Shooting the War

Presenting the Plan d3sf4wr6gk

Joe had created a business plan for a new gourmet mustard venture. He had spent a great deal of time developing the business initially and very little time putting together a business plan itself. It took Joe a good long while to learn the importance of the look of the plan. It almost cost him everything.
Joe’s plan was a visual mess. The margins were only half an inch wide. Joe had learned in school that wide margins on term papers meant you didn’t have anything to say. In the world of academia, the narrower the margins, the more words per page. More words per page meant more content, which to his professors meant that more work had gone into the effort. And by this measure (instead of an actual reading in some cases) a better grade was received. And so, consequently, Joe felt that with narrow margins and a cramped style the brilliance of his plan would be revealed.
Instead, the opposite was true. The first venture capitalist to receive the plan took one look at the tightly spaced and crowded first page and set the whole thing aside. All Joe received was a letter saying the investment didn’t fit their profile. He never learned it was the presentation of the plan itself that didn’t fit their standards.

The second venture capitalist to receive the plan was a stickler for consistency, neatness, and grammar. Joe’s plan was inconsistent in the formatting of tables, charts, and section headings. It was stapled together in a fairly sloppy fashion. Joe had not bothered to spell-check. By the time the second venture capitalist saw his second spelling error, he had had enough. The whole plan was set aside, and Joe again received a letter saying the investment did not fit their profile.
Joe was perplexed. He had done a great deal of work putting everything in place. He was ready to start shipping cases and cases of the product. He felt like he wasn’t getting a straight answer. He needed to know why the venture guys didn’t relish his gourmet mustard.
One of Joe’s friends offered to hook him up with a venture capitalist who would give him a straight and honest appraisal of the plan. Joe jumped at the offer and overnighted the plan that afternoon,
In three days, Joe met with Jessica, a well-dressed, no-nonsense professional investor. Jessica got right to the point. Joe’s plan was a disaster. It was difficult to read because it was too cramped, without any relieving white space. It was a jumble of type styles and inconsistent formats. The binding with off-centered staples was not neat or professional. Jessica said the entire product reflected poorly on Joe and his business. And in a game where first impressions are crucial, Joe’s current first impression would never lead to a second one.
Joe was crestfallen but thanked Jessica for her candor. He muttered he would probably lose his orders for 100,000 cases. Jessica immediately picked up on the comment. What 100,000-case order? Joe elaborated that he had received several purchase orders from the likes of Safeway and Wal-Mart. The buyers loved this gourmet mustard and were awaiting shipment.
Jessica asked Joe why the purchase orders weren’t included in the supporting materials. Joe didn’t realize the documents themselves were important. He had mentioned the orders at the bottom of page 27. Jessica scoldingly told Joe he was hiding his light under a bushel. Orders of that magnitude should be mentioned on page 1 and attached as supporting material exhibits.
Joe smiled. Did she think he had something? Jessica was now tearing through the financials, the management section, and all her other favorite parts of a business plan. She was starting to appreciate the opportunity in front of her.
As it turned out, Jessica’s firm invested in Joe’s business. And in the process, and very  fortunately, Joe came to fully appreciate the importance of plan presentation and the inclusion of important supporting materials.
Your First Impression
The first impression many people will get of your business is your plan’s appearance. Do you think a potential investor or lender will look differently at a business plan that is neatly bound and formatted for ease of understanding compared to one that is written margin-to-margin in purple crayon? What impression do you want to give? Here are a few hints for a good-looking plan:
•    Use white (or very light-colored) paper.
•    Margins should be at least one inch (but less than two inches) all the way around.
•    Font styles should be kept to a minimum (no more than three).
•    Colors should be used conservatively (photos and complicated graphics are exceptions). Black print and one or two accent colors are best.
•    Pages should be printed on one side only.
•    The entire document should be single-spaced with double spaces between paragraphs.
•    Don’t be afraid of white space.
•    Use bulleted points whenever you can.
•    Be consistent with formatting of tables, graphs, charts, titles, and section headings.
•    Use neat, professional binding—no staples.
•    Use a spell-checker.
•    Get someone you trust to look through and read the plan.
•    Include a table of contents at the beginning and an index at the end.
Your cover sheet should include all the information a reader will need to get ahold of you (company name, address, and phone number; names, titles, addresses, and phone numbers of owners) as well as the company logo, the date the plan was prepared, and the name of the person who prepared it.
Length
It’s ironic that it takes a 200-page book to explain how to write a succinct business plan. Typical business plans average between twenty to forty pages, including support materials. (Others, of course, maybe longer.) On the surface, it may seem unnecessary to do all the research and planning and organization we suggest, but think of your business plan as a crucible. The research, planning, and organization are the components you focus on in order to create a successful business. A winning business plan not only maps out the keys to a successful business but, more important, addresses the unique aspects of your business in a way that will serve your unique temperament, goals, and experience while simultaneously meeting the needs of investors and financiers.
So how long should your business plan be? The answer is simple: as long as it needs to be. How do you know how long it needs to be? You do the preliminary footwork. This book is an excellent first step. Then start writing. As you write it all out, you’ll get a sense of how long feels right. And again, have trusted friends review your work. They’ll help you determine which areas need to be fleshed out and which ones need to be pared down.
Presentation
Business plans are meant to be seen. Whether you wrote your plan to attract funding or to help with management, you will need to show the plan to someone.
•    The plan’s appearance reflects your commitment to creating a winning business plan.
•    The plan’s content is far more important than its appearance, but it won’t be read if it lacks a professional look.

If you wrote your business plan in order to attract funding and/or investment, you will need to get the plan into the hands of the people who can decide whether or not to give you money Most of us are uncomfortable when it comes to talking about money. Many of us were taught that it is rude to talk about something so crass. But if you want someone to give you a loan or invest in your company, you will have to get over your upbringing because you can’t just mail out your plan and hope for the best.
If you want loan or investment approval, you will need to schedule meetings to present your plan. Don’t think that just having the meeting and leaving the plan for the decision makers to read will cut it. Don’t leave something as important as your business’s future to chance. Decision makers may promise to read your plan and give it consideration, but you can’t be sure they actually will. The only way to be sure that your potential investors or funders get your message is to present it.
The presentation of your business plan should be a business meeting, a formal presentation. Even if the potential investors are your parents and your little brother, you want to present your plan in a serious and professional manner. (Remember, you can’t advertise for people to come to this meeting.) But for your preexisting audience—your friends and family and any professionals you’ve been in touch with—you might want to use a conference room. This room can be at the potential investor’s or lender’s office. If not and you lack the facilities, try borrowing space from a friend or renting a conference room. You might want to use presentation equipment, such as a computer/projector for your PowerPoint presentation. You should give your audience hard copies of your plan as well. When is up to you.
You can have the plan delivered before the meeting so that your audience will have time to formulate questions, though you run the risk of them making a negative decision before you have a chance to highlight all your positive points. Try having the plan delivered just the day before the meeting so your audience can become familiar with it without enough time to make a decision. Or you can hand out the plan at the beginning of the meeting, though here you run the risk of your audience reading while you are trying to present. Either way, have copies of your presentation slides to hand out so your audience can follow along.
Your slides and their corresponding handouts should contain short, bulleted points and be in the same visual style as your plan. Your presentation should be less formal than your plan in that you don’t want to sound like you are reading. Try to make it as much like a story as you can. Practice your presentation and get feedback from people you trust to give You honest opinions before you go before people who can make or break your business. Keep in mind that your audience can read—your slides and your handouts—so you don’t have to. Let your slides be reminders for your talk. Let them remind you what points you want to make and then expand from there.
If you wrote your business plan to aid in management, who sees the plan will depend on your business, your style, and your goals. Obviously, if the whole business is comprised of you and your spouse, there don’t need to be a lot of secrets. But if yours is a business with a rigid hierarchy with decisions made only at the top level, you might want to limit access. You might choose to share your plan with management only or show employees on a need-to-know basis. You might distribute a version of the plan (say, a version without financial detail, but with graphs and percentages instead), or you could include sections of the plan in your employee manual. It is entirely up to you. Odds are you will want to consider the twin needs of protecting sensitive information and building a sense of ownership, and only you know how to do so.
While people involved with money will have a pretty good idea why you are showing them your business plan, employees might not. You might include your business plan presentation as part of a company retreat or have a special meeting just for the plan. Maybe you want to introduce the plan to everyone at once or department by department. Wherever you choose to have your plan unveiled, be sure you are present. You may choose to deliver the entire message yourself, or you might be better served using a team approach, with appropriate managers discussing different sections. Again, it comes down to your particular approach and your particular business. Regardless, be sure to explain what a business plan is and how it should be used, why you are showing it, and what you expect listeners to do with it. Similarly, if you use the plan as part of your training program for new employees, be sure that they are not just handed the plan cold but are given the same message you gave the others.

