Planning for Capital Needs
Recently, I sat down with a business that was creating a business plan for a large expansion project with external funding needed. In short, we are creating a story to sell bankers or investors to get them to invest in the project. Typically, the planning process includes business forecasting spanning three-years and out using pro-forma financial statements (income statement, balance sheet, cash flow and budget statements). Since the business already exists, we chose to utilize both historical and industry data in creating our financial assumptions. Sounds easy right? Below are a few tips that will support the process of business planning and ultimately garner the interest of bankers or investors.
- Develop realistic sales projections. Sometimes entrepreneurs are too optimistic, projecting hard-to-believe sales to a banker, venture capitalists, or family members. To support the sales projections, use both historical data and industry data to reflect realistic expectations.
- Construct projections from distinct suppositions about marketing and pricing plans. In other words, explain how marketing is going to generate that 20% or 30% increase in overall sales you are espousing.
- Use realistic profit margins. You can rely on historical margins, which the business has generated, but they should reflect industry averages or provide some evidence why they differ from those averages.
- List data on a monthly basis for the first year of operation and annually for the remaining two years. Five years of data used to be typical in planning, but five years is a rather large time frame, which is subject to economic volatility.
- Keep financial information simple. Use a planning philosophy that reflects the most-likely scenario and a break-even scenario. The most-likely scenario reflects reasonable expectations while the break-even scenario reflects the level of sales required to break-even.
- Check and double check to make sure the numbers you are using for planning are accurate in order to appear credible to bankers and investors.
- Make sure that your personal finances can support the business plan. Sometimes entrepreneurs forget to include salaries or do not anticipate the proper length of time that living expenses will have to be sustained. Inadequate planning in this step can cause entrepreneurs to deviate from the business plan, thus effecting business performance. Most businesses require a three-to-five year period in order to attain a break-even threshold where operations can support owner salaries.
When I was the president of the Chamber, I often asked the Chamber staff to under-promise and over-perform when interacting with members and sponsors. When assembling a start-up or expansion business plan the same philosophy is appropriate. You want to utilize specific, measurable, attainable, realistic, and time bound efforts in order to provide the financial outcomes you are projecting to those bankers and investors which took a risk on your business idea.
If you would like to discuss this further please feel free to do so at [email protected] or at Keiser University, Fort Myers (239) 277-1336.