experienced pilot does not fly a risky mission without
a detailed, well-researched flight plan. Yet people everyday,
with minimal business management experience, try to operate
businesses without active business plans. "Taking
a flyer" on a business venture is no less a life
and death hazard for you, your family and your friends,
than flying that dangerous mission in a small plane. Make
no mistake, when you start a business, your home life,
your family life and your marriage are on the line, front
Without a Plan and Cash flow - An Example:
A relative dies and leaves you a $45,000 inheritance.
You have about $115,000 clear equity in your family
home, according to a recent appraisal. You've always
had an itch to be your own boss and operate your own
retail sport fishing store.
pay a business student to make up a simple business
plan with cash flow projections to satisfy the bankeršs
request and on that basis the bank approves a $40,000
five-year demand loan. You secure it
with a second mortgage on the equity in your home. This
loan will require a payment of approximately $900 monthly
to service the debt.
sign a 5 year lease on a 1500 sq. ft. store location
two blocks off the main shopping artery at about $1900.
rent per month. You find by the time you completed the
signage, furnishing your office, buying a van and the
leasehold improvements, the inheritance money is spent.
excitedly attended the sport fishing tradeshow in Los
Angeles and committed to purchases of seven lines of
electric boat motors, all the popular brands of downriggers,
the entire product lines of Mitchell-Garcia, Daiwa and
Zebco automatic baitcasting and spinning reels, a large
assortment of freshwater, saltwater and flyfishing graphite
rods, and countless lures, lines and accessories. The
big suppliers have all been encouraging and suggested
you may qualify for 30 day credit terms within the year but for now it's C.O.D. You're
committed to almost $55,000 in stock.
haven't given the banker a second thought since you
got the loan, or even glanced at the business plan you
submitted. It's served its purpose, so you think. Your
store finally looks presentable and its only taken you
a month longer to get it up and running than you had
anticipated. Of course not all the stock has arrived
yet, but everyone in the business tells you that's normal.
had almost no sales the first month because you were
only open part time and the construction people were
not finished. Nobody makes money the first month in
a business; so you figure you will catch up. You might
have to cut your part-timers' hours next month. The
next month it rains a lot, no money for advertising
and few customers came in to buy your wonderful stock,
(by now almost all arrived ... along with the C.O.D.
invoices). How quickly that $40,000 loan evaporated!
business fails to generate sufficient revenue to cover
its expenses. Your monthly payables become competing
priorities. You must choose which invoices and statements
will be paid and which will be have to wait.
suppliers say Sure, I understand. (what can they say,
they are unsecured creditors) but your overdue unpaid
invoices send a message to trade suppliers that the
business is getting into trouble and the account will
require watching. Suppliers often share credit information
among themselves and other suppliers are quickly phoned
and quietly asked if they have had any difficulty with
payments on your account. They become concerned and
respond by requesting immediate payment and holding
back some of your merchandise shipments. Their bankers
are asked to check with your banker to see if there
are any problems.
is the first hint your banker has that something may
be wrong. The banker begins to worry about the integrity
of the $40,000 loan. The business plan on which he/she
had based the loan showed there would be lots of money
and sales revenue to cover the early expenses. Your
banker begins to wonder what has happened. Your demand
loan is now in danger of being recalled. Instead the
banker chooses to request that you put a little more
equity, more of your own cash, into the business.
pressure pot has started to boil. The landlord reminds
you about your five year commitment, the signage is
on a long term lease, the suppliers are calling for
quicker payment, holding back shipments, more of your
time is needed because you can't afford employees, there
is no money for advertising and that friendly encouraging
banker is requesting more money be put into the operation.
You may have to sell your house and it is pretty difficult,
at this time, to interact normally with the family at
business plan is for a business, what that flight plan
is for an airplane en route to that distant destination.
The fact is, the more experienced the pilot, the more
certain you can be that he/she will not make that flight
without a detailed, well-researched flight plan.