Updated: Jul 15, 2019
Business plans are a great tool in helping you make significant decisions, a business plan helps you grow according to a survey conducted by the Kauffman Center for Entrepreneurial Leadership. Companies with a written business plan have 50% greater sales growth and 12% higher gross profit margins than those without one.
The ideal business plan should be formulated with an excellent financial modelling tool and should project forward for five years. The modelling tool needs to project forward based on what you sell, what the cost of sales is, overhead costs, key people salaries and any funding requirements.
You should also be able to easily adjust the underlying financial assumption in your business plan's economic model — adjustments to your average value of sale for each product or service line. The number of units (sales, projects, items sold) should be able to be easily adjusted and flow through each projected year. You should be able to change the cost of goods as a real value – not as a percentage as this gives you the power to increase prices without increasing your cost of sales.
One of the real powers of business planning should also be to the owner's stake in the business, their risk, and what they take home as a salary. Therefore, you should have a separation for the key people of the company so you can model adjustments to the take-home salaries of the business owners. This factor alone may have the most profound effect of the financials of the business. Just imagine you are the business owner and your current take-home salary is £75,000 per annum. However, you believe, based on the sweat equity, long hours, the risk to your assets that your take-home should be more along the lines of £500,000 per annum. Placing this into a flexible financial model will help to define the real adjustments needed for sales, profits, and cash flow.
Being able to adjust the financial model in your business plan easily, so it's aligned with your needs and your desires for being compensated adequately is the real value of a business plan.
Therefore, your business plans need to be more than the vision, mission, and purpose statements. It needs to take into consideration how your competitors will adversely affect gaining the results of your financial model. How targeting the right customers gets you your economic outcomes, and how targeting the wrong customers reduces your margins and blows up your ability to cash flow your business.
You need to be able to quickly go back into your business planning software and make adjustments as your business makes real-world adjustments. What happens to your profit, cash flow, and business value if your average amount per sale is below expectation? What happens to cash flow if you are outselling expectation, but costs are higher than expected? What happens if you are growing and you need to move into larger premises, hire more staff or shift into a new geographical location?
Your business planning system needs to be a tool you can make real-world adjustments into and immediately get back financial answers to support your decision-making process. Is moving into a new premise a good idea? Let's put that into the economic model and see the impact on cash flow. Is hiring new staff a good idea? Let's put that into the financial model and see the effect on cash flow. What happens if we reduce price and increase the volume of sales? Let's put that into the economic model and see the impact on cash flow.
The real value of a business plan is how it supports you to model the financial outcomes for your business. Taking thoughts and seeing how those thoughts impact revenue, net profit, cash flow and business value.
A useful business planning tool with a robust and easy to use financial modelling system will help you predict the future. Having this type of instrument at your disposal will support you in making the right decisions more often and impacting your ability to grow your business.
Don't be fooled into creating a business plan that is based on complicated Excel worksheets. These will only frustrate you and end up in the bottom drawer. Find out how we help you to model your business, so it produces predictive results, and how you can use the plans model to make simple but powerful adjustments as your business grows.