Business Plan Tips

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These business plan tips are updated regularly.
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For convenience, tips have been classified as The Basics, The Financials and The Plan and are listed on separate pages.

The full list of tips is presented below with the most recent tips at the top.

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The Art of the Start

The Art of the Start : The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything by Guy Kawasaki is generally considered to be one of the best books written on entrepreneurship. He covers a raft of issues in a very friendly and practical way including:

Watch Guy's 40-minute presentation at TiECon 2006 on The Art of the Start and then buy his book here:

We agree absolutely with Guy's comments on wishy-washy mission statements. Read our assessment of hard and soft mission statements at Developing a Strategic Business Plan and view Intel's original back-of-menu plan as a great example of a hard statement. To create a soft statement, use the Dilbert Mission Statement Generator mentioned by Guy.

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Use Strategic Planning to lay the Foundation for your Business Plan

Entrepreneurs and business managers are often so preoccupied with immediate issues that they lose sight of their ultimate objectives. That's why a preparation of a strategic plan is a virtual necessity. This may not be a recipe for success, but without it a business is much more likely to fail.

A strategic plan is not the same thing as an operational plan. The former should be visionary, conceptual and directional in contrast to an operational plan which is likely to be shorter term, tactical, focused, implementable and measurable. As an example, compare the process of planning a vacation (where, when, duration, budget, who goes, how travel are all strategic issues) with the final preparations (tasks, deadlines, funding, weather, packing, transport and so on are all operational matters).

A strategic plan should not be confused with a business plan. The former is likely to be a (very) short document whereas a business plan is usually a much more substantial and detailed document. A strategic plan can provide the foundation and frame work for a business plan. For more information about business plans, refer to Writing a Business Plan, Insights into Business Planning and Free-Plan: Business Plan Guide & Template.

A satisfactory strategic plan must be realistic and attainable so as to allow managers and entrepreneurs to think strategically and act operationally - see Developing a Strategic Business Plan and Devising Business Strategies for further insights. Use the Online Strategic Planner to create your own 2-3 page strategic plan.

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Decide on your Type of Business Plan at the Outset

Before you put "pen to paper", decide the type of business plan you need:

• Basic plans are short (often under 10 pages plus appendices etc.); relatively quick to prepare (under one or two months); use limited external assistance; need few drafts; and require much more researching than writing. They are somewhat more difficult to prepare than anticipated - all parts equally difficult. They are frequently used to assess the viability of a business or for internal/personal use and they are rated as important/useful for the business.
  
  
• Comprehensive plans are longer than basic plans; require some months to prepare; make slightly greater use of external help; and require somewhat more time researching than writing. They are more difficult to prepare than anticipated, especially the financial projections and market analysis parts. They are often used to help raise venture capital/equity or bank loans, and they are viewed as being critically important/useful to the business.

Based on a survey of over 400 business plan writers, the following table characterizes "typical" plans written for different purposes:

For more information on the survey results, see Insights into Business Planning and for the latest survey results see Views on Preparing a Business Plan.

For detailed guidance on compiling a plan, review the white paper on Writing a Business Plan, Free-Plan (free 150-page Business Plan Guide and Word-based Template) and the Checklist for Preparing a Business Plan.

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Before Starting to Write a Business Plan

Before any detailed work commences on writing a comprehensive business plan, you should:

• Clearly define the target audience
• Determine its requirements in relation to the contents and levels of detail
• Map out the plan's structure (contents page)
• Decide on the likely length of the plan
• Identify all the main issues to be addressed.

Shortcomings in the concept and gaps in supporting evidence and proposals need to be clearly identified. This will facilitate an assessment of research to be undertaken before any drafting commences. Bear in mind that a business plan should be the end result of a careful and extensive research and development project which must be completed before any serious writing of a plan should be started. Under no circumstances should you start writing a plan before all the key issues have been crystallized and addressed.