As your business and your business knowledge grow, take some time to check back in with employees to see how the plan is being used and how employees feel it is working. Get suggestions and comments from employ ees and then use that input to improve the plan. Let the plan work as a road map, a checkpoint, and a management tool.
Your Plan Is a Living Document
A business plan is an ever-changing, never-completed document. It is always in a state of revision. With the passage of time, expertise grows, markets change, customer bases alter, and technology continues ever onward. Anyone who reads your plan should get the most up-to-date and complete information you are capable of providing. This means that even after you write the last section of your plan, you need to continue to study the markets and stay abreast of industry, market, and economic trends. Just as your business will be in a constant state of flux, so, too, should your plan be.
Anticipating Problems
Ideally, any business plan, whether written for management purposes or to attract funding, will help anticipate problems that could strike your company. Are costs of supplies going up? Is technology getting cheaper? Is competition increasing or decreasing? What is the motion (if any) of your labor pool? What advertising trends seem to be coming around again? Where is the economy in its current cycle? Are your best-selling products peaking, or are they on their downward slide? Which products are showing new strength? Use your plan to draft alternate budgets so you will have some sort of road map if good times get bad or bad times get better. Use your plan to assess whether or not your current circumstances (good or bad) are short-term or long-term.
Supporting Materials
Supporting materials are all the documents that can help convince readers of your business plan that your business is worth their time and/or money.

The documents should be introduced or referenced in the text of the previous sections so that they can stand alone in this section. These documents should need no introductory or explanatory text in this section and therefore can be simply arranged and attached to the final plan or offered as a separate document to serious investors or appropriate personnel.
As you go through the process of writing your business plan, you will think of a host of materials that can help you make the argument (to yourself, your management team, or potential lenders and investors) that your business is a good risk. These documents give credence to your arguments, and they back up your numbers. They help show how you came to your decisions and how you will make your plan work. As you prepare the plan, you should keep a notebook close by to jot down the supporting documents you reference in other sections or that you think you might want to include. Be sure you include every document that you mention in your plan. Don’t make your readers search for the information they need in order to make an informed decision (ideally, the positive decision you want them to make). Some of the support materials you should consider are these:
•    Resumes. Ideally, resumes are one page and include work history, education, professional affiliations and honors, and special skills. Include resumes for all owners/partners and corporate officers (whatever applies to your corporate entity).
•    Letters of reference. Your letters of reference can come from past investors, lenders, or business acquaintances (people you’ve worked for or with, suppliers, distributors, etc.) or from nonbusiness acquaintances (but avoid letters from friends or relatives) and should be assessments of your business skills.
•    Personal finances. While some practitioners suggest including a balance sheet of your personal financial history as well as that of other owners/partners, I am not keen on it. Keep your personal information as private as possible.
•    Leases. Include any lease agreements you have for your business (such as those for buildings, vehicles, equipment).
•    Contracts. Include any contracts for your business (such as loans, purchase agreements, service contracts, even maintenance agreements).

Remember Joe’s 100,000-case gourmet mustard order? That type pe of business validation is well placed in this section.
•    Other legal documents. Include any other pertinent legal documents, such as copyrights, patents, trademarks, insurance policies, and articles of incorporation.
•    Other attachments. Include any other documents or information that you have referenced in the body of your plan but that do not fall into any of the above categories. These would include demographic information, maps, and the like.
Depending on your business and the information available, you might also consider attaching:
•    Glossary of industry terms
•    Product information
•    Additional or more specific marketing data
•    Marketing materials (brochures, catalogs, etc.)
•    Financial analyst reports
•    Newspaper or magazine articles
•    Company history
•    Press releases
•    Web pages
Not all plans will need the same information. Those written for management purposes will not need the resumes, letters of reference, or credit reports. Even plans written to attract funding will differ as different lenders or investors will want to see different information. It is best to prepare as much information as you can so that you can easily tailor copies of your plan for various readers and institutions. And please note that the plan found in the appendix is a somewhat abbreviated version for reasons of space. Your plan may have much greater detail.

