(DOWNLOADABLE/EDITABLE WEB VERSION)
Copyright © 2008 Ronin Software
APPENDIX B: CREATING A BUSINESS PLAN
"If you don't inherit it, you have to borrow it."
-- Motto of a junk bond financier, quoted in
Liar's Poker, by Michael Lewis
Why Have a Business Plan?
Suggestion: Take the time to read Section 1 and
Section 2 below, to get an overview and perspective, before
you attempt to start creating your business plan, in Section
3, which is a broad outline. Since using this template
will require you to do a lot of writing, to create your
business plan, we suggest you stop now and copy this entire
file or import it into a good word processor, such as
Microsoft Word, WordPerfect, or whatever other word
processor you will use to create a professional-looking
business plan document.
STOP NOW to turn this business plan outline or worksheet
into a word processing file and save it to disk under a
different file name before you proceed, unless you have
already done so....
...
.... Good. Now that you are reading this in your word
processor program, we suggest you go ahead and read Sections
1 and 2 of this outline. (Sections 3 through 16 contain the
actual outline you will flesh out.)
At some point, before you print out the completed business
plan with your word processor or desktop publishing software
program, you will want to delete the comments and other
instructional portions of this file that are enclosed in
brackets, such as this paragraph, and you will also want
to delete all of Sections 1 and 2 of this outline, which
are for your guidance only. In addition, each separate
section of this business plan guide is followed by a "Help
Notes" section that you will also want to delete from
the document file before the business plan document is
finalized and ready to print out.
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SECTION 1: Why Have a Business Plan?
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In practice, most business plans are created, not when
companies need them, but when the owners begin to realize
that they are running out of money and will need to borrow
or raise funds through a sale of stock. That is usually
the wrong time, and is often too late to be of much
benefit. As has often been said, "A business owner who
fails to plan, plans to fail."
That doesn't mean you can't succeed in business without a
written business plan -- There are many, many large and
successful businesses that got started on an informal
basis with the only business plan being a set of strongly
held convictions and good ideas in the head of the founder,
with the only written plans being a few numbers scribbled
on a napkin. But creating a business plan can definitely
help you improve your odds of success, if you are willing
to make the additional effort that is required to create
a well thought out business plan.
By treating a business plan as a necessary evil, and as
a document that is merely another tool in the quest for
financing, you will be overlooking the most important
single user of a well-written and thoroughly researched
business plan: yourself. There can be enormous benefits
from going through the intellectually rigorous exercise of
creating a business plan before you start a business, or
even after it is in operation, to help you make needed
course corrections. You may even want to consider your
company's business plan as an ongoing set of blueprints
or an operating manual for your business, showing where
it has come from, how it works, what its goals are, and a
compass to keep you focused on where it is going, at any
given point in time -- a "living document" that is updated
regularly as conditions change and as goals are either met
or not met, or are revised, expanded, or abandoned.
This business plan worksheet is designed to help you through
the creative process of developing a business plan. We will
NOT write the business plan for you, and will not give you a
boilerplate document in which you merely fill in a few blanks
and then print out your business plan after an hour's work
and give it to your friendly banker.
Sorry, but doing a useful business plan is not that simple.
While there are business plan software products that attempt
to do the foregoing, and consultants who will help you write
(i.e, "ghost write") a plan for a fee, lenders and venture
capitalists who read or review hundreds of business plans a
year will tell you they have learned to easily spot "canned"
business plans that have been generated by a computer or by
an outsider (often using such "canned" business plan software
themselves), with little reflection, insight, or input by the
owners who will have to make the business go.
Needless to say, bankers and prospective investors are not
overly impressed by such mass-produced business plans, even
if they are expensively printed and contain glossy pictures
and reams of text and data.
So, if you use this worksheet, YOU are going to write this
business plan, not the computer. However, we will coach
you every step of the way, and will suggest numerous
resources and approaches you may want to use or consider.
(Wherever you are in this worksheet and outline, just
go to the "Help Notes" at the end of each section at any
time, for more detailed advice and suggestions on how to
go about developing the particular section you are working
on at that moment.)
Only you are likely to understand your business well enough
to pull together a plan that shows that:
. You know the market;
. You have a product or service that will sell; and
. You know how to deliver it at a price that earns a
rate of return on investment that is attractive enough
to make the business worth going into and,
incidentally, worth lending to or investing in, from
the viewpoint of an outsider, if you are seeking
outside financing.
Even if you never intend to go for outside financing,
going through the process of creating a detailed business
plan can awaken you to the fact that a proposed business
idea may not have any better chance of succeeding than
a snowball in a hot place.... In which case, you may
save yourself a great deal of time, money, energy and
disappointment by doing your homework BEFORE you start
the business, or get too deeply into it, rather than
after.
In the past, the rule of thumb for business plans seems
to have been to have a hefty document of 40 to 50 pages
in length, with an "executive summary" of about 3 pages.
Unfortunately, most such business plans have tended to
go directly into landfills, rather than being read. The
current trend reported, among those with expertise in doing
business plans, is to aim for a very short, condensed, and
well-reasoned document, often between 8 and 12 pages in
length, which IS likely to be read, if it makes a compelling
case for why the business will succeed and pay back its
lenders and investors within a short time frame. At today's
hectic business pace, most lenders simply don't have time to
linger over a novel-length business plan document, when they
have a stack of business plans to consider.
We leave it up to you as to how long a document you want
to create. We have included a very exhaustive list of
areas you may want to cover in a business plan, so if you
take all our suggestions you may have a fairly lengthy
document, though certain parts of this outline will clearly
not be applicable to your particular business.
However, keep in mind the foregoing, that most of your
intended audience will be more favorably impressed with a
concise, crisp business plan than a lengthy one that throws
in massive amounts of detail. At the same time, if there
are key issues you need to deal with, don't leave them out
just for the sake of brevity. But feel free, if you get
the sense the document is going to be too lengthy, to
shorten your discussion of any given subject by leaving
out some of the items we have suggested, if you feel can
do so without weakening your presentation.
Of course, you may also decide you don't need a business
plan at all, or at least not until you need financing
somewhere down the road. That is your choice, but we would
urge you to keep a few things in mind when you decide on
whether or not to create a business plan at a very early
or preliminary stage in your business:
. By going through this undeniably laborious process of
creating a business plan, you will be exercising the
kind of self-disciplined approach that is often
useful in selecting a potentially profitable business
and then actually make it go. You will also gain more
of an understanding of the market environment in which
you must operate, plus a grasp of the kind of financial
numbers that your enterprise will need to be able to
generate if it is to succeed. This can either give you
the confidence you need to go ahead, or can disclose
the danger signs that tell you that the business you
are considering is unlikely to succeed, before you make
a major commitment of time, energy, and financial
resources.
. In any type of potentially profitable business, you
are likely to be up against energetic and sometimes
sophisticated competitors, some of whom will have done
their own detailed business planning. If you don't
similarly do some careful planning and analysis, they
are likely to have an edge on you.
. On the other hand, many of your competitors may not
have done business plans, and may be simply "flying
by the seat of their pants," reacting to events on a
day-to-day basis, with no overall strategic plans. If
you have done your homework by thoroughly researching,
writing, and documenting your business plan, you will
have a definite edge on less organized competitors.
In today's extremely competitive marketplace, you
need every edge you can get.
. Finally, if you have a good, well-written business
plan, and keep it relatively up to date, you should
know well in advance when you will need to begin to
seek financing, and it will be useful in helping you
to obtain such financing.
Six months or more before you start your business may
be a much better time to devote yourself to creating a
business plan, which may take 50 to 150 or more hours
to research, write and document. Once you are in
business and working long hours to keep the business
afloat, meet your payroll, put out fires, and keep
creditors at bay and customers happy, it may be much
harder to find the free time to do your research and
writing of the business plan, once you realize you need
it to get financing. If you already have written a
plan before you start a business, you will undoubtedly
need to make some changes and update it after you have
been operating for a few months or a year or more,
with the advantage of hindsight. However, that will
be a much easier task than starting from scratch with
creating your business plan, at a time when you are up
to your neck in alligators.
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HELP NOTES RE: SEC. 1. WHY HAVE A BUSINESS PLAN?
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OVERVIEW:
---------
HINTS AND GENERAL COMMENTS ON WRITING A BUSINESS PLAN
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GENERAL COMMENT. In most cases, you will have already
decided that this particular business is a "go." The
business plan is usually done mainly to create evidence to
support that decision, and to project cash needs before
you need to go for financing. However, if you are not at
that stage yet, we hope you will at least have read through
Section 1 of the Business Plan Worksheet file, which discusses
a number of reasons why you should consider doing a business
plan for your new or existing business, even if you do not
see any near-term need for financing.
DON'T WORK IN A VACUUM. If you are the person in your
business organization who is preparing the business plan,
don't work alone, if you have business associates. Get
their input at an early stage, as much as possible. And
even if you don't have any partners or other business
associates, seek help while developing your business
plan from someone with business experience, like a SCORE
counselor at your local Small Business Administration
office, or someone at a nearby Small Business Development
Center, which is also there to help small businesses like
yours to get off the ground. At a bare minimum, at least
run your business plan document past some such person,
after you have done the initial draft, before you
release it in final form.
AVOID NAIVE STATEMENTS. In writing your business plan,
try to avoid the temptation of using certain trite or
naive sounding terms, like describing what you do as
"unique." In one sense, of course, every business or
product is unique; but in another sense, almost nothing
is unique. You might want to tout in a business plan that
your cookie company's chocolate chip cookies are made from
a "secret and unique" recipe. Well, maybe. But even
Coca-Cola, which has kept its soft-drink formula more
secret than the Manhattan Project for a century, doesn't
have a totally "unique" product--as any Pepsi drinker, who
may prefer the quite similar taste of the very competitive
Pepsi-Cola, will be quick to point out to you.
Also shy away from using words like "guaranteed profits"
or the like. There is no such thing as a sure thing in the
business world, particularly when it comes to predicting
future profits, and the financial people who will be
reading your business plan are painfully aware of that
fact, more so than most other people. Don't insult their
intelligence by using such terminology.
Similarly, don't ever refer to your projected financial
results as "conservative estimates." Bankers and venture
capitalists tend to be hard-nosed realists. They know
that if you think you can reasonably predict a million
dollar a year profit by Year 3, you are unlikely to do
projections that show only a $200,000 profit in Year 3 and
then label it as a "conservative estimate." The cynics
know the writer of such a business plan is more likely to
project $1.5 or $2 million profits by year three in that
case, and call THAT number a "conservative estimate" of
profit levels that can support a $10 million loan they are
seeking.
In short, remember who you audience is when you write a
business plan, if you are going to use it seek financing.
In most cases, people who make decisions to lend to or
invest in a small business are pretty sophisticated -- they
are not the proverbial "widows and orphans" who are likely
to be impressed by razzle-dazzle claims on your part.
In fact, by actually being somewhat understated in tone,
but making your case clearly and simply, you may succeed
in leaving the sophisticated financial person who reads
it with the impression that your projections really are
"conservative estimates," and that there's a good chance
that your profits and cash flow could actually be far
better than you are suggesting. But you aren't likely
to get that kind of reaction by trying to beat the reader
over the head with such self-serving language. In other
words, "walk the walk" and you won't need to "talk
the talk," in trying to convince lenders or potential
investors that they have discovered a possible diamond
in the rough, one that may even be a better investment
than you, the owner, may realize.
HAVE AN EXIT STRATEGY. Even if seeking equity investments,
you need to be able to lay out a plausible "exit strategy,"
since everyone, including equity investors, wants to know
how they'll get their money out. This, of course, means
profits and cash flow will have to be adequate to cash out
equity partners within a reasonable time frame.
COMMON SENSE APPROACH. Writing a business plan is a highly
creative process and your business plan should reflect
common sense and original thinking on your part, not just
an ability to use a cookie-cutter book or software program
to grind out a boilerplate document, "by the numbers." The
lenders or investors are considering whether they want to
commit their money into your enterprise are looking for
someone who has good business sense, not just someone who
is technically competent at using business plan software or
copying business plan forms from a book on the subject.
Sound reasoning, plus a clear explanation of how and why
your business is likely to succeed, are the features most
likely to impress the people you need to impress.
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END HELP NOTES FOR SECTION 1 (ERASE ALL OF SECTION 1
BEFORE PRINTING OUT BUSINESS PLAN DOCUMENT)
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SECTION 2: Key Elements of a Business Plan
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The key elements your business plan should contain, in
recommended order of their presentation, are as follows.
Note that while the Executive Summary is one of the first
items presented in most business plans, it should actually
be the last part you write, after you have created the
rest of the business plan and carefully honed your message.
Also, the last item shown, Monitoring the Results, will
not be part of the physical business plan document, but is
instead your ongoing follow up analysis of how your business
plan is working, if you choose to actually keep your
business plan updated as a management tool that can greatly
help in keep your company focused on its goals.
Go to the "HELP NOTES" following this section now for a
brief description of what each of the following elements
consists of, if you are unclear on what any element
comprises.
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| COVER PAGE AND |
| CONTENTS SECTION|
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|
|
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|EXECUTIVE SUMMARY|
|(INCLUDES MISSION|
| STATEMENT) |
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|
|
-----------------
| ABOUT THE |
| COMPANY |
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|
|
-----------------
| ABOUT THE |
| PRODUCT/SERVICE |
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|
|
-----------------------------------------
| |
| |
----------------- -----------------
| MARKET ANALYSIS | |INDUSTRY ANALYSIS|
| (DEMAND) | | (SUPPLY) |
----------------- -----------------
| |
| |
| -----------------
| | THE |
| | COMPETITION |
| -----------------
| |
-----------------------------------------
|
|
-----------------
| SALES AND |
| MARKETING |
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|
|
-----------------
| OPERATIONS |
| AND PRODUCTION |
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|
|
-----------------
| MANAGEMENT |
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|
|
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| FINANCIAL |
| PROJECTIONS |
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|
|
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| APPENDIX |
| (OPTIONAL) |
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|
|
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| MONITORING |
| YOUR RESULTS |
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HELP NOTES RE: SEC. 2. KEY ELEMENTS OF A BUSINESS PLAN
----------------------------------------------------------
The contents of each key element of a business plan is
briefly described below. See the more detailed specific
help for each specific element or section. Read the
text for any box below for more details.
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| COVER PAGE AND |
| CONTENTS SECTION |
-------------------
|
|
The cover sheet should contain the name and address of your
company and contact information for the person who will
handle responses from lenders or possible investors. A
table of contents, while not an absolute necessity, should
be included, to help the reader quickly find any particular
part of the business plan quickly. As an optional item,
you may also want to include a Loan Request page immediately
after the cover page or after the Table of Contents.
|
|
-------------------
| EXECUTIVE SUMMARY |
|(INCLUDES MISSION |
| STATEMENT) |
-------------------
|
|
This first segment, the Executive Summary, which is a
short summary of the entire business plan document,
should also encapsulate the "mission statement" or
"statement of objectives" for your company. While the
Executive Summary should be in the first part of your
finished business plan document, it should usually be
the last part of the document to be written, after all
the other pieces are in place.
|
|
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| ABOUT THE |
| COMPANY |
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|
|
Describes your company -- a brief history of when it began,
what type of legal entity you have selected (corporation,
LLC, or other), where you are now, and where you are going.
|
|
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| ABOUT THE |
| PRODUCT/SERVICE |
-----------------
|
|
A detailed description of the product (or service, or both)
that your company sells or will be selling.
|
|
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| |
| |
----------------- -----------------
| MARKET ANALYSIS | |INDUSTRY ANALYSIS|
| (DEMAND) | | (SUPPLY) |
----------------- -----------------
| |
| |
Description and identification Analysis of the industry
of your customers, their within which you operate,
geographic location and the or will be operating.
share of this market you expect |
to be able to capture. |
| |
| -----------------
| | THE |
| | COMPETITION |
| -----------------
| |
| |
| Describe who your competitors
| are, their strengths and
| weaknesses, and what your
| competitive advantages are.
| |
| |
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|
|
|
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| SALES AND |
| MARKETING |
-----------------
|
|
Explain and describe how you will go about marketing your
product (or service), how your product or service will be
positioned, whether you will employ an in-house sales
force and why (or why not). In this segment, also go
through your calculations as to the level of sales your
business will generate, based on your research regarding
market demand, and the amount of the market you expect to
be able to capture with your product and your marketing
program.
|
|
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| OPERATIONS |
| AND PRODUCTION |
-----------------
|
|
Discuss the nuts and bolts of how you will go about
producing your product, explain your production strategies,
and give your analysis of what it will cost to produce the
product. |
|
|
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| MANAGEMENT |
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|
|
Discuss and describe the organizational structure of your
company, who fills, or will fill, the management slots
needed to oversee the rank and file employees, with a brief
resume of each of the key members of your management team.
|
|
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| FINANCIAL |
| PROJECTIONS |
-----------------
|
|
Present your projected financial statements and results
here, including projections of profits and losses, cash
flows, and future balance sheets, which should illustrate
how the company will be able to pay off its loans or cash
out its equity (stock) investors within a reasonable time
frame. |
|
|
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| APPENDIX |
| (OPTIONAL) |
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|
|
If you are going to create a thick document, the Appendix
is a good place to put a lot of information that does not
necessarily need to be incorporated into any of the other
parts of the business plan. You can use this catch-all
segment to include backup data for assertions and statements
made in the main text of the business plan, letters of
recommendation from important people, such as customers,
detailed resumes of your key executives, copies of articles
or excerpts from research reports, significant leases,
contracts, or other legal documents, current financial
statements for your business, and the like. You can also
insert footnote references into the main text and put
the footnotes or supporting data here, in the Appendix.
While not every business plan needs to have an Appendix, it
can make the rest of your business plan document much shorter
and, therefore, more readable, if you put a lot of the detail
in an appendix, rather than trying to work everything into
the main text. |
|
|
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| MONITORING |
| YOUR RESULTS |
-----------------
This last segment is also an optional part of the process
of creating and using a business plan, but it is not a
written part of a business plan you would submit to an
outside party. However, if you are serious about using
the business plan as an ongoing management tool for your
firm, and not just a one-shot document to be used as part
of an effort to obtain financing, you will want to monitor
your results on an ongoing basis. You will be, in effect,
revising the "blueprint" for your business as conditions
change or as results show that your plan is working, not
working, or needs to be modified.
Thus, a regular monitoring and assessment of your results
can be extremely useful to you from both an operational
and a business strategy standpoint.
The remainder of this worksheet file is the actual business
plan worksheet outline. When you are finished, you should
delete everything up to this point in this file. The
business plan document you will fill-in and flesh out
starts in Section 3 below. You should either remove the
section numbers, or renumber the sections, using your own
numbering system, if you choose, in creating the final
document.]
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SECTION 3: Business Plan Outline -- Cover Page
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[SAMPLE COVER PAGE]
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| |
| BUSINESS PLAN FOR: |
| |
| ________________ (Name) |
| |
| ________________ (Address) |
| |
| ________________ |
| |
| |
| E-mail: xxxxxx@xyz.com |
| |
| JULY 200x |
| |
| CONTACT: Joan Smith, President |
| Phone: (212) 555-xxxx |
| E-mail: xxxxxx@xyz.com |
| |
| |
| |
| This business plan contains confidential |
| information that is the property of |
| [NAME]. Reproduction or release of this |
| document is not permissible without the |
| prior written consent of [NAME]. |
| |
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HELP NOTES RE: SEC. 3. BUSINESS PLAN OUTLINE -- COVER PAGE
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COVER PAGE
----------
The cover page is the first thing a prospective lender
to or investor in your company will see, so it should be
professional looking, on good quality paper or company
letterhead, ideally with your company logo displayed.
