Most prospective business owners believe they need only prepare a business plan if they intend approaching funders. But the truth is that every business owner should compile a plan that includes both short- and long-term goals, as well as targets. A business plan is your guide to where you want to take your business, and you should continuously measure to see if you are on track to achieve those goals. If not, then find out where you have gone wrong and put corrective measures in place or revise the goals to more achievable levels.

If you are applying for finance to buy a business, the business plan is the document that will convince the bank to grant your loan. It incorporates cash how forecasts and income projections, together with a projected balance sheet if required by the bank.

You’ve assessed your suitability for the life of a small business owner/operator. You’ve identified and evaluated several business ideas and decided which one is right for you. You’ve also completed your preliminary research and made some decisions as to how your business will be structured and how it will operate. It’s now time to clearly articulate and describe your venture by completing a business plan.

Your plan is a written document that describes all aspects of the venture, including:

– Who you are

– Where you are located

– Your basic product or service

– How it will be produced and marketed

– Who your customers are

– Who the competition is

– How you will finance the business

In short, it outlines comprehensively, yet concisely, what your objectives are and how you will achieve them within a set budget.

Why prepare a business plan?

Developing a comprehensive business plan involves a lot of research and hard work, but the resulting benefits to you and your business are well worth the effort. It is the most important document you will ever prepare and will help you:

– evaluate your business idea

– improve your chances of success by setting realistic goals and financial objectives against which you can measure actual performance

– obtain finance

Investors and lenders will use your plan to assess the viability of your proposed business venture. Financial institutions generally require a detailed business plan before they will even consider lending you money.

The key elements of a business plan

While not all elements of the business plan will be applicable to every type of small business or to your particular circumstances, it is important that your plan be as comprehensive as possible without being so lengthy that no-one will read it. The suggested maximum length is 20 to 25 pages,

The body of your business plan should contain the following elements:

Port A: Background information

  1. Company and Industry Details

In this section describe the start-up and current status of your business, and describe the industry in which your business will operate. Include the following;

– A brief history of the business.

– The legal status of the business. State whether you are setting up a close corporation, etc. Also mention the legal status of the business under the existing owner (the seller).

– Names and addresses of the proposed owners and what percentage they will own.

– Business goals and basic strategies for achieving these goals.

– The major characteristics and size of the industry.

– Industry trends, including where you predict the industry will be, and where your business will be, in five and 10 years.

  1. Products and Services

Potential investors and lenders consider this a key part of your plan. You should describe in detail the products and services you plan to sell. Include the following:

– A thorough description of your product or service and an honest assessment of its strengths and weaknesses in relation to its competitors.

– The stage of development your product is in. Are prototypes, working models or finished products available?

– Any patents, trademarks or copyrights you may hold.

– The technology you will use to produce your product or deliver your service.

– Industry rules, regulations and restrictions under which you must operate the business.

– Timelines for the introduction of your product or service.

  1. Management

The strength of your management team is crucial. In this section, include the following:

– How your business is organised and the work to be done by key personnel.

– Short biographies of key management, including related business experience.

– Management salaries and other compensation.

  1. Land, Buildings and Equipment

Here the physical requirements and details of your business operation are described, including:

– The site you’ve chosen and the reason for choosing it. This applies to start-ups rather than existing businesses. If you buy an existing operation, you will still need to give some information on the premises and their suitability.

– Details of the lease agreement and the landlord.

– A list of all fixed assets, their condition and current value, supported by a valuation from a sworn appraiser.

  1. Operations/Human Resources

Look at day-to-day operations:

– Describe how you will manufacture your product, as well as quality control measures. Use diagrams if necessary.

– Detail your stock control methods.

– Outline the availability, cost and credit terms of supplies and materials.

– Describe your human resources plan, including staffing schedules and salaries.

– Detail your production schedule.

Part B: Market analysis and planning

Here you should summarise the market for your product or service, how you lit into this market and your plans for achieving a share of the market. Include the following:

– The total market and your target market.

– Competitor names, market share and analysis.

– Your current and/or projected market share.

– Your marketing advantages relative to your competitors.

– A pricing policy, including how you determine the cost of your products and services.

– The size of your sales force and how they will be paid.

– Selling policies, including product price and credit terms available to customers.

– How you will distribute your product or service.

– Your advertising and promotional plan.

– Planned customer service programmes.

– How you will handle service problems and warranties.

Part C: Financial Planning

  1. Financial Plan

This is the nuts and bolts of your plan. Investors and lenders will use the information in this section to evaluate the financial outlook of your business. Detail the following:

– Start-up costs – this must include the price you are paying for the business plus the cost value of the stock that you will buy from the previous owner plus your working capital requirements. Remember you will need to pay a rental deposit plus one month’s rent in advance, electricity and the telephone deposit. You will also need working capital to help you survive until money starts coming in. Some businesses have large debtors’ books and until these clients start paying, you will need money to buy stock, pay salaries, pay overheads, etc. The best route would be to be conservative in your working capital requirements and provide for too much rather than too little.

