Beyond the balance sheet

What is the purpose of a business plan?

James Tillotson 21/11/2016 6 minute read

How to write a business plan

James Tillotson explains why you should use an advisor to establish a viable plan for your start-up.

How can you formulate an idea, create an entity in the form of a business and then run it if you haven’t any specific plans to work from? Such rudimentary questions should already provide some clarity as to what is the purpose of a business plan. Worryingly a number of small businesses don’t have anything documented in this manner.

We say “worrying” because to manage a successful start-up requires a clear strategy that states your ambitions, how are you going to go about achieving them and, exactly when. Writing a plan will help you summarise what your business is about and where it is you want it to get to. It’s absolutely vital you do this prior to launch (or at latest in the very early days) because if you don’t then your start-up will:

1. Lack clear objectives

2. Struggle to monitor and communicate progress

3. Be rudderless with activities reactive in nature and lacking any clarity of purpose

Creating a business plan is no easy task but it can be made simpler and more effective by working through it with an advisor. Ultimately getting your thoughts down on paper will prove invaluable for obtaining start-up funding and thus the potential future success of your enterprise.

[Free guide] How to write a business plan to raise finance

What a business plan will do for your start-up

Provide a road map

A detailed plan will help you as the owner and founder to manage your business effectively. Writing down and illustrating both your ideas and tactics will establish a path and course of action, akin to a road map. This will give you something concrete by which to monitor and assess the progress you make.

It may seem like an odd suggestion but you should look to work with your accountant on this task even at this early stage. Why? Well, a quality professional advisor will have helped many early stage businesses. Given how close a good accountant is to the operations and strategic direction of a company, they’ll be able to draw upon their experience of what’s worked and what hasn’t with other clients. 

This means they’ll be well placed to help you test your assumptions. Remember you want your business concept to be as well thought through as possible and having a fresh set of eyes reviewing your ideas from a different perspective could make all the difference as to the viability of your business model. An accountant will know what success looks like along with what’s required and when to achieve it.

In charting a potential course of action you may find your company is faced with multiple different potential paths. It would therefore be wise to plot the most likely scenarios and strategies for these different circumstances. If for example your business is heavily reliant upon exporting then you may need to consider potential global and political events, and their impact on currencies in your chosen markets in the near future.

What does a 10% currency appreciation or depreciation mean for your sales, revenues, profits and cashflow? Working through this with your accountant will ensure you can ascertain the impact of such events from a financial perspective. You’ll then be able to craft potential solutions accordingly to deal with such events.

Developing a clear plan and strategy will focus your mind as to what resources you’ll need and when to achieve each of your goals. This will provide you with clarity as to how much needs to be invested at each early stage of the business and when you’re going to need cash injections based on likely cashflow. We cover more on this later on.

Understand what to focus on

As an entrepreneur, where should your efforts and concentrations be centred on? It’s a common issue; the early days of starting out can be very chaotic. There’s so much to set up, think about, implement and develop. It’s an emotional roller coaster of mass excitement and sharp shots of anxiety. Amid all this and with an ever mounting in-tray of to do’s, you can fast lose track of what’s important.

When writing a business plan you’re defining exactly what your organisation is today and then intends to become tomorrow. This coherence concerning the purpose of your business and direction in which you’re heading is invaluable. Doing this means you’ll understand what needs to be implemented to move your company forward.

As an example, your business plan should describe your ideal customer and include their needs and wants. Then you’d expand on this as to how your products or services address their requirements and demands. How are you going to market to these potential customers to get your name out there and what approach will you adopt to make sales and generate revenue?

These are vital matters to address early on. Growth primarily comes through new customers and achieving repeat custom. This then determines your progress towards profitability. By mapping this all out on paper you’re giving yourself yardsticks to work towards which means all tasks that you as the entrepreneur should focus on should be geared towards achieving your next goal. In a nutshell that’s where your focus should be.

Projections and the need for an accountant

Raise finance

The likelihood is to support your growth will require an injection of funding, unless you have an extremely cash generative business model. That’s because more often than not you probably won’t have enough customers and thus free cash flow to finance the next opportunity. You'll have a working capital requirement and thus need investment beyond the reach of the business at that time.

You’ll likely have to approach potential sources of finance and they’ll want to assess the company’s income statements/profit and loss statements, and business plan. If you’re still at concept stage or haven’t begun making sales then their decision will rest solely on the strength of you and your business plan.

The statements help prospective lenders and investors understand the history of the company to date, the business plan on the other hand provides them with a view of your future direction. They’ll look for many things in your plan but ultimately their interest will focus on whether the expansion or development of your business will generate sufficient cash to both operate effectively while also fulfilling debt obligations.

This means you’re going to need to detail both profit and cashflow projections. Good forecasting and planning is seen as a way of understanding income and expenditure. This is particularly useful as a means to prevent payment issues over things like suppliers and staff wages which can potentially lead to the closure of a business.

The likelihood is unless you’ve done this before, and know what you’re doing, then you’re going to need the help of an accountant. They’ll work with you to model the likely amount of cash in the business over time. This will then act as evidence to potential investors and financiers that there is likely to be sufficient money generated by the activities of the business to both fund future growth and meet all financial commitments.

Manage your business effectively

The usefulness of a cashflow forecast doesn’t end there though. Managing your cash position, as you may have already gathered, is fundamental to the long term future of your business. There’s a common quote that “most businesses fail because they run out of money” meaning they’re no longer able to pay their debts when they’re due.

You should therefore reference your cashflow projections in your business plan regularly. When you invest in your business, there will be significant out flows of money before any cash comes in. The timing of your investments thus needs to be considered against your projections and statements (where available) to assess trading patterns, seasonal variations and the likely impact on cash flows.

If for example you sell through a credit extension, you’re going to receive payment in the future and thus after the goods or services have changed hands. The likelihood then is you’ll have to make payments in relation to the usual operations of your business before that income comes in from your customer.

So you can then see how poor cash management creates real issues for a business. Make sure you work with your accountant both in the creation of your business plan and monitoring performance in relation to it. The documentation of well thought through ideas combined with a shrewd strategy and carefully planned projections will markedly improve your chances of long term survival and growth.

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The content of this post is up to date and relevant as at 03/11/2016.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

[ Date Posted: 03/11/2016 00:00:00 ]

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