What makes a good business plan?

A business plan should be a realistic view of the expectations and long-term objectives for a new or existing venture.

by Bruce Hodgman — 

First of all, let’s begin with some business plan basics. A business plan should be a realistic view of the expectations and long-term objectives for a new or existing venture. It should provide the framework within which the business will operate and, ultimately, succeed or fail. For entrepreneurs seeking external support such as financing, the plan is the most important sales document they will likely ever produce, as it could be the key to raising funds.

Preparation of a business plan will not guarantee success in obtaining a loan or mobilizing support, but a businessperson lacking a sound plan that cannot tell the right story will undoubtedly fail at securing funding.

What should be included in the plan? From the Small Business Association’s (SBA) point of view, a business plan must contain whatever information is required to excite the financing source, prove that management truly understands the market and detail the execution strategy. Various surveys done by many different organizations indicate that 50 pages of text is about the minimum length necessary to accomplish this. However, some Web sites recommend less, others more.

During a recent lender-training event hosted by the SBA, a local participating lender brought up a concern about the quality of a business plan prepared by a local professional that was “SBA-qualified.” The discussion quickly turned to the problems some of our participating lenders have been seeing in the quality of start-up business plans. The lender refused, in this case, to either consider the applicant’s plan, take the time to point out the errors or even contact the small business service provider that helped with the preparation.

From this feedback, we thought it would be of benefit to all Arizona entrepreneurs to identify some of the most common problems seen in business plans from a participating lender’s perspective. If you are considering a start-up or are an organization that assists others with the preparation of business plans, this may be good feedback for all.

Most of the ideas below are accepted and routinely practiced by professionals, but it does not hurt to pass them on again.

1. While this may sound obvious, make sure the accounting or financial columns add up correctly. Most SBA lenders reported this as a common problem.

2. Make sure you provide ample information and documentation to explain the business and support the loan amount. Providing a 17-page plan for an $850,000 start-up loan request is generally insufficient when 75 or 100 pages are in order.

3. Make sure the document contains all the required components of a good business plan. There are many different types, sources and formats that can be used, but some are inappropriate. Make sure yours is complete and follows the proper formula for your particular business or the loan you are seeking.

4. It is a good idea to have your financial projections reviewed by a qualified accountant for accuracy, GAAP (generally accepted accounting principles) compliance and presentation. If an accountant prepares the financial data, ask if he will provide a statement of financial accuracy that can be included with the plan. This adds credibility to your plan’s financial data. The financial plan is one of the most important components.

5. Make sure assumptions are documented and justified. For example, the cost of a leased location is better presented if it includes a letter from a commercial realtor indicating the lease costs per square foot, for various types of property available in the same vicinity. This small effort will help justify your projection for an expense of this kind and help validate the projections. Wild guesses are usually discounted or discarded.

6. Include a table of contents, use tabs, and add an appendix for graphs, charts or pictures.

7. Be certain that your plan includes an executive summary, but do not make this the basis for the whole plan. A good business plan must stand alone and stand the test of time.

8. The use of homemade accounting formats for preparing financial statements or pro forma work is discouraged. Frequently these have cell errors or formatting problems. In other words, use a professional template.

9. Do not submit incomplete or “let me know what you think” plans. Most lenders do not have the time to review incomplete work or give you their opinion about how it might be received in our current economy.

10. Make sure, as the small business owner, that you have a significant hand in preparing your plan and can answer any questions posed by an underwriter. Being unfamiliar with the details of your own plan can really send the wrong signal.

11. Documenting your ability to manage the business correctly is very important. If you have no experience in operating a business or working within the industry, document the additional training or personal development you have completed to enhance your management abilities. In many cases, too much reliance is placed on caretaker-manager experience that has proven unstable and unreliable in many start-ups.

A detailed guide to producing a solid business plan is available on the SBA Web site: www.sba.gov/library/pubs.html#mp-32. Additionally, the SBA’s resource partners offer free training and counseling to future entrepreneurs, including assistance in business plan preparation. Call the SBA’s office for contact information at 602-745-7200.

Bruce Hodgman is the Deputy Director of the Small Business Administration in Arizona. [email protected].

Reprinted from AzNetNews, Volume 27, Number 3, June/July 2008.