Business plan
Business Planning
Managing and Sourcing Finance
Professor Carole Howorth
1
You & your business idea
Market segments & value proposition
Marketing Strategy
Operations plan
Risk &
strategic options
Financial plan
Resources available
Resources needed
New Venture Creation
Framework
(Burns, 2014)
2
Financial Objectives of New Businesses
Profitability
Efficiency
Liquidity
Risk
Business plans need
Financial planning
especially cash flows
Funding
Right amount
At the right time
From an appropriate source
“Cash is King”
25% of businesses which fail are profitable but run out of cash
Young SMEs may have “lumpy” cash flow
Failure may be caused by overtrading
Overtrading
Cash Flow and Revenue
Revenue Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 0 2000 5000 6000 10000 12000 8000 8500 8000 8000 9000 10000 Cash Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 13000 6000 4000 -2000 -5000 -6000 -8000 0 1000 2000 4000 Column1 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
Working capital is needed
to pay wages to employees
to pay day to day expenses – rent, rates, travel, heat and light…
to buy stock
to pay suppliers (creditors)
to finance credit given to customers (debtors)
7
Estimating the main costs for your business
Start up costs
What will you need before you can start your business
Examples include machinery, fixtures and fittings, premises, stock
On going costs
Costs incurred as you carry on the business
You will need a realistic idea of the costs that you will likely incur, e.g:
| Item | Cost per month |
| Premises (rent/mortgage) | £2000 |
| Water | £30 |
| Electricity | £100 |
| Gas | £200 |
| Salaries/wages | £6000 |
| Professional fees | £200 |
| Advertising/Marketing | £1000 |
| Insurances | etc |
| Travel & Transport | etc |
| Office equipment | etc |
| Machinery | etc |
| Disposables | etc |
| Raw materials | etc |
| etc | etc |
| etc | etc |
| etc | etc |
Can you think of any others?
Which are start up costs, and which are ongoing costs
What sort of professional services might you need? (payroll, legal, accounting, etc?)
Do you need to trademark, patent, or copyright any of your intellectual property?
What insurances will you need? (public liability? Building and contents?)
What other employment costs must you consider? (national insurance, pension provision, etc)?
How/where might you find out information about how much these costs are likely to be?
Different types of cost
Fixed costs do NOT vary directly with the level of output.
You have to pay them regardless.
Examples include rent, internet service, management salaries
Variable costs – do vary directly with the level of output
Examples include raw materials, event costs, casual labour
Income Statements
Sales
- Cost of Sales
= Gross Profit
- Operating costs
= Operating Profit (EBIT)
- Interest
= Net Profit (EBT)
- Tax
Does not include asset purchases (except depreciation)
Cash flow forecast
Shows the flow of ‘cash’ in and out of the business.
If the cash balance goes negative then you have run out of money so you cannot pay wages or suppliers or rent or…
And your enterprise risks failure
Your business plan may be a pitch for investment to cover cash flow shortage
Your cash flow forecast will show how much is needed
Cash flow forecast helps identify where adjustments can be made
A Simplified Cash Flow Forecast Objective = survival/ break even
Example Cash flow forecast
Note: figures are in £thousands.
Are estimates so round the figures in your business plan to the nearest appropriate figure. Avoid showing very small denominations.
14
Your Cash Flow Forecast
Preparation
When will the cash move in or out?
Estimates of costs and sales
Do it
Excel spreadsheet
Or cash flow forecasting tool
Use it
Adjust assumptions
‘What if’ scenario testing
Identify funding needs
Scenario Planning: ‘What if?’
A solid business plan requires at least a second pass through the forecasting exercise to produce a worst-case scenario projection.
You may also show a ‘best case’ scenario to encourage investors.
‘Nobody will give you money until you can
prove your idea is a winner.
There’s lots of money out
there but only for
proven concepts’
Martyn Dawes (Founder of Coffee Nation) (2004)
Bootstrapping?
Lifting yourself up by your bootstraps
Without any assistance from external financiers
Creative ways of acquiring needed resources
Ask The Right Question
Wrong - Where can I get the cash I need?
Right - Where can I get the resources I need?
Focus on resources needed & approach the source
You don’t have to own a resource to use it
Make an arrangement, build a relationship to use
Avoid (or in addition to) bankers and venture capitalists.
18
Bootstrapping: who might help?
19
Bootstrapping: who might help?
20
Bootstrapping: who might help?
21
Bootstrapping: who might help?
https://tweakyourbiz.com/marketing/9-great-examples-crowdsourcing-age-empowered-consumers
https://tweakyourbiz.com/marketing/9-great-examples-crowdsourcing-age-empowered-consumers
22
Crowdsourcing
Greenpeace
How will you access a crowd?
Crowdfunding
Funding from a large number of donors for a specific project through a campaign within a specified time limit (usually a few weeks)
Types
Equity based
Loan based
Reward based
Donation based
Kickstarter; Indiegogo; Crowdcube; Crowdfunder.co.uk; Rockethub etc etc
Crowdfunding and Crowdsourcing
Success factors
Need to be authentic, sincere and demonstrate ability to achieve the outcome.
Considerable effort up-front designing campaign.
Monitoring and responding throughout the campaign (real time updates).
Transaction convenience
Reputation of organisation
Popularity of the campaign
Donors empathise with aims of project
Crowdsourcing: Failure factors
Lack of clarity
Lack of credibility
Poor website
Weak social network
Project not attractive
Crowdfunding
Questions
Who is the ‘crowd’? Target donor community.
