California entrepreneur Sandra Delarosa stayed up late at night to ready her business plan. The document, which she originally crafted in 1997 using a book and a sample from a friend, laid out Ms. DeLaRosaís vision for creating a line of rash guards for female surfers, a market that had some big players with large balance sheets.
Ms. DeLaRosa, who had been in the surf apparel industry for years, was convinced that her products could make some serious money, but the bank wasnít buying it. Ironically, the entrepreneur cited a lack of cash flow and a lack of collateral as reasons why the bank declined her $30,000-to-$50,000 micro-loan proposal.
In retrospect, Ms. DeLaRosa admits her main drive for writing a business plan for her company, Raw Skin, was to get a loan. When that backfired, she re-evaluated her plan to make sure it was in step with what she really wanted to do. "Writing a business plan makes you do your homework, and it teaches you about what youíre getting yourself into," she says.
For decades, finance experts have viewed business plans as coming in two basic flavors. Some plans are sophisticated sales documents to help the entrepreneur get capital. Like most promotion materials, these plans emphasize the positive and engage the reader. Other plans are operational documents that rely on objective data about the company and its markets.
Crafting a business plan solely as a fund-raising document worked during the 1990s boom, but that approach now meets with skepticism from investors and finance experts. Gaining credibility, naming identifiable customers interested in the product, and having a clear vision for growth are the key ingredients for a successful business plan in todayís market.
Likewise, in terms of format, gone are the days when investors threw money at high-flying entrepreneurs who wrote business plans on the back of a napkin. And despite books like next monthís "Burn Your Business Plan" (Lauson Publishing, $19.95), consultants, academics, and investors still encourage CEOs to get back to the fundamentals of plan writing. Entrepreneurs can find business plan templates online (see box, "Templates for Success") or get help through Small Business Administration (SBA) Small Business Development Centers.
CEOs who feel intimidated putting it all down on paper can utilize plan-writing software. But no program will perform the major chore of fact-gathering, warns Tyler Orion, CEO of the San Diego Regional Technology Alliance, a nonprofit that assists tech start-ups. "Five to ten years ago, the rage was business plan software, which gave paragraph-by-paragraph instructions on how to write a business plan. Those things were junk, because they didnít force you to do your homework," Mr. Orion says. "If you donít know enough about your business to write your thoughts down in a cohesive way, you should go get a job."
When starting to create a plan, customer research reigns supreme, says Luis Villalobos, founder of the Tech Coast Angels, a band of private-placement investors with three branches in Southern California. Mr. Villalobos, a private-placement investor since the early 1980s, points out what venture capitalists call the "Chinese syndrome" Ė the claim by some entrepreneurs that if they sell their product to just 1 percent of the 1 billion people in China, they will automatically have a market. He says a strategy explaining how the company will actually get those sales is more effective and realistic than claiming a certain slice of a potential market.
In the aftermath of management scandals at Enron, WorldCom, Tyco, ImClone, and others, even the "soft" section of a plan, naming the management team, plays an important role in building the planís credibility. "It takes a different set of skills to launch and start a business than to manage and grow a business," says Mr. Orion. "Smart entrepreneurs will recognize when they have passed their skill set and will bring in good management."
The financial section of the plan should include an honest evaluation of the companyís needs. "You rarely hear the founder of a start-up say, ĎI estimated and budgeted right and had plenty of money,í" says Ken Yancey, CEO of the Service Corps of Retired Executives (SCORE), a Washington, D.C.Ėbased program that provides mentorship and consulting assistance to small businesses. "Particularly in a down economy, you need to make sure youíre honest about your early capital requirements. Weíre talking about money for traveling, software, computers, telephone lines, and server leases."
These days, Mr. Yancey adds, itís important for a business plan to prove the company can bootstrap Ė a far cry from the dot-com boom, when lavish office expenses were common. Companies must show where they need to spend money and where they donít.
Extra expenses werenít something Ms. DeLaRosa initially planned for. After consulting with her local SBA Small Business Development Center, she learned her expenditure projections were way off.
"You donít realize how many expenses there are, running a business," she admits.
To avoid such mistakes, entrepreneurs can develop a plan with input from a variety of sources, from outside experts to bankers to employees.
"Entrepreneurs often work with consultants, but they donít get enough people involved in the business plan who are on the other side of the fence," says Rebeca Romero, CEO of Centinel Bank of Taos in New Mexico. "Many people are scared to bring in a business plan when itís not complete, but Iíd much rather have someone come in and say, ĎThis is a rough draft Ė what do you think?í"
Also, itís clear from investors that business plans arenít just for start-ups. An established company will have a different, larger readership for its finished business plan. "If youíre already in business and donít have a plan, you want to involve those stakeholders important to you and your organization, whether theyíre clients or financiers, so they have a concrete understanding what your business is," says Mr. Yancey of SCORE.
Mr. Villalobos believes entrepreneurs who are shopping around their business plans will benefit by being realistic about financial projections. "Investors want to be told the truth," he says. "Theyíll work with you even if times turn bad, but donít fudge around and say you donít have a [financial] problem."
Not getting a loan right away forced Ms. DeLaRosa to rethink her business plan, which meant examining the market more closely. Last year, she received a $35,000 line of credit to help boost production Ė and celebrated her first profitable year.
Her re-evaluation even prompted her to make a change in her product line. "Iím glad
I didnít get that [first] loan," she says. "It gave me more time, which meant making less costly mistakes."
Templates for Success
Helpful sites for writing a business plan:
•B Central (www.bcentral.com/articles/bizplans/101.asp): Straightforward article on how to put together a basic plan.
•PlanWare (www.planware.org/freeware.htm): Provides links to freeware sources and papers on financial forecasting, strategic planning, and capital management.
•SBAís Business Plan: Road Map to Success (www.sba.gov/starting/indexbusplans.html): No-nonsense outline of sections and content for start-up company plans.
•SBA Online Library Reading Room (www.sba.gov/library/sharewareroom-starting.html): Contains downloadable ZIP files covering format and strategic thinking behind a planís organization.
•Vfinance (www.vfinance.com): Capital matchmaking site provides free business plan template. Registration required.