Keep it simple. The cover page should contain the
following minimum information:
. The name of your business
. The fact that the document inside is a business
plan for your company
. The address of the company
. The name of your contact person, and telephone number
. The date of its release
Other items you may also want to present on the cover page
might include any of the following:
. A brief promotional blurb about your business and
its goals or potential.
. The amount of capital you require (see the sample Loan
Request page included in this business plan worksheet
outline).
. The name of the party to whom the plan is directed,
if you are targeting a single specific lender or
investor for your financing.
. A statement that the information in the business plan
is confidential. (You may want to have a different
cover page for each individual copy you send to
each different person or institution.)
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SECTION 4: Business Plan Outline -- Loan Request Page
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LOAN REQUEST SUMMARY:
[Example, if seeking debt financing]
Borrower: XYZ Corporation
Amount requested: $100,000
Interest rate: 11.25%
Loan fee: 1.5% or $1,500
Type: Term loan
Term of loan: 48 months level
payments amortization
Payments: $2,596.71
Prepayment Option: No penalty for
prepayment at any
time
Corporate collateral: [Specify]
Stockholder guaranty: Yes
Stockholder collateral: [Specify]
Sources of Repayment [Specify]
Use of Funds: [Describe]
Guarantors: [List names, if any]
EQUITY FINANCING REQUEST SUMMARY: [Example, if seeking
--------------------------------- equity financing]
Issuing Corporation: XYZ Corporation
Amount requested: $100,000
Type of security: Convertible
preferred stock
Issue price: $25 per share
Par [or Stated] Value: $25 per share
Dividend rate: 10% of par [or stated]
value
Dividend frequency: Payable quarterly, on
January 1, April 1,
July 1, October 1,
Cumulative dividends: Yes
Convertibility Feature: Convertible at holder's
option at any time, into
5 common shares for each
share of the convertible
preferred stock
Dividend and liquidation
preferences: No distributions in
liquidation may be made
to common shareholders
until par value and any
accrued dividends are
paid on preferred; no
dividends may be paid on
common if preferred
dividends are in arrears
Voting rights None, unless dividends in
arrears for 4 quarters,
then each preferred share
votes as 3 common shares
Redemption: Required to be redeemed
by issuer at par value,
5 years from the date of
issuance, if not called
earlier or converted by
holder
Call provisions: Callable after 2 years
by issuer, at $25 per
share plus all accrued
dividends, upon 30 days'
notice
Sources of Repayment [Specify]
Use of Funds: [Describe]
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HELP NOTES RE: SEC. 4. BUSINESS PLAN OUTLINE --
LOAN REQUEST PAGE
--------------------------------------------------------
Immediately after the cover page, or perhaps as the first
page following the Table of Contents, if you prefer, you
may want to have a Loan Request Page. (Call it an "Equity
Financing Needs" page if you are seeking an equity investor
to provide equity financing, in the form of common or
preferred stock.)
This page might also be inserted at the end of the Financial
Projections segment of the business plan, if you prefer.
However, some people will prefer, as a courtesy, to let the
reader know instantly the amount of funds they are seeking,
since the amount requested may either be too large or too
small for certain institutions to even consider.
We have included a sample outline of a Loan Request Page
in the worksheet, immediately after the cover page, if
you choose to use it.
Alternatively, if you are seeking equity financing, you
might instead have an Equity Financing Request page. While
we have included an example to give you an idea of what
this might look like, DO NOT USE THIS SAMPLE, as you will
definitely need LEGAL ADVICE and assistance from a business
lawyer with corporate and securities law experience. As
a practical matter, if you are seeking equity capital, you
will in many cases be dealing with a venture capital firm
that will tend to dictate the terms of the stock, debt,
or convertible debt that they are willing to acquire from
your company, or equivalent types of interests in an LLC.
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SECTION 5: Business Plan Outline -- Table of Contents Section
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TABLE OF CONTENTS
Page
LOAN REQUEST SUMMARY [Optional]....................... i
EXECUTIVE SUMMARY..................................... 1
THE COMPANY........................................... XX
PRODUCT DESCRIPTION................................... XX
MARKET ANALYSIS....................................... XX
DEMAND.............................................. XX
THE INDUSTRY........................................ XX
THE COMPETITION..................................... XX
SALES AND MARKETING STRATEGY.......................... XX
OPERATIONS AND PRODUCTION............................. XX
MANAGEMENT............................................ XX
FINANCIAL PROJECTIONS................................. XX
APPENDIX.............................................. A-1
FOOTNOTES........................................... A-1
EXECUTIVE RESUMES................................... A-xx
LETTERS OF REFERENCE................................ A-xx
LEGAL DOCUMENTS..................................... A-xx
OTHER............................................... A-xx
---------------------------------------------------------
HELP NOTES RE: SEC. 5. BUSINESS PLAN OUTLINE --
TABLE OF CONTENTS
---------------------------------------------------------
While not absolutely necessary, it is a good idea for
you to include a table of contents in your business plan
document. It will not only make your business plan easier
to read and understand, but failing to include a contents
section may give the reader the impression that you have
not done a very professional job of putting together the
document. Since first impressions are very important, you
want to start off on a good footing, rather than force a
user to page through the entire document to find whichever
portion he or she is most interested in seeing first.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 6: Business Plan Outline -- Executive Summary
-----------------------------------------------------------
EXECUTIVE SUMMARY.
------------------
[This should be an overview and lead-in to the rest of
the business plan. It should emphasize your competence
in three key areas: marketing, technical capabilities,
and financial management. See the "Help Notes" segment
that follows this Section 6 for ideas and more assistance
in developing this Section 6 of your business plan.]
(1) Description of Your Business or Proposed Business.
[Describe below your product or service, and identify
who you are, and the present situation of your business,
such as startup, new business, or an existing business
with several years (or more) of operating history.]
(2) Mission Statement. [The following template may be
useful to you in formulating you mission statement.]
"To provide [or other active verb, like "create," "offer,"
or the like] ______ [adjectives, like "high quality" or "low
cost"] ________[description of the nature of product or
service], ______ which ______ [describe the benefits to
customers derived from using your products or services] ___.
____________________________________________________
____________________________________________________
____________________________________________________
[Use the following workpaper, which you can delete after
you are finished, to refine the concepts you want to
express in your short, preferably one-sentence Mission
Statement or Statement of Objectives. Read the "Help
Notes" following this Section 6 now for "coaching" advice
that will help you to create your Mission Statement,
which will appear above.]
-----------------------------------------------
| |
| MISSION STATEMENT WORKPAPER: |
| |
| 1. What does your business do? That is, |
| list below the products or services that |
| you will provide: |
| |
| --[Left-handed monkey wrenches, sky---- |
| ---hooks, hubcap gaskets and muffler--- |
| ---bearings, for example]-------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 2. What are the main features of your |
| product or service that make it |
| different from the rest? |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 3. What are the key benefits to the consumer |
| or user of your product? |
| |
| ---------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 4. Now, try writing your Mission Statement |
| or Statement of Objectives, in the |
| one-sentence format we showed you above, |
| using the facts you've identified in this |
| workpaper. |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
-----------------------------------------------
(3) Business Model or Marketing Strategy.
[Provide a brief description of the market segment you will
be trying to reach. Then outline the channel(s) you will
use to reach this market, such as direct mail, retail, or
wholesale distributors. Explain the key points or factors
in your strategy that you believe will give your business
the edge or advantage that makes it successful.]
____________________________________________________
____________________________________________________
(4) Physical Needs of the Business.
[Describe in summary form the physical facilities and
other resources your business will need to acquire to
be able to achieve its goals. These will include both
tangible assets such as land, buildings, equipment,
vehicles, and inventories, as well as intangible needs,
such as working capital to finance inventories and
receivables, contracts, licenses, franchises, or any
intellectual property rights you will need to obtain,
such as patents or copyrights.]
____________________________________________________
____________________________________________________
(5) Projected Financial Performance.
[State the estimated dollar amount of sales and net
profits that you project for each of the first 3 to 5
years of operations, then set forth the amount of starting
capital you will need. Where cash flow is negative (as is
usual) in the first few years, it may be helpful to show
your net cash "exposure" or cumulative negative cash flow
for each month or quarter, to show that your initial
starting capital will be more than sufficient to cover
such maximum exposure. Or, if your cash resources will
not be sufficient at some point in time, you will have
to make a good case for how you will be able to obtain
second-stage financing at that point to carry you through
until you are able to pay off your initial loans or cash
out your initial investors.]
(6) Amount of Financing Requested.
[State the amount of financing your business is seeking to
obtain and, if appropriate, tie it to your summary of the
physical needs of the business and your projected cash flow
exposure described in paragraphs (4) and (5) above.]
____________________________________________________
____________________________________________________
(7) Repayment Timetable. (Or "Exit Strategy)
[Explain how your financial projections above translate in
your ability to repay the loans you are seeking in a timely
and orderly fashion. Or, if you are requesting equity
financing, explain how and when your business will be in a
financial position (in a relatively few years, preferably)
to cash out those equity investors at a large profit to
them.]
____________________________________________________
____________________________________________________
____________________________________________________
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HELP NOTES RE: SEC. 6. BUSINESS PLAN OUTLINE --
EXECUTIVE SUMMARY
--------------------------------------------------------
EXECUTIVE SUMMARY
-----------------
This is usually the most important section of the entire
written business plan. Many prospective lenders or
investors will read this section first, and if you have
not done a sufficient job of making the case for your
business, and why it will succeed and be able to pay off
its debts or cash out its investors at a large profit,
it will probably be the ONLY part of your business plan
that gets read.
Thus, we cannot overemphasize the importance of your
carefully crafting and polishing the wording of the
Executive Summary, as it is the heart of the business
plan.
Remember that, while the executive summary is usually to
be found at the beginning of a business plan document,
it should be the last part that you write, after you
have done all the research, analysis, and creative work
of developing the rest of the plan.
The Executive Summary should ordinarily cover all of the
following subjects:
. A brief description of what your company does, or
proposes to do, and who you are.
. The "Mission Statement" of your company. (Or you
may prefer, as some do, to call it a "Statement of
Objectives.")
. Your business model, or marketing strategy that will
make your particular business succeed in a competitive
marketplace.
. A description of your business's physical needs to
meet its goals, such as land, buildings, machinery,
inventory, working capital, and other assets.
. A brief summary of your financial projections for
the future.
. The amount and form of the financing you are requesting.
. Your repayment timetable for debt financing or your
"exit strategy" for cashing out equity investors.
Each of the above points is discussed in more detail below:
. COMPANY DESCRIPTION. Simply say who you are, what your
company does, and where you intend to take it, in a
few sentences, if possible.
. MISSION STATEMENT, or STATEMENT OF OBJECTIVES. Your
business will deal with a wide range of people,
including customers with widely varying dispositions,
tastes, education, and levels of comprehension, as well
as various suppliers, providers of professional and
business services to your firm, lenders, employees and
potential employees, and, in many cases, investors.
In your dealings with all of these diverse individuals
and interests, it will be useful if your company's
objective, or its "mission," can be communicated to
them in as clear and straightforward a fashion as
possible. To do so, we strongly suggest that you
condense your mission statement down to one sentence,
if possible.
That sentence should:
. describe what your business does, by describing
your product or service;
. define the main (and most importantly, the
distinguishing) features of your product or
service; and
. describe the benefits of your product.
Remember, in creating your Mission Statement (or "Statement
of Objectives") that:
- Your company's mission statement might be a very short
and simple one, like the Boeing Company's avowed goal
of having the lowest cost per seat of any airliner.
- Long, flowery, general statements aren't very useful,
like "We will be all things to all people and create
the best products that money can buy." Be a little
more specific than that. A lot more specific, in fact.
- The mission statement may focus on key features of your
product or service, like the Boeing mission statement
mentioned above. It should also define the benefits
of using your product or service from, the customer's
point of view. For example, if your firm is in the tax
consulting business, your mission might be "to maximize
customers' after-tax income with minimal audit risk
exposure."
- A suggested structure for your mission statement is
a single sentence like the following: "To provide
[or other active verb, like "create," "offer," or the
like] ______ [adjectives, like "high quality" or "low
cost"] ________[description of the nature of product
or service], ______ which ______ [describe the benefits
to customers derived from using your products or
services] ________."
We suggest you now return to the business plan worksheet
and use the short Mission Statement Workpaper we have
provided, to develop the ideas for your Mission Statement.
Then put the statement into words, preferably in a form
similar to that in the preceding paragraph.
(Reminder: Once you are happy with the Mission Statement
you have developed for your company, be sure to delete the
Mission Statement Workpaper from the business plan worksheet
outline.)
- BUSINESS MODEL OR STRATEGY. This is the very crux of
your entire presentation, so make it good, and spend as
much time as necessary to polish and refine it, until you
are satisfied that it says what you want to communicate.
It should explain in summary form the essence of how you
will market and position your product or service, and
what selling advantage you will have that will enable
your business to attain the level of sales that will
make it a financial success. This may be anything from
your invention of a better mousetrap, strong legal or
intangible rights, such as a patent for the ultimate
widget, a highly favorable long-term sales or supplier
contract, or a superior (lower) cost structure that
will allow you to compete successfully on price, or
some other special advantage that your firm will have.
- NEEDS ASSESSMENT. Describe briefly what items your
business will need funding for, in order to carry out
your mission. These would include land, buildings
(rented space or purchased); office fixtures and
equipment, production equipment; working capital
to finance your receivables and raw materials or
finished inventories; executives or individuals with
certain kinds of technical expertise; and other
resources you may need, such as money to acquire
licenses, patents, or trademarks.
- FINANCIAL PROJECTIONS. Summarize the bottom line
projections you have developed in the main part of
the business plan, focusing on the low points, i.e.,
the point when your cash flow "exposure" will be
deepest, and the high point, when your company will
reach a level of high profitability and substantial
cash flow.
- FINANCING NEEDS. Show how the above projections impact
on your need for funds and describe the amount of initial
financing you are requesting. If you have created a
LOAN REQUEST SUMMARY, you may want to keep this to a
minimum description, while referring the reader to the
LOAN REQUEST SUMMARY.
- EXIT STRATEGY AND TIMETABLE. Explain briefly how and
when your cash flow or ability to refinance will make
it possible for you to pay off the initial financing
you are seeking to obtain, whether it be to repay loans
or cash out equity (stock) investors.
Remember, the foregoing is an Executive SUMMARY, so try
to keep it brief, a page or two in length, if you can do
so and still get your message across. All of the points
covered in this summary, except the Mission Statement,
should be covered in greater detail in the remainder of
the business plan document, so do not go into needless
detail in the summary. Just hit the high points, and
state your key facts and arguments that you want most to
impress upon the reader.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 7: Business Plan Outline -- The Company
-----------------------------------------------------------
A. THE COMPANY.
----------------
[This section should tell the reader about your company.
It will be in part a company profile, showing what
exactly your business does, its history, when the company
was formed, and how it is organized, both in terms of
legal entity and structure and operationally. You should
also include current financial statements (or refer to
them, if included in an Appendix). Also, if the business
is already a going concern, discuss where the business is
going in the future, in its particular business environment.
Read the "Help Notes" segment that follows this Section 7 now
for more detailed instructions on what should be included
in this Section 7.]
(1) Company History. [Briefly and objectively describe
your company's history to date, or, if in the startup stage,
indicate that you have not yet started the business. Even
in that case, you may have done preliminary work, however,
such as developing a patent, writing a software program,
doing technical or market research, or the like, which you
would describe in a short history of your startup company.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(2) Present Situation. [This section describes your
company's current situation, including its financial
condition and capitalization, the size of your workforce,
how well you have managed to meet your previous goals
to date, the existence of important assets, such as
favorable contracts, government licenses, patents, and
such, and potential threats, such as new competitors,
rising costs charged by suppliers, or harmful government
regulations or legislation that may be pending.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(3) Current Financial Statements. [Include here your
most recent financial statements, if yours is a going
concern. Alternatively, instead of including your
financial statements here, in the main text of the
business plan, you may want to instead briefly and
clearly characterize your financial situation -- the
company's size, in terms of assets, sales and net worth,
and its level of profitability, while referring the reader
to a set of your financial statements in the Appendix at
the end of the business plan document.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(4) Company Direction. [Describe where the company
is going, including the existence of any obstacles to
achieving your goals, and how you plan to overcome such
obstacles.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
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HELP NOTES RE: SEC. 7 BUSINESS PLAN OUTLINE --
THE COMPANY
--------------------------------------------------------
THE COMPANY
-----------
This section should be a combination of a company profile
and a short history of your business. Without getting into
too much detail about your product or service, or about the
industry you are in (which are both discussed in more detail
in subsequent sections of the business plan), you should
briefly mention what the company makes or does, and give a
general overview of the state of the industry within which
it operates and any economic trends that are particularly
relevant to your business or industry. Some of the types
of items you may want to discuss, where relevant in your
situation, will include the following:
- HISTORY. In showing where the company has been, to date,
give an objective description of when and how the company
was organized, and the type of legal form in which it
operates. Ordinarily, in the United States, this would
be a corporation, limited liability company (LLC), or
partnership or, if no legal entity of any kind has been
established, a sole proprietorship. There are variations
on some of the types of entities, such as S corporations,
limited partnerships, and limited liability partnerships
(LLPs). You may also want to mention how it obtained its
initial startup capital, in the case of an existing firm.
- PRESENT SITUATION. Describe the current status of your
company. If your business is already in existence,
briefly tell how it is capitalized is capitalized, such
as the number of shares of voting common stock, any
preferred stock or hybrid securities such as convertible
debt, and any long-term indebtedness, such as bank loans,
and describe the extent to which the assets of the
business have been pledged or mortgaged as security for
debts, and the amount of any loans personally guaranteed
by the stockholders or other owners of the firm. The
discussion of capitalization will not ordinarily be
relevant in the case of a startup company that has not
yet begun business.
Also list any exclusive licenses or intellectual property
rights the company owns. These may include various
government licenses or permit approvals that may be
important to have (or disclose if you have not yet secured
any such necessary licenses or approvals); intellectual
property rights such as patents or copyrights; and any
valuable private intangible rights that are owned, such
as a McDonald's franchise, or a well-known trademark or
trade name.
This is also an appropriate place to discuss any business
problems that your company is presently facing. For
example, low-cost competition from overseas producers
in a Third World country may be hurting your sales, so
that you may find your business is in a position where
it needs to raise capital in order to acquire expensive
new automated production equipment. Using such modern
equipment might enable you to lower your unit costs of
production, which may actually give you a significant
cost advantage over the labor-intensive foreign
competition, and greatly increase your sales and
profitability, as an example.
- CURRENT FINANCIAL STATEMENTS. For an existing business,
include copies of your most recent financial statements,
including profit and loss statements, cash flow
statements, and balance sheets. (See the explanation of
these terms in the "Help Notes" segment of Section 15
of this business plan appendix if you are not familiar
with what these accounting terms mean.) If you have
financial statements that have been audited, reviewed
or compiled by a CPA firm, they will be more credible,
generally, than financial statements you have prepared
yourself without any verification or other involvement
by an independent accounting firm.
- FUTURE DIRECTION. In this section, you should outline
where the company is going, and specify the outcomes
that are desired with respect to the existing operations
and activities of the business. In effect, this section
should outline your goals, in tangible, measurable terms,
such as describing the percentage of market share you
intend to capture, the level of unit sales, or dollar
sales, or percentage profit margin you wish to obtain.
Your goals could also be to attain certain key financial
ratios, such as a specifically defined high ratio of
current assets to current liabilities, a strong indicator
of good financial health, as compared to industry norms.
