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Thursday, July 16, 2015

Writing a Business Plan

As I had stated in a previous post, writing a business plan is a critical first step in taking a business idea that you have and turning it into a successful reality. There are several reasons for this, which include:

1. The ability to explain a concept articulately is indicative of knowledge and understanding.
2. A well developed business plan provides a tool for evaluating the actual results of the business as you implement your key decisions and makes it easier to adapt to the unexpected.
3. Providers of financing will generally require one before they will agree to lend you any money.
4. The process of writing and developing the plan forces an objectivity to the evaluation of the idea that can keep naive optimism in check.

It is often said in academic circles that the ability to teach a subject indicates how well a person has mastered the subject at hand. So it is also with your business concept. If you can explain to someone who knows nothing about your proposed business idea and who does not possess any understanding of your chosen industry/field in a way that convinces them that it would be a good idea to invest their money in your business, then that is a pretty good indication that you have a viable business model and that you are ready to actually go into business for yourself.

Writing the plan forces you to think about all the things that could go wrong, which you mind will have a tendency to minimize or assume away. This is especially true the more excited you are about your idea and the more desperate you are to get started. Responding to these issues on paper and developing strategies to address them, will make you much better prepared to deal with the unexpected, once you have actually started your business. Writing the plan will also force you to identify what actions should take priority over others, something which may not always be obvious at the outset.

Finally, a well written business plan is a must when approaching banks or many private individuals, such as venture capitalists for financing. One of the main reasons why a lot of start-up businesses fail is that they are not sufficiently capitalized to be able to develop enough sales to sustain the salaries and other overhead expenses of the business. In my own case for example, I have to sell enough stamps to provide a profit after re-investment of at least $6,000 per month in order to be able to earn enough after tax to pay for the lifestyle that I described in my earlier post. How much inventory do I need to be able to generate that much each month? A lot more than you would think. Many of my stamps can take up to two years to sell. The right buyer always comes along eventually, but it takes time. So if I have too little inventory on hand, then what winds up happening is that the sales dollars get consumed by the monthly expenses to the point that no inventory growth can occur, and eventually it consumes the capital of the business. As this happens the sales fall and there are continual losses, which require cash to cover. My point is that you likely will need a lot more money to run your business than you think and a good business plan will reveal to you what your true requirements are.

A business plan consists of two components:

1. A written narrative that outlines the concept, explains what the market is, who the competitors are and explains all of the key strategic decisions you are making that will enable your business to maintain a sustainable competitive advantage in the marketplace. In addition, it will present in summary form, the expected financial results of the business.

2. A financial forecast that projects what the expected business results are for a period of time into the future. Usually that period is five years, but it can be longer or shorter. This forecast will include the standard financial statements such as a balance sheet, income statement and cash flow statement. In addition to the financial statements, you have to include all of the hypotheses and assumptions that you have used to develop the numbers contained in the projection. Usually this will mean a detailed section for sales, another one for expenses, another one for employees and salaries and finally another one for financing.

If the second component is very thoroughly done in an excel spreadsheet, then you can make a copy of the spreadsheet and use your actual results to modify the projections in real time as the results emerge. This will enable you to compare to your original forecasts to see how accurate your assumptions have turned out to be. Thus you can see whether or not you are ahead of the game, or behind the game so to speak. In addition, if you maintain these projections, then it will be very easy to apply for additional bank financing as your business expands.

The Business Development Bank of Canada (BDC) has an excellent template available that you can download for free. You can access it from the following link:

Their template does include both components, although I found the financial projection template to be too simple for my use. However for your purposes, it should be fine, particularly if you are not familiar with financial accounting concepts. It comes with very detailed instructions on how to write the plan and complete the projections. The advantage to using their template is that you can then use it to apply for their small business loan of $50,000. They offer a good interest rate of between 8-9%, which is not bad for what amounts to a completely unsecured line of credit.

It may seem like a daunting task to complete, and it definitely is if you try to do it all in one sitting. What I would suggest instead, is to download it to your laptop, and work on it piecmeal as an idea hits you, or another facet of your plan comes into focus for you. As you do this, you will reach a point where you will feel it slowly coming together. At this point, it would be good to enlist the help of a friend, relative or accountant to look it over and provide some feedback.

Check it out today and give it a go!

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