In my last post I discussed the challenges entrepreneurs and small business owners face managing an undercapitalized business. I noted that in some cases entrepreneurs knowingly start their businesses undercapitalized, mostly because they can’t raise all the capital they need. It is no secret that many entrepreneurs, especially black entrepreneurs, lack access to capital.
In other cases, however, businesses end up undercapitalized because actual costs, whether start-up or operating, exceed what was projected, or because actual sales grow slower than projected, both resulting in unexpected losses.
This happens often and has led some to question the value of financial projections and even of the business plan. Why spend time preparing a business plan and financial projections if they’re not going to lead you to business success?
In point of fact, however, that’s the very reason to prepare a business plan and financial projections. Because they will lead you to business success. Granted, financial projections may not be totally accurate, and one’s planned operating strategy may not materialize exactly as outlined in one’s business plan.
But the solution is more likely collecting additional information and/or factoring contingencies into the plan, not abandoning it. You have to understand that a business plan and its related financial projections are not static documents. They are “living” documents, to be updated and revised to reflect new information and/or changing circumstances.
Writing a business plan provides the entrepreneur with numerous advantages that increase their likelihood of success. First the business plan clearly articulates the market opportunity the business will exploit. This includes identifying the business’s core customer, the customer’s need, and the business’s competitive advantage opposite the competition in satisfying that customer need. Combined these create the goalpost the entrepreneur focuses on in planning how the business will take advantage of the market opportunity.
Second, the business plan articulates the strategy the business will use to exploit the market opportunity. This is outlined in an operating plan that details the activities the business will carry out to accomplish its goals. The operating plan includes sections related to production, management, marketing, competition, and financing. These should be developed strategically, with the activities outlined in each section supporting the activities of the others.
Once prepared, the operating plan allows the entrepreneur to itemize the business’s start-up costs, those expenditures that have to be made before the business actually “opens”, its monthly operating costs, those recurring expenditures required to keep the doors open, and its product/service costs, those costs related directly to procuring the product or providing the service.
The entrepreneur will use the market opportunity to estimate demand and price and use these to project expected monthly sales.
Taken together these estimates allow the entrepreneur to project the business’s monthly profit or loss. It is important to remember that these estimates are based on assumptions which should be premised on information obtained from research. As the plan is implemented, it is important for the entrepreneur to compare actual results to projected/forecasts results. If the comparison is favorable, all is good. If not, then the entrepreneur should adjust her plan. This adjustment should take the form of adopting one of the contingent strategies included in the plan that resulted from the entrepreneur asking the question “what if?”.
What if product costs increase? Can my core customer pay a higher price for my product? What if a competitor lowers their price? Will my competitive advantage support what becomes a premium price?
These types of questions, posed as one is writing their business plan, allows them to anticipate likely market reactions to the start of their business and develop effective contingency plans.
Remember, bottom line, a business plan is a road map to business success. As such it should include planned detours around unexpected obstacles.
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