By Barry Wiseman.

Time and effort must be spent determining the viability of the business before you start on a business plan. To determine its viability ask:

  • Is there a need for your product or service?
  • What makes it different from all the other offerings in the market?
  • Has sufficient market research been done regarding demand, competitors, market size etc.?
  • Do you have the right skills and expertise to start a business?
  • Can you work out realistic financial projections based on sound assumptions?

Unfortunately, many business plans are prepared before the viability of the new venture is established. My advice is to put in the time and effort upfront to avoid major problems later.

Raising finance – key aspects of a business plan

Bear the following in mind before drawing up your plan:

  • Assume that the bank or financial institution you are approaching will know very little about your business or industry. They receive hundreds of business plans, so it is important to make a good impression from the start.
  • Prepare a comprehensive business plan. Some of the content may be fairly generic but, depending on the nature of the business, some of the key aspects will need specific mention. In a manufacturing business, for instance, you will need to discuss the sourcing of raw materials, quality control, technical skills available etc.
  • The core of the business plan must represent your thinking and input. After all, it is your business and you need to be prepared for questions from the financiers you approach. But don’t hesitate to employ a professional to help with areas in which you are weak and to give you a different perspective. Make sure that you use reputable consultants or advisors and don’t be afraid to ask them about their success rate when preparing business plans to raise finance.

1) The management team

Businesses are run by people and it’s their core skills, commitment, passion and determination that will bring success or failure. In fact, bad management is among the most significant contributing factors when firms are forced to close down. As a result, financiers will be very keen to know who the “jockeys” are in your business and what their particular skills are.

You will need to try and show that:

  • The key members of your management team have experience and skills in the various areas of the business, including finance, marketing, production etc. The size and type of business you intend starting will determine the skills required. You may also need to bring skilled workers in from outside on an ad hoc basis.
  • The shareholders of the business are willing to contribute financially to the business. This shows their commitment to the business and their faith in its viability. The type and size of the business, as well as the amount of finance required, usually determines the size of the contribution expected.

2) The industry and market

There is no substitute for thorough market research. You need reliable, accurate and meaningful information on the industry and market sector you intend operating. This is even more crucial today in ever-changing market conditions.

Besides the macro and market environment – market demand, what your competitors are doing and who the main role players are etc. – you should also consider recent and future developments that could affect the business such as:

  • How the current global financial crisis will change the markets you supply.
  • Possible changes in consumer behaviour or buying patterns.
  • Changes in the political environment and resultant opportunities that present themselves or conversely how they could impact negatively on your business.

3) Financial projections and assumptions

One of the most important and challenging aspects of starting a new business is projecting the volume and value of sales for the first 12 months. You will be asked to provide five-year projections. Start by focusing on the first year of trading and try to be as accurate and conservative as possible. Forecasting beyond this period really comes down to guess work, Remember, however, that financiers are usually trying to establish whether your business has the ability to repay and service debt of up to five years. The assumptions used for your projections are critical to the credibility of the figures. Be sure to include all the relevant assumptions relating to each key aspect of the income statement – sales, cost of sales, major expenses, cost of borrowing etc. Break down ail the key variables and make sure that the figures in the projections can be explained and justified.

Preparing a cash flow projection is another critical task. Here, you should adopt a conservative approach. Many businesses run out of cash in the first year of operation because the owners underestimate how long it will take to become cash positive. Make provision for the following to ensure you have sufficient cash on hand to cover your expenses during the early stages of the business:

  • One month’s deposit on a lease;
  • The raw materials required for at least the first two to three months of production;
  • Monthly fixed overheads for the first six months;
  • The need to extend credit to clients.

4) Your business model

Your business model must be clear in your mind i.e. you must know how and where you derive your revenue from, what costs are incurred to achieve expected revenue streams and the critical success factors. These three aspects are interrelated and you need to fully understand how a change in the one impacts on the others e.g. if sales reduce by 25%, how would this affect cash How and profitability? Or if your business failed to secure the renewal of a large contract, what would the impact be?

5) The extent and nature of finance required

When you approach a financial institution, you must be confident about how much you require from them. Approaching the institution for additional finance shortly after starting up will reduce your credibility and could put strain on the relationship. Provide a breakdown of the different types of funding you require together with supporting information for example:

  • Machinery or equipment finance via an instalment sale or financial lease. You will need to provide the name and details of the supplier, cost of the equipment (inclusive of Vat and commissioning if applicable) supported by recent quotes.
  • Working capital finance usually comes via an overdraft facility. This would need to be supported by a detailed cash flow projection highlighting the monthly net cash position together with peak borrowing periods.

6) Implementation and milestones

As with any plan, proper implementation will see your business start off on the right foot. Roles and responsibilities must be assigned upfront to prevent any uncertainty or ambiguity during the crucial first six to 12 months. These roles must be included in your business plan. Key milestones must also be set out and should be measurable with detailed timeframes e.g.:

  • Plant and equipment to be delivered, installed and commissioned by June 30, 2009.
  • On-the-job training for factory staff to be completed by July 15, 2009.
  • First product to be produced by July 31, 2009.
  • Business to reach breakeven by October 31, 2009.
  • Business to generate a net profit before tax of at least R100 000 in the first trading year.

7) Executive summary

Although this normally appears at the beginning of a business plan, it should only be written once the rest of the plan is complete. The executive summary highlights key areas of your plan and should provide compelling evidence that the business will be a success. Remember your plan will be read by financiers who will be looking for evidence that your business is viable, sustainable and affordable and that you have a management team capable of running the business. Of course, you will also need the necessary collateral to secure the loan. To reduce the risks associated with running a small business today, it is essential that you commit enough time and energy to create a solid business plan that focuses on the factors that will ensure your success. And just as important is that you revisit the plan on a regular basis – say every six months – to monitor your progress and decide whether corrective action is necessary.