme (SFLG), one of the most successful and valuable support programmes for early-stage businesses in the UK. A busy bank manager will want to be presented with a snapshot of the business and its management team to assess quickly whether the rest of the document should be given more of his valuable time. Below is an extract from a sample business plan that clearly sets out the strength of the proposition, reflected in the business’ solid financial performance, and the long-standing experience of the team, providing the ideal backdrop to attract the reader’s attention. Example Sample Executive Summary Mr Smith-Harris owns and operates a successful shop in central London, known as The Snackbox, selling gourmet soups and salads to local workers at lunchtime. Due to the success of the first store Mr Smith-Harris is currently planning to expand into five additional London locations, targeting the same market segment. Mr Smith-Harris opened his first store in December 2001. Since then the business’ management has built a profitable company 14 Successful Business Plans final2.indd 14 19/6/09 17:32:45 THE PURPOSE OF A BUSINESS PLAN with a loyal following and powerful brand identity. The store is currently showing annual revenues of nearly £450,000. The store is supplied from its satellite kitchen in Euston. The kitchen has the capacity to also supply several new stores from its current set up. One of the main advantages of The Snackbox is its product offering, soups and salads, which are sold in different seasons, allowing the business to be profitable year round. The business is owned by a UK registered company (The Snackbox Ltd) which is 80% owned and managed by Paul Smith-Harris. It started trading in December 2001. Mr Smith-Harris has many years of experience in the catering sector. At The Snackbox he is responsible for the day-to-day running of the company, marketing, public relations and new business development. He is also involved in product development. He is supported by shop and kitchen staff and will employ an admin person once the new stores open. The Snackbox’s market is a very attractive one. Key Note estimates that the size of the UK Fast Food and Home Delivery market was £8.2bn in 2008, up from £6.55bn in 2007. This represents a growth of 25.1%. Key Note forecasts the market will grow from £8.2bn in 2009 to £9.4bn in 2011. This represents a growth of 14.3%. The Snackbox is a highly profitable business. The company will generate a small loss after tax of –£1,717 in the year ending 31 May 2009, a profit of £152,724 in the year ending 31 May 2010, £477,574 in the year ending 31 May 2011 and £600,978 in the year ending 31 May 2012. Management assumes that it will open five new shops in total, in: J anuary 2010 J une 2010 N  ovember 2010 A  pril 2011 S  eptember 2011 15 Successful Business Plans final2.indd 15 19/6/09 17:32:49 SUCCESSFUL BUSINESS PLANS For each new shop management assumes rental deposit and refurbishment costs of £110,000. The business is premised on a proven successful model that is cash generative and profitable. It is looking to raise £200,000 to finance the first of these two store openings and has strong cash flows to be able to service bank funding (capital and interest repayments) as well as finance all other store openings from its increased turnover at that time. Any shortfall in security should be available under the terms of the Small Firms Loan Guarantee Scheme. This extract comes from a business plan which was successful in raising bank finance. It clearly addresses the requirements of the bank in the following ways: Showing that the business has a trading history. Clearly identifying the business’ activity and how it generates cash. Highlighting the efficient operation of the centralised business to demonstrate its ability to generate increased turnover from an increased number of locations. Refering to the experience of the management to establish credibility. Giving headline forecast financials that demonstrate the business’ potential. Summarising the growth trends in the market to justify its stability. Describing a clear expansion plan with relevant and realistic timescales. Identifying an exact funding requirement. Refering to the availability of security. Whatever the situation, a business plan seeking debt which does not address the bank’s two fundamental issues (availability of security and how the debt will be serviced) will be of no value. Both issues should be clearly addressed in the financial narrative 16 Successful Business Plans final2.indd 16 19/6/09 17:32:52 THE PURPOSE OF A BUSINESS PLAN section of the business plan, which we will look at in detail later in chapter 10. Business plans for investment capital Angel or venture capital investors have a very different point of view from bankers. Unlike lenders, who are looking to get their money back, plus interest, angel investors are seeking explosive returns on capital – high risk for which inflated reward is demanded. Dividends are unusual in an early-stage business, and realisation of capital, ie return of investors’ money, generally comes only at exit via share sale. The expected returns may vary from 20% pa for a mature business to 60%+ pa for a start-up. Since