For more tips and suggestions, check the white paper on Writing a Business Plan and Free-Plan our free 150-page Business Plan Guide and Template (Word format). Also, refer to the 30-point Checklist for Preparing a Business Plan.

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Looking for New Business Ideas

When looking around for business ideas, bear in mind that these could be based on any of the following approaches:

• A manufactured product where you buy materials or parts and make up the product(s) yourself.
• A distributed product where you buy product from a wholesaler/MLM, retailer, or manufacturer.
• A service which you provide.

You should narrow your search to specific market or product areas as quickly as possible. For example, the "food business" is too broad a search area. Do you mean manufacturing, distribution or retailing, or do you mean fresh, frozen, pre-prepared etc. or do you mean beverages, sauces, confectionery etc.? It is better to pursue several specific ideas (hypotheses) rather than one diffuse concept which lacks specifics and proves impossible to research and evaluate. Generally, you should always aim for quality rather than cheapness. Be very cautious about pursuing ideas which involve any prospect of price wars or are very price sensitive; of getting sucked into short-lived fads; or of having to compete head-to-head with large, entrenched businesses.

To locate ideas, observe consumer behavior:

• What do people/organizations buy ?
• What do they want and cannot buy ?
• What do they buy and don't like ?
• Where do they buy, when and how ?
• Why do they buy ?
• What are they buying more of ?
• What else might they need but cannot get ?

Also, look at changing existing products or services with a view to:

• Making them larger/smaller, lighter/heavier, faster/slower
• Changing their color, material or shape
• Altering their quality or quantity
• Increasing mobility, access, portability, disposability
• Simplifying repair, maintenance, replacement, cleaning
• Introducing automation, simplification, convenience
• Adding new features, accessories, extensions
• Changing the delivery method, packaging, unit size/shape
• Improving usability, performance or safety
• Broadening or narrowing the range
• Improving the quality or service.

For further suggestions and tips, see the white paper on Getting New Business Ideas.

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Difference between Profit and Cash Flow

Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc. For further information on the cash cycle and working capital, click here.

The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits.

The following simplified example illustrates the timing differences between profits and cash flows:

This shows that the cash associated with the reported profit for Month 1 will not fully materialize until Month 3 and that a serious cash short- fall will be experienced during Month 1 when receipts from sales will total only $20,000 as compared with cash payments to suppliers of $40,000.

Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.

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Lessons to be Learnt from Business Plan Survey

Lessons about business planning derived from an extensive survey conducted by PlanWare include the following:

1. Decide the underlying purpose of the plan at the very outset - to raise money, secure approval etc. - as this will largely determine the comprehensiveness and length of the plan, amount of research required, use of external help and overall time scale.
   
2. From the outset, specify the structure of the plan in the form of a detailed table of contents. Use this to identify critical issues requiring research and/or external assistance.
   
3. Create a work program and timetable which allows adequate time for researching, writing and redrafting.
   
4. Recognize that the process could be much more difficult than expected and consider seeking external assistance, sooner rather than later, for the most vital areas.
   
5. The more important the plan, the longer it will be and the longer it will take to complete.

For more detailed guidance on preparing a plan, check the white paper on Writing a Business Plan and Free-Plan our free 150-page Business Plan Guide and Template (Word format). Also, refer to the 30-point Checklist for Preparing a Business Plan.

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How NOT to Write a Business Plan

Here are some suggestions to follow if you want to write a truly dreadful business plan, or to avoid if you wish to write a good plan:

