Monthly Archives: October 2016

Planning Is Not Just for Startups

One of the greatest misconceptions about business planning is that a business plan is useful only for start-ups. While start-up companies are indeed one significant segment of business planners, business planning is being utilised by an increasing number of companies as a means to manage growth better, to ensure new ideas have been assessed for commercial viability, and to value a business on exit.

Secondly, the importance of the business planning process is often under-emphasized relative to the primary focus on the final output, the business plan. The very process of producing a business plan enables management to take a holistic view of their organization. It helps them give due consideration to the various factors that mesh together to create the opportunity they are seeking to explore, as well as the resources required and the key drivers needed for success. This article aims to justify a more expansive remit for the business plan, by highlighting a number of key areas where its application is of considerable benefit for all companies.

1. Intrapreneurship
Companies are increasingly encouraging employees to create new growth opportunities as competition intensifies in their core (mature) business lines. Mature invariably means competitive, so the focus on growth opportunities is via innovation and creativity, especially in emergent areas. The term intrapreneurship thus refers to “inside entrepreneurs”; where intrepreneurs personify the key characteristics of an entrepreneur, but do so within the company bounds.

Intrapreneurship is not new – 3i, a venture capital/equity investment company, has been one obvious practitioner for many years – and its application of intrapreneurship has helped to spawn a number of new products. Google, a company renowned for innovation, operates a 70 percent rule, whereby employees are expected to spend 70 percent of their time on the core business, 20 percent on related projects, and 10 percent on unrelated new business opportunities. While the generation of new ideas is paramount, ensuring their commercial viability is of critical concern, and writing a business plan is one key way to assess the merits of an innovative proposal in a more rigorous fashion. The plan can thus be produced for an internal opportunity as if it were a stand-alone entity, with the author being required to detail both the opportunity and the resource implications of pursuing it.

2. Managing performance
A business plan can also be used as a management tool to assess ‘actual results’ against ‘planned results’. Using these figures in conjunction with an assessment of year-on-year performance can ensure that managers reflect on performance not just based on the previous year’s achievements, but also in relation to the original planned figures. This enables managers to analyse deviations from plan so as to understand what figures are materially different from the planned ones and what drivers shaped the disparities. It also helps to shift the focus away from solely historic comparisons –instead the manager is tasked with planning for the year ahead and hence there is an agreed goal up front and greater transparency on a month by month basis when ‘actuals’ can be compared with ‘planned’.

Such analysis helps to enhance a manager’s understanding of the changes that have impacted recent performance. If planned results and actual results are considered on a monthly basis, this analysis may also help the manager take remedial action in a more urgent time frame.

3. Planning strategically
The process of business planning is, in and of itself, a worthwhile pursuit as it forces the authors to remove themselves from the day-to-day tactical/responsive mode in which many managers operate. The planning process forces any manager to consider the future. In particular, they must take into account the resources at the company’s disposal and plan to maximise the return on capital, as limited by the wider context.

For many companies, a desire on the one hand to maximise the return from the existing product/service revenue stream, needs to be balanced on the other by a desire to develop new additional revenue streams. By putting a business case together for a particular course of action, a manager ensures that the proposal is financially robust (i.e., worthy of pursuit), that the goals are kept in focus and that resources are allocated accordingly.

Hence, a business plan can support a company’s focus on exploiting a particular market segment, creating a new product, promoting a new use for a product, etc. Once the plan is committed to paper, it is easier to ensure that there is consensus, ownership of the plan, and a breakdown of tasks, milestones and deliverables to help achieve the goals set out in the plan.

4. Preparing for a future exit
At some point in the life cycle of a business, the founders/investors may decide that they want to cash out of the business. The exit strategy will typically focus on extracting the highest value possible from the sale. An up-to-date business plan detailing the opportunity for new buyers will support any valuations put on the business by its current owners.

Before a company reaches the point of sale, it is important to get everything ready by making sure that all historic accounts, cash flow statements and business plans are up-to-date. It is generally accepted that thorough preparation for a sale, well in advance of the sale date, improves internal management focus, aids performance, and ultimately serves to increase the final valuation.

Once management identifies the key drivers for a typical potential acquirer, a business plan can be put in place to focus the minds of employees and ensure that the sale value is maximized. For example, if the general bases for valuation for the industry are focused more on cash generation than profit, a company can drive short term revenues by undercutting sales prices of competitors by selling at cost + 5%. While such activity may not be sustainable in the long run, it can serve to help cash flow when a sale is being considered and prospective acquirers are reviewing performance. While some managers are not that comfortable with planning and projections, the preparation of a thorough business plan plays a vital role in extracting the maximum value from a sale.

