I have seen many business plans in my time and you might be or maybe not, astounded at the number of plans that do not have backing for their financials.   This doesn’t surprise me but what does impress me is an individual’s drive to start a business venture with some basic direction and a lot of passion.

This drive combined with proper management expertise can bring the company to success.  Unfortunately most new ventures are lacking one component and end up in failure.

When it comes to raising money, most sources overlay your numbers with their impression of the market and what you could be generating.  Venture capitalists (VC) will ask you a few questions about your financials and if you don’t supply the right answers they will show you the door.  Rarely is a VC so impressed with your business concept that they throw everything out the window and re-do it for you.

Business plans aren’t all about financials, as some may suggest, but presenting erroneous financials is the single fastest way to destroy your credibility; which is pretty much the only thing you have got in a startup situation.

I would like to talk about financials but before I do that I would like to spend a moment to impress upon you some of the key points in the body of a business plan that need to be addressed.

1. Background, spend some time speaking about the industry and why you will succeed.  Keep this short, don’t be verbose.  If you don’t have an executive summary this will be what the reader will hone in on.  Be factual and the reader will have to give the plan credence.  Don’t talk about what might happen or peg success to future events, you may come across as a dreamer.

 

2. Management, discuss the strengths of the management team,  years of experience, management experience, prior P&L responsibility and if the management team has worked together before… definitely state that, it is a key thing that VCs look for.

 

3. Operations, a lot of people spend too much time on this section and most people don’t read it.  This section will end up as a guide for your own people so keep it directional and be clear with your intent.

 

4. Strategy,  few plans have this section but it is a section that can show the reader that you have a viable venture.  The strategy section has the opportunity to get the reader on your  side.  How are you going to compete?  How are you going to evolve? What is your differentiator?  Just a few questions when answered expertly, will garner you support.

 

5. Risk, another component that I see rarely and when I do see it, it is not addressed properly and ends up doing more harm than good, showing you don’t understand your own business.  This is also another opportunity to show the reader that you have thought through the business venture.  List all the substantial risks you can think about and answer them one by one.  All businesses have risks and many of them. Don’t be afraid to list a lot of risks.  This process will show the reader and even yourself that you have thought about all the potential problems.  Craft the answers as strategically as possible.

 

6. Sales & Marketing, usually this section ends up being fluff, but it will be the biggest support mechanism to back up your financials.  Do not pass this section over lightly.  This should be the driving engine of your company and ideally it should be based on what you have achieved in this industry before.  The other 5 sections above should support the information in the Sales & Marketing plan.

There are many other components of a good business plan but focus on reality and emphasize these areas.

Now a bit about financials.  How does it sound when I say “I am starting up a new company and all we need is 10 percent of the Market.”?  If my business plan’s financials are based on a percentage of the market and then reversed engineered from there, you will never achieve the plan.  I have been in industry for more than 20 years and I have never seen this work.  Here are some tips to ensure the numbers are real:

1. Do not create a plan that displays instant revenue.  Rarely, do you open the business and the phone rings off the hook.  Revenue is a slow build, even for Google, Microsoft and IBM.

 

2. A budget does not equal financials.  A budget is a background document that feeds into the financials.  If you don’t know this, that is why we use accountants.  You can put your 1 or 2 year budget in the business plan but you should have an Income Statement, Balance Sheet and Cash Flow Statement (or Changes in Financial Position) as your Financials.

 

3. Cash flow is a very important part of financials that most entrepreneurs do not comprehend easily.  A cash flow statement shows that you have money to buy the things you need, when you need them.  Without managing cash flow (and this is one of the many reasons that a business plan is a living document) you will find yourself with no place to turn for money when you need to restock inventory or to make payroll.  The financials are highly interwoven and a change in one place will propagate to the other components.  Have an accountant work with you to put the financials together.  Show them the business plan!  If the accountant has many questions and he takes a long time to put the financials together.…good, pay him.  This is a very very good investment.

 

4. Examine every little number.  Is that cost real?  Is that cost inflated?  Can I actually get the employees I need for that rate?  Good employees take a risk with your company as well, so don’t assume there will not be a premium associated with it.

 

5. Frustration, something that exudes from an inaccurate plan.  If the plan has not been well thought out, you will see that using that plan as a blueprint (and it is) is difficult to do.  How can a contractor build something without a plan?  So, how then can you ask your staff, contractors or confidants to help you build something without a plan?

 

6. Take your time.  The plan is so critical to success it is highly justifiable to spend a lot of time on it.  The plan has to be coherent to work.  A lot of new companies start with passion and drive but the number one reason for failing is poor planning.

Good luck.

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