Scott was clueless when it came to financials and forecasting. Scott knew how to make money at his video production studio, but keeping it was another matter. He was considered one of the best studios in town for video, audio, and mixing. He even produced quality still photography shots from videos for publicity purposes. But Scott sensed he was slipping. He grudgingly knew he needed to expand his operations to keep up with the market. But he was having so much trouble tracking his money, how could he? He was overwhelmed when it came to accounting and bookkeeping and finances in general.
Then one day, two things happened that dramatically changed his course. First, he lost a significant job to a company he considered to be a lesser production house. When he called to find out why he had lost the work, Scott learned that his lowly competitor had expanded its services offered and had upgraded all of its equipment. It could now produce a higher-quality video at a lower cost. Second, several employee checks had bounced. The employees were not happy. Their NSF payroll checks caused a cascade of late fees and penalties on mortgage, credit card, and other payments. One  employee quit over it. Scott’s valued assistant warned him that such a thing could never happen again.
That was it for Scott. He knew he had to get a handle on his books and then prepare a business plan so he could catch up with the competition. He asked his lawyer for advice on how to proceed. The attorney gave him the name of a consultant who had helped out another client recently.
Shortly thereafter, the consultant, Ron, visited Scott at his studio. He listened to Scott talk of his frustrations with his accounting and his need for a bank loan to acquire new equipment to keep up with his competitors. Scott was very worried he could never get a bank loan because he didn’t have the systems in place to prove that he’d ever be able to repay a loan. At this moment, he wasn’t even sure whether he could repay a loan or not.
Ron told Scott not to worry. There were plenty of entrepreneurs in his
they’d been able to pull it together, obtain
exact situation. With a little help,
a bank loan, and thrive. He would, too.
That was fine, Scott said. But the accounting had become such a problem that he had developed a mental block to it all. When he heard all the financial terms, he just tuned them out. He was stressed that he could never comprehend it well enough to talk to a banker.
Ron had the solution to Scott’s mental block. They would go through the four main accounting reports and relate them to Scott’s business. This way when Scott heard the term, he could equate it to an aspect of his business and be able to talk about it. Scott agreed to give it a try. Ron identified the four main reports they would be discussing as income statement, cash flow statement, balance sheet, and break-even analysis.
Ron could sense Scott’s frustration at the mere mention of these terms. So he asked Scott a production question: “What is a snapshot?” After several questions as to why this was relevant to anything at all, Ron got Scott to answer that a snapshot, as in a photograph, is an image in time. Ron then told Scott that was also what an income statement is: a snapshot of your business at one point in time. If an income statement is prepared on June 30, then like a photograph taken on June 30, it will show you if you are making any money as of June 30. Scott slowly nodded.
Ron also pointed out that in an income statement you bring all of your revenue from sales and other sources into the picture, take out all of your costs,  and end up with a snapshot of net income. This is your photo of the amount of profit or loss you  have on, for example, June 30.
Ron went on to say that income statements are also called earning statements or profit and loss statements (P&Ls) and that they all provide the same thing: a snapshot of the business on a fixed date in time.
Scott said he was getting the picture, so to speak. Ron laughed and said next was the cash flow statement.
A cash flow statement is movement, he said. It shows where the money comes from and where it goes. It is different from an income statement, which takes a still picture of sales and profits. Instead. Ron said, the cash flow statement tells you where the cash comes from, how it is being used in the company, and how it is going out of the company. There is movement to a cash flow statement, Ron explained. It is a video. Scott’s eyes lit up. He could visualize the movement.
Ron went on to explain there are two parts to this video. One is called the sources of funds, which tracks not only sales but also loans, line of credit drawdowns, and equity investments from investors. It records the movement of money into the company. Part two of the video shows the uses of funds—the movement of money within the company. This includes the cost of goods sold, administrative expenses, loan and interest payments, equipment purchases, and dividends or draws paid to the owners.
The result of this movement of cash into the company, around the company, and out of the company is called the net change in cash. It is the difference between total funds in and total funds out.
Ron noted that a happy ending to this video would show a positive number and an upward trend. Scott said he was on the edge of his chair to see how his cash flow video ended. Ron agreed but reminded Scott that the cash flow statement doesn’t have a finite end. Instead, it is a measuring tool, a means for improving performance over time. A never-ending video. Scott liked that idea.
A balance sheet was the third report he needed to understand. This matches your assets (the things you own) with your liabilities (the items you owe on). The result is your total assets.
Scott didn’t see how this related to video production. Ron asked him to think about a mixing job, where you lay the audio (the sound) with the video Ron said this was how Scott should remember a balance sheet: the mix of audio and video into one valuable asset. Or, in accounting terms, the mix of assets with liabilities to equal net worth. Scott saw it, and Ron went on to clarify that just as an income statement is a snapshot of the business, and a cash flow statement is the movement of money, a balance sheet is used to get at the owner’s equity or net worth of the business.
The key element of the balance sheet is that it has to balance. In video terms, it can’t look like the English translation of a Japanese movie where the spoken words don’t match the movement of the actor’s lips. Instead, the assets on one side and the liabilities on the other side have to be equal and have to balance.
Ron noted that if you had more assets than liabilities (and hopefully he did), the difference was the net worth of the business. By tracking this regu- larly, you could see if you were getting richer or poorer. Scott understood, and Ron moved on to the break-even analysis.
Ron guessed that Scott, like almost every other video guy he’d ever met, would love to someday make a big-budget Hollywood movie. When Ron asked the question, Scott perked up at the thought. Ron then explained that break-even analysis is like opening night. The movie has been made. Now, how many tickets do you have to sell to break even? Scott understood but asked about the distributors and movie houses. TheN, got a cut of every ticket sold.
Ron explained that was factored into the equation. With a movie, you know on opening night what the fixed costs to make it were. And you know how much the distributor took out of each ticket—for example, 60 percent. Similarly, in a business you have fixed costs such as rent, insurance, and office costs each month, and you have an average gross profit margin on each sale.
Continuing with the movie example, suppose it cost $1 million to make a low-budget thriller. That was the fixed cost. The distributor and movie houses were going to keep 60 percent of each $7 ticket sold. Your gross profit margin was 40 percent. By T dividing the $1 million film cost by the 40 percent you get from each ticket, you learn that you need to sell $2.5 million in tickets to bring in the $1 million needed to break even. Scott clearly understood this and began talking about a script he’d been working on with a friend. Ron brought him back to reality
Just as you had opening night for a film, you have the first of the month for your business. You know what your rent and other fixed expenses are. From there, you have to figure how many things—be it tickets, products, or services—you would have to sell and at what percentage of profit to break even for the month.
Ron got Scott to focus on his own business. With rent and all the other fixed expenses, it cost him $12,000 a month to keep the doors open. A video production job, after paying for film and supplies, netted him 50% percent of the monies paid by the client. So, using the break-even equation, Ron told Scott that he needed to bring in $24,000 a month just to break even.
Scott shook his head. There were some months when he came nowhere near that amount. Ron said he needed this tool for bidding on jobs and taking on new business. You needed to know where you were every month, and you had to hold your margins to reach your break-even point before moving into profitability.
Ron summarized the discussion by writing it down on a piece of paper for Scott to remember:
Accounting Term    Production Term    Answers the question
Income statement    Snapshot    Am I making money?
Cash flow statement Video    Where did the money move?
Balance sheet    Audio/video mix What is this worth?
Break-even analysis    Opening night    When do I start making money?
Scott appreciated the assistance. His mental block was removed. With Ron’s help, the financials were brought into order, reasonable income projections were crafted, and a bank loan was obtained. Scott went on to profitability and eventually made his movie.
The Importance of Forecasts
Bankers and investors will be looking at your plan to see if your business is a good risk. In other words, will your business income allow for timely repayment of borrowed money? One of the ways this risk is analyzed is by reviewing your income projections, which is also known as a pro forma profit and loss forecast. Your income projections report is based on the other four reports we’ve just discussed. If you are a start-up and don’t have a prior history, you’ll be making all five reports up out of thin air. In which case we must favor reality over creativity.
The income projection is a way for bankers and/or investors to get an idea of what the near future (usually three years, seldom more than five) will hold in terms of income and expenses based on reasonable assumptions of costs and sales. Your assumptions should be based on prior experience and real-world numbers. Don’t try to predict the future with a cracked crystal ball, Be realistic.
Obviously, a three-year income projection is a pro forma statement and must be backed up by sound reasoning and expertise—both of which you should have after all your research on industry standards and trends. If you are basing your projections on past performance, be clear about it. But don’t just take last year’s numbers and shove them into next year’s projec-
tions.    ections. Be sure to take into account changes in the industry, the economy
marketing, competition, efficiency, costs, and the like. If you are basing projections on standards and trends, state where you got your information. Again, be realistic. The people you’ll be dealing with will know when you’re blowing smoke.
Whereas the cash flow statement records the movement of all cash going in and all cash going out, the income projection looks only at income and deductible expenses. But all parts of your business plan build on each other. The cash flow statement will contain some of the information you need for income projection.
Forecasting Timelines
The timeline for an income projection can vary depending on how you are using the plan and what you want to accomplish. Three to five years is the average. But remember that the art of prognostication blurs with distance. Three years is certainly a reasonable timeline because it gives a glimpse of the future without risking too much inaccuracy. But note that different funding entities may prefer other timelines. Don’t be put off if someone asks for five years and you’ve only got three. If you want their money, go back and do five.
As with the overall timeline, the time breakdown of your forecast can vary as well. If you are preparing your plan for management purposes, you may want to show your projections by  year. If you are preparing your plan to attract funding, projections by month may work well. But different entities have different preferences, so it is a good idea to check with your target entities ahead of time to find out how they would like your financials laid out.
The basic categories for an income projection are the same as those for the income statement:
Income
Net Sales [account for returns, allowances, and markdowns] Cost of Sales [such as inventory, purchases, and cost of goods available for sale]
Gross Profit [Cost of Sales subtracted from Net Sales] Expenses
Variable [such as advertising, professional fees, packaging costs, freight, supplies and parts, payroll—including overtime and benefits—repair and maintenance, travel]
Fixed [such as rent, leases, utilities, loan repayment and interest, insurance, depreciation of capital assets, workers' compensation, taxes and licenses, and office salaries]
Total
Income from Operations [Expenses subtracted from Gross Profit] Other Income (such as interest income)
Other Expenses
Net Profit or Loss Before Taxes
Taxes [such as sales, real estate, income, inventory, and excise] Net Profit or Loss After Income Taxes •    If you want to take the exercise one step further, include a column for industry standards so that anyone reading your plan can quickly see how your company stacks up against industry averages.
•    As time goes on, you can compare your projections to your real income and expenses and adjust accordingly. Even projections are a good management tool.
•    Financial projections require a high level of financial literacy. If you don’t have great expertise, use the creation of your financial projections as a learning experience and hire a CPA or accountant who will teach you the fundamentals of the statements while you prepare them together.
•    There are several user friendly accounting programs for small businesses that are great resources for both the financially astute as well as the new business owner. Research the Internet for what others have to say about affordable software such as QuickBooks from Intuit.
Forecasting
Forecasting numbers for the future should not be an exercise in wishful thinking. Rather, your forecasts should be based on realistic expectations and real-world experience. However, not all that experience needs to come from you. If you are a brand-new business owner, it is a good idea to talk to others or even hire some professionals to help you get the numbers right. If you are an owner of an existing business, try including your managers and department heads in planning for the future. This is called bottom-up forecasting.
Bottom-up forecasting uses the knowledge of the front lines to predict as accurately as possible the future needs of your business. Managers and department heads can plan ahead for the needs of their teams and give the data to you to approve and compile. These front liners know what equipment will need to be replaced next year, what positions will need to be added, and how many training programs need to be added. Your sales team should have a good idea as to where sales are going and what trends might change the path you are currently on, and the like. Each manager or department head can look at the next few years month by month and come up with a realistic forecast. You can add all those forecasts together to prepare a picture of the future of your business as a whole. Of course, your front liners cannot accurately predict everything that will be needed in the coming three years, but they might have insights you don’t.
Top-down forecasting is planning for the future with the end in mind. It starts with your goals for three years out and backtracks the steps it will take to get there. You start with the big picture—the industry—and your goals within it. With your market share goal, you can figure your projected revenue. From there, you work your way down the table, filling in exact numbers where you can and making your best predictions where you can’t. Still, these are not guesses. Even the advertising section (one of the most variable sections of your projection) can be worked out logically. You know where you stand with the competition and the industry norms. So you know if you will need to spend more or less than the norm in order to increase your piece of the pie. How much more is a little murkier, but your marketing section analysis should be able to guide you.
Top-down forecasting allows you to work your goals into your company’s expectations of the future. It also allows for some spin, but keep it real.
Now to drive home the financials and forecasting of financials, we’re going to review the four reports again and look at some new beneficial ratios to use. If you feel like you’ve had enough of all the numbers, feel free to go on to the next chapter.
Cash Flow Statement: Cash Is King!
Money comes in; money goes out. The difference between the two is your profit or loss. Put it all on paper along with a timeline, and you have a basic cash flow statement (or budget). This means you put down how much money you expect from whom (by category—sales, loans, etc.) and when (by date, week, month, or quarter), and how much money you will need to pay out (bills, debts, and expenses) to whom and when,
In Rich Dad’s Guide to Investing, Robert Kyosaki and Sharon Lechter wrote: “Cash flow management is a fundamental and essential skill if a person truly wants to be successful in the B quadrant. Many small business owners fail because they do not know the difference between profit and cash flow.”If preparation of the report seems daunting, try breaking it down into easily digestible pieces. Create separate budgets for revenues (real and/or projected), cost of sales, fixed expenses, and variable expenses. You may also want to create a table of all your sources of incoming cash as well as one for all outgoing cash. You don’t have to include all this information in your plan (the table may contain detail better left under wraps). Then you can use these tables to figure out where the money is going to come from to pay the bills each month if cash in and cash out don’t exactly coincide. And there’s your timeline.
Your table or spreadsheet for cash flowing into your business can include categories such as:
•    Amount of cash you have available for the business
•    Sale revenues (broken out by sales, service, accounts receivable, collections, and deposits)
•    Interest income
•    Any sales of long-term assets
•    Liabilities (such as loans)
•    Equity (such as owner investments, sales of stock, or venture capital)
Your table or spreadsheet for cash flowing out of your business can include categories such as:
•    Start-up costs (including business licenses)
•    Inventory purchases
•    Controllable expenses (such as freight, packaging, and advertising)
•    Fixed expenses (such as rent, utilities, and insurance)
•    Long-term purchase assets
•    Liabilities (such as paying back Loans)
•    Owner equity (money you take out as an owner)
You can prepare a statement for any stretch of time you want, but remember that the further out you project, the more you risk losing accuracy. It is best to stick to one fiscal year, beginning with the start of the current fiscal year and stepping month to month to the end of that same fiscal year. To improve accuracy, keep revising the statement (monthly is ideal) to reflect reality, and your ever-increasing expertise.
The timeline will help you plan for the time lag often involved with collection of receivables and will allow you to time collections so that you are not caught short when bills come due. For example, your office supply store likely experiences an influx of cash during August and September because of the back-to-school frenzy. your big bills may come significantly later in the year. Plan accordingly.
The cash flow statement (like most budgets) only includes real money (cash in, cash out). It does not include noncash transactions (such as amortization or depreciation).
The traditional format of a cash flow statement has the total for the year and the subtotals for each month in thirteen columns (vertical) with column labels across the top. The rows (horizontal) show the beginning balance and the amount of cash in and cash out by source, with the sources listed on the far left. The table (or spreadsheet) will be easier to understand if you break categories into subcategories when you can. Here is an example of a detailed cash flow statement:
Total [this row is the total for each category by column] Beginning Cash Balance [enter under month 1]
Cash Receipts
Sales Revenues
Cash Sales
Receivables
Sale of Long-Term Assets
Interest Income
Total Cash Available [add the Beginning Cash Balance to all Cash Receipts]
Cash Payments Cost of Sales Material
Labor
Purchases

