With the economy in a state of flux because of the COVID-19 pandemic, many manufacturers may need additional financial assistance. A business plan that accurately reflects your business is something every company — manufacturing or not — should have. Now is the time to create or update your business plan to provide company growth expectations and strategies.
Setting the scope
The first section of your business plan should generally contain an executive summary and a business description. Be sure to include an overview of your management team and organizational chart. From there, you can move on to an industry and marketing analysis. Most importantly, have a separate section for your company’s financials. Of course, 2020 will be a tough year to encapsulate due to the economic ramifications of COVID-19.
Conclude your business plan with a section discussing how you intend to implement the plan. Small or midsize businesses might balk at compiling a comprehensive business plan. However, it is an essential part of the loan application process for start-ups and when a company needs financing for major capital expenditure or is nearing the edge of bankruptcy.
Remember, the best plans can be quite simple. You do not want to bury management’s message in a long-winded plan. For a small business, the executive summary should not exceed one page and the maximum number of pages should generally be fewer than 30.
Seeing the future
Though many companies are just trying to get through the short term due to the COVID-19 disruption, business planning involves long-term vision. Determine where the company is now and where it wants to be in six months, the next year, or three, five or ten years.
Lenders tend to look at executive summaries first, but it is the last thing management should write. It is better to start with historic financial results. From there, identify key benchmarks that management wants to achieve. These assumptions will drive the financials.
Financing the business
After reviewing the executive summary, lenders will dive into a business plan’s financials section. Management’s goals are fleshed out in its budgets and financial projections. The financials section outlines how much financing your company needs, how it plans to use those funds and when you expect to repay the loans.
For example, suppose a company with $5 million in sales in 2020 expects to double that figure over a five-year period. How will the borrower get from Point A ($5 million in 2020) to Point B ($10 million in 2025)? Many roads may lead to the desired destination.
Let’s say the management team decides to double sales by hiring two new salespeople and acquiring the assets of a bankrupt competitor. These assumptions will drive the projected income statement, balance sheet and cash flow statement.
When projecting the income statement, management makes assumptions about fixed and variable costs. Salaries and rent are generally fixed. Direct materials are generally considered variable. However, some fixed costs can be variable over the long term. For example, rent may become variable if the company has a lease that is about to expire and management decides to relocate to a different facility to accommodate changes in size.
Balance sheet items, such as receivables, inventory, payables and so on, generally grow in tandem with revenues. In a business plan, management makes assumptions about its minimum cash balance and then debt increases or decreases to keep the balance sheet balanced. Remember that your bank will be expected to fund any cash shortfalls that take place as the company grows. This makes cash flow projections among the most significant for lending purposes.
The best business plans are realistic business plans. Be sure that all sections of your plan provide reasonable and well-founded data and analyses. The COVID-19 pandemic is affecting manufacturers in different ways and no one knows how long it will last. Projections based on 2019 might not necessarily be relevant for 2020, so be sure to make adjustments for the current economic realities.
For more information, contact Brandon Vahl at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.