Volume 8 Issue 1 -- January/February 2004
Volume 8 Issue 1 -- January/February 2004
What is a business plan and should you do one if
you are starting a new business? Without
reservation the answer is, “Yes.” A
business plan is basically a projection of future income and expenses.
Anyone who has started a business and done a
business plan can attest that doing a business plan is a devilish exercise in
wishful thinking and practicality. The
wishful thinking is inherent because, if the individuals starting the business
did not believe it would succeed, they would not invest the time, effort, and
money it takes to start a new business.
Prunella (“Prun”) has run a large nursery for
years and desires to start a retail nursery selling a new type of shade tree
engineered by her brother, Les, a noted biologist.
The new type of tree requires little water, needs no insecticides,
requires little trimming — hence the name “PrunLess Trees.”
Neither Prun nor Les have substantial amounts of money, but they have
collective experiences that complement
desire or “wishing” is the initial motivating force for the new effort.
Without Prun and Les wanting to take on the challenge, nothing would
happen. This is the “sizzle” of
a business plan — the ability to
tell bankers or investors, with pride, that the two principals have won awards
and sold X dollars worth of plants, or whatever, for so many years.
The sizzle can be great and motivating to the individuals sprouting the
business plan. As with sizzling
fajitas, the sizzle will only last for a short time. Then practical
considerations have to be addressed.
If PrunLess will borrow money to get started or
bring in investors, the providers of the cash will want to know what the
business plans are. This is the
tedious part of the business plan. Someone
has to make estimates of the space needed for growing trees, the cost of
an office, advertising, etc. Of course, startup expenses, like salaries
and advertising, have to be paid before any trees are sold.
The next question is: paid from what source?
Borrowed funds or Investor dollars? If
the answer to this question is, “payment of initial expenses will come from
borrowed funds,” the next question will be for how long?
There are professionals that can help,
sometimes. The reason I generally recommend that a professional not be
hired to write a business plan seems obvious.
Who knows the tree business better, Prun and Les or a lawyer or
In addition to knowing
the PrunLess business better than a professional, there is a more practical
reason why Prun and Les should do the plan.
By making cash flow and
expense projections, Prun
and Les will become very familiar with the practical side of their
business plan. In
meeting with lenders or investors, the proponents of the business plan will be
well acquainted with their projections and how they reached them.
Since lenders and investors are by nature cautious,
many basic dollar-type questions will be asked.
How Prun and Les respond to these money oriented questions will probably
determine whether they get the funds from lenders or investors or not.
The allure or sizzle, if you will, of a business
will seldom carry the day. Lenders
or investors will want to know that Prun and Les have made practical business
projections. Remember to be careful
about bringing in investors. Check our newsletter, “Stumbling into Securities
Status,” July/August 2001.
Many business plans are wrong, including some I
have done for myself. Does that mean
the effort is worthless because there may be mistakes?
If a business plan is wide of the mark, that does
not mean the business will necessarily fail. Many businesses fail for a variety
of reasons, while others adjust to reality and continue on, sometimes in
different or reduced mode. If a
business plan is done in the beginning of the effort and income projections are
off, with a plan, there is a conceptual platform for reducing expenses and
revising modes of operations.
As tough as it is to start a new business, the
planning element is essential. True,
there are successful businesses that never did a business plan.
It is equally true that a business plan will not insure success.
The exercise of doing the planning is the key.
Doing the business plan involves making educated guesses that often
benefit the business, even if the business plan is wrong.
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