The material in this publication may not be reproduced or transmitted in any form or by any means -- electronic, mechanical, photocopying or other -- without prior written permission of the U.S. Small Business Administration. "How to Write a Business Plan." Copyright 1990, Linda Pinson and Jerry Jinnett. All right reserved.

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

TABLE OF CONTENTS

INTRODUCTION�

MARKETING

PRODUCTION

HOW MUCH MONEY IS NEEDED?

GETTING THE WORK DONE

MAKING YOUR PLAN WORK

KEEPING YOUR PLAN CURRENT

APPENDIXES

INTRODUCTION

A business plan can provide the owner-manager or prospective owner-manager of a small manufacturing firm with a pathway to profit. This publication is designed to help an owner-manager draw up a business plan.

In building a pathway to profit you need to consider the following questions: What business am I in? What goods do I sell? Where is my market? Who will buy? Who is my competition? What is my sales strategy? What merchandising methods will I use? How much money is needed to operate my company? How will I get the work done? What management controls are needed? How can they be carried out? When should I revise my plan? Where can I go for help?

No one can answer these questions for you. As the owner-manager you must answer them and draw up a business plan. This publication is a combination of text and workspaces so you can write in the information you gather in developing your business plan.

A Note on Using This Publication

It takes time, energy and patience to draw up a satisfactory business plan. Use this publication to get your ideas and the supporting facts down on paper. And, above all, make changes on these pages as the plan unfolds and you see the need for changes. Bear in mind that any factors you leave out of the picture will create an additional cost when they unexpectedly crop up later.

If you leave out or ignore enough items, your business is headed for disaster. Keep in mind, too, that your final goal is to put your plan into action. More will be said about this step near the end of this publication.

What's in This for Me?

There was a time when an individual could start a small business and prosper, provided he or she was strong enough to work long hours and had the knack for selling at a higher price than raw materials or product cost. Small stores, grist mills, livery stables and blacksmith shops sprang up in many crossroads communities as Americans applied their energy and native intelligence to settling the continent.

Today this native intelligence is still important. But by itself the common sense for which Americans are famous will not ensure success in a small business. Technology, the marketplace and even people themselves have become more complicated than they were one hundred, or even twenty-five, years ago.

Common sense must be combined with new techniques in order to succeed in the space age. Just as one would not think of launching a manned space capsule without a flight plan, one should not think of launching a new small manufacturing business without a business plan.

A business plan is an exciting tool you can use to plot a course for your company. Such a plan is a logical progression from a common sense starting point to a common sense ending point. To build a business plan for your company, you need only to think and react as a manager to questions such as What product is to be manufactured? How can it best be made? What will it cost me? Who will buy the product? What profit can I make?

Why Am I in Business?

If you're like most business people, you're in business to make money and be your own boss. But few business people would be able to say that those are the only reasons. The money you will make from your business will seldom seem like enough for all the long hours, hard work and responsibility that go along with being the boss.

Then, why do so many stay in business?

This is hardly the time for philosophy. If you're starting or expanding a business, you have enough to think about. But, whether or not you even think about it, the way you operate your business will reflect your business philosophy.

Consider this. An owner-manager inspects a production run and finds a minor defect. Even though in nine out of ten cases the user of the product will not notice the defect, the owner decides to scrap the entire run. What does this tell you? It shows that that owner gets an important reward from doing what is right in this case, providing a quality product.

The purpose of this section is not to play down the importance of making a profit. Profits are important. They will keep your business going and attract additional capital. But you should be aware that there are other rewards and responsibilities associated with having your own business.

In your planning, you might give some thought to your responsibilities to employees, the community, stockholders, customers, product and profit. Jot these down. Later, when you've lined up your management team, discuss these subjects with the members. This type of group thinking will help everyone, including yourself, understand the basic purposes for each day's work.

Even though you won't advertise it throughout your market, the way you operate your business will reflect your business philosophy.

What Business Am I In?

In making your business plan, the next question to consider is What business am I really in? At first reading, this question may seem silly. If there is one thing I know, you say to yourself, it is what business I'm in. But hold on. Some owner-managers go broke and others waste their savings because they are confused about the business they are really in.

The experience of an old-line manufacturing company provides an example of dealing with this question. Early in this century, the founder of the company had no trouble answering. As he put it, I make and sell metal trash cans. This answer held true for his son until the mid-1950s when sales began to drop off. After much thought, the son decided he was in the container business.

Based on this answer, the company dropped several of its lines of metal trash cans, modified other lines and introduced new products, such as shipping cartons used by other manufacturers and government agencies.

What business am I in? (Write your answer here.)

Ask yourself questions like What does my product do for my customer? Why? When? Where? How? What doesn't it do? What should it do later but doesn't now? The answers can lead to the ultimate conclusion of what business you're in and possibly direct you to new lines of products or enterprises.

MARKETING

When you have decided what business you're really in, you have made your first decision. Now you must face other marketing considerations.

Successful marketing starts with you, the owner-manager. You have to know your product, market, customers and competition. Before you plan production, you must decide who your market is, where it is, why customers will buy your product, whether the market is a growth or static one, if there are any seasonal aspects of the market and what percentage of the market you will shoot for in the first, second and third years of operation. Your production goals and plans must be based on and be responsive to this kind of fact finding (marketing feasibility and research).

The following narrative and work blocks are designed to help you work out a marketing plan. Your objective is to determine what needs to be done to bring in sales dollars.

