GUIDETOPREPARINGABUSINESSPLAN

GUIDETOPREPARINGABUSINESSPLAN
INTRODUCTION Why should you go to the trouble of creating a written business plan? There are three major reasons: 1. Theprocessofputtingabusinessplantogether,includingthethoughtyouputinbefore beginningtowriteit,forcesyoutotakeanobjective,critical,unemotionallookatyour businessprojectinitsentirety. 2. Thefinishedproductyourbusinessplanisanoperatingtoolwhich,properly usedwillhelpyoutomanageyourbusinessandworktowarditssuccess. 3. Thecompletebusinessplanisthemeansforcommunicatingyourideastoothers andprovidesnecessaryinformationtoyourlandlord,amongothers. The importance of planning cannot be overemphasized. By taking an objective look at your business,youcanidentifyareasofweaknessandstrength,pinpointneedsyoumightotherwise overlook, spot problems before they arise, and begin planning how you can best achieve your business goals. As an operating tool, your business plan helps you to establish reasonable objectivesandfigureouthowtobestaccomplishthem.Italsohelpsyoutoredflagproblemsas theyariseandaidsyouinidentifyingtheirsource,thussuggestingwaystosolvethem.Itmay evenhelpyoutoavoidsomeproblemsaltogether. No business plan, no matter how carefully constructed and no matter how thoroughly understoodwillbeofanyuseatallunlessyouuseit.Goingintobusinessisroughoverhalfof allnewbusinessesfailwithinthefirsttwoyearsofoperation;over90percentfailwithinthefirst 10years.Amajorreasonforfailureislackofplanning.Thebestwaytoenhanceyourchancesof successistoplanandfollowthroughonyourplanning. Useyourplan.Dontputitinthebottomdrawerofyourdeskandforgetit.

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STATEMENTOFPURPOSE The first page of your plan should state the objectives of the plan as simply as possible. The statements should be a brief description of how you intend to support the investment you are makinginthebusiness.Keepthestatementshortandbusinesslike.Itwillusuallybenolonger thanhalfapage,butitmaybelongerifnecessary.Useyourownjudgment. TABLEOFCONTENTS The Table of Contents should follow your Statement of Purpose. The remainder of the plan is devotedtoelaboratingandsupportingtheStatementofPurpose. Therearethreemainsectionsofyourplan: I. TheBusiness II. FinancialData III. SupportingDemographics Thesesectionsmaybebrokendownfurtherifitseemsnecessarytodoso.Ithelpsthereaderfind his or her way through a lengthy proposal if you break the Table of Contents down into sub categories. The Statement of Purpose states what your deal is. Your reader may want to turn immediatelytospecifics. ASAMPLEFORMAT I. THEBUSINESS...1 A.ExecutiveSummary......1 B. DescriptionofBusiness....1 C. Market.....1 D. Competition....2 E. Management..3 F. Personnel....3 G. Financing....4 II. FINANCIALDATA....6 A.SourcesandApplicationsofFunding....6 B. CapitalEquipmentList.....7 C. ProFormaBalanceSheet......8 D. BreakevenAnalysis...9 E. IncomeProjections..10 1.FiveYearSummary..10 2.DetailbyMonth,FirstYear.11 3.DetailbyYear,SecondThroughFifthYears....12 4.NotesofExplanation....13 F.ProFormaCashFlow....15 1.DetailbyMonth,FirstYear15 2.DetailbyYear,SecondThroughFifthYears...16 3.NotesofExplanation...17 III. SUPPORTINGDOCUMENTS

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 PARTI.THEBUSINESS

This is the most important part of your business plan. The objective of this section is to makeaclearstatementof: 1.Whatthebusinessis(orwillbe); 2. What market do you intend to service, the size of the market and your expectedshare; 3. Whyyoucanservicethatmarketbetterthanyourcompetition; 4. What management and other personnel are available and required for the operation;and TheExecutiveSummaryshouldanswertheseandotherquestionsasoutlinedbelow. Remember that technical support for your business idea will be found primarily in the FINANCIAL DATA section and the SUPPORT DOCUMENTS. In this section (THE BUSINESS),referencethesupportingdataasneeded.

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A. GUIDELINESFOREXECUTIVESUMMARYSECTION The following checklist is an outline you can use to make sure that important points are covered in your Executive Summary and your entire plan. These Guidelines are a suggestion.Yourbusinessmayneedtostressdifferentpoints.Ifso,makesurethatthey areincluded. DescriptionofBusiness 1.Businessform:proprietorship,partnership,corporation? 2. Merchandising,manufacturingorservice? 3. Whatistheproduct? 4. Isitanewbusiness?Atakeover?AnExpansion? 5. Whywillyourbusinessbeprofitable? 6. Whenisyourbusinessopen? 7. Isitaseasonalbusiness? 8. What have your learned about your kind of business from outside sources (tradesuppliers,banks,otherbusinesspeople,publications)? TheMarket 1.Whoisyourmarket?DEFINEYOURMARKET. 2. Howareyougoingtosatisfyyourmarketswants? 3. Howwillyouattractandholdyourshareofthemarket? 4. Howareyougoingtopriceyourproduct? Competition 1.Plantokeepaneyeonthecompetition. 2. Whoareyournearestcompetitors? 3. Howistheirbusiness? 4. Whathaveyoulearnedfromtheiroperations?

