Giving Your Business Plan Real Value
A GENERAL INTRODUCTION TO USING BUSINESS PLANS AS A LIVING FORCASTING DOCUMENT
By: Ralph Castano, Owner of Bookkeeping Stars
When launching a small business you will find people seeking to give you advice. One consistent piece of advice you will hear is that you need to have a written business plan. Let me toss in my two cents and say that a well thought out business plan does have value to a business. Understand that doing a good business plan will take time and effort but you will find that it is time well spent if you incorporate the use of the business plan into your regular monthly report analysis. Regular use and updating of your business is a key to making it a valuable tool in managing your business. A mistake often made by small businesses is doing a business plan, presenting it to a bank when seeking a business loan of some type and then the business plan is left unchanged until the next time the business needs to make a financing request. Using a business plan to seek funding is only one use and in my view it is not even the most important use.
Lets all agree that having a business plan is important for a small business. The next question to answer is how to prepare a business plan. There are no end to sources of forms and people who for a fee will help you create a business plan. You can seek help in preparation of a business plan but I firmly believe the small business owner has the best insight into their business and that makes them the best person to describe the purpose of business. Even so getting help with preparation of financial forecasts and gathering of market data can be beneficial if those are not areas the business owner has expertise in preparing.
Select a format and third party help that you are comfortable with. While specific formats can vary they all have some common components that you will need; one is a narrative section that explains how the business will operate, who will use the business, what financing will be needed to support the business, who the principle employees are (short bios with their qualifications), who will the business compete with, and what will be the business marketing strategy (compete based on price, quality, brand building, etc…). Another section is financial projections and at a minimum you should have a statement of cash flows, balance sheet, and income statements that show no less than a 3 year period and no more than 10 years. A good projection window is 5 years, this is enough time to show solid growth expectations without going so far into the future that estimates become mostly unsubstantiated.
Your completed business plan in hand you can now use it for what I believe is one of the most and valuable uses the plan has; forecasted comparison to actual results. Each month as you close your books you should compare your results with those projected in the business plan. This simple process helps to keep you focused on the plan that you believed gave you the best chance to succeed. Keep in mind that if you did get financing based on the business plan being able to explain both positive and negative variances from the plan in actual results will help you to keep your lender comfortable that you have control of the business.
Each year you complete you will make some changes to your future year projections and you will add an additional year on the end. Remember your business plan is a living document, so don’t be afraid to make changes each year as you see changes happening, to the business, customers, competition, and to the market place. Keeping your lending partner abreast of these changes keeps them in tune to the challenges you are facing and the successes you are enjoying.
By far the largest mistake made by small businesses is not doing regular forecast comparisons to actual results. The easiest way to explain why these comparisons are important to do on a monthly basis is to consider your projections to be your road map to reaching your goals. Would you only look at a map at the beginning of a trip, then not again until the end of the trip? Of course not, you would monitor your progress on the map throughout your tip to be sure you were still heading to your destination. Each time you found yourself going off course you would make changes to get back on track to reaching your destination. It is the same way you should use your business plan financial projections, documentation of these adjustments to get back on track will aid your ability explain to others how your business, customers, competitors, and market place are changing.
The intent of this article is to start a conversation so please feel free to comment and share your experiences.
Ralph Castano is an accounting professional with over 20 years of experience. He holds an MBA and has worked with companies from startup to over $100,000,000 in annual sales. He is the owner of Bookkeeping Stars, a division of Castano Accounting and Financial Services, LLC and welcomes questions and comments.
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