Understand How to Write Your Business Plan for Investors
Published April 29, 2010 | 
Let me start by reminded you that the audience you will be presenting the business plan to should be the driving fact for the way the document is laid out and constructed, and of course, since different readers expect to see different things in the plan, 
it is extremely important that you completely understand the audiences viewpoint and perception.
If you’re trying to secure equity-based capital, you cannot spend enough time on the executive summary of your business plan, since this is the first and most important thing, if not the only thing, that gets read by an equity investor.
It is very important for you to understand that the executive summary is your business plan in the miniature and it should contain the scope of the opportunity in the absence of the full plan in less than a page, and after reading the executive summary and making the decision to continue reading, equity investors always look to one section of the plan more than the rest, and that’s the management team, as savvy investors know all too well that an experienced and well-rounded management team can make all the difference when it comes to success of the business.
You should be well aware that your management team section should be very comprehensive including citing the background, education, experience, skill-sets, and responsibilities for every member of the team, and also, you 
should include all of the outside professionals that you will utilize such as an attorney, accountant, management consultants, etc.
Even well-put together plans can flounder because of the failure to appreciate the crucial difference between entrepreneurs and investors. You must understand that Entrepreneurs focus on the potential of an idea, while investors focus on its risks, and the key to raising capital is therefore lowering risk, not hyping the upside, and the Entrepreneurs with this clear understanding, and who say how they’ll reduce risk are the ones who get the capital.
Of course, investors and growing companies understand that risk is always a part of the equation, but they want to see evidence that an Entrepreneur recognizes the risk factors facing the business and has taken steps to control them, which means addressing questions about market risk, financial risk, and technological risk, stressing not the dazzling upside but the return investors can reasonably expect, weighted against a limited and carefully chosen and defined set of risks.
If an investor likes what they see in the management team section, they will usually proceed to the financial projections, and obviously one of the most important things an investor wants to see is what the potential return might be weighted against the clearly defined risks, and for this they turn to the projected profits of the business. Finally, keep in mind that while your business plan need not discuss the amount of ownership you were willing to give up (that will be negotiated later) it should give the investors some idea of what returns they might expect to receive from their investment in your business.
Understand How to Write Your Business Plan for a Lender
Published April 27, 2010 | One simple business planning rule that is also one of the most important, and actually makes a lot of sense, is the fact that the audience the business plan will be presented to should drive the way the document is constructed and presented, 
and since different readers expect to see different things in the plan it is extremely important that you put yourself into their shoes before starting the plan, and if you can develop a strong understanding of exactly what they are looking for as important components needed to make a decision, and want to see before they consider funding your business, then you have made great progress towards achieving the funding goals you have set for yourself and your business and it’s ultimate transition from concept to successful reality.
Lenders by trade and nature are conservative and they need to see collateral to secure the loan for the debt-based capital you seek, and the financial projections you provide need to be very conservative, taking extra care to be sure you break down your loan request for your business’ initial required funding into its essential elements. In other words, you should list out how much you need for equipment, leasehold improvements, inventory, supplies, signage, prepaid expenses, working capital, etc.
You should always keep in mind that the most important thing a banker is looking for (after collateral) is the cash flow of the business, and they want to see that your business has enough capacity to repay the loan amount, as your business plan should include these assumptions in the financial projections, that show fairly clearly posted principal and interest payments being made back to the lender, while showing positive cash flow growth along with the initial and subsequent growth of the business.
The business plan should also contain important profitability ratios, as well as other important ratios and indicators that lenders use in determining the decision on whether or not to fund your business project. Of course, be reminded that these ratios and indicators should be based upon very conservative estimates and projections that you can use to show the business that you confidently project, will have a great chance of exceeding based upon your thorough research for the industry and market.
It is important to remember that lenders do not take risks, ever, and they will be looking to secure any loan they consider with enough collateral and equity injection from you to reduce the amount of risk to the very lowest possible level, and all of this has to be realistically shown as part of the plan to have any chance of success for raising debt-based capital from the lenders.
Questions You Should Answer in Your Business Plan
Published April 22, 2010 | I routinely get questions from clientele trying to understand the kind of information that should be included in a Business Plan they most often need to present to either lenders, or investors, and I begin by pointing out there are some basic questions that even the simplest business plan should always answer. 
First understand that you should best answer the questions for yourself to determine if you have developed a sound business model, based on thorough detailed research specific to the many facets of the business including current state of the industry and market and associated trends, competition, market niche, market strategies, and projected financial feasibility to name a few, and following are a few of the questions along with issues specific to each that need to be addressed.
