ESSENTIALS OF BUSINESS PLANS

Transcription

1 ESSENTIALS OF BUSINESS PLANS Introduction The Business Plan is perhaps the most potent tool available to an agency that is approaching a source of funding or trying to raise other support for an enterprise, be it an in-house program, or a social-purpose venture that will contribute to the agency s purpose. A business plan, though, provides a number of benefits to an agency, other than being a tool for fundraising: It will provide a positive introduction of the enterprise and the agency to potential supporters It provides an opportunity for the directors to plan strategically for the future direction of the agency vis-à-vis the enterprise It is a valuable framework for management decisions It can provide a really valuable evaluation tool for measuring the progress of an enterprise undertaken by an agency. When evaluating the potential for launching a social enterprise, the business plan will in some ways be the ultimate step in the process. It is the step that follows a decision to move forward with the development. Typical steps in the development process will be: Perform a Needs Analysis to see where a gap exists in service provision Do some analysis of the gap, determine the potential causes for the gap Design an enterprise or program solution that will address the gap Carry out a feasibility analysis for the solution that includes not just the economic feasibility, but the capacity of the agency to carry out the development and operation of the enterprise, and the social benefits it will provide Provided there is a feasible way forward, make the decision to launch the development process Prepare the business plan. Needs Analysis Gap Analysis Feasibility Analysis Business Plan

2 The business plan itself has a number of objectives 1. It must introduce and cast a positive impression of the enterprise and the people involved in planning 2. It must introduce in detail the service that is being delivered 3. It must make a positive case for the need for the service 4. It must make a positive case for the success of the enterprise 5. It must lay out the financial framework for the development, launch and operation for 3-5 years 6. It must define the case for support Following are the main components of a business plan, and the part each plays in building a strong case for support of the social enterprise development. For the purposes of this document, we will assume a business plan for an enterprise that will provide rides for seniors, being developed by a charitable non-profit agency. The Business Plan Provide an Executive Summary 1 The executive summary is a condensed but critical summary of your entire business plan. In some cases the banker, investor or other reader will make decisions after reading only the executive summary. An executive summary should: Briefly describe the business opportunity, the owner(s) and/or key management personnel, the service, your competitive advantages, and a marketing strategy. Outline your sources of funding, including your equity portion and your required portion; it will explain how the financing will be used. Explain how you will be able to accomplish your goals. It creates a first impression of you and your enterprise: Use clear and concise language - although this applies to your entire business plan, it is especially important in your executive summary. Use words that command attention, and that get your reader excited about the opportunity you are presenting. Limit the length of your executive summary to 2 to 3 pages. Stick to the facts. Investors are searching for evidence that: Justifies the soundness of your opportunity, and Gets them excited about what you intend to achieve. Common mistakes with an Executive Summary: 1 Business Builders Tool Kit Module 7; Produced by: Margaret Mahan, Vancouver BC, Greg Smith, Skeena Native Development Society, Terrace BC; Patti Dempster, Community Connections, Hope BC. January 2005

3 Lacking a specific focus Being too long and wordy, and failing to get to the point Trying to be all inclusive (it should be a powerful summary) Failing to demonstrate a special or unique opportunity Failing to outline the terms of the investment sought Failing to generate enthusiasm in the reader Failing to say why you will succeed Introduce the Agency: The name of the agency, where is it located, how long has it been in operation, is it charitable? Describe the agency s purpose, services and programs. Include its vision, its mission statement and objectives. Talk about any awards or recognition the agency has received. Talk about the people involved the executive director, some key staff, and key board members. For those who will be closely involved with the development, a resume should be provided. For others, a brief profile, one or two paragraphs, will usually suffice. The purpose is to provide the reader with a good sense of what the agency is, and is best when cast in a positive light. In general, the information needed for all of this will be available through interviews with key staff people, the agency s web site, and historical documents. Introduce the Service: Give an overview of the service. Describe the work that was done leading to the conclusions both that this service is needed, and that there is a market for it. Now go into some detail about the service; who it is designed to serve, how it will be delivered, the scope the geographical area it will cover and so on. Introduce the Business Model: How will the enterprise be structured: will it start off as a program, and if so, at what point will that change, and how will it be restructured? Have you come up with an operating name? The purpose of this is to provide a thorough picture of the enterprise that you will be launching. There s no need for too much detail here, but it should be a complete enough overview that the reader has a good picture when he or she begins to read about the operations and financial considerations later in the business plan. At this point the reader should feel like they have enough of a sense of the enterprise to go into some detail about the case itself. The presentation consists of 4 components, and these too are intended to build a picture of a well-planned enterprise with a clear set of objectives. The components are The Market The Revenue generated The Operations Financial profile Each of these is also divided into sections that will include a profile of the customer, analysis of the competition, pricing strategies, anticipated revenue, any licenses or required permits, any restrictions on the market or operations, and other aspects of the plans for the enterprise.

