Anyone who has watched Dragons’ Den may well have been frustrated at times when a seemingly good product fails to get funding because of a poor, vague or non-existent business plan.

Business plans are important for any new or existing business because they help focus owners’ and managers’ thoughts on the key factors that will affect income, costs and, ultimately, profit over the next trading period, and beyond.

The plans themselves can be as basic or as complicated as one requires. Indeed, overcomplicated plans with numerous variables may look impressive but can become incomprehensible when trying to ascertain what key factors are likely to affect the business going forward.

I met a former colleague recently who told me that he was taking his career in a completely different direction, and had decided to sell used cars. He had already identified suitable premises and had attended a few auctions to see the types of vehicles he might be interested in buying and selling, and the typical costs involved.

Dragon's Den

Out of interest, I asked him whether he had made a business plan or estimated what level of funding he might require. He hadn’t. He had saved £10,000 and decided that this substantial amount of money would be adequate for his purposes.

I asked him what was the average cost of the vehicles he was looking to sell, and how many vehicles he intended to have on his forecourt. He thought the average cost would be around £2,000 and he envisaged having around 10 vehicles to provide a variety of interest. This, I pointed out, would mean that he would have to find at least £20,000 just to provide his new business with some opening stock, and he would require even more just to cover his initial start-up costs and day-to-day running expenses. He added that he was aiming to make around £500 margin on each vehicle he sold, so I asked him to ‘do the math’ (as the marketing people refer to it) – calculate how many vehicles he would have to sell at £500 margin in his first, and every, year to cover his expenses and make a profit. His mouth became an upturned U as he realised how many vehicles he would have to sell every week just to cover his operating expenses, and how many more he would have to sell to make a profit which would support his and his family’s lifestyle. He went away to re-think his plans.

I wasn’t trying to be clever here, or to intentionally depress the man, but it became clear from even the most basic business plan that we managed to construct whilst standing outside W H Smith one Saturday morning that he needed to do some more research before risking his £10,000 savings on a ‘career change’.

Visitors to the Dragons’ Den, or any budding new business people, may well heed this salutary tale.