Virtual Business Plan

Financial statements and projections should follow Generally Accepted Accounting Standards and must (at a minimum) include properly prepared balance sheets, income statements and cash flow statements.
Bankers and investors are familiar with the correct content, organization and presentation of financial statements, and expect to see them in your business plan.
Don't cut corners or attempt to devise your own method of financial and pro forma statement presentation.

In most cases, capital sources expect financial projections for a three to five year period, and historical statements for the past three years (or since inception if operating period is less than three years).

Consider organizing your financial statements as follows:

Income Statements

• Year 1 - Monthly Projections
• Years 2 thru 5 - Quarterly or Yearly Projections
• Existing businesses should provide income statements for the last 3 years if available.

Balance Sheets

• Year 1 - Quarterly Projections
• Years 2 thru 5 - Yearly Projections
• Existing businesses should provide current balance sheet and balance sheets from the prior 2 years if available.

Cash Flows

• Year 1 - Monthly Projections
• Years 2 thru 5 - Quarterly or Yearly Projections

Other information that you may consider including:

Financial Assumptions
These are critical to properly convey the "reasons behind the numbers" for outsiders reviewing your financial projections.
Explain how you calculated the numbers you used in your financial statements.
For example, we will sell 1000 units per month at $5.00 per unit.
This is projected to increase by 4% every month, etc.

Break-Even Analysis
These figures demonstrate the volume of sales, in units and dollars that must be generated to cover fixed and variable expenses.
At the break-even point, you start becoming profitable.
Normally this data is presented in a graph format with sales on the X-axis and units sold on the Y-axis.

Sources and Uses of Funds
This section explains to your reader which sources you expect to secure capital from, and what you specifically plan to spend it on.

Investment Structure and Objectives
This section outlines the amount of capital needed, various investment structures, and the estimated return to your investor.
It is critically important to tell your investor how they will recoup their money, when they can cash out, and what they will receive as a return.

Financial Ratios
Providing standard financial ratios helps your business plan reader to analyze how well your company will perform compared to other companies within your industry.
For existing companies, show the trends over the last 3 to 5 years to outline any improvements in your performance.

• Failing to include the "Big 3" statements and projections (income statement, balance sheet, cash flow).
• Presenting sales and profit projections that are unrealistic and unfounded.
• Omitting financial assumptions to explain where the "numbers" originated.
• Presenting "creative" rather than "accepted" financial statements.
• Underestimating expenses and not budgeting for unexpected costs.
• Lack of financial investment on the part of the founders.
• Including excessive salaries and office expenses at start-up.
• Offering a lower percentage of ownership than the investment requirement demands.
• Offering a return on investment that is out of line for your industry.
• Absence of contingencies and projections for worst case scenarios.
• Financial statements that are not prepared or reviewed by a reputable accountant.

Financial ratios put financial statement information into perspective, and allow businesses to spot financial issues that may threaten cash flow, or even the overall viability of a business. Financial ratios, particularly for privately held companies, fall into four general categories: liquidity, profitability, turnover and leverage.
 

Liquidity Ratios
Liquidity ratios focus on a company's ability to pay its bills when they come due.
Bankers and suppliers use liquidity ratios to measure a company's credit worthiness. If liquidity ratios remain relatively high for a prolonged period, too much capital may be invested in liquid assets (for example, cash, short-term investments, accounts receivable, inventory) and too little capital may be devoted to increasing shareholder value.
If liquidity ratios remain relatively low, a company may not have sufficient liquidity to meet ongoing financial obligations.

Profitability Ratios
Profitability ratios offer a glimpse into a company's operational performance and help business owners determine if they are maximizing their bottom line.
They also offer insights into the return a company is generating from its assets and invested capital.
These ratios should be compared on a period over period basis (i.e. year to year).
While these ratios may vary from industry to industry, standard ratios include Return on Assets, Return on Equity and Return on Sales.

Turnover (Efficiency) Ratios
Turnover or efficiency ratios measure the activity or changes in certain assets, including accounts receivable, accounts payable and inventory.
Poor turnover generally indicates resources are invested in non-income producing assets.

Leverage Ratios
Leverage ratios indicate how well a company's uses borrowed funds (rather than stockholders' equity or investments) to expand its business.
The goal is to borrow funds at a low interest rate and invest in a business activity that produces a rate of return exceeding the target rate of return for investments.

Begin by asking yourself why you are getting into business.
Do you see yourself running your company twenty years from now, or are you interested in moving on after a few years?

Are you in it for the big money at the end of the rainbow, or are you more interested in running a solid and steadily growing family business?

It's important to think through these issues and decide what you intend to do with your business before you can adequately answer the questions, and address the issues, concerning how your investor will exit your company.
The requirements of each investor will vary in terms of return and exit strategy they seek. Two examples follow:

Venture Capital
These investors look for a high return and an exit strategy of approximately 3-7 years.
They work almost exclusively with companies that may go public or can be sold for a significant profit. However, keep in mind that going public is very rare and is unattainable for most companies.