How will you reach them?
What is the compelling story /message that gets across the project’s importance.
Why should they care? Needs to be concise.
What happens if you don’t raise enough?
N.B. Kickstarter = All or nothing.
Financiers of Entrepreneurial Firms
LEVEL OF INV. RISK
ASSUMED BY INVESTOR
HIGH
LOW
STAGE OF ENTREPRENEURIAL DEVELOPMENT
SEED START-UP EARLY GROWTH ESTABLISHED / MBO
Founder Family
& Friends
Commercial Banks
Business Angels
Venture Capitalists
Private Equity Fund Mgrs.
Quoted Equity Mkts
28
| Type of finance | Used for | Risk for funder | Reward |
| Founder - equity | Start up | High. No security. Could sell assets | Growth of business. Exit Personal satisfaction |
| Family and Friends – loan or equity | Start up | High. No security. Trust. | Altruistic. Repayment (with interest?) |
| Business Angel - equity | Early growth – working capital and assets | High. No security. | Growth. Exit: 5x to 10x investment |
| Bank Loan | Working capital and assets | Low. Collateral. Personal guarantees. | Interest and repayment |
| Private Equity (poss mixed) | Growth or MBO | High but usually established concept | Exit: 5x to 10x investment |
| Overdraft (line of credit) | Short term working capital | Low. Can recall at short notice. | Interest and charges. Repayment. |
| Leasing | Assets | Low. Ownership of asset is retained. | Interest and charges. |
| Grants | Specific | Moral hazard | Economic or social gains |
Theory and Practice of Entrepreneurial Finance
Asymmetric Information
Moral Hazard
Adverse Selection
Finance Gaps
Credit Rationing
Things to consider…
The business planning process is iterative and will require lots of research, trial and error, time, and patience (with each other and with the project!)
Finances cannot be done in isolation from marketing, operations and strategy.
Keep asking yourselves:
How will this impact on budget?
How much investment will be required?
What will be the sources of finance and funding?
At any point in the 4 years do we run out of money?
Finances must be in line with other aspects of business plan
Be realistic and credible…
Things usually cost more than you think…
May not be able to take a large wage out of the business to start with
Some assets / expenses need to be bought before the business starts trading – how are these going to be financed ?
Include bank and other borrowing costs (repayments and interest)
Determine when costs will be incurred (monthly? Quarterly?)
Your venture will (hypothetically!) need to spend money on accounting/legal, office & rental costs etc
Income will usually be very slow in the beginning
Many businesses do not make a profit in Year 1 (look at what is normal for your industry).
Think long term. Do you have an exit or growth strategy ? e.g. expansion/ franchising/ merger/sale etc…
Remember that this module and its assessments are a simulation. Please do not enter into any real contracts or commit yourself financially.
32
Business Plan Requirements
Limited company (if social enterprise CIC)
Pitch to a potential investor
Financial projections for first 4 years
Year 1: Monthly cash flow + annual income statement + (optional) balance sheet
Years 2-4: Annual income statement + (optional) balance sheet. (Cash flows if relevant)
Start up costs and capital expenditure
Analysis: key ratios GP; NP; liquidity; ROI; break even
Key events as relevant e.g. investment, expansion, repayments, investor exit, buy-back
Finances: costs
Under-estimating/ optimistic
Some gaps in costs
Premises? Rent, rates, insurance etc
Salary “on-costs”.
Add 13.8% employer NI contribution
Add 3% employer pension contribution.
Tax – include 20% corporation tax,
payable 9 months after financial year end (cash flow) but chargeable in period profit is earned (income statement)
Price - profit?
Estimate your ‘average customer’
What will they buy in the ‘average’ or typical transaction?
How many items?
How frequently?
What will the financial value of the average transaction be?
Know your busiest and quietest months, days, times and factor into income estimates
Finances: calculate income
Reading
Burns, P. (2014). New Venture Creation – A framework for entrepreneurial start-ups. Basingstoke: UK. Palgrave Macmillan
Chapter 14: Obtaining Finance
Chapter 15: Financial Forecasts
Notes from
Year 1: Business Accounting
OR Financial Accounting and Management Accounting modules
JAN FEB MARCH
£ £ £
BAL B/F (70) 480 80
ADD Receipts
Student loan 1000
Loan from parent 100
Total Receipts
1000 0 100
LESS Payments
Rent 200 200 200
Clothes 100 50 0
Beer 80 80 80
Food 50 50 50
Mum’s Loan 20 20 0
Total Payments
450 400 330
Balance c/f 480 80 (150)
|
|
JAN |
FEB |
MARCH |
|
|
£ |
£ |
£ |
|
BAL B/F |
(70) |
480 |
80 |
|
ADD Receipts |
|
|
|
|
Student loan |
1000 |
|
|
|
Loan from parent |
|
|
100 |
|
Total Receipts
|
1000 |
0 |
100 |
|
LESS Payments |
|
|
|
|
Rent |
200 |
200 |
200 |
|
Clothes |
100 |
50 |
0 |
|
Beer |
80 |
80 |
80 |
|
Food |
50 |
50 |
50 |
|
Mum’s Loan |
20 |
20 |
0 |
|
Total Payments
|
450 |
400 |
330 |
|
Balance c/f |
480 |
80 |
(150) |