Business Plan Basics

A Business Plan is nothing but a Document that describes:

• How a Business works.
• What are the different parts of a Business.
  • Process.
  • Team.
  • Facilities.
  • Suppliers and raw materials.
  • etc.
• Why a Business is or will be successful.
• How is expected this Business to perform in the future.
  • This is called “Business Projections”.

Assuming you have done a good and serious research, this last part, the “Business Projections”, is usually the “heart” of the Business Plan.

Why?

• Because it describes what you can expect from this Business.

It tells you:

• Is it profitable enough?
• When you could have your money back.
• How much you should invest.
• How much money this Business needs for starting.
• etc.

These “Business Projections” are so important, that many professionals refer to them as “Business Plan” directly.

We have worked in Venture Capital for years.

We know for sure that, your Business Projections are the most important part of your Business Plan… by far.

And that is why here, we’ll focus on your Business Projections (we’ll call them “Business Plan” directly).

If you understand how to develop your Business Projections and do it correctly, you have a Business Plan.

Otherwise, no matter how well you define:

• Your Team.
• Your Market.
• Your Competitors.
• etc.

If your Business Projections are poorly developed… You have nothing.

* If you are interested in How a whole Business Plan is made, we have a very good publication where we share the structure we use, how long each section should be, etc…

• Check our “How to write a Business Plan“.

Developing a Business Plan is something difficult, tedious and messy.

• There are dozens of inputs, and estimations involved, and the predictions are rarely fulfilled.
  • Remember: we are talking about your Business Projections (everybody refer to them as “Business Plan” directly).

We have developed dozens of Business Plans and we know it well: it is not a pleasant task.

• Although deep down, we like it.

But, if it is your first time developing a Business Plan, the question is: What should you start with?

Here, we want to share with you What are the Key Points you should focus on when starting a Business Plan.

* Due to the technical content of this section, it is very important that you check our “Business Plan Templates” and download the free basic “Basic Business Plan template” (BP.01).

• It is very useful for a better understanding of what we are about to explain.
  • It also allows you to start “playing” with numbers, margins and rates.

Now that you understand why your Business Projections are the most important part of your Business Plan, let’s focus on its main Key Points.

As we mentioned earlier there are dozens of variables involved in a Business Plan (Revenues, Costs, Margins, etc…) and some of them are more important than others.

According to our professional experience, there are 5 Key Points you should be especially concerned about, the Basics of every Business Plan:

• Revenues.
• Variable Costs.
• Fixed Costs.
• Contribution Margin.
• EBITDA.

Let’s explain What these factors are and Why they are so important:

Basic but not always properly supported: how much you estimate that will be sold to your clients.

Important: Disaggregate it by Clients and products since it will be helpful to further margin-per-client and product analysis.

Its growth-rate must be properly justified by a correct Market analysis and the right Strategy.

Costs that depend just on the amount of products or services sold.

• Transportation costs, Raw materials, etc.

Why are Variable Costs important?

• Variable Costs give you an idea about your capacity to cope with a decrease in sales.

If you had a 100% Variable Costs (no Fixed Costs) you could face a decrease in sales, indefinitely: No Sales, no Costs.

Example: If you had an on-line trading business and sold 10 products through Amazon every month, you would have  a certain amount of Variable Costs [(10 x  price of products sold) … among others] that would be zero in case you sold nothing.

Costs that don’t vary with a reasonable increase or decrease in manufacturing.

Why do we say reasonable? Because lot of people get confused here:

• There is not a single company that could keep its fixed costs if its sales were multiplied by 1,000.

Why are Fixed Costs important?

• Fixed Costs give you an idea of the Income you need to maintain the Business.

The higher the Fixed Costs, the more stable and higher your Income should be.

Fixed costs are those that don’t vary with an expected increase or decrease in sales or manufacturing.

Examples of Fixed Costs:

• Salaries.
• Rent.
• Insurance.
• etc.

It is the Amount of money (or margin) remaining after covering all variable costs.

Depending on the economic sector they are expected to be higher or smaller.

• Generally, in the Service sector, the Contribution Margins are higher, while in Industry, they are smaller since they have more suppliers, raw materials… more Variable Costs involved.

Why is the Contribution Margin important?

• The Contribution Margin give an idea about how a certain Company is structured compared to other in the same Business sector.

By comparing the Contribution margins of different companies you can assess if they have more fixed costs, if they depend more on external services, etc…

Example: if you earned money assessing companies, your variable costs would be practically zero, while your fixed costs; your salary (considering it as a fixed salary) would be much higher.

• As result, your Contribution margin would be high.

The EBITDA reflects approximately the Cash generated.

• This statement is not accurate.
  • The Cash generated depends on multiple variables, factors…

However, the EBITDA is a decent approximation that can be easily calculated.

As its name indicates, it is the Earnings Before Interests, Taxes, Depreciation and Amortizations.

• Basically: Revenues – Operating Costs (Salaries, Raw materials, Rents…).

Why is EBITDA important?

• EBITDA can give you an idea of a company’s capacity to self-finance.

The higher, the better. There is no discussion here.

If you are interested in calculating the Cash Flow accurately, we have a whole publication, where we explain perfectly how to Calculate Cash Flows step by step easily.

• Check our “Cash Flow Calculation” Page.

Why not take Taxes, Amortization/Depreciation & Interests into account?

Mainly Because:

• Some of these Costs don’t imply an actual loss of Cash.
  • Amortizations are “virtual” costs.

• These Costs that can be addressed in many different ways.
  • Taxes are not always applied (in case you lose money) and sometimes can be deferred.
  • Interests can be re-negotiated.
  • Amortizations can be re-calculated.

With all these basic factors, you can start checking:

• The relative weight of your variable and fixed costs.
• How your company is doing, compared to other companies in the same sector.
• How prepared a company is, to face a decline in sales.
• Whether you can expect a positive cash generation or not (EBITDA greater than 0).
• etc.