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 LocationofBusiness 1.Plantokeepaneyeonanydemographicshiftsinyourarea. 2. Whyisthisadesirablearea?Adesirablebuilding? Management 1.Howdoesyourbackground/businessexperiencehelpyouinthisbusiness? Also,foryourownbenefit,whatweaknessesdoyouhaveandhowwillyou compensateforthem,i.e.whatrelatedworkexperiencehaveyouhad? 2. Whoisonthemanagementteam? 3. Whatarethedutiesofeachindividualonthemanagementteam? 4. Arethesedutiesclearlydefined?How? 5. Whatadditionalresourceshaveyouarrangedtohaveavailabletohelpyou andyourbusiness? Personnel 1.Planfortrainingpersonnelforbothoperationsandmanagement. 2. Wages:Salaryorhourly?Overtime?Fringebenefits?Taxes? 3. Whatareyourpersonnelneedsnow? 4. Whatwillyourneedsbeinfiveyears? ApplicationandExpectedEffectofInvestment 1.Howwilltheinvestment(loanorinjectionofothernewfunds)makeyour businessmoreprofitable? 2. Shouldyoubuyorleaseequipment? 3.Doyouneedthismoney?Establishaprocedureformakingborrowing decisions.Planyourborrowing.

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 B.DESCRIPTIONOFBUSINESS Theobjectiveofthissectionistoexplain owhatyourbusinessis; ohowyouaregoingtorunit; oandwhyyouthinkyourbusinesswillbesuccessful. Deciding what your business is and what it will be in five years is the most importantdecisionyouwillhavetomake.Asmallbusinessmaybeinvolvedinmore thanoneactivity:Ifso,thejudgmentofwhatthecentralactivityis(orwhatthecentral activities are) is crucial. Your entire planning effort is based on your perception of whatbusinessyouarein. TheDescriptionofBusinessincludes: 1.Thetypeofbusiness:Isyourbusinessprimarilymerchandisingorservice? 2. Thestatusofbusiness:Isyourbusinessastarup?Anexpansionofagoing concern?Atakeoverofanexistingbusiness? 3. 4. 5. 6. 7. ForANewBusiness Yourdescriptionofthebusinessshouldcontainresponsestothefollowing(aswellasthe sevenitemspreviouslylisted): 1.Whywillyoubesuccessfulinthisbusiness? 2. Whatisyourexperienceinthisbusiness? 3. Haveyouspokenwithotherpeopleinthiskindofbusiness? 4. Whatwillbespecialaboutyourbusiness? Ifyoursisaseasonalbusiness,orifthehourswillbeadjustedseasonally,make surethattheseasonalityisreflectedinyourrepliesto5&6. Whathoursofthedayanddaysoftheweekwillyoube(areyou)inoperation? Whenwillyourbusinessopen? Thebusinessform:Soleproprietorship,partnership,corporation? Whyisyourbusinessgoingtobeprofitable?

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Many businesses fail to take advantage of the insights and experience of possible competitors.Theyareyourbestsinglesourceofinformationandwilloftengiveyoumuch valuableadvicefornothingmorethanachancetoshowtheirexpertise.Talkingwiththem (and observing their business practices) will also help you define what the special advantagesofyourownbusinesswillbe. 5. Haveyouspokenwithprospectivetradesupplierstofindoutwhatmanagerial and/ortechnicalhelptheywillprovide? 6.Haveyouaskedabouttradecredit?

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C.THEMARKET In order to generate a consistent and increasing sales flow, you must become knowledgeableaboutyourmarketthepeoplewhowillbebuyingyourservice,product, ormerchandise. Thebasicmarketingconsiderationsare: 1.Whoisyourmarket? 2. Whatisthepresentsizeofthemarket? 3. Whatpercentofthemarketwillyouhave? 4. Whatisthemarketsgrowthpotential? 5. Asthemarketgrows,doesyourshareincreaseordecrease? 6. Howareyougoingtosatisfyyourmarket? 7. How are you going to price yourservice, product,or merchandise to make a fairprofitand,atthesametime,becompetitive? DEFINEYOURMARKET Inmarketingterminology,defineyourtargetmarket.Definingthetargetmarketisdonein alogicalfashionbyconsidering: owhoneedsyourservice? owhoneedsyourproduct? owhobuysthekindofmerchandiseyoustock? Itmaybenecessarytochangeyourservice,product,ormerchandisemixtomeettheneeds ofthemarketyouhavetargeted(Item6)ormakerationalpriceadjustments(Item7). Yourtargetmarket,themarketyouhaveselectedtoserve,mustbemeasured.Havingtoo few customers puts you out of business. Although your business will receive cash from foursources(1)sales,(2)loanproceeds,(3)saleoffixedassets,and(4)proceedsofnew investmentitwillultimatelyrelyonSALESasthemainsourceofmoney.Ifthereareno sales,thereisnobusiness. YoucanobtaininformationaboutthesizeofyourmarketfromtheChamberofCommerce, trade publications, marketing consultants, other business persons, schools, and colleges. AnexcellentsourceofinformationistheFederalCensusReportwhichincludesyourarea. Itisbesttogethelpinassessingthemarketfromsuchsourcesratherthantryingtoguess by watching passing traffic and hoping for the best. Good marketing strategy must be planned,anditmustbebasedongoodinformation.

