Every business is seeking to make money, but some overlook the plan that spells out how to handle that money.
When David Coffman did tax returns earlier in his career, he saw small businesses present information with poor records. Today, he works from tax returns when he does business valuations for Harrisburg-based Business Valuations & Strategies PC.
“Record-keeping is one of the common shortcomings of most small businesses,” he said. “It's something put on the back burner.”
However, record-keeping is crucial, because poor records can create red flags in a potential sale process. Coffman said poor records can lead to a company not selling or selling for less than it is worth.
Execute the plan
Bob McCormack of Murphy McCormack Capital Advisors, which is based in Lewisburg, Union County, and has an office in Harrisburg, sees financial plans through not only his investment banking firm but also as an angel investor.
“I certainly think the best plans I see have clear goals with action steps associated with them that are reasonable,” McCormack said.
When making decisions as an angel investor, McCormack looks for reasonable goals and business owners good at executing them. He has concerns when good plans are developed and then put in a drawer.
Likewise, Coffman feels that too often an emphasis is put on the document itself, not the ongoing changes and reviews that need to happen.
“You need to be planning on a regular basis rather than focusing on a plan nobody's using or just looking at as a reference,” Coffman said. Regular questioning and adaptive review are necessary, he said.
McCormack encourages newer businesses to take advantage of resources like SCORE templates or small business development centers. Still, he feels the business owner really needs to take ownership of the plan.
“People come in with a business plan, and you start asking questions ... and they say, 'Those are not my thoughts,'” McCormack said.
A business owner knows his or her company better than anyone else, so that person should oversee the plan and use a mentor for a critical review, Coffman said.
Avoid the pitfalls
McCormack identified the three main mistakes he sees in a financial plan:
1. Unrealistic expectations. This includes “hockey stick” financial projections with skyrocketing revenue growth, such as $10 million in the coming year and $20 million the year after that.
2. Failure to consider working capital. How are you funding the growth? “Many businesses do not consider balance sheet issues,” McCormack said.
3. Ensuring the right people are on the team. A lot of entrepreneurs, McCormack said, are reluctant to get a good CFO or human resources director. Some companies don't consider how an investor's money will translate into that person having influence over future decisions.
Falling into one or more of these pitfalls can result in a financial plan not being in a usable form, McCormack said. He recommended seeking the services of a good certified public accountant, financial consultant or small-business development center.
“Go to a third party and ask them to be brutally frank with you,” he said.