8. Avoid Common Financial Mistakes

There are so many potential mistakes to be made in this area that it deserves its own article. However, here are some basics:

• The Income Statement, Balance Sheet and Statement of Cash Flow must agree with each other.
• Most Limited Liability Companies (LLCs) do not pay corporate income taxes. I see this one all the time. Over 80% of LLCs are setup to pass tax liability through to members, yet most business plan spreadsheets include a line-item for taxes that people fill-in anyway. When you do this, you underestimate your Operating Income by the amount of the tax. Because Operating Income is an important metric to most analysts, it's not a good idea to artificially decrease it.
• Don't Forget the Notes. For an analyst, financial statements without explanatory notes are almost useless. The notes will contain essential information like the company's fiscal year, basis of accounting (cash or accrual), definition of inventory and the details of liabilities (interest rates, maturities, etc.). To illustrate my point, consider the simple case of revenue recognition. Suppose you receive an income statement that claims a company will earn $1,000,000 in revenues this year. Does that figure refer to cash received or the value of sales contracts? Only the notes will tell. Anybody remember Enron?
• Tell Them How Much You're Asking For. Another common mistake is not including a Statement of Sources and Uses (sometimes called a Funding Plan). This statement expressly sets forth how much fundi
  How to Establish a Problem Solving Strategy
  What do you need to be doing to succeed in life? What traps await you on your path? How much are goals really important? Is it true you can succeed the most in conducting the business you enjoy the most, or is it perhaps better to be doing something else? How to deal with people so that they love you, respect you and at the same time listen to you and follow you? These are just some of the questions most people ask themselves when it comes to success.And every question requires a clear answer if you wish to avoid doubting in your success and so making your path more difficult. But, is it at all possible to find the answers to these questions? And, even more important, are these answers valid for all people in all situations, especially for you? It depends whether you are dealing with the cause or the consequence.If you discover the cause of the problem, which is always the same, and succeed in solving it, you also permanently solve the problem and automatically move forward to a higher level. For instance, if something in your house has a rotten smell, you can solve the problem by taking that thing outside, and the stench won't repeat itself.This is solving the problem at its cause, which is most effective. But people sometimes handl
  Just as manuscripts are screened by assistants before reaching an editor, business plans submitted to financial institutions and venture capitalists are almost always screened by someone like me, a professional analyst who gets paid to "manage risk," which is MBA-speak for finding legitimate reasons not to fund your project. In this article I provide tips on getting your business plan past me and on to the people who sign checks. That's easier said than done, as research consistently shows that only a tiny fraction of business plans ever result in financing.

  Before I delve into specific recommendations, let's briefly review the purposes of a preparing a business plan.

  In practice, a business plan has three purposes and three purposes only: (1) to demonstrate the validity of your business model (including the existence of a market); (2) to establish the qualification of your team to execute your business model; and (3) to convince investors/lenders that the only thing you're missing is capital. That's it. Anything else you try to make it will detract from these goals.

  If you want your business plan to make it to the Loan or Investment Committee, consider following these 8 recommendations:

  1. Present the Right Type of Plan to the Correct Audience

  Generally speaking, there are three types of business plans: Loan-Targeted; Equity-Targeted and Operating-Only. Do not send an equity investor a loan request and do not send a lender a request for an equity investment. Operating-only plans do not seek to raise capital and thus are not discussed in this article.

  Loan-targeted and Equity-targeted business plans are quite different. Lenders are principally concerned with collateral and cash flow. They tend to give a lot of weight to the debt coverage ratio. Equity investors focus on the Return on Equity generated from anticipated liquidity events like a lucrative acquisition or initial public offering. There are other differences. For example, if you're trying to raise equity, then your business plan will likely be known as a Private Placement Memorandum. This terminology comes from Regulation D of the Securities Act of 1933, a federal law which applies to your business plan if you're attempting to raise private equity across state lines. This document has a specific format that investors are accustomed to. Failure to follow this format is a sure sign of a novice.

  2. Abide by the 50/50 Rule

  Your business plan should be no longer than 50 pages and no more than 50% of its content should be quantitative in nature.

  There are two compelling reasons to keep your page-count under 50 pages:

  First, whether your business plan is 20 pages or 200 pages, in most cases an analyst will reduce it to a 10-page summary called an Internal Credit Memorandum. The ICM is the only thing the decision-makers will ever see. Save the trees and save your time.

