In anyone’s mind, the business plan would probably rank fairly high on a list of ‘documents not to screw up’. Therefore, we figured it may not be the worst idea in the world to call in an angel investor, a business plan expert and a finance guru for some much-needed insight. Unsurprisingly there was a recurring theme in their reflections: it’s not so much about making a ‘fault-free’ business plan – it’s about presenting one that grabs an investor’s attention from the outset.
Understand your business
It almost goes without saying that, to stand any chance of investment, an entrepreneur’s product or service has to solve a problem that has never been solved before. Or, failing that, solves it in a more efficient and cost-effective way than what’s already out there.
“One of the biggest problems investors report back is that entrepreneurs are not clear about what they do,” comments Johnny Martin, financial fitness coach for accounting software firm Intuit and founder of financial mentoring service Johnny Martin Business Education. “There is a failure to explain the pain as it were. You have got to make sure you are really clear why you are different from other companies. Why are people going to come to you, as opposed to anybody else?”
Sort your figures out
At the end of the day, it’s all about the money for investors. It has to take something pretty special for them to part with a hefty wad of cash, safe in the knowledge that it will multiply over the next few years. That is why accurate financial forecasting, especially of cashflow, is imperative, according to Sabrina Parsons, CEO of global business planning software and small business solutions firm Palo Alto Software.
“If you do a cashflow forecast correctly, you will actually see when your balance goes negative and that is where you insert a loan or a credit line, or investor money,” says Parsons. “Too often, you see that piece missing and if you look at the one reason small businesses fail, it’s not because they are not profitable, it is because they have run out of cash.”
It is probably worth knowing what your break-even point is too, suggests Martin. “That is a key financial milestone,” he says.
What valuation have you put on your business? “It is only of laughable interest,” suggests angel investor Bill Morrow, founder and CEO of website Angels Den, which connects investors with entrepreneurs. “Most entrepreneurs have absolutely no idea what the valuation of their business is, but you are stupid and naïve if you think you are worth £1bn and you haven’t sold anything yet.” As bluntly as he puts it, Morrow hits the nail on the head here – the only way an entrepreneur can be taken seriously is by displaying a healthy dose of realism.
“One of the things I see a lot of people do is shy away from admitting that maybe they don’t know everything,” says Parsons. “The reality is that the business plan is about realistically putting out what you can actually do, in what time frame you can do it, and how much money you need to do it.”
Fill the gaps
So, you’ve convinced an investor you have a product that plugs a hole in the market, but in order to really make them dig into their pockets, it is relatively important to explain why you actually require an investment of cash.
Parsons explains: “One of the biggest mistakes I see in business planning is two or three founders who are going to do everything, and are positioned as if they know everything. It is much better for someone starting the business, or who has an ongoing business, to recognise where there may be some holes in the management team. In their plan, it’s worth saying that one of the things they are going to do if they raise money, or if they get sales to a certain point, is to hire a VP (vice president) of sales who has enterprise sales experience, because nobody else on the team does.”
Back to basics
Finally, it would probably be of some assistance to the entrepreneur to make the business plan easily accessible to the investor, and free from obvious mistakes. “There is an accepted format for business plans and you just want to follow that,” says Martin. “Don’t try and re-invent the wheel.”
Length is also a conundrum for some entrepreneurs but generally it would appear to be a case of the shorter the better – at least initially. “Everybody reads information so quickly and they don’t want to spend a lot of time,” explains Parsons. “So, what you want is to get in the door with a really great summary document and you can’t do that if you don’t have the basics right.”