What is a Business Plan?
A Business Plan is nothing but a Document that describes:
- How a Business works.
- What are the different parts of a Business.
- Suppliers and raw materials.
- Why a Business is or will be successful.
- How is expected this Business to perform in the future.
- This is called “Business Projections”.
Assuming you have done a good and serious research, this last part, the “Business Projections”, is usually the “heart” of the Business Plan.
- Because it describes what you can expect from this Business.
It tells you:
- Is it profitable enough?
- When you could have your money back.
- How much you should invest.
- How much money this Business needs for starting.
These “Business Projections” are so important, that many professionals call them “Business Plan” directly.
We have worked in Venture Capital for years.
We know for sure that, your Business Projections are the most important part of your Business Plan… by far.
And that is why here, we’ll focus on your Business Projections (we’ll call them “Business Plan” directly).
If you understand how to develop your Business Projections and do it correctly, you have a Business Plan.
Otherwise, no matter how well you define:
- Your Team.
- Your Market.
- Your Competitors.
If your Business Projections are poorly developed… You have nothing.
* If you are interested in How a whole Business Plan is made, we have a very good publication where we share the structure we use, how long each section should be, etc…
- Check our “How to write a Business Plan“.
How to start a Business Plan
Developing a Business Plan is something difficult, tedious and messy.
- There are dozens of inputs, and estimations involved, and the predictions are rarely fulfilled.
- Remember: we are talking about your Business Projections (everybody refer to them as “Business Plan” directly).
We have developed dozens of Business Plans and we know it well: it is not a pleasant task.
- Although deep down, we like it.
But, it if it is your first time developing a Business Plan, the question is: What should you start with?
Here, we want to share with you What are the Key Points you should focus on when starting a Business Plan.
* Due to the technical content of this section, it is very important that you check our “Business Plan Templates” and download the free basic “Basic Business Plan template” (BP.01).
- It is very useful for a better understanding of what we are about to explain.
- It also allows you to start “playing” with numbers, margins and rates.
How to start a Business Plan
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.