The Recipe For Writing a Business Plan That Could Win Funding
Writing a business plan is one of the most daunting assignments that you as an entrepreneur or as a business executive could face. This is not only because it is challenging to create an all-encompassing roadmap (which it certainly is) and deciding on what to include and what not to. The biggest challenge to overcome is our mental conditioning which always makes us resist planning of any sorts. Afterall, freewheeling opportunism and day to day fire-fighting is way more exciting than trying to find our way to success through a carefully developed roadmap.
carefully thought-out business plan is essential to the success of
entrepreneurs and corporate managers. Whether you are starting up a new
business, seeking additional capital for existing product lines, or proposing a
new activity in a corporate division, you will never face a more challenging
writing assignment than the preparation of a business plan.
At the early stages of my career, as a young finance executive, like many others, I did not have much respect for the value which such work adds to a business. I considered formally written business plans to be fancy documents full of fluff and nice honest things (which often no one had any intention to follow) that served only PR purposes. I thought that all providers of finance make their investment or lending decisions independently of what you tell them. i.e. based on their own judgement of the risk which the venture exposes them to and the return which they desire to earn at that risk level. That view was further supported by banker’s attitude who always looked at your balance sheet to find collaterals, no matter how brilliant was the project or new venture idea you were trying to present them to for funding.
Developments in the business management approaches
Whilst the broad connection between a funding decision and risk-return profile is fundamentally correct, the belief in the futility of an effective presentation and its effects on a funding decision is not true. In fact, it is far from being true. To understand it further, we have to take a quick look at the developments in business management approaches in the past two decades.
Rewind 23 years, back
to 1996/97. The years when I was still training with the audit firm. Times were
turbulent and we were witnessing one mega financial fraud (or mismanagement)
case after another, sending shockwaves through the international financial systems.
Accounting & auditing processions as a whole were forced to take a fresh
look at the objectives & approaches that were till then adopted and taken.
We started hearing about the need for accountants to add value to the business
rather than being ‘bean-counters’. Till then, there was very little in our
training which could equip us to look at a business strategically and scan
through for non-financial signs of a corporate failure. Similarly, we rarely heard
of the need for an alignment between all business functions and its correlation
with success. The focus was always on control, which we as young auditors
construed to be the systems of financial controls.
In the past two
decades, we have certainly come a million miles in the development of new management
philosophies which are based on the realization that strategic alignment is by
far the most important factor for continued success. You hear more and more
people talking about the importance of an alignment between a business’s
mission, its environment, its pursued strategies, different elements of its
value chain and its performance measurement systems (though I believe not many
still fully understand it). Businesses tend to devise their performance
measurement systems which could give an indication of the likelihood of future
success rather than historic results. Strategy has become more or less a buzz
word and planning activities seem to be getting more management focus alongside
With this background in our minds, let us take a fresh look at the real purposes of formally written business plans.
The purposes of writing-up business plans
Written business plans are formal documents which always have some sort of presentation purpose. In case of a startup, this could be a presentation to potential inventors or loan providers or in case of an established business this could be presentation to a board securing funding for a new project or a proposed new vertical. Or it could be a transformation plan which aims to demonstrate a turnaround roadmap of a struggling business/SBU, again with the objective of securing funding or continued investment commitment.
The presentation document is the final tangible output. It is however, by no means the most important outcome of the process through which you produce that final document.
The most important
outcome of the process is the inevitable simulation of the likely performance
which you achieve through the plan development process. The linkages (or lack
of) between your goals, your environment, your competencies, your resources and
the strategies you aim to deploy to pursue your objectives, start to become
clearer. This is by far the most valuable outcome. Afterall, how are you
supposed to convince others about the viability of a venture if you in the
first place are not convinced yourself?
When a business plan
has been developed through right methodology with objectivity & honesty
(i.e. where the objective is not to willingly deceive) it exudes that alignment
between all stages and elements of its implementation. It almost feels like a
proven path to success. Through the process, you should be able to discard the
idea (or amend your plans) if it does not stand the tests which the process
subjects your idea to.
