How to make a successful business plan

Common mistakes in business viability assessment

Our experience tells us that most investors, when assessing business viability, only have in mind short-term indicators. However, relying only on this narrow set of indicators can be detrimental:

• Total Gross Revenue
• Gross Profit
• Net Profit
• Average Order Value
• Gross Margin by Product Type

Avoid guesswork! The lack of real data leads you to work based on assumptions, but by broadening your indicators you can make decisions based on proven data that can drive the way to shape the future.

Furthermore, it’s convenient to analyze and compare industry data to ensure accurate decision-making. In this case, useful information about companies in Portugal and Spain can be found through the SABI platform.

Whatever the project, its viability must then start from a business plan able of analyzing projections and statement of costs and mid-long-term results. To put this process into place, we recommend reading IAPMEI’s explanatory guide, useful to create a business plan and respective financial model.

11 steps to make a business plan

Among all the factors that form the basis of a good business plan, we have selected 11 essential components:

1. Presupposes
2. Sales and Turnover
3. Costs of Goods Sold and Materials Consumed
4. External Service Suppliers (ESS)
5. Staff Cost
6. Profit and Loss Statement
7. Cash Flow Statement
8. Financing Plan
9. Balance Sheet
10. Project’s Economic and Financial Assessment Indicators
11. Project Assessment

IAPMEI also provides Project Evaluation Tool, recommended to evaluate and test the rentability of new investments in five or ten years.

Following, we go deeper into three of these key components - aspects related to presupposes, project’s economic and financial assessment indicators, and finally project assessment.

1) Presupposes

At this stage, you should list all incomes and costs. This data ranges from tax aspects to revenue from the sale of goods and services to any investments or financing. You should also take into account macroeconomic data, such as the current inflation rate.

The capital cost, that is, the WACC (Weighted Average Cost of Capital), also has to be considered. WACC is about the financing of owned and borrowed capital. Overall, someone will invest in a project if its return is higher than WACC. Therefore, the lower WACC, the more attractive the business and the lower the risk.

Remember that completing the Project Evaluation Tool provided by IAPMEI automatically generates the necessary information at this stage, without the obligation to spend time performing complex calculations. Just make sure you have all the data requested.

2) Economic-financial evaluation indicators

It is in the project's Free Cash Flow (FCF) tab that the evaluation indicators are obtained. FCF is the forecasted cash flow, available to pay debts and dividends, buy own shares or finance external growth. To get this, it is only necessary to subtract cash outflows from cash inflows.

A key point when calculating Free Cash Flow is net income. This last indicator depends directly on the calculation of EBITDA, EBIT and EBT, which result from subtracting expenses from sales. That said, the net result is the profit of a company at the end of a year, after deducting all costs.

After these considerations, the main economic and financial indicators that define the project’s viability are the Net Present Value (NPV), the Internal Rate of Return (IRR) and the Payback Period.

3) Project assessment

There are many points to consider when it comes to risk management and the calculation of these values. Find out what each one says about the project assessment, below.

The NPV is an assessment of all the cash flows involved, whether positive or negative. If it’s positive, then the project is profitable; if it’s negative, it doesn’t show the ability to generate enough cash to go ahead.

Net Present Value (NPV).

The IRR is related to the return on an investment and tell us the potential profitability of the project. The higher the IRR, the greater the probability of project return. Equally, this indicator should not be lower than the WACC.

Internal Rate of Return (IRR).

The Payback Period is used to estimate how long a project takes to recover the initial investment. This happens when it accumulates positive cash flows, which equals the expenses incurred so far.

Payback Period.

It is important to highlight that the first few years of business are often unprofitable. That’s because the company aggregate initial costs and does not have significant turnover in the beginning. The goal is to generate more earnings gradually, reducing initial costs.

When the subject is strategic planning and the future of your business is at stake, looking at all scenarios it is never enough. So, what happens if these three indicators come into conflict? If they collide and don’t discriminate on the same criterion, be aware that NPV should prevail since it shows the total financial value, while the other indicators do not.

Finally, remember that the financial model, as well as the business strategy, should be developed with the support of an expert.

Ecommerce case

In fact, the concepts mentioned are valid for 100% online business. But are these indicators sufficient to evaluate business models within ecommerce? Actually, yes and no! Specifically, in the case of ecommerce, we have additional metrics able to reflect its viability, depending on the goals of the brand and the target audience.

At the ESS level, a business 100% online, does not consider, for example, the water supply. On the other hand, it has other expenses such as operational costs, plugins, website hosting, domain registration or services like SEO, advertising, among others. 

Performance indicators such as CAC (Customer Acquisition Cost) and conversion rate, although extremely difficult to predict, are key factors. In the case of the first metric, the CAC, it is essential to potential investors because it considers the financial viability of the project. It should be noted that the CAC should never be higher than the CLV, meaning that a customer must generate a return greater than its acquisition cost.

Other metrics such as average ticket or ROAS (Return on Advertising Spend) help not only to understand how financial resources are managed, but also to predict the viability of the business and its investments.

Let’s wrap things up

We warn you that only looking at metrics alone or economic and financial indicators alone, it’s not a bullet-proof solution. To make an intelligent investment decision, entrepreneurs should take a broad and convergent view of both, especially if they want to make their business more attractive to external financing through partners and long-term financial applications.

Running a business requires time and many skills, and it is difficult for one person to do it all. So consider increasing your chances of succeeding: choose the right tools, delegate tasks, and hire specialized external services where appropriate.

And last but not least, do not be overwhelmed by the numbers! Keep in mind that all plans evolve, so it is important to make adjustments as the market or other factors change.

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