The high incidence of business failure within the first year, points amongst other things to a serious lack of financial knowledge amongst most budding entrepreneurs. Martin Feinstein, CEO of Enablis South Africa, believes that cash flow forecasts and financial planning are two key elements in business survival.
In fact, most of your time and effort should be spent on the financial model for the business.
Entrepreneurs should understand their finances inside out – those that do, may well hold the key to success and prosperity. To give you a simple example: take a coffee shop business – it would take a basic calculation to know that they would need to sell for instance 8 000 cups of coffee per month, just too breakeven. In many instances this mathematical exercise is not done and the business fails.
“You can outsource your financials if you are not a numbers guru, but that doesn’t mean you can abdicate from the responsibility to understand what they mean and make sure they are accurate and reflect a real possible business path.”
Use these ten points when preparing the financial elements in your business plan:
- Don’t over- or under-estimate your investment need.
- Provide realistic budgets for a three-year period from launch. Your first 12-month budget will be the most detailed.
- Plan your cash. You’ve got to make a good, educated guess, then manage your planned cash flow versus actual cash flow very carefully. Growth costs money, and profits don’t necessarily mean cash, so write this out in detail. The maths isn’t hard, but getting your financials organised takes some time and effort.
- Demonstrate an ability to service your loan with interest without placing your cash flow under strain.
- Allocate resources sensibly. Cut costs wherever possible. Opt to buy second hand and lease inexpensive premises instead of sinking your financier’s cash into plush offices. Similarly, draw your minimum salary requirement in the first year to two until the business breaks even and begins to show a profit.
- Be specific about dates and deadlines. Determine where you want to go and break that down into specific, concrete steps with dates, deadlines and budgets.
- Show commitment by putting ‘flesh in the game’. The term refers to the entrepreneur’s own contribution. Potential investors want the comfort of knowing that if the business fails you have something to lose. Your own contribution may not be in the form of hard cash. You should be able to put a value to your intellectual property (the concept for the business), your time investment (sweat equity), expenses incurred in developing the business plan, suretyship and other guarantees.
- Develop your financials using a professional software package such as Excel. Make these files available for scrutiny should the financier request them.
- Only include the financial highlights in the body of the business plan itself. Longer, more detailed budgets can be included in the appendix.
- Have an expert double-check your calculations before you submit your plan.
How optimistic should financial projections be in a business plan?
Be clear about the funding the business requires and what it will be used for – don’t inflate the monetary assistance required, but don’t under-quote either.
Include any non-financial support that your business will require (financial education, accessing new markets, etc) especially if you are planning to apply to development financing institutions, as most of them provide additional services that you may not have to pay for and that can reduce your business expenses.
Martin Feinstein, CEO of Enablis South Africa, lists his top mistakes that all entrepreneurs should avoid when compiling their business plan:
- Overestimating sales in the first year
- Underestimating costs and overheads in the first year
- Confusing the opportunity to sell with the reality of making sales
- Neglecting to accurately price inputs and raw materials
- Planning to buy assets (vehicles, equipment) instead of leasing them
- Planning on being profitable in year one when in reality it will take longer
- Including too much unnecessary detail that will distract a funder from your core plan
- Not being specific about how much your margin is and where it is
- Going on about job creation and social upliftment when your first priority is to survive
Should a consultant be used to assist with a business plan?
Creating an effective business plan is the first step in a long and arduous journey to building a sustainable business. The effort you put into your research, business model development and financial planning will be the first of many steps that will determine whether your business will succeed or fail.
Why then would an entrepreneur outsource this critical element?
As we have said over and over it is best to write your business plan yourself. No-one knows your business better than you. There are various business plan templates available on the Internet that you can use for guidance. However, the areas where you are lost – make sure you get help. Use consultants and experts where necessary but don’t outsource the whole process.
Use a consultant to guide you if you need to, but insist on the consultant transferring skills to you, as you need to understand the key drivers in your business and potential funders will pick up that you do not have a good understanding of your business dynamics if the business plan is done by a consultant without your input and understanding.
Why do I need a business plan?
The process of developing your business plan allows you to focus on the business and how it’s going to operate.
I’m starting my own business and have downloaded business plan templates from your website. But it seems like a huge amount of information is required and it’s going to take me ages to complete. Exactly why do I need a business plan?
Starting, and developing, a sustainable business takes more than just a good idea, a superior product or great trade skills. Being the very best electrician, fashion designer, or website developer may cause you to be an excellent employee in a company, but it will not guarantee that you will be able to grow a successful business of your own.
An employee only needs to focus on his specialised role in the company, but a business owner needs to focus on every single aspect of the entire business.
You need a map to success
Building a business is like building a house. Can you imagine building a house without any designs or drawings? Or starting to build without first raising sufficient money to complete the house?
This is no less foolish than trying to build a viable and sustainable business without first sitting down and planning every aspect of your business. How many people could successfully build a house if all they had were some building materials and a picture in their mind of what they wanted their house to look like?
Sadly, this is exactly what happens to so many small businesses in South Africa. They start out with a good idea, some resources and practical skills, and they begin their businesses without any further planning or research. A recent survey revealed that only one in five small businesses manage to survive beyond three years.
There are many reasons why businesses fail, but in most cases, these failures could have been avoided if they had developed a comprehensive business plan before starting their business.