Have you ever
thought why case studies often make so much sense? Well the primary reason is
that case studies are written backwards with the luxury of hindsight i.e. where
a known outcome is traced back to its origins. To develop a winning business
plan, you have to use the same methodology.
objective with the venture should be established first. Assuming that you
intend to achieve that objective in a certain amount of time, you should try to
work backwards to established what in your best judgement it is going to take
to achieve that. Break it down into milestones and reach a startup point.
Establish resources and competencies which would be needed at that startup and
which you would need to develop along the way. Decide if these needs are in
line with what you could realistically mobilize and develop. Assess the risk
and uncertainty inherent and contingent in the environment and assess your
capabilities to effectively respond to these. Once your business/venture idea
has stood this extensive testing, you have done the most important bit of
business plan development. Rest is all fairly simple.
When you look at Google map directions for a destination where all the road names, turns, distances, likely traffic and expected arrival time are clearly marked, you do not feel much risk following these directions. Same is the case with all the people who are going to make a funding decision based on your plan. If you plan is as clear and as reliable as the Google map, their risk perception will inevitably go down. There is nothing more reassuring for investors and lenders then the feeling that they are dealing with someone who knows what he/she is talking about. Not only you will increase your chances of securing funding, but will stand a good chance of reducing their desired rate of return as well.
A detailed look at the business plan write-up process
With the preceding
commentary about understanding the real purposes of developing business plan
documents, let us now turn our attention to the practical aspects i.e. how we
actually write a business plan.
The business plan
admits an entrepreneur to the investment process.
Same is true for an SBU manager seeking funding from the board for a new
venture. Without a plan furnished in advance, most investor groups and the
boards of directors won’t even grant an interview. And the plan must be
outstanding if it is to win investment funds.
A vast majority of funding
seeking entrepreneurs & business executives continue to believe that if
they build a better mousetrap, the world will beat a path to their door. As we
tried to demonstrate in the opening commentary, a good mousetrap is important,
but it’s only part of meeting the challenge. Also important is satisfying the
needs of marketers and investors. Marketers want to see evidence of customer interest
and a viable market. Investors want to know when they can cash out and how good
the financial projections are
Importance of addressing all relevant perspectives
Only a well-conceived and well-packaged plan can win the necessary investment and support for your idea. It must describe the company or proposed project accurately and attractively. Even though its subject is a moving target, the plan must detail the company’s or the project’s present status, current needs, and expected future. You must present and justify ongoing and changing resource requirements, marketing decisions, financial projections, production demands, and personnel needs in logical and convincing fashion.
Business plan write-up process is tedious and demanding. Because entrepreneurs and managers struggle so hard to assemble, organize, describe, and document so much, it is not surprising that sometimes they overlook and ignore the fundamentals. To keep right focus, and keep your work coherent, it is extremely important that you address in a structured way, the perspectives of three constituencies.
- The market, including both existing and prospective clients, customers, and users of the planned product or service.
- The investors, whether of financial or other resources.
- The venture initiator, whether the entrepreneur or the corporate manager.
A majority of business plans are written only from the viewpoint of the third constituency i.e. the initiator. They describe the underlying technology or creativity of the proposed product or service in glowing terms and at great length. They neglect the constituencies that give the venture its financial viability i.e. the market and the investor.
To understand it better,
let us take an example of few construction engineers seeking financing to
establish their own engineering consulting firm. In their business plan, they
list a lot of specialized engineering services related to construction industry
and estimate their annual sales and profit growth which they consider likely
only because of their own feeling about the services they will provide. But they
do not determine which of the proposed services their potential clients really
needed and which would be most profitable. By neglecting to examine these
issues closely, they ignore the possibility that the marketplace might want
some services not among the ones listed.
Moreover, they fail to
indicate the price of new shares or the percentage available to investors.
Dealing with the investor’s perspective is extremely important. For a new venture,
backers would normally seek a return of 40% to 60% on their capital, compounded
annually. The expected sales and profit growth rates projections which are not
in line with this return expectation, could not provide the necessary return
unless the founders are willing to give up a substantial share of the company.
In this example, the
initiators (engineers) have only considered their own perspective, including
the new company’s services, organization, and projected results. Because they have
not convincingly demonstrated why potential customers would buy the services or
how investors would make an adequate return (or when and how they could cash
out), their business plan would lack the credibility necessary for raising the
investment funds needed.
