How To Respect the Importance of Business Plans for Investors

No one likes to lose money, and this is most true of savvy investors! Unless you were born as rich as Croesus, chances are that you will definitely be looking for funding to start your own business or to expand or diversify an existing one! This is where investors come into the picture. What convinces an investor, individual or institutional, to invest in a business or company?

The answer: a well-planned, comprehensive and strong business plan! As someone who hopes to be an entrepreneur, you would have received endless advice or information about preparing a business plan and why this is a critical document. How about looking at the business plan from the other side, i.e. from the viewpoint of people from whom you are trying to attract money? Here are the reasons why business plans are important for investors…

Return on investment (ROI)

This is the one and only reason why a business plan is important to any investor, no matter the amount of investment involved. Let’s consider an example of you as an investor. You have some money lying idle in your savings account, say about $500, which is currently earning interest at the base rate, 2%. You are offered the opportunity to invest in a new business where the investment required is $1,000 and the estimated ROI is 4% per annum. Now, would it make sense leaving the money in your savings account to earn 2% when you can double the return by investing your money in the new business?

This, of course, is a very simplistic example but you get the general idea as to why an investor would consider putting their money into your business.

Business plan components
A basic business plan will be composed of the following sections:

1. Executive summary
2. Market analysis
3. Description of the proposed business
4. Structure and management
5. Sales and marketing
6. Products or services to be offered
7. Details of funding required
8. Financial data

Of these, the 6th and 7th elements are of the utmost importance for potential investors. What is the information and data that investors look for? Read on…

Funding details

Information provided in this section should be backed up by documentary proof in the ‘financial data’  section. In brief, the funding section must cover the following information:

1. Total amount of funding required over what prescribed period
2. Break-up of total funding into: initial funding, future funding for subsequent phases, etc.
3. How the funds will be applied to the business or the expenses which the funding is supposed to cover.
4. Type of funding required
5. Repayment of invested funds

Financial data

As far as possible, break-up the financial data into individual elements; this will provide potential investor(s) with the information necessary for them to take a decision. These are listed below:

1. If you have an existing business, provide financials for a period between 3-5 years, or the period for which you have been in business, whichever is lower.
2. Data should include income statements, P&L statements and balance sheets, cash flow, assets or collateral that can back up loan payments.
3. For a new and existing business, projected or estimated financial data for the next five years.
4. Provide for each year, the documents listed in point 2 above and add capital expenditure estimates. Data should be provided on a month-to-month or quarterly basis for the first year, and thereafter, quarterly or annual projections for the next four years will suffice.
5. Ensure funding amounts match with the estimates provided, list all assumptions or strategies based on which projected data is calculated.
6. Conclude with an analytical summary of your financial data, including any trend analysis or other information which will influence the investors’ final decision.

By now, you should have a fair idea of how important a good business plan is for investors. Follow the simple guidelines discussed in this article when preparing your business plan, and you’ll find investors lining up to fund your business!