Controllable Expenses
Supplies
Salaries
Freight
Packaging
Advertising
Miscellaneous Fixed Expenses Rent/Lease
Utilities
Office Salaries Licenses/Permits Insurance
Advertising
Miscellaneous Loan Payments Interest Payments Long-Term Asset Payments
Taxes
Federal Income Tax
Other Taxes Owner Draws
Total Cash Paid Out [add Cost of Sales, Controllable Expenses, Fixed Expenses, Loan Payments, Interest Payments, Long-Term Asset Payments, Taxes, and Owner Draws]
Balance [subtract Total Cash Paid Out from Total Cash Available; put negatives in brackets]
Incoming Loans [loan money coming in]
Equity Deposits [deposits to be made]
Ending Balance [add the numbers for each month; this number should be the same as the total for month 12]
An example of a pro forma cash flow statement is found in the appendix; the following is an example of a simplified Cash Flow Statement:

f you don’t, or if you find it difficult to prepare a reasonable projection, you may want to rethink your other sections and go back to researching.
Balance Sheets
A balance sheet (also known as a statement of financial position) is a balance of your company’s finances. It presents data on assets, liabilities, and net worth. Assets are anything of monetary value owned by the business. Liabilities are company debts. Net worth is capital—the worth of your equity as owner. When you add liabilities and net worth, you get a total for assets. Generally accepted accounting principles link these three factors because of their mathematical relationship. A positive net worth means assets outweigh liabilities; a negative net worth means liabilities outweigh assets.
No matter the business, no matter the use, balance sheets share the same format. All professionals expect this format. Anyone can read them and easily compare one to another. Due to the ease of interpretation of this format, balance sheets are relatively simple to create.
Assets are anything of value owned by or legally due to the company and fall into four categories:
1. Current: those that can be converted to cash within a year (such as cash, checking and savings accounts, accounts receivable, short-term investments, prepaid expenses, and inventory from raw materials to finished products)
2. Long-term: investments such as stocks, bonds, and special savings accounts to be kept for at least a year
3. Fixed: resources not meant for resale (such as land, buildings, improvements, equipment, vehicles, and furniture)
4. Other: assorted assets that typically are unique to a business’s circumstances.
Liabilities fall into two categories:
1. Current: payable within one operating cycle (such as notes, taxes, interest, payroll accrual, and accounts payable)

2. Long-term: mortgages, vehicles, notes, and the like (take the current payment due subtracted from the remaining balance)
Net worth or owner equity is given according to the legal structure of your business. Corporations use the total invested by owners or stockholders added to retained earnings (after dividends are paid). Partnerships, LLC’s, and sole proprietorships use the original investment of owners added to earnings after withdrawals.
A sample projected balance sheet is round in the appendix.
Balance sheets should be prepared on a regular basis, not just when you are preparing a business plan. The balance sheet can help you ou spot trends and plug cash leaks before they sink your company.
If you are preparing your plan fora new business, you might want to include a balance sheet of your personal finances instead of a business balance sheet, to show your ability to handle money. Then again, you might not want to do so, in order to show that you value your privacy.
Income Statement
The income statement (also known as a profit and loss statement or statement of operations) reveals your business profitability at a set point in time. What your business has spent (and what it was spent on) is combined with what your business has brought in (and from where) to tell you whether you made money or not.
Preparation of the income statement is best done on a monthly as well as yearly basis. You really don’t want to wait a year to see if you are making money. The data for your income statement should be readily available from your company records.
Again, there is a standard, expected format for your financial data. The income statement should include:
Income
Net Sales [returns and allowances subtracted from gross sales] Cost of Goods Sold