The need to emphasize the market
More often than not, investors
would want to put their money into market-driven rather than technology-driven
or service-driven companies. i.e. the potential of the product’s markets,
sales, and profit is far more important than its attractiveness or technical
One can make a convincing case for the existence of a good market by demonstrating user benefits, identifying marketplace interest, and documenting market claims.
of user benefits is your goal,
not extolling the virtues of the proposed product or service as you see it. To
understand it better, let us take an example of an entrepreneur making a
presentation to a group of venture capitalists about an instrument designed to
control certain aspects of the production process in the textile industry which
is likely to result in reduction of the production costs. He spends majority of
his time explaining the technical features and speaks with passion about what
an innovative product it would be.
The panelists initial
reaction could be completely negative about the company’s prospects for
obtaining investment funds because they could think that its market was in a
Now, let us assume
that one of the panelists asks the presenter, “How long will it take your
product to pay for itself in decreased production costs?” The presenter
immediately responds, “Six months.” The second panelist could reply, “That’s
the most important thing you’ve said tonight.”
The venture capitalist
would quickly reverse their original opinion, saying that they would back a
company in almost any industry if it could prove such an important user benefit,
and emphasize it in its sales approach. After all, if it pays back the
customer’s cost in six months, the product would after that time essentially
The venture capitalist
would know that instruments, machinery, and services that pay for themselves in
less than one year are mandatory purchases for many potential customers. If
this payback period is less than two years, it is a probable purchase; beyond
three years, they probably would not back the product.
In order to succeed,
the entrepreneur would need to recast his business plan so that it emphasizes
the short payback period and plays down the self-serving discussion about
The virtues of finding-out
the market’s interest. Calculating
& demonstrating the user’s benefit is only the first step. An entrepreneur
must also give evidence that customers are intrigued with the user’s benefit
claims and that they like the product or service. The business plan must
reflect clear positive responses of customer prospects to the question “Having
heard our pitch, will you buy?” Without them, an investment usually won’t be
A very valid question
that you may ask at this time, would be: how can start-up businesses, some of
which may have only a prototype product or an idea for a service, appropriately
gauge market reaction?
To understand possible
solutions to this problem, let us look at another hypothetical example. An executive
of a small company puts together a prototype of a device that enables small
payments made just by waving a mobile phone in front of the device. He needs to
demonstrate that customers would buy the product, but the company has exhausted
its cash resources and is thus unable to build and sell the item in quantity.
The executive wonders,
how to get around this problem. There could be two possible responses (among
others off-course). First, the founders could allow a few customers to use the
prototype and obtain written evaluations of the product and the extent of their
interest when it becomes available.
Second, the founders could
offer the product to a few potential customers at a substantial price discount
if they paid part of the cost (say one-third) up front so that the company
could build it. The company could not only find out whether potential buyers
exist but also demonstrate the product to potential investors in real-life
In the same way, an
entrepreneur might offer a proposed new service at a discount to initial
customers as a prototype if the customers agreed to serve as references in
marketing the service to others.
For a new product,
nothing succeeds as well as letters of support and appreciation from some
significant potential customers, along with “reference installations.” You can
use such third-party statements (from would-be customers to whom you have
demonstrated the product, initial users, sales representatives, or distributors)
to show that you have indeed discovered a sound market that needs your product
You can obtain letters
from users even if the product is only in prototype form. You can install it
experimentally with a potential user to whom you will sell it at or below cost
in return for information on its benefits and an agreement to talk to sales
prospects or investors. In an appendix to the business plan or in a separate
volume, you can include letters attesting to the value of the product from
The importance of
documenting the claims. Having
established a market interest, you must use carefully analyzed data to support
your assertions about the market and the growth rate of sales and profits. Too
often, entrepreneurs & executives think along the lines, “If we’re smart,
we’ll be able to get about 10% of the market” and “Even if we only get 1% of
such a huge market, we’ll be in good shape.”
Investors know that
there’s no guarantee a new company will get any business, regardless of market
size. Even if the company makes such claims based on fact (as borne out, for
example, by evidence of customer interest) they can quickly crumble if the
company does not carefully gather and analyze supporting data.
