Next Projected Budgets
How to Prepare Business Plans Your Lenders Will Love
Running a business can be a whirlwind experience. Every day can bring a new set of challenges, from servicing to customers to dealing with vendors to managing employees. Amid the chaos and day-to-day obstacles, it can be hard to focus on the bigger picture.
You’ve probably considered a long-term goal for your business. How do you know if the decisions you’re making are consistent with achieving that goal? More importantly, how do you communicate those goals with your employees so they will make the decisions you’d want them to make?
From a financial standpoint, decision making can be a difficult choice between short-term needs and long-term goals. Deciding which bill to pay, which project to accept, or which new hire to make can be difficult without a road map that leads the way. How do you know if you’re making financial progress toward your goals? How do you know how well your business is performing relative to expectations? How do you prove your company’s financial success to lenders and potential investors?
Two essential business documents can provide answers to these big-picture questions. The first is a business plan, which sets out a company’s purpose and mission. It also maps a path for how a business will transform an idea into profit.
The second document is a business budget. A budget for a business isn’t much different than a personal or household budget. It helps a business keep spending in check, determine whether sales meet expectations, and make important financial business decisions.
Both of these documents are also helpful when communicating information about your business to other important parties, like employees, investors, and lenders. In the following sections, we’ll discuss in-depth what these documents are, why they’re important and how you can create them for your business.
Business Plan
What is a business plan?
In its simplest form, a business plan is a written description of the future of your business. It can be as short as some notes jotted on a napkin or as long as several hundred pages. Most business plans for small to medium-size businesses are 15 to 25 pages.
A business plan generally addresses the what, why, and how of business. What is the business? What are its vision and mission? Why is this business unique? Why will it be successful? How will the business get revenue and control expenses? How will the business reach its goals?
Why is a business plan important?
A business plan is an essential document for any business for a few reasons. First, developing the plan allows a business owner the opportunity to think about the business in a much larger sense. A business plan isn’t about day-to-day operational issues; it’s about vision and long-term goals. Just by putting a vision and goals on paper, a business owner can gain greater clarity and purpose with regard to where the business is headed.
A business plan is also an important tool to communicate the business’s purpose and strengths to other interested parties. Before offering to finance, lenders may want detailed information about a business’s planned operations. Investors may want to see a written road map for viability before committing themselves to business.
Finally, a business plan formalizes the idea. While your business’s goals and purpose may be very clear to you, they may not be so clear to your employees. By putting a business’s purpose, mission, strengths, and plans onto paper, you turn your ideas into a written guide for your employees. They can then use the written plan to make decisions that are in line with the stated purpose of the business.
What does a business plan include?
Business plans can come in a wide variety of forms and lengths. However, all business plans have some common elements. Your business plan should have three sections. The first is the Business Concept, which is where you should describe your business, its products or services, and what makes your business and its products unique.
The Business Concept
The Business Concept section may include the following documents:
- Executive Summary. An executive summary is a one or two-page document that quickly and concisely summarizes the plan. Readers should be able to look at the executive summary and get a high-level understanding of what to expect in the remainder of the business plan.
- Business Description. A business description is exactly what it sounds like. It’s a document that describes your business, from what it provides to how it’s structured to goals, mission, and purpose. Write the business description section as if the reader has no understanding of your business.
- Product or Service Description. Use this section to describe your products or services and what makes them unique to the market. It’s important to emphasize why your product or service is different and is positioned to be successful.
The Market Analysis
The second section is the Market Analysis. In this section, you should discuss your potential customers and your competition. The focus is on how your business and its products fit into the overall market and how you will gain market share.
The following are two common components of a Market Analysis:
- Market Strategies is the foundation of a marketing plan. In this section, you define your target market in detail. It’s important to not only describe your potential customers but also what product qualities and characteristics are important to your customers. What types of products do they want? What qualities do they look for in your type of service? Readers of your plan should be able to connect the interests of your potential customers to the strengths of your product or service.
- Competitive Analysis is important for further defining your advantage in the market. Use this section to describe some of your biggest competitors and how you are positioned against them. Also, think bigger than just your direct competitors. Try to think of anything that could stand between you and your potential customers. For example, if you run a home improvement business, other local home improvement businesses are certainly your competitors. However, do-it-yourself home improvement is also your competition.
The Financial Analysis
The final section is the Financial Analysis, which is where you turn ideas and concepts into concrete numbers. The financial analysis section should include projections on revenue, costs and capital needed. It should also include best and worst case scenarios, so you’ll be prepared for any outcome.
Generally speaking, it’s best to include as much detailed financial information as possible in your financial analysis. However, there are a few financial documents that should always be included.
- Capital Required. This is important if you are seeking some kind of investment or financing. This document would break down how much money you seek and how it will be used.
- Balance Sheet. A balance sheet is a snapshot of a business’s health at any point in time. It’s a listing of all assets, debt, and equity in the business. Many lenders will look at a balance sheet to gauge a business’s financial health.
- Income Statements are compiled at regular points in time, usually every quarter and at the end of a fiscal year. They show all revenue, expenses, and net income or loss for the given period. You should also include projected income statements, especially if you are seeking an investment or financing.
Business plans and financial projections are helpful for predicting the future success of the business, but they can’t tell you how the business has performed in the past or in the present. That’s where our second important financial document comes in. In the next section, we’ll discuss a budget in greater detail, including why a budget is crucial for any business and how to create one for your business.
Author: Marc J Marin