Gross Profit [Cost of Goods Sold subtracted from Net Sales]
Other Expenses
Direct, controllable, variable [those associated with sales]
Indirect, fixed, office, overhead [those associated with administration] Other
Net Profit/Loss Before Income Taxes
Income Taxes
Net Profit/Loss After Income Taxes
A sample of a detailed income statement is shown on page 147. Here is an example of a simplified income statement:
Income Statement for 2008
Gross Sales
Cost of Goods Sold Gross Profit
Expenses
Net Profit Before Taxes Taxes
Net Profit/Loss
The income statement can help you track the effectiveness of ,your plans by showing how expenses and sales are affecting profits or losses. It will also help you plan for variations in sales volumes from month to month. Though you only need one year’s worth of info for the business plan, a comparison of income statements over a period of years can help you see longer-term trends and therefore can help you plan accordingly. Break-Even Analysis
As discussed, a break-even analysis answers the question of how much your business will need to sell in order to cover its costs. For example, if you sell copy machines, the break-even analysis enables you to figure out exactly how many copiers you need to sell in order to pay all your bills. Add one more copier to the mix and you suddenly see profit.
The analysis is a good one for entrepreneurs because it encourages an in-depth understanding of costs. The analysis is a good one for lenders and investors because it says a lot about whether or not you, as writer of the plan, are realistic in your assumptions.
The break-even point is the dream of any entrepreneur. It is that point at which you can start to breathe a little easier. It is the point when you start to think maybe going into business for yourself was a good decision. It is the beginning of stability. It is the point too many businesses never reach. But numerically, it is the point at which your fixed and variable expenses (including cost of sales) are met by your product and/or service sales. You won’t be making a profit, but you will no longer be taking a loss either.
You can display this point in a number of ways in your business plan. In either graph h or table form, you can show dollars of expense compared to dollars of revenue or even dollars of expense compared to units of production (in either products or services). Your income projection can be the source for either way of showing the information.
If you decide to use a mathematical presentation, you can find the exact break-even point with a simple formula:
break-even = fixed expenses + (1 – variable expenses/sales) come that increases as sales increase, your revenue line will be drawn at a forty-five-degree angle on the chart. The point at which your revenue line and your total cost line meet is marked as your break-even point.
Break Even Analysis    Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7
Sales    20000 22000    24000    26000    280000    30000    32000
Variable Costs    12000 13000    14000    14000    150000    16000    17000
Fixed Costs    10000 10000    10000    10000    100000    10000    10000
Fixed + Variable Costs    22000 23000    24000    24000    250000    26000    27000
Net    –2000 –1000    0    2000    3000    4000    5000
Because the graphic presentation is such a great way to express complicated data for a visually focused society and the numerical presentation is so great for bankers and other number-focused types, you may choose to present Your data in both formats (might as well cover your bases) or pick and choose and customize for your particular audience.
Ratios
When potential investors begin their task of analyzing your business for risk and feasibility, they bring experience and expertise to bear on your business plan. It’s not simply a matter of whether or not they like your idea or whether or not they have the money to give. Nor is it a matter of how personally persuasive you are. What it comes down to is whether or not they think your business proposal, as presented in your business plan, is feasible. In other words, can your business make money?
40000
30000
Costs 20000
10000
0
(sales) Break-Even
(variable costs)
(fixed cost)
Sales Over Time
To create your own break-even diagram, you must first plot your fixed costs and variable costs. Label your vertical axis as costs (in dollars). Then label the horizontal axis as sales (in dollars). Your fixed costs will form a straight horizontal line across the graph because your fixed costs will stay constant even as your sales increase. Your variable costs line will increase as sales increase. The line formed by plotting variable costs on top of fixed costs will create your total cost line. Now you must add your revenue. Because revenue is in-come that increases as sales increase, your revenue line will be drawn at a forty-five-degree angle on the chart. The point at which your revenue line and your total cost line meet is marked as your break-even point.
Break Even Analysis    Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7
Sales    20000 22000    24000    26000    280000    30000    32000
Variable Costs    12000 13000    14000    14000    150000    16000    17000
Fixed Costs    10000 10000    10000    10000    100000    10000    10000
Fixed + Variable Costs    22000 23000    24000    24000    250000    26000    27000
Net    –2000 –1000    0    2000    3000    4000    5000
Because the graphic presentation is such a great way to express complicated data for a visually focused society and the numerical presentation is so great for bankers and other number-focused types, you may choose to present Your data in both formats (might as well cover your bases) or pick and choose and customize for your particular audience.
Ratios
When potential investors begin their task of analyzing your business for risk and feasibility, they bring experience and expertise to bear on your business plan. It’s not simply a matter of whether or not they like your idea or whether or not they have the money to give. Nor is it a matter of how personally persuasive you are. What it comes down to is whether or not they think your business proposal, as presented in your business plan, is feasible. In other words, can your business make money?
40000
30000
Costs 20000
10000
0
(sales) Break-Even
(variable costs)
(fixed cost)
Sales Over Time

One of the ways experienced financial decision makers make their decisions is through the analysis of ratios. just as the term implies, ratio analysis involves taking numbers from the financial tables and comparing one to another. Which numbers are chosen and how they are combined tell a lot about different aspects of the business under scrutiny.
Most ratios are not analyzed in a vacuum either. Ratios are commonly compared to one another in a historical, competitive, and/or budgetary context. By comparing current figures with those of the past, decision makers can get a feeling for mobility and trends within the company. By comparing figures for one company to those of competing companies, decision makers can get a feeling for where the company stands in the competitive hierarchy of its industry By comparing real figures to budgeted figures, decision makers can see how well you have budgeted. This last comparison usually comes into play after funding has been granted. It is a good way for investors to stay on top of a company’s promises. It is also a great way for you or your management team to learn to refine your budgeting abilities.
Knowledge of ratios on your part is akin to learning to speak the language of potential investors. It gives you a chance to see what impressions your financials will make on decision makers. It alsoives you a valuable management
tool. By tracking your ratios, you can spot trends, strengths, weaknesses, and potential roadblocks. Following are some of the most commonly used ratios.
Liquidity Ratios
The current ratio and the quick ratio are two examples of liquidity ratios. The current ratio is used to determine liquidity of an existing business by dividing current assets by current liabilities. If the current ratio is greater than 1.0, then the business has a chance of being able to pay its short-term bills. The larger the number, the better the chance of paying the bills. If that number is less than 1.0, the business may be in rough water. However, decision makers will also take into account industry norms. If a ratio of 4.0 is the average for an industry, that current ratio of 1.0 is not nearly as good as it would be in an industry with an average of, say, 1.5.
The quick ratio (also called the acid test) is a measurement of liquidity without inventory being calculated in. It is current assets (not including inventory) divided by current liabilities. Comparing the quick ratio to the cur-rent ratio gives decision makers an idea of how dependent liquidity is upon inventory.
Debt Management Ratios
Debt management ratios include the debt ratio and the times interest earned ratio (TIE). The debt ratio is a measure of risk in that it shows how well the company’s assets support its monetary obligations. The debt ratio is found by dividing total debt (including long-term debt, short-term debt, and current liabilities) by total assets. A high debt ratio means high risk to potential investors.
The TIE measures how well earnings cover interest and can be found by dividing earnings before interest and taxes by interest. The higher the number, the more times earnings can cover interest, thus the safer the investment.
Asset Management Ratios
Inventory turnover and average collection period (ACP) are both examples of asset management ratios. The inventory turnover ratio measures how often your company gets rid of and restocks an average-sized inventory It is measured by dividing costs of goods sold by inventory. A higher number is better because higher numbers mean you are more quickly going through your inventory. This means fewer of your business dollars are tied up in inventory. Inventory can cost you in storage, taxes, insurance, and interest as well as time. Inventory and time are not friends. As time passes, inventory can become outdated, unpopular, or even unsafe.
ACP measures how long it takes to collect on sales on credit. When you sell on credit, there will be a lag time. That lag time is measured by the ACP
9    by
(also known as days sales outstanding and the receivables cycle) and is found by dividing accounts receivable by sales and multiplying the total by 360. Obviously, you want that number to be as small as possible. Ideally you want it as close to your company’s terms of sale as you can get it. If the number exceeds your terms of sale significantly T (greater than 30 percent is usually a problem), you show that you are not being as strict with your credit choices as you should be or there is significant customer dissatisfaction. Neither is going to endear you to potential investors. While you may have most
T    very
of your receivables paid promptly, a few very old accounts can skew this ra-tio. Take into account the odds of ever getting payment from those very old accounts and decide whether or not to write them off.
Profitability Ratios
Profitability ratios include return on sales (ROS), return on assets (ROA), and return on equity (ROE). The ROS ratio is the most basic measurement of profitability and says something about how well you can keep down costs and expenses. Divide net income by sales and, voila, you have profitability (at least on paper).
The ROA ratio similarly says something about how well you use invested assets and is found by dividing net income by total assets.
The ROE ratio builds on the ROA by taking leverage into account and is found by dividing net income by equity. Debt affects ROA and ROE in that the two will be close if debt is small. But when debt grows large, ROE is higher than ROA when the company is doing well and lower when the company is doing poorly.
Financial History/Loan Application
A good indicator of where you’re going in business is where you’ve been. One of the best ways to reassure investors of future success is through showing past success. If you are writing your plan for an existing business, you will include information on your business from start-up to present. Put this first in the financials section; it is your loan application. But prepare it last. Preparation of all the other financial documents will greatly help you in preparation of the financial history.
Even if you are not preparing your plan for investment purposes, this exercise will help in your management practices by helping you look at your business from a big-picture perspective.
The financial history subsection is a summary. Summarize the data from the other sections and reference those sections accordingly. The following are some of the categories usually summarized in this section:
Assets
Liabilities Net worth

