The do's & don't's of writing a winning business plan

Black Enterprise, April, 1996 by Carolyn N. Brown

A balance sheet shows the status of the company's assets, liabilities and equity ownership. You should have a current financial snapshot of the business as well as a projected balance sheet showing how these figures are likely to change over time. A balance sheet should be updated yearly.

The profit-and-loss (or income) statement shows the results of operations over a period of time. It compares total revenues against all operating costs and expenses (i.e., salaries, supplies, insurance, marketing, overhead). Organized by fiscal year, these tables are used to determine net income and should be updated annually.

Cash-flow forecasts chart the movement of funds in (receipts) and out (disbursements) of the company. By monitoring the sources and uses of cash, you will have an idea of how much money or credit you'll need to carry out planned operations, and you'll be alerted when cash runs short. Forecast three to five years out.

The break-even analysis shows how long it will take for the business to make a profit. This figure is arrived at by calculating the business' fixed and variable costs and measuring them against projected revenue. You break even when sales revenues equal total cost.

"Few business plans have realistic financial projections," says Richard Magary, senior vice president of administration and former chief financial officer of American Shared Hospital Services, a publicly traded medical services company. Too often, entrepreneurs get caught up in wishful thinking. "Wring all the optimism out of your projections," Magary urges. "Realism is more convincing than naive enthusiasm." An alternative is to provide two scenarios, one that lists conservative projections based on weak market performance and the other, aggressive projections based on robust demand.

While a good business plan is one that raises money, it's important that you tailor your plan to the type of financing you need. There are two major categories of financing: debt (loan) and equity (ownership interest).

Bankers will be interested primarily in the company's fixed assets, such as building, equipment, etc., and the collateral the business owner can offer. The bank's main concern is how and if you are going to pay back the loan at the going interest rate.

On the other hand, venture capitalists and other investment groups will want a chunk of your company and its profits. Usually, they want to earn at least a 30% to 35% risk-adjusted annual return on investment. In other words, they want to get back six times their money in three to five years.

A common mistake entrepreneurs make is inadequately addressing the return on the investment, says Liz Harris, vice president of Boston-based UNC Partners, a venture capital investment management firm. She says that venture capitalists want to know what they are getting into and when can they get out and how. So, provide an exit strategy that has timetables plus projected returns.

TAILORING AND UPDATING YOUR PLAN

When Harry Davis started Real-to-Reel Pictures Entertainment Inc. in February of 1992, he needed to raise about $20,000 in a private placement stock offering to produce two short films. Davis and his partners in this New York-based production company, Cornelius Pitts and Percy Davis (no relation), went to work on a business plan that took three months to complete.