Setting up your own business has never been tougher and the margins for error amongst the business community have never been so slender. The aftertaste of the world recession has left banks and other investors across the region cautious in their lending practices. Funding grants for establishing small or medium enterprises are scarce and becoming ever more difficult to obtain. Greg Pogonowski, an independent financial advisor, stresses the importance of a solid business plan in today’s economic climate and how, without a comprehensive plan of action from the outset, investment will not be forthcoming.
If you don’t know where you are going, then it doesn’t matter which road you take. On the other hand, if you have a clear goal – albeit over the horizon – it is much easier to plan the safest, cheapest or quickest route to get there. This is the benefit of having a sound business plan.
A business plan is like a route map to your destination. It is not, in itself, the answer to all the questions and problems your business might face on the way, though it is an essential first step. However, the only thing worse than action without planning is planning without action. So a good business plan has to be one that you can actually implement. Such a plan helps in four ways:
• It gives your business a sense of direction.
• It convinces others that you have a sense of direction.
• It helps build commitment because you have publicly announced your objectives.
• It gives you something to measure your progress against – helping you identify issues early on and take appropriate action.
This is not just theory either. Research shows that businesses that undertake regular business planning have an average profit margin of 54%. For those that do not, the average profit margin is 35%.
Sense of direction
Your business plan is the first step towards bringing your dreams to reality. However, it is not something you just do once at the start of your business, or when you need to raise funds. Rather, a business plan should be seen as a continuously developing document or process.
It’s a vehicle to spell out your vision for what your business will look like at the end of a given period. It’s also a template for action and directs everything you and your people should do to move you towards that vision. Many businesses fail because they literally do not know what they are doing. They usually start with a good idea, but are often distracted by every money-making opportunity that comes their way. Some of these opportunities may turn out to be profitable, so it seems logical to follow where they lead – at least in the short-term. After all, isn’t money-making what business is all about?
Unfortunately, the answer is not that simple, because, after a year or so, you may wake up one morning and find you are no longer in control of the business. The business is controlling you. Indeed, what you may have is not so much a business as a collection of deals. This may be fine until one deal goes sour and the whole pyramid collapses. Bills still have to be paid, but you don’t have the income-generating base to pay them. No one, especially professional financiers, would invest in a business like that.
Also, resources such as time and cash are scarce for almost all businesses. So you must have some way to prioritise which opportunities you will pursue for the maximum long-term benefit. That is why it’s essential to have a clear vision in your own mind of where you want your business to go. Writing it down does two things. It forces you to address the details of your vision and it also helps you think through how you will communicate your vision to others.
When you have the direction of your business clear in your own mind, you can more easily convince others to share it.
- First, you share it with your colleagues and employees. A good plan will set targets by which progress can be measured. This should lead to a shared sense of achievement that will help you motivate everyone in the business.
- Second, your plan has to convince your financial backers – investors, bank managers, the spouse who allows you to remortgage the house and anyone else on whose money you must rely. They will need to be assured that you have not only thought carefully about the future of the business, but also that your thoughts are sensible. The fact that a proper plan exists is as important as what it actually says.
To this end, there is something really tangible and even comforting about a solid business plan. It is something to which everyone can refer – you, your staff, your bankers and your investors. It is evidence of a shared commitment.
Banks and investors will often demand a business plan as a matter of course. Even where it is not required, it is a useful tool to persuade others to invest time, money and effort in your business. It can also help you to recruit better, higher-level employees.
The key elements of a business plan
Although it is possible to include all sorts of additional information, a proper business plan must provide clear and concise answers to four easy questions:
• Why does the business exist?
• Where does it want to go?
• How will it get there?
• What will it cost?
Or, to put it more technically:
• Why – Purpose
• Where- Objectives
• How- Strategy
• What cost- Budget
Your purpose is sometimes called a “mission statement”. Long pompous statements are counter-productive. All you need is one or two short sentences on what you hope the business will achieve.
One might imagine that the sole purpose of a business is to make money – and one would be wrong. Money is a by-product of business, albeit an important one. Many people who set up their own businesses could often make more money doing something else. They are usually motivated by something else, such as a desire to be their own boss, or a fascination with a particular product or industry.
While purpose should be general, objectives should be smart, that is:
So, objectives should always have a measurable target e.g. not just to increase exports but to increase exports by 15% by the end of the year. For the period of the plan a business may have several objectives. These might include:
• Financial objectives
• Strategic objectives
• Operational objectives
• Marketing objectives
The various objectives should complement each other, but some prioritising may be necessary.
The old military maxim applies here: “Maintain your objective, but be flexible about how you get there”. So strategy can be flexible as long as you are clear about where you want it to take you. If you know where you want to go and you know where you are now, strategy is simply a matter of working out the shortest, simplest or cheapest route from one to the other.
It is vital that you do market research on potential customers and competitors; economic and market conditions, the way trade is usually done in your sector, who the suppliers are and staff and technology required. You also need to indicate that you have done this research in your business plan. Perhaps the most important aspects to research are trends and emerging technologies. There is little point in entering a declining market. And technological developments such as the Web may completely transform an existing market.
You must now put figures to your strategy. This is the part of the plan that other people will read with greatest attention. A 12-month cash flow and an estimated two-year profit projection are probably the safe option. Anything beyond that is verging on speculation.
All of the above should hopefully give you a brief idea as to the main areas you need to look at. Working closely with a qualified adviser will give you the best results, as they should know what a bank wants to see and know and so be able to help you produce a finished document that will help you achieve the desired result. Remember, a Business Plan is not there to impress you, but the people who you are putting it forward to, enough for them to lend you the right amount of money and/or go into business with you in some other way.
GREG POGONOWSKI – DipPFS, MAQ, CertCII(MP), MDRT, is an independent financial advisor with over 27 years experience in the financial services profession and works with Pinnacle Asset & Wealth Management.
He can be contacted by email at: email@example.com or telephone: +971 (0) 50 8769035.