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2/18/07

Business Plan Formation Part 9

Business Plan Formation Part 9

After this long 9 part series, you should now have knowledge of the basic, essential business plan documents. The final step is to put everything together into a cohesive, easily understood plan. Sections you should include are: (1) all the sections discussed in this blog, as they apply; (2) a title page; (3) a table of contents; and (4) any ancillary documents that may be specific to your product/idea/concept.

In order to easily explain certain formatting issues, the following represent some frequently asked questions:

How long should the business plan be?

The length of your business plan depends on your product/idea/concept. The more complex your product/idea/concept, the longer your plan may have to be in order to fully explain everything to your potential investor. However, I do caution that you not make the plan too long. What constitutes too long? If you find yourself repeating the same thing over and over, you may want to consider a revision. Always keep in mind the “if I were an investor” question. For example, “If I were the investor, would I want to read X amount of pages on this idea?” BE HONEST with your answer!

Should I include drawings or renderings?

Once again, this depends on your product/idea/concept. However, as a general rule, I would say yes. Be aware that this could cost you some money. If you happen to know an artist or architect (depending on your product/idea/concept) you may be able to get these for free. For most of us though, this will probably cost some money.

If I do include drawings or renderings, what show they depict?

Once again, this depends on your product/idea/concept. The best way to answer this is with the “if I were an investor” question. For example, “If I were the investor, what images/pictures/renderings would I want to see regarding this product/idea/concept?”

Should I bind my business plan?

Without out question, YES! You want your plan to look as professional as possible. Just go to Kinkos, OfficeMax, Office Depot, or wherever else does binding. It is relatively inexpensive and can usually be done in a couple of hours.

Should I have somebody read my plan before I pitch it?

Once again, absolutely YES! In fact, have somebody read your plan before you bind it. This way, if any changes need to be made, you can easily make them without paying for binding twice. Be sure that you get an UNBIASED opinion. This means that you should not (unless they are an expert of some kind) give your plan to your parents, siblings, friends, or significant other. Find a disinterested third party to read your plan and give you some real constructive criticism.

Can I add other documents to my plan?

Yes, you can add other documents. Just make sure that they will help you present or explain your product/idea/concept. My blog posts have been about documents that I feel are essential to a business plan. I did not cover all possible areas or sections of a business plan. If you feel your plan needs more financial documents, marketing documents, sales documents, etc., add them as you will. However, make sure that the additional documentation is relevant, necessary, and informative/explanatory.

In what order should I put my documents?

General order of business plans is up to you. Take into consideration the audience you will be presenting to (idea orientated vs. numbers orientated) and the purpose of your plan. A couple of pointers to keep in mind: (1) title page goes first, followed by the table of contents; (2) the ES should be the first page of your actual plan; and (3) your contingency plan should always come last. Everything else is up to you. Consider the story you want to tell and to who you want to tell the story. Whatever you decide, make sure your plan has a logical flow and does not randomly jump from section to section.

Should I include confidential information in the plan?

Confidential information is the information that you may be afraid of sharing. For example, let’s say you created a new computer program. Should you include the complete programming code for the program? My answer is no. Instead, I would suggest that you bring something to prove that your code works. For example, bring in a computer that is running your program.

Another example would be for a restaurant. Should you bring in the entire menu and recipes? Once again, my answer is no. Maybe bring in three recipes (one appetizer, one entrée, and one desert) to show the potential investors. This way you prove that you know what you are talking about, and the investors have an idea on what you want to accomplish.

This may sound cynical, but not all potential investors want to help. Some are out for themselves and will look for an opportunity to take advantage of you. Therefore, you should only give away enough confidential information to prove you know what you are doing, but not enough that a dishonest potential investor could take advantage of you.

Should I include a confidentiality agreement for potential investors to sign?

No. You can try, but for the most part, no potential investor will sign it. Remember, you are there to try to advance your situation. You are looking for financing and maybe a little expertise. You want your product/idea/concept to be mutually beneficial to all parties, but at the end of the day, you are pitching your product/idea/concept to make your life better, not theirs. Potential investors already have money and resources, why should they sign an agreement when ultimately they may not need your business?

If a group of us worked on the plan together and a disagreement exists about what sections to include, how do we resolve the dispute?

In this situation I believe that the person that created the idea should make the ultimate decision. If both are all members of the group came up with the idea, the person who is the expert on the product/idea/concept should make the ultimate decision. If more than one person is an expert on the product/idea/concept than a compromise needs to reached. For example, if one person wants the section in the plan and the other wants it out, a possible solution is to include the section but have the person that does not want to include the section decide where in the plan the section should go.

Bottom line, if a big dispute occurs over the formatting of your business plan, your business group has bigger problems than the plan. If you people cannot work together on a business plan, who are you supposed to execute a product/idea/concept?

If anybody has any other questions, please feel free to leave a comment, or e-mail me at cashspeak@yahoo.com.

Finally, as Anna Quindlen said, “If your success is not on your own terms, if it looks good to the world but does not feel good in your heart, it is not success at all.”

