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    7 Replies Latest reply on Oct 18, 2009 9:33 AM by JasonTees

    One of those who never wrote a business plan

    Tracker

      In one of the business forums I participate in, a business owner contacted me asking for some advice; he wrote me about the predicament he was in. What he shared with me is a good point to make to those of you starting a business or that want to start a business:

       


      <hr />
      his message to me<hr />

       


      I am one of those who never wrote a business plan because our business needed no "borrowed" start up money. We used a proven method, studied our competition, found our niche, made our sales calls, contacted mutual friends in the industry, and business came.

       


      We sold $200,000 the first year; 2001, $1,000,000 the second; and at over $4,000,000 by the end of 2006. We branched out into new markets for us and our customers to keep them and find new ones; one stop shopping we called it. We added staff, added equipment, and trained. Then, the gas prices and the economy killed the industry.

       


      Our diversification is working, but too slowly to keep up with the losses. An example: one of our customers 2 years ago was doing $16,000 per month, and they paid monthly. Their budget is now less than $8,000 per month.

       


      How do I convince a bank to loan me the capital for a year to keep up and wait out the recession? Do I go to the bank? I am really at a loss and have responsibilities to the people who work for me.

       


      I have cut payroll, I have cut bonuses, I have cut expenses, my family has personally put in additional hours to make deadlines, I have focused on new customers and worked to keep the old ones.

       


      What can I do now to get cash flow before it is too late?

       


      I have done a marketing plan with former jobs, but not my own. It was recommended by the SBA? Does history make a better marketing plan? Is this what I should focus on right now? How is the economy slide, recession, and my lower, slower revenue going to affect my bank's decision to "bail me out"? I know transportation will rebound, but how do I keep alive until then? I have to do something soon.

       


      What would you advise?
      <hr />
      my reply<hr />

       


      Business plans are not just for start-ups. They are also necessary when established businesses hit a plateau or are staging/preparing for growth or when they are entering difficult economic times ... those are times when it is important to have a business plan in place to support meetings with their lenders (or prospective lenders) and investors to raise capital to help fuel growth or get them through the tough times. And sometimes it is important to show your plan to creditors as part of a restructuring of debt to get temporary relief from a cash crunch.

       


      All of the things you have done would go into that plan to show what remedies you have taken to cut expenses as much as possible, to retain customers and to create new ones.

       


      If the plan is put together well, and the picture it shows is one where you prove the viability or sustainability of your business going forward, that may be what swings getting some capital lined up to help you until things get turned around.

       


      So, if you can do it, I recommend getting your plan (including realistic financial projections) together and using that as a means to show people you can get through the crunch. Even during tough times it may be possible to bring in an angel investor (one that understands your industry and can see your business is sustainable and should recover). So that may be something to consider as well. An equity investor as opposed to a loan (debt) would mean you don't have additonal demands placed on cash flow.

       


      I hope the above helps you in some way.

       


      <hr />
      end of my reply<hr />

       


      One thing to point out here.

       


      Even when you are an established business it pays to have a business plan prepared and kept current. And if you are a start-up that does not need money now. You may need it at some point and scrambling to prepare a business plan can slow you down on being prepared to talk with investors and funding sources.

       


      There are many opportunities that occur in business, where a business plan may be needed to help you come up with the capital to grab the opportunity while its still there ... and as you can see in the case outlined above; when things turn tough and you need to lean on or find financial resources to get you through ... not having a business plan ready to present to funding sources or investors, puts you way behind the curve and at a disadvantage.

       


      Dennis Lowery

       

      Adducent, Inc.
        • Re: One of those who never wrote a business plan
          JasonTees Wayfarer

          I guess my question to you Adducent is: what could that business owner
          possible have put into a business plan that would offset such a
          dramatic drop in revenue?

          After reading that business owners predicament, I'm still not sure that a business plan would matter. I don't say this as a critic, but as a workout officer for a lender. Yes, for large corporate or middle market businesses, a business plan that demonstrates projections and methods to turn around the business might help sway a bank.

          But for small business owners? My experience is that most business owners lack the time or financial sophistication to create financial projections that add any value. If the bottom has fallen out of the economy, there's not much planning one can do for that anyway, especialy when you consider that most small business ventures are under-capitalized to begin with. If the people stop walking in the door, there's no magic words that will turn the spigot back on. To me, whether a bank will give a small business owner time to recover is more a function of whether the bank is looking at a huge charge-off (ie if they have no collateral, they are more likely to give it time to turn around) than it is of a good business plan.

