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A business plan is not just a means to raise funds, as is the popular belief among entrepreneurs. While the importance of an executive summary, market, strategy, and management team in a business plan cannot be ignored, how does an entrepreneur know if she is headed in the right direction? Against what parameters does she need to monitor her progress? How does she know if she was able to reach all the milestones within the timelines she set out for the company, and whether these milestones were achieved within budget? In short, how does she know if she is managing her business effectively?
Build rather than write
A business plan has to support growth. During my experience as an entrepreneur and co-founder of a startup, I have realized that a business plan is not just 10-page document template, widely available over the internet. It is not enough to say that the company will capture ‘k%’ of the market, that the expenses/revenues would be ‘x’, ‘y’ and ‘z’ in the first, second and third years, or that the company will break-even in the nth year; there has to be a logic and math behind these numbers. Years have to be broken down into quarters and quarters into months – this is essential to monitor progress. A detailed business plan should mention what is the total market size, what percentage of it will be targeted, the cost of customer acquisition, the gradual change (read increase) in the target market acquired, and the timelines for effecting the increase. The plan should have the ability to change over time as the company grows.
Describing the co-founding/managing team is always good, however, how many plans talk about the number of people that will be required to start and to expand over the years? Almost none. An entrepreneur must know what will be requirement in terms of the number of employees; this should be broken down further within different departments. She must know the number of people required for the IT division, or the number of people in the sales and marketing team, the size of the delivery team, or the number of people manning customer support, number of people in the accounts and the quality teams or the number of workers required in the manufacturing unit every month/quarter.
Further, the number of people hired has a direct implication on the assets required by the company. The number of desktops, laptops, phones, machinery and even the office space (and therefore rent, water, electricity) required is hugely impacted by the staff and even by the function/department they are employed in. This is when depreciation (and amortization) also come into play. It is important for the entrepreneur to make sure that the business plan captures the implication of depreciation (and amortization) on the profit and, therefore, on the income tax.
It is also important to make sure that the business plan accurately records the cash flow, the management of which is fundamental to all businesses. A significant outflow of cash or cash coming in advance, the timings of the inflow and the outflow, seasonal variation in demand or supply – all these factors have an impact on the funding requirement, and therefore a business plan should help an entrepreneur manage the cash requirements well in advance.
Having talked about these numbers, it is essential to note that assumptions play an important role in any business plan. An entrepreneur cannot know everything before she hits the ground running. The business plan, therefore, should have an ability to reflect the impact of any changes in the assumptions on the revenues, expenses and the manpower requirement. What happens to the revenue and the expenses if the product/service is being sold at price ‘b’ instead of price ‘a’, as was originally planned? What is the impact of market captured on the manpower requirement? And how does a change in manpower effect the assets’ requirement? A practical business plan is an intricate connection of these numbers and effectively reflects the changes when assumptions are modified.
Even if the purpose of the business plan is to raise funds, entrepreneurs must note that no investor has the time and bandwidth to go through a 10-page document. Based on my interactions with several investors, and startup founders, I have learnt that a concise presentation with the business plan built in an excel file, capturing the strategic interplay of numbers, is always a good idea to head into your fund-raising pitch.