In the same week as the government started to talk about a new £4bn scheme for state-backed lending directly to small businesses primarily because the earlier Project Merlin agreement for increased bank lending to business isn’t believed to be working it was quite interesting to listen to a senior manager from one of the big High Street banks. He was explaining to an audience of would-be entrepreneurs about how to obtain funding. The biggest single reason for refusing to lend is that applications aren’t supported by a comprehensive, written, business plan. That may seem like stating the obvious, but apparently a huge proportion of funding applications are rejected simply because they haven’t presented a document that can be examined at various stages in the bank’s internal review processes. So, if you need to visit your bank manager in the near future, perhaps just to obtain an extension or renewal of existing credit facilities, this may just tip the odds in your favour.
What’s a business plan?
In the simplest terms, a business plan is a projection of the revenues, costs and cash flow of the business during a particular period in the future. It’s rather like preparing business accounts that cover the next 12 months, rather than the last 12, with the added illustration of just what the cash and borrowing requirements are expected to be at various stages within that period.
Of course, since we can’t know the future, we have to make a series of assumptions about what is likely to happen.
Those assumptions need to be reasonable and, just as importantly, need to be quite explicitly stated within the business plan.
How far into the future am I supposed to look?
The usual requirement is for a business plan to cover the whole period of the lending. So, if you are just asking for an extra 12 months’ overdraft facility, it would be for one year. If you want a new bank loan, it’s more likely to be three or five years. Just remember that the longer the period, the less likely your assumptions are to be accurate by the end. There were very few people in 2006 who were preparing five-year business plans and actually predicting the state of the economy today! The lender will be aware of that, so it’s generally better to ’play safe’ and avoid depending on anything too wildly optimistic about the world in 2016.
Where do I start?
The most obvious place is with your latest business accounts and that means your most up-to-date balance sheet.
Of course, if those are already a year or more out of date, you’re going to need them brought a bit closer to today’s real position before you can start extrapolating them into the future.
What do I do with them?
Well, you start with your revenues. Look at the sales and gross margins you’re currently making. What do you expect them to be in the next year? Will there be a new supermarket opening half a mile away sometime soon, or do you know that one of your competitors is scheduled to close for good within a year? If you expect volumes to remain broadly similar, inflation alone is likely to put your ’sales’ figures up by say 4% over the next year. Are the margins going to stay comparable, or have you already negotiated a better deal with another supplier? The key to any business plan is getting the revenue side right sales and margins. As far as the costs are concerned, those are usually easier to predict from historic data allow for general inflation across the board, but pay attention to ’step-change’ costs, such as rent, business rates and perhaps utility charges.
Incidentally, don’t forget to include a realistic assessment of what you’re likely to take out of the business over the same period.
The bank will expect you to explain how you intend to live on bread and water for a year if that’s all you’re showing as your own salary or drawings.
What do I end up with?
At this stage you should have a projected sales, trading, and profit/(loss) account for the next 12 months. With a starting balance sheet, the projected profit/(loss) account can be used to generate a projected closing balance sheet for the end of the next period where the money will be a year from now.
Yes, that does mean that you’ll need to have some knowledge of accounting principles and practices. Alternatively you could ask an accountant to do it for you.
What else do I need?
You should also have a cash flow report. This illustrates the amount of cash generated or spent at various points during the period, and the extent of any surplus or additional liquid capital required.
Producing one is not beyond a DIY job, provided that you understand the principles, and are explicit about the assumptions involved (eg how long does it take to convert your fuel card sales into cash at the bank?). Professional help may be a good idea.
This sounds expensive
It needn’t be, and there are several things you can do to minimise the cost of professional assistance with the business plan. Firstly, get your accounts as up to date as possible before you start a business plan. If you’re only used to seeing annual accounts, then start preparing full management accounts, at least quarterly.
Secondly, remember that your chosen accountant should have some experience of how the petrol retail business actually operates without that they could miss something important, or will spend a long time learning the peculiarities and charge you for their education. Finally, provide them with as much information as you can. If they have to spend time asking you things, you’ll end up paying for it.
Armed with a professional business plan, you’re ready to face the bank manager and far more likely to obtain what you need.