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Building a successful business
plan
By Marian
Miller Chang • Bankrate.com
 March
8, 1999 -- The first step to approaching a bank or other financial
institution for money is the development of a good business plan.
"It is the single most important document you
can present to a bank when seeking financing," says Rod Jorgensen,
director of counseling for the University of Nevada-Reno Small Business
Development Center. "We take on 100 new clients every quarter, and
each one of them gets our help and critique of their business plan."
Finding
a format
Business plan guides are available in hard copy, as well as on computer
software and on the Internet. Software programs include "Bizplan
Pro" and "Bizplan Builder." Jorgensen and counselors at the Service
Corps of Retired Executives often recommend a plan available on
the SCORE
Web site and a series of comprehensive business planning guides
at Commerce
Clearing House's Web site.
"Any business management textbook will contain
samples of business plans, too," Jorgensen says. "We recommend that
our clients find one that best suits their capabilities. Those who
haven't written one before need a plan outline with lots of questions,
to spur them along. Others just need a bare-bones outline."
At the SCORE office in Las Vegas, retired business
executive Robert Thomas counsels businesses daily in how to build
a good business plan. He says certain basics should be included
in every plan:
- A definition of the business:
- Is it a sole proprietorship or limited
liability corporation? An attorney can help in setting up
a corporate structure.
- What is the company trying to do: Is
it a landscaping company that specializes in hedge trimming
or is it a restaurant that serves only vegan fare in a college
community?
- A mission statement: Defines what
the business would like to accomplish.
- An internal and external description:
What is the business going to look like physically and operationally?
- Competitive assessment: Who or what
is the competition? What competitive edge does the business have?
What makes the business new and different? How does it give people
something they will use?
- Forecast: A projection of what the
business will do in terms of net profit margin and other earnings-related
numbers. If uncertain, consult an accountant or bookkeeper.
- Strategies: How does the owner plan
to make the business grow? What are the marketing strategies?
- Plan of action: Outline a marketing
plan and describe how it will work. A banker examining the business
plan needs to know how the company is being directed.
"We want all the basics in a business plan and
it is amazing how much of this is overlooked," Thomas says. "We
tell people, put down your background, who's going to operate the
business, how it's going to operate. For instance, are you leasing
your building or buying, and are you leasing or buying your equipment?
Where is the money coming from? You need at least enough money to
finance your business on your own for six months before a bank will
even look at your business plan."
Avoiding
common mistakes
Thomas once owned and operated a successful pest control business
in Las Vegas, but before he approached First Interstate Bank for
a credit line of $10,000, he showed them six months worth of financial
statements and a business plan. He received his line of credit,
which gradually increased as his business grew and his net profit
margin increased.
"You can't go into business for a month and
then get into the red," he says. "Bankers are going to scrutinize
your business plan to see if you have a vision for what you're doing
next year, and in the future. Keep in mind that while this plan
is really for your own use, you are probably going to show it to
a loan officer at some point, and you want accuracy to be key."
Sierra West Bank vice president and commercial
loan officer Mike Shulewitch says common mistakes include off-the-mark
projections for net profit and other economic numbers, and the absence
of a marketing plan.
"We want additional information to substantiate
those figures they are using as projections," Shulewitch says. "We'll
have people walk in the door with a restaurant business plan with
25 percent net profit figures, but they can't tell us why. They
have no faith in their numbers and, basically, pulled them out of
the air. We need research and facts to show us how they arrived
at those numbers."
People
and money
Other common mistakes include projections that are inconsistent
with the industry norm or that don't generate enough cash flow to
service the debt, Shulewitch says.
"We have to make good decisions on loans, especially
with high-risk startups," he says. "You simply can't make unrealistic
projections and expect to get a loan, especially if you're talking
about a 25 percent net profit margin, when the industry projections
show only 4 or 5 percent."
Experts agree that management experience and
marketing plans have to be spelled out in the business plan, too.
"The vast majority of small-business owners
come from a technical level of expertise, with no background in
marketing research and advertising, so they spend only a nominal
amount of time discussing those aspects in their business plans,"
Jorgensen says. "In my opinion, the marketing plan should be the
most important component of the business plan. You have to identify
your market and how to approach it."
Other would-be small-business owners forget
such things as their own resumes, tax returns, pre-lease agreements,
insurance binders, and detailed listings of inventory and equipment,
Jorgensen says.
"Many people supply a sort of narrative, but
forget all the necessary supplementary material," Jorgensen says.
"Then it takes another week at the bank, or more, because they're
missing things in their plan."
Show
your enthusiasm
Jorgensen adds that he is not a big fan of business planning software,
because the built-in templates provide a "fill-in-the-blanks" tone
for the plan that removes all creativity and enthusiasm.
"Bankers can usually see it from a mile away,
that it's just a cut-and-paste plan," he says. "That's not necessarily
bad, if you can back up the reasons why you cut and paste your information
that way. Many people have no clue what the numbers mean, and that
doesn't bode well for your banker."
Although a good business plan can certainly
help, the hardest part about starting a business is getting credit,
Jorgensen notes. "Most businesses that are startups have to go
elsewhere for financing, not to a bank.
"The first choice for startups is friends,
family and relatives, or venture capital. Second choice is home
equity loans and beyond that, an SBA loan or funding from other
nonprofit groups is possible."
But the bottom line remains that a good business
plan must be in place before most entities will consider offering
financing.
"It also doesn't hurt to get to know your loan
officer, first, before approaching him for financing," Thomas says.
"Loan officers tend to characterize you as a person first, and a
businessman second. Choose banks that are favorable to small business
and have a logical, well-thought-out business plan in hand, with
lots of marketing ideas and growth projections grounded in reality.
Then you may have a fighting chance for financing."
Marian Miller Chang is a freelance
writer
To comment on this story, please e-mail the
Bankrate.com
editors
-- Posted: March
8, 1999
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