– If you are borrowing money from a bank, you must also stipulate the amount of own contribution (deposit) you will be putting down and how much you will be borrowing.

– If you are buying an existing business, attach the financial statements for the last three years. These should include income statements, balance sheets and notes to the financial statements. They should be signed by both the owner of the business and his accountants.

Next comes a crucial part of your financial plan: Income and cash flow projections, Income projections are your profit forecasts and estimate the income and expenses of the business. The end result is a profit or a loss. These figures should be realistic and should be based on historical data together with your growth forecasts. They should be done month by month for a three-year period. Items commonly included in these forecasts:

– Turnover (this figure should be net of Vat)

– Less cost of sales – this comprises opening stock plus purchases less closing stock. In other words, in your first month you will have an opening stock figure (the amount paid for the stock) plus all stock bought during the month. At the end of the month you will do a count again and this would be your closing stock.

– Gross profit is the amount left after deducting cost of sales from turnover. This gross profit figure is extremely important because there are industry norms that detail the averages for the various industries. You can compare yours with the industry average to see if you are under-pricing your goods.

But there is another reason that this percentage is important. Let’s assume you have a set mark-up of 100% on your goods. This means that if you paid R50 for the item and you mark it up 100% you will sell it for R100 and your gross profit should be R50 or 50%. If, when you do your stock count at the end of the month, you find that your gross profit is only 40%, warning bells should sound. If your sales, cost of sales and mark-ups are correct, only one of two things could be going wrong. Either stock has been stolen or there has been wastage (in a kitchen for instance). This is referred to as shrinkage.

Shrinkage must be watched very carefully because if not controlled you could lose your business very quickly. This also explains why waiters always complain that restaurant owners are angry and strict. They have to watch their businesses very carefully as mistakes can be costly. So be sure that you know the norms for your industry when starting up.

You now know your projected gross profit figure. Now track your expenses to see if you made a profit or not. At this point remember that this is a forecast or projection. Once your business is up and running, you must do monthly management accounts that can be compared to your forecasts.

The following are among the more common expenses that business owners will come across: Accounting fees, advertising, bank charges, cleaning, computer expenses, consumables, delivery expenses, depreciation, electricity, entertainment, insurance, rental of equipment, legal expenses, levies, members’ drawings, motor vehicle expenses, pest control, postage, printing and stationery, protective clothing, rent, repairs and maintenance, salaries, security, subscriptions, telephone and fax, travel and accommodation, and wages. There are others, but these are the most common.

What is a cash flow forecast?

This is a very important document as it shows you how much cash the business will have on hand from month to month. You can’t rely on profit alone because you can make large profits, but have no cash to operate. This would usually happen if you carry a large debtor’s book and struggle to collect money.

Your cash flow forecast shows the money coming in and going out on a monthly basis. Working capital is needed to avoid a cash crunch. Many businesses, like restaurants and supermarkets, operate on a cash basis so don’t carry debtor’s books. However, they have large stock holdings, so their cash lies in their stock,

Depreciation is not a cash How item as cash doesn’t change hands when assets are depreciated. These are tax deductible expenses and are brought into your expenditure, so affect profits. Prudent business owners will ensure that the amount allowed for depreciation is actually put away and saved for when fixed assets need to be replaced or refurbished.

  1. Summary of risks and assumptions

In this section, you will list the critical assumptions you made when formulating your business plan. You will also identify major risks to the success of your business and indicate what steps you are taking to avoid or minimise these risks.

Appendix: References

Here you must demonstrate to potential investors and lenders that you have had solid, professional business relationships in the past and you’re a good credit risk. Include the following:

– Banks or other financial institutions with which you have had financial dealings.

– Names of existing investors or lenders.

– Names of accountants, lawyers or other professionals with whom you have had business relationships.

– Your current lawyers or accountants.

– A personal net worth statement.

How to present your written business plan

Because one of the main purposes of your business plan is to attract potential investors, it should as professionally put together as possible. In addition to the key elements mentioned earlier, it should include:

– An introductory letter with the name of your company, your reasons for writing the plan and presenting it and the major features that will be of interest to the reader.

– A title page listing the name, address and phone number for the company, your personal details, as well as when the plan was completed.

– A table of contents listing headings and subheadings contained in the plan.

– An executive summary designed to interest and attract the reader, as well as summarise the highlights of the plan. This could well be the most important part of your plan because it may be the only section a busy investor reads. Write the executive summary last and make sure you include start-up costs, owner’s equity, the investment required and any available security.

– Appendices that explain or support the material in the body of your plan.

References: Peter Bond