Small companies can benefit by devising formal plan.

Business plans assist start-ups with staying on course

A business plan allows a company to set a wise course, avoid problems and measure progress against original projections. It can also present an attractiv picture of the firm to potential investors or lenders.

"Most small business operators need a business plan as a benchmark against whic they can compare their actual results," said Melvin S. Ozur, a partner in the Beverly Hills accounting firm Ozur, Andersen & Radder. Most business operators who do first-time business plans turn to CPAs or consultants for help.

"A business plan in the form of a budget will keep them on track, instead of making expensive business decisions on the spur of the moment," he added.

Business plans vary widely in quality, according to Dennis Zaron, a partner wit the Los Angeles accounting firm of Horowitz, Kolb & Zaron. "There are cut-rate business plans which may not be as good as more thorough ones. But then again, they might give you enough to get a loan from a bank -- which could be all you want."

Most small firms don't have any formal business plans at all. Some firms avoid the expense of professional assistance, but work up an informal business plan o their own.

"We have most often been involved with firms after the fact, after they have gotten in trouble," Ozur recalled. "Often a firm came to us to have its tax return prepared, and it became clear to us that they needed structure."

A lot of start-ups underestimate what their first-year costs will be and go in with insufficient capital or ability to borrow. Such firms often fail.

According to Ozur, many firms fail to prepare financial statements monthly or even quarterly. He believes regular financial statements allow a business to se how well or poorly it is doing. "Unfortunately, a number of small business people feel that, if they have sufficient cash in the bank, they are doing well."

It is difficult for a small business person with no track record and few personal assets to get working capital from lending institutions. In industries which require a lot of capital for inventory or fixed assets, a good business plan is mandatory, Ozur said.

According to Alan Rosen, a partner in the L.A. office of international accounting firm BDO Seidman, a business plan table of contents lists: an introduction, overview of the industry, future of the industry, opportunity, th company, its management, marketing plan, test marketing, investment required, financial projections and charts and graphs.

"A business plan is a description of a firm's goals and its plans to achieve these goals," Rosen stated. "It includes a financial forecast that determines how much money will be required and when; it also projects the company's operating results."

A business plan can cost as little as a few thousand dollars or as much as tens of thousands, depending on how much detail is involved. At BDO Seidman, a small business plan typically runs between $2,500 and $7,500. Over the past year, Horowitz, Kolb & Zaron -- which bills by the hour -- has charged its business plan clients between $2,000 and $5,000.

A business plan should be revised on an ongoing basis, as necessary, but at least once a year. A CPA is rarely needed for revisions. Once the program is se up, revision is as simple as filling in the blanks and making the necessary calculations.

If a firm doesn't want to use a CPA, it may purchase very good in-house accounting packages from accounting software vendors. Computer stores sell low-end software, such as Quick Books by Intuit, and more sophisticated packages, such as MAS 90 from State of the Art, and a lot of programs in between.

Prepackaged spreadsheet programs such as Excel and Lotus can be adapted for business plans as well. BDO Seidman uses Lotus or Excel software to help it design business plan programs from scratch. There is specific software availabl that works only on projections and forecasts. Books on business plans are also available in local libraries.

A business plan should be understandable, legible and usable. Small business people tend to be intimidated by programs that are needlessly complicated. The important thing is to create the business plan in your own language, Rosen advised.

A business plan includes both an income projection and a cash flow projection. "You need a monthly cash flow projection over three to five years to indicate how much cash the business will need, and when," Rosen said. "When billing merchandise, you have to predict when and how much you will receive in income. Matching anticipated receipts against expenditures indicates cash needs."

Doing cash flow projections in a business plan helps a firm decide when it need to borrow and how much. "Banks appreciate this because they like to see an orderly presentation of cash needs," Rosen added. Cash flow projections save a firm interest expense, because they allow the firm to avoid borrowing until it actually needs the money.

"You usually need assistance with the financial forecast, so ask professionals for a quote, make sure it is affordable for you and attempt to negotiate when necessary," Rosen suggested.

The marketing plan makes the entrepreneur think about what it takes to sell his or her product -- what kind of advertising is best, what it costs and what medi are preferable.

"The marketing plan is usually a new world," Zaron explained. "New business owners know what they want to sell but not how they want to sell it. We try to brainstorm with the client and his associates."

Zaron has seen more and more professionals doing business plans -- particularly when they first go into practice and need a bank loan.

"Sometimes people come in thinking they want a business plan, and we realize they only want a forecast," Zaron said. "They don't care about the narrative. O the other hand, a business plan with a narrative gives you credibility with lenders and investors."

Zaron cautioned that a plan is only a plan; there are no guarantees. If you don't do your marketing research, the numbers won't meet projections.

A business plan can be a sales document for the company, describing to an outsider what the company's market position is, who is involved in the company and what their backgrounds are.

If a business plan is done correctly, it usually validates the business. If not it indicates how things could be done differently and allows the planner to change the elements so the business can operate successfully. "Instead of setting up a business that cannot succeed," Rosen explained, "you can see how practical the business is from the business plan and make any necessary changes up-front."

Rosen said he considers the business plan a plan for success.

"Some entrepreneurs start with an informal plan in their heads, but few succeed that way," he declared.

"A formal business plan allows you to analyze whether your new or continuing business is based on sound reasoning," he added. "It also allows you to compare original projections with ongoing results and fine tune to fit changing circumstances."