You should write a business plan each year so that you can see what your needs are for the coming year and to show yourself and the bank how far you have progressed since your original plan was written. A new business venture writes a plan in order to show their intentions to operate and to provide information to financial institutions in support of start up capital and funding for other operations. In most cases, the banks want to see three to five year projections showing your intention for the funding. Depending on the scope of the business, they may only finance the first year, and will want additional proof that your venture is progressing along the terms of the original plan before they will advance any more funds.

Since you are not able to really show much in the way of financial records, having a plan also shows potential creditors what you anticipate for the future. They can then compare this to your original plan to verify if you are moving along as planned. They do not want to be stuck with an noncollectable loan by advancing funds to a venture that has no potential of becoming successful. Even if you are a little behind your original projections, they are able to see if the potential is there for improvement, and may even make suggestions for helping you reach your original goals. On the other hand, if your progress is way behind the original projections, that can be a sign that you are failing, so it's likely that you will not receive any more funding until you can prove that you are on the way to profitability.

It's normal for any business to take three to five years to turn a profit, but if you aren't showing improvement, that is an area for concern. As you enter into your second year, you should be showing less of a loss and more of a profit even if you don't yet show a net gain in income. Even if you are not looking for additional funding, you should look at this as a warning sign and start making some changes so that you can make the gains that you originally intended. It may mean your prices are too low, or your expenses are excessive for the amount of gains you have and need to be cut. For instance, if you are selling products from a website, investigate what others are charging for the same type of items to see if you are in line with the industry standard in pricing. If you sell services, find out what others are charging for the same service-maybe your prices are too high, and thus people are going elsewhere for the same service. In reality, these should have been checked first, but some people in their haste to begin a business forget the most important step of price comparison.

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Tom McMullen
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