(DOWNLOADABLE/EDITABLE WEB VERSION) Copyright © 2023 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 "Any business plan won't survive its first encounter with reality. The reality will always be different. It will never be the plan." -- Jeff Bezos, founder of Amazon.com 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, OpenOffice, 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SECTION 1: Why Have a Business Plan? ----------------------------------------------------------- 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. ------------------------------------------------------- HELP NOTES RE: SEC. 1. WHY HAVE A BUSINESS PLAN? ------------------------------------------------------- OVERVIEW: --------- HINTS AND GENERAL COMMENTS ON WRITING A BUSINESS PLAN ----------------------------------------------------- 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 your 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - END HELP NOTES FOR SECTION 1 (ERASE ALL OF SECTION 1 BEFORE PRINTING OUT BUSINESS PLAN DOCUMENT) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SECTION 2: Key Elements of a Business Plan ----------------------------------------------------------- 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. ----------------- | COVER PAGE AND | | CONTENTS SECTION| ----------------- | | ----------------- |EXECUTIVE SUMMARY| |(INCLUDES MISSION| | STATEMENT) | ----------------- | | ----------------- | ABOUT THE | | COMPANY | ----------------- | | ----------------- | ABOUT THE | | PRODUCT/SERVICE | ----------------- | | ----------------------------------------- | | | | ----------------- ----------------- | MARKET ANALYSIS | |INDUSTRY ANALYSIS| | (DEMAND) | | (SUPPLY) | ----------------- ----------------- | | | | | ----------------- | | THE | | | COMPETITION | | ----------------- | | ----------------------------------------- | | ----------------- | SALES AND | | MARKETING | ----------------- | | ----------------- | OPERATIONS | | AND PRODUCTION | ----------------- | | ----------------- | MANAGEMENT | ----------------- | | ----------------- | FINANCIAL | | PROJECTIONS | ----------------- | | ----------------- | APPENDIX | | (OPTIONAL) | ----------------- | | ----------------- | MONITORING | | YOUR RESULTS | ----------------- ---------------------------------------------------------- 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. ------------------ | 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. | | ----------------- | ABOUT THE | | COMPANY | ----------------- | | 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. | | ----------------- | ABOUT THE | | PRODUCT/SERVICE | ----------------- | | A detailed description of the product (or service, or both) that your company sells or will be selling. | | --------------------------------------- | | | | ----------------- ----------------- | 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. | | | | --------------------------------------- | | | ----------------- | 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. | | ----------------- | 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. | | | ----------------- | MANAGEMENT | ----------------- | | 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. | | ----------------- | 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. | | | ----------------- | APPENDIX | | (OPTIONAL) | ----------------- | | 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. | | | ----------------- | 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.] - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SECTION 3: Business Plan Outline -- Cover Page ----------------------------------------------------------- [SAMPLE COVER PAGE] ----------------------------------------------- | | | 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]. | | | ----------------------------------------------- -------------------------------------------------------------- HELP NOTES RE: SEC. 3. BUSINESS PLAN OUTLINE -- COVER PAGE -------------------------------------------------------------- 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.) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SECTION 4: Business Plan Outline -- Loan Request Page ------------------------------------------------------------ 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] -------------------------------------------------------- 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SECTION 5: Business Plan Outline -- Table of Contents Section ----------------------------------------------------------- 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.] ____________________________________________________ ____________________________________________________ ____________________________________________________ -------------------------------------------------------- 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.] ____________________________________________________ ____________________________________________________ ____________________________________________________ ____________________________________________________ -------------------------------------------------------- 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 12 21 31 57 101 [Assumes 9% state taxes and 21% fed. corp. tax] ------------------------------------- Net Income After Taxes: 31 55 79 146 257 [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 21 45 69 136 247 ===================================== [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 602 654 731 883 887 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 1112 1194 1296 1511 1585 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: 2291 2326 2355 2519 2548 ===================================== 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 21 66 135 271 518 ------------------------------------- Total Stockholders' 501 546 615 751 998 Equity: ------------------------------------- Total Liabilities and Stockholders' Equity: 2291 2326 2355 2519 2548 ===================================== [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 your 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) 31 55 79 146 257 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 47 54 158 239 345 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 602 52 77 152 4 Beginning Cash 0 602 654 731 883 ------------------------------------- Ending Cash 602 654 731 883 887 Minimum Cash Required 525 550 550 575 600 ------------------------------------- Excess (Shortage) of Cash Balance Needed 77 104 181 308 287 ------------------------------------- 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.] ------------------------------------------------------------- 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!