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1/22/07

BUSINESS PLAN FORMATION PART 6


The Financial Plan is the part of your business plan that shows all the costs and possible revenues. Three main financial documents need to be in your Financial Plan, (1) the Start-Up Projection; (2) the Pro-Forma; and (3) the Break Even Analysis. Preparing each document is a labor intensive task. Therefore, I will discuss each document in separate posts.

First, I will discuss the Start-Up Projection. This spreadsheet shows all of the costs associated with beginning your business or initiating your idea/product/concept. In preparing this document, you must account for all the possible costs associated with starting your business. Make sure you find support for your numbers. In other words, do not blindly state that it will cost $1,000,000 to start your business. You need to break this number down into its individual parts.

In a previous post I wrote about the two types of potential investors. The two types pf potential investors are “idea orientated” investors and “numbers orientated” investors. Even though idea orientated investors will allow you more “wiggle room” in your financial information, they will not accept an unsupported plan. Whichever type of investor you happen to be pitching to, your financial information must be concise and accurate.

Here is an example spreadsheet. I will use this to help me explain the elements of the Start-Up Projection. This example spreadsheet is VERY BASIC and is for a restaurant.

You can decide the format you want to use. Let me caution you to use this spreadsheet only as an EXAMPLE!

As you can see, each section needs to be itemized. For example, under the Equipment Section, you have to list out the equipment that needs to be purchased. Do NOT put only a “total.” If you where a potential investor, would you wonder how the entrepreneur arrived at the total for the section? I sure would. The point is, do not leave any question unanswered. If the potential investor asks you how you arrived at your numbers, have research, quotes, comparables, etc. to support your projections.

Do not lie on your projections. I know what you are all thinking because I thought the same thing, “If these numbers are lower, I will have a better chance of getting financing.” Although this can be true, this idea is most definitely false if it creates inaccurate costs. State your costs accurately and financing will come. Another caveat, do not overstate your costs. A delicate balance needs to be achieved on your spreadsheet. Some information you obtain may state a particular cost on the high end and another piece of information may state a cost on the low end. For example, one contractor may quote you at $400 per square foot and another may quote you at $300 per square foot. Which number do you state on your Start-Up Projection? I recommend the average of $350 be used. By using this average you give a more accurate number to the potential investor. Although you found somebody that quoted your project for $300 per square foot, that quote may increase by the time your project is ready to be constructed. Also, the price given to you was only a quote. Think about every time you got your car repaired. How many times have you seen a difference in the quoted price and the actual price? Isn’t the actual price always higher than the quoted price? The point is, do not use the lowest number just because it is the lowest number.

One final tip; remember that this is a Start-Up Projection. As such, only list the costs that are going to be a factor at start-up. Your regularly occurring expenses will be reflected on your Pro Forma. The point is, costs that affect you eight months from now should not be show on your Start-Up Projection. If you accurately and completely itemize your costs need for start-up, your Start-Up Projection will be fine.
Next time, the Pro Forma...

1/14/07

BUSINESS PLAN FORMATION PART 5

The Organizational Plan is not a long section in your business plan. The basic purpose of the Organizational Plan is to show the potential investor the hierarchy of your business. This section is NOT one of the main sections in your plan, but this does not mean that you should slop something together at the last minute. A basic Organizational Plan will have a chart that looks something like this:


Your Organizational Plan will probably not include this many positions. All I am trying to show is the hierarchy of your company so that when a potential investor asks, “Who is in charge of X,” you will be able to answer the question effectively.

In addition to showing some type of visual chart, you should write a brief summary of what each job position will involve. You should have already written some of this information in your Management team section. Even if you have explained these positions in a different section of your plan, you should still give a descriptive narrative of each position’s duties. Do NOT ramble on for a ten paragraphs, but do make sure you thoroughly, but concisely, describe each position.

One other suggestion, if you have something like forty (40) “ store workers” in your Organizational Plan, do NOT put forty (40) different squares for “store workers.” Instead, put one (1) “store worker” square and put a (40) under the “store worker” title. It will look something like this:


Think of the Organizational Plan as a visual Management Team section with ALL of the job titles described. If you have completed your Management Team section before you do your Organizational Plan, half of your work will be done. However, the same is true vice versa. Depending on what type of “thinker” you are, the section you should complete first is up to you. If you like to see the whole picture before describing the individual parts, doing the Organizational Plan first may be more beneficial to you. If you like to build the individual parts and put the whole together at the end, doing the Management Team section first may be more beneficial to you. Either way, make sure all the elements are in each respective section.


The Contingency Plan is more commonly known as “Plan B.” This is the section of your business plan that explains how additional sales, covers, etc. can be achieved if one of three scenarios occurs: (1) your idea/concept/product is producing revenue that is NOT achieving the “beak-even point” (explained later); (2) your idea/concept/product is producing revenue that is achieving only the “break-even point;” or (3) your idea/concept/product is producing revenue barely above the “break-even point.” In these three scenarios, your idea/concept/product is either losing money, or making just enough to stay afloat. Either way, your investors and you are not making enough money to be “happy.”

