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Why the Business Plan is Not Enough!

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Entrepreneurs may be tempted to start writing the business plan as a first item of business once the technological and competitive basis of the company is determined and provisional patent applications accomplished. The business plan, of course, is the key document needed to open up discussions with potential investors. Its completion would seem to presage the securitization of investment needed to start the business.

My experience with numerous entrepreneurs, inventors, and innovators is that a keen appreciation of the importance of having the rationale for the sales projections stated in the business plan is often lacking. To be fair, it is hard work to come up with a robust marketing and sales plan that ultimately underlies the value of the business.

However, the business plan (BP) needs to be supported with defensible projections of revenue, sales, and net profit. Projections of revenue and sales are derived from a detailed analysis of the target markets and the strategies and tactics needed to secure revenue and sales. Net profit is determined from an analysis of all relevant financial factors and reported in the financial plan (FP).

The Marketing & Sales Plan.

The assumptions and conclusions reached in the marketing-and-sales plan (MSP) need to be supported with both data and sensible extractions and analysis. The volume of supporting material researched in order to develop the MSP is typically too large to place within a business plan (BP), and its presence within the BP would be distracting; hence, a separate plan for marketing and sales is necessary.

The MSP represents a continuous thought process, from relevant facts and data (related to markets, products, and competitors) to the identification and selection of appropriate strategies and tactics for the company to deploy. Major conclusions are summarized in several pages using charts and figures in both the MSP and BP. The MSP should be referenced in the BP and provided to investors when needed, and, like the BP, the MSP is considered a confidential document and only provided serious potential investors.

The effort to develop an appropriate MSP is often underestimated and given inadequate consideration by entrepreneurs. Unless you are an entrepreneur with a marketing and/or sales background, the MSP can be challenging to adequately prepare, but it can be done. But it would be a mistake to start the BP before the MSP is well along. Why? Because it is difficult, if not impossible, to write a fully adequate BP unless the key underpinnings of the MSP exist.

The MSP is the most important document to start first because of the longer calendar time it takes to conduct research and analysis properly. The sales projections resulting from the MSP support the initial valuation of the business and are carefully reviewed by investors. The critical elements of strategy, tactics, and projections must have been thought out and rationalized in order for any estimate of sales to be sound. Furthermore, critical early-stage revenue rests ultimately on the efficacy of the initial MSP and its execution. Founders also support their own credibility by demonstrating to investors that they understand markets, products, and competition sufficiently to develop sustainable strategies and tactics.

The Financial Plan

 

If you are fortunate enough to have a financially minded person on your team, then the hurdle of developing sound financial data will be more easily surmounted. If, like many early entrepreneurial teams, you are missing your future CFO, then you may be faced with developing financial information and projections without that person’s expert guidance.

Details about how to put a financial plan together that is respected by investors is described in Chapter 6 of my book. An excellent method for development of an integrated set of financial statements that enable an entrepreneur to also perform financial modeling is provided by securing my CD from Amazon (http://www.amazon.com/gp/product/B00K2KPSI2).

In any event, a sound set of financial statements will serve your business well and make investors much more amenable to making an investment.

The Business Plan

The business plan (BP) should be viewed as an investment document that presents an investment opportunity that is supported by sales projections, financial statements, and concise but fully explained reasons as to why the business will be successful and provide a return of capital to the investor. In this context, the BP is typically the document most discussed between investors and entrepreneurs; however, it is merely one of a triad of important documents, as illustrated in the figure used in this posting.

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