Angel Investor
These investors typically are looking for a high return but are more flexible with the terms of the exit strategy.
Angels are typically less sophisticated than venture capitalists or institutional investors, and will become involved in your business because of a personal relationship with you.

Here are some possible exit strategies to consider:

• Initial Public Offering (a very, very rare event for most startups)
• Merger/Acquisition
• Buyout by partner in business
• Franchise the business
• Hand down the business to another family member

• Assuming you have a business with the potential to go public.
• Failing to explain how your investor will specifically recoup their investment and a sufficient return.
• Failing to take your personal goals into account when planning your exit strategy.
• Completely ignoring this aspect of the planning process, or having no exit strategy at all.

Well, not exactly. Investors are interested in the growth of your business, but ultimately their commitment of capital hinges upon their ability to recoup their initial investment and a healthy profit.
The lack of a solid and realistic exit strategy demonstrating how investors can accomplish this goal can immediately turn off many sources of capital.
Your chances of cashing in with an investor are seriously reduced without a clear definition of how they will cash out their investment.

Entrepreneurs rarely place the same level of importance on the exit strategy in a business plan that an investor would.
Business owners are focused on raising the capital needed to launch and expand their venture.
Solid business plans with thorough marketing, sales, operations, management, and concept analysis can, and will, fall short when little consideration is given to the exit plan.

In our experience at entrepreneurs and business owners most often list "going public with an IPO in five years" as their intended exit strategy.
Although this is an optimistic and hopeful goal, this outcome normally remains just that - a hope.
Providing realistic exit strategies will result in instant credibility and helps reassure investors concerned with receiving a significant return.

The book "Finding Your Wings" by Benjamin & Margulis addresses the IPO misconception, noting that, "Acquisition or buyout is the predominant method for achieving liquidity for small company shareholders.
The primary method of achieving liquidity is not IPO - far from it.
But the misconception remains.
Too often, entrepreneurs and their business plans say they will take their company public in five years.
The odds are that such and event will not occur.
So entrepreneurs need to consider how that investor is going to achieve liquidity."

Ok, so the exit strategy plays an important role in the business plan, especially in the eyes of your potential investors.
In this issue of  Newsletter we outline the most common exit strategies for you to consider along with brief advantages and disadvantages of each.

Initial Public Offering

• Description: Sell the shares of the company to the public to be traded on a stock exchange
• Advantages: Conversion to cash for investors, major shareholders usually maintain control, high potential return
• Disadvantages: Company must have tremendous growth potential to receive IPO, costly process, uncertain outcome. Major shareholders may be limited as to how much, when, and how they can sell stock

Acquisition

• Description: Business bought outright by another existing company
• Advantages: Receive cash or stock, often purchased by strategic partner, management contract can be negotiated
• Disadvantages: Fit must be appropriate, potential management changes, corporate identity may disappear

Sale of Company

• Description: Business bought by other individuals or entities
• Advantages: Receive cash immediately
• Disadvantages: Must find willing buyer, normally results in new management

Merger

• Description: Join with and existing company
• Advantages: May receive stock and some cash, resources are combined, current management may stay
• Disadvantages: New partners or bosses, less control, may receive little or no cash

Buy-Out

• Description: One or more stockholders buy out the others
• Advantages: Seller receives cash, other owners remain in control of the company
• Disadvantages: Seller must be willing, buyers must have sufficient cash to buy others

Franchise

• Description: Sell business concept to others to replicate
• Advantages: Receive cash, retain current management, opportunity for large scale growth
• Disadvantages: Concept must be appropriate for franchising, legally complex

Because each business is different, a realistic exit plan should take into account your particular industry, business life-cycle, competitive environment, management needs, and more.
It is also important to consider your personal and financial goals, and how they relate to the future of your business.

Do you value privacy and autonomy?

Then an IPO, with its heavy public disclosure and extensive outsider demands, may be an unsuitable fit for you and your venture.
Does building your business from the ground up excite you, but the prospect of managing it over the long haul turn you off?

Exiting with a sale of your business may be your best bet, freeing you to pursue other entrepreneurial projects and allowing new owners to manage the day to day operations in the future.

Ultimately, the most effective exit plans will take into account business, personal, and investor goals.
Keep in mind that the business plan is the road map for your company and a well thought out exit strategy simply clarifies a future destination when your investor can expect to reach liquidity.

Incorporating a variety of well thought-out exit strategies is typically the best approach to build investor confidence and increase your chances of successfully raising capital.

We suggests inserting the table of contents immediately after the executive summary in your business plan.
Most readers will start with your executive summary, and then want to locate specific information that they want to address first.

Your table of contents should list all the major sections within your business plan, and can also be broken down into important or clarifying sub-sections.
Make sure your table of contents page is organized, clear, neat and properly numbered.
Mistakes, sloppiness, or misspellings in the table of contents give your reader the impression that you are unorganized and careless right from the start.

• Important sections and/or subsections are missing
• Page numbers do not match up correctly with the content of the plan
• The table of contents is two pages in length when it could neatly fit onto one page
• The table of contents provides too much detail and is cluttered.
• The text layout is not uniformly aligned and looks sloppy
• It appears that little or no thought went into its design and creation