Copyright 1993, Linda Pinson and Jerry Jinnett. All rights reserved. No part may be reproduced, transmitted or transcribed without the permission of the authors. SBA retains an irrevocable, worldwide, nonexclusive, royalty-free, unlimited license to use this copyrighted material. While we consider the contents of this publication to be of general merit, its sponsorship by the U.S. Small Business Administration does not necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are affiliated.

All of SBA's programs and services are extended to the public on a nondiscriminatory basis.

TABLE OF CONTENTS

INTRODUCTION 

COVER SHEET 

STATEMENT OF PURPOSE (MISSION STATEMENT) 

THE BUSINESS

MARKETING

FINANCIAL DOCUMENTS

SUPPORTING DOCUMENTS

PUTTING YOUR BUSINESS PLAN TOGETHER

KEEPING YOUR BUSINESS PLAN CURRENT

REFERENCES 

APPENDIX: INFORMATION RESOURCES 

INTRODUCTION

There are two main purposes for writing a business plan. The first, and most important, is to serve as a guide during the life of your business. It is the blueprint of your business and will serve to keep you on the right track. To be of value, your plan must be kept current. If you spend the time to plan ahead, many pitfalls will be avoided and needless frustrations will be eliminated.

Second, the business plan is a requirement if you are planning to seek loan funds. It will provide potential lenders with detailed information on all aspects of the company's past and current operations and provide future projections.

The text of a business plan must be concise and yet must contain as much information as possible. This sounds like a contradiction, but you can solve this dilemma by using the Key Word approach. Write the following key words on a card and keep it in front of you while writing:

Answer all of the questions asked by the key words in one paragraph at the beginning of each section of the business plan. Then expand on that statement by telling more about each item in the text that follows.

There is no set length to a business plan. The average length seems to be 30 to 40 pages, including the supporting documents section. Break the plan down into sections. Set up blocks of time for work with target dates for completion. You may find it effective to spend two evenings per week at the library where the reference materials needed will be close at hand. It takes discipline, time and privacy to write an effective business plan.

You will save time by compiling your list of supporting documents while writing the text. For example, while writing about the legal structure of your business, you will realize the need to include a copy of your partnership agreement. Write partnership agreement on your list of supporting documents. When compiling that section of your plan, you will already have a list of necessary documents. As you go along, request any information that you do not have, such as credit reports.

With the previous considerations in mind, you are ready to begin formulating your plan. Read through this entire publication to get an overall view of the business planning process.

COVER SHEET

The first page of your business plan will be the cover sheet. It serves as the title page of your plan. It should contain the following information:

After completing this section you or your lender will know who your competitors are, where they are located, what products or services they offer, how you plan to compete, how your customers can access your business and why you can provide a unique and beneficial service or product.

Methods of Distribution

Distribution is the manner in which products are physically transported to the consumer or the way services are made available to the customer. Distribution is closely related to your target market.

Establish the purchasing patterns of your customers. If you are selling a product, do your customers purchase by direct mail, buy through catalogues or make in-store purchases? Will you sell directly or through a manufacturer's representative? If you are shipping the product, who will absorb the shipping costs and what carrier will be used? Use the key words to answer questions regarding your distribution plan. Back up your decisions with statistical reports, rate sheets from shippers, contracts with manufacturer's representatives or any other supporting documents. If you are involved in a service business, will you provide in-shop service? Will you make service calls, and, if so, how will mileage costs be handled? What is your planned response time to fill your customers' needs?

List the pros and cons of the various methods of distribution and give reasons for your choices. Keep in mind the worst case scenarios mentioned above. Present alternatives. For example, if United Parcel Service, your major shipper, were to go on strike, how would you distribute your products? If your mobile service van were to break down, do you have a vehicle which could be used as backup? Provide for a smooth business flow.

Advertising

Advertising presents the message to your customer that your product or service is good and desirable. Tailor your advertising to your target market. Your marketing research will have spelled out which television and radio stations and which publications are of interest to your target market. Those are the ones you will use. Analyze your competitors' advertising in these publications. Be ready to back up your decisions. Include copies of your promotional materials, such as brochures, direct mail advertisements and flyers. Tell the lender where you will put your advertising dollars, why you chose those methods, how your message will reach your target market, when your advertising campaign will begin, how much your plan will cost and what format your advertising will take.

