THE BEST-LAID PLANS...

Any business plan will probably be out of date by the time the final draft is typed. However well-researched it may be, it will never actually come to fruition. All the assumptions it makes will inevitably be flawed. The only things that are guaranteed to happen are those that could never be imagined (the First Law of Business Forecasting: always expect the unexpected).

Yet it is absolutely essential that you have an up-to-date business plan. There are two reasons for this:

  1. It impresses would-be investors and bankers. The wildest predictions have a reassuring air of certainty about them when translated into business-school jargon, surrounded by columns of figures, laser printed and placed inside a shiny cover.
  2. You must be consistent. If separate bluffs are not to contradict, it helps to have one’s imaginary empire put down on paper. It also helps to refer to your business plan as often as possible in conversation. If you keep telling people that you’re working to a plan, you might just give the impression that you know what you’re doing.

A business plan should have three basic parts, each answering a separate question:

  1. the mission statement (‘Why am I doing this?’);
  2. the strategy (‘How am I doing this?’); and
  3. the financial data (‘How much is this going to cost and generate?’).

Only the last one really matters but it is important to pad it out with a full plan containing as much surplus information as possible. It is possible, and desirable, to have more than the three basic sections (e.g., human resources policies, Corporate Social Responsibility policy, IT disaster recovery plan, etc.). A business plan must give the impression that every aspect has been thought out in excruciating detail.

THE MISSION STATEMENT

The words ‘goals’ or ‘purpose’ are often used instead, and are probably more accurate, but the phrase ‘mission statement’ conveys a certain sense of destiny. It should make clear:

The business you’re in. A short, pithy sentence will do. It should be as broad as possible: a road haulage company should describe itself as being in the ‘transport business’, a printing company is in ‘business services’, and so on. It shows one takes it for granted that one is going to expand.

Why you’re in it. This may seem obvious – so obvious that people never bother to think about it. In fact, most business people do not go into business with the sole aim of making large amounts of money. Research shows that:

a) most would make more, certainly more per hour of work, if they were employed by someone else; and

b) surprisingly, very few who go into business state that their primary motive is to get rich.

People actually go into business for a wide variety of reasons, including: the desire for independence and the ability to make their own decisions; the desire to do particular work or produce a particular product; the desire for a ‘quiet’ life outside the corporate rat race; or any combination of motives – among them, of course, the desire for financial reward.

It is vital that you sort out in your own mind exactly what you want out of business because that should determine exactly how you operate. For example, an entrepreneur who wishes to get rich will adopt a high-risk strategy more heavily dependent on bluff, but someone who simply wants to earn a living doing work that he or she enjoys will be wise to adopt a low-risk strategy.

THE STRATEGY

A good strategy should be as simple as possible. Unfortunately, such a strategy would hardly look impressive on paper. It must therefore be expanded with a number of superfluous sub-sections, such as:

Objectives

Not to be confused with ‘goals’ or ‘purpose’. For example, a firm whose purpose is ‘to build a global merchandising business’ might have as objectives ‘to take over the small shop down the road’ and ‘to increase sales to £120,000 per annum’.

You should be fairly consistent about maintaining your objectives. The thing to avoid at all costs is the reputation of being a gadfly, flitting from one project to the next.

Market profile

This is supposedly based on your ‘market research’. However, formal market research is a) expensive and b) useless. The small business is more likely to rely on instinct and personal contacts – but, of course, you cannot actually say that. Instead, this is your chance to state at length what a marvellous business opportunity you have and how the world is crying out for whatever it is you are selling.

Economic profile

This is an optional but wonderful piece of padding in support of the market profile. Just go online and find some recent economic statistics – almost any will do. You can be reasonably confident that no one will check them, but do try to look for something beyond Wikipedia and verify any source that looks a little too good to be true.

Trading profile

This is where you prove your expertise by showing that you know how your chosen business is actually done: standard retail, wholesale, transport, credit arrangements, etc.

Competitor profile

More easy padding. All the relevant information can be found online these days so you no longer need to troll through countless records at Companies House or sift through trade publications to draw your competitive landscape. What you must engage in is a bout of ‘mystery shopping’. It involves getting your competitors’ sales and marketing material by posing as a potential customer. Everyone does it. Just expect newcomers to do the same to you in a few years when your business is the new yardstick for excellence. After all, imitation is the best form of flattery.