What does the business stand for now and what will it be in the future?
- This question addresses the questions of mission and vision for the business.
- It should not only address what the business is but also what the business is not.
What does success look like?
- This is about goal setting. If you don’t know what success looks like the new can never find it.
- Goals should be set for specific time frames.
- Ask yourself: What do I have to accomplish by the end of this year to achieve my definition of success?
What do you make?
- Every business must create value and ultimately make something.
- This is about the basic value proposition of the business.
How do you make it?
- This question is about your craft, systems, and way of doing business.
- It addresses your inputs, processes, and outputs of the business.
How do you sell it?
- While making something is about the creation of value this question is about marketing or capturing value.
- Many entrepreneurs are great at creating value but many failed to capture hit by dropping the ball when it comes to marketing execution.
- As management author Peter Drucker wrote, “There are only two functions of business: Innovation and Marketing.”
Who are the customers?
- This question addresses the people that the business service.
- Most successful small businesses operate in turbulent and uncertain markets catering to small niches of customers that a big business does not want to serve.
- By doing this they are able to stay off the competitive radar screen of the big companies that can’t afford to take huge gambles on such uncertain market segments.
What can you or business contributed to the world that no one else can?
- This is about the understanding of what your “one big idea” is.
- It involves a deep passion, understanding of what you can be the best in the world at, and a sufficient economic engine to drive it.
Who will manage the business and how?
- Who are the people who will operate and grow the business and how will they be organized? This speaks to the organizational structure of the business, as well as, the legal structuring.
- Having a great idea is never enough. Greater ideas are common, but the people who can successfully implement are rare.
How are profits generated and where do they come from?
- At the end of the day, the business must be profitable or it is not a business.
- You should be well versed in the revenue and cost drivers that make business profitable.
- Without profits the company cannot grow and will never be anything more than just a lifestyle business.
What stands in the way of success and how will you overcome it?
- This is about your future story, the enemy and how you overcome it and ultimately win.
- Up until now, you have been addressing questions that concern your business model which is essentially your business in the vacuum.
- But sooner or later, your business will confront internal forces or external competitors that will potentially keep you from achieving your goals.
- Dealing with this reality is, in essence, your strategy.
The way you deal with these questions and issues will directly determine the level of quality information presented and contained in your Business Plan, and the ultimate success you will have obtaining not only the funding you seek, but reaching the level of success your business model achieves.
Power in Understanding Investors
Published September 2, 2009 | 
Each day we are asked by Entrepreneurs about investors that might be interested in their business projects, that are poor candidates for lender or bank funding for reasons from collateral issues, to equity injection issues, to new market issues, all of which can greatly increase the amount of risk exposure to the point where banks are not in the fundamental position to approve even limited funding, if any at all, and many Entrepreneurs have a limited understanding and knowledge of just what investors are all about.
An investor is someone who places money into a business usually receiving an ownership or partnership stake in the business, and they are looking for high growth industries and markets and experienced management teams, and investors also undertake a great deal of risk since most of the money they provide is unsecured, therefore in many cases they seek very aggressive rates of return on their money.
It must be remembered and considered by Entrepreneurs that an investor is undertaking a lot of risk, therefore they may want a substantial share of ownership in your company, but just as important, investors typically don’t want in forever, usually after three, five, or seven years they want to exit the business, and if you have a problem with giving up ownership in your business then you’re going to have a very big problem in securing outside investment.
It’s important to understand the kind of money investors provide your business, which is typically not a loan and therefore not debt-based capital. In other words, since they are not providing your business with a loan, equity-based capital is placed in your business, and equity is money provided to your business in exchange for an ownership stake in the project.
Clearly, some advantages of equity are that equity capital can be much more flexible than debt, since there are no collateral requirements for equity capital, and repayment terms and conditions can be tailored to the needs of the business. Usually, payments to investors can be put off until the business exceeds break-even or reaches a certain level 
of profitability, so needless to say, this can really help the cash flow of an emerging business, and also equity capital can be a great way of raising large amounts of money for your business.
Advantages of having investors, are investors contribute to the credibility of a startup or growing business through their scrutiny, certification, and investment, and investors can also draw upon their own reputations and contacts to help the startup secure customers, employees, suppliers, and so on. Indeed, most Entrepreneurs that are recipients of venture capital indicate that the advice and mentoring they received from their investors was worth more than the money itself.