You can find industry standard ratios of numerous kinds,
for almost any kind of business, at your local library,
from companies such as Robert Morris and Associates or
Dun & Bradstreet. Or you may be aiming, in a retail
business, to generate a certain annual level of sales
per square foot of retail space. Sales Management and
Marketing Magazine publishes detailed information on
average sales per square foot for a very wide number of
types of retail establishments, to which you can compare
your desired results.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 8: Business Plan Outline -- Product Description
-----------------------------------------------------------
B. PRODUCT DESCRIPTION.
(1) Description of Product. [Provide a complete technical
description of the product or service to be offered, in
considerable technical detail, including a summary of any
test data if any sort of testing work has been done, or
describe any tests that are currently planned. Also, show
that you are already anticipating the future by outlining
any further refinements or logical next steps for developing
an improved or different product later (or comparable plans
for further innovations in a service business). This is
your chance to show that you really have something that
is a better mousetrap and is also technically feasible.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(2) Key Product Features. [Describe your product's two
or three most important features, which distinguish it
from the competition.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
[The following workpaper may be helpful to you in writing
a product description and in analyzing and selecting the
features of your product you want to emphasize above.]
-----------------------------------------------
| |
| PRODUCT (OR SERVICE) FEATURES WORKPAPER: |
| |
| 1. What is your product? Describe the |
| nature of the goods or services that |
| you will provide: |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 2. How is your product classified? That |
| is, is it goods or services? If goods, |
| is it an industrial item or a consumer |
| item? If services, is it a professional |
| service? Is it a service to consumers |
| or a business service? If goods, is it |
| a convenience good, like food, that the |
| consumer purchases frequently and with |
| a minimum of effort? Or is it a durable |
| goods item, like cars or refrigerators, |
| for which consumers may spend considerable|
| effort comparing price and quality of |
| competing products before making their |
| purchase? Or is it a specialty item |
| with a strong brand or name loyalty, |
| for which certain consumers will not |
| be particularly concerned with either |
| convenience or price? (Such as a |
| Harley-Davidson motorcycle, designer |
| clothes, or the like.) |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 3. What are the product's features? Describe|
| the weaknesses and strengths of your |
| product, and what features distinguish it |
| from other products on the market. Also, |
| discuss any substitute products that may |
| compete with your product. For example, |
| if you sell lumber for housing |
| construction, substitute products that |
| users would likely consider, if the price |
| of lumber becomes too high, would include |
| bricks, stucco, or even steel framing. |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 4. How is the product or service used by |
| the consumer, and what key benefits does |
| it confer upon the user? |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 5. Describe any other possible uses of your |
| product. Consumers, being the creative |
| creatures they are, often discover their |
| own uses for products for items that were |
| designed for a wholly different purpose. |
| Discuss here any such alternate uses that |
| you know about, or that you think your |
| product might be put to. |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 6. How do users purchase your product? |
| Is it purchased in bulk, in single units, |
| or along with certain other products? |
| Is it a complementary product? For |
| example, if you sell bromine test kits |
| for hot tubs, your product will be a |
| complementary product to bromine tablets |
| that are sold to spa owners. |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
-----------------------------------------------
[Delete the Product Features workpaper from the business
plan document, after you have completed it and used the
information you have developed to write the text for this
section of your business plan.]
(3) Product Line. [If you have several products, such as
a number of different kinds of sweet snacks, like cookies
and candies, then your product line consists of some mix
of those various, related types of products. If so, you
should discuss the nature of your product line in this part
of the business plan. If you have more than one product
line in your product mix, describe the nature of each such
product line and its relative importance in the overall
product mix for the company.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(4) Test Results and Approvals. [If your product has
undergone testing or you have secured any required
approvals from federal, state, or local governments
with regard to the product or service, discuss the test
results or approvals here. You may want to attach any
certificates or other evidence of such test results or
approvals in the appendix, referring the reader to
such documents in this text segment.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
--------------------------------------------------------
HELP NOTES RE: SEC. 8. BUSINESS PLAN OUTLINE --
PRODUCT DESCRIPTION
--------------------------------------------------------
PRODUCT DESCRIPTION
-------------------
This section will describe your product in some detail. We
will use the term "product" in this discussion to refer to
whatever it is that your business sells, or plans to sell,
to its customers, whether that be some kind of tangible
goods, or a service. In short, your "product" is either
some kind of goods you create and sell, or buy for resale,
or some kind of service you provide, either by itself, or
in connection with some kind of goods. The focus here is
on whatever it is that your customer pays you for -- that
is your "product."
- IDENTIFY AND DESCRIBE THE PRODUCT. Give a technical
description, if appropriate, of what your product is,
what it does, and what it accomplishes for the user or
customer.
- PRODUCT FEATURES. Every product has at least one or
more key features that will be your selling points.
Explain to the reader what the 2 or 3 key features of
your product are, focusing only on the most important
features. The worksheet contains a detailed and
useful Product or Service Features Workpaper you
should fill out now, before you write the text for
this segment of the business plan. (After you have
completed the Workpaper and have written the text for
this segment, you can delete the Workpaper from the
business plan worksheet.)
- PRODUCT LINE. Many businesses have multiple products,
similar in function and use, such as the various types
of beverages sold by a soft drink company like Coca
Cola, including other carbonated beverages, fruit
juices, wines, and other beverages. If your business
has a group of such similar products that are closely
enough related to consist of a product line (such
as building materials, or farm supplies, as examples),
discuss what items your product line consists of.
- TESTS AND APPROVALS. In some industries, safety or
efficacy, or even basic workability of the product
may need to be demonstrated before your product becomes
viable, or even before you will be able to get financial
backing, in many cases. Thus, if you have had product
testing done to demonstrate that the product does what
you want it to, or if you have obtained any sort of
required approvals from government agencies (such as
U.S. Food and Drug Administration approvals that are
required in order to legally market a prescription drug
or certain food additives), discuss the results of any
such tests or approvals. If there are evidentiary
materials supporting such test results or approvals,
attach them in the appendix to the business plan
document.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 9: Business Plan Outline -- Market Analysis
-----------------------------------------------------------
C. MARKET ANALYSIS.
(1) DEMAND. [Discuss in this section your analysis of
customer demand for your product. You can use the following
workpaper to help you to think through some of the issues
you need to research and focus upon, then use the parts
of the outline following the workpaper that are relevant in
your situation, to structure your discussion of the market
for your product or service. Or, you may want to organize
your discussion in a totally different way than we have
outlined it below, just using our outlined items as a sort
of checklist of items that you should cover or at least
consider in putting together your market demand analysis.]
-----------------------------------------------
| |
| MARKET DEMAND ANALYSIS WORKPAPER: |
| |
| 1. Identify the customers for whatever is it |
| that your business sells. Who are they? |
| |
| --[Businesses, nonprofits, governments, |
| individual consumers?]----------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 2. Where are your customers located? Is |
| the market for your product or service |
| local, regional, nationwide, or without |
| any geographic boundaries? \
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 3. How many customers (whether they be |
| individuals, businesses, schools, etc.) |
| are there in the market into which you |
| will be selling? |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 4. How frequently (in a one-year time |
| frame, for example) will your customers |
| use your product, on average? |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 5. What is the average price per unit your |
| customers will typically pay for your |
| product or service? |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 6. What are the characteristics of your |
| potential customer base? |
| |
| --[Demographic characteristics, such as |
| ---age, sex, income levels, social ---- |
| ---and cultural factors]--------------- |
| |
| 7. What market, economic, social and |
| government trends will affect the buying |
| habits and tendencies of your potential |
| customers? |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| 8. Where is your product, in terms of its |
| "product life cycle," if this is a |
| relevant factor? |
| |
| [ ] Introductory or developmental |
| stage |
| [ ] Maturity stage |
| [ ] Saturation stage |
| [ ] Declining stage |
| |
-----------------------------------------------
[NOTE: After you fill out the above workpaper, use the
information you have developed in completing it, and
have finished writing the section on market demand, you
should delete the workpaper from this text file.]
(a) CUSTOMER IDENTIFICATION. [Identify who the customers
for your business are, or will be. Read the "Help Notes"
in the segment that follows this Section 9 now to view
suggestions on developing this part of the discussion.]
Geographic Area. [Identify and describe geographic scope
of your market.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
Age or sex groupings. [Identify and quantify the age or
sex groupings, if any, to whom you will be marketing the
product.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
Income levels. [Give a breakdown of consumers in your
primary market area by income level, and indicate which
groups, if any, you will mainly draw from as your potential
customers.]
-- Under $15,000 a year household income
-- $15,000 - $25,000 a year
-- $25,000 - $35,000 a year
-- $35,000 - $50,000 a year
-- $50,000 - $75,000 a year
-- $75,000 - $100,000 a year
-- Over $100,000 a year
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
Social, cultural, ethnic factors. [Describe how your
product will be applicable to certain segments of the
population based on these factors.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
Business demographics. [If selling to government or
business markets, categorize and quantify the potential
customers in that market.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(b) PRODUCT LIFE CYCLE. [Identify, if applicable, where
in the product life cycle your product's market is, at
present: introductory (rapid expansion) stage; maturity;
saturation; or decline. Or, you may prefer to cover this
in the "INDUSTRY LIFE CYCLE" portion of this business
plan, under "THE INDUSTRY" segment, rather than here.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(c) MARKET BREADTH OR DEPTH. [This means the number of
customers in a particular market. You will also want to
attempt to quantify and discuss market size (how many units
are bought within a given market or the number of users
who will buy); frequency of use (how many units of the
product or service a typical customer will consume in a
year, for instance); and market potential. (Based on the
number of customers times frequency of use times average
selling price per unit, what is the total potential size
of the market, in dollars, per year?)]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(c) TRENDS. [Discuss market trends that will affect
the demand for your product or service, such as changes
in demographics (age, birth rates, disposable income
levels, etc.); alternative or substitute products which
may affect demand for your product; social trends (such
as demands by society for non-polluting, safer, or
recyclable products); and government and economic trends
like tax rates, regulations, economic growth rates of
the larger economy, inflation, and other such macroeconomic
factors.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
--------------------------------------------------------
HELP NOTES RE: SEC. 9. BUSINESS PLAN OUTLINE --
MARKET ANALYSIS
--------------------------------------------------------
MARKET ANALYSIS
---------------
You need to look at the market for your product from both
sides -- an analysis of the demand for it and the main
factors affecting that demand, as well as the "supply
side" of the equation, including a review of the industry
and who your main competitors are. This segment focuses
on the demand side.
DEMAND ANALYSIS. The market or market demand for your
product or service consists of all the people who might be
interested in buying it. The following discussion outlines
some of the key areas you may want to touch upon, where
they are relevant to your business or product, and some
suggestions on how to go about researching and writing up
this section of the business plan.
- CUSTOMER IDENTIFICATION. Not everyone is a potential
customer--certain age groups, income levels, geographic
areas, ethnic groups and educational levels will be more
likely to be your customers. You need to focus on who
will need your product and be most likely to buy it.
Identify, as clearly as you can, who your customers are
most likely to be. As part of this discussion, describe
the market scope and market segmentation by specifically
analyzing each of the following (if relevant):
(a) Geographic area -- Where you will draw most of
your customers from, plus any other areas from
which you expect to also be able to draw some
customers. Obviously, if you are marketing your
business entirely through the Internet, this
discussion will be very different than for, say,
a dry cleaning business, as an Internet-marketed
product may well be marketed in all geographic
areas, or perhaps in all English-speaking regions
of the world, depending on the nature of the
product and the scope of your marketing program.
Accordingly, the geographic scope of your market
may be local, regional, national, or worldwide.
(b) Ages or sex group - If your product is primarily
of interest to individuals of a particular age
group or gender, such as toys for children,
describe and quantify this potential market. Or,
if there are certain age or sex groups to whom
your product will definitely not appeal, be sure
you define the size of your market by excluding
members of those groupings.
(c) Income levels - If yours is a consumer product,
describe the income levels in your target audience
to whom the product will primarily appeal. You
may want to summarize your market research by
breaking down the targeted groups by income
strata, such as:
-- Under $15,000 a year household income
-- $15,000 - $25,000 a year
-- $25,000 - $35,000 a year
-- $35,000 - $50,000 a year
-- $50,000 - $75,000 a year
-- $75,000 - $100,000 a year
-- Over $100,000 a year
(d) Social, cultural, ethnic factors - Describe how your
product will be likely to appeal more to people in
certain social, cultural and ethnic groups than
others, if that is the case.
(e) Business demographics - Other types of market data
that may help you further segment your market,
especially if selling primarily to businesses or
government entities, would include categorized
information on local, regional, state and federal
government agencies, and breakdowns of companies
by their size, types of ownership and geographical
location. You won't need to discuss these market
segments, generally, if you are offering a consumer
product or service that is not normally purchased
by such government or business organizations.
To help develop the above information, you may have to
use a number of different sources for your research. It
may be helpful to get to know the business specialist at
your local public library, who can often be extremely
helpful in guiding you to useful library publications,
such as U.S. Census data, market research data published
by such organizations as Sales and Marketing Management
Magazine, Predicasts, Inc., trade magazines, trade
organizations, U.S. Department of Commerce publications,
information put out by your state's Chamber of Commerce
and the state office of economic development, and similar
sources. You may also want to do some primary research,
by contacting some potential customers and conducting
your own market research - ask them how they buy products
or services such as yours, what price they think such a
product or service should sell for, and how they would
want to see your product, or existing similar products,
improved.
If you are trying to project population growth and
income data in your local area, many local governments
have planning departments which can often provide you
with extremely useful information on such trends, as
well as other key factors such as projected numbers
of new homes or highways to be built. Expansions or
improvements to the local or regional transportation
system, such as new freeways or rapid transit lines,
may have a major favorable or unfavorable effect on the
potential profitability of your business, especially if
you will be opening a retail business of some kind.
- PRODUCT LIFE CYCLE. The market for most products or
services usually has a life cycle, beginning with very
rapid growth in the introductory or developmental stage,
which slows to a more moderate growth rate in the
maturity stage, flattens out in the saturation stage,
and finally begins shrinking in the declining stage.
If you believe your product or service is one which has
such a life cycle, try to determine and explain to the
reader where the market for your product is at present,
in terms of where it stands in its product life cycle.
(The product life cycle for your industry can either
be discussed here, or, if you prefer, can instead be
covered in the next segment, on the industry.)
- MARKET BREADTH OR DEPTH. This refers to the number of
customers in a particular market. You will also want
to quantify and discuss:
(a) Market size - How many units of the product are
bought within a particular market?
(b) Frequency - How many units of the product or
service will the typical consumer use in a given
time period, such as a year? For example, if
are selling hamburgers, you are interested not
only in how may customers you may have, but in
how many times a year they are likely to buy
your hamburgers.
(c) Potential - What is the market potential? That
is, based on the number of consumers in the
market you have defined, how many dollars a year
will they spend? Determine this by multiplying
the number of customers in the defined market
times the frequency of purchases of the average
customer, times the average selling price per
unit of the product. For example, if you have
a dental practice in a city of 20,000 potential
patients, who go to a dentist an average of 1.25
times a year, at an average cost per visit of
$100, you would multiply out those numbers and
get a market potential of $2,500,000 a year for
your particular market. Then identify the share
of that market which you feel your business should
be able to capture, and explain your reasoning that
backs up your assertions as to what you expect your
market share will be.
- TRENDS. Discuss various market trends that will affect
the demand for your product or service. These can
include things such as:
. Demographic changes, such as increasing numbers of
babies being born, due to the age distribution of
the population in the relevant market area, or
increasing income levels, or sociological changes
in tastes and preferences of consumers.
. Alternative products, such as substitute products
that may undercut the demand for your product at
current price levels, if cheaper substitutes are
available.
. Social trends, such as pressures by consumers to have
ecologically friendly products, increased safety, and
the like, as well as consideration of any factors
such as any rapid technological changes that may be
affecting the market or distribution methods for your
product category.
. Government and economic trends, such as rising tax
rates, increasing levels of disposable after tax
incomes of consumers, inflation, interest rate levels,
government spending levels, new government regulations
that may either crimp or expand the demand for your
product, and similar macroeconomic factors.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 10: Business Plan Outline -- The Industry
-----------------------------------------------------------
(2) THE INDUSTRY. [Discuss, in this section of your
market analysis, the characteristics of the industry you
are in. Is it fragmented or concentrated, wide open, with
no dominant market leaders, or is it an industry that is
dominated by one or a few large companies? Read the "Help
Notes" segment following this Section 10 now for an outline
of discussion points you may want to cover in your
discussion of your industry.]
(a) SIZE. [Describe how large the industry is, in terms
of annual industry sales or revenues, plus description of
any subcategories.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(b) MARKET STRUCTURE. [Discuss the structure of the
industry, in terms of ease of entry, number of firms,
and the like. Read the "Help Notes" segment following
this Section 10 for further hints on what to discuss in
Section 10.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(c) OVERVIEW OF COMPETITION. [Give an overview of how
firms in the industry compete, either in terms of price,
quality, or other means of product differentiation.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(d) INDUSTRY LIFE CYCLE. [Discuss the state of the
industry, in terms of the industry life cycle. If you
have already covered this, under the "PRODUCT LIFE CYCLE"
segment of this business plan, don't repeat it here,
except possibly to briefly summarize your conclusions
from the "PRODUCT LIFE CYCLE" section of this worksheet.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(e) INDUSTRY TRENDS. [Discuss industry trends here,
such as growing profitability, capacity expansions,
major new entrants into the industry, new governmental
regulations or taxes, and any other factors affecting
supply or output of whatever your industry sells or
produces.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
--------------------------------------------------------
HELP NOTES RE: SEC. 10. BUSINESS PLAN OUTLINE --
THE INDUSTRY
--------------------------------------------------------
THE INDUSTRY. This section also looks at the market
environment for your product or service, but from a more
qualitative standpoint, rather than attempting to quantify
the size of the market demand. Some of the points you may
want to analyze and address in this segment would include
the following:
- SIZE. Indicate in your description how large the industry
is, in terms of sales. You should be able to determine
this information from trade associations or trade
publications, which exist for most industries. Also
discuss the major categories within the industry, such
as a particular category in which you will compete, and
the relative size of the various categories, if known.
- MARKET STRUCTURE. Briefly address the structure of
the industry, noting whether it is an industry (like
consulting or housecleaning services) with considerable
ease of entry, or if it is one (like the auto industry)
that has high barriers to entry by new firms. Also
discuss whether the industry is dominated by one or a
few large firms, or is one characterized by large numbers
of small firms, or whatever other characteristics exist
in your particular industry.
- OVERVIEW OF COMPETITION. Analyze whether there is
significant product differentiation in the industry.
That is, are most of the participants in the industry
selling virtually the same, standardized product, like
gasoline or milk, or are the products significantly
differentiated to meet the needs and tastes of different
markets, such as wrist watches? Obviously, if product
differentiation is not significant in your industry,
this will shape your marketing strategy, since marketing
costs that would ordinarily go towards creating a brand
identity, based on perceived superior quality of your
product, may be misdirected if you are selling something
like milk or are running a gasoline station, where price
may be of paramount importance.
In general, this section should analyze how firms in
the industry compete, such as based on price, product
quality, brand name, or by other means.
- INDUSTRY LIFE CYCLE. Where in its "life cycle" is your
industry? In the developmental (growth) stage, maturity,
saturation, or decline? Note that this is essentially
the same as the discussion of your product's life cycle,
which you may have chosen to discuss in the earlier
segment of this business plan, as part of the description
of your product. It's up to you whether you prefer to
work that discussion into the section on "PRODUCT LIFE
CYCLE" or here, in this section on the industry. We
suggest you don't duplicate the discussion in both
parts of this business plan, however, although you may
want to briefly refer, in this section, to where the
industry is in its life cycle, summarizing what you
previously discussed in the section on "PRODUCT LIFE
CYCLE."