• Don't include a contents list, don't number any pages and don't follow any consistent approach for section heading etc.
• Do write the plan's summary before you write the plan, or, better still, don't include any summary.
• Do develop your business strategies and ideas progressively as you write the plan. It will draw readers into the process and make the ending more unexpected !
• Do start the plan with your financial projections - the more detail and tables the better !
• Don't summarize the projections - let readers figure out the full-year totals, profits, cash flows and so on for themselves.
• If you include projected balance sheets, make sure that they don't balance.
• Don't produce any separate cash flow forecasts, just rename the P&L or income projections.
• Do ensure that your financial projections indicate 40% profit margins in the third year. If raising external capital, do explain that the projected return to investors will exceed 100% per annum within three years.
• Do mention in the marketing section that your proposed offering has no competition. This will save you having to do any market analysis.
• Do base the plan's marketing section around a few quotes from research reports that you found on the web.
• Don't consider customer behavior, needs or trends unless you wish to present a series of supportive (unresearched) theories that will support your plans.
• Do base your sales projections on the presumption that you will gain, at least, a 1% share of the total market and don't bother with any market segmentation.
• Do pad out your sales plan with lots of buzz words like customer-driven, first-to-market, market-led. Do underpin it with a disproportionately small (or large) marketing budget but don't be too explicit as to how, where and when it will be spent.
• Don't include any background to your business idea/invention, progress to date or current status.
• Do spend at least ten pages describing your offering - do make this as detailed and technical as possible to impress your readers. Don't mention any benefits as these should be obvious !
• Do anticipate technical breakthroughs and new offerings but don't discuss related costs or risks.
• Do include a 6-8 page CV for yourself but don't worry about building a management team or sorting out operational issues like production, delivery etc. Do make some heroic assumptions about these matters and do pledge to address them at a later date.
• Do spend as little time as possible on the plan but do make sure that it runs to at least sixty pages even if this entails lots of padding and inclusion of superfluous or irrelevant material.
• Do use as wide a variety of font types, sizes and colors as possible to add style to your plan and don't bother using a spell checker.
• Don't let a qualified outsider see your emerging plan and don't bother with reading over or redrafting.

More seriously, if you reverse each Do and Don't, you'll have a useful guide for preparing a sound business plan. You can get this list in a printable checklist format at Checklist for Better Business Plans. For further help, see Insights into Business Planning, Business Plan Guide and the white paper on Writing a Business Plan.

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Plan to Become a Successful Business

When planning a new business or developing an existing one, it is useful to have a gut feel for the characteristics of a successful business. Here are some criteria against which to measure your business or its plan:

1. Sensibly financed (with prudent mix of equity and debt).
2. Strong cash position (with access to follow-on or contingency funds).
3. Offers above-average profitability (in terms of return on capital invested).
4. Aims for rapid growth in revenues (with profits lagging but in prospect).
5. Targets expanding, or otherwise attractive, market segments.
6. Develops a strong franchise or brand.
7. Devotes substantial resources to innovation (R&D, offerings or market).
8. Competes on non-price issues (e.g. quality, service, functionality).
9. Very close to customers and responsive to their needs.
10. Seeks specialist/leadership image with superior offerings.
11. Well managed with high-grade staff & good people-management.

Behind every characteristic there should be an explicit strategy designed to increase the chances of success and not simply aimed at reducing the likelihood of failure. For more help on setting strategies, see Developing a Strategic Business Plan, Devising Business Strategies and the free Online Strategic Planner for creating a 3-page strategic plan.

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Your Business Plan - First Impressions Count

Once your business plan has been drafted, you should turn your attention to its presentation. First impressions can be very important and it is essential that your plan makes a good initial impact. Here are some suggestions:

• Convey a quietly professional impression. Your plan should not come across as either a dry academic thesis or a glowing promotional brochure. Aim for something in between.
• Add an attractive cover page. A color picture of your proposed offering would help distinguish the plan and serve as an introduction to your products or services.
• If the plan is longer than about 30-40 pages, consider dividing it into two volumes. Use the first volume for the main plan and place detailed, backup material in the second volume.
• Get a trusted, experienced outsider to read your plan to check that it makes good business sense, reads well and is clearly presented. Don't be resentful of any criticism - use it to improve the final plan.
• Make sure that pages are numbered and that the plan contains a contents list.
• Be sure to spell check the plan once it has been finalized.
• Use easy-to-read fonts and sizes. Print on one side of pages. By all means use color but in a restrained, business-like way.
• Double check the 2-3 page summary of the plan to ensure that it is interesting and reflects the plan's detail. Remember, many recipients will use this summary to determine whether your plan merits further examination.
• When binding your plan, use a system that allows pages to be opened flat.

