The Importance of Business Planning

Wednesday, December 15th, 2010

After nearly 40 years in the marketplace, and some 14 of those helping small business owners, I am convinced that this is one area where most small businesses just don’t cut it!  I will even go so far as to say that the greater majority of these small business owners never start with a properly structured plan, nor do they bother with one later on; not nearly enough attention is paid to even the most basic business plan.  In fact, I think it’s safe to say that the only time most small business owners prepare a plan of any kind, is when it is demanded of them by their banker or potential lender.

 Think about it for a minute! 

 The biggest investor you have in your business is you.  It’s quite likely that you have ‘hocked’ yourself to the back teeth to finance the venture. It’s also quite likely that you have no idea whether the business will survive or not. It’s ‘seat of the pants’ stuff. Its ‘a wish and a prayer’ stuff!

 Not so long ago, I asked a small business owner a question about where he thought his business was headed.  His reply was simple:

 “I just have to make it work.”

“How do you anticipate doing this,” I asked.

“I just have to get out there and find the business – I have no option!” he insisted.

 While I understand the tenacity, I think its folly. (And he certainly does have an option – he could even close the business down and start something else!).   It has to be the biggest waste of time pounding away at something that may never work.  And it can be exhausting too.  Imagine you’re in a jungle, hacking away aimlessly at the bush surrounding you, hoping you’ll get to a road or river so you can find your way?  Imagine how you’d feel if you realised that just 100 meters away there was a road, which you’d be able to see, if you just stopped hacking, climbed a tree, and looked around?

 There are a number of Proverbs that speak volumes of wisdom about the need for planning. I’m going to take the liberty of quoting some of them here:

 “For lack of guidance a nation falls, but many advisors make victory sure.”

 “The way of a fool seems right to him, but a wise man listens to advice.”

 “Plans fail for lack of counsel but with many advisors they succeed.”

 “Make plans by seeking advice; if you wage war, obtain guidance.”

 “A plan in the heart of a man is like deep water, but a man of understanding draws it out.”

 Paul Yongi Cho, who heads up what is probably the largest Christian church in the world today, says that “…if you fail to plan, you are planning to fail.  Plan to succeed and you’ll succeed with your plan.”

 I believe that the main problems these business owners face are two-fold:

  • Finding the time in their busy days to put the plan together, and
  • knowing how to put it together!

 There are a couple of key fundamentals to consider when writing out your business plan.  Owners must realise that it’s harder these days for established small businesses to get a banker or investor interested in readingnever mind funding—their business plans. Here in South Africa we have a New Credit Act, commonly referred to as the NCA.  This has resulted in a great deal more scrutiny by lenders than ever before, and credit is now significantly more difficult to obtain, from anybody.  Venture capitalists too, are becoming increasingly finicky about the types of small firms they will back with expansion capital.

Certainly, most of these venture capitalists probably read only one out of ten plans that cross their desk. One of them even went so far as to say: Lenders want to see solid, incisive business plans that clearly demonstrate an entrepreneur’s credit-worthiness and his ability to build and manage a profitable company.”

So what are these fundamentals?

  • Don’t make outrageous claims of financial potential.

Who are you trying to fool?  You won’t fool a canny lender, and it makes no kind of sense trying to fool yourself.  The business world is no place for foolish dreamers – imagination and innovation, yes! Determination and tenacity, Yes!  But, always grounded in well-informed reality!

The investment community is still looking for the basics—a balance sheet, cash flow, sales-and-profit projections, market forecasts, summaries of managers’ experience and so on. But, I don’t think they put too much credence in the financial projections anymore.  In my own experience, I have rarely found a financial projection that pans out with any certainty – especially if there’s no yardstick on which to measure the projection.  Any potential investor is going to be more interested in how you propose to solve an important problem for customers with your niche product or service; how you plan to reduce their transaction costs; or how you plan to improve on the quality and service of the product they currently use.

  •  Know how much money you really need.

Most small-business owners don’t have a clear idea of how expensive it will be to build their product or service, and more importantly, to expand their sales and distribution network. Investors will look them in the eye and ask for detail, and they need to be clear about these details. They will ask hard questions such as, ‘How much time will it take to develop this product? How long will it take you to get the quality you will need?’