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Whenyouhaveafeelingforyourmarket,thefollowingquestionscanberaised: 8. Howwillyouattractandkeepthismarket? 9. Howcanyouexpandyourmarket? Items 8 and 9 are elaborations of Item 6. Item 6 should be part of your basic company policy.Items8and9bringinsuchideasashowandwheretoadvertise,thesuitabilityof yourlocation,andtheattractivenessandcomfortofyourstorefortheclienteleyouhopeto acquire. Thesecondaspectofyourmarketingstrategy(Item7,above)concernsprice: 10. Whatpricedoyouanticipategettingforyourproduct? 11. Isthepricecompetitive? 12. Whywillsomeonepayyourprice? 13. Howdidyouarriveattheprice? 14. Whatspecialadvantagesdoyouofferthatmayjustifyahigherprice(youdont necessarilyhavetoengageindirectpricecompetition)? Inordertomakeaprofit,abusinessmustmakemoreonsalesthanitspends(bothdirectly, asincostofgoodssold,andindirectly,asinoverheadandsellingcosts).Manybusinesses flounderbecausetheylosesightofthissimpletruth.

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 D.COMPETITION If you havedecided onyour target marketand it is large enough to be profitableand contains reasonable expansion possibilities, the next step is to check out your competition, both direct (similaroperations)andindirect.Considerthesequestions: 1.Whoareyourthreenearestcompetitors? 2. Howwillyouroperationbebetterthantheirs? 3. Howistheirbusiness:steady?increasing?decreasing?Why? 4. Howaretheiroptionssimilaranddissimilartoyours? 5. Whataretheirstrengthsand/orweaknesses? 6. Whathaveyoulearnedfromwatchingtheiroperations? Theobjectiveofthissectionistoenableyoutomakeyourbusinessmoreprofitablebypickingup thegoodcompetitivepracticesandavoidingtheerrorsofyourcompetitors.Carefullyviewing thecompetitionwillsometimesleadyoutoalteryourbasicbusinessstrategyorchangeexisting operationstocompetemoreeffectively.Thisshouldbeanongoingpracticesincemarketsshift andsuccessattractscompetition. InItem1,thenumberofcompetitors(three)isaminimum.Theremaybemore,bothdirectand indirect.Makesureyoukeepabreastofthecompetitiononaregularbasisatleastquarterly, preferablymoreoften.

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E.MANAGEMENT Accordingtovariousstudiesoffailuresofsmallbusiness,roughly98%ofbusinessesfailbecause of managerial weakness; less than 2% of the failures are due to factors beyond control of the personsinvolved. Your business plan must take this into account. You should make sure that your landlord is awareofwhatstepsyouhavetakenoraretakingtocorrectanyweaknessesinyourmanagerial staff(yourselfandanyothermanagerialpersonsinvolved);ifyouaretouseyourbusinessplan toitsfullestextent,youshouldusethissegmenttohighlightbothstrengthsandweaknessesof managementforyourownsake. InpreparingtheMANAGEMENTsection,therearefiveareastobecovered: 1.PersonalHistoryofPrinciples 2. RelatedWorkExperience 3. DutiesandResponsibilities 4. Salaries 5. ResourcesAvailabletothebusiness Theaimistospotareasofpotentialweaknessbeforeproblemscausedbythemariseandputyou outofbusiness. 1.PersonalHistoryofPrinciples Thissegmentshouldincluderesponsestothefollowingquestions: 1.Whatisyourbusinessbackground? 2. Whatmanagementexperiencehaveyouhad? 3. What education have you had (including both formal and informal learning experiences)whichhavebearingonyourmanagerialabilities. 4. Personal data: age; where you live and have lived; special abilities and interests; reasonsforgoingintobusiness. The personal data neednt be a confession, but it should reflect where your motivation comes from. Without a lot of motivation, your chances of success are slight. It pays to be ruthlessly honestwithyourselfevenifyoudontputtheresultsonpaper. 5. Areyouphysicallyuptothejob?Staminacounts. 6. Whyareyougoingtobesuccessfulatthisventure?

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Keepinmindthatyourfamilywillbeaffectedbyyourdecisiontogointobusinessforyourself andtrytoassessthepotentialfallout;whiletheymaybesupportivenow,willtheycontinueto be? 7. Apersonalfinancialstatementmustbeincludedasasupportingdocumentinyour Businessplan. 2.RelatedWorkExperience Thissegmentisadetailedresponsetotheexperiencefactorsmentionedearlier.Itincludes(butis notlimitedto)responsestothefollowing: 1.Directoperationalexperienceinthistypeofbusiness; 2. Managerialexperienceinthistypeofbusiness; 3.Managerialexperienceacquiredelsewherewhetherintotallydifferentkindsof businessesorasanoffshootofcluborteammembership,civicactivities,church work,orsomeother. 3.DutiesandResponsibilities Onceyouhavewrittendowntheexperienceandskills(andhaveafeelfortheweaknesses)ofthe proposedmanagement,thissegmentbecomesmuchsimpler.Followtherule: ALWAYSBUILDONSTRENGTHSANDSEEKTO ALLEVIATEWEAKNESSES Attemptingtomakeasalesmanageroutofyourstarsalesmanmayalsobefolly.Useskillsto advantage. Thescarcestassetyouwillhaveistime.Tomakethemostofit,makesurethatyoubudgetyour timecarefullybyspellingout,inadvance, owhodoeswhat; owhoreportstowhom;and owherethefinancialdecisionsgetmade. Include: 1.Timeforplanningandreviewingplans 2. Majoroperatingduties(purchasing,sales,personnel,promotion,production,andso forthasappropriateforyourbusiness. 3. Planning.