To understand this
better, let us look at another hypothetical example. An entrepreneur wants to
sell a service to small businesses. Whilst making a presentation to a panel of
potential investors, he reasons that he could have 200,000 customers if he
penetrated even 1% of the market of 20 million small enterprises in the country
(hypothetical). The panel points out that anywhere from 14 million to 17
million of such so-called small businesses were really sole proprietorships or
part-time businesses. The total number of full-time small businesses with
employees was actually between 3 million and 6 million and represented a real
potential market far beneath the company’s original projections and prospects.
Similarly, in a
business plan relating to the sale of certain equipment to citrus growers, one
must have the relevant department of agriculture statistics to discover the
number of growers who could use the equipment. If your equipment is useful only
to growers with 40 acres or more, then you need to determine how many growers
have farms of that size. i.e. how many are minor producers with only an acre or
two of citrus trees.
A realistic business
plan needs to specify the number of potential customers, the size of their
businesses, and which size is most appropriate to the offered products or
services. Sometimes bigger is not better. For example, a saving of $10,000 per
year in production cost may be significant to a modest company but unimportant
to a nationwide industry leader.
research should also show the nature of the industry. Few industries are more
conservative than banking and public utilities. The number of potential
customers is relatively small, and industry acceptance of new products or
services is painfully slow, no matter how good the products and services have
proven to be. Even so, most of the customers are well known and while they may
act slowly, they have the buying power that makes the wait worthwhile.
At the other end of the
industrial spectrum are extremely fast-growing and fast-changing operations
such as mobile telecom and ecommerce companies. Here the problem is reversed.
While some companies have achieved multi-million-dollar sales in just a few
years, they are vulnerable to declines of similar proportions from competitors.
These companies must innovate constantly so that potential competitors will be
discouraged from entering the marketplace.
You must convincingly
project the rate of acceptance for the product or service and the rate at which
it is likely to be sold. From this marketing research data, you can begin
assembling a credible sales plan and projecting your plant and staff needs.
How to address investor’s needs?
The marketing issues
are tied to the satisfaction of investors. Once presenters make a convincing
case for their market penetration, they can make the financial projections that
help determine whether investors will be interested in evaluating the venture
and how much they will commit and at what price.
investors’ concerns in evaluating business plans, you will find it worth your
while to gauge who your potential investors might be.
Most of us know that for new and growing private companies, investors may be professional venture capitalists and wealthy individuals. For corporate ventures, they are the corporation itself. When a company offers shares to the public, individuals of all means become investors along with various institutions.
But one part of the
investor constituency is often overlooked in the planning process i.e. the
founders of new and growing enterprises. By deciding to start and manage a
business, they are committed to years of hard work and personal sacrifice. They
must try to stand back and evaluate their own businesses in order to decide
whether the opportunity for reward some years down the road truly justifies the
risk early on.
entrepreneur looks at an idea objectively rather than through rose-colored
glasses, the decision whether to invest may change. To understand it better, let us take a
hypothetical example of an entrepreneur who believes in the promise of his
scientific-instruments company. The entrepreneur is facing difficulty in
marketing because the product is highly specialized and could only have, at
best, few customers. Because of the entrepreneur’s heavy debt, the venture’s
chance of eventual success and financial return are quite slim.
As an advisor to that
entrepreneur, one could conclude that the entrepreneur would earn only as much
financial return as he could, holding a job during the next three to seven
years. On the downside, he might wind up with much less in exchange for larger
headaches. When the project is viewed in such dispassionate terms, the
entrepreneur could actually agree to give it up.
With the above
background in our minds, let us explore what most Investor’s primary
frequently do not understand why investors have a short attention span. Many
who see their ventures in terms of a lifetime commitment expect that anyone
else who gets involved will feel the same. When investors evaluate a business
plan, they consider not only whether to get in but also how and when to get
fast-growing companies have little cash available for dividends, the main way investors
can profit is from the sale of their holdings, either when the company goes
public or is sold to another business. (Large corporations that invest in new
enterprises may not sell their holdings if they’re committed to integrating the
venture into their organizations and realizing long-term gains from income.)
Venture capital firms
usually wish to liquidate their investments in small companies in three to
seven years so as to pay gains while they generate funds for investment in new
ventures. The professional investor wants to cash out with a large capital
Investors want to know
that entrepreneurs have thought about how to comply with this desire. Do they
expect to go public, sell the company, or buy the investors out in three to
seven years? Will the proceeds provide investors with a return on invested
capital commensurate with the investment risk i.e. in the range of 35% to 60%,
compounded and adjusted for inflation?
