Writing a business plan for a potential investor? then you need to read this!

You have a business idea that you are very passionate about, you are very positive that it will be a huge success once it sees the light, it could be the seed of a very profitable project, or maybe it also has ethical/environmental side which can generates more than just money? Maybe you want it to serve others and the community you operate in? It has a strong social corporate responsibility sense behind it. All good!

Now you are planning to emphasize on all those great points into your business plan to present it to potential investors or funding entities, and you are thinking that they could really support your proposal, right?  WRONG! 

Don’t get me wrong, being passionate about your idea is a good indicator that you will be more committed to the transformation of your idea into reality and to the success of your project.

Taking into account the social responsibility of your company and its contribution to the development of the community it operates in, not just an ethical point but it also has an economy behind it and can contribute directly or indirectly to the sustainability of your operations and your company as a whole.

But when you prepare your project plan for potential investors, you need to focus on one point, ‘Value creation’!

Value creation in a business plan means that you need to prove that your project is going to perform successfully! Well, that’s a given, right? 

But how performance should be measured here? Based on customer’s satisfaction? The company’s survival? Sales? Profits?

Whatever the way you choose to measure performance, one fact is unquestionable, which is: 

Companies which need funding, a certain capital to operate, from private investors/individuals or public/private funding entities, those investors seek to fund certain projects, put capital into them, and expect an adequate return relative to the risk they may face (The company’s conditions, sector, and business environment etc).

So, how will your company/project be going to create value (suitable return on capital relative to the potential risk) is what you need to focus on and show investors how you plan on doing so.

So, the measurement of the company’s performance should be based on this question: Is the company creating value for its investors or not?

Companies may think of buying a lot of fixed assets, buy certain raw materials and other inputs, outsource marketing through certain agencies, pay salaries if applicable, and many other expenses which the company needs to spend to operate effectively and be able to generates sales on which a return will be made.But return on sales in itself, is not a priority for investors, because if a lot of sales can be generated with small investments, then they would be satisfied with a small return, while if a huge capital needed to generate small sales, then what they would expect is a huge return on sales to equal the funding they put in.

You can use this formula for calculations:

Return On Capital Employed (ROCE)= Operating margin/sales x Sales/Capital employed

So, what really matters to investors is the return on capital employed! Anything the company does, must be done with the following question on mind:

Would that certain decision/action we are about to make, will lead to the creation of return adequate to the capital employed/invested by our investor(s)? Even the examples which mentioned earlier, regarding CSR or adapting an environmental approach, if it’s going to have a role in generating a return relative to capital employed, then why not?!

Overall, the strategy your company adapt must be aimed at maximizing the investors’ return on capital employed, this results from the margins (return on sales) the company creates, but also from the level of sales it can reach no matter the amount of capital.

In order to create a bigger sales’ margins, you need to adapt a strategy that allows you to widen the gap between your costs and willingness to pay you elicit in your customers/clients, because this will help you your company to sell more and make bigger margins or return on sales.

Also, you need adapt your strategy suitable to the capital available, and work within it to create an adequate return, for example, if the capital available is minimum then your goal should be to adapt a strategy that enable you to create a certain level on sales which will be suitable relative to the capital it was poured into the business.