One of the main reasons why many start-up companies cannot develop is a lack of financing. It’s easy for large corporations to issue bonds, take a loan or even go public and issue stocks. However, small businesses have many constraints. The first source of financing would be owners’ capital. If a start-up is lucky enough, it may even get a small loan from a bank or find a business angel or venture capital company. Yet, luck is not a key factor of attracting financing. All providers of capital want to be sure that the investment will pay off and the start-up will remain solvent and profitable in the foreseeable future. The best way to make providers of capital confident in your start-up is to have a solid business plan. In this article, I will review the top 5 things that a business plan must have in order to attract financing.
1. Market Analysis
It’s not enough to state the mission of the company, your plans and strategy in the business plan. Providers of capital must be ensured that you know the market you are entering. In making a successful market analysis, you can use frameworks such as SWOT analysis, PEST analysis, and Porter’s Five Forces. It is important to provide as many details as possible on your current competition and barriers to entry in the industry. You must also present the core competencies and competitive advantages your start-up will possess.
2. Revenue Forecast
A good business plan should contain a lot of numbers. The ultimate goal of any company is to make a profit and maximise it. Profit-making starts with revenue. Once you have completed a detailed analysis of the market you enter, the providers of capital will want to know how much revenue the business will earn in the next five years. Since you do not have a starting point for revenue at the time of the writing of the business plan, the forecast of revenue can be tricky but don’t worry. There are proven methods how to make realistic projections of sales in your business plan. Method #1 is find your close competitors in the market and estimate how much revenue they made in the past five years. Extrapolate these values into the future using historical average growth rates and you will get an approximate figure of expected sales for your company. Note that this forecast will be valid if your company is similar to an average company in the industry. If you have strong competitive advantages that you expect will accelerate your sales, you can assume higher than industry average growth rates of revenue. Method #2: Estimate your production capacity and the maximum volume of goods or services you can realistically provide during the next five years. Then, adjust this figure by the potential demand for your goods and services. In order to do this, you must know a few things: the price you intend to charge and the number of potential customers in your market.
3. Cash Flows Forecast
Investors and lenders are even more interested in the cash flows to and from the business. That’s why, besides the projection of revenue, you have to make a professional forecast of your future cash flows (usually for the next five years). What are the cash flows and how are they different from profits? Profits are purely accounting figures that may be derived after deducting both cash and non-cash expenses from revenue. Thus, accounting profits are not very representative. Cash flows, in turn, are the profits adjusted for all non-cash items. In other words, cash flows are the finances that flow in and flow out of your business on a regular basis regardless of the accounting rules. While forecasting cash flows, just as any forecast, will not be accurate 100%, your goal is to make the forecasts internally consistent and realistic. What this means is that you cannot expect a consistent growth in cash flows without reinvestments in fixed assets and working capital. You cannot expect fixed assets to serve you indefinitely. You must account for depreciation. These are only a few examples of the issues that will help you determine whether your forecasts are realistic or not.
4. Capital Requirements
In order to achieve the expected growth rates in revenue and cash flows, you will need to invest. The investments can be funded using internal financing such as owners’ own money and external sources such as banks, venture capitalists, business angels and capital markets. In your business plan, you will need to demonstrate what financing mix you require for making all investments, what is the total funding you need and how your business will provide a return to those who supply you with funding. This will be greatly determined by the revenues you have projected and the size of the market you assessed.
5. Marketing Plan
The last point that you must include in your business plan to attract financing is a clear marketing plan and market strategy. You cannot expect that customers will just find you and start purchasing your goods or services. Providers of capital will want to know how you intend to win the market and overcome the competition. Even though this part of the business plan is less quantitative, it is still very important. You will have to think of the channels through which your products or services will be distributed, how your business will look for customers and retain customers, what pricing strategy you intend to use, what marketing costs are expected and what means of promotion and advertising you will employ.
In conclusion, there are different business plans and companies can be quite flexible in their creation. However, a good business plan that will have a higher probability to attract external financing will always have these five points: Market Analysis, Revenue Forecast, Cash Flows Forecast, Capital Requirements and Marketing Strategy.