When Is the Best Time to Write Your Business Plan?
If you’re serious about starting your business — even if you don’t have anything down in writing — you’ve already started to plan.
So how do you find time to write a business plan? You don’t. You are always planning. Your plan is never done, but your planning process is your key to good management.
Your plan is for you first. Don’t make it for anybody else. Do it because it helps you divide and manage big goals into practical steps. Instead of looking at it as a document, think of your business plan as a place on your computer where you collect ideas, useful stories, lists and numbers. It’s a place where you keep track of the market, your milestones, goals and projections.
All your business plan really needs at the early stages is:
- Milestones: What’s supposed to happen, when, and who’s responsible.
- Basic numbers: Simple spreadsheet projections for sales, costs and expenses.
- Strategy: Strategy is about deciding how to focus a business offering on a key target market. It can start with just bullet points. I’ve seen it done well with pictures. It’s mostly a reminder for you and your team.
- Cash flow: Because profits don’t guarantee enough cash to pay your bills, you need to manage cash from the beginning. Month by month, account for what you spend and what you deposit — not profit as it appears on the books, but money as it shows in the bank.
- Review schedule: Set aside time for a plan verses actual review once a month to compare what you planned would happen in your business to what really happened. Be brief and practical.
Keep track of these main elements and grow your plan organically as your business grows. By recording what is supposed to happen you’ll be able to better manage why, when and how things go wrong. And you’ll be able to set performance metrics and develop accountability for different tasks and milestones.
Stages of Growth
3 Key Financial Sticking Points for Growth Companies
In their first year of operations, one company expected to spend $400,000 in development costs with no revenue. They are looking at a pre-money valuation of $3.5 million before the end of the year.
In their second year of operations the company experienced a fourfold decrease in revenue and a $1 million loss – compared to a break even year in their first year. They explain their $7 million pre-money valuation based upon a “pivot” in the second year.
The company experienced a $250K loss in the first 3 quarters of the current year. They are now projecting a $250K profit for the entire year and based upon that they are looking for a pre-money valuation $12 million. This is down from $15 million post-money valuation from an earlier round.
FINANCIALS THAT DON’T CONFORM TO GAAP
Company showing a negative inventory of $65,000. This presumably arose when the bookkeeper made an entry to correct cost of sales. Effectively it is impossible to have negative inventory. That probably represents revenue, a liability, or simply a posting error. The thing is, when you’re presenting to investors, get your CPA to ensure that they make sense before you distribute them.
Company with half of their $800K of assets represented by other assets – which remains identical from one year to the next. Given the nature of the business, the assets were probably development costs. Since the company is in a loss position – and has never been profitable – they would not meet the standard for capitalization under generally accepted accounting principles(“GAAP”). Regardless of what it was the CEO couldn’t explain what half his assets were.
UNSUBSTANTIATED EXPONENTIAL GROWTH
Since angel investors are looking for exponential growth, it is pretty much expected that investee companies will project exponential growth. However it strains credibility if you project 200 times revenue growth in a single year. Most of the rest of the companies in my sample used 10 times growth at least once in their projections – which is almost certainly way too optimistic.
The SR&ED Audit – Q&A
WHEN SHOULD CLAIMANTS CREATE TECHNICAL DOCUMENTATION?
(and when should they assemble it?)
Preparing for an “SR&ED” (Scientific Research and Experimental Development) tax audit should really begin well before your company receives notification that your claim is under review. In fact your company should begin assembling supporting documentation at the same time that you decide to perform eligible SR&ED.
As we’ll see later on from the audit letter itself (see Section 3 on page 2 of the letter), there is an expectation that the documentation was developed at the time the work was being performed. It has been our experience that claimants like to assemble that information only after they receive notification of audit. Presumably they do this in the hopes that they won’t be audited. There are 3 serious problems with this approach:
The chances of being subject to an audit have increased significantly in recent years. It is our belief that claims prepared on a contingent (i.e. success-based) basis receive special attention from CRA. Regardless of the engagement terms, the doubling of SR&ED audit staff means that an SR&ED audit is far more likely.
- Documentation assembled after the fact may not have existed before the audit letter was issued – and therefore can’t be construed as ‘contemporaneous documentation‘. If this is apparent to the auditor, the CRA might elect to deny your claim in its entirety for lack of ‘acceptable’ documentation.
- The CRA generally provides 30 days of lead time to assemble supporting documentation. However they don’t communicate by email, but by letter or fax. This effectively reduces the available time to respond by a week or so – and as you’ll see, the amount of documentary evidence requested is considerable – particularly if it wasn’t identified before the claim was filed.
WHAT KIND OF DOCUMENTATION DOES THE CRA EXPECT?
The CRA expects claimants to develop ‘contemporaneous’ documentation detailing plans to overcome technological uncertainties and achieve the desired advancement.
Note that the suggested format presupposes sophisticated activity-based costing – from small businesses that are often challenged maintaining rudimentary books and records on a timely basis.
MAPPING SR&ED TO PRODUCT DEVELOPMENT – WHAT IS THE CHALLENGE?
The Income Tax Act requires that SR&ED activities be “related to a business of the taxpayer”.
In fact 95% or more of SR&ED claims relate to the experimental development of new and improved products or processes – which clearly relate to a business. However even the most sophisticated claimants have difficulty distinguishing between the new features of the product or process and the technological advancement required to deliver these ‘new features’.
Pre-Revenue “Growth” Companies
If your company isn’t yet earning revenue, you are probably closer to the kind of startup that Eric Ries discusses in his book “The Lean Startup”.
That means you are most likely developing a new product or service. In Canada you may be eligible for important tax incentives.Canada’s SR&ED (scientific research & experimental development) tax credits can be a very important source of funds for companies doing qualifying work.
If the development work is difficult and involves technological risk, your company may qualify for annual cash refunds that approach 40-50% of your development wages. While a discussion of the eligibility requirements are beyond the scope of this course, if you think your company might be eligible, you should certainly take a look at the eligibility requirements.
If your company is eligible there are important record-keeping requirements that you’ll need to consider at the outset. While most CPA firms can help you file your tax return – which includes the SR&ED claim – many companies engage a SR&ED specialist to assist with the claim.
It is important to know that your own staff will have to take an important role in documenting SR&ED activities – even if you hire a specialist. Your developers will have to track their time and document the problems they faced – the time spent and the work done.
Unlike most CPA firms, the majority of of our clients do make successful SR&ED claims.
One of the biggest difficulties is that companies face is they focus – understandably – on the features and benefits of the products they develop. As a result – if they keep records at all – they document these features and benefits NOT the underlying technological problems.
As specialists we help companies properly define their eligible SR&ED projects (as opposed to business projects) and try to identify naturally-generated documentation that allows us to document the extent of eligible work done.