You’ve been in business for years, you’ve got a solid Profit and Loss Statement, so why is your bank asking for an updated business plan before providing you with a loan? Well, to simplify it, even though you’ve known your cousin Sharon for 30+ years, you probably wouldn’t loan her thousands of dollars without asking her what she plans to use it for, how risky a venture it is, and how she plans to pay it back. It’s kind of the same theory. Even though your company isn’t a start-up, you’ve been known in the community for years, there is still a risk for the bank in lending your business the money.
Even if your bank doesn’t require a business plan, there’s still a lot of value in updating your plan every year. Most people know that starting a new business is hard, but 50% of businesses don’t even make it to the 5-year mark!
A study by the Warwick Business School discovered that while there are many successful businesses that opt not to create an updated business plan each year, business plans do add a lot of value to the businesses that choose to write them, including high-quality ventures, and these effects are quite dramatic. Growth in the venture is increased by a factor of around 30% because of writing a business plan.
There are 4 key areas that every business plan should update and assess each year.
- What is the uniqueness of the business proposition? The business plan must identify what feature is going to distinguish it from its competition and keep it from failing. Knowing what makes your product or service unique will help you focus your efforts on that key difference from your competition. While that might sound obvious, thoughtfully going through the business planning exercise might reveal other relevant differences that will allow your business to compete at an even higher level. Doing this step year after year might show new opportunities or areas where you can capitalize.
- Is it a purely report plan? The plan shouldn’t be written by someone who doesn’t know the ins and outs of the business, just the numbers. The business plan must be based on a real feel for the business, not just a set of figures produced from a report. The plan must reflect a real-world view of the business from the perspective of someone who has rolled up his or her sleeves and really understands what the business is supposed to do and what it’s doing now.
- How realistic is the plan and the financial projections? Are the projected volumes of sales realistic? Are there other businesses like this one that have delivered similar sales? Are the costs accurate? The projections should be realistic and match actual data that exists. Someone reading the plan won’t be impressed with your figures if they determine they aren’t something that can be accomplished.
- Is the business static or dynamic? This is kind of a trick question. Most people can’t accurately predict the future. So, you need to create a plan and measure performance against the plan—with a willingness to adjust the plan when necessary—seems to be an approach that works well. So basically, Burke and I agree, leveraging both approaches often yield good results.
Building a sound, thoughtful, and a useful business plan is not necessarily easy, but it could be worth it. Creating a detailed, accurate, and realistic business plan is a good investment in your business and can help you get the funding needed to take it to the next level.
Whether you need a solution for short-term cash flow or financing for an expansion or equipment purchase, Litchfield Bancorp has a suite of products that can help your business prosper. Give us a call or stop in!
Bob E. Teittinen
Commercial Lender, Senior Vice President