Paulius Pališkis: To Make A Business Idea Not Only A Dream
The legendary businessman Henry Ford has said that vision without its implementation is just a hallucination. This sentence is very fit for entrepreneurs who rely on a potentially successful business idea, but fail to substantiate it on assumptions, predictions and risks. In a nutshell, who tend to take no care of business plan.
“Sometimes it seems to business people that a unique idea or new product will already guarantee success, and the business plan will only be needed to present oneself to the bank. I always say that the business plan is primarily needed for the entrepreneur: this is a tool for understanding business details, foreseeing risks and planning for the future”, says Paulius Pališkis, director of business clients of Šiaulių bankas for Klaipėda region.
Starters and less experienced entrepreneurs tend to trust the business idea too much: they often believe in finding a niche in the market not noticed by competitors, or having created a product that will get a surge of customers. The danger comes when an entrepreneur “falls in love” with his idea and strives to look for arguments to justify it, often closing eyes against potential risks and worst-case scenarios.
The calculations-based business plan allows a businessman to model the viability of the idea under real conditions. By borrowing responsibly, banks always ask for a business plan to decide if the investment will pay off.
Reasonableness is more important than the number of pages
According to Paulius Pališkis, the business plan must first of all be clear to the entrepreneur himself: it must briefly identify and describe the structural parts: company presentation, market analysis, competitor identification and competitive advantage, sources of funding for the idea, profit and loss account, cash flow forecast, planned costs (production, personnel, marketing, etc.), sales strategy.
There are a lot of various templates, samples and tips available on the web for business plans. There is no unified recipe of how the ideal business plan should look like. It is important that this document was fluent, clear and reasonable.
“There are business plans that stand out for large volumes: entrepreneurs describe the macroeconomic situation, base upon a wide range of information sources. To see the global image is welcome, but it is not necessary to develop it in the company's business plan, especially if the business is small or new. Important is not the completeness but the reasonableness, the critical assessment”, notes the banker.
Some executives mistakenly believe that a large-volume business plan submitted to the bank will improve access to finance. Not at all, as the bank's business client advisor will firstly seek out for key information that could make sure that the business is able to meet the financial goals and manage the risks.
Risk assessment is important
Risk assessment is one of the most important parts of the business plan. Based on various assumptions, the plan simulates operational scenarios and predicts potential risks.
The range of listed risks should be as wide as possible: starting with changes in the macroeconomic environment, changing market conditions, exchange rate fluctuations and other factors that could negatively affect the company's future.
“By expanding their business, entrepreneurs do not take into account the important details, for example, a large part of investment projects is delayed for a variety of reasons. For example, due to technological peculiarities, there is a delay in the installation of new production equipment, as well as often overlooked bureaucratic conditions. All this leads to a costly downtime”, emphasizes P. Pališkis.
It is advised to provide not only B but also C scenario in the business plan. How to calculate whether the scenario is realistic? The recipe is simple: just take the worst case scenario and divide its result by two. If even after this action the plan works, it means that the plan is ready for the risk. For example, in a business plan, the company aims to make an investment in production with payback within three years. Then it is necessary to evaluate the scenario whether the company would be strong enough for a six-year payback period. If so, the risk is weighted.
Focus on cash flow
It is important to objectively evaluate the planned financial indicators in the business plan: income, costs incurred, to calculate profitability.
According to Klaipėda Region business client director, a frequent mistake in business plans is the lack of an analysis of cash flow. When assessing business plans, banks pay particular attention to this indicator, while the company in the business plan focuses on the feasibility of an investment project, and does not foresee working capital needs.
“Careful cash flow planning will help to ensure that businesses do not face solvency problems that can be met by both a loss-making and a very successful business. For example, due to the unexplained development, the company may face a shortage of working capital, which can, in a very short time, paralyze the company's operations”, the banker says.
To trust the consultants or not to trust?
According to P. Pališkis, the main responsibility for the preparation of a business plan lies with the manager of the company who should form and justify the business idea. It is also advisable for a manager to engage, in compiling of the business plan, other business professionals, for example, a financial specialist who will make financial calculations.
On the Internet, it's easy to find business consultants’ ads: for a few hundred euros, the consultant is ready to prepare a detailed business plan. External consultants help in the preparation of specific business plans (for example, for EU support).