In the book, Write Your Business Plan, the staff of Entrepreneur Media offer an in-depth understanding of what’s essential to any business plan, what’s appropriate for your venture and what it takes to ensure success. In this edited excerpt, the authors offer tips on creating a business plan you can use when seeking financing for your business.
A business plan is almost essential for entrepreneurs who are seeking to raise money to help fund their companies. In fact, business plans are so closely tied to fundraising that many entrepreneurs look at them as suited only for presenting to investors and overlook the management benefits of planning.
But for those entrepreneurs who are seeking funding, a business plan accomplishes several things. First, it helps convince potential sources of funding that the entrepreneur has thought the idea through. It also gives any actual investors a set of financial benchmarks for which the entrepreneur can be held accountable.
In a sense, a business plan is a ticket to enter the financial dance. It would be overly simplistic to say that you must have a plan to get funding. But it’s not too simplistic to say that a good plan will help you raise your funds more quickly, more easily and more completely than you could without it.
Before seeking investors, you need to know exactly what you're seeking and where that money will be spent. Not unlike justifying expenses when sending your taxes to the IRS, you need to justify the amounts you're asking for and be specific -- investors aren't simply writing out checks with no idea of where the money will be spent. Sure you can ask for a little more than you need in hopes that the negotiating brings you down to the amount you truly need for funding ... or something reasonably close. It’s also important to maintain your credibility because you'll probably need additional funding as your company grows. If you squander the money your investors have provided, you can be pretty sure you won’t get a round two when you need additional funding.
Having justification for what you put in your plan is essential for winning over someone reading it. Random ideas get random results. Well-thought-out, justified ideas get serious consideration.
It’s also advantageous to take a few minutes to make sure your company has the potential to succeed before digging for those hard-to-get dollars. For most of us, our desires about where we'd like to go aren't as important as our business's ability to take us there. Put another way, if you choose the wrong business, you’re going nowhere.
Luckily, one of the most valuable uses of a business plan is to help you decide whether the venture you have your heart set on is really likely to fulfill your dreams. Many businesses never make it past the planning stage because their would-be founders, as part of a logical and coherent planning process, test their assumptions and find them wanting.
Test your idea against at least two variables. First, financial, to make sure this business makes economic sense. Second, lifestyle, because who wants a successful business that they hate?
Assessing your company’s potential
Answer the following questions to help you outline your company’s potential. There are no wrong answers. The objective is simply to help you decide how well your proposed venture is likely to match your goals and objectives.
1. What initial investment will the business require?
2. How much control are you willing to relinquish to investors?
3. When will the business turn a profit?
4. When can investors, including you, expect a return on their money?
5. What are the projected profits of the business over time?
6. Will you be able to devote yourself full time to the business financially?
7. What kind of salary or profit distribution can you expect to take home?
8. What are the chances the business will fail?
9. What will happen if it does?
10. Do you have a backup or alternative plan?
Tips to help you win funding
Keep these tips in mind to help you win the funding you are searching for:
1. Spend extra time working on the executive summary. Because bankers and professional investors receive so many business plans, they sometimes go right to the executive summary for an overall view of what your plan is all about. If you can’t seize their interest in your executive summary, go back to the drawing board and try again.
2. Make sure your business plan is complete. You'd be surprised at how many business plans are submitted with important data missing. You need to double- and triple-check to make sure all the important components are included. Even when using business plan software, people skip sections or decide an area isn't important. Leave nothing to chance. A well-written and complete business plan gives you a higher chance of success and better odds of getting the financing you're seeking.
3. Be able to back up anything you have on paper if asked for more details. While the business plan should have all the answers, investors, bankers and venture capitalists are shrewd and ask questions that may not be answered in the plan. Be ready to answer anything they can possibly throw at you. Expect the unexpected, and prepare for it.