4 The Product Production Costs The Market Projected Sales revenue Financial Profile: Revenue, Gross Margin, Operating Costs, Surplus Generated The Operations Operating Costs This is typically laid out in an Income Statement format, similar in form and content to an income statement for any type of business or non-profit agency. Generally this takes the form of Gross Revenue Production Costs = Gross Margin Gross Margin Operating Costs = Net Surplus The Market This part of the business plan will fall into four sections: Service User profile, Market Analysis, Competitive Analysis, and Marketing Plan. Customer Profile: This will begin with a profile of the typical Service User, or typical User groups. For seniors, for example, needs differ somewhat according to age. This means that the service that is appropriate for seniors years old may differ from that for elder seniors over 80 years of age. In this section, you will profile the demographic, the numbers of seniors in each age group that live within the geographic area you described above in the introduction to the service. What growth rate is anticipated in the numbers for your area? What is their financial profile? Much of this information will be available from the Needs Analysis and the Feasibility Analysis that you have created in preparation for the business plan. Market Analysis: From the above numbers and the needs analysis, you can demonstrate a need. From the gap analysis you have done, you can demonstrate how much of the need will translate into market. You will know whether the market in your area is growing or shrinking, and at what rate. You will know how many seniors will be able to afford the service you are providing.

5 Competitive Analysis: A certain amount of analysis of the competition was done when the Needs Analysis was being prepared, for purposes of the business plan, it will be a good idea to probe a bit deeper, to confirm the numbers in the Needs Analysis, or to improve on them. Competition will take a number of forms, and will include items that were not addressed in the Needs Analyses. These include taxis and rides provided by family, friends and neighbours. This information is difficult to enumerate, but with the assistance of the agency carrying out the enterprise planning, some analysis might be possible in addition to what was done in the needs analyses. With a good analysis of the competition in the area covered, it should be possible to conclude this section with an estimate of the market share that your enterprise should be able to assume at launch, and over a number of years. Marketing Plan: Now that you have determined who your primary customers are, how large your market is, and who else is delivering the same or similar services into that market, you can move forward to define your marketing plan. Marketing into the seniors market can be challenging. Seniors are typically very loyal to providers of services they like, and will be suspicious of new entrants into their market. They will, however, also have a strong loyalty to the agency that is developing the rides service. It may well be that the best way to promote the service will be to families of seniors. These and other things will need to be considered when defining your marketing approach. Revenue Projections You should conclude the marketing plan section by making an estimate of the revenue the enterprise is likely to generate through delivering the service to its market. The estimated revenue should be tied into the marketing plan in some way. This could be done by tying projected revenue into marketing to a particular age group, a particular neighbourhood, a particular group of potential service users (those living in assisted living homes, for example) or any other demographic that may be determined from the business profile. The conclusion of this section should also include a marketing budget, laying out the people and activities included in the marketing plan, and attaching a budget for these people and their activities. Operations Begin here by reiterating the service description. In this section you should go into a lot more detail. In other words, where above you may have described the service as door-through-door with volunteer drivers using their own cars, in this section you will elaborate how many drivers, will any of their costs be covered, how will payment be handled, what training will be provided? How will enterprise supports be provided (booking reservations, scheduling drivers, collecting fees, compensating drivers for their costs, and so on). You will have to quantify the inputs by the agency, and the cost of these inputs. Identify which costs are fixed i.e. will be incurred to a similar extent not dependent on the number of rides being delivered (e.g.: insurance, office rental, administration-related salaries), and which are variable - i.e. those that will vary according to how many rides are being delivered (e.g.: fuel for the shuttle bus, driver salaries or stipends, STAR fees). When you ve enumerated all the costs that you will incur from

6 operations, an operating budget must be prepared. Fix the variable costs to the revenue projections you made in the marketing section, place the fixed cost numbers directly into the operating expense budget. Depending on the nature of the service the agency wishes to put into place, there may or may not be capital expenditures involved in the launch. This might be as simple as a couple of computers, a cell phone or two, or it could be as complex as one or more shuttle buses. The conclusion of the operations section should include a list of capital items, with the costs placed on a timeline during the first 3-5 years. Financial Profile At this point, you have revenue projections developed from the marketing plan, your marketing costs enumerated, as well as your production costs, operating costs and capital costs. In addition to these, the agency should track all the costs it has incurred in developing the service, including the cost of feasibility analyses and/or business plans. These will all have to be put into a financial forecasting tool that will produce income statements, cash flow forecasts and balance sheets for the period from start-up to 3-5 years. If the service is intended to generate net revenue, the forecast should cover the period up to the point where net revenue is being produced, and then at least one year subsequent to that. For purposes of the business plan, what you will be doing is projecting a full set of financial statements for each of the first few years. Because these don t yet represent actual data, they are referred to as pro forma financial statements. For the business plan, you will need pro forma income statements, balance sheets, and cash flow forecasts. Income Statement: 2 The pro forma income statement predicts how successfully management will be using the enterprise s resources to generate profits. Also known as the profit and loss statement, it projects the difference between gross income and operating expenses for all activities over a given period of time, generally a year. Projections for second and third years are usually logical extensions of first year pro forma projections, although not all revenue and expenses will increase in the same proportion year over year. Balance Sheet: While the income statement records the results of a series of activities over a period of time (usually a year), the balance sheet is a snapshot of the condition of the enterprise at a given point in time (usually the end of a fiscal year). The pro forma balance sheet summarizes the value of the resources invested by the developing agency by showing the enterprise s assets, liabilities, and the accumulated value of the net assets (the excess of the value of the assets over the value of the liabilities). A net profit generated by the enterprise increases the net asset value; a net loss by the enterprise decreases the net asset value. Generally a pro forma balance sheet will be created showing the above mentioned amounts right before the enterprise opens as a service for the first time, and another for the end of each fiscal year while the enterprise is in business. 2 The Canadian Social Enterprise Guide: Enterprising Non-Profits Program, October 2005

