How to Build a Better Business Plan: A Hands-On Action Guide for Business Owners
by Alastair Thomson
One of the primary benefits of a business plan is “finding a business model that works.” Alastair Thomson, an accountant and experienced C-level executive, guides you to think from a lender’s or investor’s perspective, whether or not you are seeking outside financing. From their side of the table, would you find your business compelling?
The completed plan becomes your “roadmap” for execution. “With the right business plan, you do your thinking up-front. You know how to take advantage when new opportunities come your way and you know exactly what problem needs solving if performance veers off-course.” Thomson encourages planning for three scenarios: best-case, worst-case, and likely outcome. “The biggest danger for a pessimist is under-resourcing their business.”
Thomson discusses what to include in each section of the business plan. Here are some highlights.
Executive Summary. “In practice, investors and lenders often read the Executive Summary to get the gist of the proposal and decide if it excites them enough to read further. If they like the broad concepts in your Executive Summary… they might take a quick look at the financial numbers towards the end of your business plan document. Finally, if your proposal passes muster on the financial front, they will go back to the start of your plan and read it from front to back in order to fill in more of the details they need to make an investment decision.”
Market Analysis. The author quotes the adage, “Just because there’s a gap in the market, it doesn’t mean there’s a market in the gap.”
“Investors and lenders want to be reassured that your marketing strategy seems plausible given the structure of the market you operate in. So, make sure your Market Analysis and Sales and Marketing sections cross-reference one another and clearly demonstrate they are both part of one cohesive plan. (Sadly, this is not as common as you might imagine).”
“Every time you state a fact or make a claim you should state where you got that information from, and the source should be as objective and independently verifiable as possible.” Trade associations and local government economic development agencies can be useful resources for this section.
Organization and Management. Are your staffing expenses mainly fixed (salaries) or variable (hourly)? How do you plan to recruit for in-demand skills? Which new positions are you planning to add in the future to support further expansion? An organization chart is recommended for this section.
Products and Services. “For investors and lenders, the first stage of the decision-making process is usually to see whether the aspects they do understand, such as the financial returns, the marketing strategy and the company’s growth trajectory make it an investment they want to get involved with… Only when there are green lights against all of those will investors and lenders start digging into the product itself. They can always bring in an expert of their own later if they need a deeper technical understanding in the specifics of your product or service.”
“They will understand that it is not always possible to have complete control over everything you would ideally like to control, but where your control is limited, you need to explain what you are doing to mitigate any risks and ensure your business won’t come to a halt due to key materials not being available or commodity price hikes making your business uneconomic.”
Sales and Marketing. “At its heart marketing is about making sure customers know you exist and teeing them up for a sale. However, an absolutely crucial, but often completely forgotten, part of the marketing process is making sure customers who express an interest in dealing with your business are the right customers for you.”
“In every industry, your sales team is far too expensive a resource to fritter away on 1-in-a-1000 sales prospects… The marketing qualification process is what gets you… to focus in on the more sensible 1-in-4 prospects instead.”
“What sectors and customers are you targeting, and why? Describe your ideal customer—and, perhaps more importantly, the sectors or businesses you won’t serve and why (e.g. too small, too far away, cost of customizing your product is too high for different regulatory environments, etc.)”
“No successful business can service every sector of every market profitably and only amateurs even try. Be clear where you are focusing your efforts.”
Capital Investment. “If part of your business plan involves making a large capital investment, you need to convince investors and lenders that any significant proposed capital investments represent a smart commercial decision.”
“If you are contemplating an asset purchase of any sort, at a minimum, your business plan should also include an analysis of whether leasing that same asset is financially more beneficial than buying it outright… This should be a fairly dispassionate decision based on the cash flows over the useful life of the asset.”
Financial Projections. “Take particular care that the Executive Summary flows clearly and cleanly into the Financial section… You want the investors and lenders to be able to flip back to earlier sections and go ‘yes, I see where that number came from’ as they work their way through the Financial section so they realize your whole plan hangs together as it should.”
“You won’t win the funding you’re looking for in the Financial section, but it’s easy to lose it here… If they thought your basic ideas were good but they flip into a wildly unrealistic financial plan you can kiss your hopes of securing their financing support goodbye.”
Funding Request. “Your mindset in this section should be on the next 3-5 years, not the next few months.” Address equity dilution effects of future rounds of fundraising here, if applicable.
Risk Analysis. “This is the place for risks which would have a major impact on your sales, operating costs, profitability, or cash flow… Business owners often consider the implication of undershooting their business plan far more deeply than they consider what might happen if they knocked their plan out of the park… But if events turn strongly in your favor, you might even need some additional short-term funding.”
Thomson prefers the term sensitivity analysis to avoid a bureaucratic approach to risk management. To illustrate the concept, he shares an example where a 5% fluctuation in material costs completely wiped out profits.
Final thoughts. Perfection is a red flag. Credibility, competence, and trustworthiness are crucial to securing funding. “Professional investors and lenders know there is no such thing as a risk-free proposition. What they want to understand is whether or not they’re dealing with an amateur who hasn’t fully thought through the consequences of their business plan.”
While the book is a do-it-yourself manual, Thomson advises where engaging a CPA can add the most value, such as discounted cash flow (DCF) calculations, revenue recognition policies, and tax projections. The author includes a link to a free Microsoft Word business plan template which parallels the sections of the book.
I’ll close with a thought that struck a chord with me. “It’s amazing how often just knowing what you’re trying to do makes something more likely to happen. Once you get complete clarity about what you want, your brain, subconsciously, starts to look for ways to make that happen for you.” So true.
Thomson, Alastair. How to Build a Better Business Plan: A Hands-On Action Guide for Business Owners. Stokesley, North Yorkshire, U.K.: Better Business Publishing Ltd, 2020. Buy from Amazon.com
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Note: I have modified the spelling to appease my American spellchecker.