Reasons for Business Failure and Equity Financing - Assignment Example

BUSINESS PLAN The important elements of business plan are to precisely define the business, identify the goals and serve as the firm's resume. Pro forma balance sheet, an income statement and cash flow analyses comprises the basic components of a business plan. Preparing a business plan helps in the allocation of resources properly, making good decisions and handling of unseen or unexpected complications that may become hurdle in the future development of the business. One of the important aspects of business plan is that it provides organised information about the company and importantly a good business plan helps in attaining a loan application. Other important applications include informing the details of the company to the sales personnel, suppliers and others so that they become aware of company's goals and achievements. Planning In any marketing sector business plan is considered to be very important and a thoughtful business plan cannot be overemphasises because much hinges on it: financial support, management of the available resources like operation and finances, credit from suppliers, promotion and marketing and last but not the least company's goals and achievements. The business plan is considered to be a necessity and if a person fails in it then he or she is in trouble. Many entrepreneurs argue the importance of business plan; according to them the market place has the tendency of changing very fast and therefore implementation of the business plan merely remains in spirit and not in action. Another lame excuse is that the entrepreneurs haven't got that much of time to prepare a business plan. As builders won't start the construction of any structure without any blueprint entrepreneurs shouldn't rush into new ventures without a proper business plan. Before writing a business plan some of the important questions that has to be addressed are: 1. What service does the business provide to the clients 2. Who are the potential customer and reasons for purchasing the service or product 3. What are the steps or ways you reach the potential customer 4. From whom or where the funds come Writing The Plan There are many ways of writing a business plan but some elements are common to all of them. They include: 1. Cover sheet. 2. Statement of purpose. 3. Table of contents. I. The Business A. Description of business. B. Marketing. C. Competition in the market. D. Ways of operating procedures. E. Personnel. F. Insurance of Business. II. Financial Information A. Loan applications. B. Capital. C. Balance sheet. D. Breakeven analysis E. Pro-forma income projections (profit & loss statements) F. Pro-forma cash flow III. Supporting Documents 1. Tax returns for last three years Personal financial statement. 2. A copy of franchise contract and all supporting documents provided by the franchiser for franchised business. Copies of the following: a. Lease or purchase agreement. b. Licenses and other legal documents. c. Resumes, that of all the principals. d. Letters of intent and other relevant material. Using The Plan A business plan is considered to be a tool comprising of three basic purposes, which are communication, management and planning. A business plans serves as a communication tool that helps in attracting investment capital, attainment of loans, hiring workers and convinces them to work for the company and importantly plays a part in attracting strategic alliances and business partners. A business plan is said to be successful if the outcome of the business is profitable, a business plan that cannot help in attain profits is said to be an incompetent business plan. A realistic approach is required at almost every stage of business and allows an entrepreneur to workout all the potential problems and all the alternatives before launching the actual business. A business plan helps as a management tool in tracking, monitoring and evaluating the progress of the business. It gives a realistic and hands on experience on developing management skills and gain knowledge on different aspects of management. Business plan helps in establishing timelines and milestones and compare theoretical projections to the realistic accomplishments. As a planning tool business plan can be used as a guide throughout the different phases of the business. Proper planning helps in coping with the problems in advance and use of alternate methods. Understanding between the employer and employee yield good results and helps in the development of the company. Financing One of the frequent reasons of business failure is poor management and insufficient and poor management of financing comes second. For starting or relocating or expanding a business sufficient capital is required. Having good financing is not enough in attaining profits; proper knowledge and planning are required to manage it well. These help in strengthening the management of financing and avoid common mistakes like miscalculating or underestimating the cost. The following points had to be addressed before inquiring about financing: 1. How much capital is needed 2. Why it is required Is it for expansion or for tackling risks 3. Are the risks involved greater than anticipated 4. At what stage of development is the business 5. How is the capital used 6. How is the business