For further help, see the Checklist for Better Business Plans, Business Plan Guide, Writing a Business Plan and Insights into Business Planning.

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How to Improve Cash Flow

Cash flow is the life blood of every business and lack of cash is a much more significant cause of business failure than trading losses. The management and preservation of cash is a priority task which must be performed day in and day out in every business. This task is so routine that its importance is often overlooked. Here are some ways to improve cash flow:

• Sales - Become more selective when granting credit.
• Costs & Systems - Improve systems for billing and collection.
• Credit Management - Generate regular reports on receivable ratios and aging.
• Purchasing - Make prompt payments only when worthwhile discounts apply.
• Inventory - Sell off or return obsolete/excess inventory.
• Investment - Use leasing etc. to gain access to the use of productive assets.
• Financing - Use factoring or discounting to accelerate receipts from sales.

For a list of over 30 ways of improving cash flow, visit the Checklist for Improving Cash Flow. Central to any program to improve cash flow is an accounting system to handle inventory, invoicing, receivables and payables. Allied to this is the need for frequently-updated cash flow projections to provide early warnings of possible liquidity problems and a foundation for improvement plans. For more on this, see the paper on Making Cash Flow Forecasts and download and try the Cashflow Plan software tools for making rolling 12-month forecasts and creating cashflow improvement plans.

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How to Wrap Up your Business Plan

Once you have completed the main parts of your business plan, insert a section entitled "Conclusion" and use it to wrap up your plan and to leave the reader with a warm and positive view of your business and its plans. Briefly, review what the business does and expects to achieve. Indicate why it will succeed and why it should be supported by investors etc. Be very positive and confident to encourage favorable reactions and draw on some of the strengths and opportunities identified in earlier parts of the plan dealing dealing with Mission, SWOTs, Strategies etc.

Confine your Conclusion to a few carefully-drafted paragraphs and write it once the plan is almost complete. At this stage, get someone to read a near-final draft plan to check that it makes good business sense, reads well and is clearly presented. Ideally, that "someone" should be a detached, independent person involved in business with experience of your industry and/or business planning. Hopefully, they will be able to see "the wood from the trees" better than you can. Don't be resentful of any criticism - use it to improve the next draft. If your plan is lengthy or important, anticipate several drafts.

Key questions you should be asking yourself at this wrap up stage include:

1. Is the plan nicely presented - bound, page numbered etc.?
2. Has the plan been spell checked in its final form?
3. Is the plan's length appropriate to its purpose ?
4. Have the business's (funding) needs been clearly stated ?
5. Does the plan's summary stimulate interest ?
6. Have all key questions been anticipated ?
7. What likely objections remain unresolved ?
8. Will the plan provoke the desired responses?

For further help, see the Business Plan Guide, Writing a Business Plan, Insights into Business Planning and Checklist for Better Business Plans.

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Presenting the Financials in a Business Plan

The financial section of a business plan should be based on monthly projections for the first year covered by the plan plus quarterly (or annual) projections for the next two years. In the case of a complex or seasonal business, monthly projections may be required for 2+ years with less detailed projections for subsequent years. The projections for each forecasting interval should comprise fully-integrated income statements, cash flows, balance sheets and key ratios.

Financial projections must not be prepared in isolation from the rest of the plan. For example, the results of market research should flow into your sales projections which, in turn, should drive the revenue forecasts. Under no circumstances should you do the detailed financial projections and then write a plan to suit. By all means, do some high-level financial planning at an early stage to get a feel for the basic figures and sensitivities but don't let the plan become a financially-driven document without any strong market basis. For further tips and traps, refer to the white paper on Preparing Financial Projections.

