the potential of stock.
■ Investment from principals. Amount of money that you or other key employees are contributing to the company; this can be in the form of cash or property.
■ Capital expenditures. Purchase of necessary equipment or property.
■ Working capital. Funds to be used for the ongoing operating expenses of the business.
■ Debt retirement. Funds used to pay off existing loans or obligations.
See page 87
Assumption sheet
Financial forms are merely meaningless numbers unless you base them on decisions and facts. Your potential financing sources want to see how you arrived at your numbers and must be convinced that your assumptions are reasonably accurate. If, for instance, you have indicated your sales at a certain amount, investors want to see what size you assume the market is and what percentage of the market you assume you can secure. If those figures seem realistic, you increase your credibility; if those assumptions seem based on inaccurate numbers or overly optimistic projections, investors will look skeptically at the rest of your plan.
It’s good discipline for you, as well, to learn to develop an assumption sheet whenever you do financial projections. Otherwise, you can be too easily tempted to write down figures that look good on paper but have little to do with reality.
If you have worked through the business planning process, putting together an assumption sheet should be a relatively easy task. You have already asked yourself most of the questions called for on this form and have the answers available to you.
An assumption sheet should list purely straightforward information; it doesn’t require substantial detail or explanation. You don’t even need to use sentences; simply provide the data in each category. Include a completed assumption sheet at the conclusion of your financial forms in your business plan and familiarize yourself with these assumptions in order to defend them well when you meet with investors.
See page 90
Guidelines for preparing your financial forms
In preparing your financial forms for your business plan, you’ll almost certainly have questions as to how to attribute certain expenses. You might wonder whether you should ascribe sales commissions to cost of goods sold or to operating expenses. Accounting practices differ, so follow these guidelines:
■ Be conservative. Avoid the tendency to paint the rosiest picture possible; doing so reduces your credibility.
■ Be honest. Experienced financing sources will sense dishonest or manipulated figures; expect to be asked to justify your numbers.
■ Don’t be “creative.” Use standard formats and financial terms; otherwise you look inexperienced to financing sources.
■ Get your accountant’s advice.
■ Follow the practices used in your industry.
■ Choose the appropriate accounting method.
■ Be consistent. Make a decision and stick with it for all your accounts, otherwise you can’t compare one year’s figures to another.
Historical performance of your company
If you run an existing business (not a newly established one), you also need to gather historical data about your own company. In particular, you should examine your past internal financial records. Here is some of the financial information you may need to locate:
ENTREPRENEUR’S WORKSHEET
Assumption Sheet
Use this worksheet to show how you arrived at the numbers in your financial statements.
■ Past sales records, broken down by product line, time period, store, region, or salesperson, depending on size of your business
■ Past trends in costs of sales
■ Overhead expense patterns
■ Profit margins on product lines
■ Variations from budget projections
Tailoring the plan for your recipients
Once you’ve researched your potential funders, you should organize your cover letter and executive summary to highlight those aspects of your business most likely to fit the needs and interests of each funder.
Is the venture capital firm particularly interested in patentable new technology? Will the bank fund only those companies established for more than three years? If so, discuss these areas in the first paragraph of your cover letter, or place greater emphasis on them in your summary.
If you cannot easily gather this information, change your reporting system so that in the future you’ll be able to have the data you need for adequate planning.
If you’ve created business plans or set goals or objectives in the past, you should also track how well your business has performed in terms of meeting the objectives set in those previous plans. Have you consistently underperformed, or perhaps exceeded your goals? Have you reached key milestones within the time period originally projected?
Preparing Your Plan
The most important aspects of your plan must jump out at even the most casual reader. Even if you intend to create a plan for internal company use only, a compelling, vivid presentation will make it more effective. Highlighting specific facts, goals, and conclusions makes your plan easier to review, more effective as a working document, and more likely to make a positive impact.
Keep in mind that funding sources primarily look for answers to the following questions concerned with the heart of the plan:
■ Is the business idea solid?
■ Is there a sufficient market for the product or service?
■ Are the financial projections healthy, realistic, and in line with the investor’s or lender’s funding patterns?
■ Is the key management described in the plan experienced and capable?
■ Does the plan clearly describe how the investors or lenders will get their money back?
Within the first five minutes of reading your business plan, readers must perceive that the answers to all these questions are favorable.
Length of the plan
How long should the perfect business plan be? No magic number exists, but on the next page are some guidelines.
IDEAL LENGTH
15–35 pages (not including financials or appendices)
Break any