Refining your Business Plan

You will have noticed, in my last post on a sample draft of a business plan, that the last section in the table of contents isn't posted. I saved it for a new post because I wanted to talk about differentiating your business plan in detail based on the type of business you have.

For Raising Capital

For Bankers

• Bankers want assurance of orderly repayment. If you intend using this plan to

present to lenders, include:

o Amount of loan

o How the funds will be used

o What this will accomplish—how will it make the business stronger?

o Requested repayment terms (number of years to repay). You will

probably not have much negotiating room on interest rate but may be able

to negotiate a longer repayment term, which will help cash flow.

o Collateral offered, and a list of all existing liens against collateral

For Investors

• Investors have a different perspective. They are looking for dramatic growth, and

they expect to share in the rewards:

o Funds needed short-term

o Funds needed in two to five years

o How the company will use the funds, and what this will accomplish for

growth.

o Estimated return on investment

o Exit strategy for investors (buyback, sale, or IPO)

o Percent of ownership that you will give up to investors

o Milestones or conditions that you will accept

o Financial reporting to be provided

o Involvement of investors on the board or in management

For Type of Business

Manufacturing

• Planned production levels

• Anticipated levels of direct production costs and indirect (overhead) costs—how

do these compare to industry averages (if available)?

• Prices per product line

• Gross profit margin, overall and for each product line

• Production/capacity limits of planned physical plant

• Production/capacity limits of equipment

• Purchasing and inventory management procedures

• New products under development or anticipated to come online after startup

Service Businesses

• Service businesses sell intangible products. They are usually more flexible than

other types of businesses, but they also have higher labor costs and generally

very little in fixed assets.

• What are the key competitive factors in this industry?

• Your prices

• Methods used to set prices

• System of production management

• Quality control procedures. Standard or accepted industry quality standards.

• How will you measure labor productivity?

• Percent of work subcontracted to other firms. Will you make a profit on

subcontracting?

• Credit, payment, and collections policies and procedures

• Strategy for keeping client base

High Technology Companies

• Economic outlook for the industry

• Will the company have information systems in place to manage rapidly changing

prices, costs, and markets?

• Will you be on the cutting edge with your products and services?

• What is the status of research and development? And what is required to:

o Bring product/service to market?

o Keep the company competitive?

• How does the company:

o Protect intellectual property?

o Avoid technological obsolescence?

o Supply necessary capital?

o Retain key personnel?

High-tech companies sometimes have to operate for a long time without profits and

sometimes even without sales. If this fits your situation, a banker probably will not

want to lend to you. Venture capitalists may invest, but your story must be very good.

You must do longer-term financial forecasts to show when profit take-off is expected to

occur. And your assumptions must be well documented and well argued.

Retail Business

• Company image

• Pricing:

o Explain markup policies.

o Prices should be profitable, competitive, and in accordance with company image.

• Inventory:

o Selection and price should be consistent with company image.

o Inventory level: Find industry average numbers for annual inventory

turnover rate (available in RMA book). Multiply your initial inventory

investment by the average turnover rate. The result should be at least

equal to your projected first year's cost of goods sold. If it is not, you may

not have enough budgeted for startup inventory.

• Customer service policies: These should be competitive and in accord with

company image.

• Location: Does it give the exposure that you need? Is it convenient for

customers? Is it consistent with company image?

• Promotion: Methods used, cost. Does it project a consistent company image?

• Credit: Do you extend credit to customers? If yes, do you really need to, and do

you factor the cost into prices?