Keep this financial section within four-eight pages by ensuring that only high-level projections are presented in summary tables and use simple charts to show trends. Do not include any detailed spreadsheet tables as no one will bother to read them! Instead, place them in an appendix at the back of the plan (or even withhold them for the plan and only make them available on request).

For simplicity and clarity, the key topics in the financial section could be presented in a series of short sub-sections (from half- to a full-page long) covering key assumptions, projected income statements, cash flow forecasts, projected balance sheets, ratio analyses and sensitivity analyses.

Our fully-integrated financial planner - Exl-Plan - offers comprehensive facilities for generating financial projections for a business plan as well doing sensitivity and ratio analyses. It also generates summary reports which are idea for use in the body of a business plan. For more help, check the Business Plan Guide to see how the section on Financial Projections fits into the overall business plan.

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When Planning a Business make Explicit Strategic Statements

When planning a business, be clear and assertive about the strategies to be followed. Don't fudge or say "On the one hand ...... and on the other hand .....". If sound groundwork has been done on the background issues relating to the business, market and SWOTS etc., many key strategies will suggest themselves. You can weave these together into explicit strategic statement(s) of intent. For example:

Any Inc's central objective is to become a full-line supplier. It will reduce its cost base through introducing new processes as result of licensing-in technology in parallel with broadening its distribution activities financed by retained profits and external debt.

Our aim is not to encourage planning by words but to illustrate the types of issues that might be considered when formulating explicit strategies. These can be applied equally to start-ups and established businesses. Of course, the big distinction is that the start-up is building strategies from scratch without the benefits of any market position, momentum or pre-existing strategies.

Any selected suite of strategies must be integrated and internally consistent, and in-line with the business's broader vision, mission and objectives (see Developing a Strategic Business Plan). There is little point in a business claiming to be technologically advanced if its R&D spend is sub-critical, or aspiring to become a leading brand if it has neither products, nor funds nor distribution to ensure this could happen.

Strategic statements can be defined as broad indicators of the direction(s) in which a business should be driven in order to fulfil its vision/mission while taking realistic account of its resources, constraints and opportunities. They also serve as the link between the a business's objective and actions plans and should result in a series of integrated sub-strategies and action programs with goals, budgets, timetables. The latter can be most effective when linked to specific functional areas within the business e.g. sales, marketing, operations and so on. Limit the number of sub-strategic (tactical) programs to what can be realistically achieved within a realistic time frame and, if necessary, prioritize them. It is possible that just one strategy is needed for each of the business's main main functional areas.

For more help, see Developing a Strategic Business Plan and Devising Business Strategies. You can also use the free Online Strategic Planner to create your own 2-3 page strategic plan.

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Stating Your Funding Requirements & Proposals

Having made great progress with writing your business plan and crunching the financials, you may identify a significant funding need that cannot be bridged from your own resources (and those of your relatives, friends, colleagues, credit cards, local bank manager and so on) or from the business's cash flow. Consequently, you will need to raise external finance in the form of equity or loans or an equity/loan combination. When writing your plan, devote a short main section (immediately after the financial section) to present your needs and proposals. Here are some suggestions:

1. To assess funding requirements, compile your projections without any external funding and take note of the peak cash deficit and its timing. Your total funding requirement is likely to correspond to this deficit. It should be injected (in one or more tranches) ahead of being required so as to eliminate (or minimize) deficits and perhaps create cash cushions. Analysis of projected financial ratios (debt/equity, interest cover and current asset) will help determine the optimal mix of debt and equity.
2. When assessing funding needs in #1 above, you should plan to finance the "most likely" case, or even "worst" case, rather than for the "best" case as revealed by sensitivity analysis. Whilst the "best" case may show the smallest funding need, it may be unattainable due to the inevitability of some aspect of the double (costs), double (time) or half (revenues) rule.
3. Summarize and tabulate your funding requirements. Indicate planned uses, possible sources and forms (equity, loans, grants, credit etc.), likely timing, security offered and desired terms. Mention any conditional or firm funding commitments already secured. For the benefit of prospective investors, indicate the likely equity funding required; range of the equity stakes on offer; exit routes (IPO, trade sale, buy-back etc.); board representation; and make a stab at the projected returns on their investment.
4. If presenting funding proposals, bear in mind the golden rule - he who has the gold makes all the rules. If valuing your business, be realistic and base it on more than one method of valuation e.g. net asset value, price/earnings ratio, capitalization/revenue ratio, industry yardsticks and so on. Take account of market sentiment/conditions, "going rates", maturity of the business and degree of risk associated with its plans.
5. Restrict this section of your business plan to less than one page. Keep it factual and avoid any "over-the-top" hyping of your business as the greatest investment ever !
6. If planning to raise equity from venture capital or "angel" sources, allow adequate time to raise it. Depending on the amount needed and track record of the promoters/business, this may take several months and tie up significant management resources throughout - brace yourself for several re-drafts of the business plan and financials.

Of course, you may wish to withhold specific funding terms until you have met possible investors or lenders face-to-face and heard their initial reactions. In this case, this section would be confined to a description of funding needs and possible uses, sources and forms.

Our fully-integrated financial planner - Exl-Plan - offers comprehensive facilities for generating financial projections for a business plan as well doing sensitivity analysis and exploring "what-ifs" and alternative funding scenarios. Check the Business Plan Guide to see how the section on Funding Requirements and Proposals fits into the overall business plan.

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Get Free Business Planning Software

PlanWare offers an interesting range of free business planning software which can be useful to cash-strapped entrepreneurs wishing to launch businesses on a shoe-string and to students doing B School or college projects, or participating in business plan competitions. The following items are likely to be most useful:

• Exl-Plan Free - Excel-based, fully-integrated business finance planner suitable for comprehensive 2-year projections.
• Free-Plan - 150-page Business Plan Guide and Template (Word format).
• Business Plan eGuides - compendium of easy-to-read, informative papers on business planning matters.

Get more details of PlanWare's free stuff here.

PlanWare's paid-for software includes Exl-Plan (comprehensive multi-year financial projections), Cashflow Plan (detailed, rolling, 12-month cash flow projections), Plan Write Business Planner (stand-alone, comprehensive business plan writer) and Quick Insight (expert system for evaluating business ideas and new ventures).

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Resolutions for Better Business Planning

Here are some suggested resolutions for better business planning applicable to any established business:

• Maintain a tight grip on cash flows. For help, see the Checklist for Improving Cash Flow and Cashflow Plan. To get started, circulate the checklist and hold a meeting of key staff to explore the options.
  
  
• Update (or create) a strategic plan for our business. For help, see Devising Business Strategies, Developing a Strategic Business Plan and the free Online Strategic Planner. To get started, use the online planner to prepare a first-cut plan as the basis for discussion with senior management.
  
  
• Compile an updated financial plan or budget. Use the free Online Financial Planner and/or Exl-Plan.
  
  
• Take time out from day-to-day operations to plan at least one new initiative every month to reduce costs or expand the business. To get going, use a Monthly Planning Calendar.

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Marketing Strategies, Sales Plans & Projections

When preparing a business plan (or a marketing & sales plan), two critical sections stand out - Profiles of Target Markets and Marketing Strategies, Sales Plans & Projections. The latter should build on the market assessment (see tip on Sound market analysis is key to a sound Business Plan). In simple terms, marketing and sales plans should cover the 4Ps - Product, Price, Place and Promotion. The following issues need to be considered:

• How will your business market its products/services and sell them to customers? What are the key market entry/development strategies?
• Indicate plans and forecast costs for marketing, selling, promotion, advertising, representation etc.
• How will your products be presented to customers? Discuss packaging, physical distribution, sales support and product support and forecast the related costs.
• Explain pricing policies and credit terms (be realistic !). What discounts will apply and to whom? Will there be bad debts and what provisions should be made?
• What will be the end-user prices? Assess the competitiveness of your business's offerings in terms of price, quality, features etc. at the level of sales outlets or end-users.
• How will you deal with the competitors? How will they respond? What are the contingency plans in the event of sales targets not being fully realized?