Customer profile

Possibly separated into corporate customers and consumers. The former are fairly easy to describe (in terms of size and business), while the latter can be broken down by age, sex and socio-economic grouping (using the magic letters A/B, C1, C2 and D/E. Don’t worry if you are not certain what the divisions represent; hardly anyone else does).

Ad men – the elite of the elite among bluffers – have taken to identifying groups within groups and giving them trendy names. In the USA, for example, the key ‘married ABC1 female, age 30-40, with children’ demographic has become the ‘Soccer Mom’, and the ‘independent, 65-75’ demographic the ‘Third Ager’. The self-confident bluffer may well be tempted to make up his or her own. ‘We see our target market as ‘Ferrets’, with valuable secondary markets among ‘Gnus’ and ‘Armadillos’...’

Analysis

Real show-off stuff. There are hundreds of models for use in strategic analysis. Few of them are of any practical use outside business schools – most are too theoretical. You would do well just to hint that analysis has been carried out, without going into any detail. If challenged, invent your own model (ideally something with a university name or a lot of letters in it: the Oxford model or the CGT model).

In reality, your target market is anyone who pays. But there is a difference between reality and what can be put in a business plan.

If you really must analyse something, use the ‘SWOT analysis’ (by simply listing the internal Strengths and Weaknesses of your business, and the external Opportunities and Threats it faces in the market); or the ‘Benjamin Franklin analysis’ (even simpler – list the advantages and the disadvantages of any proposed course of action) – also known, in a slightly different guise, as a ‘cost benefit analysis’ or CBA.

Target market

In reality, anyone who pays. But, once again, there is a difference between reality and what can be put in a business plan. You should be fairly specific, choosing one of the categories discussed in detail in the customer profile, but keeping your options open by mentioning ‘valuable secondary markets’.

Marketing plan

Businesses of all sizes can be divided into two categories: those dependent on large numbers of sales of small value and those dependent on small numbers of sales of larger value. In the former case, there is an established way of contacting customers (such as passing trade for a small shop), while the latter will probably rely on personal contacts.

Since you can hardly say that your marketing plan depends on your ‘brother-in-law who is head of purchasing for a major company’, you should discuss your ‘marketing mix’, a useful expression meaning the combination of traditional marketing methods such as advertising, social media, direct sales, mailing and promotions – including ‘POS’ (point of sale), etc. Even if such methods are entirely inappropriate, they are worth mentioning to show that you are aware of them.

Competitive advantage

Also known as ‘USP’ (unique selling proposition). Conventional business-school wisdom has it that there are two ways of distinguishing yourself from the competition: ‘price differentiation’ (being cheaper, or sometimes more expensive) or ‘product differentiation’ (being better, or at least different). The bluffer’s real competitive advantage is of course the ability to bluff, but since that is one of the many truths one cannot actually put in writing, the best USP is probably a nebulous product differentiation like ‘superior quality of service’.

Sales forecast

Very important but best avoided because someone might hold you to it. Be vague, or at least qualify it as much as possible (‘assuming an increased rate of economic growth’, etc.).

Operations plan

A slightly more impressive way of saying ‘production plan’. Most people produce something first and worry about selling it afterwards. The far-sighted will secure orders or at least firm interest in their product or service and then ‘reverse engineer’ a smart way of delivering it, on budget and on time.

Policies

The final touch. Policy, in general, is the framework within which a business operates. The most important policies are the strategic objectives themselves, but even the smallest firm might have a range of additional policies, from major ethical considerations to standard administrative procedures.

A comprehensive list of policies in a business plan would look a little too obvious, but a short note showing that you are aware of the need for them and explaining your procedure for their formulation (e.g., ‘Policy will be set by the board on the recommendation of the chief executive.’) might be acceptable.

SUMMARY OF THE STRATEGY

A summary of the strategy is an excuse to bring in your real strategy under the guise of a short synopsis.

