The business plan is usually the first formal document a company presents to the world, and it is often crucial in establishing the image and identity of the company. One of the critical functions served by such plans is to present to potential lenders and investors the risk profile of the company -- basically, the chances that if you give them money, you'll get it back. The presentation of the company's financial statements is key to establishing current viability and survivability.
Lots of elements go into the creation and evolution of business plans, and the financials themselves are not self-revealing but must be evaluated in light of the whole company context. Here are three variations on advice about how to put such plans together; each has their own take on how to present and interpret financial data:
Darrell Zahorsky, Critical Steps to Writing a Business Plan About.com
BusinessTown.com, Creating your business plan.
As your case assignment for this module, you are to read the following three sample business plans:
Interstate Travel Center
Silvera and Sons
For this assignment I want you think in terms of being an investor and what interest rate you would require on your investment in each of the companies. The discount rate for determining net present value is related to risk in a business and the interest rate charged by investors. The article on buying a business by T. Berry, http://articles.bplans.com/index.php/business-articles/buying-a-business/buying-a-business-know-what-you-are-getting/ , talks about the discount rate and risk. You want to make sure that you charge a high enough interest rate to recoup your investment and make some money. Remember the higher the risk, the higher the interest rate (return on investment) you want to charge.
The background information has further material on using financial data to assess risks and comparatively evaluate the future possibilities for companies. In addition, you may wish to seek out further information through your own research. When you have reviewed the advice and the plans. please prepare a short (3-5 page) paper discussing:
Which of these three projects do you think should have the highest discount rate reflecting risk inherent in the business plan? Which one do you think should have the lowest?
Please carefully explain your reasoning about each of the three businesses, with reference to the appropriate financial and other information. You do not have to perform calculations or determine a specific interest rate you would charge - that would be extremely difficult in an introductory course. A rating of high, medium and low will do.
Links to Business Plans
After reviewing the articles regarding business plan preparation, and the data for each company relative to their business plans, a few areas stand out dramatically:
- First, each of the plans (I believe) significantly over reach in terms of the financial information presented
- Second, I would question their forecasting techniques and how they arrived at their information --- specifically break even point for each firm (the data presented doesn't really synchronize with the actual figures presented)
- Third, the first 2 firms (Acme and the Interstate Travel Center) appear to be severely UNDER funded for what they are trying to accomplish and for not presenting any contingency plans nor providing any risk assessment per se
- Fourth, while they all have risk associated, the least risky firm appears to be Silvera & Sons, but not by much due to the international flavor of the firm.
So let's discuss why I make the statements above. Both Acme and the Travel Center are forecasting break even points which DO NOT actually cover all of their forecasted costs. For example, Acme is forecasting a break even point of $12,500 per month, but their stated personnel costs alone are more than that per month --- approximately $16,000 per month would cover these payroll costs.
Remember that break even is the point at which Sales equal Total Costs (includes both fixed and variable costs). Fixed costs occur whether the firm has sold no things, or many things --- and they include rent, utilities, salaries, supplies, insurance, and the like. Variable costs will vary in relation to Sales, and will include cost of goods sold, sales commissions, marketing costs, transportation, and the like. Neither of the first two firms really delineate these costs so that they are understandable, and so that they can be interpreted in the context of their overall sales strategy. And the only way to insure sustainability is to be able to control fixed costs (variable costs will vary with the direction and level of sales).
In addition, the start up costs of both of these firms are extremely high, with Acme in the negative from the first day of operation. The Travel Center is forecasting an immediate need to borrow approximately 90% of their needs for start up and for capital needs, which is a HUGE red flag from an investment perspective. They essentially have little "skin in the game", while relying on long term borrowing for the bulk of their funding --- not a good way to start, and may prove very difficult to gain the funding (if they can at all?). All of these two firms projections center around future revenue from operations, but there are no guarantees in place --- no existing contracts or potential immediate contracts for Acme, and all future business for the Travel Center rests upon the reliability of the data associated with the "travel corridor" in Dallas. All of this suggests that these firms will need immediate sources of cash flow just to maintain operations for the short term in the event the projections do not ...
What to look for when creating a business plan designed to gain acceptance and funding as an investment opportunity.