There’s an old adage that no plan survives first contact with the enemy, which is why a business plan shouldn’t be seen as restrictive, fixed and inflexible. It should be an opportunity to get real clarity on what you want from your business, who you want to serve in terms of your customer base, along with some realistic numbers.
The most important part of a business plan
I love a good business plan! At the start of Cypher’s journey we needed some finance so I wrote my first business plan with two aims; one to convince my wife that it would work and secondly to convince the bank so they would give us the funds we needed. I included all the traditional bits; the unique opportunity we’d got, what our strengths were going to be, some SWOT analysis, our typical customer, who our competition was and how we would be different, then I did a three-year financial forecast. It became an 81-page PDF.
I would argue that the final document, all 81 pages of it, is not particularly useful anymore, but the time we spent thinking about each section was really powerful.
The most important element of business planning is the time and the headspace business owners give themselves to actually think about their business. Business owners need to understand who their competition are, understand their ideal client, understand the importance of cash flow for their business and how everything fits together.
When I showed a business coach the financial forecast, he immediately recognised that it was for my wife’s benefit. Cypher was operating just above breakeven. At the time I was acting out my business horror story and I needed help to see a brighter future. But that is another story.
The 1 page business plan
One of the best things we did with our 81 page business plan was to distil it into a one-pager; a pitch-deck of the key headlines. It has a summary of each section, plus some of the key numbers in the forecast. Now, whenever we log in to our client management system, the first thing everyone sees is our core values; what we stand for and why we’re trying to do things differently. All the stuff that came out of that business planning process is front and centre in our daily routine.
The importance of Cash Flow in Business planning.
The amount of business plans I see that have no mention of cash flow is phenomenal. A lot of new business owners are able to create a solid profit and loss account; they project the amount of sales they will make and estimate how much it will cost them to make those sales. Based on that, they break even in month six and are profitable by month eight. Well done them.
What they miss is the disconnect between profit and loss and cash flow. The amount of times I’ve had to sit with someone and say, this P and L is great, you’re making profit in month eight, but to get to that point, you’ve first had to buy £100k of assets, you’ve had to pay for everything up front because you’re brand new but your customers have 90-day payment terms, so actually if you don’t make profit by month four, you’re going to run out of cash before month seven, so being profitable in month eight is a waste of time.
Forecasting is tough, but if you forecast profit and loss, you’re only doing half the job and you’re forgetting the most important part. A business can trundle along for a few months, breaking even if cash flow is ok, but no business can survive with no cash.
For example, its vital to understand the impact of payment terms; are customers paying 50% upfront and the balance on completion, or 100% on point of delivery or is payment due 30, 60 or 90 days after delivery. With this information, we can build the rules around when the business is receiving funds for work done. By understanding the impact of each transaction a simple decision to shorten payment terms from 30 to 14 days for example, might give you another three or four months of trading at a very low income rate.
We then look at fixed costs, for example; is the rent paid quarterly in advance, or is it paid monthly? What payment terms does a business have with its suppliers? We know things like if you’ve got staff that they get paid at the end of the month but that national insurance and PAYE is paid on the 19th of the next month to spread the risk.
Beware the cash black hole
Our aim, using all of this knowledge is to find the month, in the first 12 months where there is a potential cash pinch. Based on funds coming in and money going out we can see if there is a cash black hole somewhere down the line.
Business planning for established businesses
If you have a more established business then the business planning process either allows you to reconnect with your plans at the start, or if you are doing it for the first time, it re-engages you with your purpose. Businesses and business owners shift overtime and a business plan reconnects you with what you are actually trying to do. Once you have done that and you have your longer term vision, the next step, is to plot what you are doing in the next 90 days to achieve part of that plan.
The Power of Review your Business Plan
Whether you make a business plan or not, the important thing is to understand that businesses change, owners change, markets, customers, competition all change and reviewing your situation at regular intervals provides great insights into a business and an opportunity to re-evaluate, or learn, unlearn and re-learn what a new framework for the business might be.
The best time to make a business plan
The good news is that typically new businesses outperform their initial forecast, but our job is to look at cash run rate based on a worst case scenario. The best time to do this is before a business model becomes a business. No cash has changed hand and the impact of decisions won’t be as critical. But however old a business is a business plan with SWOT, competitor analysis, customer research, P&L and cashflow forecasting brings huge amounts of clarity.
For me the best outcome for a good business plan is that it gives the business owners the comfort or belief that there is a business there; that they know it isn’t going to run out of cash in six months, they have thought about who their customers are and know there’s a market for their product or service, that their pricing is correct and their idea has legs. Then distil it all down to one page and you have a plan.