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Thepurposeofyourplanistomakeyourbusinessrunmoresmoothly.Ifyoufindyouspenda lotoftimesolvingyesterdaysproblems,stop,getoutoftheshop,sitdownandstartplanningso youdontperpetuallyrunincircles. Allocating duties and responsibilities is critical. If the chain of command is unclear to your employees,youwillhavetheworstkindsofpersonnelproblems.Thisisamajorresponsibilityof managementandmustnotbeevadedundertheguiseofwecanworkitoutlaterwhenwesee wheretheproblemsare. 4.Salaries Asimplestatementofwhatthemanagementwillbepaidissufficient.Justremember,cutthefat from your personal budget, add 15% for contingencies, and then stick to it. Be realistic about salaries, but dont be greedy. The payoff comes in the future after the business becomes successful. Knowingwhatyouneed,asdistinguishedfromthinkingyouknowwhatyouneed,takeseffort butonesurewaytodamageasmallbusinessistobleeditforfamilynecessities.Ifyourbusiness cantaffordtopayalivingwage,andyouhavenootherincomeorsavings,youhadbetterthink yourdealoveragain. 5.Resourcesavailabletothebusiness ALLbusinesses,nomatterhowtiny,need: 1.Anaccountant 2. Alawyer 3. Aninsurancebroker Ifyoudonthavethese,getthemimmediately!! Othersourcesofassistanceinclude: 4. BusinessInformationCenters 5. ChambersofCommerce,RegionalPlanningCommissionsandCouncils 6. Business, trade, civic organizations often have a pool of talent available to their members 7. SmallBusinessAdministrationtechnicalassistance,ACEandSCOREprograms 8. Consultants 9. Colleges,universities,schools

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10. Federal,stateandlocalagencies 11. YourboardofDirectors(ifappropriate) 12. Yourlandlord You wont necessarily have to use all of these resources (except the lawyer, accountant and insurancebroker),butitisagoodideatoknowwhathelpwillbeavailableifyouneedit,andto knowwhereitis(andwhoitis)wellaheadoftime. Bylistingtheseresources,andmakingyourselfknowntothem,youcanplugmanygapsinyour experienceandincreaseyourchancesofsuccess.Manyofthemwillcostyounomorethantime andaphonecall.

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 F.PERSONNEL Businessesstandorfallonthestrengthoftheirpersonnel.Goodemployeescanmakeamarginal dealgo;pooremployeescandestroythebestbusiness.Studieshaveconsistentlyshownthatout of100customerswhostoppatronizingtheaveragestore,over70dosobecausetheydidntget prompt,courteousattention.Herearesomequestionstothinkaboutindeterminingyourhiring needs: 1.Whatareyourpersonnelneedsnow?Inthenearfuture?Infiveyears? 2. Whatskillsmusttheyhave? 3. Arethepeopleyouneedavailable? 4. Fullorparttime? 5. Salariesorhourlywages? 6. Fringebenefits? 7. Overtime? 8. Willyouhavetotrainpeople?Ifso,atwhatcosttothebusiness(bothtimeofmore experiencedworkersandmoney)? Becarefultrainingpersonnelcanbeahiddencostthatyouhavenotcountedon. One excellent personnel control is the job description. Hire people only when it will result in addedprofitabilitytoyourbusiness,andthinkbeforehiringwhetherthejobisreallynecessary. Ifitis,thencarefulselectionofapersontofillthejobwillmorethanrepaythetimeandeffort involved in hiring the best person for that job. There are standard application forms you may find useful in the selection process. You should also check with the SBA for their booklets on personnelmanagementaswellasyourlocalDepartmentofEmployeeSecurityandperhapsgeta copyofPersonnelfortheSmallBusinessfromtheSmallBusinessReporter,Department3120, BankofAmerica,SanFrancisco,California94120.

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 G.FINANCING This section is important, whether you are seeking a loan or planning to finance your deal yourself.Indetermininghowmuchmoneyyoullneedandforwhatpurposesitwillbeused,do not rely on guesses when exact prices or firm estimates are available. If you must make an estimate,specifyhowyouarrivedatyourfigures.Itmaybehelpfultomakeathreecolumnlist: BareBones Reasonable Optimal What youd like if money were no problem and you werent worried about makingaprofit. Examples: Custommade El Dorado (Cadillaccustomat$18,500) Customteakdeskat$750

What you can just scrape by with secondhand, makeshift the bare minimum. Examples: Bicycle with large basket (Schwinn52at$12.50) Useddeskat$7.00

What you will most likely get some new some used, somefancyandsomeplain. Examples: Pickuptruckwith camper(usedFordat $1,885) Renovateddeskat$25

FillouttheBareBonesandOptimalcolumnsfirst,thenmakeyourreasonablechoice.Itmaybe importanttoyoutohavealuxuryitemortwo,butweighthecost.Thistabularworksheetis particularlyusefulforastartupbusinessandcanbeusedwheneverapurchaseofadditional equipmentiscontemplated. Makesurethatthissectioncontainsresponsestothefollowing: 1.Howistheloanorinvestmenttobespent?Thiscanbefairlygeneral(workingcapital andnewequipment,inventory,supplies). 2.Whatis(are)theitemoritemstobebought? 3.Whoisthesupplier? 4.Whatistheprice? 5.Whatisthespecificmodelnameand/ornumberofyourpurchase(s)? 6. Howmuchdidyou(willyou)payinsalestax,installationcharges,and/orfreight fees?

