Being a small business owner is a busy job, but investing time in business planning is essential for success. Clive Lewis FCA, head of enterprise at ICAEW, outlines the three main reasons for preparing a business plan and the key components to include.
Approximately 500,000 new businesses start up in the UK every year. When you have an idea for a new product or service, the impulse is to start sharing it with the world as soon as possible before completing all of the necessary plans and forecasts.
In the UK, however, one in three new businesses ceases to trade within three years and, after 10 years, only one in five is still in business. A well detailed business plan cannot guarantee success but it will help give your business the best possible chance of success.
Three reasons why you need a business plan
1. To develop a route map for your business
At start-up stage, your first plan will focus on developing a route map to establish a viable business.
In early plans especially the sales forecasts are critical. The focus will be on the business proposition, research into the potential market, defining the competition and developing a marketing and sales strategy.
You’ll also need to identify the resources (people, equipment and money) required to achieve the forecast sales, together with realistic timescales to achieve significant milestone dates, such as website launch, ready to start trading, first stock delivered, etc. This information becomes the basis of the financial forecasts. Once completed, the plan can be used to monitor the performance of the business.
2. To raise debt finance, such as a loan or overdraft
As your business grows, you can use the techniques and basic information developed in the first business plan to prepare annual budgets and updated financial forecasts. These are usually focussed on the year ahead. The next time a business plan is required is usually when considering raising finance, often debt finance from a bank.
Banks and other finance providers require considerable information in support of loan applications. These include financial forecasts, historic annual accounts and management accounts. A business plan will help persuade finance providers that you are professional and take financial planning seriously. The plan should include sales and market information and how current sales will translate into the future sales forecast. In addition, it will identify why the finance is required and how it will be paid back.
3. To raise equity finance
But it’s when a business wants to raise equity finance from either a business angel or venture capital company that a full business plan will be required. The business plan is crucial in persuading potential investors to engage in discussions regarding an investment. It must be exciting but credible, with clearly identified customer benefits, and offer evidence of growth and future prospects.
Business angels and private equity investors read and reject many business plans; the executive summary is vital and it must have a wow factor. It should state the business proposition and summary of the financial figures, including the amount of capital sought. It is worth committing the main points to memory to discuss as required.
Credibility is common to all good business plans. An open and balanced view of the past and future prospects creates this. A good investor will quickly see through a biased explanation of past events and performance, or unrealistic projections for the future.
The information provided to business angels and private equity investors will be as for a bank, but you will also need to provide a significantly expanded business plan. Financial forecasts will now be required up to five years ahead. Potential investors will want to examine the details supporting the business plan, particularly the market analysis and the financial forecasts. So be prepared to back up key assumptions.
What else do you need to include in a business plan?
The other elements of the expanded business plan should include:
- A history of the company
- Its current and future products and/or services (including patents)
- Its sales channels and delivery
- How the products will be produced
- How the business operates and why it will be successful
- A description of the market and sector plus details of the marketing strategy and sales and distribution process
- Full details of the management team
- Financial information (including debt finance already in place)
- A risk analysis
Committing to that first business plan and investing time in developing it may seem unnecessary when there are so many demands on your time. However, the skills learnt and the perspectives gained will help with growing the business, raising finance and, who knows, one day potentially the sale of a successful business.
Five key takeaway components of a business plan are:
- Executive summary: Remember to give it a wow factor
- Business model: Clearly explain the business proposition
- People: Detail relevant past experience and successes for you and other key people involved
- Financial projections: Ensure you map a clear path of growth
- Key assumptions: Ensure you back them up with clear evidence
Business plan templates
There are lots of business plan templates online but two websites that offer particularly good templates are:
© ICAEW 2017. ICAEW will not be liable for any reliance you place on the information in this material. You should seek independent advice.