Contingent liabilities
Inventory detail
Revenues Expenses
Real estate holdings
Stocks
Bonds
Legal structure
Insurance
Audit information
If you are writing your plan for a new business, you may want to include information on your personal financial history and status, including a personal finance balance sheet with information on assets (cash, life insurance cash value, trust deeds, personal property, mortgages, real estate, stocks, bonds, mutual funds, accounts receivable, notes receivable), liabilities (unsecured loans, credit card debt, revolving credit debt, notes and deeds, loans secured by personal property, loans against life insurance), net worth, annual income, and annual living expenses. This information will help potential investors see how well you handle money. But remember also that in this era of identity theft, the less information you give out the better.
Keep in mind that the personal financial history combined with the information you include in your loan application (provided by institutions upon request) needs to be verifiable and accurate, just as it would if you were providing information on an existing business’s financial history.
Uses of Funds
It would be nice if your promise to pay someone back was all it took to get funding for your business. It would be nice if there were institutions or individuals who would write you a blank check to pursue your dreams. But it’s not likely. Most institutions and individuals want to know exactly what you plan on doing with their money. And keep that straight: It is their money.
The best place to start with how you will use the funds you are requesting (if that is the purpose of the plan) is to provide a summary of your business’s financial needs. If you are preparing the plan for management purposes only, you will want to skip this section.
The summary of financial needs and the uses of funds can both be short and to the point. An example is found in the appendix. The summary is a simple statement of what you need. Working capital, growth capital, and equity capital are the three broad categories of funds. The main difference between the three is in how quickly you will be expected to repay the money. Working capital loans are usually for only a year, growth capital loans are for a few years (usually no more than seven), and equity capital is usually repaid through a stake in the business (which means the payback could be slow in coming, but it may continue to pay over the long haul above and beyond the initial investment),
Be specific as to what you need the funds for. Are you looking for a loan to buy equipment or pay for training? Are you looking for an investor to take on a significant portion of start-up costs?
Also be specific as to how much you need and how it will be disbursed. If you are buying equipment, for example, list how much that equipment will cost, along with the exact make and model. If you are investing in training, list how much it will cost, how long it will take, and who will be doing the training. Give the details it will take for a lender to determine whether or not the investment will increase profit. In fact, if you have data on how profit will be increased (and you should), include that in this section as well.
Assumptions
Not even numbers are concrete in today’s world. There is always a bias, whether conscious or not. The purpose of the assumptions subsection is to explain to readers how you chose your numbers. It is the section readers turn to in order to interpret the biases of the preparer. Assumptions answer the all-important question “Why?” Why did you decide, for example, that you could double your sales in two years? If readers don’t know your reasoning, they cannot make an educated decision as to the validity of your numbers. Your assumptions are yet another chance to convince your readers.
If you are preparing your business plan in order to attract investment, you definitely need this section. If you are preparing your plan for manage-meet purposes, you might leave it out if it’s only for your own use. However, if the plan will be used by others or if you are preparing it for the edification of others in your business, you might want to keep it in. With your assumptions in mind, others within your company are better able to meet goals because they know what is behind those goals. For example, if your income projection states that you plan to double your sales within two years, it would be nice for your sales staff to know how you think that is possible. Is there new technology in the offing? Is a piece of proprietary information finally snaking its way through the approval process? Do you plan an expansion? All good information for your staff to know
As for format, some plans include the assumptions as footnotes at the bottom of each of the financial tables, some include them as a separate page within each table’s subsection, and yet others have one separate subsection devoted to explaining all the assumptions that went into all the financials. Choose the format that works best for your business.
Don’t get lazy with this subsection and never assume that any of the numbers are self-explanatory. Discussions about your plan may occur months after you have prepared your numbers, and you might actually forget why, for example, you thought you could double sales within two years. Don’t get stuck fumbling for explanations in a loan or investment meeting. If the assumptions are on paper, you can refer to them. If they aren’t, you could end up losing the trust of those whose money you are trying to obtain. Why risk it?

•    As final points on the financials, know that your investors want to see how much “skin in the game” you have. Keep your salaries as low as possible to show that you are investing “sweat equity”
•    Also know that your investors will want your overhead kept low. They want to see their money spent on the business, not on the office surroundings.