  Second, people with money to invest or lend are among the busiest people on earth. None of them have time during the business day to sit and read more than 50 pages. The ideal length of a business plan is 20-30 pages, which is more than long enough to concisely state everything you need to. In my experience, every business plan longer than 50 pages contains unnecessary filler. Filler is bad. No matter what you read in that business plan book, your business plan does NOT need to include patent applications, folded-up blue prints, job descriptions, research studies, brochures, or pictures of your children. If and when I need any of these items, I will request them from you during the due diligence phase.

  The reason you should limit your quantitative content to no more than half is because your business plan should tell a persuasive story that your numbers support. The numbers themselves are not the story.

  3. Your Narrative Must Match Your Numbers

  In many cases, the person who writes the narrative portion of a business plan is not the same person who prepares the financial portion. This often leads to inconsistencies, usually because your plan was not proofread or because one section gets updated without updating the other. A common example is where the Narrative lists executive salaries that amount to one figure but the Income Statement calculates salaries as a percentage of revenue, resulting in an entirely different figure. In addition to appearing sloppy, the problem with such inconsistencies is that they force the person analyzing your business plan to decide which of the two figures to accept. When I'm that person, I always pick the more conservative figure. That's usually bad for the applicant.

  4. Show Them the Money

  An entrepreneur once famously remarked, "If I succeed, everyone wins. If I fail, the bank loses." Your investors have heard this one too, but they're not amused. Investors and lenders are much more favorably inclined towards projects where the sponsor will be sharing the risk of the venture by co-investing some of its own capital along side theirs. They also saw the movie "Other People's Money," which may be why they instruct their analysts to discard business plans that include no sponsor equity.

  5. Pass the Acid Test

  One of the first things most analysts do with a new business plan is go straight to the Balance Sheet and check if Cash plus Cash Equivalents is greater than Current Liabilities. It's called the Acid Test. A ratio of less than 1 is a danger sign. Without getting too deep into financial theory, it's a warning that you have (or will have) a liquidity problem, or worse, a solvency problem. There are several acceptable methods of calculating this ratio. Pick the most favorable method. For most businesses, the most favorable method is to include the value of accounts receivable in the numerator.

  6. Pass the Common Sense Test

  No one wants to invest money in a profit-making enterprise that doesn't make any profits. Don't submit a business plan that projects a loss in the first few years but great profits thereafter or one where your product loses money on each sale but claims profit will be made "on volume." Even if you honestly believe that either of these scenarios will actually happen (which, statistically speaking, they won't), you will be much better off simply projecting break-even or a very small profit. The difference in dollars is negligible, but the difference in perception is critical. The main reason to avoid this is that most lenders and investors have policies against intentionally "funding losses."

  7. Real Men (and Women) Don't Use Templates

  If you're going to use business plan software to produce your business plan, then at least spend the time to make it unique and credible. Every month, without fail, I get several business plans produced by one particular software package. The reason I know this is because every one of them, regardless of the business model or industry, contains the EXACT boilerplate language and the EXACT default figures from the program. Because this demonstrates a lack of diligence and effort, those plans usually go straight in the trash bin. A coffee shop and a multinational defense contractor should not have the same financials. The only number these two businesses really have in common is the $99 they paid for the software.

  8. Avoid Common Financial Mistakes

  There are so many potential mistakes to be made in this area that it deserves its own article. However, here are some basics:

  • The Income Statement, Balance Sheet and Statement of Cash Flow must agree with each other.
  • Most Limited Liability Companies (LLCs) do not pay corporate income taxes. I see this one all the time. Over 80% of LLCs are setup to pass tax liability through to members, yet most business plan spreadsheets include a line-item for taxes that people fill-in anyway. When you do this, you underestimate your Operating Income by the amount of the tax. Because Operating Income is an important metric to most analysts, it's not a good idea to artificially decrease it.
  • Don't Forget the Notes. For an analyst, financial statements without explanatory notes are almost useless. The notes will contain essential information like the company's fiscal year, basis of accounting (cash or accrual), definition of inventory and the details of liabilities (interest rates, maturities, etc.). To illustrate my point, consider the simple case of revenue recognition. Suppose you receive an income statement that claims a company will earn $1,000,000 in revenues this year. Does that figure refer to cash received or the value of sales contracts? Only the notes will tell. Anybody remember Enron?
  • Tell Them How Much You're Asking For. Another common mistake is not including a Statement of Sources and Uses (sometimes called a Funding Plan). This statement expressly sets forth how much fundin
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    s focus on the Return on Equity generated from anticipated liquidity events like a lucrative acquisition or initial public offering. There are other differences. For example, if you're trying to raise equity, then your business plan will likely be known as a Private Placement Memorandum. This terminology comes from Regulation D of the Securities Act of 1933, a federal law which applies to your business plan if you're attempting to raise private equity across state lines. This document has a specific format that investors are accustomed to. Failure to follow this format is a sure sign of a novice.

