Wednesday, September 17, 2008

biz plan contd

Section VI financials :
many entrepreneurs tell me that this is where they come to a grinding halt. the problems they face are two fold: one they are not finance guys, hence have no clue how to put this section together ; two, even if they have a smattering of finance, they find it difficult to project sales, costs and bottomline over a five year period.

Gone are the days when banks insisted on a 1+2 year projection; most funding agencies like to see five year projections of P&L, cash flow, capital deployment and return on capital deployed. their reasoning is very simple. all of them, without exception, like to exit within 3 years with minimum 30% return. very rarely do VC's hold on to their investment beyond three years. There has to be an overwhelming reason for them to do so.

if you have a clear idea of your biz concept, especially if you know for sure what is your target segment, extrapolating that from the universe is not a big deal. there are any number of MR agencies that have conducted demographic surveys and that data is available.

if you have clarity on how you want to go about creating your biz product and reaching it to the market place, then working out production and operational costs should not be rocket science.

if you have estimated your resources correctly, it should be easy to identify what your total capital outlay is, out of that how much are you bringing to the table and the balance that you need to raise. it is absolutely imperative in today's context that a certain percentage of the capital required is brought by the promoter himself. gone are the days of only 'sweat equity' that the promoter brought to the table either by virtue of his experience or knowledge. he cannot hope to attract external funding unless he has invested a sizeable amount himself.

the size of your biz determines whether you are going the debt route or the equity route. interestingly, if your capital requirement is large, VC's are your best bet as VC's will not look at anything less than a $50 million requirement. Larger the cap required, better your chances are in attracting VC's into your biz.

Irrespective of who is the funding agency, what everyone looks for in the biz plan are :
the biz idea
the management
the financials
and the logic in the thought and implementation process.

i have seen biz plans where the capex required is about 200000 INR, but the financials project breakeven after 2 years! i have seen biz plans which inflate topline so irrationally that even the promoter has a hard time lying consistently about it! I have seen biz plans which list risks so perfunctorily, it is almost as if they are listing them becasue they have to fill up the risks column!
the logical flow in the biz plan, from concept to implementation, is its biggest asset and nowhere else does it reflect so blatantly as in the financials.