By Jean Kruse / Guest Editorial
In my last article about business plans, I discussed some of its history.
Business plans were mostly used in the beginning by dot.com companies and they were submitted primarily to venture capitalists. Lending institutions necessarily have always required documentation that a potential borrower would be able to repay the loan; the packet of information, for example, that the Small Business Administration (SBA) still requires when they guarantee a loan.
In the 1980s and 1990s, this packet of information became popularly described as a business plan. With the explosion of computer and software capabilities, proforma business plans could be spewed out which made each of these lengthy plans look professional and persuasive. Lending officers, however, are not fooled and they do not have time to read 30-40 pages of mostly an exaggeration of the prodigious qualities of the product or service promoted in those pages.
Having said all of that, I encourage you to write your long business plan. The purpose in writing a business plan is not to borrow money, but to think through every aspect of a business before you get to the point of how to finance the business. Businesses fail because critical issues were not fully thought out or, even worse, were not even considered because the entrepreneur did not prepare a business plan in the first place. Here are some common mistakes that entrepreneurs make when they prepare their business plan:
One size fits all. Every business is different, so every business plan is different also. Using standard documents may save you time, but the end result will not be tailored to your business or fully meet your needs. Be precise and avoid unnecessary verbiage that fills up space or builds up hype falsely.
Understand cash flow. Many newcomers to business will think in terms of profits, or sales minus costs and expenses. Unfortunately in business, we don’t spend profit, we spend cash. Many businesses fail because they lack the necessary cash to operate, not because they are “bad” businesses.
Don’t be overly optimistic. Be realistic with your projections and bear in mind that very successful companies often take many years to get to a point where they succeed. Losses are normal in the first few years of most businesses.
Inadequate executive summary. After you have written your 30-40 page business plan, you must create a one-or two-page overview that condenses all of those pages. This is not easy, but it must be done. That is why the executive summary should be written last. If you are seeking financing, the lender may only read that part of your business plan.
Every entrepreneur needs to go through the process of writing a business plan because that helps them to synthesize their thoughts and forces them to do a lot of the research that is needed when starting a new venture. This exercise, however, is not the most important reason for you to have a business plan. Use your business plan to manage your business. Set a schedule to review it and revise it monthly, quarterly or at least annually. Understand that it gets obsolete in weeks. Keep it on your computer where you can refer to it easily and keep it up to date.
Compare your projections to your actual financial numbers; make changes in your plan when you see that your present strategy is not working. Former president and Gen. Dwight Eisenhower famously said, “The plan is useless; but planning is essential.” Making a business plan forces you to plan.
If you need to borrow money to get your business started, you will definitely need a business plan. However, I recommend that you reduce your long plan down to 10-12 pages, hitting the highlights, the most important points, of each section and take that reduced business plan to your first visit with the lending institution. Have your long detailed plan in a notebook with you when you visit the bank or credit union, so that if the loan officer requests more detail, you will be able to provide it.
If you need help in creating a sound, high-quality business plan, there is no better resource than SCORE “Mentors to America’s Small Business.” SCORE is a nonprofit organization of knowledgeable volunteers who provide free, confidential business mentoring and training workshops to small business owners. Visit its website (www.scorecr.org) to request a mentor or to find available workshops.
Jean Kruse is a SCORE counselor, past chair of SCORE CR and a certified public accountant. She operated her own CPA firm for 13 years and in 1988, joined RSM McGladrey, a national firm, where she provided accounting and tax services to small businesses.