Pricing

Your pricing structure is critical to the success of your business and is determined through market research and analysis of financial considerations. Basic marketing strategy is to price within the range between the price ceiling and the price floor. The price ceiling is determined by the market; it is the highest cost a consumer will pay for a product or service and is based on perceived value. What is the competition charging? What is the quality of the product or service you are offering? What is the nature of the demand and what is the image you are projecting?

The price floor is the lowest amount at which you can offer a product or service, meet all your costs and still make your desired profit. Consider all costs -- raw materials, office overhead, shipping, vehicle expense, taxes, loan and interest payments and owner draws are a few. The profitable business operates between the price ceiling and the price floor. The difference allows for discounts, bad debt and returns. Be specific about how you arrived at your pricing structure and leave room for some flexibility.

Positioning -- predetermining the perceived value in the eyes of the consumer -- can be accomplished through promotional activities. To be successful, you must decide what your product or service offers that your competitor's does not and promote it as the unique benefit.

Very few items on the market have universal appeal your product or service cannot be all things to all people. However, if you position your product or service properly, prospective purchasers or users will immediately recognize its benefits to them.

Product Design

Packaging and product design can play a major role in the success of your business. It's what first catches the customer's eye. Consider the tastes of your target market in the ultimate design of your product and your package design. Decide what will be most appealing in terms of size, shape, color, material and wording. Packaging attracts a great deal of public attention. Be advised of the Fair Packaging and Labeling Act, which established mandatory labeling requirements. The U.S. Food and Drug Administration (FDA) has strict procedures for the labeling of items falling within its jurisdiction. The packaging guidelines can be obtained from the FDA or found in the library. 

Timing of Market Entry

The timing of your entry into the marketplace is critical and takes careful planning and research.

Having your products and services available at the right time and the right place depends more on understanding consumer readiness than on your organizational schedule. The manner in which a new product is received by the consumer can be affected by the season, the weather and holidays. Early January and September are the best times to mail flyers and catalogs, as consumers seem to be more receptive to mail order purchasing in those months. The major gift shows are held in the summer months (June, July, August) and again in January and February.

Most wholesale buying takes place at these shows. November and December are not good months for introducing new service businesses unless they relate in some way to the holiday season. Spring is a better time to introduce a service. Trade journals and trade associations in your field can provide the information you need on the timing patterns of your industry. Tell the lender when you plan to enter the market and how you arrived at your decision.

Location

If your choice of location is related to your target market, cover it in this section of your business plan. List the reasons for your choice. What is the character of the neighborhood? Does the site project your business image? Where is the competition in the area? What is the traffic pattern?

What are the terms of the lease? What services, if any, does the landlord provide? What is the occupancy history of your location? Did any companies in the area go out of business within the past few months? If so, try to find out if it was related to location. Is the area in which you plan to locate supported by a strong economic base? What alternate sites were considered? These are some of the questions to be considered. Refer to Location in the business section for additional information.

Industry Trends

Be alert for changes in your industry. New technology may bring new products into the marketplace that will generate new service businesses. Read trade journals and industry reports in your field. Project how your market may change and what you plan to do to keep up.

FINANCIAL DOCUMENTS

You are now ready to develop the third area of your plan. Financial records are used to show past, current and projected finances. In this section we will cover the major documents you will want to include in your business plan. They will consist of both pro forma (projected) and actual financial statements. Your work will be easier if these are done in the order presented.

Summary of Financial Needs

If you are applying for a loan, your lenders and investors will analyze the needs of your business.

They will distinguish among the three types of capital to be used as follows:

Working capital -- Used to meet fluctuating needs that are to be repaid through cash during the business's next full operating cycle, generally one year.

Growth capital -- Used to meet needs that are to be repaid with profits over a period of a few years. If you seek growth capital, you will be expected to show how the capital will be used to increase your profits enough to be able to repay the loan within several years (usually not more than seven).

Equity capital -- Used to meet permanent needs. If you seek equity capital, it must be raised from investors who will take the risk in return for some combination of dividend returns, capital gains or a specific share of the business.

Keeping the above in mind, you must now prepare a summary of financial needs. This document is an outline telling why you are applying for a loan and how much you need.

SUMMARY OF FINANCIAL NEEDS

The potential lender will require a statement of how the money you intend to borrow will be used. It will be necessary for you to tell how you intend to disperse the loan funds. Back up your statement with supporting data.

