Importance of Business Planning: Part 2

In my previous article I discussed the importance of and benefits of doing a business plan from the perspective of the entrepreneur herself.The other readers of a business plan are the external audience; most likely to be potential lenders or prospective investors.These are people who you need to convince to believe in your dream and, essentially, believe in you. External audience readers are looking for different things when they read business plans.However, all of their areas of concern can be boiled down to asking 3 key questions while they read a business plan.
1.Does the Entrepreneur "Get It"
From the perspective of someone who has been responsible for business lending and, now, reviewing business plans, it's pretty easy to tell if someone wrote their own business plan or had someone do it for them or even if they simply lifted it from some online resource. All I need to do is just ask questions!
In order for any outside reader to give the business plan and, by extension, the prospective entrepreneur any credibility and move on to next steps of consideration the plan must make sense to the reader and the author has to prove that they really understand what they are writing about. This sounds simple enough but, sadly, my experience is that it's not always the case.Just as everything in life and business, there are no shortcuts. You either get it. Or, you don't.
2.Is there a Real Market Opportunity?
Hopefully, you really do understand what is written in the plan, it reads well and the reader can see you have a real feel for the business proposition. The next question that needs to be answered is: Has the entrepreneur convinced me that there is an opportunity to sell your product to an underserved market?
"Underserved" could mean: High demand, low or no supply; poor quality supply or overly high AKA "premium" market supply only; a specialized niche not currently being filled, etc.
Essentially, once you convince me that you understand your business proposition you need to convince me of the market, the market's readiness and potential acceptance of your business and, given an assumption of reasonable management effort, that there is long term potential of sustainability. It's not just enough to convince a potential lender that your business could capitalize on an opportunity in the short term. Rather, such readers are looking to see if the entrepreneur can you make a justifiable case that there is a long term opportunity for sustainability and growth
In other words, hopefully your business is not going to rely on the last few remaining drops of a dying industry or is trying to capitalize on a fad. These 2 cases represent reasonable revenue potential streams but should not be relied upon for your core operations.
3.Will I be Repaid?
Assuming you've been convincing enough about your comprehension of your business proposition and that there's a viable market opportunity the next question a lender or investor will be asking is: When and how will I get repaid if I lend or invest in this business?
Remember that you should consider an investor as a lender who has an equity position in the business, which means the better the business does, the better they do…and they may have a say in how you operate your business.
In order to better answer this question, the lender will focus in on the cash flow projections and capitalization.
Further detailed questions the lender will try to find answers for include: Does the cash flow look reasonable? Are the sales projections over ambitious? Are costs accurately reflected? Do the projections account for likely seasonal fluctuations that are natural to all businesses? Do the projections accurately reflect a reasonable monthly payment for the loan the entrepreneur may be seeking? It's amazing how many loan applications for funding I've seen over the years where the applicant does not include loan payments in their cash flow projections they submit.
Regarding capitalization – one of the major causes of business failure in the start up phase is under capitalization. This means a business not having enough money to ride out the initial start up period where you are building market awareness and sales. Lenders and investors want to feel confident that if they support your business financially that you have enough money to ride out the initial start up phase in order to get repaid at some point in time. Lenders typically don't like to provide start-up capital for this purpose. Usually, they will lend against assets that you need to run your business and not the cash that you need to operate.
Investors are more likely to provide some level of operating capital but, of course, the more they put up, the more they risk and thus, the more control over your business they will require. Plus, they will demand more of your business profits, and rightly so.