If you are a business owner (or would like to be one) the first step would be to research how to launch and sustain a business. This means you need to build a business plan.
Building a business plan is the entrepreneur’s “due diligence.” It is the document that most lenders and all investors will want to see.
It is rare that a startup or small business will have sufficient funds to pull through the first few months. You must come up with a good strategy to determine which business loans and funding techniques will be most favorable for your business.
Building a Business Plan: Where to Start
To understand how to start a business you have to come up with a good plan in preparation for business funding.
First, a business plan opens a gateway through which you see your funding options.
Second, it provides insight for possible investors so they can be able to set up financial benchmarks through which you will hold yourself accountable.
The rationale is that building a business plan gives justification for your funding needs. It also justifies the spending habits of your business. The return on investment adds a level of earnestness among the investors and/or lenders.
Building a business plan will ensure that your business ideas are viable and the venture you have decided to set your eyes on is profitable enough to pay back on time. The goal here is sustainability.
The most important part of building a business plan is the financial information. Some investors will ignore your whole plan and just look at your financials.
Your projected financials is what gives direction to the investor and peaks their interest about your business. Investors will express interest in your business blueprint before committing to a partnership.
As the entrepreneur, you can only write some parts of the business plan after you have explored costs and revenue potential for your industry. If your business is a startup, most of the financial information will be projected: estimated from businesses that already exist in your region and industry.
On the other hand, if you seek funding for an existing business, all financial information should be reflected in your existing financials. If you use QuickBooks online or a similar service, the software will draft each financial statement for you.
Business financials will include a timeframe, anticipated expenses (fixed and variable), sales, cost of goods, marketing expenses, distribution expenses, and research costs.
Additional factors to include are administrative and legal costs such as taxes, inventory, accounts receivables, equity injection (the cash you bring into the business), property value, depreciation, accounts payable, debts and interest expense. It is advisable to include a CPA or business attorney when forecasting this expenses.
Any projected financials make up your Pro Forma Statement, and include the following financial statements:
- Balance Sheet
- Income Statement (Profit and Loss)
- Break Even Analysis
- Cash Flow Statement
Business Financials and the Pro Forma Statement
According to the Small Business Administration, business financials are essential for the success when building a business plan. They help keep track of your day-to-day operations and will also help you build a solid business plan.
The first financial document is the balance sheet: an overview of your business’ finances. In the balance sheet, you fill in numbers to the equation liabilities (projected debt to lenders/investors) + owner’s equity (owner cash, sweat equity, and/or assets) = assets (total liquidity of the company if you dismembered its cash and possessions).
The second financial statement is the profit and loss statement or the income statement. It is a projection of your business’ sales and expenses over a particular period, ideally 3-5 years, segmented monthly.
An often overlooked financial statement is a break even analysis. In a break even analysis, you compare your costs to your sales to represent at what does the business pay for itself and make money.
The final financial statement is the cash flow statement. The cash flow statement that shows how much money has been coming into and out of your business (how your money flows in and out of the business).
Creating the Pro Forma Statement
A projection of income is the primary role of the pro forma statement, and you will need to use hard data to support both a best and worst case scenario.
A pro forma statement naturally plays out how your best and worst case scenario looks on paper. For the best business plans, entrepreneurs develop a best and worst case pro forma (balance sheet, income statement, and cash flow statement) for a total of 6 financial statements, plus the break even analysis.
The pro forma statements outline a budget along with projected sales. If you want an investor or lender to take you seriously, you are required to do your due diligence, which means developing a pro forma. Your business plan is incomplete without it.
Your first step is ensure that are working with realistic estimates. This means talking to other business owners in your industry and your CPA.
Your second step is to demonstrate a solid pay back strategy for any liabilities you incur (investor capital and/or loans). It is important to distinguish between operating costs and your liability costs.
Your third step is to anticipate your speed of growth. Most startups require 2-5 years before generating a profit. If you show a profit your first year, you need to be prepared for investors/lenders to be both interested and skeptical. Make sure to back of your numbers with hard data.
Your fourth and final step is the creation of a chart of accounts that are easy to follow. This could be bar/pie graphs or line charts. If you do not know how to use chart/graph features with Microsoft Excel or Word, consider hiring someone that knows how to take your financial statements and turn them into clear presentations.
Using your Business Plan for Financing
With a good business plan, you will have access to a greater array of financing options. Funding your business without assistance from an investor is called bootstrapping.
Many private and/or hard money lenders make loan offers based on the feasibility of your business plan. The most famous kind of loan offered to small business owners with a good plan is the SBA (or 7a) Loan.
An SBA loan is the most popular source of business funding for start-ups and small businesses. It is a federal-sponsored debt-financing loan and is considered one of the best financing options for businesses in the United States.
In an SBA loan, traditional lenders give you more serious consideration because a government agency (the Small Business Administration) is co-signing your loan. Rates are lower than alternative lending options.
Be advised, however, that the SBA is a government agency with a lot of red tape. Some SBA loans take as long as 9 months to process and fund, though recent underwriting software such as nCino allows SBA loans to process much faster.
Most SBA loans require a significant down payment, plus packaging and origination fees. It is important to know all fees associated with your SBA loan before signing the dotted line.
If you need cash fast and don’t have much for a down payment, an SBA loan is not your best option.
As an aspiring business owner, you have to delve deeper into the accuracy and attractiveness of your financial information. If your business requires funding, take all aspects into consideration for an enticing strategy.
Building a business plan shows why it is not only wise to invest in your business: it would be stupid not to! Shrug off any negativity that may arise. If someone is a doubter, then you do not need their money. Take criticism in stride, as many will give you tips to make your plan more irresistible. All you need is one good loan or investor offer to make a difference.