Fail to Plan or Plan to Fail
Posted: March 21, 2023 in Business
How to best assure the success of your new business
Author: Steve Piekarski, Executive Vice President/Chief Operating Officer at ProFed Credit Union
Regardless of the source of information, new businesses reportedly fail at a very high rate. From my forty-five years as a lender, business owner, and consultant, I know business failure is not necessarily a reflection of a bad idea. Be it the result of a flawed implementation or unanticipated setbacks, in the end, it is often because a business runs out of money before owners or management can make adjustments to hit their stride.
A well-thought business plan smooths implementation as it helps identify circumstances that impede progress toward performance objectives and relative time frames. A well-thought business plan tells the owner and management if they are on or off the right path, ahead or behind schedule. It identifies a need to adjust or reset plans to leverage better all that is good and counter all that might be bad.
A business plan may be formal or informal. Its depth and degree of sophistication depend on its intended audience. While the owner’s ideas and concerns might effectively be captured as years’ worth of thoughts recorded and organized in a notebook, a more polished presentation will likely be required to capture the attention and the confidence of investors or lenders.
So, what are the elements of a sound business plan? At a high level, a business plan should reflect the business proposition (i.e., product description, need(s) solved, and prospective market). It should also address the traditional elements of finance, production, sales/marketing, and, even more so, logistics and risk management.
That is all well and good, but if I’m a lender or an investor, exactly what detail should you provide to gain my confidence? The bottom line is that I want to know if you can make all that you say happen. Do you have integrity? Do you have the necessary experience? How will you compensate for the experience you don’t have? Are your assumptions reasonable? And, most importantly, do the numbers make sense?
Many of the business plans I’ve seen over the years reflect nineteen pages of narrative and one page of numbers. That’s obviously a generalization, and while a narrative is always of significant value, the accompanying numbers often seem a secondary consideration in many budding business owners’ plans. Leaning on ‘average’ sales and the lack of any relative timeline will significantly undercut the presenter’s credibility. If you’ve watched ‘Shark Tank,’ you are likely aware that you won’t get a second audience if your numbers leave questions unanswered.
That takes us full circle. How do you best assure the success of your new business? Develop a cash forecast reflecting anticipated cash investment and month-to-month cash availability from your first expenditure through 36 months of operations. If you’re not comfortable with Microsoft Excel, find somebody that is. The top line of your forecast should reflect your starting cash each month. Your bottom line should reflect your ending cash each month. You will need to provide for your anticipated revenues and associated expenses. An IRS Schedule C provides an excellent basis to pattern your income and expenses. Avoid generalizations or averages. Expand the monthly revenue forecast to show each product/service line. Expense categories must reflect all associated production inputs and other sales or administrative costs. (Example: “Utilities’ might include electric, gas, water, and internet. While ‘Wages’ should be expanded to include the number of employees, hours worked, relative rates of pay, benefit costs, unemployment insurance, and federal, state, and local payroll taxes.)
Before asking your accountant, your advisors, or others to help polish your model, consider fumbling through this exercise. You will learn a lot about the business on which you are inclined to bet your family’s future and fortune. You will know if you have enough cash and when or how much more you might need. The information will show to what degree your implementation schedule needs to be adjusted, the prospective impacts of the seasons on your revenues and cash, when the business might fully support operations, and when the business is likely to support you and your family.
I believe in the principle of ‘right place, right time.’ A good idea today will likely still be a good idea next month or next year. If you don’t properly plan for the cash needed to succeed, you will kick yourself if you shutter your doors because your suppliers cut you off or your landlord kicks you out when you are looking to close your biggest order.
Take the time to develop a detailed and sound cash forecast as a part of your plan, and wait to start the business until you have confidence in your funding. In doing so, you distinguish yourself from the wannabees that routinely knock on lenders’ and investors’ doors. It is more likely they will be open to qualifying their interest and continuing discussions even if they cannot immediately say yes.
View more posts about Business