2/9/07

Business Plan Formation Part 8

The third and final vital document to have in your financial plan is the Break Even Analysis. The Break Even Analysis is the document that shows your potential investors the minimum amount of sales necessary to have your company break even. Therefore, this “break even amount” will create no profit, but will mean you have no losses either. The point of this document is to help the potential investor analyze the viability of your Pro-Forma and your Start-Up costs. Remember, reaching the break-even point is NOT your goal! The break-even point should be your floor.

The following is an example of a very basic Break-Even Analysis. This document is ONLY an EXAMPLE!

As I mentioned, this document will be used to determine the viability of your other financial documents. You will also want to analyze this document. You may be surprised by the results. This document could help you adjust your product’s price, your business costs, and/or your ideal revenue per available seat hour (for restaurants). It is important to remember to keep your Marketing Plan and Market Analysis in mind if you decide to adjust your product price. It is very easy to increase your product price on paper; however, your market has to be able to tolerate your increase. Do NOT arbitrarily raise the price of your product to make your break-even point “easier” to reach!

On a side note, I was asked whether to include a Sales Forecast in a business plan. A Sales Forecast is a document that shows the amount of sales you speculate you will make during a given time period. If you want to include this document in your business plan, that is a format issue that is yours to make. Note that the Pro-Forma and Market Analysis will include all the information that the Sales Forecast will. The Pro-Forma is a speculation of your monthly/weekly profit and therefore will include your sales. The Market Analysis will include your research about the market you are trying to penetrate and will therefore be the basis for determining your Pro-Forma amounts. A Sales Forecast may be able to more easily tie these two documents together, but it not absolutely vital in your business plan construction. In my opinion, I would include a Sales Forecast in the Market Analysis section. This way you can create a logical progression between the market statistics and you sales projections. However, as I stated before, I am giving you a general formation plan. You can absolutely include additional documents that you feel will make your plan more clear or easier to understand. I have but one caveat to give you; do NOT consistently include documents that create redundancies in your business plan. Saying the same thing five different ways has the possibility of upsetting the potential investor and of chipping away your credibility.

2/4/07

BUSINESS PLAN FORMATION PART 7


One thing to keep in mind with your Financial Plan, all of your numbers are speculation. Doing research is vitally important so that everything is accurate, but until you actual purchase something or make a sale, all of your numbers are, for lack of a better word, guesses. However, this does not mean that you should arbitrarily pick a number to include in your Financial Plan. The purpose of me telling you this is to remind you not to second guess yourself too much. You should recheck all of your numbers, and you should do hours of research to find accurate, credible numbers. However, do not beat yourself up if the numbers “do not feel right.” For example, when members of my business family where working on the start-up projection for our Financial Plan, we felt that these numbers were too high. As such, we did more research and more than halved our original amounts. At the pitch, we were told that our original amounts were more accurate and that they in fact were still a little low!

After that brief digression, back to the point. The Pro Forma is a financial document that speculates what your idea/product/concept will make for a set time period. The example below is based on a monthly formula. However, some Financial Plans use a weekly formula, a quarterly formula, or even a yearly formula. The formula you use depends of your idea/product/concept. A word of caution, be careful if you use a yearly formula. The larger the amount of time your Pro Forma encompasses, the harder it is to accurately speculate.

Here is the example. Once again this example is for a restaurant. This example is based on a monthly formula and is for EXAMPLE ONLY! I am only giving you a general format. Do NOT copy and paste this document and expect to have a sound Pro Forma:

As I stated above, your Pro Forma is a time-based document that speculates you much money your idea/product/concept is going to make. In other words, this document shows how profitable your idea/product/concept could be. A couple of points to remember: (1) make the numbers realistic. Do NOT state an amount you know you cannot make; (2) think of all possible expenses associated with your idea/product/concept. The last thing you want is a surprise cost eating away your profits; (3) make sure your Pro Forma has a logical progression. Start with gross revenue and work your way down; and (4) make sure your gross revenue is set on a logical formula.

Do NOT make up a number for gross revenue, create a formula. For example, if you have a product and want to sell it for $5.00, multiply that amount by the number of units you speculated you will sell for your set time period. Gross Revenue = Product Price x Amount Sold During Time Period. Therefore, if you want a monthly formula and believe that you will sell 1,000 units per month, your formula will be: Gross Revenue = $5.00 x 1,000. Therefore, your gross revenue will be $5,000. Keep in mind, “gross” means that no expenses have been deducted from this amount. Therefore, this amount is NOT profit!

If you have a logical progression to your Pro Forma and have done research that supports your speculation, you should have a presentable Pro Forma. Also, learn from my story above. If the numbers do not “feel right,” do not second guess yourself too much. Lastly, make sure your Pro Forma compensates for your Start-Up Projection. If your Start-Up Projection is $1.5 million and your Pro Forma states that you will have profit of $5,000 a month, you may want to rethink your business plan. I doubt your investors and yourself will be happy making less than $60,000 a year each after having invested over a million dollars!

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