A common mistake in
many business plans is that the writers often do not show when and how
investors may liquidate their holdings.
Five-year forecasts of
profitability help lay the groundwork for negotiating the amount investors will
receive in return for their money. Investors see such financial forecasts as
yardsticks against which to judge future performance.
entrepreneurs go to extremes with their numbers. In some cases, they don’t do
enough work on their financials and rely on figures that are so skimpy or
overoptimistic that anyone who has read more than a dozen business plans
quickly sees through them.
To understand that
better, let us look at a hypothetical scenario example. A team of retail
entrepreneurs are proposing to set up a retail ecommerce company and forecast a
net income after taxes of 25% of sales during the 2nd and 3rd
years following investment. While businesses in some industries can go to such
high levels of profitability in a short span of time, ecommerce retail is
certainly not one of those industries. The marketplace is so competitive and
the value-chains are so full of inefficiencies that the need for constant
marketing spend and erosion of margins due to non-value adding activities make
it harder to earn decent profitability. The investors will certainly be aware
of these facts. They are very likely to conclude that the entrepreneurs have
grossly and carelessly understated some important costs and have overstated the
projected sales. The investment decision is then not too had to guess.
On the other extreme,
some entrepreneurs think that the financials are the business plan. They may
cover the plan with a smog of numbers. Such “spreadsheet merchants,” with their
pages of computer printouts covering every business variation possible and
analyzing product sensitivity, completely turn off many investors.
Investors are wary
even when financial projections are solidly based on realistic marketing data
because fledgling companies nearly always fail to achieve their rosy profit
forecasts. In a survey (which my firm conducted with a small sample of venture
capitalists back in 2018) officials of five major venture capital firms said that
they were satisfied when new ventures reach 50% of their financial goals. They
agreed that the negotiations that determine the percentage of the company
purchased by the investment dollars are affected by this “projection discount
All investors wish to
reduce their risk. In evaluating the risk of a new and growing venture, they
assess the status of the product and the management team. The farther along an
enterprise is in each area, the lower the risk.
At one extreme is a
single entrepreneur with an unproven idea. Unless the founder has a magnificent
track record, such a venture has little chance of obtaining investment funds.
At the more desirable
extreme is a venture that has an accepted product in a proven market and a
competent and fully staffed management team. This business is most likely to
win investment funds at the lowest costs.
with brilliant product or service ideas but with limited or no experience of
having built/run businesses in the past, need to concentrate first on making a
prototype and assembling a management team, with marketing and financial
know-how, to complement their product/service-development expertise. Because
they never before started a company, they need to show a great deal of visible
progress in building their venture to allay investor’s concern about their
understand a company qualitatively, they can begin to do some quantitative
analysis. One customary way is to calculate the company’s value on the basis of
the results expected in the fifth year following investment. Because risk and
reward are closely related, investors believe companies with fully developed
products and proven management teams should yield between 35% and 40% on their
investment, while those with incomplete products and management teams are
expected to bring in around 60% annual compounded returns.
the potential worth of a company after five years to determine what percentage
they must own to realize their return. Take the hypothetical case of a
well-developed company expected to yield 35% annually. Investors would want to
earn 4.5 times their original investment, before inflation, over a five-year
After allowing for the
projection discount factor, investors may postulate that a company will have
$20 million annual revenues after five years and a net profit of $1.5 million.
Based on a conventional multiple for acquisitions of seven to ten times
earnings, the company would be worth between $10.5 to $15 million in five
If the company wants
$1 million of financing, it should grow to $4.5 million after five years to
satisfy investors. To realize that return from a company worth $15 million, the
investors would need to own a bit less than one-third. If inflation is expected
to average 7.5% a year during the five-year period, however, investors would
look for a value of $6.46 million as a reasonable return over five years, or
43% of the company.
For a less mature
venture (from which investors would be seeking around 60% annually, net of
inflation) a $1 million investment would have to bring in close to $15 million
in five years, with inflation figured at 7.5% annually. But few businesses can
make a convincing case for such a rich return if they do not already have a
product in the hands of some representative customers.
The final percentage of the company acquired by the investors is, of course, subject to some negotiation, depending on projected earnings and expected inflation.