Entrepreneurs also fail to honestly estimate how long it will take to get enough revenues flowing – good old-fashioned cash flow – to get a good return on their investment. Any investor will have questions such as, ‘Do you have customers for your new widget? Have you talked about pricing with them? How many additional sales representatives do you plan to hire?’ Business owners need to know the answers to all these questions.

  • Make sure your marketing and distribution plans are simple to implement, and easy to maintain

These need to prove that you understand the competition and can offer something superior in your niche market; and that you can establish the right sales channel for reaching customers. It might mean forming a strategic alliance with another company that can help you distribute your product, and you may need to have strategies for expanding your brand and product line in place, as well as plans for broadening relationships with your customers.

  • Make sure you have a management team that can actually manage!

Investors demand solid management experience, and they want to see team members that have at least three or four years’ worth of operating experience in the industry you’re targeting.  This is not the time to employ cousin Bob because he’s been out of a job for a few years!  Nor is it time to employ Bongani just to meet some BEE criteria in the hope you’ll attract government work! And it certainly isn’t the time to take people on because their salary demands are low. If you pay peanuts you’ll usually get monkeys.  Remember this too – it’s now much harder for a 28-year-old with little experience to secure funding to start or expand a company.

  • Understand your competition, and what makes you different from them.

Many business owners just slam their competitors without offering real facts. This turns investors off, and proves not only that you’re ignorant but arrogant too. You need precise data showing why the competition cannot meet the needs of your target market.

IF YOU’RE TRYING TO RAISE FINANCE:

If you’re preparing a business plan to raise investment and/or loan capital, please bear the following in mind:

  • Don’t use the shotgun approach!

Nobody looks closely at a business plan that arrives in the mail addressed to “Whom It may Concern”.   The most important thing is to get an introduction to the prospective funder through someone you know. Any introduction, – even a casual one, through a friend of a friend—is better than none. If you don’t know anyone, hook up with other entrepreneurs who’ve received funding.

Once you’re introduced, follow up with a phone call or e-mail message—without being irritating, of course.  You’re dealing with busy people – never forget that – and they don’t like having their time wasted!    When you call to set up the meeting, offer to send along the one-page executive summary of your plan. This summary must be clear, short and sweet! It should show

  • how your company differentiates itself,
  • what the market is, and
  • Why the management team is uniquely prepared to drive your company to success.
  • Also submit names and phone numbers of customers who will verify your reputation and the solidity of your business.

Don’t hand over a daunting document.

Keep the packaging professional but pointed.  No one likes a massive tome which repeats and repeats your dream list.  Quite the contrary!  I would advise that you build the key points in PowerPoint, which forces you to be crisp, tight, and clear. The first few slides should contain the 30-second elevator pitch, which defines the product or service, the market opportunity vis-à-vis the competition, and the value proposition. Some of this can be done very convincingly with graphics. In addition to the PowerPoint presentation, you should have additional documents covering the financial details and background on the team.

Remember to submit resumes on your key staff members. Investors will want to review detailed resumes for each member of your management team, including their job history, job titles, and their specific responsibilities and achievements. After that, make sure you are always reachable, whether by e-mail, cell phone, or at home. Investors won’t phone twice!

IF IT’S NOT ABOUT THE FINANCE:

Even if you’re not trying to raise money for expansion, and for launching a new business venture, as the largest investor in your business, with the most to lose, you should be addressing all these issues for your own peace of mind.

 They can be summarised as follows:

  • How will you reduce your customer’s transaction costs?
  • How will you improve on the quality of the products they already use?
  • How long will it take to develop your product and market?
  • How long will it take to get a good return on your investment?
  • Do you understand your competition? How do you differ from them?
  • What plans do you have for broadening relationships with customers and expanding on product lines?
  • Do you have access to the necessary experience?

If you haven’t got the time or the know-how to do all this, employ the services of a specialist to help you.  It may cost you a few thousand Rand (anything between R5,000 and R15,000 for the average small to medium sized business.) but it could save a fortune – literally – in the long run!