- INDUSTRY TRENDS. After you have done your research
homework on the background of the industry, you should
also develop an understanding of current and future
trends in the industry, discussing them here. These
would include subjects like the fact that, due to excess
competition (perhaps from abroad) or outside influences,
firms in the industry may be experiencing hard times and
many may be withdrawing or even going bankrupt. Or, on
the other hand, perhaps the industry is experiencing
very high profit margins, which may be attracting major
expansions in capacity, or entry into a small industry
by large new competitors, such as the entry of software
giant Microsoft into the "browser" segment of the
software industry, which until then consisted only of
small firms like Netscape. Other trends would include
new governmental regulations, new taxes, and other
governmental actions, such as new trade agreements
allowing duty-free imports from foreign countries.
This segment would also consider other indirect effects
on the industry, such as trends in related industries
with complementary products. Thus, if you sell drapes
and blinds for houses, and much of your business comes
from purchasers of new houses, you would want to pay
a lot of attention to the trends in housing starts in
your market area, which will greatly influence your
level of sales. Or, if you are starting up an airline,
changes in the price of fuel, a major cost component,
will affect the entire airline industry, as any attempt
by airlines in the past to pass along major fuel price
increases by raising fares has generally tended to
reduce the demand for airline travel.
In short, you need to know enough about your industry
to intelligently and clearly describe the major industry
currents that would be of concern or of interest to
any potential investor in or lender to your firm. If
there are negative trends at work, assume that your
reader will know about them -- in which case you had
better mention them and show, in the strategy portions
of the business plan, how you tend to deal with, or
even take advantage of, such trends. If you do not
mention the problem, a sophisticated investor or
lender, who is aware of a negative industry trend
that you have failed to mention, is likely to quickly
send your business plan document to the local landfill,
without reading any further.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 11: Business Plan Outline -- The Competition
-----------------------------------------------------------
(3) THE COMPETITION. [In this important section of your
business plan, you need to spell out the following major
items:
. Who are your main competitors?
. What is their basis of competition? (Price, quality,
better distribution, reputation, etc.)
. What is your firm's competitive advantage that will
allow you to compete effectively with in your industry?
Read the "Help Notes" segment following this Section 11 for
suggestions on how to go about preparing Section 11 of the
business plan. Before writing this section, you will first
need to do any necessary research on your competitors, and
then use the workpapers below to assist in compiling and
organizing the data you will need to write this section.
The following sample workpaper may be helpful to you in
organizing the relevant facts about each of your competitors.
You can make several copies of this form as is, or with any
modifications you wish to make to it, and fill out one for
each competitor. Obtain as much of the information listed
as possible; however, you will find that some or much of
the information items on your competitors that is listed in
the workpaper will be private and difficult or impossible
for you, as a potential competitor, to obtain from them.]
-----------------------------------------------
| |
| INDIVIDUAL COMPETITOR PROFILE |
| (SAMPLE WORKPAPER) |
| |
| Name of Company __________________________ |
| |
| Location ________________________________ |
| |
| Type of business _________________________ |
| |
| _______________________________________ |
| |
| |
| Number of employees: _____________________ |
| |
| Sales per employee: _____________________ |
| |
| Sales by fiscal year: |
| |
| Year Revenues Market share % |
| ------ ---------- -------------- |
| |
| 19___ |
| |
| 20___ |
| |
| 20___ |
| |
| 20___ |
| |
| 20___ |
| |
| Strategy: (The message this competitor is |
| sending to customers and the general public) |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| Strengths? _______________________________ |
| |
| __________________________________________ |
| |
| Weaknesses? ______________________________ |
| |
| __________________________________________ |
| |
| Other comments: |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
-----------------------------------------------
[Once you have completed a workpaper like the above sample
for each of your main competitors, use that information to
complete the summary workpaper below.]
-----------------------------------------------
| |
| THE COMPETITION: SUMMARY WORKPAPER |
| |
| Identify your major competitors: |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| What are the factors that make these |
| companies competitors? (Such as price, |
| quality, personnel, reputation, good |
| distribution, or other factors) |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| Summarize the weaknesses or vulnerabilities |
| of your major competitors: |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
| Compare your business to the competition, |
| feature by feature: |
| |
| |
| FEATURE THE COMPETITION'S YOUR FIRM'S |
| ------- ----------------- --------------- |
| Quality |
| ---------------- --------------- |
| Technology |
| ---------------- --------------- |
| Price |
| ---------------- --------------- |
| Reputation |
| ---------------- --------------- |
| Location |
| ---------------- --------------- |
| Selection |
| ---------------- --------------- |
| Knowhow |
| ---------------- --------------- |
| Selection |
| ---------------- --------------- |
| Availability |
| ---------------- --------------- |
| Convenience |
| ---------------- --------------- |
| Delivery |
| Time |
| ---------------- --------------- |
| Financing |
| ---------------- --------------- |
| Service |
| ---------------- --------------- |
| Warranty |
| ---------------- --------------- |
| Reliability |
| ---------------- --------------- |
| Other |
| ---------------- --------------- |
| |
| Describe what you feel is your firm's |
| competitive advantage, which will make your |
| business successful: |
| |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| --------------------------------------- |
| |
-----------------------------------------------
[Once you have completed the above workpapers on your
competition, and have finished writing your "competition"
section of the business plan below, you should delete the
above worksheets from this outline.]
(a) MAIN COMPETITORS. [Identify in this section who your
main competitors are, and give some information about
them.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(b) BASIS OF COMPETITION. [This is the main part of your
discussion of the competition, where you analyze the key
competitive factors, such as pricing or quality, in your
industry. Drawing on the information you have developed,
mention the strengths and perceived weaknesses of the
competitive positions of your main competitors.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(c) COMPETITIVE ADVANTAGE. [Summarize your conclusions
as to the competitive advantage your firm will enjoy, or
how it will successfully meet the competition.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
--------------------------------------------------------
HELP NOTES RE: SEC. 11. BUSINESS PLAN OUTLINE --
THE COMPETITION
--------------------------------------------------------
THE COMPETITION. Who is the competition? This section of
the business plan should identify the main competitors that
your company will face in its market area. However, you
will need to do more than simply identify who they are --
you should do a comparison of the major features of your
business versus the competition, and demonstrate how you
will meet the competition effectively. That is, you need
to be able to convincingly show the reader of your business
plan what your company's "competitive advantage" is, which
will be one of the key selling points in your entire
presentation. Accordingly, you need to put a great deal
of thought into developing this part of the plan, not only
for the purpose of creating an impressive business plan,
but for creating a business strategy that will actually
improve your odds of making the business a success.
We suggest you attack this part of your business plan by
taking the following steps (after doing the necessary
research to find out what your competitors are doing):
- IDENTIFY THE COMPETITION. Determine who the main
companies are that will comprise the competition for
your business, and briefly mention who they are. At
this point, you are still gathering information, and
are not yet ready to begin writing the "competition"
section of the business plan yet. Once you do begin
writing this section, you may or may not want to spell
out the situation of each such competitor in detail.
Or, you may want to include "competitor profiles" for
each competitor, summarizing your research into their
operations, but provide this detailed information in an
appendix, not in the main text of the business plan.
- INDIVIDUAL COMPETITOR PROFILES. In doing your research,
it may be helpful to create individual competitor profile
workpapers for each such competitor, using a workpaper
like the sample one we have provided in the business plan
outline. Note that the workpaper is designed to help you
organize the relevant information about your competitors,
and need not be included in the final business plan
(except, as noted above, in the event you want to include
such profiles in an appendix to the business plan). Once
you have completed the individual competitor profiles,
proceed to the next step, which is to create a summary
workpaper describing your competitors and your response
to such competition.
- SUMMARY WORKPAPER -- COMPETITION. Based on the data you
have compiled on your individual competitors, using the
individual competitor profile workpapers described in
the preceding paragraph, create a summary workpaper
that outlines the basic information on your competitors
and describing how they compete (pricing, reputation,
convenience, quality, or other features). Then you should
identify and spell out the features of your product or
service, or in the way your business operates, that will
give your firm a competitive advantage that will allow
it to succeed. You can use the second workpaper we have
provided in this segment on "the competition," making any
additions or modifications to the workpaper that you feel
are useful in your situation.
Now, finally, you are ready to begin writing the
"competition" section of your business plan, using the
information you have developed from the two workpapers
described above.
- WRITTEN DISCUSSION OF THE COMPETITION. Now that you are
ready to begin writing an analysis of the competition in
your industry, use the information you have developed
so far from your research and through using the sample
workpapers we have provided in the business plan
worksheet outline, to develop this section of text.
A suggested outline of this discussion would be as
follows:
(a) Identify the competitors. List the names of your
main competitors, and provide some background
information on them, and how they operate.
(b) Basis of competition. Discuss the factors that make
your competitors effective, and also cite any
weaknesses or vulnerabilities that they may have,
which your company may be able to exploit. This
will be the heart of your discussion, mentioning
the competitive factors that you perceive as most
important to customers of the industry, such as
pricing, quality, etc.
(c) Competitive advantage. Summarize this section by
describing the competitive advantage (or advantages)
that your business will have, which you feel will
enable you to succeed in this particular competitive
environment. Make it good, as this is one of the
key fulcrum points of your entire presentation. If
you cannot make a good case here for your company's
ability to successfully meet the competition, your
business plan will not be very persuasive, as a
whole.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 12: Business Plan Outline -- Sales and Marketing
-----------------------------------------------------------
D. SALES AND MARKETING. [Based on your analysis of the
market demand and your assessment of the competition and
your company's strengths and weaknesses, develop your sales
forecast for the business in this segment. This section
should also include a concise summary of your marketing
plan and strategies that will enable you to reach the
level of sales you are projecting. Read the "Help Notes"
segment following this Section 12 for a detailed discussion
of various points you may want to consider as you develop
your sales projections and create your marketing strategy,
both for the purpose of writing up this section of the
business plan document, and for your own actual business
strategy and planning purposes.
Discuss here your marketing plan or strategy. This will
include identifying the market segment you are seeking to
reach, and the various means through which you intend to
reach it, such as door-to-door sales, retail sales, direct
mail, media advertising, selling through sales reps,
jobbers, Amway-type multi-level distributorships, or
whatever else you plan to do to market your product.
Mention also the degree of market penetration and market
share you expect to achieve, year-by-year, for the period
for which the business plan is making projections.
Also discuss in this segment how you plan to create an
awareness of the product among its ultimate consumers,
through advertising, seminars, publicity or otherwise,
even if most of your sales may, perhaps, be made to
intermediaries such as wholesalers or retailers. Cover
all methods you will employ, such as telemarketing,
advertising circulars, print or electronic media
advertising, direct mail, catalogs, the Internet, or
other means. Here it can be helpful to include photocopies
of dummy ads, brochures or other promotional materials
that you may have already prepared, if you feel they will
be effective in selling your business plan -- or refer to
such items here, but include them in the appendix.
You may prefer to write up your marketing plan and then
follow it with the sales projections, or vice versa; or,
depending on your writing style, you may find that the
two subjects are so intertwined that you will find it
more persuasive to weave your sales projections into the
discussion of your marketing plan, rather than trying to
separate the two subjects. There is no "best" way to
present these two interrelated areas of discussion, so
we suggest you structure and sequence these portions of
business plan document in the way that seems most natural
and readable to you. Thus, while we may have given you a
number of ideas and suggestions above and in the "Help
Notes" segment for this item, we have purposefully not
given you a structured outline below for the order in
which the component segments of the sales and marketing
sections should be written, as they will necessarily be
somewhat freeform, in an order that should be determined
by you.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
[Your sales projections should be summarized in a format
somewhat similar to the following:]
SALES FORECAST BY YEAR FOR XYZ CORPORATION [SAMPLE]
(In Thousands)
YEAR1 YEAR2 YEAR3 YEAR4 YEAR5
------- ------- ------- ------- -------
Units Sold 500 550 600 720 900
Sales ($) 800 880 980 1250 1700
Less Cost
of Sales:
-Returns 25 27 30 40 50
-Discounts 0 0 0 0 0
-Bad debts 16 18 20 25 34
-Commissions 0 0 0 0 0
Net Sales 759 835 930 1185 1616
--------------------------------------------------------
HELP NOTES RE: SEC. 12. BUSINESS PLAN OUTLINE --
SALES AND MARKETING
--------------------------------------------------------
SALES AND MARKETING. This part of the business plan deals
with two different sides of the same coin, a sales forecast
and the marketing strategy that is your company's plan for
creating the level of sales that you are projecting.
As you will note in the outline of the business plan
worksheet, we have not tried to tell you which of these
two subject areas you should discuss first, since they are
closely intertwined. You may prefer to give your sales
projections first, and then explain the marketing strategy
by which you will achieve that level of sales; or you may
find it more logical to discuss your marketing strategy
or plan first, before summarizing your projections. Or
you may even find it simpler to discuss the two subjects
together, weaving your projections and marketing plan
together in a single segment, if that approach to writing
this segment of the business plan works better for you.
In any case, the discussion below will alert you to a
number of points to consider as you create your marketing
plan and sales projections, not all of which will be
pertinent or relevant to your business.
- MARKETING STRATEGY. Most businesses that fail tend to
do so because of poor marketing of a good product. In
fact, even a business with a mediocre product (or in
some cases even a poor product) will often survive or
prosper if it does a good job of marketing its product.
Like the Sony Betamax technology for VCR's demonstrated,
the best product does not always prevail over a competing
product that is technically weaker but better marketed.
Similarly, many people would agree that for most of the
time since its introduction, the Apple MacIntosh user
interface has been far superior to any DOS or Windows
in most respects, yet, due to some unfortunate decisions
in marketing strategy by Apple, it has been greatly
outsold by DOS and Windows products in recent years.
Think of a well-thought out marketing program, with
sufficient time, energy and financial resources devoted
to developing and implementing it, as a life preserver
for your business -- and don't go near the water without
it!
Marketing is an overall strategy, composed of a variety
of complementary tactics, all aimed at getting your
product into the minds of targeted customers and then,
ultimately, into their hands, as a completed sale.
These tactics should or may include:
. Advertising and Promotion. We don't need to explain
to you what advertising is, as you are bombarded
with it from every direction, every day, as endless
commercial messages directed at you seek "mind share."
Advertising is often a major component of a company's
marketing program, and typically involves the purchase
of space in newspapers, magazines, technical or trade
publications, or purchase of time on radio or TV
stations to get out the message about your product or
your company. Other common forms of advertising you
might use would include advertising circulars (handed
out on the street, distributed door-to-door, or placed
on car windshields), inserts in the local newspaper,
direct mail, or a post card included in "card decks"
distributed by advertising firms, leased billboards
in prominent locations along major streets and
highways, and listings in the Yellow Pages or in
trade or professional directories for your industry.
Advertising messages may take many forms -- they can
consist of little more than a notice to the consumers
in your market area or target market segment that your
firm or product exists, and that you are conveniently
located or otherwise easily accessible to the consumer.
This might be appropriate, for example, in a newly
developing community, where yours is the first
restaurant, first laundromat, first tax preparation
service, or other such business in that area, thus
offering a new level of convenience to consumers in
the area. Or, your advertising may be more product
oriented, explaining in simple terms the advantages
in features, price, convenience, or quality that your
product offers, or may be less rational and designed
more to evoke an emotional response in consumers --
for example, that by using your breath mints they
will improve their sex lives, or by using a certain
athletic shoe brand they will run in and win the
100-meter dash in the Olympics.
Promotion is a close cousin to advertising, in the
arsenal of marketing. Properly done, it can often
be very effective. While some forms of promotion
can be quite expensive, such as putting on free
seminars to explain and to publicize your product,
or renting space and setting up a booth at a trade
show, they can provide you an opportunity to get your
product message across in depth, which can be very
profitable if you have a compelling story to tell.
Or, some of the best kinds of promotion, publicity
in the print or electronic media, can sometimes give
you great exposure at little or no cost. If you can
write an interesting press release about your company
or product that a radio producer or newspaper editor
may decide is of sufficient interest to merit a news
story on their station or an article in their paper,
the benefits can often far exceed those of a paid
advertisement. Most people have learned to "tune
out" most advertisements in the media, but are likely
to pay attention to a newspaper article about your
sushi bar or matchmaking service, etc., since it
comes from an unbiased news report, and is not
merely another advertisement.
Promotional activities can include all manner of
other ways of getting information about your product,
or the name of your business, before the public.
These may include things such as gift certificates,
involvement in community organizations, contests,
sponsorship of special events, speeches to service
clubs like Rotary, Lions, or Kiwanis, publication of
books or articles by you or members of your firm, or
anything else you can do, limited only by your own
creativity, that gets your name or product information
out to consumers in a positive context.
. Merchandising. In retailing, another aspect of
marketing is merchandising, which can range from the
package design for your product, to displays in a
shop window or in-store product displays, to various
other gimmicks for making sales, such as store signs,
brand names, special discount offers, or creating a
particular atmosphere or ambiance to appeal to certain
market segments. Other forms of merchandising tactics
would include shelf space strategies and positions,
point of sale displays at the checkout counter (selling
"impulse" items like chocolate candy, for instance),
or promotions like "2-for-1" free meal offers, as a
way to get people to try out your restaurant.
. Selling. The most intense and direct form of
marketing is one-on-one sales contacts with your
customers. This may be aggressive, door-to-door
sales or telemarketing, or lower-key sales techniques
taught to your retail floor clerks in a store context,
where they are taught how to best deal with questions
from shoppers, helping them to close sales or to
stimulate purchases of add-on items or accessories to
go along with items the consumer has already decided
to purchase. Or sales may be relatively passive
order-taking by a staff of people answering 800 number
calls from people whom you have solicited by direct
mail or media advertising, as examples. In some cases,
you may want to have your own in-house sales force,
while in others you may choose to outsource your sales
activities, such as to independent manufacturers'
representatives, if you are manufacturing a product
for sale. There is no single, best sales approach.
However, if you are selling a product that requires
a great deal of technical understanding on the part
of the sales people, and are selling to sophisticated
customers, you may need to have an in-house sales
force, thoroughly trained and kept up to date on your
product's specifications and capabilities, or else
provide such training to any independent sales reps,
if you do not have your own sales force.
There are a great many other ways to get people to
sell your product for you other than by hiring your
own sales people or dealing with manufacturers' reps,
including multi-level marketing, franchises, network
sales, license agreements, tie-ins with other
businesses or products, distributorship arrangements,
and other similar approaches.
While you should consider all the possible ways of
marketing your product or service, you will probably
rely on only a few that seem most suited to your industry
and to your product and capabilities. You do not need
to cover all of the possibilities in writing this part
of the business plan, however. Instead, you should
be able to summarize your marketing strategy and any
marketing theme (perhaps expressed as a slogan) that you
may decide to adopt, in a few short paragraphs, at most.
Note, if you adopt a clear marketing theme: Will it
mesh with your company's mission statement? It may not,
necessarily, but at the very least, it definitely should
not be in conflict with your mission statement!
- SALES FORECAST. This key section of the business plan
should take the results of your market research and
make numerical projections, in both dollars and unit
sales, of:
. The total sales expected to be generated by your
firm and all its competitors in your particular
market, whether this be on a large scale (national
or regional, for example), or in a relatively small
geographical area for a business such as a carwash
or small retail operation, which will draw most of
its customers from one locality; and
. The share of the relevant market, as you have
defined it, that you expect that your product or
business should reasonably be able to capture.