How to make it happen?
Unless you are wealthy
enough to furnish your own capital to finance the venture and test out the pet
product or service. The only way to tend to your needs is to satisfy those of
the market and the investors.
Of course, you must
confront other issues before you can convince investors that the enterprise
will succeed. For example, what proprietary aspects are there to the product or
service? How will you provide quality control? Have you focused the venture
toward a particular market segment, or are you trying to do too much? If this
is answered in the context of the market and investors, the result will be more
effective than if you deal with them in terms of your own wishes.
Once you accept the idea that you should satisfy the market and the investors, you face the challenge of organizing your data into a convincing document so that you can sell your venture to investors and customers.
Importance of effective packaging of the final product i.e. the written plan
A business plan gives
financiers their first impressions of a company and its principals.
expect the plan to look good, but not too good i.e. to be the right length;
to clearly and precisely explain early on all aspects of the company’s
business; and not to contain bad grammar and typographical or spelling errors.
Investors are looking
for evidence that the principals treat their own property with care and will
likewise treat the investment carefully. In other words, form as well as
content is important, and investors know that good form reflects good content
and vice versa.
Among the format
issues I think most important are the following:
In soft form, the
presentation should be professionally designed and should not look like a colorful
promotional product brochure. It should avoid funky fonts and should use font
sizes which are easy on eye to read but are not excessively large. In the
printed form, the binding and printing must not be sloppy; neither should the
presentation be too lavish. A stapled compilation of photocopied pages usually
looks amateurish, while bookbinding with typeset pages may arouse concern about
excessive and inappropriate spending. A plastic spiral binding holding together
a pair of cover sheets of a single color provides both a neat appearance and
sufficient strength to withstand the handling of a number of people without
A business plan should
be no more than 40 pages long. The first draft will likely exceed that, but
editing should produce a final version that fits within the 40-page ideal.
Adherence to this length forces entrepreneurs to sharpen their ideas and
results in a document likely to hold investors’ attention.
Background details can
be included in an additional volume. Entrepreneurs can make this material
available to investors during the investigative period after the initial
expression of interest.
The Cover and Title
The cover should bear
the name of the company, its address and phone number, and the month and year
in which the plan is issued. Surprisingly, a large number of business plans are
submitted to potential investors without return addresses or phone numbers. An
interested investor wants to be able to contact a company easily and to request
further information or express an interest, either in the company or in some
aspect of the plan.
Inside the front cover
should be a well-designed title page on which the cover information is repeated
and, in an upper or a lower corner, the legend “Copy number______” provided. Besides
helping entrepreneurs keep track of plans in circulation, holding down the
number of copies outstanding (usually to no more than 20) has a psychological
advantage. After all, no investor likes to think that the prospective
investment is shopworn.
The two pages
immediately following the title page should concisely explain the company’s
current status, its products or services, the benefits to customers, the
financial forecasts, the venture’s objectives in three to seven years, the
amount of financing needed, and how investors will benefit.
This is a tall order
for a two-page summary, but it will either sell investors on reading the rest
of the plan or convince them to forget the whole thing.
The Table of
After the executive summary include a well-designed table of contents. List each of the business plan’s sections and mark the pages for each section.
Even though we might
wish it were not so, writing effective business plans is as much an art as it is
a science. The idea of a master document whose blanks executives can merely
fill in, much in the way lawyers use sample wills or real estate agreements is
appealing but unrealistic.
Businesses differ in key marketing, production, and financial issues. Their plans must reflect such differences and must emphasize appropriate areas and deemphasize minor issues. Remember that investors view a plan as a distillation of the objectives and character of the business and its executives. A cookie-cutter, fill-in-the-blanks plan or, worse yet, a computer-generated package, will turn them off.
Write your business plans by looking outward to your key constituencies rather than by looking inward at what suits you best. You will save valuable time and energy this way and improve your chances of winning investors and customers.
ABOUT THE AUTHOR:
MOHAMMAD KASHIF JAVAID
The writer is an international business consultant. His LinkedIn profile could be viewed at:
You can write to him at firstname.lastname@example.org
To find out about his consulting services, please visit: https://www.acsconsulting.pk/
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articles by the writer, please follow the link: https://www.acsconsulting.pk/blog