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Youshouldconsiderthepossibleadvantagesofleasingsomeofthecapitalequipmentyouneed. Mostimportantly,askyourself: 7. Howwilltheinvestment(loanorequity)makeyourbusinessmoreprofitable? Interestisanexpensewhichreducesprofits.Ifyouproposeborrowingmoneyorinvestingyour own,youmustknowhowthemoneyisgoingtoworkforyou. MAKESUREITEARNSMORETHANITCOSTS

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 PARTII.FINANCIALDATA Projections or forecasts are an integral part of your FINANCIAL DATA, and are critical to accuratelyevaluatingthefeasibilityofyourdealandtoplanningjusthowlargeaninvestmentis required to get the business to a stable level of operation. Your assumptions must be carefully thought out and explained. Be honest here for your own benefit. Overoptimism can lead to failure. ThefollowingitemsshouldappearintheFINANCIALDATAsection: A. SourcesandApplicationsofFunding B. CapitalEquipmentList C. BalanceSheet D. BreakevenAnalysis E. ProFormaIncomeStatements F. ProFormaCashFlowAnalysis

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 A. SOURCESANDAPPLICATIONSOFFUNDING ThissubsectionisanessentialpartofyourBUSINESSPLAN.Itisarestatementoftheinformation in part G. FINANCING. Major anticipated expenditures should be supported by copies of contracts, lease and/or purchase agreements, or similar documents and included in the APPENDIX.

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SAMPLE

CashFlow SourcesandApplicationsofFunding SOURCES BankLoans: 1.MortgageLoan.$22,000 2.TermLoan...10,700 3. ReservedLoan.3,300 4. OwnersInvestment.5,000 TOTAL..$41,000 APPLICATIONS PurchaseEquipment.$22,000 TenantImprovements...4,000 Inventory700 WorkingCapital.6,000 ReserveforContingencies.8,300 TOTAL...$41,000 Tobesecured By AssetsoftheBusiness SignaturesofthePrincipals

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 B.CAPITALEQUIPMENTLIST YourBUSINESSPLANshouldcontainaCapitalEquipmentListtohelpmaintaincontrolover depreciable assets, insure against letting your reserve for replacement of capital equipment becometoolow(orbeusedasaslushfund),andassistinthecreationofacostaccountingsystem. Capitalequipmentisthatequipmentwhichyouusetoprovideaservice,orusetosell,store,and deliver merchandise. It is not equipment that you will use and wear out or consume as you do business (this does not include items which are expected to need replacement annually or more frequently). Examples of capital equipment are office furniture and business machines (desks, typewriters, addingmachines),storefixtures(displaycases,refrigerationunits,permanentfixturessuchasair conditioners, lighting fixtures), and vehicles utilized for deliveries. None of this type of item is expected to wear out before a period of years. These goods are depreciable, and their cost is expressedasdepreciationexpenseontheincomestatement.

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 C.BALANCESHEET BALANCESHEETSaredesignedtoshowhowtheassets,liabilities,andnetworthofacompany are distributed at a given point in time. The format is standardized to facilitate analysis and comparisondonotdeviatefromit. Balancesheetsforcompanies,greatandsmall,containthesamecategories.Thedifferenceisone ofdetail.Yourbalancesheetshouldbedesignedwithyourbusinessinformationneedsinmind. These will differaccording to the kind of business you are in, the size ofyour business,and the amountofinformationwhichyouraccountingsystemmakesavailable.

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SAMPLE

ASSETS CurrentAssets Fixedassets LessAccumulated Depreciation NetFixedAssets TotalAssets Footnotes LIABILITIES CurrentLiabilities LongtermLiabilities TotalLiabilities NetWorth TotalLiabilities andNetWorth Retailer

December31,20 BalanceSheet

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 The Categories can be defined more precisely. However, the order of the subcategories is importantandshouldbefollowed.Theyarearrangedinorderofdecreasingliquidity(forassets) anddecreasingliquidityimmediacy(forliabilities). Abriefexplanationofeachprincipalcategoryfollows: 1. CurrentAssets:cash,governmentsecurities,marketablesecurities,notesreceivable(other thanfromofficersoremployees),accountsreceivable,inventories,prepaidexpenses,any other item which will or could be converted into cash in the normal course of business withinoneyear. 2. FixedAssets:land,plant,equipment,leaseholdimprovements,otheritemswhichhavean expected useful business life measured in years. Depreciation is applied to those fixed assets which (unlike land) will wear out. The fixed asset value of a depreciable item is shownasthenetofcostminusaccumulateddepreciation. 3. Other Assets: intangible assets such as patents, royalty arrangements, copyrights, exclusiveusecontracts,notesreceivablefromofficersandemployees. 4. CurrentLiabilities:accountspayable,notespayable,accruedexpenses(wages,salaries), taxespayable,currentportionoflongtermdebt,otherobligationscomingduewithinthe year. 5. Longterm Liabilities: mortgages, trust deeds, intermediate and longterm bank loans, equipmentloans. 6. NetWorth:ownersequity,retainedearnings. 7. Footnotes: you should provide displays of any extraordinary item (for example, a schedule of payables). Contingent liabilities (such as a pending lawsuit) should be includedinthissection. If you need to provide more detail, do so, but remember to follow the standard format. If your balance sheet is assembled by an accountant, he will specify that it was done with or without audit.