7 Cash Flow Forecast: The pro forma cash flow forecast projects your enterprise s cash needs or resources by summarizing the cash that comes in and the cash that goes out each month. It shows how much cash will be available or needed, and when it will be needed. If the cash drops into negative numbers, you will have to plan a loan, grant, investment or other type of financing to cover the time until your cash supply becomes positive again; in other words you have enough cash again to run the enterprise. At start up, cash supply will likely come from investment by the agency, funding support or other sources, and the enterprise will be more of a drain on the cash supply. As time goes on, though, once the enterprise is up and running, profits from the enterprise will provide the most consistent supply of cash. At that point cash deficits could still arise due to seasonal downturns, or large expenditures, but aside from that, you should look to the enterprise to take care of its own cash needs from its own revenue. Pro forma financial projections need to be carried out in a way that integrates the cash flow projections, income projections and balance sheets. If these are not fully integrated, changes to one may not get reflected in the others, leading to discrepancies in the forecasts. Nothing will hurt an agency s credibility more than presenting a business plan with a set of financial forecasts that do not integrate from one forecast to another, or one year to the next. Income Statement Proceeds of Loans or other (nonrevenue) cash inputs Cash Flow Forecast Capital Costs Balance Sheet The pro forma financial statements will be accompanied by a narrative version in the business plan that explains and illustrates the numbers that appear in them. Issues that arise in the financial projections will be dealt with in the narrative. Potential issues may be The net income may not ever reach into the positive. This is a non-starter, and changes will have to be made such that either net income is generated, or the model is altered to one where continuing support from funding sources is built in. At that point the entire business plan may have to be redrafted to fit the new model. The cash supply will run out before the enterprise ever begins to earn income. This is a likely situation, and a strategy must be developed to deal with cash shortfalls during development. It could be grants received, loans taken out, or extra contribution by the

8 founding agency. Whatever strategy is decided upon, the financials will have to reflect this. Look over the financials with a critical eye. They can t look too optimistic; this will hurt the credibility of the business plans. They can t be too pessimistic; this suggests that a change may be needed to the entire business model, if the benefits do not warrant the amount of energy and resources being invested in the development. If you feel that changes are needed, make the changes to the financials, and then change the narrative of the business plan to make it match. Key risks should be identified at this point. A shortage of revenue should be included as a risk, and a financial reflection of the different scenarios laid out. Key personnel risks must be accounted for, market risks, operational risks. In each case, if there is a financial implication, it should be laid out, and ameliorating efforts identified and quantified. Are there some risks that would lead the agency to close it all down? If so, identify this, and describe the exit strategy for the agency, as well as any creditors that might still be on board. The enterprise/program should have its own financial statements right from the point of start-up, including opening and period-end balance sheets. While it operates as a program of an agency, these will be combined into the overall financial statements at year-end by the agency s auditor or accountant. In the event that the program is rolled out into a wholly owned subsidiary, or another business model is chosen, having a separate balance sheet for the enterprise will ease that process greatly, and make the calculated benefits and financial implications much easier to assess. When the opening balance sheet for the enterprise is prepared, all the start-up costs incurred by the agency should be included as agency capital input into the enterprise, either in the form of equity capital, or as an internal liability from the enterprise to the agency. Either way, when the enterprise begins to earn money, the agency can have access to this pool of stored capital without accounting for it as non-receipted income. Conclusion The conclusion will include a proposal: a request for loan financing, capital, or other inputs from the recipient of the business plan. These should be laid out in the conclusion to the business plan. The business plan needs to include the results of a positive outcome. In other words, if a loan is sought to cover cash shortfalls during the development, that should show up on the cash flow forecast at the point where it is needed. If it is a grant that is requested, show the grant revenue at the point where you anticipate its receipt. Your intention as to repayment of loans must be included in the financial statements, and described in the proposal. The final part of the conclusion is a set of positive statements about how the service will improve the lives of seniors, how it will provide a positive profile for anyone who supports it, and should end on a positive note about what things will be like with the service in operation.