this book is largely focused on early-stage SMEs (small and medium-sized enterprises), we can assume that the returns required are nearly 60% pa. A 60% compound growth over a five year period can be broken down as follows: Sample compound growth table to illustrate investor returns Period Capital Valuation Annual Growth Rate Annual Growth in Capital Total Valuation Year 1 £100,000 60% £60,000 £160,000 Year 2 £160,000 60% £96,000 £256,000 Year 3 £256,000 60% £153,600 £409,600 Year 4 £409,600 60% £245,760 £655,360 Year 5 £655,360 60% £393,216 £1,048,576 So, if an investor puts £100,000 into a business in Year 1, he will expect that sum of money to be worth just over £1,000,000 when he gets paid out for his share of the business in five years’ time. The £100,000 will have been expected to have grown incrementally as shown above, based on the valuation of the company in accordance with its performance as each year passes. 17 Successful Business Plans final2.indd 17 19/6/09 17:32:54 SUCCESSFUL BUSINESS PLANS You may be surprised that a 60% annual growth rate equates to approximately 10 times return on an investor’s money over a five year period. However, this scale of appreciation comes as no surprise to angels who so frequently lose their investment. An angel investor is looking to identify growth in sales without a corresponding rise in costs (known as scalability), as this is essential to achieving the explosive growth which is the goal of an investor. If you understand this crucial point about an investor’s mindset and translate it into visible scalability in your business plan, you will have gone a long way towards making an investment in your business look attractive to a potential investor. So it quickly becomes clear that a business which is, at best, only able to generate an attractive lifestyle for the entrepreneur or the business’ management team, is of limited appeal to an investor, who is looking for domination in a field that will be able to generate high growth returns for everyone. It is easy on paper to compare the potential of a retail concept whose brand and systems are capable of being rolled out across multiple locations with an independently owned shop that just about makes its owner a living. Realistically, however, very few businesses are able to aspire to these growth criteria, and entrepreneurs become disappointed that they cannot raise external finance for them. All too many business plans seeking investment lack the necessary global ambition, and the potential for growth without spiralling costs, to provide the required returns. The inappropriate use of so-called J-Curve or hockey stick financial projections, where an unrealistic growth rate of sales is graphically depicted to appease the hopes and aspirations of investors, is dealt with further in chapter 10. This aspect of finding the best return on capital (ideally with the least risk) is a crucial and often absent theme in business plans, whether they are for start-ups or mature businesses. For this reason, it is not possible to write the definitive business plan for any business. Business plans are about making choices – 18 Successful Business Plans final2.indd 18 19/6/09 17:32:56 THE PURPOSE OF A BUSINESS PLAN choices of where to allocate scarce capital. That is why writing a well-crafted plan takes time and thought and input from all of the management team. J c u rv e £1,800 £1,600 £1,400 £1,200 £1,000 Year Sales Sales£800 £600 £400 £200 £0 1 2 3 4 5 Ye a r Typical J-Curve or ‘hockey-stick’ sales graph Action point Try to be realistic about the potential of your business and what you want/ expect from it. Are you offering something so unique that it has the potential to carve out a unique place and enjoy growth nationally or even internationally? Or does your business have appeal to only a limited local audience even if it may well be able to support you in a lifestyle which you would be happy with over the next few years? Answering these questions will affect who you approach for funding and how you target your business plan. Internal business plans An internal business plan written for the company’s management is quite different from either of the first two categories which have been written for the purpose of attracting finance. In contrast, an 19 Successful Business Plans final2.indd 19 19/6/09 17:33:21 SUCCESSFUL BUSINESS PLANS internal business plan is typically the result of a brainstorming session whereby all members of the team have agreed on a way forward for the business. The internal plan crystallises this thought process in a document that can be shared among the whole company. The reasons for creating an internal plan are wide ranging: perhaps the management team is documenting their strategy for the future, justifying budget allocation, providing evidence of job security and a career path, presenting a clear roadmap and an understanding of any innovation that is to be used. Internal business plans for larger organisations tend to be departmental plans, and so you need to address the financial objectives of the organisation. In particular, senior management will want to understand why resources should be allocated to your department instead of any other department; indeed