Research that is necessary in a business plan
The conversation began with a call. The caller had decided they were going to open a garden center. They had worked in the industry for many years and because their saving for years as well as a small inheritance, they were ready to start out on their new adventure.
They knew the amount of money they had on hand would not be enough to start the business but felt that with a good business plan and their net worth they could secure the necessary bank loan.
As they asked the question of how much it would cost to have me walk them through the process, the follow up question was, “What if we decide to not go forward with the business?”
My answer was that the money they would spend with me would be the best money they had ever spent because we would have prevented them from a tremendous financial loss.
They shared the business plan they had begun to write and asked for an initial review. While not complete, their written plan was rather lengthy and required quite a bit of time to read as well as to review all of the numbers and calculations they had produced.
When we next visited they first wanted to know what I thought of the business plan. The review I had planned to share was quite detailed, but they quickly wanted to tell me that their business plan and loan application had been approved in the amount they had requested.
After their announcement, they asked me to continue with my evaluation of their initial business plan. The plan was a disaster. Getting past all of the typos, incomplete and improper sentences, the plan had little chance of success.
The numbers were ones the potential business owner and their accountant had created after several discussions. The potential business owner created the plan and then paid the accountant to review it before sharing it with the banker.
As one who spends a good deal of time looking at things like this, I am not sure who I am most disappointed or angry with. From the professional side, I saw an accountant that simply confirmed the numbers to be accurate. And while the numbers did add up, the way the numbers were stated reminded me of the individual that first noticed the Bernie Madoff scandal. In both situations, when the numbers were graphed, the increases were in a straight line.
I was also very disappointed in the banker. The potential owner asked if his business plan was OK. When he got an answer of ‘yes’, he thought he had done his homework correctly. Instead, the banker was approving the loan based on the collateral that was offered. The potential business owner believed he had received sound advice from two professionals; this was not the case.
What was missing, and why was the plan doomed to failure before it started? The problem with showing a sales increase from month to month is faulty because we operate in a seasonal business. Unless you sell fall or Christmas decorations, it is pretty hard to expect that the sales in the last quarter of the year is going to exceed the third quarter.
When you are preparing the business plan, you cannot just plug in numbers for the operating expenses. If you are going to utilize a 4,000 square foot building, you need to examine other similar 4,000 square foot buildings in the area to learn what their operating expenses are. As long as the other businesses are retail oriented, it does not matter if they are a garden center, hardware store, or other form of retail.
You need to have numbers based on fact. If you are paying property taxes, you need to know the basis of how property taxes are calculated in your community and find similar businesses to compare to.
When you are looking at payroll, in addition to having some industry standards with regard to payroll as a percentage of sales, you need to calculate just how many hours of manpower that payroll is going to buy you and how many people you need in the business when it is open. You also need to know just how much you are going to pay yourself.
As sales are calculated, you need to know how that number translates to sales per square foot. In the case of our example person, their sales per square foot was approximately twice the national average. I was asking how the potential business owner thought he could be so good as to be able to produce that much. Only at the point that I had performed the calculation did he begin to see that what sounded good at first could not possibly add up.
Over a period of weeks, we worked to tweak the numbers so that the expectations were reasonable. We added a large dose of common sense that previously was missing. Too often, when a person talks with an accountant, a buying group, franchise program or other vendor about starting a business, a basic Excel chart is utilized to plug in the numbers to create the business plan.
Too often, once getting the approval of the bank, the business plan is put away on a shelf and never looked at again. When you are planning to open a new business, or if you are an existing business that is asking for a bank loan for improvements or enlarging your business, these factors have to be considered. After all, when all the paperwork is completed, and you are signing on the dotted line, it is you that the bank is looking to as the source of repayment of the loan.