The high incidence of business failure within the first year, points amongst other things to a serious lack of financial knowledge amongst most budding entrepreneurs. Martin Feinstein, CEO of Enablis South Africa, believes that cash flow forecasts and financial planning are two key elements in business survival.
In fact, most of your time and effort should be spent on the financial model for the business.
Entrepreneurs should understand their finances inside out – those that do, may well hold the key to success and prosperity. To give you a simple example: take a coffee shop business – it would take a basic calculation to know that they would need to sell for instance 8 000 cups of coffee per month, just too breakeven. In many instances this mathematical exercise is not done and the business fails.
“You can outsource your financials if you are not a numbers guru, but that doesn’t mean you can abdicate from the responsibility to understand what they mean and make sure they are accurate and reflect a real possible business path.”
Use these ten points when preparing the financial elements in your business plan:
- Don’t over- or under-estimate your investment need.
- Provide realistic budgets for a three-year period from launch. Your first 12-month budget will be the most detailed.
- Plan your cash. You’ve got to make a good, educated guess, then manage your planned cash flow versus actual cash flow very carefully. Growth costs money, and profits don’t necessarily mean cash, so write this out in detail. The maths isn’t hard, but getting your financials organised takes some time and effort.
- Demonstrate an ability to service your loan with interest without placing your cash flow under strain.
- Allocate resources sensibly. Cut costs wherever possible. Opt to buy second hand and lease inexpensive premises instead of sinking your financier’s cash into plush offices. Similarly, draw your minimum salary requirement in the first year to two until the business breaks even and begins to show a profit.
- Be specific about dates and deadlines. Determine where you want to go and break that down into specific, concrete steps with dates, deadlines and budgets.
- Show commitment by putting ‘flesh in the game’. The term refers to the entrepreneur’s own contribution. Potential investors want the comfort of knowing that if the business fails you have something to lose. Your own contribution may not be in the form of hard cash. You should be able to put a value to your intellectual property (the concept for the business), your time investment (sweat equity), expenses incurred in developing the business plan, suretyship and other guarantees.
- Develop your financials using a professional software package such as Excel. Make these files available for scrutiny should the financier request them.
- Only include the financial highlights in the body of the business plan itself. Longer, more detailed budgets can be included in the appendix.
- Have an expert double-check your calculations before you submit your plan.
How optimistic should financial projections be in a business plan?
Be clear about the funding the business requires and what it will be used for – don’t inflate the monetary assistance required, but don’t under-quote either.
Include any non-financial support that your business will require (financial education, accessing new markets, etc) especially if you are planning to apply to development financing institutions, as most of them provide additional services that you may not have to pay for and that can reduce your business expenses.
Martin Feinstein, CEO of Enablis South Africa, lists his top mistakes that all entrepreneurs should avoid when compiling their business plan:
- Overestimating sales in the first year
- Underestimating costs and overheads in the first year
- Confusing the opportunity to sell with the reality of making sales
- Neglecting to accurately price inputs and raw materials
- Planning to buy assets (vehicles, equipment) instead of leasing them
- Planning on being profitable in year one when in reality it will take longer
- Including too much unnecessary detail that will distract a funder from your core plan
- Not being specific about how much your margin is and where it is
- Going on about job creation and social upliftment when your first priority is to survive
Should a consultant be used to assist with a business plan?
Creating an effective business plan is the first step in a long and arduous journey to building a sustainable business. The effort you put into your research, business model development and financial planning will be the first of many steps that will determine whether your business will succeed or fail.
Why then would an entrepreneur outsource this critical element?
As we have said over and over it is best to write your business plan yourself. No-one knows your business better than you. There are various business plan templates available on the Internet that you can use for guidance. However, the areas where you are lost – make sure you get help. Use consultants and experts where necessary but don’t outsource the whole process.
Use a consultant to guide you if you need to, but insist on the consultant transferring skills to you, as you need to understand the key drivers in your business and potential funders will pick up that you do not have a good understanding of your business dynamics if the business plan is done by a consultant without your input and understanding.