How to start a Business Plan
Now we will explain the 5 main factors necessary to start building a basic business plan.
There are different ways of approaching a Business Plan, and in future sections we will explain more about others. There is not a single and unique Business Plan structure: providing all the costs and revenues are included: you can distribute it in different ways, highlighting different factors that would the answers you are looking for.
* Due to the technical content of this section, it is very important to check the “Business Plan Templates” Tab within the Business Plan section and download the free basic “Basic Business Plan template” (BP.01) that can be useful for a better understanding of what we are about to explain. It also allows you to start “playing” with numbers, margins and rates.
Basic but not always properly supported: how much do you estimate that will be sold to your clients.
Try to disaggregate by Clients and products since it will be helpful to further margin-per-client and product analysis.
As mentioned, its growth must be properly justified by a correct Market analysis and the right Strategy.
These are the costs that depend just on the amount of products or services sold, for example: Transportation costs or raw materials.
In example: if you have an on-line trading business (you buy from China, for example and sell to Europe/USA) and sell 10 products through Amazon, you would have [(10 * raw material costs) + (10 * Commission costs)]: a certain amount of Variable Costs that, in other case if you had sold nothing, would be zero.
It reflects the costs that will not vary with a reasonable increase or decrease of the sales (or production).
Why is reasonable underlined? Because lot of people get confused here: There is not a single company that would maintain a single fixed cost if they sold a 1.000 times their current amount of product or services.
So fixed costs would not change theoretically if the projections behave as expected: salaries or rents, for example.
This margin gives the “amount of money” or margin remaining after covering all the variable costs.
Depending on the economic sector they are expected to be higher or smaller.
Usually on services, the contribution margins are higher, while in manufactured products are smaller since you would have more suppliers, raw materials… Variable Costs involved.
In example: if you earn money “assessing” companies, your variable costs are practically zero, while your fixed cost, your salary (considering it as a traditional fixed salary) would be much higher. As result, the Contribution margin would be high.
We will discuss deeper in the future about the different uses of the EBITDA (Earnings Before Interests Taxes Depreciation and Amortization) but for now let’s simplify it:
The EBITDA reflects approximately the Cash generated, providing you pay and charge your suppliers and clients “at the moment”.
For a more accurate Cash Flow description, with usually delays between payments and charges, taking into account the “fiscal shield” of the taxes paid… together with the different kinds of Cash Flow (Cash Flow, Operational Cash Flow, Equity Cash Flow…) we will have a specific section about the Cash Flow.
But for the majority of businesses, the EBITDA (specially in percentage) works pretty nicely as a “predictor” of the cash generation and since is a simple index, even important investment companies use it as the main index to put their eyes on.
Why not taking into account the Taxes, Amortization/Depreciation & Interests?
Because these “costs” that can be tackled in different ways.
For example: the amortizations can be done in flexible periods of time, the taxes vary in different countries/regions and if a company has negative results, you may be exempt of paying them. And the Tax Shield affectation on the Cash Flow generation is not that big usually to make a difference in assessing a project (regarding medium or small companies).
With all these basic factors, you can start checking:
- The relative weight of your overall variable and fixed costs.
- Which scope of action you have, to cover you fixed costs (if you can afford more workers, for example).
- Whether to expect a positive cash generation (EBITDA greater than 0) that will allow you to grow through self-financing.
In further sections, we will increase these content explaining other approaches and factors that give answer to other important aspects as Margin per product or Break Even points among others.