The better you understand your business, the better prepared you are to write the business plan. Ideally, you will have thoroughly thought out your business long before you ever open your doors for sales. Too many entrepreneurs jump into business with both feet and don’t bother with understanding (let alone planning) until the water is rising. jumping into the deep end of the pool is not the best way to learn to swim. If you’re lucky, you won’t drown, but even if you make it out of the pool, the experience is likely to be remarkably unpleasant.
The Business Section
The first major part of your business plan should be a detailed description of your business. You’ll address your corporate entity choice, be it corporation or limited liability company. You won’t even consider using a sole proprietorship or general partnership, because, first of all, investors wouldn’t even bother to read the plan and, second, there is too much personal liability for you in a sole proprietorship or general partnership. To fully appreciate this, see my book Own Your Own Corporation (Warner Books, 2001).
Your detailed description will also include strengths and weaknesses, a description of your operations, location, personnel, records, insurance, and security.
For the business, the market, and the financials sections of your plan, it is best to introduce the section with a brief (as in one page) summary. From there, you can use more detail in each subsection. While the entire plan should be succinct, these summaries will allow interested parties to graze for pertinent information.
There are two questions you need to ask yourself about your business that color every part of this section, though their answers are never directly addressed in the plan:
• Why are you in business?
• What is your business?
If these seem like easy questions to you, either you’ve done a good job thinking through your business or you haven’t even started. We’ll hope for the former.
Why are you in business? How well do you know yourself—in particular, your personal motivations? When you decided to go into business, was it out of desperation (lost job, family illness, personal injury)?)? It’s okay for desperation to spur you into a new direction, but don’t let it rush you. Did you decide to go into business out of a desire for personal fulfillment (following a dream, helping others)? Many businesses are begun for just this reason, but if you don’t understand the realities of owning and operating a business, you aren’t likely to stay in business long enough to do you or anyone else any good. Did you decide to start a business in hopes of amassing great riches? This is another common reason, but chasing after dollars runs the risk of leading to early burnout and/or disillusionment. Understand your motivations, and you can guard against many a typical disaster.
What is your business? Don’t answer too quickly. Just because you ou sell office supplies, that does not necessarily mean you want to look and feel like all the competitors. Think about it: There are plenty of office supply stores out there. Most are better established than yours. Many will have lower prices than yours. So why should anyone go to Your store? Answer that question, and you will know what business you are really in. Do you offer faster service and delivery? Do you have a specialized staff that can help clients with organization, technology, or planning? What is it that your customers (or potential customers) say about your business when they recommend it to friends? What part of the idea for your business originally got you so excited that you Couldn’t wait to tell your family about it? When it comes to identifying the heart of your business, look to your own heart. Concentrate on what your business is rather than what it does. Think back to the spiritual mission and business mission section and ponder what higher purpose you have to serve that will differentiate you in your space and allow you to generate cash flow
With the answers to these two deceptively simple questions, you will hopefully find the key that unlocks the potential of your business idea—an identity that can’t be duplicated. And it is that identity that will garner you funding, investors, and customers. But first, we’ve got to overcome one of the toughest parts of business plan authorship: writing about your strengths and weaknesses.
MIKHAIL
Mikhail was stuck. He needed to finish his business plan in the next two days for a potential investor but couldn’t get past the next section on his template: strengths and weaknesses.
Strengths and weaknesses. How could he write about that?
“Our company’s strength is me. I’m the best taco maker on earth.”
He couldn’t write that, even if it was true. It seemed too brazen, like a tedious NFL show-off player dancing wildly in the end zone. That wasn’t Mikhail’s style.
And weaknesses? How was he supposed to handle that one?
“Our company’s weakness is that management has no idea how to write a business plan.”
Again, while true, it didn’t inspire much confidence.
Acknowledging his writer’s block, Mikhail left the house and walked down to Starbucks for a toffee latte something. He got in line behind Jill, a new friend who had done well in starting and selling several businesses. He told her of his barrier to completing the plan. She offered to help, and they sat down to brainstorm with their vessels of caffeine and sugar.
Jill agreed that in the business plans she had worked on, the strengths and weaknesses section had always been hard to write. But she noted it was a positive part of the process because it forced you to think about some crucial issues:
• Why would someone really want to invest in you?
• Just what are your strengths and weaknesses?
• Are your strengths common or competitive?
• Can your weaknesses be overcome?
While talking about Mikhail’s business, and after several latte refuelings, some headway was achieved. Mikhail did indeed make excellent tacos. He infused them with all sorts of unique combinations, from mangoes to margarita-marinated mahimahi. His strengths were both common (he was good at making tacos) and competitive (he made them better than anyone else around). Jill suggested he focus on these issues as his strengths. Mikhail didn’t have to be brazen to make such claims, she said. A section beginning with “Management believes that its strengths are found in its ability to prepare unique and flavorful tacos” would work.
The weaknesses section, she said, was the trickier one. Just as strengths came in two varieties, common and competitive, so did weaknesses: They were either common or catastrophic.
After reviewing his plans some more, Jill didn’t see anything that would stand out as a catastrophic weakness. Was there a risk that the entire country would turn away from Mexican food? Not likely. Was there a risk of mad taco disease? Again, not likely. But Jill did see two common weaknesses and, she said with a smile, it was in this section where one could turn a negative into a positive.
Mikhail made a great taco. The weakness, which was common to many new businesses, was that no one knew this. The company was weak for brand awareness. This, of course, could be overcome.
The other obvious weakness was that Mikhail was a recent Russian immigrant. Who would ever expect a former Moscow bicycle mechanic to be a creative genius when it came to Mexican cuisine?
Jill saw this possible weakness as a huge potential strength. The human interest angle alone—Russian immigrant/Mexican cuisine, only in America—would help turn a lack of brand awareness into a branding strength. Mikhail was on his fourth latte and saw her vision clearly. He wanted to get back home and start writing. Jill laughed and said she understood. She also asked to see the business plan when it was finished. She knew some people who might be interested.
Before we further discuss the strengths and weaknesses section, it is important to underscore a key element of the story. Business plans aren’t always (or best) written in a vacuum. When you are blocked or struggling with a section, clear your head and seek out the perspective, insight, or just different view of someone you trust. It is amazing what human interaction can do for breaking through a tough section. And, with the benefit of additional input and review, you will find yourself drafting a better plan.
Part of gaining an intimate knowledge of your business is understanding your strengths and weaknesses (also called Core Competencies and Potential Liabilities, or Competitive Advantages and Competitive Challenges, and often given its own section). Think back to everything you’ve ever learned about competition and marketing (or skip ahead and read Chapter 10 on marketing). At their most basic, competition and marketing are about exploiting the weaknesses of other businesses and/or playing to the strengths of your own business. Analyze your business and think like a competitor. What strengths would a competitor try to downplay or neutralize? What weaknesses would a competitor want to highlight?
Once you have identified strengths and weaknesses, you can begin to plan accordingly. Are there strengths that are currently underutilized? What might you do to take advantage of your unique attributes? Are there weak points that you can shore up—through training, strategic hiring, team building, organization, or planning? What can you do now to limit the marketing options of your competitors later? Focusing on strengths and weaknesses will lead to better decisions as you proceed.
Strengths
As discussed in Mikhail’s story, there are two basic categories of strengths a business can exhibit: common and competitive. A common strength is something you do well. A competitive strength is something you do better than others in your field.
How a company exhibits strength—through corporate vision, product, operations, marketing, or sales—may change from business to business but will inevitably fall into one of the two categories. Determining whether your strengths are common or competitive can be difficult. But knowing which they are can be extremely useful. A business can improve through common strengths. A business can dominate through competitive strengths.
What are your strengths? It shouldn’t be a tough question_ to answer if you have a compelling business strategy Challenge your idea’s reason for being if it doesn’t have clear strengths.
Consider that business strengths are noticed by two groups: competitors and customers. What they see will help you understand what you’ve got. Customers (hopefully) will notice strengths in individual products (lower price, higher quality, better variety) or through positive brand associations. A strong brand can encompass a number of individual products and enhance the perceived positives of all of them. For example, the Coca-Cola brand extends to and benefits Sprite, Diet Coke, and potentially even Mr. Pibb.
Operational strengths such as logistics may not be noticed directly by customers, but they will feel the effects of such strengths. Higher efficiency will mean lower prices, faster service, and fewer mistakes. Even if customers don’t know why your product or service is better. they will certainly notice the end result. So will competitors, and soon your strength may become a common business practice for an entire industry But the point is that if both customers and competitors are noticing these things, whether directly or directly¬. you should notice them, too. Practically speaking, they should be deliberate strategies in your business plan.
Sales and distribution strengths will likely not be noticed by customers. They won’t care how many stores carry your product or how good your contracts are. All they know is whether or not they want to buy your product or service. But they can’t buy if they are not exposed to it. Distribution controls that exposure. Sales come from an ability to turn exposure into commitment. As such, sales and distribution strengths are key and an area your competitors will be sizing you up on. If they are noticing your strength, so should you.
