How to Write a Business Plan


Chapter 6 -
Risk factors

Most business plans begin with a detailed description of the business. That’s certainly a logical approach, and there’s nothing wrong with it. But on the SCOR stock offering form, before you get to the business description, you must disclose any factors you consider to be significant risks to an investor.

For companies issuing stock, this is an important confession. First, it warns investors of the risks involved in purchasing the security. Second — and more important to you — it protects you and your company from subsequent claims that you didn’t make investors aware of all the risks in buying the stock. Failing to disclose known risks can land you in serious legal trouble and might even be considered fraud.

On the surface, a section on risk factors appears unnecessary for a business plan, and certainly it’s rarely given this much attention. But even if you are looking for debt financing rather than equity, stating your risk factors upfront shows that you are honest about your situation and that you understand that the lender has a lot at stake. Also, when the financing market is tight, lenders look at loan requests even more critically, almost as an investor would.

If your business plan is solid and the threats to your success manageable, you may win greater confidence from the lender by being blunt about the risks than you would by trying to downplay them. Just make sure that your plan, taken as a whole, suggests that those risks are manageable.

What are your risk factors? If you did your strategic planning correctly, you already have your risks in black and white: the weaknesses and threats you identified in your SWOT analysis. Risk factors might include:

  • Cash flow problems
  • Inexperienced management
  • High turnover rate
  • Chapter 11 protection sought by an important shipper
  • Opening of a terminal nearby by a major truckload carrier

Some risk factors, however, aren’t problems you have now but problems you could face due to the nature of your operation. Because of the severe potential consequences, adverse enforcement action by the Department of Transportation is a risk for an investor even if your record currently is clean. It may be a small risk, but it’s one you should disclose.

Another risk factor might be having a single customer account for a large portion of your revenues. Although you may have no indication that that customer’s business is in danger, an investor looks at risk factors not only in terms of their likelihood, but also in terms of their consequences.

Don’t list risk factors randomly; place them in descending order of importance. And most important, make sure you reference portions of your business plan that discuss those risks. Don’t tell your readers all your risks without also telling them how you plan to address them. Either discuss your plan within the description of the risk factor or direct readers to where they can find your plan for addressing them. In general, your action plan, discussed in Chapter Seven, will address your strategic problems. If you want, also include a copy of your strategic plan as an appendix to your business plan.

If you are seeking a significant amount of money, a lender will identify the risks if you don’t. Consider disclosing them first and taking credit for integrity.

Example of risk factors

• Unreliable cash flow. SCU Trucking Co. in the past year has experienced periods in which several shippers and brokers at a time failed to pay freight bills in a timely matter, leaving the company with a cash crunch. We stabilized our cash flow by taking advances on accounts receivable, but the poor credit ratings of these customers have required us to pay unsustainable factors on our receivables. We are trying to improve the situation by using a collection agency before settling for an advance and by adopting a strict policy of not accepting a load until we have completed a credit check.

• High driver turnover rate. SCU Trucking Co. suffers from a common problem in the trucking industry — the inability to maintain a stable driver workforce. During the most recent calendar year, the number of W-2s we prepared for drivers exceeded the number of power units we run by more than 70 percent. The greatest impact has been the inability to accept some loads, which reduces our revenue potential. We are addressing the problem through a combination of new policies, such as guaranteed home time during each two-week period and driver-oriented specs for new equipment. We also are exploring a slight pay increase. But unemployment in our region is lower than the national average, so we anticipate continued problems with driver retention.

• Concentration of revenue stream. SCU Trucking Co. has relied for most of its history on a small but stable customer base. Although we have perhaps a dozen regular customers, one — Cirillo Wholesale Produce — represents more than 35 percent of our revenue stream. SCU Trucking Co. has served Cirillo as its lone truckload carrier for more than 10 years. Although we have no reason to believe this business is at risk, loss of this customer could present a significant financial problem for us until we could find new freight.

• FMCSA enforcement action. Like all interstate motor carriers, SCU Trucking Co. is closely regulated by the Federal Motor Carrier Safety Administration and by state law enforcement agencies acting on its behalf. Our vehicles and drivers are subject to roadside inspection at any time to determine whether either are operating in accordance with FMCSA regulations. Drivers, for example, are subject to limitations on driving and duty time and must maintain log books accounting for driving, work and rest periods. In addition, we are subject to FMCSA compliance reviews. Although FMCSA indices show us at a very low risk of being audited, the consequences of an unfavorable compliance review include fines and loss of our satisfactory safety rating. Several of our largest customers have strict policies against doing business with motor carriers that have conditional or unsatisfactory safety ratings.

In Summary
Although it’s unusual for a business plan, listing your risk factors first may inspire confidence in your ability as a manager to identify the key threats to your success and tackle them head-on. It also shows that you appreciate the risk the lender or investor is taking in providing capital for your business.