You must be sure that your supporting data can be easily found by the loan officer who is examining your application. If you do not have your information well organized and retrievable, your application may be refused for the simple reason that the material cannot be found. It will be necessary to have a well written table of contents.

USES OF FUNDS

Cash Flow Statement (Budget)

Cash flow statements are the documents that project what your business plan means in terms of dollars. They show cash inflow and outflow over a period of time and are used for internal planning. If you have been in business for some time, worksheets can be put together from the actual figures of income and expenses of previous years combined with projected changes for the next period. If you are starting a new business, you will have to project your financial needs and disbursements. Your profit at the end of the year will depend on the proper balance between cash inflow and outflow. The cash flow statement identifies

!    When cash is expected to be received. 

!    How much cash will be received.

!    When cash must be spent to pay bills and debts.

!    How much cash will be needed to pay expenses.

It also allows the manager to identify the source of necessary cash, i.e., will it come from sales and services rendered or must it be borrowed? Be sure that your projections take into account receivables and how long it will take your customer to pay. The cash flow statement deals only with actual cash transactions and not with depreciation and amortization of goodwill or other noncash expense items.

A cash flow statement can be prepared for any period of time. It is recommended that you match the fiscal year of your business. It should be prepared on a monthly basis for the next year and revised not less than quarterly to reflect actual performance in the preceding three months of operations.

In preparing your cash flow statement, it might be useful to compile several individual budgets.

They could be as follows: 

Two worksheets can be used in developing a cash flow statement:

Note: Projections in the two worksheets must be made for the same time period (monthly, quarterly or annually).

Once you have completed the two worksheets, you are ready to transfer the information into your cash flow statement. You will need to think your way through each month, projecting what amount from each category of the worksheets will be appropriate to what month. For example, if your total sales amount to $100,000, you will have to project the individual amounts that will probably occur in each month.

SOURCES OF CASH WORKSHEET

(Cash Flowing Into Your Business)

CASH TO BE PAID OUT WORKSHEET

(Cash Flowing Out of Your Business)

Completing Your Cash Flow Statement

The vertical columns of a cash flow statement represent the twelve months, preceded by a total column. Horizontal rows on the statement contain figures for the sources of cash and cash to be paid out copied from the two previous worksheets and from individual budgets.

The figures are projected for each month, reflecting the flow of cash in and out of your business for a one-year period. Begin with the first month of the business cycle and proceed as follows:

To complete the total column, proceed as follows:

Note: If your business is new, you will have to base your projections solely on market research and industry trends. If you have an established business, you will also use your financial statements from the previous tax years.

A quarterly budget analysis should be used as a record to compare your cash flow statement (or budget) with your business's actual performance. Its purpose is to let you know whether or not you are operating within your projections and to help you maintain control of all phases of your business operations. If your analysis shows that you have gone over budget in some areas you will have to compensate by adjusting your cash flow statement with future cuts in those or other areas. If properly used, a cash flow statement can prove to be an invaluable tool to help you reach your financial goals.

Your cash flow statement can be compiled on a month-by-month basis and then compared with actual monthly performance. The SBA's Form 1100 (4-82) is very useful in this regard; for a free copy, contact your local SBA office. Prepared in this manner, your statement can provide an annual projection for your next fiscal year.

Three-year Income Projection

The three-year income projection is a pro forma income statement (profit and loss statement for more information, see Income Statement, page 18). The difference is that the three-year projection only includes income and deductible expenses while the cash flow statement includes all sources of cash and cash to be paid out.

There are various opinions as to what period of time should be covered in estimating income and expenses, i.e., whether it should be on an annual or monthly basis. If this income projection is for the purpose of obtaining a loan, talk to the lender about his or her specific requirements. If the projections are for your own use, a three-year projection is suggested with annual rather than monthly projections.

Sources of Information 

Information for a three-year income projection can be found in your cash flow statement, sales forecast and individual budgets, and your business and marketing analyses if you are new in business. Again, if you are an established business, you will also be able to use past financial statements to help determine future projections for your business. Be sure to take into account fluctuations anticipated in costs, efficiency of operation, changes in the market and any other factors. Increases and decreases in income and expenses are only realistic. These changes should be reflected in any projections. Remember, too, that industry trends can cause decreases in both income and expenses. An example of this might be the computer industry, where competition has increased greatly and standardization of components has caused a decrease in both the cost and the sales price of certain items.