    2. Abide by the 50/50 Rule

    Your business plan should be no longer than 50 pages and no more than 50% of its content should be quantitative in nature.

    There are two compelling reasons to keep your page-count under 50 pages:

    First, whether your business plan is 20 pages or 200 pages, in most cases an analyst will reduce it to a 10-page summary called an Internal Credit Memorandum. The ICM is the only thing the decision-makers will ever see. Save the trees and save your time.

    Second, people with money to invest or lend are among the busiest people on earth. None of them have time during the business day to sit and read more than 50 pages. The ideal length of a business plan is 20-30 pages, which is more than long enough to concisely state everything you need to. In my experience, every business plan longer than 50 pages contains unnecessary filler. Filler is bad. No matter what you read in that business plan book, your business plan does NOT need to include patent applications, folded-up blue prints, job descriptions, research studies, brochures, or pictures of your children. If and when I need any of these items, I will request them from you during the due diligence phase.

    The reason you should limit your quantitative content to no more than half is because your business plan should tell a persuasive story that your numbers support. The numbers themselves are not the story.

    3. Your Narrative Must Match Your Numbers

    In many cases, the person who writes the narrative portion of a business plan is not the same person who prepares the financial portion. This often leads to inconsistencies, usually because your plan was not proofread or because one section gets updated without updating the other. A common example is where the Narrative lists executive salaries that amount to one figure but the Income Statement calculates salaries as a percentage of revenue, resulting in an entirely different figure. In addition to appearing sloppy, the problem with such inconsistencies is that they force the person analyzing your business plan to decide which of the two figures to accept. When I'm that person, I always pick the more conservative figure. That's usually bad for the applicant.

    4. Show Them the Money

    An entrepreneur once famously remarked, "If I succeed, everyone wins. If I fail, the bank loses." Your investors have heard this one too, but they're not amused. Investors and lenders are much more favorably inclined towards projects where the sponsor will be sharing the risk of the venture by co-investing some of its own capital along side theirs. They also saw the movie "Other People's Money," which may be why they instruct their analysts to discard business plans that include no sponsor equity.

    5. Pass the Acid Test

    One of the first things most analysts do with a new business plan is go straight to the Balance Sheet and check if Cash plus Cash Equivalents is greater than Current Liabilities. It's called the Acid Test. A ratio of less than 1 is a danger sign. Without getting too deep into financial theory, it's a warning that you have (or will have) a liquidity problem, or worse, a solvency problem. There are several acceptable methods of calculating this ratio. Pick the most favorable method. For most businesses, the most favorable method is to include the value of accounts receivable in the numerator.

    6. Pass the Common Sense Test

    No one wants to invest money in a profit-making enterprise that doesn't make any profits. Don't submit a business plan that projects a loss in the first few years but great profits thereafter or one where your product loses money on each sale but claims profit will be made "on volume." Even if you honestly believe that either of these scenarios will actually happen (which, statistically speaking, they won't), you will be much better off simply projecting break-even or a very small profit. The difference in dollars is negligible, but the difference in perception is critical. The main reason to avoid this is that most lenders and investors have policies against intentionally "funding losses."

    7. Real Men (and Women) Don't Use Templates

    If you're going to use business plan software to produce your business plan, then at least spend the time to make it unique and credible. Every month, without fail, I get several business plans produced by one particular software package. The reason I know this is because every one of them, regardless of the business model or industry, contains the EXACT boilerplate language and the EXACT default figures from the program. Because this demonstrates a lack of diligence and effort, those plans usually go straight in the trash bin. A coffee shop and a multinational defense contractor should not have the same financials. The only number these two businesses really have in common is the $99 they paid for the software.