          In the past year, I've worked with abut 150 struggling small business owners, and I'm yet to see a set of projections come true. I like to say that most projections are an excercise in telling the bank what they want to hear (so yes, your mention of realistic projections is quite on point). Of course, the small business owners is between a rock and a hard place. If the projections aren't good enough, the bank will say their cash flow is too weak. If the projections are too optimistic, the banker will dismiss them as fiction. The only way that a small business owner can turn things around is to make some sort of dramatic change...like bring in a partner who has cash, sell some significant asset, or raid their retirement savings. Unfortunately ideas like increasing marketing efforts, and cutting employees hours don't ever seem to make enough of a difference to keep a small business afloat during bad time.

          The last point that I'll mention is a stat I heard at my bank. 85% of businesses that are transferred to our workout area never make it out. I think the lesson to be learned is that no matter how much planning you do, the world of capitalism is unrelenting.

          (I hope you don't take my arguments as criticism. I've read many of your posts, and you are clearly an articulate and knowledgable person when it comes to business)
            • Re: One of those who never wrote a business plan
              Tracker

              You are correct that a business plan would not have prevented a decline in their business or or prevent something that adversely affects that is beyond their control--that was not the point I was trying to make. But if they had their plan in place that explains their business, the management team, the opportunities in their market place, they would have had the document in place to update/revise with a recovery plan based on Use of Proceeds from the investors/funding sources. They need to have such a plan/document to present to investors/funding sources. Now they not only have to deal with the decline in their business, the scramble that they are in--they also have to pull together a plan from scratch and it make sense and have logical/provable projections to present to investors/funding sources. Not a good time to have to do that when you're under a lot of pressure like they are. And even then a plan is only as good as the business/management team behind it and that a lender/investors sees they can turn the business around.
                • Re: One of those who never wrote a business plan
                  JasonTees Wayfarer
                  Fair point, especially if presenting to an investor with no idea who you are or what you do. Then again, I've never actually seen an investor bail out a small business. More often they let the business fail, then buy the assets on the cheap and run themselves or bring in their own management.

                  With regards to dealing with a bank as a funding source, the reality of most situations is that projections offered up by small business owners are NOT provable. It's usually not because they don't understand their projection, but really because by the time they are coming back to their lender with hat in hand, all reasonable ideas have been tried and failed.

                  Overall, my view is that while a business plan can't hurt to have, I don't see it as something you can hang your hat on with any confidence when times get tough and you are desparate for cash.
                • Re: One of those who never wrote a business plan
                  Tracker
                  At some point perhaps my other reply will appear - here's the short version. You are correct, a business plan does not prevent bad things from happening to a business. But having one ready, that you can update/modify with a recovery plan that shows to investors/funding sources your business, management team, opportunities in the market, opportunity to recover and Use of Proceeds on how money (from investors/funding) will be used to achieve recovery--is essential. If you don't have a plan in place that you can modify/revise to show you you can recover ... that means you have to build one from scratch ... and doing that while you are in trouble, scrambling, with a lot of pressure on you--can be hard to focus on.
                • Re: One of those who never wrote a business plan
                  phanio Pioneer
                  I agree with JasonTees - a business plan would not have protected this company from the economic decline - might have made the process of applying for a loan a bit faster - but any plan that would have been written for the business would have had to be rewritten for the bank. Also, it would almost seem as if they had a business plan in the beginning - it just was not a formally written one.

                  The morale I see from this business's stroy is that anything can happen that is out of your control - thus, you constantly have to montiro your market, industry and economy as well as stay flexible.

                  This business still has assets in place - and, while those asset (PP&E, people, brand, etc) may be able to be used as they once were - they can still be employed in some capacity to help this business generate additional revenue. Example, this is a Chinnese ideology - Most Chinnese manufacturing plants are so flexible that one day they can be turning screws on toaters and the next day turning screws on motherboards.

                  If this business you mention is in the transportation industry - I assume they are transporting goods - whatelse could they use those vehciles for? Where is the demand - look under very rock - if you have the assets - put them to some use - be flexible.

                  Business Money Today
                  www.BusinessMoneyToday.com
                    • Re: One of those who never wrote a business plan
                      Tracker

                      See my response to Jason when/if it appears. Basically my point is that having a plan in place to modify with how they can recover with funding is needed. A business plan does not prevent bad things from happening-but if they expect to get any lender/investor interest they need to have that plan ... doing it from scratch when you're under the gun like they are is tough to do and not exactly a good time to have to do it. Better if you have in place beforehand.
                      • Re: One of those who never wrote a business plan
                        Tracker
                        At some point perhaps my other reply will appear - here's the short version. You are correct, a business plan does not prevent bad things from happening to a business. But having one ready, that you can update/modify with a recovery plan that shows to investors/funding sources your business, management team, opportunities in the market, opportunity to recover and Use of Proceeds on how money (from investors/funding) will be used to achieve recovery--is essential. If you don't have a plan in place that you can modify/revise to show you you can recover ... that means you have to build one from scratch ... and doing that while you are in trouble, scrambling, with a lot of pressure on you--can be hard to focus on.