In general, a good strategy should include:

  1. As many figures as possible. Don’t worry about their accuracy or relevance; no one will actually read them but they will be reassured to see them there.
  2. As many long, American-sounding words and phrases as possible. As a rule, prefix everything with ‘long-term’, ‘short-term’ or ‘medium-term’, and end everything with ‘isation’. And never use two syllables where five or six would be more confusing, or one word where three would take more space. Never be afraid of making up your own business expressions: there are so many that no reader will know them all and will be unwilling to state positively that yours are not in general use somewhere.
  3. As many repetitions (or at least rephrasings) of your basic points as you can fit in without becoming obvious.

It is a nice touch to number pages, headings, subheadings, sections, sub-sections, paragraphs and sub-paragraphs using a consistent system. You can then cross-reference (‘as discussed in 3.9.14.8’ or, in the more archaic style, ‘see sub-paragraph 1(4) (c) (ii), in chapter 2, part II, page 37’). This looks good and makes it less likely that it will be read in any detail; only the most dedicated masochist will try checking cross-references. Keep paragraphs short, but make sure there are plenty of them.

Remember that it is unlikely that anyone will read your strategy with any great attention, especially if you make it as long as you can. Anyone who has any real interest in the business plan will home in on the financial data without hesitation. However, it is essential that the strategy that precedes it – and on which the financial data is supposed to be based – looks right to the casual eye.

THE FINANCIAL DATA

This forms the most important part of any business plan because, unlike the rest of it, it will be read. More than that, it will probably be read in great detail by clever people seeking to prove their cleverness by catching you out on some tiny point of detail which could undermine the credibility of the whole plan.

As far as a small business or start-up is concerned, there are four types of financial data:

  1. budgets – what you hope will happen;
  2. forecasts – what you think will happen;
  3. out-turn – what actually does happen; and
  4. accounts – what your accountant says happened.

The business plan must include a budget. When it becomes clear that this is completely unrealistic, it can be updated by forecasts which in turn can be replaced by ‘revised forecasts’ when they, too, prove to be inaccurate.

It is absolutely vital that you are always able to point to an up-to-date plan which shows that the finances are on target (even if that plan was only produced the night before to formalise an existing situation). It gives bankers and investors the reassuring illusion that you are in control.

It might be a good idea to blur the distinction between budget and forecast by using that all-encompassing word ‘estimates’ to replace both.

The proper format for a budget is a matter of endless debate, but you would do well to forget any idea of trying to draw up model balance sheets and profit-and-loss accounts based on what you think your accountant will draw up at the end of the first year. There are naturally two reasons for this:

  1. It is meaningless. Everyone knows that such formal accounts bear little relationship to reality; one would change accountants immediately if they did.
  2. It is fiendishly difficult to do. You really need to be an accountant to do it properly, and even then any reader with the slightest training in financial management can, and will, pick holes in it. Even if it is done by an accountant you can never be sure that the reader will not be used to a different system, and if you yourself were to be examined in detail it could be very awkward indeed.

As with most things, it is best to keep it simple. A cash flow analysis, while frowned on by purists, is:

a) easier to do;

b) more impressive because it involves putting far more figures on the page; and

c) actually rather useful because it shows you how many real pounds and pennies go in and out, rather than how many notional ones.

A cash flow analysis is drafted as follows:

  1. Write the 12 months of the year across the top of your page (abbreviate to the first three letters if necessary), starting with the month that begins your financial year, leaving broad spaces on either side for the financial year in the top left-hand corner and the word ‘Total’ in the top right-hand corner.
  2. Down the left-hand side, list all categories of income, then all the categories of expenditure, leaving a line for ‘Total’ and a space below both, and adding another line at the very bottom – the proverbial ‘bottom line’ for ‘Surplus/(Deficit)’, i.e., total income minus total expenditure.
  3. Fill in credible sums for each category for each month, then calculate and record in the appropriate columns:

a) the annual total for each category;

b) the total income and expenditure for each month and for the entire year; and

c) the monthly and annual surplus (or deficit).

It is a good idea to have as few categories of income as possible: in business you find that sales you expect, and rely on, never emerge, but money sometimes comes out of the blue from a direction you never envisaged. By not being too specific about sources of income, you will retain a degree of flexibility and not damage your reputation as someone who can predict what will happen to the business. Of course, you always have the option to buy a crystal ball or visit a psychic.