    8. Avoid Common Financial Mistakes

    There are so many potential mistakes to be made in this area that it deserves its own article. However, here are some basics:

    • The Income Statement, Balance Sheet and Statement of Cash Flow must agree with each other.
    • Most Limited Liability Companies (LLCs) do not pay corporate income taxes. I see this one all the time. Over 80% of LLCs are setup to pass tax liability through to members, yet most business plan spreadsheets include a line-item for taxes that people fill-in anyway. When you do this, you underestimate your Operating Income by the amount of the tax. Because Operating Income is an important metric to most analysts, it's not a good idea to artificially decrease it.
    • Don't Forget the Notes. For an analyst, financial statements without explanatory notes are almost useless. The notes will contain essential information like the company's fiscal year, basis of accounting (cash or accrual), definition of inventory and the details of liabilities (interest rates, maturities, etc.). To illustrate my point, consider the simple case of revenue recognition. Suppose you receive an income statement that claims a company will earn $1,000,000 in revenues this year. Does that figure refer to cash received or the value of sales contracts? Only the notes will tell. Anybody remember Enron?
    • Tell Them How Much You're Asking For. Another common mistake is not including a Statement of Sources and Uses (sometimes called a Funding Plan). This statement expressly sets forth how much fundi
      Company Names - 1 Vital Question to Consider when Naming your Company
      The naming of your business could be one of the most important decisions you will make. A name's originality and legal availability will create a real asset value of its own, as it becomes marketed and gains market acceptance.The name you choose will become the focal point of all the benefits and features that relate to your product or business. Customers will be able to find and refer others to it in the future. Established products or businesses realize the value of customer good will.A well chosen name will provide an extra marketing advantage, which may mean the difference between failure and success.The vital question is…is your company name truly available?While the name may be unique and distinctive to you, there is a possibility that another party already has prior trademark or common-law rights to the name for your industry. Before you invest time, money and effort into your name, do some research. The first places to check are right at your fingertips – the World Wide Web – and they're free!Preliminary Search Sites:The Trademarks section on the USPTO Web SiteYour Secretary of State to see if they have a searchable database
      >

      The reason you should limit your quantitative content to no more than half is because your business plan should tell a persuasive story that your numbers support. The numbers themselves are not the story.

      3. Your Narrative Must Match Your Numbers

      In many cases, the person who writes the narrative portion of a business plan is not the same person who prepares the financial portion. This often leads to inconsistencies, usually because your plan was not proofread or because one section gets updated without updating the other. A common example is where the Narrative lists executive salaries that amount to one figure but the Income Statement calculates salaries as a percentage of revenue, resulting in an entirely different figure. In addition to appearing sloppy, the problem with such inconsistencies is that they force the person analyzing your business plan to decide which of the two figures to accept. When I'm that person, I always pick the more conservative figure. That's usually bad for the applicant.

      4. Show Them the Money

      An entrepreneur once famously remarked, "If I succeed, everyone wins. If I fail, the bank loses." Your investors have heard this one too, but they're not amused. Investors and lenders are much more favorably inclined towards projects where the sponsor will be sharing the risk of the venture by co-investing some of its own capital along side theirs. They also saw the movie "Other People's Money," which may be why they instruct their analysts to discard business plans that include no sponsor equity.

      5. Pass the Acid Test

      One of the first things most analysts do with a new business plan is go straight to the Balance Sheet and check if Cash plus Cash Equivalents is greater than Current Liabilities. It's called the Acid Test. A ratio of less than 1 is a danger sign. Without getting too deep into financial theory, it's a warning that you have (or will have) a liquidity problem, or worse, a solvency problem. There are several acceptable methods of calculating this ratio. Pick the most favorable method. For most businesses, the most favorable method is to include the value of accounts receivable in the numerator.

      6. Pass the Common Sense Test

      No one wants to invest money in a profit-making enterprise that doesn't make any profits. Don't submit a business plan that projects a loss in the first few years but great profits thereafter or one where your product loses money on each sale but claims profit will be made "on volume." Even if you honestly believe that either of these scenarios will actually happen (which, statistically speaking, they won't), you will be much better off simply projecting break-even or a very small profit. The difference in dollars is negligible, but the difference in perception is critical. The main reason to avoid this is that most lenders and investors have policies against intentionally "funding losses."