5. Supporting a company valuation at sale time
Ascertaining the value of a company is a difficult and ultimately subjective process whereby the sellers are naturally looking to maximise their return and the buyers to minimise their outlay. The bases for valuation are numerous and tend to be the subject of much negotiation, with various multiples being considered as both parties attempt to come up with an agreed price.

The primary aim of the acquirer will usually be to assess the future income generation capability of the company. As a result, negotiations will usually include attempts to agree on an ‘earnings multiple’, a common method of valuation which focuses on the ability of the firm to generate revenue and cash. These earnings multiples can vary but are correlated with perceived risk, so they tend to go down for smaller companies, where the perceived risk is often higher. Conversely, a higher earnings multiple is likely when a company has strong historic growth figures and a robust business plan. This will usually lead to a higher price.

The importance of business planning

While the business-planning process is in itself a very worthwhile pursuit, most business plans are produced for a specific purpose. The plan is used as a means to convey an idea with a view to achieving a specific goal, e.g. securing funding. Hence the plan needs to be tailored with the audience in mind, and good knowledge of their requirements will help shape a winning plan.

For example, the requirements a Venture Capitalist will have in assessing a plan seeking to secure a million-pound investment will differ considerably from those of a local bank manager who needs a plan to support a small-loan application. While the former will be primarily looking for capital growth, the latter will be more concerned with security. Regardless of the specific purpose of the plan, these following business plan lessons will apply.

1. Incredible financial projections

One of the key areas business plan readers will focus on will be ‘the numbers’. Specifically, they will concentrate on the projected Income Statement or Profit & Loss. The fact that numbers are projected does not mean that those figures can be included without due rigour or process. They need to be credible, defensible and consistent. Of course forecasting is not an exact science, and the use of proxies can help the author ensure that the figures included are plausible and consistent with the story being told in the other areas of the business plan. The figures must also show an ability of the company to generate free cash flows so that the business can be run profitably while satisfactorily servicing their debts at the same time.

All costs should be recorded including salaries to owner managers who run the company. It is not credible to generate P&L projections where expenses such as salaries are omitted to demonstrate managerial commitment or to artificially reduce losses, etc. By the same token, no investor will be prepared to fund a business where the projected salary payments are excessive. While dealing with finances is not everyone’s strong point, there has to be someone on the management team who is cognizant with the maths. A business plan will need to include everything from break-even projections to proposed return on investments to cash flow forecasts, and one of the key players will have to converse on these subjects in a convincing manner. They will also need to justify the numbers.

2. Lack of a viable opportunity

A business plan needs to not only describe an opportunity, it must also detail how the opportunity can be exploited profitably and demonstrate the company’s ability to deliver what is required. In recent years there has been a significant increase in plans that are inaccessible to the average reader because they are couched in technical jargon and unfamiliar terms. If the reader of the plan cannot fully grasp who the prospective customer is, how that customer will be targeted, and the prospective benefits from the proposed solution, the reader will not invest. In an increasingly time-pressed world, people crave simplicity. Many business plan recipients will only scrutinize the Executive Summary and the financials, using these as the decision points as to whether to read further or not. Hence it is of paramount importance that both the executive summary and the wider plan describes the opportunity in readily understood terms, such as:

  • What is the issue or pain point?
  • What is the proposed solution?
  • What are the benefits of the solution?
  • Why are these benefits compelling?
  • Who will benefit the most from these?

Once these are detailed, there will be greater transparency regarding the viability, or otherwise, of the proposed opportunity in terms of the company’s ability to profitably serve the target market.

3. No clear route to market

All opportunities are only prospective ones without evidence that the target market can be accessed profitably. Many entrepreneurs are inherently product focused, concentrating their energies on ‘the idea’ to the exclusion of many other important elements such as how they intend to access their customer base. The growth in popularity of the Internet has certainly helped niche producers find geographically dispersed customers, making many more ideas commercially viable. However, it does not come without its challenges, as creating awareness online is both costly and intensely competitive. The business plan must include a comprehensive and credible analysis of how the company intends to secure access to their target market in a cost-effective manner. The low cost and barriers to entry for websites have resulted in the creation of hundreds of thousands of sites. Ensuring that a site stands out from the crowd is easier said than done. Knowledge of who the customer is and how they buy is very important, but identifying them and accessing them on an individual basis is much more challenging and costly.