The forecast should ordinarily be for at least the next
3 to 5 years, and perhaps longer in some cases. You
will need to integrate your sales forecast, in terms
of both the periods covered and the amounts of your
expected sales, with your overall financial projections
for the business.
The sales forecast will also, to a considerable extent,
be a function of the amount of resources you plan to
devote to the various aspects of marketing -- to
advertising, promotion, merchandising, and selling.
Many businesses tend to mistakenly look upon their
marketing costs as a percentage of sales, like overhead.
More realistically, it should be viewed the other way
around, with sales seen as a multiple of marketing
costs, but with some point of saturation or diminishing
returns. Of course, there are no guarantees, so your
firm may spend $100,000 on advertising to generate a
projected $5 million in sales -- but sales may only
turn out to be $3 million. Nevertheless, there will
be SOME degree of correlation between marketing efforts
and sales generated, unless your marketing efforts are
completely ineffective or even counter-productive.
(Examples of counter-productive marketing would be
themes such as GM's ill-fated attempts to market its
"Nova" automobile in Latin America -- with a product
name that meant "no go" in Spanish; or Kentucky Fried
Chicken's "Finger-licking good" slogan that allegedly
was translated into a Japanese slogan that meant
"You'll chew your fingers off"; or another American
company's Japanese TV commercial that showed happy
Japanese consumers frolicking at a picnic, all dressed
in white, which was very offensive, as white is the
color worn for mourning in Japan.)
Many factors may go into your success at achieving a
given level of sales. While not all of the following
will necessarily apply in your case, these are some of
the factors that you might consider and bring to bear
in your analysis and explanation of how your firm will
achieve a certain projected level of revenues:
. Pricing strategy. This covers a number of issues,
including a determination of optimal pricing that
will generate the most profit (price too high, and
you make more per unit sold, but don't make enough
sales to cover your overhead costs; price too low
and you sell a lot of units, but your profit margins
are so low that you make little, if any, money,
after figuring in overhead).
. Market share. In some industries, especially those
that are still growing rapidly, you may want to
sacrifice profitability for a few years to attempt
to achieve a larger market share, in order to realize
certain economies of scale that will allow you to
eventually achieve a production cost advantage over
your competitors. This is inherently risky, of
course, as you may have a hard time generating the
capital you need to expand rapidly, if you are pricing
your product so aggressively that you are foregoing
profits and positive cash flows. You may be out of
business before you ever achieve the desired market
share you are seeking, which would enable you to
"cash in" on your strong market position.
. Reverse psychology. In some markets, especially for
prestige items, or personal or professional services,
you may find that you attract more business by
pricing your product or service somewhat HIGHER than
the competition, creating an image of superior quality
in the consumer's mind, by virtue of the higher price.
. Market penetration. If you are a new company, trying
to break into a market controlled by other firms, you
may need to take special measures to get consumers to
try what you are selling. This may take the form of
giving away samples (like the little packages of new
household products from Procter & Gamble or other
such manufacturers, which all of us receive from time
to time in our mailboxes), or introductory coupons or
deep discounts from the list price to encourage the
consumer to try your product at least once and compare
it to competing products.
In developing and writing the above sections on marketing
strategy and sales projections, keep one overriding thought
in mind: Properly done, your market analysis and research,
put together with a carefully thought out marketing strategy,
should cause the sales forecast numbers to "fall out" of
your analyses, rather than simply act as a supporting
rationale for a set of sales forecast numbers you have
already decided on. If you ignore this advice, and instead
work backward from an assumed level of sales that you have
"picked out of the air," you may not only be misleading
the reader of your business plan, but you may also be
badly misleading yourself as to how feasible your business
really is, with potentially dire consequences, since you
will probably be the person with the most to lose if the
business fails.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 13: Business Plan Outline -- Operations and Production
-----------------------------------------------------------
E. OPERATIONS AND PRODUCTION. [Include in this section
an operational plan, describing in detail the type, and,
if known, location of facilities that will be required,
and equipment that must be obtained. Also discuss what
portions of any production work will be done by outside
subcontractors, and what parts will actually be done by
your people. Read the "Help Notes" segment following this
Section 13 now for suggestions on other areas to cover when
you write this Section 13 of your business plan.]
(1) Production strategy and requirements. [See the "Help
Notes" following this Section 13 for assistance in writing
this Section 13 of the business plan.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(2) Distribution strategy. [See "Help Notes" following
this Section 13 for assistance in writing this Section 13.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(3) Warranties and Refund Guarantees. [Explain what your
policies will be with regard to product warranties --
whether you will offer them and, if so, whether you will
charge for warranty protection. Also describe any refund
policy, if you plan to offer your product or service with
any kind of "satisfaction guaranteed" refund policy.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(4) Other Supporting Data.
. Technical Drawings of Product.
. Detailed Description of Services To Be Offered.
[Delete one of the two above items, unless both apply.]
____________________________________________________
____________________________________________________
. Itemization of Capital Equipment Required & Cost.
____________________________________________________
____________________________________________________
. Pricing Schedule.
[Detailed list of prices for products or services to be
offered, in their different configurations.]
____________________________________________________
____________________________________________________
. Plant Layout.
[Include floor plans or layout of a proposed manufacturing
plant, if any. Consider including a manufacturing flowchart
and costing estimates for producing the product, broken
down into cost accounting detail. You may want to only
refer to such items, placing the detailed information in
the appendix to the business plan, rather than here.]
____________________________________________________
____________________________________________________
. Tooling Required for Production.
[Describe here all tooling that will be required, and the
estimated costs thereof. Obviously, this will only apply
to certain kinds of businesses.]
____________________________________________________
____________________________________________________
--------------------------------------------------------
HELP NOTES RE: SEC. 13. BUSINESS PLAN OUTLINE --
OPERATIONS AND PRODUCTION
--------------------------------------------------------
OPERATIONS AND PRODUCTION. This part of the business plan
is where you explain the nature of your operation -- what
is needed, how you will operate, and what it all will cost.
Businesses generally require some combination of land,
labor, and capital to create whatever valuable commodity
or service they wish to sell. You have already analyzed
the sales you expect to be able to generate, and the number
of units of the product (or man-hours or a similar measure
of your output, if you are selling a service) that you
will be able to sell.
For example, you may have concluded that you will be able
to sell 100,000 units a year of your new Super-Widgets at
$32 each, wholesale. Now you need to explain to the reader,
in sufficient detail to make it clear that you understand
all the steps required to get the business running properly,
what the cost side of the equation will be, and how you
will go about actually producing those 100,000 widgets and
getting them delivered to wholesale distributors on a
timely business.
Some of the types of things you may need to discuss in this
segment would include the following:
- What facilities, equipment, and staffing you will need
to produce, store, and distribute your product? (Not
all of which will be relevant to all products, or if
you are selling a service, rather than a tangible
product.)
- What will it cost for each of the above factors of
production, and when will you need the financing to pay
for any large purchases, such as for land, buildings,
equipment, initial inventories of raw materials or
components, and working capital?
- If your business plan is based upon sale of some product
that you will be creating, you will probably need to
create a prototype of the product, a test version of it.
Or, if you already have a prototype, it will almost always
require a number of modifications before you have a
finished version that can be mass-produced and marketed.
If you already have a prototype, consider including a
picture of it at this point in the business plan. Some
of the questions you should answer about a prototype
would include the following:
. How much time and money, and what special skills,
equipment and other resources will be needed to create
a prototype? (Unless you have already created one.)
. Once a prototype is ready, what kind of testing will
be required, over what period of time and at what
cost, before the prototype can be turned into a
suitable finished product, ready for the market?
- What is your production strategy going to be? (If your
business will involve manufacturing a product of some
kind.) Will you be:
. Expanding an existing operation?
. Creating a new operation from scratch?
. Investing in new technology to upgrade and improve
the efficiency of an existing operation?
. "Downsizing" an existing operation, making it more
functional and cost-efficient by closing unproductive
or obsolete facilities, or by selling off unused
capacity?
. Improving or redesigning an existing product?
. Working on improving your distribution system, such
as by improvements in warehousing operations and in
transporting the product?
- Will your firm lease or buy its production facilities?
Or will you outsource some or all of the production,
rather than attempting to manufacture the product
yourself?
- What will your unit cost of production be? This will
be comprised of both a variable cost per unit, other
than overhead, plus an overhead factor, spread over
the total number of units produced. Since a greater
number of units produced (and sold), with a given
level of fixed overhead costs, such as factory rental
or building depreciation, will mean the overhead cost
per unit is lower, your total production cost per unit
will vary at different levels of production.
Thus, you should also do a calculation of the "breakeven
point," which is the number of units you must produce
and sell at a given price in order to cover your costs
of production plus selling and general administrative
costs of the business, so as to break even financially.
This figure will be of particular interest to most
readers of your business plan, since it tells them how
large a "margin of error" in your sales projections can
occur without the business operating at a loss.
- What will your variable costs be? You will need to
carefully analyze and then summarize in written form
what the costs of labor and raw materials will be to
produce each unit of your product.
- What will your fixed costs be? These will include a
number of labor-related costs, some of the more common
of which will be:
. Salaries of managers, accounting staff, marketing
people, and others not involved directly in production.
. Payroll taxes (state and federal unemployment taxes
and federal FICA taxes) and workers' compensation
insurance costs. You can look up FICA and federal
and state unemployment tax rates, which are based on
wages paid per employee, elsewhere in this program.
You will need to contact a workers' compensation
insurance carrier or an insurance broker to get
quotes on what workers' compensation insurance will
cost you, based on your projected workforce.
. Employee fringe benefit costs, such as for medical
or life insurance, or any retirement plan benefits.
These costs are generally optional, although you may
find it difficult to attract good employees without
providing some or all of such benefits, depending
upon the common practice of other companies in your
industry.
. Overtime pay for employees who work over 40 hours
a week (generally), except for exempt executive and
administrative employees. Overtime pay is generally
at 1.5 times the regular hourly wage rate. You may
also choose to pay overtime to some exempt employees,
as well, although not necessarily at 1.5 times their
regular hourly rate of compensation.
. Facility expenses, such as janitorial and maintenance,
property taxes, fire and liability insurance, trash
pickup and any waste recycling costs, heating, gas
and electricity costs (other than those directly
consumed in the production process).
. Telephone charges and Internet access expenses. Since
more and more business communication now occurs over
the Internet, you will probably need an Internet
service provider for e-mail, at a minimum, and may need
a more significant outlay if, like more and more firms
are doing, your company sets up a Web site to facilitate
contact with customers or suppliers, or both.
. Computer network costs. For any but the smallest of
firms, you will probably need some kind of network to
tie all the company's computers and work stations
together in a workable manner. This costs money to
set up, and you will probably need a full- or part-time
network administrator to keep it functioning properly,
afterwards. Many firms are now moving towards an
"intranet" type of setup, which can be much simpler
and sometimes less costly than the traditional types
of networks. An intranet uses the same time-tested
and widely familiar technology as the Internet, tying
together all the computers in your company like a
small-scale version of the Internet.
. Automobile and truck expenses, if any.
. Interest expense on indebtedness the company will
incur.
Note that, while you may spend a great deal of time
gathering the information to calculate each of the
above cost items, so that the numbers you arrive at
are defensible, you don't need to go to great lengths
in the business plan document, explaining how you
arrived at each such number. But you should keep
copious background notes to show how you arrived at
the numbers, and be familiar with them, in case a
prospective investor or lender questions how a certain
number in your business plan was arrived at. However,
in most cases, if you have done your homework and
calculations of expenses properly, you probably won't
get many such questions, since such readers are usually
sophisticated enough to know when such numbers for,
say, payroll taxes, appear to be reasonable, or look
to be questionable.
- What is your distribution strategy? Will you have one
centralized warehouse, or regional warehouses? Will
you ship directly to customers, or to wholesalers or
to sales reps? If shipping directly to customers, will
you have your own delivery trucks, or will you rely on
common carriers like UPS or Federal Express to deliver
the product to customers?
- How many days of inventory will you need to keep in
stock? Remember that you have incurred all of the
cost of production when an item is added to inventory,
but you don't recover your cost until it has been sold
and payment received from a customer, so that large
inventories can soak up your available cash like a
sponge. On the other hand, if you keep your inventory
too lean, you may not be able to respond to orders
quickly enough, and may lose some business as a result.
The inability to keep inventories under control is a
major reason many businesses, small and large, fail.
Remember to factor in the amount of capital you will
need to carry X days of inventory, into the calculations
of how much working capital you will need, along with
an allowance for the average number of days it will
take you to collect receivables once a sale from
inventory is made.
- Will you offer product warranties, or make refund
guarantees to dissatisfied customers who return your
product within, say, 30 days? If you do offer product
warranties, will the cost of providing the warranties
be built into the price of the product, or will you
offer a warranty as an optional additional cost item
to the customer?
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 14: Business Plan Outline -- Management
-----------------------------------------------------------
F. MANAGEMENT. [Here it is important to spell out in a
convincing way your plans for structuring the organization,
including a description of the key positions and the people
who you have lined up to fill them, with their (hopefully
impressive) qualifications. For the 5 or more key people
in the company (including each top person in the sales,
finance and technical departments), include their resumes
at this point, or place them in an appendix at the end
of the business plan, but refer to them here. A suggested
outline for this section appears below.]
(1) Management Team and Qualifications. [Name your key
people, and give a description of their qualifications to
run this particular business, citing education, overall
business experience, and particularly any successful
experience in a closely-related type of business operation.
Refer the reader to the appendix, if you are including
more detailed resumes of your management team members
in the appendix.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(2) Organizational Structure. [Describe the management
or organizational structure for your firm, and consider
including an organizational chart, similar to the sample
provided below.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
[SAMPLE OF ORGANIZATIONAL CHART]
-------------------
|BOARD OF DIRECTORS |
| (If applicable) |
-------------------
|
|
-------------------
| PRESIDENT / OWNER |
-------------------
|
|
-------------------------------------------------
| | | |
| | | |
-------------- -------------- -------------- --------------
|Vice President||Vice President||Vice President||Vice President|
| FINANCE || MARKETING ||HUM. RESOURCES|| OPERATIONS |
-------------- -------------- -------------- --------------
| | | |
| | | |
| -------------- -------------- --------------
| | Managers || Managers || Managers |
| -------------- -------------- --------------
| | | |
| | | |
| -------------- -------------- --------------
| | Staff || Staff || Staff |
| -------------- -------------- --------------
|
|
----------------------------------------------
| | | |
| | | |
----------- ----------- ----------- -----------
| Manager | | Manager | | Manager | | Manager |
|A/C Receiv.| |A/C Payable| |Gen. Acctng| | Payroll |
----------- ----------- ----------- -----------
| | | |
| | | |
----------- ----------- ----------- -----------
| Staff | | Staff | | Staff | | Staff |
----------- ----------- ------------ ------------
[If appropriate, you may also want to extend the detail
of the chart for major departments such as Marketing, Human
Resources and Operations or Production, as the sample chart
has done for the Finance department.]
(3) Management Responsibilities. [List the management
responsibilities for each of the key people on your team
below.]
President ______________________________________
______________________________________
Vice President ______________________________________
______________________________________
Controller or
V-P Finance ______________________________________
______________________________________
V-P, Marketing ______________________________________
______________________________________
V-P, Operations______________________________________
______________________________________
Human Resources
Director or V-P______________________________________
______________________________________
Other ______________________________________
______________________________________
(4) People/Talent To Be Hired. [Give a description of
any management positions or specific talents your firm
needs to acquire, or positions you will need to fill in
the future, as the company grows. Give your best estimate
as to the number of employees and positions that are needed
in order to effectively operate the business.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(5) Outside Services. [List here any outside professionals
who provide support to your management team, such as CPAs,
attorneys, management or marketing consultants, EDP experts,
pension or financial consultants.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(6) Compensation Summary. [For each member of the management
team, list salary histories and proposed compensation levels.]
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
--------------------------------------------------------
HELP NOTES RE: SEC. 14. BUSINESS PLAN OUTLINE --
MANAGEMENT
--------------------------------------------------------
MANAGEMENT.
[Describe, in this section, your management team, including
the members of your board of directors, if your business
is organized as a corporation. If your firm is not a
corporation, you will not have a board of directors. If it
is a partnership or a limited liability company (LLC), you
may want to describe who some of your partners or LLC
members are, other than members of the management team, if
some of them are key backers of your business, who provide
needed expertise as well as financial backing.
A key part of this management segment will be to set forth
the experience, background, and qualifications of each of
the key members of your management group. If you prefer,
you may choose to include resumes for each key manager in
the appendix, at the end of the business plan document, and
give only a thumbnail sketch here, while referring the reader
to the appendix.
This section should also include an organizational chart
for the company, showing the organizational groupings and
lines of authority. A sample organizational chart is
included in the worksheet document, which you may work
from as an example.
After displaying an organizational chart, give a brief
summary of the responsibilities for each of the top 5 or
6 management functions.
Then outline a needs assessment, if there are gaps in
your management team that you need to fill, and indicate
what steps you have taken to acquire such talent, such as
hiring an executive search firm, candidates whom you have
already located or to whom you plan to make job offers,
or other steps you plan to take to find the required key
personnel. Also look ahead to the future. For example,
if you will be outsourcing your production for the first
two years, but then will begin doing your own in-house
manufacturing at that point, you may need to discuss the
necessity of hiring a production manager at that time.
Not all the skills your firm will need will necessarily
have to come from the ranks of your management team. Most
small or new firms, in particular, rely to a considerable
extent on outside advisers, such as law firms, certified
public accountants, employee benefit consultants, and
a wide range of other types of business and financial
consultants. If you have developed relationships with
such outside talent, such as reputable or prestigious
law firms or accounting firms, this is where you should
emphasize those connections and the availability of such
outside expertise as support for your management team.
Finally, give past (or current) and projected compensation
information for each key person in management. Include
not only basic salaries, but incentive compensation such
as bonus or profit sharing plans, stock options, phantom
stock, or other types of supplementary compensation and
fringe benefit packages. Note that if these numbers are
unrealistically high or low, you will raise troubling
questions in the minds of any readers of the business plan.]
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 15: Business Plan Outline -- Financial Projections and
Line-by-Line Overview of How Financial Statements Work
-------------------------------------------------------------------
G. FINANCIAL PROJECTIONS. [Include here the financial
projections, and any historical financial statements, if
you are already in operation, for the business.]
(1) Profit and Loss Projections.
[These should be on a monthly basis for the first year or
two, and quarterly for subsequent years, in most cases. A
basic outline of annual profit and loss statements would
be as set forth in the samples below. Click on "Help" for
a description of each of the accounting terms used below.
Unless you have substantial training and experience as
an accountant, you will need the assistance of a CPA to
develop the financial forecasts and put them in a proper
format for your type of business. For example, the
sample financial statements in the outline below would
NOT be in the appropriate format for a service business.]