      7. Real Men (and Women) Don't Use Templates

      If you're going to use business plan software to produce your business plan, then at least spend the time to make it unique and credible. Every month, without fail, I get several business plans produced by one particular software package. The reason I know this is because every one of them, regardless of the business model or industry, contains the EXACT boilerplate language and the EXACT default figures from the program. Because this demonstrates a lack of diligence and effort, those plans usually go straight in the trash bin. A coffee shop and a multinational defense contractor should not have the same financials. The only number these two businesses really have in common is the $99 they paid for the software.

      8. Avoid Common Financial Mistakes

      There are so many potential mistakes to be made in this area that it deserves its own article. However, here are some basics:

      • The Income Statement, Balance Sheet and Statement of Cash Flow must agree with each other.
      • Most Limited Liability Companies (LLCs) do not pay corporate income taxes. I see this one all the time. Over 80% of LLCs are setup to pass tax liability through to members, yet most business plan spreadsheets include a line-item for taxes that people fill-in anyway. When you do this, you underestimate your Operating Income by the amount of the tax. Because Operating Income is an important metric to most analysts, it's not a good idea to artificially decrease it.
      • Don't Forget the Notes. For an analyst, financial statements without explanatory notes are almost useless. The notes will contain essential information like the company's fiscal year, basis of accounting (cash or accrual), definition of inventory and the details of liabilities (interest rates, maturities, etc.). To illustrate my point, consider the simple case of revenue recognition. Suppose you receive an income statement that claims a company will earn $1,000,000 in revenues this year. Does that figure refer to cash received or the value of sales contracts? Only the notes will tell. Anybody remember Enron?
      • Tell Them How Much You're Asking For. Another common mistake is not including a Statement of Sources and Uses (sometimes called a Funding Plan). This statement expressly sets forth how much fundi
        Benefits of a Merchant Account for Your Business
        If you own a business, then you can truly benefit from signing up for one or more merchant accounts for your business. Merchant accounts are established by millions of business all over the world and such accounts help business owners bring in serious money. Plus, there are myriad benefits derived from having one or more merchant accounts for your business. Let's explore the benefits below.You will be surprised by the advantages afforded to you when you apply for merchant accounts for your business. First, with one or more merchant accounts, you can accept a variety of credit cards from your customers. In fact, once you apply for one or more merchant accounts, you can start accepting Visa, MasterCard, Discover, and American Express from your customers. Thus, with a variety of ways to accept payments, you will find that merchant accounts for your business help you gain significant income and will ultimately increase your bottom line.Secondly, with the advent of the Internet, many business owners are now conducting their business online. With merchant accounts, you can dramatically increase your sales. Customers will enjoy the ease in which they can make purchases and they will, in turn, recommend your web-based business to others. Finally, word-of-mouth
        es. It's called the Acid Test. A ratio of less than 1 is a danger sign. Without getting too deep into financial theory, it's a warning that you have (or will have) a liquidity problem, or worse, a solvency problem. There are several acceptable methods of calculating this ratio. Pick the most favorable method. For most businesses, the most favorable method is to include the value of accounts receivable in the numerator.

        6. Pass the Common Sense Test

        No one wants to invest money in a profit-making enterprise that doesn't make any profits. Don't submit a business plan that projects a loss in the first few years but great profits thereafter or one where your product loses money on each sale but claims profit will be made "on volume." Even if you honestly believe that either of these scenarios will actually happen (which, statistically speaking, they won't), you will be much better off simply projecting break-even or a very small profit. The difference in dollars is negligible, but the difference in perception is critical. The main reason to avoid this is that most lenders and investors have policies against intentionally "funding losses."

        7. Real Men (and Women) Don't Use Templates

        If you're going to use business plan software to produce your business plan, then at least spend the time to make it unique and credible. Every month, without fail, I get several business plans produced by one particular software package. The reason I know this is because every one of them, regardless of the business model or industry, contains the EXACT boilerplate language and the EXACT default figures from the program. Because this demonstrates a lack of diligence and effort, those plans usually go straight in the trash bin. A coffee shop and a multinational defense contractor should not have the same financials. The only number these two businesses really have in common is the $99 they paid for the software.