Unique leadership skills and corporate vision can create highly advantageous employee and vendor loyalty. They can also increase sales through good distribution relationships. There can be huge benefits from such skill and vision. That said, none of it may be noticed outside the corporate structure. Until, that is, your competitors wonder why you are kicking butt while they are sitting still. Then corporate vision and leadership will be noticed by everyone with whom you do business—from the letter carrier to the sales force to the customer. Do you notice it internally now? Have you developed it into a core competency that can be considered one of your strengths? It should all flow from your mission statement as a reflection of an organization’s leader. Think back to Rich Dad’s B-I Triangle, which outlines the mission, leadership, and teamwork as the three pillars of a successful business.
There are many more examples to consider. Maybe you are charismatic or have a gift for motivating others. Maybe your honesty engenders loyalty in those with whom you partner. Maybe you were an accountant in a past life and have a true talent for budgeting on a shoestring. Your personal strengths may translate quite well to your business. Don’t overlook any strengths you might have. In business, you need every one you can get.
Think widely about your strengths, Think about what you do well. Think about the strengths of your partners or team members. (For more information, see Blair Singer’s The ABC’s of Building a Business Team That Wins, published by Warner Books in 2004.) Think about what works well in your current business, if you have one. If you aren’t currently in business, you will need to do more of that creative thinking to try to see possible strengths you might show in the future. Be real and don’t fool yourself. Talk to people you trust about what they think your strengths are. Do any of these strengths really help your business? Do they lead to lowering costs or increasing sales? These are the types of strengths to include in your business plan.
Know your competition. Read their business plans. And keep in mind they may be reading yours. A business plan is no place for details that threaten your Competitive advantage. Check out your competitors’ advertising. Know their operations as intimately as you possibly can and see if they share your strengths. If they do, your strength is common. If they don’t, your strength may be competitive, and that’s good for you!
Once you know your strengths, you will need to understand the whys and hows of those strengths. Why is it a strength that you have developed a new way to track your office supply store inventory? Is it because it makes it possible to fill orders more quickly than your competition? Or is it because your system is so user-friendly for vendors that they give you a break on your contracts? Or maybe your tracking has opened up an entirely new route for getting your product exposed to customers.
How did your skill, service, product, or idea become a strength? Was it through innovative use? Was advertising a key? Did you discover it on your own through research or study? Or did you learn it from watching how another company does things? How did your customers become aware of the benefit of your strength to them? By understanding the howl and whys, you increase your chances of repeating your strengths in other areas while playing them up throughout the company and through customer awareness. The bottom line is this: Strengths are strengths because they serve customers, which results in strengthened profits.
• If you don’t possess the right skills or strengths for a business, communicate how you surrounded yourself with the right employees or advisors. You don’t have to be a great mechanic to own a thriving automative repair business. If you have great leadership and marketing skills you can hire great mechanics.
• Public company 10-K annual reports area great source of reference material for entrepreneurial business plan. They provide benchmark costs and strategies as well as relevant industry information. Securities laws require them to disclose information that is very helpful to entrepreneurs.
Weaknesses
Examining real or potential weaknesses is not nearly as much fun as examining strengths, but it is just as important. (Don’t you hate how that usually works?) And you sure don’t want to write down all your weaknesses, print them on good paper, and then hand them to other people to read.
The problem is that while this may not be a section you want to shout from the rooftop to potential investors or lenders, it is one of the most useful sections for you as an entrepreneur. Our greatest weaknesses are our blind spots, which we rarely see in ourselves. Most great entrepreneurs surround themselves with people who tell them the good, the bad and the ugly because confronting the brutal facts is the best way to achieve progress on those elements of the business that are holding you back. Novice entrepreneurs hide issues and great entrepreneurs seek to identify issues.
Just as with strengths, weaknesses fall into two general categories: common and catastrophic. Common weaknesses are those that you share with a lot of other businesses, such as start-up hurdles, learning curves, and cash flow. As long as you are generally as good as the industry standard, you’ll likely be okay, although you may not excel. Catastrophic weaknesses are those that consistently put you at the bottom of the pile. Another way to look at it is that common weaknesses are those that can or will be overcome. You will eventually learn how to use your inventory software or hire someone to take over those duties, you will eventually work out an efficient order fulfillment system, and you will eventually have enough money to kick off that dream ad campaign. Catastrophic weaknesses are those that you can’t or won’t overcome. These may include a fatal error in a software program that can’t be remedied, the use of someone else’s intellectual property, coming in second in the race to introduce new technology, and the worst weakness of all, arrogance.
Obviously, doing the footwork for your business plan should help you eliminate many of your common weaknesses before you begin your business or before you continue to the next phase of business. But the identification of catastrophic weaknesses should make you rethink your entire plan. Do you really want to put all of your time and energy into something that has a very high likelihood of failure? Aren’t there other businesses to pursue that have a greater likelihood of success? Some of the best business plans are the ones you throw in the garbage because you learned from them and moved on to a better idea. Fatal flaws usually don’t get better.
Just as with strengths, weaknesses can be perceived by customers and/or
competitors. Your weakness could be in poor product quality, noncompeti-
tive pricing, or lack of variety. Distribution may be your weakness if you can’t
keep your products on the shelves or on enough shelves to have an impact.
Operational weaknesses are frequent killers of great ideas. Many a creative person has thought up a fabulous idea only to be thwarted by the business realties of deadlines, inventory, budgets, cash flow, customer service, distribution, and management. Knowing your weaknesses in these areas going in will help you pick partners and personnel to fill in the gaps. Don’t be afraid to admit you might not know everything. You can always build a team that does.
When you focus on weaknesses, consider that perhaps your weakness isn’t so much ‘ Vour weakness as much as a competitor’s strength. If you are in an industry ruled by one or two brands, it will be hard to break in and then break out with your own brand identity. Advertising is key for brand identity. In order to build your unique identity, advertising needs to be effective and visible. There is a crucial interplay between vision and volume that will ultimately determine the effectiveness of an ad campaign.
Figuring out your weaknesses (or potential weaknesses if you have not vet begun your business) is done pretty much the same way you determined your strengths. Talk to people you trust. Ask these honest and trustworthy people what they think you could improve in your company, your knowledge base, and your interpersonal style. It will be hard to get an honest answer. People who like you may not want to tell you how irritating it is, for example, that you always wait four days to return a call. Emphasize to these people that you need to know now, before you quit your day job and sink your life savings into this idea. Or be honest in explaining that your current business is hitting hard times and that sugarcoating could mean its demise. Never be afraid to goad people into telling you the truth, even by making them feel guilty. It is that important. Of course, when you get the truth, take it gracefully—don’t get all defensive—and be effusive in your thanks so that the people who are honest with you will offer that same frankness if you need it in the future. If you pout and sulk because they suggested that your lack of punctuality is a business weakness, you are shooting your business (and yourself) in the proverbial foot. Getting honest feedback may not be pretty or fun, but if it leads to business success, it is certainly worth it.
Be creative in your thinking. Try to look at every single aspect of your business. Try to imagine your product going from inspiration to sale, step by step, through all the parts of your company, from R&D to construction to employee benefits to management to advertising to sales, all with an eye toward improvement. If you were the competition and had this kind of inside information, how would you use it? If you were an average consumer, what would you want to see done differently? If you were not the business owner, but only thinking of buying the business, what would you want to see changed before you signed on the dotted line? If you were the ad agency hired to promote the business, what aspects of the company would you downplay or ignore? If you were an employee, how would you rate the business?
Create your business on paper. List everything your business will need to
do (or already does). From hiring personnel to maintaining equipment, from
creating a filing system to choosing a system to track your stock—put it all
down on one side of the page. Next put some thought into which areas are
weak and assign a number or letter or stars or whatever suits your fancy to sig-
nify if the weakness is small, medium, or great. Then write out what it would
take to conquer each weakness. Finally, do a simple cost-benefit analysis and
decide which of your weaknesses are worth (in time or money) eliminating.
Some weaknesses you can live with, some you can’t. The bottom line: Look
for weaknesses that lead to lowered sales or increased costs—profit-eaters.
Once you have a good handle on where your weaknesses lie, fix what you
can, decide which weaknesses are truly important to your business, and put
your plan mayebe
them in your plan. Choosing which weaknesses to include in ~,
the hardest part of the preparation process. You don’t want to include so many that your business looks like a failure before it even begins, but you don’t want to have so few as to come off looking like a naive dreamer.
Every business has weaknesses. Seasoned professionals (the kinds you’ll be asking for money from) will be able to look through your business plan and see the holes. If you want to come off as a professional as well—as the kind of person who can take an idea and turn it into a successful business—you need to prove you share that ability to analyze your business needs.
By pointing out what others would find on their own, you prove your abilities. But, more important, putting weaknesses in the plan allows you to show how you plan to eliminate or work around them. You can list a weakness and follow it with a discussion of your plans for improvement, thus showing your problem-solving skills as well as your ability to plan for the future.