XYZ CORPORATION
Income Statement Forecast [Sample]
For the Years Ended December 31, ____ through ____
(In thousands)
YEAR1 YEAR2 YEAR3 YEAR4 YEAR5
------ ------ ------ ------ ------
Units Sold 500 550 600 720 900
[If applicable]
Income from Operations:
Sales Revenue
Gross Sales 800 880 980 1250 1700
Returns 25 27 30 40 50
Bad Debts 16 18 20 25 34
Discounts given 0 0 0 0 0
-------------------------------------
Net Revenue 759 835 930 1185 1616
Cost of Goods Sold 384 422 470 600 816
(Schedule)
[If applicable]
Gross Profit: 375 413 460 585 800
Operating Expenses
Sales/Marketing 40 45 50 63 85
Operations 48 53 60 75 102
General & Admin. 32 35 40 50 68
Depreciation 40 44 46 47 49
Amortization 13 3 3 3 3
-------------------------------------
Total Operating Exp.: 173 180 199 238 307
-------------------------------------
Net Operating Earnings
Before Interest & Taxes: 202 233 261 347 493
Non-Operating Income
And Expenses:
Interest Income 10 12 11 10 13
Less: Interest Exp. (167) (167) (160) (153) (146)
Less: Loan Fee Amort. (2) (2) (2) (1) (2)
-------------------------------------
Net Pretax Income: 43 76 110 203 358
Income Taxes 10 19 32 74 143
[Assumes 9% state taxes
and fed. corp. rates]
-------------------------------------
Net Income After Taxes: 33 57 78 129 215
[The next two lines would
not be needed, unless, as
this example, the company
is paying dividends on an
issue of preferred stock.]
Less: Preferred Stock
Dividends Paid 10 10 10 10 10
-------------------------------------
Net Income to Common
Shareholders 23 47 68 119 205
=====================================
[You will probably need to attach supporting schedules to
give more details of some of the line items above. For
example, a supporting statement for Cost of Goods Sold,
showing components such as labor, materials, depreciation,
and other factory overhead, as in the following sample
schedule.]
XYZ CORPORATION
Schedule of Cost of Goods Sold [Sample]
For the Year Ended December 31
YEAR1 YEAR2 YEAR3 YEAR4 YEAR5
------ ------ ------ ------ ------
Beginning Inventory 0 85 98 110 130
Add: Direct Labor 214 193 230 290 401
Add: Materials 170 156 160 228 325
Add: Depreciation 31 30 33 37 42
Add: Factory Overhead 54 56 59 65 72
-------------------------------------
Total Costs Incurred 469 520 580 730 970
Less: Ending Inventory 85 98 110 130 154
-------------------------------------
Cost of Goods Sold 384 422 470 600 816
=====================================
[Insert similar detail schedules here for other income and
expense categories, if you wish to show such details in the
business plan. Even if you do not include them, you should
work through and prepare detail schedules for your own use,
to assure that the numbers on your income statement have
been well thought out, and not simply plucked from the air.]
____________________________________________________
____________________________________________________
(2) Pro-Forma Balance Sheets.
[These should show your projected ending financial picture
for each of the periods covered by the P & Ls.]
[Sample balance sheet]
XYZ CORPORATION
Statement of Financial Position Forecast
For the Year Ended December 31
(In thousands)
YEAR1 YEAR2 YEAR3 YEAR4 YEAR5
------ ------ ------ ------ -------
Assets:
Current Assets
Cash 604 658 734 869 831
Accts. Receivable 408 418 429 470 510
Less: Reserve for
bad debts (2%) -8 -8 -9 -9 -10
-------------------------------------
Net Accts. Receiv. 400 410 420 461 500
Inventories 85 98 110 130 154
Prepaid Expenses 15 17 18 20 23
Deposits 10 10 12 12 14
Other 0 5 5 5 7
-------------------------------------
Total Current assets 1110 1198 1299 1497 1529
Fixed Assets
Machinery & Equip. 220 230 250 275 310
Furniture and
Fixtures 155 160 168 180 196
Buildings 700 700 700 700 700
Less: Accum. Dep. -71 -145 -224 -308 -399
Land 100 100 100 100 100
-------------------------------------
Total Fixed Assets 1104 1045 994 947 907
Other Assets
Loan Fees 25 25 25 25 25
Less: Amortization -2 -4 -6 -7 -9
Startup/Org. Costs 55 55 55 55 55
Less: Amortization -13 -16 -19 -22 -25
Miscellaneous Assets 10 27 10 10 10
-------------------------------------
Total Other Assets 75 87 65 61 56
-------------------------------------
Total Assets: 2289 2330 2358 2505 2492
=====================================
Liabilities and Stockholders Equity:
Current Liabilities
Accounts Payable 427 378 399 468 531
Current Portion of
Long-term Debt 60 60 60 60 60
Lines of Credit 100 200 200 220 0
Accrued Interest Pay. 13 12 11 10 9
-------------------------------------
Total Current
Liabilities 600 650 670 758 600
Long Term Debt
Mortgage Payable 290 280 270 260 250
SBA Fixed Loan 900 850 800 750 700
-------------------------------------
Total Long Term Debt 1190 1130 1070 1010 950
-------------------------------------
Total Liabilities: 1790 1780 1740 1768 1550
Stockholders' Equity:
Common Stock 300 300 300 300 300
Preferred Stock 100 100 100 100 100
Paid in Capital in
Excess of Stated 80 80 80 80 80
Value (or Par)
Retained Earnings 23 70 138 257 462
-------------------------------------
Total Stockholders' 503 550 618 737 942
Equity:
-------------------------------------
Total Liabilities and
Stockholders' Equity: 2293 2330 2358 2505 2492
=====================================
[Note that the above balance sheet shows a retained
earnings number that increases by the amount of the
company's net income each year, computed after a $10,000
payment of preferred stock dividends to the holders of
preferred stock. No dividends are paid on the common
stock in this example.]
[You may want to attach supporting schedules to provide
detail on certain of the above numbers, as well as
footnotes regarding the terms and payment schedules of
loans, and other assumptions you are making in creating
these projected financial statements.]
____________________________________________________
____________________________________________________
(3) Cash Flow Projections.
[Show monthly or quarterly and CUMULATIVE pro-forma cash
flows, which should tie into the P & L and balance sheets
for each period covered. You will definitely need some
professional accounting assistance to prepare the statements
of forecasted cash flows, which are somewhat technical and
complex, compared to profit and loss statements and balance
sheets. However, for your guidance, we have included a
statement of cash flows that ties in to the income and
balance sheet statements above.]
[Sample cash flow statement]
XYZ CORPORATION
Statement of Changes in Financial Position Forecast
For the Year Ended December 31
(In thousands)
YEAR1 YEAR2 YEAR3 YEAR4 YEAR5
------ ------ ------ ------ -------
Operating Activities:
Net Income (Loss) 33 57 78 129 215
Adjustments
Add: Depreciation
Operations 40 44 46 47 49
Cost of Goods Sold 31 30 33 37 42
Add: Amortization 15 5 5 4 5
Changes in Operating
Assets and Liabilities
Accounts Receivable (400) (10) (10) (41) (39)
Inventories (85) (13) (12) (20) (24)
Prepaid Expenses (15) (2) (1) (2) (3)
Deposits (10) 0 (2) 0 (2)
Other Assets 0 (5) 0 0 (2)
Accounts Payable 427 (49) 21 69 63
Accrued Interest Pay. 13 (1) (1) (1) (1)
-------------------------------------
Cash Flow from (Used in)
Operating Activities 49 56 157 222 303
Investing Activities:
Purchases-Intangibles (80) 0 0 0 0
Purchases-Real Estate (800) 0 0 0 0
Purchases-Equipment (375) (15) (28) (37) (51)
Purchases-Other Assets (10) (17) 0 0 0
Sales of Assets 0 0 17 0 0
-------------------------------------
Net Cash from (Used in)
Investing Activities (1265) (32) (11) (37) (51)
Financing Activities:
Proceeds from Line
of Credit 100 100 0 20 0
Payments on Line
of Credit 0 0 0 0 (220)
Proceeds from
Mortgage 300 0 0 0 0
Payments on
Mortgage 0 (10) (10) (10) (10)
Proceeds from
SBA Loan 950 0 0 0 0
Payments on
SBA Loan 0 (50) (50) (50) (50)
Proceeds from Issuance
of Common Stock 380 0 0 0 0
Proceeds from Issuance
of Preferred Stock 100 0 0 0 0
Dividends (10) (10) (10) (10) (10)
-------------------------------------
Net Cash from (Used in)
Financing Activities 1820 30 (70) (50) (290)
-------------------------------------
Net Increase in Cash 604 54 76 135 (38)
Beginning Cash 0 604 658 734 869
-------------------------------------
Ending Cash 604 658 734 869 831
Minimum Cash Required 525 550 550 575 600
-------------------------------------
Excess (Shortage) of
Cash Balance Needed 79 108 184 294 231
-------------------------------------
Borrowings Required 0 0 0 0 0
=====================================
[Include any detail schedules or explanations below,
including any footnotes to this statement you need to
include to clarify any of the information it contains.]
____________________________________________________
____________________________________________________
(4) Break-Even Analysis.
[In chart form or otherwise, show the level of sales you
will need each year in order to break even for that
period.]
____________________________________________________
____________________________________________________
(5) Acquisition Schedule for Fixed Assets. [Spell out
when you will acquire fixed assets, such as building,
land, machinery and equipment, transportation equipment,
and furniture and fixtures, and the anticipated dates by
which you plan to acquire each significant item. Also
include the date the items will be placed in service, if
later, which is the date that depreciation begins, for
income tax purposes.
This is an optional item, which you may choose not to
include, in the interests of brevity. A sample of such
a schedule is provided below.]
XYZ CORPORATION
Acquisition Schedule for Fixed Assets [Sample]
DATE OF DESCRIPTION OF PURCHASE DATE PLACED
ACQUISITION ASSET ACQUIRED PRICE IN SERVICE
------------ --------------- --------- ------------
10/01/1999 FACTORY BUILDING 400,000 11/01/1999
____________ _______________ _________ ____________
____________ _______________ _________ ____________
____________ _______________ _________ ____________
____________ _______________ _________ ____________
--------------------------------------------------------
HELP NOTES RE: SEC. 15. BUSINESS PLAN OUTLINE --
FINANCIAL PROJECTIONS AND
LINE-BY-LINE OVERVIEW OF
HOW FINANCIAL STATEMENTS WORK
--------------------------------------------------------
FINANCIAL PROJECTIONS. This is the "bottom line" portion
of your business plan, and is thus of key importance.
Unlike most of the other portions of the document you are
creating, you will probably not be able to prepare this
part alone, without professional help from your CPA or
another person with significant "hands-on" experience in
accounting. However, you will need to be closely involved
with developing the forecast numbers, and will rely on
your accountant primarily to help you put the numbers in a
format that is proper and appropriate for your particular
type of business. There is no one standard form of any
financial statement that can be used for all kinds of
businesses. Every business, whether it be retail,
manufacturing, service, or other, will have a slightly
different financial statement format, which your CPA or
other accounting expert will have to help tailor for you.
Accounting is a very technical field, and while you don't
need to be an accountant to run a successful small business,
you will definitely need to become familiar with basic
accounting concepts and how to read and understand financial
statements. While preparing financial statements on a
regular (say monthly) basis may seem like an unnecessary
and burdensome exercise when you are trying to keep the
business afloat and creditors at bay, the truth is that you
will not get very far "flying blind"--which is how you will
be running your business if you don't generate and analyze
financial statements for your own use on a frequent basis.
Flying by the seat of your pants and assuming that all is
well, so long as you have a certain amount in your bank
account, is a recipe for disaster. Going through the regular
discipline of preparing financial statements will give you
an understanding of how the business is doing, what things
are out of line financially and need to be fixed, and how
to plan for next month and next year and beyond.
As in politics, money, or cash flow, is the "mother's milk"
of business, and you must always keep a particularly good
handle on how your cash flows are going. If you are able
to project a cash flow shortfall well in advance, you may
be able to either make changes to avert it, or take steps
to obtain financing to cover it, if it is just a temporary
crunch. On the other hand, if you let it blind side you,
it will probably be too late to do anything about it when
you wake up one day and find the bank account is down to
zero and you have payroll to make, and suppliers insisting
on payment of outstanding balances before they will ship
any more goods to you--which is the point at which many
businesses have to close their doors, and belly up.
Doing and carefully analyzing your financial statements
will also show you where there are problems or opportunities
that need to be addressed. For example, if you have a
line of bank credit and are borrowing at 10%, but see that
you are building up much more working capital than you need
for the foreseeable future, and are only earning 4% or so
on short-term investments with the excess cash, that may
prompt you to pay down a good portion of the line of credit
temporarily and save the 6% spread you are paying on the
unneeded borrowing. Or you might see from your income
statements that some expense item, such as for raw materials,
has suddenly gotten out of proportion, which may alert you
to the fact that your new production manager is doing a poor
job of running the machinery, so that an unacceptably high
percentage of the raw materials you are buying is going
out the back door as waste or scrap -- or is simply
disappearing.
In short, doing frequent financial statements, perhaps even
on a weekly or daily basis, if you have a good computerized
accounting system, is an absolute necessity, if you want
to understand what is going on in your business. As a
business owner or manager, it is, therefore, going to be
important for you to learn about the basics of business
accounting, so you can get the most out of the financial
statements you or your accounting people will prepare.
Some things you might want to consider to improve your
knowledge of accounting would include the following:
. Take a few management accounting courses at night
school, at a local community college.
. Spend some time with your accounting advisor, such as
a CPA, asking for help in understanding accounting
concepts and interpreting financial statements. Don't
be afraid to pick up the phone and call your accountant
if there is something you don't understand. Talking
to your accountant may cost you a few dollars, but not
understanding what is going on may cost you far more.
. Buy one or two reference books on financial and cost
accounting from a bookstore, or check them out from
a nearby library. You may also want to spend some time
in the business section of a bookstore, looking at some
of the trade paperbacks on business accounting, which
may be easier to read and put to use than the standard
accounting textbooks.
Note that you will probably be most interested first in
financial accounting, which deals with the basic financial
statements that are mentioned in this business plan, and
is concerned with presenting overall financial results.
Cost accounting is much more complex, almost like a cross
between accounting and engineering, and is usually most
important in a large manufacturing operation, where a
great deal of time and effort is put into "capturing" the
actual costs of every step and detail of the production
process, where finding a way to save a penny or two on
some small procedure may result in huge dollar savings.
Many small companies get along quite well for years without
a formal cost accounting system, although even the smallest
manufacturer will need to at least use some kind of
informal costing system to determine how it will manage
production and how to price its product.
In preparing the projected (and possibly historical)
financial statements for inclusion in this business plan,
the following discussion should help you to understand
the purpose of each statement and some of the basic
accounting terminology.
- TYPES OF FINANCIAL STATEMENTS. The primary financial
statements you will need to include in any business
plan are the three main ones:
. Income statement (or profit and loss statement)
. Statement of financial position (balance sheet)
. Statement of changes in financial position or cash
flows (cash flow statement)
Other, less critical statements you may also want to
include would be a schedule of costs of goods sold, a
breakeven analysis and, optionally, an acquisition
schedule for fixed assets.
Note that the sample income and balance sheet statements
we have provided in the business plan worksheet outline
are FORECASTS of expected results, as opposed to examples
of actual historical statements. This is a critical
part of any business plan, as the forecasts shown in
these two statements and in the cash flow statements
(the latter of which we have not included in the outline)
are the key numbers that should tell how well your
company will do, and whether and when it will be able to
pay off loans or to cash out investors.
However, if yours is an existing business, which has an
operating history, you will also need to include copies
of the actual financial statements for your company
up to the present time. Preferably, these should be
statements that have either been compiled, reviewed, or
audited by an independent CPA firm, rather than financial
statements you have simply done by yourself, without any
type of attestation by a certified public accounting
firm. Since you may not be familiar with "compiled,"
"reviewed," or "audited" financial statements, these
three levels of verification or attestation by auditors
plus a new fourth level, "assembly" statements (which
you may not use with your business plan) are described,
in non-technical terms, as follows:
. "Audited" financial statements are the most credible,
as they require extensive testing and verification
by the CPA before they will issue an auditor's
opinion that your financial statements fairly reflect
your firm's operations and financial condition,
in accordance with generally accepted accounting
principles ("GAAP") and generally accepted auditing
standards. This does not mean that the CPA has
"audited" or checked all the details behind every
single number. It merely means that they have done a
statistically acceptable amount of random testing of
your accounts, and an examination of the efficacy of
your internal financial controls to satisfy themselves
that the numbers as a whole are substantially correct.
However, most small firms do not ask their accounting
firm to help them issue audited statements, since the
accounting fees for audits are often prohibitively
expensive.
. "Compilation" statements are the least expensive
kind of statements a CPA firm will sign its name to.
In the case of a compilation, the attached opinion by
the CPA firm will indicate that it has NOT audited
the statements and does not vouch for their accuracy,
but has merely compiled the statements in a proper
accounting format from information provided by the
company, and that the CPA has not become aware of
any incorrect or misleading information contained in
the statements. In short, the auditors are saying
that they haven't done any audit or testing of the
financial records, and are giving only a half-hearted
blessing to the FORM of the statements, not their
accuracy.
Thus, compilation statements provide the least amount
of assurance to a reader of the financial statements,
but are still likely to be given more respect than
statements you have prepared on your own, with no kind
of certification by an outside CPA firm. However, in
many cases, compilation statements are often quite
adequate, as a practical matter, for a small firm.
. "Review" statements provide an intermediate level of
assurance. They involve more analytical work by the
CPA firm than compilation statements, but come nowhere
near the level of investigation that is involved in a
full-blown audit. As such, a review usually costs
less to perform than an audit, but more than a mere
compilation.
. "Assembly" statements, which are also sometimes called
"management use only" or "plain paper" financial
statements, are a new level of service, introduced in
the accounting profession after the year 2000 by SSARS 8.
While each of the other levels of service includes a
report signed by the accountant, describing the level
of service provided, this level of service permits the
accountant to submit financial statements without an
attached report, if third parties (lenders, investors,
etc.) are not reasonably expected to use the financial
statements.
Assembly statements are basically statements that your
accountant prepares for your use only, within your
company, and thus do not involve any auditing or other
verification of the accounting data you submit to the
accountant. The accountant merely takes your information
and puts it in a useful financial statement format for
you, and gives you the statements. SSARS 8 requires the
accountant who provides this level of service to obtain
a signed engagement letter from you, the client, which
specifies the nature and limitations of the services to
be performed, noting that the financial statements may
make material departures from GAAP, and must include your
acknowledgement and agreement that the financial statements
they have prepared for you are never to be used by or
presented to third parties outside your firm. (Thus, you
cannot use "assembly" statements as an attachment to
your business plan document, since such statements are
not to be presented to third parties.)
Your accountant or financial consultant will probably
be the best person to consult as to the level of
assurance -- audit, review, or compilation -- you
are likely to need for financial statements for your
particular company, in connection with preparing the
business plan. Note that in each case, the financial
statements are prepared by you, and, in theory at
least, the auditor is merely expressing (or not
expressing) an opinion on their correctness. Also
remember that audit, review, and compilation statements
have to do only with actual financial statements for a
going concern. These concepts do not have anything to
do with the projected or forecasted statements you will
include in your business plan. While you will very
likely need the help of a CPA in preparing forecasted
statements in a proper format, the CPA will not attach
an audit, review, or compilation opinion to the
forecasts, only to your historical financial statements,
if any.
Each of the several forecasted financial statements
that you should include in the business plan is
discussed individually below.
- INCOME STATEMENT. The income, or profit and loss,
statement, tells the reader what sales the business
has generated (or in the case of these forecasted
statements, what sales are projected to be) for each
financial period. It also shows what expenses are
expected to be incurred, and the amount of the
resulting net income or loss before taxes, the amount
of any taxes, and the resulting net income after taxes.
While our example shows yearly numbers, you may want
to provide more detailed monthly projections, at least
for the first one or two years of the period you are
covering, and perhaps quarterly statements after that.
Our example also shows a projection of units sold,
which is not dollar amount, but an estimate of the
number of units of whatever you make that you expect
to sell, at the prices you have calculated previously
in this business plan. You may not include the units
sold number if it is not a relevant item, such as for
a service business, or a retail store that sells a
wide range of items at widely varying prices. The
"units sold" line item would usually be shown only if
you are essentially selling one kind of item, such as
an auto dealership, selling Ferraris.
