There is a bit of an injustice in the way entrepreneurs are told about the business planning process.
First, new entrepreneurs are told that to get money from a bank they need a business plan. While there is some truth to this, a major missing piece is that they will likely not get any funds from a bank to start their business. This means that writing a business plan in the hopes that a bank will provide debt financing is in itself not a good reason.
Moreover, many would-be entrepreneurs are discouraged when attempting to complete a business plan because of the way the information is presented to them, leaving them frustrated and confused.
I see two fundamental issues with the way the topic of business planning is presented to nascent entrepreneurs. The first is related to the order in which the business planning process is presented. It starts on the cover page and executive summary and finishes with financials. While that is the way someone wanting to know about your business might read the business plan, it is not reflective of the order in which it needs to be written. Essentially, a business plan is three sub-plans presented in the following order:
Operational Plan
Marketing Plan
Financial Plan
All too often the first question I receive from someone writing a business plan is what kind of entity is right for their business. From my perspective, I cannot answer this question until I know how the business will be funded. To understand that, I’d need to see a completed Financial Plan first. So I recommend that when writing a business plan you first complete the Financial Plan, then the Marketing Plan, and finally the Operational Plan, where decisions about corporate entity type are included. I have provided a simple to follow the business plan outlined in the Free Downloads tab of this blog.
The next injustice issue relates to the elements of a Financial Plan. Remember that when a bank is reading your business plan in consideration for some debt financing it is most likely that you are an established business with several years under your belt. During that time the business has accumulated assets, incurred liability, and completed several tax returns. Therefore, the existing business has a meaningful Balance Sheet and a Profit & Loss (P&L) aka; Income Statement. The problem is that for a start-up there is no Balance Sheet, and a start-up has no income so there is no P&L yet either. Therefore the sub-elements of the Financial Plan (also included in the Free Downloads tab of this blog) for a start-up business plan should include the following elements:
Start-up cash requirements
Break-even analysis, so you know what you will need to charge for your product or service
Cash-flow projections, so you can see how much additional cash you may need to inject to keep the business afloat during the start-up phase.
When these three elements of the Financial Plan for a startup are done you can move to the Marketing Plan.
The break-even analysis should give you at least a minimum pricing start point to begin your Marketing Plan efforts. During the process of completing the Marketing Plan, you may have to adjust some of your calculations in the Financial Plan.
Once these two sub-plans are done and you have some idea of how much money it will take, and if you need to include partners in your business, you can much better address the issues contained in the Operational Plan.
Have you been prevented from completing a business plan because you attacked it from the wrong end?