why your department should not be outsourced or re-structured completely. Above all, the internal business plan and the process that is typically undertaken to arrive at this point provide the opportunity to align everyone’s thoughts. Aside from quickly identifying who’s who in your team it will also highlight any gaps that may well have otherwise been concealed from being too close to the day-to-day operation of the business. Example Internal business planning provides the opportunity to evaluate what aspects of a business are working properly and those which would benefit from a new way of working or perhaps from a complete overhaul. Sometimes internal changes are needed as a result of external (or market) influences, as was identified by Company X, one of the UK’s leading educational consultancies. Company X wanted to develop a three year business plan as an internal roadmap to evaluate opportunities from the three areas within which the client company was operating: 20 Successful Business Plans final2.indd 20 19/6/09 17:33:24 THE PURPOSE OF A BUSINESS PLAN i) Content Development ii) Research iii) Training Of these, Research was regarded as the fastest growing field and generated a 90% margin, whereas Content Development generated the largest proportion of the company’s turnover but was an unpredictable source of revenue because it was wholly project driven. The client company then enjoyed a gross income of £2m pa which they aimed to grow to approximately £3.5m within the next two to three years, potentially broken down as follows: Content Development: to be sustained at approx £1m pa Research: to grow from £750,000 to £2m pa Training: to grow from £150,000 to £500,000 pa The client’s market included blue chip companies, charities and, in the main, public sector organisations. The client’s management undertook an in-depth business planning process to deliver a new three year business plan that would provide direction for the company, its management team and staff, to determine where and how the company should focus its efforts. The interaction from and ‘buy in’ of everyone concerned was regarded as integral to the effective implementation of the company’s future strategy. Business plans to sell a business Most readers of this book are probably just thinking about starting or are in the early days of running a new business, so the idea of selling your business seems a long way off. However, a fourth reason for writing a business plan is to show clearly why someone should buy the business from you. By the time you are ready to sell the business, the planning skills and discipline 21 Successful Business Plans final2.indd 21 19/6/09 17:33:26 SUCCESSFUL BUSINESS PLANS you will have acquired throughout the life of your business will certainly stand you in good stead. At this stage, the structure and format will remain pretty much the same, but you will be faced with the challenge of convincing your reader that the business represents a great opportunity whilst at the same time addressing the inevitable question about why you want to sell it if it has such enormous potential. Clearly, then, one of the main questions that you will need to answer in this kind of business plan is to spell out your reasons for wanting to sell it – however personal they may be! In fact, the more personal the better as this will demonstrate that your decision is in no way related to the business and ensure that it remains appealing to a prospective purchaser. Passion and vision Above all use your business plan as an opportunity to showcase the passion and vision you have for your business. Try to get others as excited as you are. Now that we have covered the different types of audience for a business plan, and why it is so important to tailor it for each purpose, we will move on to how to make sure your business idea is strong enough to stand up to scrutiny. 22 Successful Business Plans final2.indd 22 19/6/09 17:33:28 THE PURPOSE OF A BUSINESS PLAN Quick recap W  ork out why you are writing the business plan – is it for the management team or do you need to raise finance? I f you are looking to raise finance decide on the potential of your business and its immediate capacity to generate cash to help you understand the best route for your business. D  etermine what different audiences will want to read about. – Are they a bank that is concerned about security and cash flow? – Are they investors who will want explosive growth in the value of their shares and a clearly identifiable way for them to get their money out of your business in three to five years time? – Are they existing or future members of the company who you will want to be inspired to work with and for you? – Are they interested in buying the business, and so will want to know why you are selling it? W  ork out how you are going to demonstrate that your business can meet their needs. I dentify your audience – do you have more than one audience type? A  mend your initial business plan to suit the needs of an additional audience. S  how your passion to inspire the readers of your business plan with your vision. 23 Successful Business Plans final2.indd 23 19/6/09 17:33:30 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.