. Gross sales (or gross revenues). This is the total
dollar amount of revenues your company will generate
for each period, before any reductions, such as
for returned merchandise or refunds, or early payment
discounts earned by customers. (Companies will
sometimes offer customers a prompt payment discount
of 1% or 2% if the customer pays their invoice quickly,
such as within 10 days.)
Some companies may have revenues from sales of goods,
as well as service income, such as an appliance dealer
that sells appliances, but also has a repair and
service department. In such a case, you would
ordinarily break out the two income categories as
separate line items, as those represent different
kinds of income. You will need to consult your CPA
or other financial professional as to the best way
to present such other types of income, if you are in
different lines of business.
. Returns. This would be any type of refund to customers
for damaged goods, or if you refund an unhappy buyer's
money, or if you accept returns of unsold items from
your wholesale or retail distributors.
. Bad debts. When you ship goods to a customer, you will
generally "book" a sale at that time, even if the sale
is made on credit, and you do not expect to be paid for
some time, such as 30 days or more. Occasionally, you
will find that some customers don't pay at all, and
you may be unable to collect. These bad debts are an
expense that is often offset against gross sales.
. Discounts given. As noted above, your company may
offer early payment discounts to customers who pay
quickly. In our example, this number is zero, because
we are assuming that the company policy is not to
offer any such discounts. Some companies do, others
do not.
. Net revenue (or net sales). This number simply
represents the gross sales of the business, less
certain items like the above -- returns, bad debts,
and discounts given.
. Cost of goods sold. This number will only appear
if you are selling some type of goods, ordinarily,
either as a manufacturer or as a wholesaler or
retailer. However, some service businesses will
use a similar concept, perhaps called "cost of
sales," or the like. This will have to be tailored
to reflect the type of business you are in, to be
in line with accounting practices in your particular
industry. Consult your accountant on this item.
We have listed cost of goods sold as a single line
item. You may want to have several sub-categories
as additional line items that make up the total
of cost of goods sold, or else refer to an attached
schedule which summarizes the details of the cost
of goods sold number for each period. The basic
components of cost of goods sold, in a typical
manufacturing operation, might be as follows:
- Beginning inventory. This is a starting number,
the value (at lower of cost or market value,
generally) of the inventory of goods you had on
had at the start of the year (or other period
which the income statement covers, such as a
quarter or month). To this will be added the
costs incurred during the year, such as raw
materials, labor and overhead, as listed below.
- Raw materials cost. This would include all of the
materials you buy that go into the process of making
your product. "Freight in" will either be part of
this cost or broken out as a separate line item, to
reflect the shipping costs you pay to bring such
materials in to your factory.
- Direct labor costs. This includes the amount of
labor costs that are directly related to each
unit of production, such as salaries and fringe
benefits of assembly line workers.
- Fixed overhead. This includes expenses of
production that are relatively fixed, such as
building rent for a factory building, and which
don't vary in proportion to how many units you
produce. (In the short run, at least -- in
the long run, if your production level needs to
increase beyond a certain level, you will need
to either expand your facilities or build a new
factory, for example. But in the short run,
your factory rent will usually stay about the
same, even if your production drops off from
running at full capacity to near zero.) Other
overhead items would include indirect labor, such
as the salaries of production managers, and items
such as property taxes, facility maintenance costs,
depreciation of factory buildings and production
equipment, and fire and casualty insurance, all
of which will also tend to be relatively fixed,
without regard to how many units are produced in
the factory during a particular month or year.
- Ending inventory. After adding together the cost
of your beginning inventory and all the above
production costs, you must back out (subtract) the
value of the ending inventory, to arrive at your
net cost of goods sold. The reason for this is
that, assuming for simplicity that your beginning
inventory is zero and you have incurred $500,000
of costs to create product during the year, your
cost of goods sold will only be $400,000 if you
still have $100,000 of unsold goods in inventory
at the end of the year. Since those are valuable
assets, which you should be able to sell in the
following year, only the $400,000 of costs that
are associated with the goods you have actually
sold this past year should be considered an expense,
or cost of goods sold.
. Gross profit (or gross margin). This number is the
difference between your net sales, and what it cost
you to produce the goods you sold, i.e., the cost of
goods sold. This will always be a positive number,
unless your company is in dire condition and on
its way to instant bankruptcy, because the gross
profit is your profit calculated BEFORE any other,
non-production, costs of the business, such as
selling expenses, general and administrative costs,
interest expense on indebtedness and the like.
Next, we consider those other operating (and
non-operating) expenses.
. Operating expenses. These would include expenses
that don't directly relate to the production of your
product, but which are still necessary to the operation
of your business. These cover a wide range of expenses
such as sales and marketing costs, and general and
administrative costs. These will typically range
from executive salaries to accounting and finance
department costs, office expenses not related to
production, human resources department costs, outside
services such as law and accounting fees, miscellaneous
business licenses and taxes, depreciation costs of
office buildings and office equipment, and amortization
of certain intangible costs, such as capitalized
startup costs. In our sample income statements, we
show startup costs as being $55,000, or which $5,000
are costs of incorporating. These organization costs
and startup costs are both deducted and/or amortized in
accordance with new 2004 tax legislation. See Chapter
13, Section 13.3 of this book for details on how such
costs are allowed to be written off after the 2004 act.
Interest on loans may sometimes be categorized here
as an operating cost, or may be partly shown as an
item of non-operating expense, depending on what the
interest expense relates to.
. Net operating income. This number is the net amount
derived by subtracting the total operating expenses
from the gross profit number. It may well be a loss,
rather than a profit, even though it is usually
computed before taking into account interest expense
(or interest income).
. Non-operating income (and expenses). This section of
the income statement has to do with expenses that are
associated more with the way the business is financed,
rather than its day-to-day operations, and any income
that is not earned by the business operations, but
from passive investments, such as interest or dividends
earned on investments. Interest expense on debts is
often the main non-operating expense item on the
income statement.
. Net pretax income. This is the figure arrived at by
adding the net operating income (or loss) to the net
non-operating income (or loss). In short, this is
the almost-bottom-line number that takes into account
all income and expenses, except income taxes.
. Income taxes. Self-explanatory. This is the total
state, local and federal income tax liability that
applies to the net pretax income. We have used a
simple example, assuming a flat 9% state income tax
rate, reducing the pretax income tax by that amount,
and then calculating federal corporation income tax
on the balance at current year tax rates. While
this may be good enough for financial projections in
a business plan, you should be aware that in creating
real financial statements for actual historical
results for your company, the computation of the
income tax number is horrifically complex. For
example, the tax may be a negative number, if your
company has a tax loss and can carry the loss to
another tax year and offset the other year tax
liability. Or your firm may be taking accelerated
depreciation and other rapid write-offs for tax
purposes, but not on your financial statements, so
that you may show a profit on your income statement
but a loss for the year on your tax returns. In that
case, no actual tax payment is required, but your CPA
will still require you to compute a "tax provision,"
as though you had to pay tax on the "book income"
rather than on the "taxable income." Tomes have been
written on this subject, so suffice it to say that
the income tax calculation is not nearly as simple as
we have shown it in our sample income statement. To
do real financial statements, you will definitely
need a good CPA to compute the proper "tax provision"
each year, although you may be able to get away with
taking the simpler approach in your projected income
statements.
. Net income after taxes. This is ordinarily the
bottom line, the company's net income after
subtracting out (or even adding back, in the case
of a pretax loss, in some instances) an income tax
expense provision. However, in our example, we
have shown a somewhat atypical situation, one in
which the company has issued $100,000 par value of
10% preferred stock, so that it pays out a $10,000 a
year dividend to the preferred stockholders. Thus
we have added a "bottom-bottom" line in our example,
as noted below.
. Net income to common shareholders. Ordinarily, this
line item would not appear, as it would be the same
as net income after taxes, the item described in the
preceding paragraph. However, for illustrative
purposes, we have assumed in our example that the
company has raised or will raise $100,000 of capital
by issuance of preferred stock, in addition to its
issuance of common stock, and that it will be paying
$10,000 a year in cash dividends to the holders of
the preferred stock. This amount is not really an
"expense" of the corporation, but it still represents
money that must be paid out, and which doesn't go
into retained earnings of the company for the benefit
of the common shareholders, so we have included a
separate line item for the net-net income that is
accumulated on behalf of the common shareholders,
after payment of the preferred stock dividends.
"Preferred stock" is a kind of stock that a company
may issue, in addition to its common stock. Preferred
stock can have a great variety of forms, and may even
be convertible into common stock, at the holder's option.
However, its usual key features are that it pays a
fixed dividend to shareholders, somewhat like a bond or
debt security, and that the preferred shareholders get
first call on the company's earnings for this dividend,
before any dividends can be paid out to the common
stockholders. Thus, if the preferred stock dividend
takes all of the year's net income of the corporation,
there may be no income that can be paid out as dividends
on the common stock. Also, when a corporation is
liquidated, the preferred stock is "senior" to the
common stock, but is limited to the amount of the
"par value" of the preferred stock. Assuming in our
example that the preferred stock has a par value of
$100,000, and that is what it was issued for, then,
if the corporation is liquidated, and has only $120,000
remaining after paying off all its debts, the preferred
stockholders would get their $100,000 first, and the
common stockholders would get only what was left. Or,
if the net assets had grown to $10 million, the preferred
stock owners would still only get their $100,000 back,
while the common stockholders would get the rest, or
$9.9 million in that example.
Again, you aren't likely to see the final two line
items we have included on our sample of a projected
income statement, in most financial statements.
However, since preferred stock is being used more and
more in venture capital settings, it does appear from
time to time, and this is how you would reflect that
fact if you were planning to issue preferred stock as
part of your corporation's financing. Thus, for a
typical company with no preferred stock, you would
not need the last two line items shown on our sample
income statement.
- BALANCE SHEET. This statement, now generally called a
statement of financial position, can be thought of as a
summary of what your company owns and what it owes.
While the income statement measures the income and
outflows and the resulting net income or loss over a
period of time, the balance sheet is like a snapshot
that measures where the company stands at the end of
that same period. Thus, our sample forecasted balance
sheets are for each of the same five years covered by
the sample income statement forecasts, and each shows
the projected financial condition of the company at the
end of each such income period.
The following paragraphs discuss in layman's terms what
each of the line items on the sample balance sheet is
intended to represent, as well as an overview of the
nature of balance sheets, and what you can learn from
looking at a company's balance sheet.
. Overview. Generally, a balance sheet has two main
parts: the assets section, and the liabilities and
stockholders' equity section. The sum of all the
assets must always be equal to the sum of all the
liabilities and the stockholders' equity section.
That is, these two sides of the balance sheet must
always "balance," hence the name given to this
financial statement. Note that unincorporated
businesses will not have a "stockholders' equity"
section, but will have a similar section, which may
be titled "proprietor's equity" for a sole proprietor,
"partners' equity" for a partnership, or "members'
equity" for a limited liability company, or somewhat
similar descriptions. Each of these terms refers,
essentially, to the "equity" or residual capital of a
company, corporate or otherwise -- that is, to the
"residue" that is theoretically left over if all the
liabilities are paid off from the total assets of the
business. The "equity" capital is what is left.
Another way of looking at the balance sheet is
that:
Assets - Liabilities = Stockholders' Equity.
That is, the stockholders' equity is whatever is
left after subtracting the liabilities from the
assets. And if liabilities are greater than assets,
then the stockholders' equity number will then be a
negative number, which usually, but not always, means
the company is in deep financial trouble.
Remember, however, that the way accounting is done,
the numbers on a balance sheet represent historical
costs, in general, rather than actual values. For
example, if a company has only two assets, a fully
depreciated building that cost $100,000 and now has
a net cost of zero, after depreciation, plus land that
cost $10,000 originally, and owes a $200,000 mortgage,
as its only liability, it will have total assets of
$10,000 and a liability of $200,000, so that its
balance sheet would show a negative stockholders'
equity of some $190,000, as in this simple balance
sheet summary:
Assets: Liabilities and Equity:
------- -----------------------
Building 100,000 Liabilities:
Less: Deprec. -100,000 Mortgage Payable 200,000
Land 10,000 Stockholders'
Equity -190,000
-------- --------
Total Assets: 10,000 Total Liab. & Eq.: 10,000
======== ========
Looks terrible, does it not? $200,000 of debt, and
only a pitiful $10,000 of assets? But remember, those
are HISTORICAL COST numbers, not what the building or
land is necessarily worth today. Suppose the building
and land were purchased for $100,000 and $10,000,
respectively in 1950. Thus, they might be worth a
million dollars in total today. With a mortgage of
only $200,000, this company would have a very healthy
balance sheet, if you knew the real values of its
assets, despite the ugly numbers that show it has
a deficit in net worth of $190,000. Its REAL net
worth, ignoring the strict accounting conventions that
don't let you "write-up" the value of appreciated,
assets (in most cases), would be more like $800,000,
wouldn't it?
Thus, in learning to read balance sheets, one key
thing to always keep in mind is that the numbers in
them represent historical costs of assets, NOT their
current fair market values, generally speaking.
The actual values of those assets may bear little
resemblance to the balance sheet amounts, except for
current assets. (However, liabilities, if a balance
sheet has been prepared by reputable accountants,
usually should closely reflect the actual amount of
the company's liabilities. Most of the "play" in the
numbers is usually on the assets side of the ledger.)
Accordingly, just because a balance sheet seems to
indicate a company has deficit in net worth (in its
stockholders' equity), that is not necessarily a
problem, if the assets are worth a lot more than
they are "on the books" for, as in our illustration
in the preceding paragraphs. However, a deficit in
stockholders' equity is definitely a warning light
that you should not ignore, an indication that the
company may be in precarious financial condition.
By the same token, if you are looking at a balance
sheet that shows a company has a large amount of
stockholders' equity (net worth), that can also be
misleading, if the company has assets on its books
that are not worth nearly as much as they are listed
at, at cost, on the balance sheet. However, if you
are looking at an audited balance sheet, many kinds of
items, like questionable receivables or hard-to-sell
inventory, should have already been "written down" to
their approximate actual values. Accounting principles
often require that assets that decline in value be
written down to their real values, but rarely allow
you to "write-up" (upwardly adjust) the values of any
assets that have increased in value. However, like
any set of exceptionally complex rules, accounting
rules are full of loopholes, and people, even good
accountants, make honest mistakes, so an apparently
strong balance sheet may nevertheless conceal some
badly overvalued assets.
With those general concepts in mind, let's now look
at the individual line items on our sample forecasted
balance sheets, to see what they mean.
. Assets. The first half of the balance sheet equation
is the listing of all of a company's assets, at their
historical costs, in most cases. (Inventory is usually
written down to the lower of its cost or fair market
value, however, and receivables will usually be offset
in part by a reserve for bad debts.) Where an asset,
like a building or equipment, is subject to depreciation,
the cost is written off in small increments over a
number of years, over its expected useful life. Thus,
when you buy a building for $390,000, you do not write
off its $390,000 cost as an expense in the year you
buy it, but may instead write it off ("depreciate" it)
at $10,000 a year for 39 years, for tax purposes. You
may depreciate it at the same rate for financial
purposes, or at a faster or slower rate, which can
lead to much more complicated accounting for the
book/tax differences.
On the balance sheet, the usual way to show depreciable
items is at their original cost, with a separate line
item for "accumulated depreciation," which is a negative
number that shows all the depreciation deductions you
have taken over the years, to date, on the depreciable
assets. Certain "amortizable" assets, which are
intangible assets, such as organization costs or startup
costs of a business, or assets like trademarks or
copyrights, are usually, but not always, shown in a
similar fashion, like depreciable assets. That is, you
may list the original cost of the "amortizable" asset,
with another line item below it (a negative number),
showing the total accumulated "amortization" that has
been written off to date.
. Current assets. The first part of the "assets" side
of the balance sheet is always the "current assets"
section. In this section of the balance sheet you
should list all of the current, or liquid, assets of
the business, such as cash or assets that can be
expected to quickly be turned into cash, in the next
year. These include:
- Cash. Actual cash on hand, plus bank account
balances.
- Accounts receivable. These are amounts owed to you
by customers, for sales you have made to them on
credit, which are supposed to be paid immediately
or within one year. If you are selling something
like houses or lots, and taking back long-term
installment notes, those would be considered as
long-term notes, appearing elsewhere than under
the accounts receivable section.
- Reserve for bad debts. When you sell goods or
services on credit, not all of your customers will
pay you all they owe you. Thus, it is usually
necessary to set up a "reserve" for bad debts,
which is simply an estimate of what percentage of
the accounts receivable that are owed to you at
the end of the year are likely to go uncollected,
based on historical experience of your business,
or your industry, and other factors. In our
sample balance sheet, we have assumed that 2% of
the ending accounts receivable balance for each
year will go uncollected. (Notice that these
numbers are not the same as the bad debt expense
in the income statements. That is because the
income statements show actual bad debt expenses
for each year, and since accounts receivable
may turn over several times a year, the total
expense may be much more than the year-end
reserve.)
- Net accounts receivable. This line item is the total
accounts receivable amount, reduced by the amount of
the reserve for bad debts (also known as a reserve
for uncollectible accounts).
- Inventories. This would include the ending value
of your products held in inventory, based on the
lower of their actual costs or market value. This
section might also include other types of inventories
than your finished goods inventories. For example,
if you are a manufacturer, you might also have
raw materials inventories of raw materials that you
have acquired but not yet used in the manufacturing
process, or work-in-process inventories, for goods
that are only partially processed or partially
completed. Retailers would usually just have
inventories of the goods purchased for resale, by
contrast, and service firms usually do not have
inventories.
- Prepaid expenses. These are simply expenses that
have been prepaid, for a period beyond the end of
the balance sheet date. For example, if you pay
your annual fire insurance on July 1, and the
balance sheet is for a year ended December 31, only
half of the July insurance premium payment will
have been taken as an expense for the current year.
The other half is a prepayment for the first six
months of the following year, so you "capitalize"
the part that hasn't been expensed this year, by
putting it on the balance sheet as a current asset.
- Deposits. These would be items like utility deposits,
or deposits required in connection with a lease or
purchase of property, which represents money you will
be entitled to get back at some time in the future,
or can be used to offset some future expense, like
a purchase of a building, when you have made a
deposit in escrow, but haven't closed the deal yet.
- Other. This would include miscellaneous other kinds
of current assets which could be turned into cash
within the next year, such as investments in marketable
securities, which you could easily sell on short
notice.
- Total current assets. This is the sum of all the
above categories of current assets.
. Fixed assets. This section of the assets side of the
balance sheet is where you list the long term productive
assets of the business, such as land, buildings,
machinery and equipment, and office furniture and
fixtures. Most of these assets, except land, are
usually depreciable assets, written off bit by bit,
year by year, in the form of annual depreciation
deductions, so they are usually shown at their
original cost, with a separate line item (a negative
amount) showing the amount of accumulated depreciation
expenses that have been taken against the original
cost from the time of purchase until the present.
Land is not depreciated or expensed, so it usually
stays on the balance sheet at the same value, year
after year, with few exceptions, until it is sold.
However, certain land improvements may occasionally
be treated as having a limited useful life, and thus
be depreciated over a number of years. This might
include costs for grading, bulkheads, or similar
expense outlays.
. Other assets. This is a catch-all category, where
you would list all other assets that are not either
"current" or "fixed" assets. These might include:
- Loan fees. In our example, we have assumed the firm
had to pay loan fees of about $25,000 on roughly
$1.25 million of loans it took out in the first
year. Since these costs are expensed by amortizing
or spreading them over the period of years the
loans are outstanding, the loan fee is set up on
the books as an asset and written off over the loan
term. Thus the balance declines each year.