It is just as important for Entrepreneurs to know the disadvantages of equity which can come at a very steep price, while a debt-based bank loan might run you say 6% to 10%, an investor or venture capitalist seeks much higher rates of return around 20% to 
40%. Also, as stated earlier, equity investors generally want to share the business so you’ll have to give up some ownership (difficult for many Entrepreneurs to come to terms with), and while these investors don’t want be involved in running the day to day operations of your business, they usually want a seat on the board of directors where they can influence the decisions of the management team.
When determining when equity-based capital should be used, it is important know equity capital is well suited for startup and later stage growth businesses that require large amounts of working capital, or involve a new product launch, and banks are most assuredly not fond of lending working capital to a business, especially if they are in the startup phase. The reasoning is simple, that when a dollar is spent on payroll or advertising, it is gone forever and cannot be liquidated by the bank should the borrower default on the loan, so instead, this is the domain of the equity investor, and the investor is willing to take on more risk, for more reward of course.
When defining the types of investors in general, outside investors fall into three broad groups, Seed Capital from friends and family, Angel Investors, and Venture Capitalists, and these three groups differ with respect to the type of deal they are looking for, the size of the deal they want to do, and their specific motivations behind the investment, and Entrepreneurs need to understand and become familiar with each group, the deals they look for, and motivations specific to each investment.
How to Structure the Business Plan Financial Projections
Published August 28, 2009 | 
Creating financial projections for your business is both an art and a science, and although investors prefer to see cold, hard numbers, it is difficult to predict with great accuracy what you expect your financial performance to be three years down the road, especially if you are still raising capital, but regardless, a short- and medium-term financial projection is a critical part of your business plan if you want the serious investors’ attention, and even if your business plan will only serve as a blueprint for managing and monitoring your business, it is imperative that you make financial projections, since the financial projections can be an effective guide to future business decisions.
Financial projections can be intimidating, but however, they are less a matter of mathematical aptitude and more a matter of your knowledge of your business, the industry, and the market, and financial projections are most often viewed as the most 
critical part of the business plan by investors, lenders, shareholders and other stakeholders with a financial interest in the potential future of the business and its projected growth and return on investment (ROI).
The financial projections section of the business plan should be thought of as simply quantifying the effects of what was presented in the plan narrative, although the projections are concerned with the future don’t think of the projections as merely a prediction, instead of the projection should be thought of as goal-setting with respect to revenues and expenses, and it always must be remembered that we cannot predict the future and yet this is precisely why planning is necessary, because we can make plans, that set expectations and goals.
Projections should at least include a list of required funds and their uses, a sales forecast of at least monthly for the first year, and quarterly for additional years, a variable cost of sales analysis, a fixed-expense operating budget, a projected profit and loss statement, and possibly a projected cash flow statement, balance sheet, and breakeven analysis.
You should list out exactly how much money you need to make your plan a reality, and your listing should break these costs down into Fixed Assets and Working Capital. Fixed Assets are property that usually has some sort of long-term value, and Working Capital is money that will be used to finance the short-term operations of the business.
For your sales forecast don’t let the fear of prediction stop you from arriving at projected revenue figures, as every business sells units of something, whether it be hours, projects, products, services, etc. Simply set goals for the numbers of units you believe you can sell taking into account any seasonality factors, and finally, multiply these 
units by your average established a prices and the result is your sales forecast in dollars. Each fundamental assumption that you make needs to be documented in this section since the assumptions themselves can be more important than the final numbers.
Variable costs are those cost incurred every time a sale is made and they of course vary with sales, while they are the direct cost associated with the producing or selling your products and services, which include the cost of goods themselves, any direct labor associated with creating the product, or any materials that go into the product itself.
Fixed expenses do not vary with sales and are usually tied to some contractual arrangement or indirect cost of doing business such as rent, salaries, loan obligations, insurance, and advertising, and you should develop a monthly fixed expense budget for the year detailing these amounts and when they occur.
A profit and loss statement commonly called the “P&L” combine’s the revenue, variable cost, and fixed cost amounts in order to see if the business is operating at a profit or at a loss, and this statement tries to line up all revenues and expenses to determine the profit potential of the business.
Finally, as mentioned before, financial forecasting is as much art as it is science: You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable, and it’s always best to be realistic in your projections as you try to recruit investors for equity-based capital, and any uncertainty in the future industry trends should be reflected in the information and associated assumptions from revenue, to costs, to payroll, to operating expense, and to the bottom line/profit, and remember to always maintain a conservative approach to the projections and you will eliminate most surprises that might occur once actual operations commence.