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D. BREAKEVENANALYSIS ABreakevenAnalysisprovidesyouwithasalesobjectivewhichisexpressedineitherthenumber ofdollarsorunitsofproductionatwhichyourbusinesswillbebreakingeven,thatis,whereitis neithermakingaprofitnorlosingmoney.Ifyouknowyourbreakevenpoint,youhaveadefinite target that you can plan to reach by carefully reasoned steps. Many businesses have destroyed themselvesbyignoringtheneedforabreakevenanalysis.Itisessentialtoremember: INCREASEDSALESDONOTNECESSARILYMEANINCREASEDPROFITS Calculating the breakeven point can be simple (for a oneproduct business) or complex (for a multiline business) but whatever the complexity, the basic technique is the same. Some of the figuresyouneedtocalculatethebreakevenpointwillhavetobeestimates.Itisagoodideato makeyourestimatesconservativebyusingsomewhatpessimisticsalesandmarginfiguresandby slightlyoverstatingyourexpectedcostfigures.Thebasicbreakevenformulais: S=FC+VC WhereS=Breakevenlevelofsalesindollars FC=Fixedcostsindollars VC=Variablecostsindollars FIXEDCOSTSarethosewhichremainconstantnomatterwhatyoursalesvolumemaybe,*those costswhichmustbemetevenifyoumakenosalesatall.Theseincludeoverhead(rent,insurance, officeandadministrativecosts,salaries,etc.)andhiddencostssuchasinterestanddepreciation. VARIABLE COSTS are those costs associated with sales including cost of goods sold, variable laborcostsandsalescommissions. Whenyouwanttocalculateaprojectedbreakevenandyouthereforedonotknowwhatyourtotal VCwillbe,itisnecessarytouseavariationoftheS=FC+VCformula.Ifyouknowwhatgross Margin(profitonsales)youexpectasapercentofsales,thefollowingformulacanbeused: S=FC/GM WhereGM=GrossMarginasa%ofsales If,insteadofcalculatingadollarbreakeven,youwanttodeterminehowmanyunitsyouneedto selltobreakeven,yousimplydividethebreakevenderivedaboveindollarsbytheunitpriceto getthenumberofunitstobesold.
*Thesecostsremainconstantinarelevantrange.However,ifatagreatlyincreasedsalesvolumeyouneedmorespace, yourfixedcostswillrise.FandVhavebeennotatedontheextremelefthandmargintoindicatewhichtypesofcosts arefixedandwhichareviable.

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EXAMPLE BreakevenAnalysis

FixedCosts=$14,700(peran.) VariableCosts=79.3% GrossMargin=20.7% Thus,BE=FC/GM BE=$14,700 BE=$71,014.5 BE/Month=$5,917.87

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 CustomersneededpermonthatBE: Assumptions: AverageUnitSellingPrice$3.00 $3.00 AverageCustomerRepeatSales=2X/Week 6.00 4.3weeks/monthThus:AverageCustomerSale/Month 25.80 Thus:CustomersneededatBE= 230/month 7.6/day Breakeven analysis also may be represented pictorially, and the diagram helps with forecasts, budgets, and projections. Using a chart enables you to substitute different combinations of numbers to obtain a rough estimate of their effects on your business. A helpful technique is to make worst case, best case, and most probable case assumptions, to chart them and then derive moreaccuratefiguresbyapplyingtheformulassuggestedabove.Thiscanbeofspecialvalueif you are contemplating a capital investment and want a quick picture of the relative merits of buyingorleasinganitem.Tomakemaximumuseofyourbreakevenanalysis,utilizeitinareas otherthansales;youhavemorecontroloveryourexpendituresthanyoudooversales.*

*Breakevenanalysiscanbedirectlyappliedtoprofitplanningbymodifyingthebasicformula,S=FC+VC.Theformula forthiscalculationis:S=FC+VC+P.Here,PstandsforProfit.Supposeyouwishtodeterminethevolumeofsalesat whichyouwillmakeaparticularprofit.UsingP=SFCVC,youwillbeabletofiguretheamountofsalesyouneed.

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E. PROFORMAINCOMESTATEMENT

INCOME STATEMENTS, also called PROFIT & LOSS STATEMENTS, are complimentary to balancesheets.Thebalancesheetgivesastaticpictureofthecompanyatagivenpointintime. Anincomestatementprovidesamovingpictureofthecompanyoveraparticularperiodoftime. Income statements that are cast into the future are called INCOME PROJECTIONS. Income projections are forecasting and budgeting tools estimating income and anticipating expenses in theneartomiddlerangefuture.Formostsmallbusinesses,incomeprojectionscoveringthenext three years are adequate, however if your lease term is 10 years, it is recommended a ten year projectionbemade.

Youdonotneedacrystalballtomakeyourprojections.Whilenosetofpredictionswillbe100% accurate, experience and practice tend to make your projections more precise. Even if your projectionsarenotaccurate,theywillprovideyouwithasetofbenchmarkstotestyourprogress towardshorttermgoals.Theybecomeyourbudget.

