The other day, my friend Bob asked me about a stock that he was thinking of buying XYZ. I told him that I had never heard of the company and would have to do some research before I could give him my opinion. Do you have a copy of the company’s annual report? I asked?
Well no, he replied. I looked at their website and it said that annual reports were all fluff. Management knows what they are doing and they are making money, he confided.
What would you think of company XYZ. Would you invest in a company that doesn’t make annual reports to their shareholders?
I am fortunate to work with a number of wealthy individuals who might be considered “angel” investors. This means that they are often willing to help individuals who are starting up or growing their business and need access to capital. Many of these business owners come to me asking me to help them obtain capital. I tell them that before I can present them to my clients, I need to screen their ideas. Please send me your business plan. It’s unfortunate that most of these people don’t even know where to start in preparing a business plan! For sure, neither I nor my clients would ever take them seriously.
Why is a business plan important? First, it requires that the company goals and objectives are clearly defined. Second, it forces one to see what their financial position is today and finally, it enables them to review and analyze strategies that will help the company achieve their goals.
While goal setting seems like an easy challenge, it really isn’t. One must be very specific as to how much money they need to gain, in what time frame they need to gain it and how they intend to do it. It’s never sufficient to just say that I want to make a lot of money. What does that mean? Without being totally specific, no goal will ever be achieved.
Sizing up where the company is today is also extremely important. Just pulling together all of the data needed to make an accurate assessment may take an enormous amount of time. Just look at the situation today with our banking industry. The banking collapse last year shows that no one really knew what investments they had or where these investments were at. Well, few situations can equate to the madness of the banking system, but we all know how difficult it is to stay organized in our financial affairs.
Once the company knows where they are at today, they are able to project their data out for a number of years to see if they will be able to achieve their goals. Often, it takes a lot of fudging with the assumptions to make things work and this is never a good thing.
But with current data and realistic assumptions in hand, the company can then review a number of strategies that when employed will give the company a higher probability of achieving its goals both over the short term as well as the long term. After reviewing the alternatives, the company decides their course of action and begins strategy implementation.
Sometimes it doesn’t matter if a company has done poorly in the past. If they can analyze their situation and have a great plan to turn things around, this is often the best investment you can find. Would you agree?
Now let’s take business planning down to the next level. Imagine that you are the CEO of Client Corp. Yes, this is your company, it is your life. How would you answer if your spouse asks you, Honey, do we have a plan to secure financial independence for our lifetime? What if you children ask, Mom, Dad, I just read that college education is costing $50,000 a year! Am I going to be able to go to college? What will happen to me if you die?
How would you answer these questions? Do you have specific goals? Do you know how much it will take for you to retire? What are your assumptions about taxes in the future, are they valid? Might taxes ruin your security? What will happen to your family if you are disabled? Or die?
Chances are, if a corporation did not do an annual plan, you might think that management was irresponsible. You probably wouldn’t invest in it. Imagine if you had a spouse or children who depend upon you and you don’t have a plan. Would you advise them to invest in you?
Gary Lewis, CFP provides Guardian Angel Protection in your Financial Affairs through comprehensive financial planning and monthly follow-ups. Gary doesn’t want to replace your current advisers, only make sure that they are working for you and not themselves. With Guardian Angel Protection, you can be assured of making informed choices in all of your investment decisions. Learn more about Gary by visiting his blog at Asset Design Center.
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