The Business Plan

A good business plan is one of the best things you can do to ensure success. By itself, your business plan will not make your products better, your customers more enthused, your sales greater, or your bank account fatter. What your plan will do is to make you THINK through your ideas. You will make fewer errors if your actions are based upon research and analysis.

Your business plan

...gives you a path to follow. It can help make the future what you want it to be, with goals and action steps to guide your business through turbulent economic cycles.

...lets your banker in on the action. By reading the details of your business plan, your lender gains insight into your situation that will help determine whether or not to lend you money.

...provides a way to communicate your operations, goals, and business philosophy to personnel, suppliers and your other business contacts.

...develops you as a manager by making you construct a clear "blueprint" of your business venture.

While there is no single best format for a business plan, this one has been used successfully by thousands of small business owners. Modify the following format to suit your needs.

Guide to Writing A Business Plan:

Begin With The Basics

þExecutive Summary

Summarize your plan in two pages or less. Make it enthusiastic, professional, complete and concise. Include the goals and objectives of the business. If applying for a loan, state the amount desired.

If you had five minutes to explain the basics of your business to an investor, what would you say? That is what goes in the summary. Write this section last.

þCompany Description

Give a brief company history.

What does your company do?

What are your products?

Who are your customers?

Where are you located?

What are your key strengths?

Is your industry or market growing?

Who are the owners?

Is the firm a proprietorship, partnership, or corporation?

þProducts and Services

What are your products (or services)?

Price and quality levels?

Distribution channels (i.e., how are products moved to the customers)?

Major competitors?

What makes your products particularly attractive?

þMarketing

(NOTE: In this section, be as specific as possible. Use statistics and numbers, and note your sources. Too many marketing plans are just enthusiastic fluff).

 

• Product

Describe your product or service from your customer's point of view.

What do customers like and dislike about your products, services, and company?

Why do they patronize you?

What services are offered as part of the product (delivery, service, warranty, support, refund offers)?

 

• Economics

What are the characteristics of your industry: growing, declining, changing?

What is the size of your market?

What is your share of the market?

Is it growing?

What is the demand for your product?

Are more firms entering?

What are the barriers to entry? Is it becoming more competitive; are profits being squeezed?

 

• Customers

Identify your customers, their characteristics, their

location.

Why will they patronize you?

What do they like about your company?

 

• Competition

List your major competitors.

Describe their size, location, reputations.

Compare your goods and services with theirs.

What are their major advantages?

What are yours?

 

• Strategy

What is your pricing policy? Why?

How do you promote, advertise, and sell?

How do you distribute or deliver your products/services?

What customer services will you offer?

Relate your strategy to prior discussions of Product. Economics, Customers, and Competition.

þSales Forecast

Now that you have written a description of your market, you need to do a detailed forecast of sales, by department, month by month, for the coming year.

þOperations Plan

 

• Production

Methods of production, product development, quality control, inventory control.

 

• Location

Described the physical location and explain why it is

appropriate.

Is it leased or owned?

 

• Credit Policies

Do you sell in credit? What terms? How do you check credit? Collection policies?

 

• Personnel

Number and type of employees.

Pay and personnel policies.

Do you have position descriptions and training

programs?

 

• Inventory

How much? What is its value?

List major suppliers.

Do they extend credit?

Who pays freight?

Do they give discounts?

 

• Legal Environment

Licensing, bonding, permits, insurance, zoning,

government regulations, patents, trademarks,

copyrights.

þManagement and Organization

Who has management responsibilities?

Resumes of all key managers.

Position descriptions for key employees.

List important advisors, such as attorney, accountant, banker, insurance agent, and advisory board or board of directors, if you have one.

þPersonal Financial Statements

Include personal financial statements of all owners and major stockholders.

þStartup Expenses and Capital

Carefully research your startup expenses: keep notes to document your numbers, Organize your figures by dividing startup expenses into major categories. We suggest:

 

• Buildings/Real Estate

• Leasehold Improvements

• Capital Equipment

• Location & Admin. Expenses

• Advertising & Promotion

• Opening Inventory

• Other Expenses

• Contingencies

• Working Capital

The contingency category is a way of allowing for costs which cannot be foreseen no matter how thorough your planning. Experienced entrepreneurs suggest you add 15% to 20% to your estimated expenses to allow for them.