Break-even Analysis

The break-even point is the point at which a company's expenses exactly match its sales or service volume. It is the point at which the business will neither make a profit nor incur a loss.

The break-even point can be calculated in either mathematical or graph form. It can be expressed in total dollars or revenue exactly offset by total expenses or in total units of production (cost of which equals exactly the income derived by sales). 

To apply a break-even analysis to a business operation, two types of expenses must first be projected: fixed costs and variable costs. Fixed costs do not vary with sales or output. Variable costs vary in direct proportion to the output. The greater the volume of sales, the higher the cost.

For purposes of the break-even analysis, make sure to include cost of sales in your variable costs figure.

Sources of Information for a Break-even Analysis

All of your figures can be derived from your three-year projection. In fact, by now you should be able to see that each financial document in your business plan builds on the ones done previously. It should be a simple matter to retrieve the figures to plug into the following formula.

Mathematically 

An example of calculating the break-even point using a mathematical formula is shown below.

Computation:

A firm's sales at break-even point can be plotted as in the following break-even analysis graph.

Using the same figures as in the above formula, draw three lines in the graph: horizontal line at point representing fixed costs (25); total expenses (TC = FC + VC) line from left end of fixed cost line sloping upward to point where total (fixed plus variable) costs on vertical scale (7) meet total sales revenues on the horizontal scale (9); total revenues (sales) line from zero through a point describing total revenues (sales) on both scales (9).

The point on the graph where the total expenses line intersects the total sales revenues line is the break-even point. This business estimates that it will break even when sales volume reaches $50,000. The triangular area below that point represents company losses. The triangular area above and to the right of the point represents potential profit.

Actual Performance Statements

Actual performance statements are those financial statements reflecting the activity of your business in the past. If you are a new business owner, you have no business history. Your financial section will end with the projected statements and a personal financial history. If you are an established business, you will include the following actual performance statements:

Balance Sheet

The balance sheet is a financial statement, usually prepared at the close of an accounting period, that shows the financial position of the business as of a fixed date. It is a picture of your firm's financial condition at a particular moment. By regularly preparing this statement, you will be able to identify and analyze trends in the financial strength of your business and thus implement timely modifications.

Categories

All balance sheets must contain three categories -- assets, liabilities and net worth -- that have been established by a system known as generally accepted accounting principles. The three are related in that at any given time a business's assets equal the total contributions by its creditors and owners. 

The relationship between these terms is simply illustrated in the following accounting formula:

Assets = Liabilities + Net Worth

Examined as such, it becomes apparent that if a business possesses more assets than it owes to creditors, its net worth will be a positive value. Conversely, if a business owes more money to creditors than it possesses in assets, the net worth will be a negative value.

Format

The balance sheet also must follow an accepted format. By so doing, anyone reading the balance sheet can readily interpret it.

All assets are divided under three headings: 

Liabilities are divided into current and long-term liabilities: 

Net worth is documented according to the legal structure of the business:

BALANCE SHEET

COMPANY NAME

As of _________________________, 19_____

(Total assets will always equal total liabilities and total net worth)

Income Statement

The income (profit and loss) statement shows your business financial activity over a period of time, usually your tax year. In contrast to the balance sheet, which shows a picture of your business at a given moment, this statement can be likened to a moving picture, which shows what has happened in your business over a period of time. The income statement is an excellent tool for assessing your business. You will be able to pick out weaknesses in your operation and plan ways to run your business more effectively and thereby increase your profits. For example, you may find that some heavy advertising you did in March did not effectively increase your sales. In following years, you may decide to use your advertising funds more effectively by using them at a time of increased customer spending. Along the same vein, you might examine your income statement to see what months have the heaviest sales volume and plan your inventory accordingly. Comparison of the income statements from several years will give you an even better picture of the trends in your business. Do not underestimate the value of this particular tool when planning your tactics.

Development

The income statement shows where your money has come from and where it was spent over a specific period of time. It should be prepared not only at the end of the fiscal year, but at the close of each business month. It is one of the two principal financial statements prepared from the ledgers and records of a business. All profit and loss statements contain income and expense account balances. The remaining asset, liability and capital information provides the figures for the balance sheet.

At the end of each month, the accounts in the general ledger are balanced and closed. Balances from the revenue accounts and the expense accounts must be transferred to your profit and loss statement.

Format