Is your business plan STILL insane?

In business planning, sensitivity analysis is a way to sanity-check the assumptions underlying your plan

-          It identifies the variables that have most impact on the outcome of your plan (for instance, sales volume or materials price)

-          In this table, your plan is shown in the “base case” column

	Previous year	Base case	Variance	Best case		Worst case
				Variance	£	Variance	£
Volume of sales	600	660	10%	12%	672	0%	600
Average unit price	£9.09	£10	10%	10%	£       10	-5%	£         9
Sales income	£5,454	£6,600	21%		£ 6,719		£ 5,181
Average unit cost	£6	£6	0%	0%	£         6	10%	£         7
Direct costs	£3,600	£3,960	10%		£ 4,032		£ 3,960
Salaries	£1,800	£1,800	0%	0%	£ 1,800	0%	£ 1,800
Rent	£720	£738	2.50%	0%	£    720	5%	£    756
Net profit	-£666	£102			£    167		-£1,335

-          The best case assumes that you can achieve the best possible values for all the main variables (volume of sales, materials prices and so on) given all you know about the market, your competition and other relevant factors

-          The worst case assumes the opposite and that you achieve the worst possible values for the same variables

-          A credible business plan will be based somewhere in the middle of these two outcomes

-          A credible plan will specify what arrangements you have in place to

o   Ensure that you achieve the best values you can for the variables identified

o   Minimise the impact should key variables go against you

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Is your business plan insane?

In business planning, variance analysis is a way to sanity-check the assumptions underlying your plan

-          It compares the planned or forecast figure to the equivalent figure in a previous comparable period – usually the previous year

-          It expresses the difference as a percentage

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	Previous year	Budget year	Variance	Assumptions
Volume of sales	600	660	+10%
Average unit price	£9.09	£10	+10%
Sales income	£5,454	£6,600
Average unit cost	£6	£6	0%
Direct costs	£3,600	£3,960
Salaries	£1,800	£1,800	0%
Rent	£720	£738	+2.5%
Net profit	(£666)	£102

-          Your wider business plan (strategy, market positioning, sales performance, supplier management and so forth) must then provide an explanation for any difference

-          This will expose any assumptions you have made and the potential impact on your business should they prove to be wrong

-          In the above example, the plan is based on increasing the number of sales as well as the price whilst holding unit costs and salaries to the previous year’s level

-          These might all be reasonable and achievable but a credible business plan must explain how and why these things are going to happen

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What do lenders want to see in your business plan?

What would you want to know if someone you didn't know asked you to lend them a large sum of money?  Probably you'd want to know a) the likelihood of getting your money back and b) the return (profit) you would make.

Your business plan is the story that provides this information to your potential lender.  I'm using the term "story" in the sense that it needs to be an interesting, rational and coherent explanation of what is going to happen - not in the sense of a fable.  The first person you must convince with your business plan is you; if you can't do this, or can't be bothered to, then take my advice - don't borrow any money.

Banks have money to lend, and want to lend it - but only to businesses that they believe will be able to pay it back.  In addition to the basic elements of a business plan (see previous blogs), lenders and investors want to see:

- A description of your management team - experience in the company and the industry, achievements & responsibilities;
- For an investor:  The required investment and the % shareholding offered, existing shareholdings and shareholder agreement;
- For a lender:  The required loan, the proportion of forecast profit the repayments will represent and any existing loans, mortgages or charges, the value of assets in the business

If you'd like to know more about developing a business plan then this event is for you.

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The business planning process

Logically you should start with your vision and long-term goals.  However, most people find it easiest to start the writing process with numbers - your forecast turnover, in fact.  Working through a simple financial forecast covering, say, three years and matching your vision or strategic goals allows you to get the business planning process started.  The numbers provide a spine for the plan around which you can flesh out the strategy, marketing, sales and so forth.

As well as turnover, the financial forecast should include direct costs and overheads (and so tell you gross margin and profit).  If you sell different product lines or to different markets then this split should be shown.  The major cost drivers should also be shown separately.

Once you have this basic model you can start to consider how you are actually going to deliver it.  How will your marketing and sales processes deliver the revenue you are forecasting?  What is the basis of your direct costs figure?  Will the level of overheads support the size of business you are plannning?

These considerations come together in the story of your business that is your business plan.

If you'd like to know more about developing a business plan then this event is for you.

Get more great business tips on our website.