As with building a house, you will need to plan and develop beyond the scope of just your area of skill or expertise. Being a great bricklayer will help you to build the walls, but you will need more than just bricklaying skills to successfully complete the entire project. Similarly, having a skill, or a thorough knowledge of your products and services, will help you to build your business, but you will need more than just this to be successful.
Things to think about
- You will need to research your industry, market and competition.
- You must consider your marketing strategy, target market, ideal location
- Know your potential customers “needs” and “wants”
- What are your operational and management structures?
- You must consider the financial components of running your business. This includes properly costing your products and services, preparing a realistic cash flow forecast and sourcing any required start-up finances.
How many financing institutions would give you a loan to build a house if you were unable to produce proper building plans, architectural drawings and a detailed cost analysis? Similarly, financiers will not give financial aid to your business if you are unable to present a detailed business plan.
A DIY plan is best
It is important that you write your own business plan, and not just pay someone to draw one up for you. Successfully running your own business requires you to know the very fabric and heartbeat of your business, being personally familiar with every aspect of it.
Take the time, effort and energy to personally research, plan and develop the best possible business plan for your new venture.
This is probably one of the most important things you could ever do for yourself and your business!
A business plan is not as difficult as it sounds. There are many great resources out there to help you to draw up a good business plan. If you are going to take the risks, and make the sacrifices, of running your own company, then you cannot afford not to develop a thorough business plan.
Start by breaking it down into its various components and focus on one at a time. Do it yourself, but seek advice and mentorship from others who have experience. Keep working on it, and keep reworking it, until you have developed the best possible business plan for your business. This will be one of the greatest factors in ensuring the success and sustainability of your business.
Do I need a business plan for my one-man business?
All businesses, regardless of size, will benefit from having a business plan.
I have a small business in which I am the only employee. Do I still need to write a business plan?
In my experience (as a business mentor) my answer to this question is a resounding “Yes!”
- One Person Business: As a one-person business, you might feel that you have all the knowledge and information needed to run the business and to steer it in the right direction in your mind. However, a business plan can be used as a working document that can be moulded and adjusted over time as things progress. Michael Gerber in the E-Myth book points out that as an entrepreneur you need to know your primary aim because it provides you with purpose and energy for your daily activities. You should consider asking yourself questions that will help you to understand your primary aim.
By having an official business plan that has been designed by you to steer your course, you can assess any potential opportunities as they arise and make a decision about whether or not they stray from or affect the original vision of your business.
If so, how far does it stray? And if it strays from it too much, will you be able to get back on course after the detour by making a lateral move? Or will it mean that you would have to backtrack after the detour to get back on to the original road.
It’s very important that your business plan is aligned to your life vision because it becomes product of your life.
- Future Growth: You should also look at future growth in the business and the possibility of needing investment such as financial investment at a later stage. Without a decent business plan it will be extremely difficult (if not impossible) to attract any assistance. Ask yourself, “Would you get on board a ship which has no compass and simply trust the captain who says he knows where he is going?” I don’t believe you would. A solid business plan will provide some assurance to potential investors that you do have a plan and know where you’re headed!
- Review: As previously mentioned, your business plan is a working document that should be reviewed every year. Add information where necessary and take out information which has become obsolete or irrelevant. This will allow you to look at opportunities which were perhaps not capitalised on during the year and others that could be put in to the plan for the upcoming year – all the while keeping the vision of the business in mind when making any decisions.
Every business, including the ‘one-person-owned business’, should view a current, relevant and company specific business plan as a powerful tool to assist them in ensuring that the business stays on course and ultimately reaches its full potential.
What information should my business plan include?
Your business plan should capture who you are.
I’m in the process of doing a business plan but am swamped by information overload. Which information and how much detail should I include in the business plan?
The most critical information for any business plan is your vision and mission – the heart of who you are. Take time and effort over this part of your plan because this speaks to the core of everything your business is about and why you started it.
Your passion for your business becomes clear to the reader through the key words of your vision and your motivation behind starting your business is reflected in your mission statement.
This is what makes you, you, and why your business stands out from the crowd. These elements tell the reader this is where your business is headed.
- It can excite a potential investor particularly where there is a “connect” with your dream.
- It allows a marketing agency to properly understand your dreams and put together a package to successfully push your business into your target market.
- It will speak to the heart of a potential employee, creating a desire to work for you and be a part of your team.
Your business plan also serves as a reminder to you the business owner of who and what you are about and in the tough times, it’s your bench mark, for things past, present and future.
6 important elements of a business plan
The guidelines below give you an overview of what the business is about, and demonstrate your research, planning and understanding.
Bear in mind that even if the reader knew nothing about you or your business, that after they have read your business plan, they should have a good idea and enough information to begin making some informed decisions.
Broadly, cover the following:
- Business and industry information
- Type of legal entity
- Where you fit into the related industry
- Your product or service offering and what makes it unique
- Your target market – ie who is your customer
- Marketing – how you plan to reach your target market
- Broad operations and structure of your company
- Financial projections and requirements
- Personal investment into business
- Start-up requirements
- Expected returns
Each business plan is unique and specific to that business, so these are just some guiding principles. And, remember that your business plan should be viewed as a living document that you need to keep up to date and relevant.
You’ll find a free business plan template here.
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