        8. Avoid Common Financial Mistakes

        There are so many potential mistakes to be made in this area that it deserves its own article. However, here are some basics:

        • The Income Statement, Balance Sheet and Statement of Cash Flow must agree with each other.
        • Most Limited Liability Companies (LLCs) do not pay corporate income taxes. I see this one all the time. Over 80% of LLCs are setup to pass tax liability through to members, yet most business plan spreadsheets include a line-item for taxes that people fill-in anyway. When you do this, you underestimate your Operating Income by the amount of the tax. Because Operating Income is an important metric to most analysts, it's not a good idea to artificially decrease it.
        • Don't Forget the Notes. For an analyst, financial statements without explanatory notes are almost useless. The notes will contain essential information like the company's fiscal year, basis of accounting (cash or accrual), definition of inventory and the details of liabilities (interest rates, maturities, etc.). To illustrate my point, consider the simple case of revenue recognition. Suppose you receive an income statement that claims a company will earn $1,000,000 in revenues this year. Does that figure refer to cash received or the value of sales contracts? Only the notes will tell. Anybody remember Enron?
        • Tell Them How Much You're Asking For. Another common mistake is not including a Statement of Sources and Uses (sometimes called a Funding Plan). This statement expressly sets forth how much fundi
          Conducting Pre-employment Background Checks
          With the infinite amounts of information being passed on the internet today, credit card frauds are happening in the information superhighway at an alarming rate. Though a lot of financial information attained for the use of credit card fraud are from the internet through means of phishing, a common and overlooked area of obtaining critical financial information is from within a company. Most businesses handle sensitive information. This may range from social security numbers, credit card information, drivers license information and other types of personal information. In order to safeguard and assure clients and customers that their information is being handled properly, it is the responsibility of the business owner to take the necessary steps in getting a thorough background checks on all their employees. Obtaining personal or professional references alone is not to be depended on solely.It is only obvious that the prospective candidate for employment to only give references to which they will be given positive feedbacks. Conducting a background check or an FCRA credited employee check will find things about the employee where the reference check cannot. Background checks will give you accurate and in-depth information regarding the candidate.Background che
          actor should not have the same financials. The only number these two businesses really have in common is the $99 they paid for the software.

          8. Avoid Common Financial Mistakes

          There are so many potential mistakes to be made in this area that it deserves its own article. However, here are some basics:

          • The Income Statement, Balance Sheet and Statement of Cash Flow must agree with each other.
          • Most Limited Liability Companies (LLCs) do not pay corporate income taxes. I see this one all the time. Over 80% of LLCs are setup to pass tax liability through to members, yet most business plan spreadsheets include a line-item for taxes that people fill-in anyway. When you do this, you underestimate your Operating Income by the amount of the tax. Because Operating Income is an important metric to most analysts, it's not a good idea to artificially decrease it.
          • Don't Forget the Notes. For an analyst, financial statements without explanatory notes are almost useless. The notes will contain essential information like the company's fiscal year, basis of accounting (cash or accrual), definition of inventory and the details of liabilities (interest rates, maturities, etc.). To illustrate my point, consider the simple case of revenue recognition. Suppose you receive an income statement that claims a company will earn $1,000,000 in revenues this year. Does that figure refer to cash received or the value of sales contracts? Only the notes will tell. Anybody remember Enron?
          • Tell Them How Much You're Asking For. Another common mistake is not including a Statement of Sources and Uses (sometimes called a Funding Plan). This statement expressly sets forth how much funding you are requesting and what you will do with the proceeds. I can't tell you how many

            business plans I've reviewed that tell you everything but how much money is being requested.

          Extra Credit

          If you want to earn goodwill points with the person who will decide if your business plan ever makes it to the investment or loan committee, consider these optional steps:

          1. In addition to a hardcopy, email an electronic copy of your business plan in PDF format.
          2. Include the NAICS code for your industry. The NAICS code is the successor to the well known SIC code. It's what an analyst uses to look up information about your industry at commercial data sources like Dun & Bradstreet and RMA.
          3. Don't use a ring binder.
          4. Include a ratio analysis with your financial projections.
          5. Don't misspell names.

          There you have it. Following these tips may not be enough to get your business plan funded, but they will get it taken seriously. The rest is up to you.