This article was first published in the February 2012 edition of Accounting and Business Ireland magazine.
In the current economic environment, it is difficult to obtain finance for all types of businesses. In order to help position a business with the best opportunity for securing finance, an approach focused on logical and comprehensive presentation of information needs to be taken when compiling projections and plans. Such an approach should include the following considerations:
It is critical to have easy access to accurate financial, product and HR information across the business. For businesses with well-organised and up-to-date systems, the process of preparing a business plan is made that much easier. For any restructuring or funding plan to be supported, banks need to have confidence and be able to easily verify the base information coming from the business.
Organised presentation of key factual information assists a bank to better understand the commercial proposition, and more importantly, the potential risks attaching to the business. From logical and structured information, it should be easier for the bank to verify the assumptions that generate the projections.
Assumptions are the fundamental building blocks of any business plan. The banks will want to focus on understanding the assumptions used to generate, for example, extra sales, i.e., is it by increasing volume and reducing sales price, and, if so, how realistic are the assumptions of the costs of increasing volume? In the hotel and catering industry, for example, there is a substantial amount of benchmarking information available on key performance indicators (KPIs). The KPIs relating to hotels will generally focus on room occupancy, average room rate and revenue per available room.
A good business plan will concentrate on reporting factual statements and assumptions that can be easily verified and lead into structured arguments to support the outcome. While it is undoubtedly important to communicate the emotional aspects and determination to succeed that is behind most businesses, the overriding plan needs to based on robust commercial facts. If this approach is adopted then, very often, the accompanying written part of the business plan can be quite short, as the main aspects are dealt with as part of the assumptions and projections within the financial model.
Strength of negotiation position
In seeking support for a bank or external investor for a business plan, it is important to consider what negotiating position should be taken on key aspects. As part of the preparation for negotiation, it is a good idea to carry out a sensitivity analysis on the key variables. For example, you should consider how the business plan will perform if interest rates change or sales/variable costs increase or decrease by, say, 10%. The results of key sensitivities or ‘what if’ scenarios, will provide a more realistic range of outturn results for the business plan.
Conclusion The process of preparing a detailed business plan can be an excellent way to go ‘back to basics’ and understand how to strengthen the performance of any business. By making available to a bank or external funder, fundamental quantitative and financial information in a structured way, the key aspects of the business can be assessed quite quickly and a decision given, hopefully, to support the plan.
Additionally, if the financial model, which contains all of the detailed assumptions and calculations, is set up correctly it can be used as a monitoring check of actual versus budget performance and an early warning system if the business plan is not working. The goal of a well- presented business plan is to assure future support from a funder and ultimate survival.
Niall Rice is a partner in RSM Farrell Grant Spark’s Restructuring and Insolvency Department