This is a guest post by Sabrina Parsons, CEO of Bplans.com.
A well-formatted business plan isn’t a requirement for getting a loan, but it’s a great tool to help you formulate what your business does, what your goals are, and how you’re going to achieve them when you sit across the desk from a loan officer to explain why he or she should give you a loan.. A good business plan can also guide you in smart decision-making when considering what type of funding to ask for, how much, and when.
Here are the three reasons to have a detailed business plan, regardless of whether or not you have to produce one for a potential lender.
1. A business plan demonstrates a clear pathway to success
When you apply for any loan, a bank or other lender will want to see your current and projected cash flow, your personal financial situation, and the business assets you bring to the table.
This data should be included in the Financial Section of your business plan. In one document you should clearly show your:
- Profit and loss statement (P&L)
- Cash flow statement
- Balance sheet
- Sales forecast
- Personnel plan
- Maybe some business ratios and/or a break-even analysis
In fact, demonstrating that you can generate profits is one of the most important battles to win. Not only does it show potential lenders you have the cash flow to pay creditors, employees, and others, but it also provides a historical perspective of the performance and liquidity of your business.
2. A business plan helps you identify how much money you really need
When seeking a loan, understanding where your business is headed is critical. A business plan not only helps you identify your current funding requirements, it also helps you evaluate future financial needs. What will you need in a year? In two years? In five years? Will the initial capital you’re seeking be enough to get you there?
Plus, any potential investors or lenders will want to know how you arrived at the loan amount you’re seeking. A tight business plan will demonstrate the logic behind your request.
Caroline Cummings, VP of Business Development at Palo Alto Software, gives this advice:
“It’s actually a very good idea to have multiple budgets and financial forecasts developed in your business plan so that you can address three different growth models for scaling your business.”
And of course, before any interviews with investors or lenders, a detailed business plan will give you the tools you need to determine where you could spend less, or where you need to make sacrifices.
3. A business plan will guide your timing regarding when you ask for funding
Because a business plan is a road map for your business—one that outlines goals and details relating to how you’ll achieve them—you can use it to identify when you’ll need a cash injection so you know exactly when to apply for a loan or seek investment.
Consider your initial startup costs (if your business is a startup) and your ongoing costs. Startup costs include things like office supplies and furniture, initial inventory, incorporation fees, business licenses and permits, office space expenses, equipment and stationery. Ongoing costs might include salaries, rent, utilities, marketing expenses, taxes, inventory, and loan repayments.
Your ongoing costs will likely be the driving force behind future cash injections, so doing a little work now to project what those costs could be in the future will help you prepare for your needs down the line. (Don’t forget to include some “what-if” scenarios in your estimates.) You may find you need less capital in the beginning to fill the gap until you start bringing in sales. Or you may determine that you need more at the outset so you can grow quickly.
Creating a detailed, accurate, and realistic business plan will take some time—but given all the good it will do you down the line, consider it an investment in the future of your business.