What is a Business Plan? What is it for?

I recently inserted the term “business plan” in a Google Adwords campaign. Elaborating business plans is one of the services we provide at Gero Consultoria. To my surprise, I got several inquiries from interested parties in this service and soon I realized that the term “business plan”, so used in the capital market and Mergers & Acquisitions, has different understandings in other markets.

After all, what is a business plan (BP)? BP is a quantitative vision of the future of a company, whether it is already existing or a new venture. BP implicitly reflects a market trend, an operational and financial strategies. BP’s goal is to estimate the company’s ability to generate cash from shareholders in the future (usually 5 years). For this purpose, sales (prices and quantities), costs, expenses (operating, non-operating and financial) and investments (working capital and fixed assets) are projected in the future.

There is a methodology, a procedure for calculating the cash surpluses that could become available to shareholders. In the same way, the BP can indicate the cash deficits that the company could generate and that would need to be financed by the shareholders and / or its banks. As such, BP is an instrument of multiple uses.

Although no one has “crystal ball”, projecting the future is very useful in running a business. It is very likely that the results projected for the coming year will be different from those that will actually take place. Understanding the differences between the forecasts and the actual figures are an important source of learning. And it has been shown that thriving companies are those that have the ability to learn from market signals in their various dimensions (consumers, suppliers, competitors, employees, processes, technologies, taxes, financial structure, etc.).

The BP also allows:

  • to identify critical variables for the success of the generation of economic value to the shareholders.
  • Identify and measure the main risks that the company and its shareholders are exposed to.
  • Needs for additional financial funds to support the company’s growth and / or strategic plan. Moreover, the BP can help the company measure how much interest it can afford to pay to the banks, and how long the amortization period of the loan should be.
  • Estimate the profitability of the company and its possible sale value in a Mergers & Acquisitions type of transaction;
  • Create parameters for variable compensation of employees and shareholders;
  • Lastly, perform an impairment test for accounting purposes.

BP can easily transform itself from a strategic planning instrument into a management tool for strategy implementation. Several of Gero’s clients have adopted this practice.

What is your experience with BPs? Share with us your vision of this strategic planning and implementation tool.

Best Regards,

Eduardo Luzio (originally written in Portuguese in October 15, 2010)

Post Scriptum (August 18, 2017) – Business Plan and Startups

Recently, I met an angel investor who was complaining about the CEO of one startup tech company he invested in. He reported to me how difficult it has been to convince the startup CEO to elaborate a BP. The CEO justified his resistance based on the fact that most startups generate negative cash flows for years. That is true, nonetheless, the lack of a BP creates a comfort zone for the management and an unsustainable anguish for the shareholders. Even negative cash flows must have a date to end, and management should commit and be liable for its achievement.

Best Regards,

Eduardo Luzio

 

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Sobre Eduardo Luzio

Economista pela USP (88) e PhD pela PhD University of Illinois (93). Consultor em finanças corporativas e estratégia. Professor de finanças na FEA-USP, FGV -SP e Insper.

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