Francine was a marketing executive for more than a decade. After getting laid off, she contacted a friend who’s a stay-at-home mom and former teacher. The two decided to open an indoor play area in her family-friendly Calgary neighbourhood. The partners applied for a business loan, but the bank requires they submit a business plan before it’ll approve financing. Neither entrepreneur knows how to write a plan, so Francine turns to her advisor.
Who do you call?
Small business banking specialists and lawyers. You need to get a good sense of what the banks are looking at when assessing a business plan.
What they say
We typically look for seven key components.
- A one-page executive summary stating the nature of the business.
- Full management and ownership details, including their experience in the industry and information on the business structure. Francine has a marketing background; we want to understand how they’ll leverage that. If they don’t have experience, are they going to bring in management with some?
- Market and competitor analysis, including the size, type and nature of the industry, and details on their target customers. What are their marketing and sales strategies? How do they want to position their products and services in their market?
- Service or product line offerings, both now and in future. They should also discuss competitive advantages and any trademarks, copyrights and licensing in place.
- Operations details, including finance, IT, human resources and merchandising strategies.
- Financial information. For new businesses, we look at three years of financial projections on the income statement, balance sheet and cash flow statement.We’d like to see cash flow broken down monthly. But, if there’s not much cyclicality in the business, an annual projection will do for initial review; different time increments may be requested, depending on the type of business and industry. We want to understand their accounts receivable, accounts payable, inventory and cash conversion cycle. How quickly can they translate their product into cash? For an indoor play area, the best place to start is an annual cash flow statement.Another piece we’re looking at is the breakdown of equity sources. How much will Francine and her partner put in upfront for start-up money? What does the equity structure look like?
Read: When to avoid RRSPs
We look at financial ratios in four primary areas: liquidity (traditionally, the current ratio); leverage (e.g., debt and tangible net worth); profitability (e.g., net profit margin); and coverage (e.g., debt service coverage). We need to understand both the business and the industry to calculate the levels required in each of the areas.
Finally, we look what security or collateral the business owner is willing to provide.