Developing a Business Plan (BP) is a very frequent action when companies expect a shift in their strategic direction or desire to have a clearer path in the future. The hardest part in developing a BP is to form a realistic plan in terms of expectations. In addition, a BP shall be understandable and easy to explain to both internal and external stakeholders in order to be implemented effectively and not just stay on paper. In this article, some insights are provided with respect to structuring and developing a BP.
Business Plan Pre-Development
1) Why a BP: before getting into writing a BP think of why you need to develop a BP, how a BP will benefit your organisation and within what time-frame (short-term / long-term) you expect that it will bear fruit.
2) Stakeholders: A company needs to identify the stakeholders that need to be involved in developing the BP as well as the frequency of their involvement. For example, internal stakeholders could be the CEO on a semi-regular basis, the Business Development Manager on a regular basis and possibly financial analysts on a regular basis as well. It is wise to consult external stakeholders such as a strategic / financial advisory firm. However, your advisor shall be a well-respected firm with significant experience in assisting its clients to develop a BP in similar sectors with proven positive results.
3) Preparation: Based on 1) and 2) the company may start to discuss internally the depth of the BP in order for the senior management together with the day-to-day stakeholders involved in the BP to budget their time prior to the development of the BP. It is crucial for the company to minimize destruction of day-to-day business during the development of the BP.
Business Plan Development
1) Availability of Historical Data: The Company shall have historical financial and operational data prepared or at least at an easily editable level. Practically the company should have 2-3 years of historical data of the following:
- Financials: financial data should be available as analytically as possible. This does not mean just using financial statements as a benchmark but preparing detailed analysis of individual balance sheet and income statement items.
- Detailed Analysis of the Company’s Operations: Assume that a company is a produces a range of products and sells them to a certain number of buyers. You need a basic analysis of the production process, a description of the end-products, analysis of terms (if any) of licensing / commercial agreements between the producer and the buyers and finally, a breakdown of the Company’s sales revenues and operational / capital expenses. For instance, with respect to revenue data: imports / exports, % of revenue coming from top 5-10 customers, revenue share of the different product categories. For costs / expenses: cost of goods sold (COGS) by product category and breakdown of operational expenses (payroll, advertising, insurance, utility, repair & maintenance expenses and third party expenses). It is very crucial to understand the relationship between these cost / expenses and revenues and not just report it on paper. Do these costs / expenses scale with revenues? If so, how? Will this relationship remain the same in the near future? If not, are these costs / expenses linked in another way with Profit & Loss (P&L) or Balance Sheet (BS) items?
- Reporting figures: The way you report revenues and expenses is the way you will manage your company, so effective reporting is crucial. Does the volume of products you sell in general and their average price matter? Or is it the number of customers that matter? Which of the two makes more sense? Are most of your expenses direct (cost of production, payroll of scientists & salesmen, etc.) or indirect (management, accounting department etc.)?
2) Projections: Projections need to be as analytic and presentable as historical data. However, it is of crucial importance to make solid hypotheses and justifiable assumptions in terms of:
- P&L items: What are the revenue drivers of the Company? Do these scale a lot with the economy at large (e.g. construction industry)? Can you analyse easily the profitability of each of your products separately? Is it worth to utilise fully your product portfolio? Or is it hurting your profitability?
- Balance Sheet Items: Are you getting paid fast? Or your suppliers / debtors manage their cash by delaying their payments? Do you have too much inventory in risk of losing some of your cash? Do your creditors demand payments in a timely manner? Or do they have a flexibility on the payment schedule?
All these questions should be answered carefully when writing the business plan. A business plan makes sense when there are suggestions on how to overcome the problems identified and assess how realistic the solutions are on paper compared to real life. In other words, an effective and pragmatic business plan should always be tied with an “action plan” for the company, especially if the company is an early or mid-stage company and not a mature company that is highly inflexible in implementing organisational changes and changes in its strategic directions.
3) Monitoring: the final step is to monitor the progress of the financial projections and the performance of the company. Is the company performing as projected? If not why? Is it something recurring or is it a one-off effect?
These “qualitative” issues should be reflected within the financial model that complements the business plan. Not everything can be modelled but it can be close enough to reality.