going Whether it is stable or depressed 7. Does the management team can withstand the challenges 8. How does the financing helps the business plan Financing is of two types, equity financing and debt financing. When you are in need of money or looking for capital, company's debt-to-equity-ratio should be considered. It is the relations between the Pounds or Euros that an entrepreneur has borrowed and Pounds or Euros invested in the business. The more the investment by the owners the more they attract the financing. When the equity to debt ratio of the firm is high then debt financing should be taken. If the proportion of the debt to equity ratio of the firm is high then it is advised that the owners should increase their equity investment, that way they cannot jeopardise firm's survival. Equity Financing Limited equity financing is used by most of the small or growth stage businesses. Whereas in debt financing, funds pour in from different quarters like from friends, relatives, etc. Venture capitalists are the most common source of equity funding. Venture capitalists may be institutional risk takers, financial institutions, wealthy persons, etc. and most of them specialise in industries. Venture capitalists are risk takers and show interest only in three to five year old companies that result in more than average profits. These venture capitalists are called as investment gurus whose interest lies in those companies that have major regional and national concerns. Debt Financing Commercial finance companies, financial institutions, banks, savings and loans, Lloyds Bank small business, etc. are some of the sources for debt financing. Because of their positive impact on the whole economy local and state government encourage the growth of the small companies. In debt financing additional funds comes from friends, family, relatives, and industry colleagues, etc when capital investment is smaller. Generally banks formed as a major source for loans for the establishment of small businesses. Banks don't offer long term loans to small firms instead they grant short term loans for machinery and equipment, they also offer demand loans to small firms that reduces the risk of leveraging the funds available. Applying for a loan Loan application should be well written, so that the reader could get a clear picture of what your plans are. The presentation should be of the best quality in the initial loan proposal and application. Only industry specific details should be included so that reader can easily understand. Business description: a. Organisation type. b. Information date. c. Location. d. Product or service. e. Firm's previous commitments (if any). f. Future plans. g. Competition. h. Customers. i. Suppliers. Management experience Resume of the owner and important employees should be included. Personal Financial Statements Care should be taken that the financial statements are not older than 90 days and financial statements of all principal owners and guarantors should be included. A copy of last year's income tax return should also be included. Loan Repayment The method of repayment of loan should be included and supporting documents of cash flow schedules, budgets and other required information supporting the statement also should be attached. Existing Business The following should be included: a. Financial statement for the last three years. b. Financial statement not older than 90 days with balance sheets, profit & loss statements and net worth. c. Account payable and account receivables. d. Schedule of term debt. Proposed Business a. Submit a pro forma balance sheet of sources and b. Uses of equity and borrowed funds. Projections Projections of future plans should be shown for at least one year and should be in profit and loss format. The projections should be explained in industry standards that include figures, tables, charts, etc. Breakeven Analysis Breakeven Analysis is an important tool that helps us to determine whether a company or a firm is able to properly use available funds and gain profits. For the businesses that just started it is important for them to know their startup costs, which provides the required information that helps in generating the sales revenue to pay the expenses for running the business. When revenue equals all business costs then breakeven point is reached. Calculating breakeven point Breakeven point = annual fixed costs/ gross profit percentage References Ali Behforooz and Frederick J. Hudson. (2003). Software Engineering Fundamentals. Noida: Oxford University Press. Associated Newspapers Ltd. (n. d.). Small Business. Retrieved July 9 2006, from http://www.thisismoney.co.uk/small-business/index.htmlin_page_id=10. Department for Communities and Local Government. (n. d.). Housing. Retrieved July 9 2006, from http://www.communities.gov.uk/index.aspid=1150232. Greater London Enterprise. One London. Retrieved July 9 2006, from http://www.one-london.com Greater London Enterprise. Starting and Growing Your Business. Retrieved July 9 2006, from http://www.one-london.com/ Lyods TSB. (n. d.). Your First Lyods TSB. Retrieved July 9 2006, from http://www.lloydstsbbusiness.com/ RICS. (n .d.). Royal Institution of Chartered Surveyors. Retrieved July 9 2006, from www.rics.org. Williams, S. (2004). Lloyds Bank Small Business Guide Penguin books: London. Read More