The purpose of this section is to show the potential investor that in the rare case that your idea/concept/product does not produce as much revenue as initially speculated, an additional step can be initiated in order to create more revenue. You may be asking, “If this Contingency Plan can produce more revenue, then why not initiate it in the beginning?” The reason you do not want to include this as part of the main plan is that a Contingency Plan usually deviates from your initial business plan and creates additional costs. For example, if your main business plan is for a restaurant, your Contingency Plan may be to turn the restaurant into a night club after your restaurant closes for the day. Another idea may be to deliver food from your restaurant or to double as a catering service. Whatever your Contingency Plan may be, note that additional costs will result. As such, do not take this section lightly. Whatever you do, do NOT come up with a last minute idea, throw it into the plan, and then expect a potential investor to take you seriously.

Your Contingency Plan should be well though out, but should not be overly descriptive. This is your secondary idea and should not take away from the main plan. Also, make sure that your plan is realistic. For example, if your product is not selling as well, do not have a new product line as your Contingency Plan. A Contingency Plan is not a “start over” plan. It is a plan that salvages the profitability of your current product. Think about it; why would an investor invest in a second product from you if your first product is failing?

Lastly, your Contingency Plan needs to show the additional costs that will result from your contingency. Make sure that these new costs do not overshadow the purpose of the Contingency Plan. The contingency has to be as cost-effective as possible. Remember, if you have to initiate this section of your plan, your idea/concept/product is not performing well. Therefore, cost effectiveness is key to a successful contingency.

Next time, the financials…

1/7/07

BUSINESS PLAN FORMATION PART 4

First, I would like to apologize for the long delay between posts. Second, I hope everybody had a great holiday season and a wonderful new year! A new year is a time for new beginnings. I know everybody has a New Year’s resolution, but always remember to stay motivated and strive to accomplish the goals that you have set for yourself and your loved ones.

And now, back to business! The Management Team section of your business plan consists of the information and experience of the persons who will be managing your idea/product/concept. The first aspect of forming this section is recognizing the various areas of your idea/product/concept that require management. This does not mean that you pick apart every single possible area of your idea/product/concept and assign a different manager for each. Remember, efficiency and effectiveness are key! A new small business does NOT require five different vice presidents. I know some of you may be laughing, but you would be surprised at the condition of some of the business plans I have read.

Second, once you have deciphered which parts of your idea/product/concept require management, you need to figure out the level of experience or education a manager needs to possess to successfully manage that area of your idea/product/concept. For example, a restaurant needs a chef that can execute the menu provided and can run the kitchen created; a front-of-the-house manager that can run the dining room and all the employees that work in the front; and a general manager that can create and regulate the communications and operations between the kitchen and the front. These position are critical is starting a new restaurant, and a potential investor will want to see some very solid credentials from these three people before he/she/it agrees to invest.

Third, do not over do it! I have read many plans that state three attorneys, two accountants, a financial advisor, and a stock broker as the management team. Although I understand that the entrepreneur is trying to convey the image and professionalism and strength, the image is flawed! If you were a potential investor and you read a business plan, for a new business, that stated all of those professionals as making up the management team, what would you think? My first question to the entrepreneur would be, “how are you going to pay those people?” Last I checked, professionals charge a lot of money. If I am investing in a new business, I do not want my investment dollars to pay the salaries of a management team that may not be necessary at your business’s current stage of development. This does not mean that all professionals should be excluded from a business plan. Sometimes, professionals are necessary based on your idea/product/concept. All I am suggesting is that you think critically and, if a professional is on your management team, that you specifically define his/her role and contribution to your idea/product/concept.

Fourth, you need to find these managers. There are many different ways to accomplish this task. First, use your connections. Some of us went to college and incurred debt in the form of student loans. While incurring this debt, I am sure that some of us made friends and created contacts. Now is the time to put your student loan dollars to work! Your diploma is important, but the connections you made in school will pay dividends here. My only note of caution is to be weary of who you pick. Choose people that will HELP manage your business! I know that sounds simple, but some people have a tendency to include random buddies just because. DO NOT DO THIS!

If you did not go to college or did not make many new contacts in college, life experiences will give you some contacts.

Second, if you do not have any contacts, you can create them. MySpace, Face Book, and other similar internet sites are a great place to meet people. You can probably develop some contacts using these services.

Third, think of yourself! Most people start a new business in a field in which they have experience. Ask yourself, “can I be a manager?” If the answer is no, you should re-evaluate your role in the business; because if you are not managing and not investing money, what use are you? A potential investor will ask you these tough questions. Make sure you are able to answer them.

Make sure that however you find your managers, you are honest with them. Do not guarantee a job when one is not currently available. Let them know that all you have is an idea/product/concept and, after reading my posts, a business plan. If they want to take the chance and join the team with no pay until the business begins, wonderful! If not, see if they WOULD join your team IF your idea/product/concept started. A commitment to manage could help.

Last, some closing thoughts. Make sure your managers and their positions are clearly defined. A manager can do more than one task, and thus increase your efficiency. Do not provide more managers then are needed or else the managers’ salaries will become an issue. Do not try to show strength by pumping your management team full of “professional power.” Professionals are highly expensive and may deter some potential investors from investing. Always remember to keep the plan neat, concise, and specific.

Next time, organizational plan and contingency plan...

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