Business Plans

BUSINESS PLANS

In this first part of a four-part paper on business plans, I look at what a business plan really is and why it is such a necessary tool for businesses. As always my focus is on the small businesses and on individuals hoping to start up their own businesses.

DO YOU REALLY NEED A BUSINESS PLAN?

Leadership is a matter of intelligence, trustworthiness, humaneness, courage, and sternness –Sun Tzu

I once consulted for a small Nigerian company operating a foundry and producing foundry works and goods. Aluminium/iron/copper furniture, heavy machine parts, small tools, farm implements, stuffs like that for a number of small and medium businesses and for quasi-government corporations.

The Managing Director needed to get a government grant, and he also wanted to shortly take a loan from a reputable Nigerian bank to provide additional financing for his business. To do all of this, he needed a business plan which would include in money terms his opinion of what his business is worth and what it can be worth if given additional funds. Naturally he consulted a professional accountant – me.

As I walked him through a question and answer session, I discovered that his company had a net worth of NGN 20,000,000 and an average annual revenue of NGN 5,000,000 and he did not know!

He was also really surprised to note that his business earned so much revenue in a year, with nothing to show for it. In fact as at the time he came to me for professional advice, he was still operating from the leased plot of land he started from some twenty years ago, without any visible improvements.

He had NO business pan, did not think it was necessary to even keep books of accounts and his business though very profitable was going to fail. In fact he told me he was planning to sell off the business if his efforts at ‘reviving’ it failed!

Is a good business plan really that important?

Edwards Deming, noted industrialist, author, and a leader in the reconstruction of post-World War II Japan, states quite succinctly: “You don’t have to do this – survival is not compulsory”.

Every business – even a one-person consultancy business- should create a business plan and create it in writing. This serves as a solid blue print for success, gives the business a sense of direction, and serves as a bench mark against which to measure its progress.

Banks will refuse to consider loaning you any money if you have no sound business plan. The banker must be reasonably convinced that your business can repay the sum borrowed plus all incidental costs of borrowing, and still be profitable.

What does a young man who wants to win a girl’s heart do? Why, he buys her chocolates and roses and showers her with care and love – in short he tries to prove to her that he is capable of taking care of her and that he is a good investment. Think of a business plan as a tool to woo potential investors. They must be convinced they are making the right choice backing your ideas with their money!

So then what do you need a business plan for?

The book Managing a Small Business Made Easy¹ identified three key reasons why you need a business plan:

1.       It is your guide to developing an idea into a successful business operation

2.       It is the “step further” that transforms your initiative into reality. Developing a business plan for your new, start-up business or for an already existing business requires some understanding of the techniques involved in running that business and the initiative to get it done.

3.       It is a useful tool for getting additional financing for your business. Note that lending institutions do not loan large sums of money based on great ideas. In addition they do not loan money if the loan request is not backed by a sound business plan that embodies the great idea and other essential ingredients for your business to succeed.

But then what is a business plan?

The MD of the foundry operation I mentioned at the onset of this paper, discussed with me the background of the company, his role, and the role of other key personnel, his company’s products, what gives his company and his products and services a competitive edge in the market place.

He explained to me how he sells and distributes his products and his ideas for new products and services in the future. He also defined for me the overall market and who his competitors were and what they produced. The amount of funds he would require for future expansion, how the funds would be spent, a plan for repaying borrowed sums, and the time period over which repayment would take place.

We also considered how the additional funds will affect the profitability of his business.

With these information, I made detailed financial projections and added them with the foregoing and voila! We have a business plan!

A true business plan simply presents the italicised information in a detailed, well written and tastefully organized document.

Almost all books written on managing a business include a description of a business plan. Managing a Small Business Made Easy dedicated a chapter to developing a business plan as does the Small Business Kit for Dummies² and the Independent Consulting – A Comprehensive Guide to Building Your Own Consulting Business³. The Harvard Entrepreneurs Club Guide to Starting Your Own Business⁴ also devotes a full chapter 36 pages long to the subject

What plan elements should be in your business plan? Nine plan elements can be identified from the many books on developing a business plan.

1.       Cover page

2.       Table of contents

3.       Mission statement

4.       Executive summary

5.       Marketing plan

6.       Operational plan

7.       Management controls system

8.       Financial statements and projections

9.       Long-term strategic plans

What should you include under each plan element, what guidelines should you follow in writing your business plan? Where can you get help and advice in writing a business plan and in developing financial projections? I will consider these questions in the next part of the business plan series titled “Writing a Sound Business Plan – A Dummy’s Guide”

References

1.       Martin, Davis E. Managing a Small Business Made Easy. Entrepreneur Press, 2005.

2.        Harroch, Richard D. Small Business Kit for Dummies. IDG Books, 1998.

3.       David, Kintler et al. Independent Consulting – A Comprehensive Guide to Building Your Own Consulting Business. F+W Publications, 1998.

4.       Sharma, Poonam. The Harvard Entrepreneurs Club Guide to Starting Your Own Business. John Wiley & Sons, Inc., 1999.