- Startup costs. We have lumped together two items
here, although you might want to show them separately:
the organization costs for the corporation, such as
legal fees and incorporation filing fees, as well as
business startup (pre-opening) costs. The IRS tax
rules allow up to $5,000 each of these two cost
categories to be expensed in the year the business
starts (assuming neither such category exceeds $50,000),
and the balance to be capitalized and amortized over
15 years. In our example, the full $55,000 is shown as
a capitalized asset, but all $5,000 of the organization
costs and $5,000 of the $50,000 of startup costs are
written off in the first year. In addition, of the
$45,000 of startup costs that must be amortized over
15 years, we show amortization of $3,000 a year.
Treating the first year write-off as additional
amortization, the first-year amortization total for
both cost categories is $13,000, and each subsequent
year shows a $3,000 amortization. (We are assuming
that the first year was a full year of 12 months of
doing business). Note that this ties to the
amortization expense shown each year under the
"operating expenses" section of our income statement
example. On the cash flow statement, the line item
for amortization includes this amount plus loan fee
amortization.
- Miscellaneous assets. This would include any other
assets that do not fall into any other category,
such as long term investments in stocks or bonds,
which are not intended to be sold in the next year.
. Liabilities and stockholders' equity. This is the
"right-hand" side of the balance sheet, in traditional
accounting parlance (or the "side towards the window"
as some bookkeepers used to try to remember it). It
consists of two main parts--the liabilities section,
and the residual or stockholders' equity section.
(As noted above, the stockholders' equity section will
be called something else for a non-corporate business,
such as "partners' equity" for a partnership.)
. Liabilities section. This section is usually broken
down into two sub-sections, one for current liabilities
and one for long term debt.
- Current liabilities. This section should list all
debts which the company currently owes and which it
must pay in the next year. These include accounts
payable owed to trade creditors, any short-term
debts, such as a line of credit that may called in
for payment by the bank on demand, and the short
term portion of any long term debts -- that is, the
principal payments on a long term debt that must be
paid during the next year. Other current liabilities
would include accrued interest on debts, which we
have listed as an example, and other types of accrued
expenses, which we have not listed, such as income
taxes that the company owes, but will not pay until
the following year.
- Long term debt. This category includes any kinds of
debts that will be paid off at some date more than a
year in the future, such as a long term bank or SBA
loan, or a mortgage on a building.
- Total liabilities. This line item is merely the sum
of the two above categories, and represents the total
of all claims or indebtedness against the company.
Some obligations, like potential damages that might
be owed in a lawsuit, may have to be estimated, or
perhaps just mentioned in a footnote without listing
them, in formal financial statements, and a certain
amount of guesswork will be involved in deciding, if
they are listed as liabilities, whether they are
current or long term liabilities.
. Stockholders' equity section. This section represents
the residual ownership of the corporate assets, after
all liabilities have been deducted from total assets.
In theory, at least, since, as previously noted, the
accounting numbers for assets do not usually reflect
actual values, only the historical costs of the assets.
Thus, if the stockholders' equity on the balance sheet
is $2.473 million, as shown at the end of five years
in our sample balance sheet, that does not mean that
their ownership interest in the company will actually
be worth that amount. The actual value of their stock
might be worth much more, or much less.
The stockholders' equity section is usually divided
into at least two or three segments, including the
common stock, usually "paid-in capital in excess of
par," and retained earnings (which may be a negative
number). If there is also preferred stock, or more
than one class of common stock, there will be a
separate line item for each class of stock usually.
There may even be other odd equity securities, such
as stock warrants, which the company has issued, which
would also show up as line items in this part of the
balance sheet. Let's look at the line items in the
stockholders' equity section of our sample balance
sheet:
- Common stock. This is simply an amount showing how
much money or property was paid in by common stock
owners when the company issued its common stock.
Depending on state law for the state of incorporation,
stock will usually have either a "par value" or a
"stated value" per share when it is issued. These
par value and stated value concepts don't have much
meaning in the modern world, except that some states
base their corporation franchise taxes on the amount
of a corporations par value or stated value of stock
issued. From a business standpoint, par and stated
value are largely meaningless otherwise, however,
except that it is usually illegal for a corporation
to issue stock for less than its stated or par value.
(Which may be a penny a share, so that is usually
not much of a concern.) Par value may also be
a limit on the ability of a company to pay out
dividends, if there are no retained earnings from
which dividends can be paid or, in some cases,
no excess paid in capital. Again, par values are
usually set so low that this is rarely a real-world
problem.
Common stock is the residual ownership of the
corporation. That is, common stock owners have the
right to all the upside if the corporation does
well (creditors and preferred stockholders usually
only earn a fixed rate of interest or preferred
stock dividend payments). On the other hand, the
common stockholder is last in line in bankruptcy
court, or even if the corporation is solvent, last
in line if the corporation is liquidated. Creditors
will have first claim on the assets in liquidation
or in bankruptcy. If any assets are left after all
the debts are paid, the preferred stockholders may
then receive up to the par value of their preferred
stock. Then, and only then, if there are still
any remaining assets, do the common stockholders
get whatever is left, which may either be nothing,
a little, or a lot.
When looking at company balance sheets, you may
occasionally see a negative amount under common
stock in this section, usually under a separate
line item called "treasury stock." All that means
is, that at some point in its past, the company
has repurchased some of its common stock, and
instead of "retiring" the stock, has decided to
keep it as "treasury stock" which it may resell
to some other investor in the future. Thus, instead
of simply reducing the amount of its common stock
account when it bought back its own stock, and
showing that as a net number, the original common
stock number is left unchanged, but after subtracting
the separate account balance for the "treasury
stock," the net amount of common stock is still the
same. As a practical matter, treasury stock is
very nearly a meaningless concept, much like par
value, so it is not something that you need more
than a passing acquaintance with. It is more of
an accounting convention, or method of presentation,
than anything else, although there can be some
occasional benefits to a company of treating its
stock it buys back as "treasury stock" instead of
treating it as retired or canceled, due to certain
nuances in some states' corporation laws. But in
most cases a company can issue all the new stock it
can and wants to sell, so there is seldom any need
for it to recycle old shares it has bought back.
- Preferred stock. Most corporations do not issue
preferred stock. As we discussed above, preferred
stock is simply another class of stock, which may
take many different forms, but usually has a first
call on dividends, and a right to be paid off at
par value, if the corporation is liquidated, after
all creditors have been paid, but before anything
is distributed to holders of the common stock.
Like common stock, preferred stock usually has a
par value. However, par value is usually much more
important in the case of preferred stock, since such
stock is usually issued at a price equal to, or close
to, par value, and because the holder is usually
entitled to receive par value for his or her shares
if the corporation liquidates, assuming there are
enough assets left after creditors have all been
paid.
In our example, we have assumed that the company
will issue $100,000 par value of preferred stock,
paying a 10% dividend, and that it pays the $10,000
dividend in cash each year for the five years
covered by the financial projections.
- Paid in capital in excess of par value (or stated
value). Stock is often issued at a price that is
well in excess of its par or stated value. For
example, it may issue stock that has a par value of
$1 per share, selling it to investors at $20 a share.
If so, the $19 difference is categorized as "paid in
capital" or "paid in surplus," rather than as part
of the par value of the common stock, for accounting
purposes. Again, this usually has little practical
significance, but there may be instances when a
corporation can legally pay out dividends that are
deemed to come from its paid in capital, when it
could not pay such a dividend that "impaired" the
par value account. Thus, companies often issue
stock at a price that is well in excess of par or
stated value, so that most of the issue price will
be considered excess paid in capital.
This account will also increase if, for example, the
sole stockholder of a company puts more money into
the company, as capital, rather than as a loan, and
does not bother to take back any additional stock
for it. (Why issue yourself more stock when you
already own 100% of the corporation? Actually, there
is a good TAX reason why you should usually go to
the trouble of issuing yourself more stock when you
need to put additional capital into your wholly
owned corporation, rather than simply putting in
the money as additional paid in capital. See the
discussion of "Section 1244 stock," in Chapter 14,
Section 14.9 of this book, for an explanation of
why it can be very important to issue more shares
each time you add capital to your corporation.)
- Retained earnings. This is a cumulative number that
shows the amount of earnings the corporation has
generated, but has retained in the corporation. Thus
each year's net income will be added to the retained
earnings account, or a loss for the year will reduce
retained earnings. Also, any dividends that are paid
by the corporation will first come out of any retained
earnings, thus reducing the amount in that account.
Accordingly, the preferred stock dividends of $10,000
a year paid by the company in our sample projections
are taken into account in computing the annual net
changes in retained earnings for the company.
Note that if a company has financial losses, its
retained earnings may become a negative figure.
While, as previously noted, this can sometimes be a
misleading figure, a negative or deficit number in its
retained earnings account usually sets off warning
bells in the heads of anyone planning to invest in,
or lend money to, such a company. Thus if, in your
projections, you are showing negative or minimal
retained earnings after several years, you had better
have some persuasive arguments elsewhere in your
business plan, showing investors or lenders why
the company will be creating substantial value, even
if its retained earnings and profits numbers do not
look healthy.
Retained earnings sometimes goes by other names, for
accounting purposes, such as "undivided profits" or
"earned surplus," in case you ever come across those
terms in a balance sheet.
- Total stockholders' equity. This is simply the sum,
positive or negative, of the above components of
stockholders' equity in a corporation. As we have
noted, it will be called something different for a
business entity that is not a corporation.
- CASH FLOW STATEMENT. We have included a sample of a
cash flow statement, now often called a "statement of
changes in financial position." However, while our
sample may give you some guidance, we do not recommend
that you try to do this statement on your own, unless
you have considerable familiarity with accounting
concepts.
Instead, we suggest you do the basic work to create the
projected income statements and balance sheets--albeit
with a good bit of help or at least oversight from your
CPA. But once those statements are done, you may want
to delegate the preparation of the statement of cash
flows to your CPA, for the most part, since all the
numbers in it will basically fall out of the income
statement and balance sheet, and since cash flow
statements involve some fairly complex calculations,
which must be done right if you want your business
plan financial projections to have any credibility
with their prospective audience.
The parts of this statement you will want to tinker
with, once your CPA has all three of the major financial
statements on a computer, are the financing assumptions.
After the first initial cut at doing the financial
projections, review the cash flow statements and
determine where, if at all, you are going to run into
a low point in your cash resources that will necessitate
either more initial financing, or supplemental or
"mezzanine" financing, at the point of maximum cash flow
exposure. Ideally, you should have monthly, or at least
quarterly, projections for the first year or two, so you
can better identify the precise point in time when you
expect your cash position to be at its lowest, or any
projected cash flow deficit to be at its largest. If
you have completed the startup cash flow worksheets in
Chapter 1 of this book, those can be used to determine
when your projected monthly cash deficit is likely to
be at its largest, and to quantify it.
Once you have identified that point, then reassess the
amount and timing of your financing, and perhaps modify
some other assumptions and objectives in your business
plan, if the amount of financing you appear to need is
more than anyone is likely to be willing to lend or
invest in your firm.
. Overview of cash flow statement. The statement of
cash flows is usually a source of confusion to business
managers, but it is of critical importance if you wish
to understand where your business's cash resources are
coming from and going to. On first impression, you
might think that cash flow is simply the net profit that
your business generates, and that if you have profits,
you will have positive cash flow. Or, if you are a bit
more sophisticated in accounting matters, you might
realize that a quick approximation of cash flow is to
simply take net income (or loss) and add back depreciation
and amortization expenses, which are non-cash expense
items.
That, admittedly, will give you a good idea of whether
a company is generating a significant amount of cash
flow, but it does not take into account a number of
other things that will be going on in your operations,
or any investing and financing activities, which will
also either provide or absorb cash.
The three main portions of a cash flow statement are
each described below.
. Cash flow from operations. This part of the cash
flow statement starts with net income (before
dividend payments), and adds back depreciation and
amortization expenses, since those expenses do not
involve any cash outlay. Various changes in operating
accounts are also reflected in this section.
Increases in accounts receivable, inventories, prepaid
expenses, and other such operating assets "absorb" cash.
Decreases in any of these assets are a source of cash.
For example, in the first year of operation, in
the sample financial statements we have provided,
inventories increase from zero at the start of the
year to $85,000 by the end of the year. This means
that the company has spent $85,000 to create inventory
that is still on hand. That is, since the inventory
has not been turned back into cash (i.e., sold),
that asset category has "absorbed" $85,000 of the
company's cash.
Similarly, increases in liabilities, such as accounts
payable, are a source of cash, and any decreases are a
use of cash. For example, if you incur accountants'
fees in December, those are expenses in the current
year, on an accrual basis. However, since the fees
were not yet paid at December 31, such an increase in
payables is a source of cash. The next year, when the
payable is paid (reducing the amount of the payable),
that would be a use of cash, since cash is being
absorbed for something that is not an expense in that
year, having been expensed during the previous year.
Notice that no adjustment is made for any income that
is both earned and received in the same year, or for
any expenses that are both incurred and paid in the
same year. All those sources and uses of cash have
already gone into the calculation of net income, which
is the starting point for the cash flow statements.
Thus, all the additions or subtractions for changes in
various accrued (but unpaid) income or expense items
are adjustments to that net income -- in effect looking
at the company's operations on a "cash basis" rather
than on an "accrual basis." (Financial statements
that are prepared in accordance with Generally Accepted
Accounting Principles are, in almost all cases,
required to be presented on an "accrual basis," even
if the company keeps its books on a "cash basis" for
income tax purposes.)
. Cash flow from investment activities. This category
reflects investments in non-current, or long-term
assets, such as buildings, land, equipment, and in
intangible expenses such as loan fees or startup
expenses. All such purchases soak up cash. Or,
if any such assets are sold, they are a source of
cash. In our sample financial statements, there is
only one small sale of an asset in one year, so that
investing activities mainly are shown as using cash,
not generating it. Note that if an asset is sold
at a gain, only its cost, as shown on the books, is
shown as proceeds of sale for purposes of these
adjustments. Any profit on the sale would have already
been included in net income, so to count the entire
sales proceeds in the cash flow adjustments would be
to double-count the gain on the sale (and vice versa
if a loss was incurred on the sale).
. Cash flow from financing activities. The final part
of the cash flow statement deals with all debt or
equity financing activities, showing all borrowings
or issuance of stock as sources of cash, and repayments
on loans as uses of cash.
The final part of the sample statement includes a cash
flow reconciliation, and also compares the ending cash
balances for each period with what is assumed to be
a minimum amount of cash needed as working capital. In
our example, it appears that with the debt and equity
financing already built into the projections, there will
be no need for any additional financing during the five
year period covered by the forecasted statements.
However, if the business is a seasonal one, it is quite
possible that if you did such projections on a monthly
or quarterly basis, you might find that at some point
in one or more of the years covered, there might well
be a serious cash shortfall, such as shortly before
Christmas season, if a large amount of capital has to
be committed to building inventory at that time. Thus,
it is highly advisable to do your projected financial
statements on a monthly or quarterly basis, rather
than in the simpler annual format shown in our sample
statements -- particularly if significant seasonal
fluctuations in business activity are a characteristic
of your business.
For your business, you will probably need advice from a
CPA or other financial professional to help you arrive
at what appears to be a minimum amount of cash the
company will need to maintain, in order to have adequate
working capital at all times. This will depend on a
number of factors, including seasonality, the size of
the operation, the amount of inventories needed to
operate effectively, how long you can "float" your
accounts payable, what percentage of your sales will be
made on credit (versus cash sales), and how fast you
can expect to collect accounts receivable.
Note also that you will probably need a CPA's help if
you want to properly reflect income tax expense in the
cash flow statement. Our example ignores income tax
expense, as we have assumed that the income tax expense
shown on the income statement is the actual income tax
paid for the year. However, as we previously suggested,
the "tax provision" calculation, particularly where it
involves "deferred tax" items, can be extraordinarily
complex, and the actual (cash) amount of tax will usually
be more or less than the amount shown as tax expense,
so that an adjustment would also be required to reflect
this difference on the cash flow statements, if they are
to be done correctly. "Deferred tax" items would arise
if, for example, you used a different depreciation period
or method for "book" (financial statement) purposes than
for tax purposes, on certain depreciable assets.
- BREAK-EVEN ANALYSIS. Some of your costs, in operating
a business, are relatively fixed. That is, these costs,
such as electric bills to run your administrative office,
continue to accrue whether or not you are selling a lot
or a little of your product. If you (or your CPA) have
put your financial projections on a computer spreadsheet,
it will not be difficult, after you have prepared the
forecasted financial statements, to do a little bit
of "what-if" tinkering. Go into your statements and
try reducing sales by a certain amount, and reducing
only your variable expenses, such as direct labor and
materials used in manufacturing inventory (since you
will need less inventory to fill a lower level of
sales). Once you determine the "worst case" level of
sales at which the company "breaks even" (i.e., has no
net income or loss), that is your break-even level of
sales, which you should show in this section of your
business plan financial projections.
- ACQUISITION SCHEDULE FOR FIXED ASSETS. Prepare this
schedule, for your own purposes, even if you choose
not to include it in the business plan document. This
schedule will simply be a list in which you describe each
planned purchase of fixed assets, such as land, building,
trucks, equipment, machinery, furniture and fixtures.
You will need this detail information to create your
forecasted financial statements, as it will reflect
when certain major expenditures must be made, and when
depreciation expenses will begin. (Depreciation begins
when an item is placed in service, generally.) You can
use a format like one we have set forth in the worksheet
outline.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SECTION 16: Business Plan Outline -- Appendix
-----------------------------------------------------------
APPENDIX. [Include here any items you want to include in
the business plan, which you have referred to in the main
text, such as management resumes, legal documents, technical
drawings, letters of reference from customers, or other
information or documentation that will support and add
value to your business plan presentation.]
FOOTNOTES. [Include numbered footnotes that explain
statements made in the text of the business plan.]
EXECUTIVE RESUMES. [Include individual resumes here for
each of the key executives on your management team.]
LETTERS OF REFERENCE. [Sometimes letters of recommendation
from business people you have dealt with, customers or
others, can add a great deal to your credibility, if from
an unbiased source. If you have any such letters, you may
want to include them here.]
LEGAL DOCUMENTS. [Where certain legal documents are key
to the viability and success of your operation, and are
described in some detail in the business plan, you may wish
to include a photocopy of such documents in the appendix.]
OTHER. [Include any other documents, technical drawings
or blueprints, articles or clippings on your company or
product, or other types of information that will provide
persuasive documentation for any assertions you have made
in the business plan.]
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HELP NOTES RE: SEC. 16. BUSINESS PLAN OUTLINE --APPENDIX
-------------------------------------------------------------
APPENDIX. Throughout this business plan worksheet, we have
suggested that a number of items be placed in an appendix
at the end of the business plan document, rather than in
the main text of the document. Insert any of those items
or documents here, at the end of the document. Don't
unnecessarily clutter up the business plan by including
too many items here, but consider including:
. technical drawings
. photographs of your product or facilities
. letters of recommendation
. articles from authoritative publications
. certifications of product testing results
. executive resumes
. current and prior year financial statements,
if yours is an existing business
. competitor profiles
. copies of key legal documents
. samples of product promotional materials or dummy ads
or anything else that gives strong support and credence to
any claims or assertions you have made in the text of the
business plan document.
At this point, if you have already gone back and written
your "executive summary," you are done, except for
polishing and carefully reviewing your business plan
document.
Congratulations!