Based on these marketing strategies and plans, you can compile detailed sales (volumes and prices) projections for your various segments and products/services. These projections should be monthly (for at least one year ahead especially if the business is seasonal) and either quarterly (much better) or annual thereafter.

Get more information on Profiles of Target Markets and Marketing Strategies, Sales Plans & Projections. See also Plan Write Market Planner - a software tool to generate a comprehensive marketing plan with examples, checklists and expert advice.

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Managing a Business Means Managing its Working Capital

Cash is a business's life blood and every manager's primary task is to help keep it flowing and to use this cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. The faster a business expands, the more cash it will need for working capital and investment.

The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Cash flow can be significantly enhanced if the receivables are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.

Management of payables is just as important as the management of receivables. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!).

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.

When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cashflow forecasts. Our financial planning software packages - Exl-Plan and Cashflow Plan - can facilitate this task as they provide for the setting of targets for receivables, payables and inventory. See also the Checklist for Improving Cashflow.

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Plan to Avoid Business Failure

Business failure is a distinct possibility for many businesses, especially for start-ups during the so-called three-year "valley of death". A key to getting through these years is to avoid the obvious mistakes. Generally speaking, businesses fail for significant and substantial reasons which are often very evident to outsiders. Insiders often fail to see them because of their closeness, determination and so on. Areas where failure is most likely to occur include finance. markets/sales, offerings, management and operations. See a detailed listing of possible reasons for business failure.

Clearly, there are very many reasons as to why businesses fail. The key point is that causes are usually very apparent (especially with hindsight) and the trick is to anticipate them by executing appropriate tactics and strategies from the outset. Three examples:

• Use market research to confirm demand and assess suitability of proposed offerings.
• Create a management team to offset any gaps in experience or expertise.
• Raise equity to reduce exposure to interest rate changes, reduce gearing etc.

Given that reasons for failure are often both simple and clear, it should (in theory) be possible to reduce the possibility of failure through prior experience, forethought and effective planning.

For more information, see Devising Business Strategies, Developing a Strategic Business Plan and Writing a Business Plan. Also look at and/or participate in the online poll on Strengths & Weaknesses of Businesses.

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Time Required to Produce a Business Plan

How long should it take to write a business plan and how should the time be allocated?

Some useful answers to these questions can be gleamed from an ongoing survey being conducted by PlanWare amongst people who have prepared written business plans.

Based on over two thousand responses, more than one-third (38%) of the respondents spent less than a month on their plan; a similar proportion (37%) worked on their plan for 2-3 months; and the balance (25%) spent several months on the task. More detailed analysis of these findings indicated that:

• The elapsed time to prepare comprehensive plans was considerably longer than that for basic plans.
• Over one-third of all plans compiled within an elapsed time of one month were used to seek bank loans or approvals from shareholders/directors, or they were compiled for internal/personal use.
• About one-third of all plans used to raise venture capital/equity took least three months to research and write.

The survey also showed that the task of actually writing the plan was usually the least time consuming part of the planning process as almost two-thirds (63%) of respondents spend more time researching than writing their plan. For a fifth (21%) of respondents researching and writing times were about equal. Only a small minority (16%) undertook little or no research before drafting their plan.

For more findings, see a detailed analysis of the survey findings and the latest survey results.

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Making Better Cash Flow Forecasts

Cash is the lifeblood of every business and more businesses fail for want of cash than lack of profit. These may be cliches but they are very, very true.

A key element of controlling cash is to forecast cash flows and requirements. This entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc. The difference between the cash in- and out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained.

Typically, a spreadsheet-based plan can be used to compile cashflow forecasts, assess possible funding requirements and explore the likely financial consequences of alternative strategies. Used effectively, this plan can help prevent major planning errors, anticipate problems, identify opportunities to improve cash flow or provide a basis for negotiating short-term funding from a bank.

