Question

RQ1 - A close friend, church member or family member has come to you with a business plan and is asking for an investment in what seems like a great idea. You have the money to invest and their financial forecasts show a positive return on investment over the next three years. PICK TWO of the following FOUR items and explain how you would evaluate their financials and business plan relative to this area. What questions might you ask and how would you evaluate their responses?

1. Projected Cash Flow
2. Profitability/EBITA/Operating Margin
3. Startup Costs and Sources of Capital
4. Sensitivity and Risk Factors

Answer 1

ANSWER:-

Evaluating one's business plan might be a tough task because for two reasons 1) it is not our own plan 2) we are not much clear about the outcomes of the plan. So we must asses the possible risks that are certain with the business plan we are interested in investing. Every business plan has risk, without risk it wouldn't be a business plan. SO we must care fully asses the risk parameters, opportunities and threats from all the sides such as business environment within which we wish to operate, market conditions, legal and political influences, cultural mix up etc.

Coming to the startup costs, the most start up costs include paying the solicitors and accountants or persons who are involved in incorporating the business and getting it registered as per the legal requirements. And it does also include the resources we require for meeting our day to day expenses and also a registered office (may be leased or own). For a startup business costs are some what mixed up because we wont be able to distinguish the costs that we incur in this period of time. So we have to careful and planned for meeting our incorporation costs and other relevant costs. Funds should be procured from those resources which has a flexible pay plan and can be repaid with minimum amount of interest expenses.

For a business having risk is common, we can classify risks as direct risk and indirect risk. Direct risks are those risks which are directly associated with the nature of our business and have direct impact on the survival, stability, growth and profitability of our organisation. Indirect risks are those risks which are not direct risks and have and indirect effects through other forces are called as indirect risks. So we have to asses these risk based on their impact and be sure to avoid them if possible or to transfer the responsible personnel or in the least case we have to accept the risk so that the impact can be less.

I would like to ask them the return which it will be providing in the future and a statement for the same showing future profitability and growth of the entity. Because growth one of the important factor for a business organisation to survive in the market. And also their plan for which the remaining funds for the business plan are being procured. Such financial forecasts must be duly authorized by a financial expert or even a Certified Public accountant or a certified analyst so to get a reasonable assurance on the financial forecasts.

Note: Above answer is given basing on my opinion on new startups and business plans and risk management principles. If you like my answer please leave it a thumbs up. It is highly appreciated.Thanks in advance.