Business plan evaluation-A Bankers' Perspective

Business plan evaluation - A Banker’s Perspective

May 2013

VentureBean Consulting Private Limited 2

Philosophy of a business plan


Purpose of business Purpose of an commercial enterprise is to make money …. by taking acceptable risks


Success in business

•  Most entrepreneurs start an enterprise around a domain knowledge that they are comfortable with

•  Domain knowledge may be a necessary but not a sufficient requirement for success of the enterprise


Key elements for success in business

•  Domain knowledge needs to be layered with expertise in other functions for an enterprise to succeed.

•  The environment also impacts the success/failure of the enterprise

Domain knowledge

Manufacturing

Quality

Finance Sales

After sales

Procurement

Domain knowledge

Human resource management


Purpose of business plan •  Business plan must articulate the

–  Domain knowledge proposed to be leveraged –  Other necessary expertise that the organisation has created

for the success of the enterprise –  How the domain knowledge and other expertise create a

value proposition for the customers –  How much money the organisation would make from the

current investment … profit need not translate into “making money” … a business that makes money generates positive cash

flows


Business plan evaluation


Banking - Defined Bank - Any Body Corporate authorised under law engaged in the business of collecting deposit from the general public for the purpose of lending

Deposits are repayable either on demand or after a fixed period

Loans need to be repaid on time to meet deposit repayments


Banking - Regulation

•  Governed by Banking Regulation Act

•  Operations monitored by Reserve Bank of India

•  Comes under the Ambit of Foreign Exchange Maintenance Act (FEMA)


Banking – Risk Profile •  Low risk profile

–  Determined by risk profile of investors (depositors) –  Social implication – bank failures –  Regulation – capital adequacy requirements

Unlike an equity company, banks have short maturity funds & conservative investors (depositors)


“I have been up and down this business, and there is still no substitute for… ‘What do you want the loan for? How are you going to pay it back? And what are you going to do to pay me back if your theory doesn't work?’ “ George Scott, First National City Bank

Banker’s Guiding Philosophy ....


What does a Banker look for? •  Intention •  Ability

….. to repay But how does a Banker assess these?


Intention to repay •  Past track record •  Bankers’ references •  Market references •  Borrower’s stake in the venture •  Personal meetings

…. Very difficult to access with first time borrowers Gut feel assumes importance


Ability to repay •  Cash flows .. Cash flows .. Cash flows •  Evaluation of

Certainity & Sustainability of Cash flows

….. Debts can get repaid only out of free cash flows of the

company ….. Business plan is the document that aims to demonstrate the

certainity & sustainability of company’s cash flows


Business plan evaluation –  Industry attractiveness

•  Industry structure •  Drivers of business & profitability •  Competitor analysis •  Margins

–  Company attractiveness •  Promoters •  Strength of Management Team •  Competitive advantages/USP •  Marketing and sales plan •  Past performance

–  Project attractiveness •  Benefits •  Identification of risks •  Risk mitigation steps


Business plan evaluation

Collaterals are integral part of a Banker’s risk evaluation – assures him downside protection


Business plan evaluation •  To determine

–  The ability of the company to leverage its resources to take advantage of the target market

–  Ability is enhanced by better •  Talent pool in the company •  Understanding of industry structure •  Understanding of drivers of business and profitability

–  Very subjective •  Interaction with promoters and management key to get

the “comfort” •  Gut feel play significant part in final decision


Business plan evaluation •  All the understanding and “feel” is then converted into a

profitability and cash flow projections which –  Are realistic –  Have high probability of occurrence

•  The understanding of the company’s strengths give comfort on sustainability of the cash flows


Some Suggestions •  Importance of a sound business plan

–  Identification of drivers of business –  Company’s ability to leverage its resources to take

advantage of market opportunities •  Technology •  Talent

•  Detailing of business plan helps –  Identify pitfalls in business strategy –  Avoid surprises once investment is made

•  Presentation –  Enables articulation of critical aspects of the business plan –  Builds confidence with lenders


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Economy & Finance

Business plan evaluation-A Bankers' Perspective