When planning to seek external funding, the time horizon covered by the forecasts should be equal to or greater than the period for which the funding is needed. The greater the amount of funding required and the longer the period of exposure for the provider of these funds, the more comprehensive must be the supporting projections and plan.

For short-term cash planning you should make assumptions on sales, costs, credit, funding etc. to produce monthly cash flow projections for up to a year ahead. Initial assumptions can be readily altered to evaluate alternative scenarios. For example, the plan could be used to explore the extent to which future sales could be increased whilst holding bank borrowings within predetermined limits; to assess the effects on cash flow of varying sales, costs or credit terms; or to determine the likely short-term funding requirements for a business.

Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.

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Sound Market Analysis is Key to a Sound Business Plan

The Market Analysis section of a business plan is very difficult to prepare especially for start-ups or established businesses diversifying in new (to them) markets. These difficulties will be compounded, due to an absence of any reliable data or evidence of likely demand, for businesses entering completely new markets or launching radically new offerings. Nonetheless, this section is critical as it underpins the business plan and demonstrates that the promoters have done their homework and know their marketplaces (at least as well as the incumbent players or other new entrants). If this section is unclear, vague or superficial, it begs the question as to whether there might be any real, sustainable demand for the proposed offerings.

Use this section to profile target markets based on market sizes, segments, trends, competition and user/customer profiles. Allow about three-six pages for this most important part of your plan. In most cases, it is very desirable that all detailed market research (field and/or desk) and analysis be completed before this section is written. If research reports or detailed findings are available, refer to their detailed findings in appendices or include them as annexes to the plan.

You will need to analyze the market in fair detail to drill down to your actual target market segments which you can then explore in depth. You will also need to consider competition, customer/user categories and so on. Create simple tables to show how market sizes, segments and shares are likely to move in the future after your entry/growth.

Avoid at all costs generalized statements like "we aim to achieve xx% of the xx market within three years". Instead, build up your projections from sound analysis/research and detailed assumptions (number of outlets, customers, consumption and so on) based on clear marketing and sales plans.

For more information and insights, see Profiles of Target Markets and Marketing Strategies, Sales Plans & Projections within our detailed Business Plan Guide.

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Get a Vision & Mission before you Plan

Before starting to write a business plan, you must have established a clear vision and direction for the business. Without these, your detailed plan will lack focus and it will roam around in whatever direction your latest idea or your keyboard (or pen) takes you. Instead, you need to start with some serious strategic thinking about a vision and mission.

First, you need to develop a realistic Vision for the business. This should be presented as a pen picture of the business in three or more years time in terms of its likely physical appearance, size, activities etc. Answer the question: "if someone from Mars visited the business, what would they see (or sense)?" Consider its future products, markets, customers, processes, location, staffing etc. Here is a fictitious vision:

AnyBiz will be operating from a xxx sq. ft. unit near xxx Town. It will have annualized sales of $xxx and be profitable. It will employ xxx people mainly engaged in R and D, marketing, support and admin. AnyBiz will offer xxx core products and provide added-value services to a large customer base throughout the xxx market segments and in xxx countries overseas. AnyBiz's offerings will be technically advanced and offer many clear-cut advantages and improvements over competitors' possible offerings. AnyBiz will continue to expand through organic growth and acquisitions in related technology/market segments. It will have recently received mezzanine finance prior to a public offering.

Next up is a Mission statement. This indicates the purposes of the business, for example, "to design, develop, manufacture and market specific product lines for sale on the basis of certain features to meet the identified needs of specified customer groups via certain distribution channels in particular geographic areas". A statement along these lines indicates what the business is about and is infinitely clearer than saying, for instance, "we're in electronics" or worse still, "we are in business to make money" (assuming that the business is not a mint !). Here is a fictitious mission statement:

AnyBiz designs, develops and markets advanced systems for specialist data capture and transaction processing man