On the other hand, expenditure should be divided into as many categories as you can imagine. The more you have, the greater the number of figures you can stick on a page and the more you can show your mastery of detail. Some will be fairly obvious: cost of sales (e.g., raw materials), rent, rates, gas, electricity, telephone, insurance, etc. However imaginative you may be, inevitably there will be items of expenditure that you miss out. Those who remember interest payments often forget about bank charges and arrangement fees, or put down wages and associated costs (e.g., national insurance) for their employees but not for themselves.

Then there are the so-called ‘variable costs’ which are supposed to vary according to your level of business but rarely do. These include advertising, publicity and other promotional material; travel and entertainment; and most other marketing costs.

There are also all the minor expenses one never really thinks of in advance but which have to be paid if the business is to operate. For example:

Of course, the more categories one has, the greater the chances that at least one will go drastically and noticeably over budget.

Two precautions can be taken against this:

  1. Have several categories that are fairly broad and vague so that if one is overspent it will be possible to transfer to another category certain items which could reasonably be found in either: for example, a coffee machine could be classed as office furniture, office fittings, office equipment, office refreshments or the ubiquitous office supplies.
  2. Put a very large sum under ‘Contingencies’. You will probably need it. Even if you don’t, anyone who knows business will respect your caution and foresight in being prepared.

Despite these precautions, it is still quite probable that your expenditure estimates will prove inaccurate. Expenditure that is substantially below budget can be put down to ‘savings due to good management practice’. But so can expenditure that is above that predicted in the budget – such as:

And, best of all:

Try to make your estimates as realistic as possible. Make an effort to think of the thousands of things that might cost money. You won’t be able to think of them all, but the more you can predict in advance, the smaller the chance of an unexpected bill cropping up just when you don’t want it.

Obtain quotes in advance where possible, as well as information about fixed costs (e.g., standing charges, statutory fees) and put them in your estimates – correct to the nearest pound, not rounded up. It looks very impressive to have a few precise pounds on the page and shows that you have done your research.

The amateur bluffer might try to fool bankers and investors with over-optimistic profits, but such figures always reveal themselves as the hype that they are. It is better to be cautious – to predict modest but acceptable profits while leaving room for a substantial margin of error.

Draw up a first draft on the basis of the most realistic figures you can get and then:

  1. Halve your sales forecasts.
  2. Double your costs.
  3. Double the amount of time your customers take to pay.

This way, any informed reader will realise that you know about business.

PLAYING WITH MODELS

Having drawn up your basic estimates, you might want to play around with them. Using spreadsheets, you can create as many different variations as you want. For example:

More than one ‘model’ on the basis of different growth forecasts. Using the same format, you can show three different sets of estimates: one optimistic, one pessimistic and one probable – the last being the real one.

Detailed estimates – not only for your first year in business but the next three, or even five, years (although the word ‘forecast’ should be used to describe estimates beyond the first year to distinguish them from the supposedly firmer figures for that year).

You can either add a fixed percentage to all figures in subsequent years to cover inflation (5% is a good figure as it is best to be pessimistic with inflation and it is an easy figure to work with), or state that all figures are at current-year price. Once again, different models using different growth assumptions can be produced for each year.

The object, of course, is to create a visually impressive wodge of paper covered in figures which should daunt the most compulsive critic. Even with a single year’s estimates and no additional models, it may not be possible to fit everything into a single page.

Include a one-page summary on the first page of your estimates and then break it down by notes, i.e., after each category put a number in brackets, the number being that of a subsequent page where that category is broken down into sub-categories using the same format. The sub-categories can, in turn, be broken down by notes for a really thick document. This is an old accountants’ trick to increase the thickness of your accounts and the size of their fees.

Finally, the financial data – indeed, the whole business plan – should always be kept up to date through constant reviews in which discredited estimates are replaced.

If, by some miracle, your estimates prove accurate, insert a ‘Variance’ column which shows the difference, or rather the lack of difference, between estimate and outturn. Whatever you may be doing at any time, it helps to be able to point to a piece of paper which says you are supposed to be doing it.