Planning, Startups, Stories

Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

What ‘Accurate’ Means in a Business Plan 2

Questions_iStock_000011860969_modified (1)I just answered this question on Quora. I think it’s an interesting question, one that comes up often enough, and one whose answer is worth considering.

How can I write a very accurate business plan. I’m hoping to win a grant in a business plan competition?

The rest of this post is my answer on Quora, reposted here with Quora’s (implied) permission:

This is an important question, but also a big one, hard to answer in a few hundred words. And I’m going to stick with the subset of business plans that apply to business plan competitions. These are more traditional and formal business plans, written to communicate with outsiders, and therefore significantly bigger than the lean plan (see below) you need to just run a business.

What Accuracy Means in a Business Plan

It starts with this: in your summary and descriptions of the business model, company formation, market, business offering, and management team, your readers take accuracy for granted and so should you. Tell the truth about your business and what you plan to do. Period. Accuracy isn’t a variable.

I have to guess that you bring up accuracy in the context of projections, specifically your market forecast, sales forecast, projected profit and loss, projected balance sheet, and projected cash flow.

Accuracy in market information

With market information, make sure you distinguish between the statistics, demographics, and descriptions you present as facts – external available information, with sources cites – and estimates and projections.

Approach this with the understanding that there are no facts about the future, just guesses; and there is no guarantee that the information you’d like to have will be publicly available. So therefore you have to develop reasonable estimates, based on assumptions, for which accuracy is mainly a matter of making your assumptions logical, and transparent.

Here’s a real example from a plan I was involved in recently for a social media consulting firm (Have Presence):

  1. The target market is small business owners who want social media presence, don’t want to do it themselves (or don’t have time), and have the budget to pay for a service.
  2. To develop an estimate for the U.S. portion of the market, I start with known statistics on small businesses in the U.S. and cite the source (in this case, the U.S. Small Business Administration), to arrive at some number, say 5.5 million (I’m not taking the time, while answering, to go check the actual number; but it’s a real number, publicly available, with a reliable source).
  3. From there I have to make an estimate of how many of those 5.5 million business owners meet the criteria of wanting presence, not doing it themselves, and having budget. There is no way to get the actual number with any accuracy. I have to estimate. And whether I end up saying it’s 2%, 5%, 10% or 20%, the quality of accuracy in this specific case is a combination of going from known statistics to estimates, and keeping the estimates clarified.
  4. If I really cared – perhaps because I was entering a business plan contest with my plan – I could probably figure out how to educate my guess in point #3 by looking at Facebook statistics, Twitter statistics, businesses by number of employees, and so forth – that would still leave me with estimates, but better estimates. In fact, I’m fine with what I did in point #3 because that tells me there is enough market to go for … whether it’s half a million to two million potential clients is irrelevant for business decisions, because it’s enough.

So this is just one example. Accurate in market description is a matter of combining what can be known with what can’t be an has to be estimated.

 Accuracy in Financial Projections

Financial projections are always wrong, by definition, but they’d better be laid out correctly, reasonable, transparent, in line with industry standards, and, above all, credible.

  1. The goal is to connect the dots in the financials so that spending is in proper proportion to sales and capital resources, and cash flow is sensitive to factors such as sales on account and inventory that make it different from profit and loss. Show that you understand how the financials are going to work in the real world. What drives what.
  2. The sales forecast has to be credible. Make sure you lay it out from the details up, not from top down. That means transparent assumptions about drivers, so for a product in retail channels it’s something like monthly sales per store, and stores carrying the product; and for a web business is traffic via organic, traffic via PPC, and conversion rates; and so on. Definitely not a top-down forecast, meaning show a huge market and a small percent of market.
  3. Profitability has to be credible. One of the most common flaws I see in business plans for competitions is absurd profitability, 30%, 40%, and more as profits to sales, in an industry in which the major players make 5% or 10% on sales.  That’s a huge negative. Accuracy in P&L means having realistic percent of sales for marketing expenses, general and admin expenses, and development expenses.
  4. Cash flow has to be credible. Another common flaw is failing to understand how sales on account and accounts receivable affect cash flow for business-to-business businesses; and yet another is failing to see the cash flow implications of having to buy product inventory and carry it before selling it.

Accuracy in the main body, descriptions, etc.

For the rest of the plan, industry information, competitive information, and so on, what’s really important is that you clearly distinguish between factual information from valid sources and guesses and estimates.

One of the worst things you can do in a business plan competition or pitching investors is to get caught presenting as fact something that one of the judges or investors knows is inaccurate. If you aren’t sure, clarify, disclose, call your guesses guesses. And it’s particularly bad to fudge the facts regarding your personal history, your business history, or those of your team members. Don’t cross the lines of accuracy related to degrees, job positions, and past jobs. You need to protect your integrity. And if you blur the truth on purpose, such as saying you studied business at Harvard or Stanford when you were just there for a few weeks in a special course, or when you failed to graduate, that can kill a deal.

  • Guy Francis Dennis

    Tim: Should I begin my financial work with a breakeven analysis, and leave it at that?

    • Guy, breakeven isn’t a bad way to start, because it includes an idea of fixed and variable costs; and the break-even point itself usually leads to some good thinking about viability. It can be a reality check.

      But I wouldn’t recommend leaving it at that. Just to run a business right, you get huge value from budgeting (forecasting) sales and spending, then reviewing actual against budget regularly. You need that to manage cash flow. And the budgets/forecasting aren’t there for show, but so you can lay out assumptions, highlight change, and adapt to reality as it shows up. Be proactive, not reactive.