The Importance Of A Business Plan

In this article experienced businessmen Nick Richards and John Panczak from LAUDIS Business Advisors explain the importance of planning in business. LAUDIS specialise in providing Non Executive business expertise as well as exit planning to fast growing businesses.

Over half of the UK’s small and medium-sized businesses are operating with no written Business Plan.

All businesses should know what they are trying to achieve, otherwise how do you know you are taking the right actions and avoid wasting time on things that don’t contribute substantially to helping you achieve your objectives? The preparation of the Plan forces you to think through in detail all the major aspects of your business, to evaluate its strengths and weaknesses, and to determine the expected funding and resource requirement. Banks and investors will usually request a business plan from a business when you approach them for funds. This document reassures them that all the essential business issues have been thought through fully.

Traditional business plans would be expected to include:

This is normally about two pages and includes an overview of the business, the key people involved, why you believe it will be successful, a summary of the critical issues and an overview of the expected financial performance and funding requirement. Many lenders and investors make judgments about your business based on this section of the plan alone. If you can’t grab their attention, explain why your company is special and demonstrate the expected financial returns, then they won’t read any further. They will assess the risk of investing in your business versus the potential returns. In particular they have to believe that you have the skills, drive and managerial skills to deliver the results. So show them the success you have achieved in the past, what you have invested in the business and demonstrate your confidence and enthusiasm.

Who you are, what you plan to sell or offer (value proposition), why and to whom. Usually you have to describe here the customer need you are fulfilling, and why you believe you can service that need better than the competition. Remember that whilst you may have a fantastic new product/service, it must be able to address a customer’s real and existing pain point to be truly valuable to them.

Why you think customers will buy what you want to sell, your Unique Selling Point (USPs) and how you plan to sell to them. A competitor analysis is very useful here too. Few new businesses are completely unique; however it is important to distinguish why your business will be different and the added value you can bring to your customers. You have to be able to demonstrate that customers have a need for your product/service and are prepared to pay the proposed price for it. Quite often business owners do some market research to prove to themselves (and others) that there is real demand.

Your credentials and the people you plan to recruit to work with you. People are the single most important factor in ensuring that your business will be successful. The founders/directors are key, and any investor will be very interested in evaluating their background, skills, drive, energy and enthusiasm as well as their personal commitment. Good people overcome problems and minimise mistakes. Over time, skills gaps may be addressed through additional training of existing staff and then recruitment. However, in the early days of the business, the more relevant skills you have ’in-house’, the lower your costs and therefore pressure on profit and cashflow.

Your premises, production facilities, your management information systems and IT. Regarding premises for example, serviced offices are very popular as a first step. The costs are known and the risks lowered because you can easily take on more space or reduce space in a relatively short timescale. Once the business becomes more established, having your own commercial property (either leased or owned) becomes much more important and is generally cheaper.

This section translates everything you have said in the previous sections into numbers. Putting as much detail as possible into this section would provide the most reassurance for a potential investor/lender. You will need to produce projected profit & loss forecasts for at least 3 years together with balance sheets, but a focus on managing cashflow is essential, since this is the cause of most business failures. The financial plan should be “internally consistent”, i.e. the level of sales, people, overheads etc should be logically linked. For example there is no point having a financial plan which requires 10 people but having premises costs which only allow for 5. Most investors expect to see a “cost contingency” included, and expect you to have carried out a number of sensitivity type calculations, e.g. what if my sales get delayed by 3 months, what if my sales price has to be 25% lower etc. etc. The specifics of the sensitivities depend on the type of business, i.e. they should reflect the types of problem your business is likely to face. All of these sensitivities will impact your P&L and funding requirement, and you need to consider them carefully.

When would you look to sell the business? Would this be via a trade sale or IPO? What valuation would you put on the business? In practice most businesses are sold to a trade buyer; very few businesses decide to float on the Stock Market. When you are selling your car most people would get their car valeted in order to try to maximise the value on sale. Our view is that business owners should prepare their business for sale in the same way. Buyers are looking for ways of negotiating the price down, so if you identify such areas and deal with them in advance you increase both the probability of sale and the value at which the business will be sold.