How to write for money - business plans

Nation's Business, Nov, 1991 by John Coker

Your business plan is supposed to help you accomplish several goals: raise capital, focus management, uncover strategic opportunity, and provide a benchmark for measuring your success. But a plan that focuses strongly on management planning may be flawed as a means to attract capital.

Your success in finding the capital for your business is likely to hinge on the quality of your formal business plan.

The venture-capital community has long used business plans to sort through investment opportunities. Today, however, capital investors and lenders alike are rejecting plans at a dramatically increasing rate. In fact, most commercial banks, for the first time, are requiring high-quality formal business plans even for modest loans well under a million dollars.

So it's important that you examine your financing plan to make sure that an otherwise good proposal does not fail because it is out of focus for its purpose.

The flaws that can sink a plan fall into four principal areas: strategy, management, focus, and quality of writing.

Strategic Flaws

Confusing strategy with tactics. Most business managers recognize that a business plan for financing must focus first on strategy. Managers who have not defined and articulated their core business strategies may, when forced to write about strategy, discuss tactics instead.

For example: "The company will place full-page advertisements in each Sunday newspaper" is a tactic, not a strategy. It does not explain what makes the company special, how it will protect its niche, or how it will defeat its competition.

The tactics may be on target, even brilliant. But if the document reveals you are focusing on tactics over strategy, it also reveals something about how the business will be run.

Competing on price. When a business plan states that the cornerstone of its marketing strategy is to offer a product already in the market for a lower price, the potential investor will regard the strategy as naive. Companies already strong in a market will reset prices low enough to beat back new entrants.

Competing on price overlooks the crucial elements of marketing strategy: product differentiation and distribution exclusivity. Investors are usually unwilling to bet that an emerging company can build the same mousetrap so much cheaper that it drives the competition completely out of the market.

Promising too much success. The danger here derives from the fact that you are setting the terms of your own success. You have to live up to your projection, or you may lose the business to the investor. If the projected results demonstrate that the business can comfortably repay the investor and leave an attractive return for the owners, don't escalate them unnecessarily.

Flaws In Management

Projecting unmanageable growth. Even executives who successfully manage large organizations are often ill-prepared for managing rapid growth in smaller companies. Projections in which sales double or triple annually will cause the potential investor to question vigorously and skeptically management's abilities to control such an organization.

Overpromoting key people. Intangibles alone, such as the hard work of key employees, will not make a business competitive. If a founder says so, the investor will think the founder has run out of intelligent ideas before convincing even himself that the plan is sound.

Promoting the one-man band. A business founder naturally wants to demonstrate that he or she has skills in all necessary managerial areas: finance, marketing, and operations. The investor will assume that one or more of these areas will be neglected, however. The investor is likely to be much more favorably impressed with a team of professional managers, each with skills in one key area.

Suggesting dramatic outperformance of industry averages. You project that your bad-debt losses will be half the industry averages and that you will achieve this through more careful credit analysis. This suggests that somehow the company has cornered the market on small credit managers and that the competition fails to work hard at collection. Not likely.

Underestimating capital needs. Three things--all bad--can result from underestimating your capital needs. First (and most probable), the potential investor will recognize the shortfall and figure you are naive. Second, the investor will recognize the short-fall and think you are being deceptive. Third, the investor won't see the short-fall and will give you the money. This may prove to be the most disastrous; the investor can renegotiate a much tougher deal when management returns for more capital.

Management should consider every capital-consuming activity and then add a cushion or contingency to its capital budget.

Flaws In Focus

Confusing equity and lender needs. Often the founder will prepare a business plan from his or her own perspective--an equity owner's. The plan will be out of focus to a banker if it is used in a loan application. It will dwell more on growing the business than on repaying the loan; it will focus on making profits rather than servicing debt.