Working capital is money needed to operate and pay bills while the business gets going. A carefully wrought cash flow projection is the only good way to estimate working capital needs. Starting without adequate

working capital will ensure early failure of the business.

If this is a startup, you must also show the sources of capital. Sources could include you, your partners or

investors, private lenders, your bank, and perhaps

equipment leases.

þFinancial History

If yours is an established firm, include financial

statements for at least the past three years as an

appendix to the plan.

Our computer template includes a spreadsheet on which these historical statements can be condensed and laid out side by side for comparison. It is a good idea to include some key ratios in addition to the raw numbers. Current ratio, Debt to net worth. Return on equity, and Inventory turnover are a few useful basic

ratios.

Include an aging of accounts receivable, showing the total amount owing you from customers, and how much is current, 30 days past due 60, days, 90 days, and over 90 days past due.

Do the same for accounts payable.

þProjected Balance Sheet

Your plan should include a projected balance sheet showing assets (things owned), liabilities (debts), and owner's equity.

If yours is a startup business, the balance sheet should show your financial position on opening day.

Existing firms should do a projected year-end balance sheet.

If you are using the business plan to apply for a loan, prepare a pro forma balance sheet projecting your financial position as of the day after the loan.

þ12 Month Profit Projection

In many ways, this is the capstone of your whole business plan. This is where it all comes together, where you show in detail how your company will make a profit. Start by projecting sales month by month for the coming year. Break monthly sales into categories or departments; for example: by product type, customer group, geographic territory, or different contracts or projects. A projection built up in this fashion will be more accurate than just guessing total sales for the monthly. Your Marketing Plan should be the basis for these projections.

Now estimate the Cost of Goods Sold (COGS) for each category of sales for each month. COGS are those expenses directly related to producing or purchasing the product/service you sell. For example: for retailers, COGS is the cost of buying merchandise; for manufacturers and construction, it is direct production labor and materials; for services businesses, it is production labor and materials. Breaking COGS down into departments will help you see which parts of the business deliver the most profit per sales dollar.

Now estimate operating expenses month by month for the year. These are necessary expenses which, however are not directly related to buying or making your product/service. They are also known as overhead items. Examples are: telephone, rent, insurance, taxes, and the salaries of office, sales, and management personnel. Use the same categories of expense you use (or plan to use) in the regular Income Statements you get from your accountant. This makes it easier to draw on history in making projections, and it makes it easier to compare your actual statements to your plan as time goes by.

þCash Flow Projection

Your profit projection will show how you intend to prosper by having revenues exceed expenses. Now you must show that you can pay your bills while prospering. Bills are paid with cash, not with profits.

A cash flow projection is basically nothing more than a forward look at your checking account.. It is derived from the profit projection, but looks at the financial data in slightly different ways. The fundamental differences are:

 

• On the income side, a cash flow asks not when a sale is made, but rather when cash is actually collected from the customer.

• On the outgo side, the question is not when an expense is incurred, but rather when the check will have to be written to pay the bill.

• Some items show only on one of the two statements, but not on the other. Depreciation, for example is a real business expense, but not an item of cash flow (you never write a check for depreciation). On the other hand, the principle part of a loan repayment is not an expense (only the interest portion is), but it definitely takes cash out of the business, and therefore needs to be shown on the cash flow projection.

By forecasting the status of your bank account, the Cash Flow tells you whether your working capital reserves are adequate. Budgeting does not create sales or put money in the bank, but it can help put you in control. When you know how much the off season will draw down your account, when you know how much it will take to get started on that new contract, when you begin negotiating that new bank loan months in advance because you can foresee the need, then you have gained a little more control over your own destiny

All your projections should be based on careful research, not casual guesswork. Keep notes detailing your major assumptions, and attach the notes to your projections.