Thereisnothingsacredaboutincomeprojections.Asyoubeginyourbusinessandfindthemnot exact,correctthemtomakeamorerealisticguide.However,atwhatpointyoushoulddothisisa matterforyourjudgment.Donotexpecttochangeyourpredictionsmorethanquarterlyoreven semiannually. In a short period, certain trends will be magnified, and these distortions will usuallyevenoutinthelongrun.Ofcourse,ifyouomitamajorexpenseitemoranewsourceof revenueyououghttomakeimmediatecorrections,butuseyourcommonsense.

The reasoning behind income projection is: Since most expenses are predictable and income doesntfluctuatetoodrastically,thefuturewillbemuchmorelikethepast.If,forexample,you havebeenoperatingasimilarbusinessatanotherlocationandyourgrossmarginhashistorically been30%ofnetsales,itwill(unlessthereisstrongevidencetothecontrary)continuetobe30%of net sales. If you are in a startup situation, you can find income ratios for businesses similar to yours (Dun & Bradstreet and Robert Marris Associates, for example). This will improve the accuracyofyourfinancialforecast.

It is important to be systematic and thorough when you list your expenses. The expense that makes your business illiquid is often one which is overlooked, and therefore, unplanned for. Therearesomeexpensesthatsimplycannotbeforeseen,andthebestwaytoallowforthemisto be conservative in your estimates and document your assumptions. Try to slightly understate yourexpectedsalesandoverstateyourexpectedexpenses.

Itisfarbettertoexceedaconservativeprojectionthantobudgetoptimisticallyandthenfall belowtheprojectedmargins.However,beingtoofarundercanalsocreateproblemssuchas nothavingadequatecashtofinancegrowth.Basingincomeprojectionsonhopesisafrequent causeofbusinessfailure.Berealistic;yourbudgetisintimatelytiedtoyourforecastedsalesand expensefigures.

Incomeprojectionsarestandardizedtofacilitatecomparisonandanalysis.Theymustbedatedto indicatetheperiodoftimetheycoverandshouldalsocontainnotestoexplainanyunusualitems suchaswindfallprofits,litigationexpenseandjudgments,changesindepreciationschedules, andsoforth.Anyassumptionsyoumakemustbefootnoted.

*ProFormasimplymeansprojected.Itrepresentswhatthebusinessisexpectedtolooklikeatsomespecifiedtimein thefuture.

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 (1) (2) (3) (4) (5) (6) (7) (8) (9)

SAMPLE

ProFormaIncomeStatement October15,20October14,20

NETSALES Less:COSTOFGOODSSOLD GROSSMARGIN OPERATINGEXPENSE Salaries&Wages PayrollTaxes&Benefits Rent Utilities/CAM Maintenance OfficeSupplies Postage Automobile&Truck MaintenanceDeliveryEquipment Insurance Legal&Accounting Depreciation Promotions/Advertising Miscellaneous OPERATINGEXPENSETOTAL OTHEREXPENSE: InterestPayments OTHEREXPENSETOTAL TOTALEXPENSE: PROFIT(LOSS)PRETAX TAXES NETPROFIT(LOSS)

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 (1) (2) (3) (4)

ExplanationofSample

NETSALES:GrossSaleslessreturnsandallowances. COSTOFGOODSSOLD:Includescostofinventories. GROSSMARGIN:GROSSSALESminusCOSTOFGOODSSOLD.Representsthegross profitonsaleswithouttakingindirectcostsintoaccount. OPERATING EXPENSE: These are primarily the costs (when added to OTHER EXPENSE)whichmustbemetnomatterwhatthesaleslevelis.Theorderinwhichthey are stated is not so important. Thoroughness is. If some costs are trivial, lump them togetherunderaheadingofMISCELLANEOUSbutbepreparedtobreakthemoutifthe MISCELLANEOUScategorybecomesmorethananarbitrary1%ofGROSSSALES. OTHER EXPENSE: These are nonoperating expenses. The most common is Interest expense.ItishelpfultohavetheInterestexpenseprominentlydisplayedtohighlightthe costofmoney. TOTALEXPENSE:Sumof(4)and(5). PROFIT (LOSS) PRETAX: GROSS MARGIN minus TOTAL EXPENSE. This is the tax base,thefigureonwhichyourtaxiscalculated. TAXES:Consultyouraccountant. NETPROFIT(LOSS):(7)MINUS(8).Thisrepresentsthesuccessorlackthereofforyour business. There are three ways to make this figure more positive: increase sales, or decreaseexpenses,orboth.

(5)

(6) (7) (8) (9)

For the most useful projections: STATE YOUR ASSUMPTIONS CLEARLY. DO NOT PUT DOWN NUMBERS THAT YOU CANNOT RATIONALLY SUBSTANTIATE. Do not puff your GROSS SALES figures to make the NET PROFIT figure positive. Give yourself conservative SALES figures and a pessimistic EXPENSE figure to make the success of your deal more probable.BEREALISTIC.

