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Even successful
companies need a business plan
Dear Small Biz
Adviser:
My husband, an accountant, and I started a small business almost
three years ago with an initial investment of about $150,000 cash.
We are up to about $400,000 in sales a year and have excellent credit.
We also have about $25,000 in personal debt and want to get our
personal money out of the company and apply for a business loan,
so we can grow the business and buy a home. Do we need a business
plan to apply for a loan, or does our track record speak for itself?
Jeannie
Dear Jeannie:
Your inquiry could lead to the conclusion that business plans serve
no purpose. Skeptical readers could say "Look at them. They
started without one and are quite successful."
I have never indicated that a startup is doomed without
a business plan. Your husband obviously does quite well monitoring,
controlling and accessing capital reserves. You and he apparently
have the knowledge, experience and marketing know-how to successfully
promote and sell your products or services. And you had a big advantage
in that the majority of startups do not have the amount of money
you were able to invest in starting the venture.
However, there is plenty of evidence to strongly suggest
most entrepreneurs do not have the capital, education, experience
or credentials to succeed without a business plan. That is why I
urge all owners to develop one when starting a company. In all cases,
even among the most qualified and prepared of my clients, the brainstorming
associated with the planning process has revealed a business aspect
to which the client had given no thought.
Planning now better than never
As for your position now, there is no doubt a business plan will
be even more valuable. It provides the opportunity to effectively
evaluate all elements associated with your operation. It will naturally
challenge you to determine whether sales and profits could increase;
if marketing, advertising and promotional activities are being maximized;
and whether expenses can be reduced to effectively increase profit
margins.
Do not misunderstand me. I am not underestimating
the accounting and analytical abilities of your husband. But development
of a business plan, even when the company is a success, demands
comprehensive evaluation and comparison of data beyond strict financial
concerns.
If your priority is to secure additional capital for
your company, anticipate the banker requesting a business plan.
I know of no commercial lender that does not request the business
plan as a part of the total list of information necessary to support
the loan application form.
On the other hand, if the priority is to secure a
mortgage, many banks, especially those where you conduct business
and maintain accounts, will likely not require a business plan.
Their priority will be the personal and company tax returns for
the last two to three years. A worksheet detailing your monthly
expenses vs. income also would be helpful. This will show whether
cash flow confirms your ability to meet payment on all outstanding
indebtedness, including your planned home mortgage.
In short, for the mortgage it is unlikely you need
the business plan if your credit is excellent and the business is
as profitable as it appears. But I encourage you to proceed with
developing one. You will have greater indebtedness with a new home,
so now is a good time to evaluate company sales and profit demands
in conjunction with mortgage needs.
I wish you well.
-- Updated: Oct. 27, 2004
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