Advice and Recommendations on Briale’s Business Plan for a Bank Loan

BriAle Brewing Limited                                                                                

************

Western Australia

25th March 2016

Re: Advice and recommendations on BriAle’s business plan for a bank loan

Dear Alexandra

Thank you for meeting me today to discuss your business expansion plan. I am writing to recap our discussion, confirm my understanding of the circumstances and to set out below my advice regarding your draft business plan. I will provide recommendations on how you can improve the plan to assist you in presenting a sophisticated business plan which is likely to go further toward obtaining a loan approval from your prospective lender.

Brief notes from our conversation

• You are aiming to expand your brewing business as well as introduce a new product line.  Therefore external financing is necessary.
• You are seeking to apply for a business loan of $300,000 for your business expansion.
• There is a high possibility that you will allocate a part of the loan funds to repairing the damage caused by a recent storm.
• You have a potential business opportunity to sell your products in a large supermarket chain.

Advice-1: Intention of using your business loan

Primarily, I strongly advise you to be honest with your prospective lender in regard to how the loan funds will be allocated in your business.  Your business’s credibility and your personal integrity could be jeopardised should the lender discover the loan was used for a purpose other than that stated. Crucially, you should put the loan into the parts of the business that generate more revenue over time and therefore help expand the business to achieve your ultimate goal.

Advice-2: The structure of executive summary

The Executive summary is the most important page in the business plan.  This section should provide a concise overview of your business and describe the business needs and the project that requires financing, as well as the amount required.  However, your business plan does not focus on a series of factors critical to a high-quality executive summary.  These factors are

• The company’s vision and mission statement

• Introduction of your personnel
• More specific explanation of your marketing strategy
• Outline of your financial plan and the loan amount required
• A loan repayment plan

Advice-3: The content of the business plan

The content of your business plan has covered too much context on the company summary and duplicated the same context in the different sections, and too little on the information that really matters.   More importantly, the whole plan has missed and stated lightly a number of fundamental elements which should be expected within a quality business plan, including:

• A thorough market analysis includes an analysis of the business and competitors, so as to demonstrate a solid understanding of your business proposition. It also includes strengths and weaknesses of your rivals which it is a critical part of your own marketing strategy.
• The sales strategy needs to be set out more specific rather than simply “to remove all obstacles between the company and the customers”. The lender needs to assess what exact sales strategy you will implement to stimulate your business growth.
• Consideration of legal issues and risk management embraces taking preventative actions and preparing contingency plans in order to eliminate the risks or mitigate them to an acceptable level. Your potential lender is likely to be quite interested in seeing whether you have an effective risk management strategy in place and a contingency plan that will assist you with repaying the loan.
• An operational plan of the new product line explains implementation for the production of the new product by demonstrating what action will be taken to achieve the growth you desire.
• Justification of the amount of the loan required, the allocation of the funds and a loan repayment plan. You need to be very specific as to the method by which you determined the amount of funding that you require. Otherwise the lender will be sceptical about the underlying purpose of the loan. A solid explanation regarding how you intend to allocate the funds will provide a big picture to your lender to determine if you have a robust strategic plan to expand your business in relation to the financial aspect. Finally, you need to set out a plan to show the lender how you will pay back the loan in a certain timeline in order to increase the lender’s confidence.
• A more detailed description of the key personnel is required.  The lender is unlikely to know the experience, qualifications, and skills of each owner and key member of your management team.  Therefore, the specific description can result in increasing the lender’s confidence on your expansion plan.
• A current cash flow statement should be provided. The lender needs to make a lending decision based on your cash management ability.

Advice-4: Assumptions and financial forecast

• Questionable assumption of the total number of staff required based on the projected production in the next three years. It is hard to believe that the same number of staff will be expected to keep up with the business’s projected sales which is assumed to increase by 15% every year.

• Insufficiency of assumptions on which the financial plan was prepared. The plan simply listed two assumptions which are average percent variable cost and estimated monthly fixed cost.

• Insufficiency of the industry benchmark used to compare with the projected business ratios.  It is difficult for the lender to identify whether the provided financial ratios are reasonable without any comparisons.

• Lack of reliability of the projected financial information.  The figures of Rent and Utilities in P/L do not reflect inflation as they are expected to be unchanged.

Advice-5: Tailoring the business plan for the prospective lender

On the top of the key elements required in the plan, you are advised to tailor your plan for your lender in order to increase the possibility of the loan approval.  The following are additional considerations you need to keep in mind:

• A result of market research in regard to the new product.  When you introduce a new product to the market, it is vital to observe how customers respond. For example, you can quote customers’ testimonials to address an objectively rational prediction of success for your new product.
• The action plan for improving underperformance areas. Based on the current collection period shown on the business plan, the lender may question the length as it affects cash flows. The business plan should set out the action plan to achieve of the business’s credit and collection policies.
• The progress of the negotiation with Woolworths.  You should mention the fact that Woolworths as a large market chain is showing its interest in getting stocks from you in order to display a potential business opportunity in the plan.

Conclusion and Recommendations

In this correspondence, I have briefly recapped our discussion and drawn your attention to what is the best for your company’s interests as long as you are honest with your lender. In accordance with the above advice provided, my recommendations are as follows;