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F. PROFORMACASHFLOW The CASH FLOW projection is the most critical planning tool for a new or growing business. Businessesneedcashforstartuporgrowth.Thecashflowanalysis:1)showshowmuchcash willbeneeded,2)whenitwillbeneeded,and3)whereitwillcomefrom. TheCASHFLOWprojectionattempttobudgetthecashneedsofabusinessandshowstheflow of cash into and out of the business over a period of time. Cash flows into the business from sales, collection of receivable, capital injections, etc., and flows out through cash payments for expenses. This financial tool emphasizes the points in the calendar when money will be coming into and going out of the business. The advantage of knowing when cash outlays will be made is the abilitytoplanforthoseoutlaysandnotbeforcedtoresorttounexpectedborrowingtofulfillcash needs.Byconstructingacashflowprojectionfortheneartointermediatefuture,youcanseethe effect of an investment in your business more clearly than you can from an income statement. Often,youcanfindwaystofinanceyourbusinessoperationsortoonlyborrowaspecificamount whichwillhelpyoutokeepyourinterestexpenseaslowaspossible. Cashisgeneratedprimarilybysales.However,notallsalesarecashsales.Perhapsthisdoesnot applyinyourbusiness,butifyouofferanycredit(chargeaccounts,termpayments,tradecredit, etc.)toyourcustomers,youmaywanttohaveameansoftellingwhenyoursalesturnintocash inhand. Unlike the income projection, the cash flow can indicate this. Your business may be subject to some seasonal bills, and again, a cash flow makes the liquidity problems attending suchlargeoccasionalexpensesclear. Acashflowdealsonlywithactualcashtransactions.Depreciation,anoncashexpense,doesnot appear onacash flow. Loan repayments (including interest), on the other hand, dosince they representacashdisbursement. Afterithasbeendeveloped,thecashflowshouldbeusedasabudget.Iftheexpensesforagiven item increase over the amount allotted for a given month, you should find out why and take correctiveactionassoonaspossible;ifthefigureisless,thenalsofindoutwhy.Byreviewingthe movementofyourcashpositionyoucanbettercontrolyourbusiness.Ifexpensesarelowerthan anticipated,itisnotnecessarilyagoodsign;itmaybethatabillwasntpaid. On the other hand, the lowered expense may alert you to a new way of economizing. Discrepanciesbetweenexpectedexpensesandrevenueandtheactualflowofcashareindicators of problem or opportunity areas. If the sales figures dont follow the cash flow, look for the cause.Perhapstheprojectionsaretoolow.YourCASHFLOWprojectionisnotauniversalcure whichwillmakeyourjobasmanagerorownersuperfluous.Itisatoolwhichyoumustuseand useconsistently. In contrast to balance sheets and income statement, there is no standardized form to follow in devisingacashflow. The following sketch and outline can be used as a guide for the development of a cash flow projectionthatfitsyourbusiness.

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 CashflowOutline: Thefirstyearcashflowprojectionisbasicallyyourbudgetforthefirstyearofoperation.

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CashFlowSketch: 18.Fees 1.Cashatthebeginningofperiod 19.accounting AddRevenues 20.legal 2.Salesofproductstobecollected 21.Utilities currently 22.telephone 3.Cashtobereceivedfromothersources 23.heat,light,power 4.Cashreceivedfrompriorperiodsales 24.Advertising 5.Cashreceivedfromassetssold 25.Principal&Interestondebt 6.Cashreceivedfromequityinvestment 26.Transportation 7.Cashreceivedfromloans 27.oil,gas 8.Cashfrombaddebtsrecovered 28.vehiclemaintenance 9.Miscellaneouscashreceived 29.tires 30.Freight TotalCashReceived 31.Provisionforbaddebts SubtractExpenses 32.Taxestobepaid 10.Newinventorypurchased 33.income(state,federal) 11.Salaries/Wagestobepaid 34.property/excise 12.Fringebenefitstobepaid 35.payroll 13.NewEquipmenttobepurchased 36.sales 14.processingequipment 37.Dividendstobepaid 38.Provisionforunforeseencontingency 15. office,salesequipment 16. transportationequipment TotalExpenses 17.Insurance Cashatendofperiod Thisisahandyadditiontoyourcashflow: APPLICATIONOFFUNDSSTATEMENT UseofFundsTotalAmountRequiredFromEquityFromLoan Inmostcases,spreadingtheuseofcashinthismannerformajoracquisitionswillmakeyour decisionsstronger.

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 G.HISTORICALFINANCIALREPORTS(ForexistingBusinesses) Pleaseattachabalancesheetandincomestatement(independentlypreparedwithfootnotes,if available)foreachofthethreemostrecentfullyearsofoperationofyourbusiness.Also,please attachcopiesofyourthreemostrecentFederalTaxReturns.

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 PARTIII.SUPPORTINGDOCUMENTS Youwillwanttoincludeanydocumentswhichlendsupporttostatementsyouhavemadeinthe body of the buiness plan. Items included here will vary according to the needs and stage of developmentofyourparticularbusiness.Thefollowinglistsuggestssomethingswhichmight beincluded: 1.Resumesofprincipals,ownersandpartners(veryimportant). 2.Creditinformationoneachoftheabove. 3.Copiesofpersonaltaxreturnsforeachoftheabove. 4.QuotesorEstimates. 5. LettersofIntentfromprospectivecustomers. 6. LettersofSupportfromcreditablepeoplewhoknowyou. 7. LeasesorBuy/SellAgreements. 8. LegalDocumentsrelevanttothebusiness. 9. Marketdata.

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