In some directories, marketing information is listed according to the Standard Industrial Classification (SIC) of the product and industry. The SIC categorizes firms by the type of activity they're engaged in and is used to promote the uniformity and comparability of statistical data relating to market research. When you begin your market research, you may find it useful to have already classified your products according to this code. (The Standard Industrial Classification Manual is available for sale from the Superintendent of Documents, U.S. Government Printing Office, Washington D.C. 20402. It may also be available at your local library.)

Market Area

Where and to whom are you going to sell your product? Describe the market area you will serve in terms of geography and customer profile:

_________________________________________________________

Who Are Your Competitors?

List the principal competitors selling in your market area, estimate their percentage of market penetration and dollar sales in that market and estimate their potential loss of sales as a result of your entry into the market.

How Do You Rate Your Competitors?

Try to find out the strengths and weaknesses of each competitor. Then write your opinion of each of your principal competitors their principal products facilities marketing characteristics and new product development or adaptability to changing market conditions.

_________________________________________________________

Have any of your competitors recently closed operations or have they withdrawn from your market area? (State reasons if you know them.)

_________________________________________________________

Advantages over Competitors

On what basis will you be able to capture your projected share of the market? Below is a list of characteristics that may indicate the advantages your product(s) enjoy over those offered by competitors. Indicate those advantages by placing a check in the proper space. If there is more than one competitor you may want to make more than one checklist. Attach these to the worksheet.

Analyze each characteristic. For example a higher price may not be a disadvantage if your product is of higher quality than your competitor's. You may want to make a more detailed analysis than is presented here. If you wish to list the specifics of each characteristic and explain the disadvantages of your product and how these will be overcome attach this list to the worksheet. The unique characteristics of your product can also be the basis for advertising and sales promotion. Remember the more extensive your planning the more your business plan will help you.

What if anything is unique about your product?

_________________________________________________________

_________________________________________________________

_________________________________________________________

Distribution

How will you get your product to the ultimate consumer? Will you sell it directly through your own sales organization or indirectly through the manufacturer's agents brokers wholesalers and so on? Write a brief statement of your method of distribution and manner of sales:

_________________________________________________________

_________________________________________________________

What will this method of distribution cost you?

_________________________________________________________

Do you plan to use special marketing sales or merchandising techniques? Describe them here:

_________________________________________________________

_________________________________________________________

List your customers by name the total amount they buy from you and the amount they spend for each of your products.

Market Trends

What has the sales trend for your principal product(s) been in your market area over the last five years? What do you expect it to be five years from now? You should indicate the source of your data and the basis of your projections.* Industry and product statistics are usually indicated in dollars. Units such as numbers of customers numbers of items sold etc. may be used but you should also relate your sales to dollars.

* This is a marketing research problem. You will have to do some digging in order to come up with a market projection. Trade associations will probably be your most helpful source of information. The U.S. Census Bureau publishes many useful statistics.

List the name and address of trade associations serving your industry and indicate whether you are a member:

_________________________________________________________

List the name and address of other organizations government agencies industry associations etc. from which you intend to obtain management technical economic or other types of information and assistance:

_________________________________________________________

Share of the Market

What percentage of total sales in your market area do you expect to obtain for your products after your facility is in full operation?

Sales Volume

What sales volume do you expect to re

ach with your products?

PRODUCTION

In making your business plan you have to consider all the activities involved in turning raw materials into finished products. The work blocks that follow are designed to help you determine what production facilities and equipment you need.

Manufacturing Operations

List the basic operations (e.g. cut and sew machine and assemble etc.) that are needed in order to make your product:

_________________________________________________________

_________________________________________________________

Raw Materials

What raw materials or components will you need and where will you get them?

What amount of raw materials and/or components will you need to stock?

_________________________________________________________

_________________________________________________________

Are there any special considerations concerning the storage requirements of your raw material? For example will you use chemicals that can only be stored for a short time before they lose their potency?

_________________________________________________________

_________________________________________________________

Equipment

List the equipment needed to perform the manufacturing operations. Indicate whether you will rent or buy the equipment and what your cost will be.

Your equipment facilities and method of operation must comply with the Occupational Safety and Health Act of 1970. You may obtain a copy of Standards for General Industry from the Superintendent of Documents U.S. Government Printing Office Washington DC 20402 or a field office of the Occupational Safety and Health Administration.

Labor Skills

List the labor skills needed to run the equipment:

List the indirect labor (e.g. material handlers stockpersons janitors etc.) needed to keep the plant operating:

If persons with these skills are not already on your payroll where will you get them?

_________________________________________________________

Space

How much space will you need to make the product? Include rest rooms storage for raw material and for finished products and employee parking facilities if appropriate. Are there any local ordinances with which you must comply?

_________________________________________________________

_________________________________________________________

Do you own this space or will you buy or lease it?

_________________________________________________________

How much will it cost you? ____________________________________

Overhead

List the overhead items needed in addition to indirect labor and include their cost. Examples are tools supplies utilities office help telephone payroll taxes holidays vacations and salaries and benefits for your key people (sales manager plant manager and supervisor).

_________________________________________________________

_________________________________________________________

HOW MUCH MONEY IS NEEDED

Money is a tool you can use to make your plan work. Money is also a measuring device. You will measure your plan in terms of dollars and outsiders such as bankers and other lenders will do the same.

When you determine how much money is needed to start (or expand) your business you can decide whether or not to move ahead. If the cost is greater than the profits that the business can earn there are two things to consider. Many businesses do not show a profit until the second or third year of operation. If this looks like the case with your business you will need the financial reserves to carry you through this period. On the other hand you might be better off putting your money into stocks bonds or other reliable investments rather than taking on the job of managing a small business.

If your new business or expansion is like most you will need a loan. You must be able to show the lender how the borrowed money will be spent and how and when you will repay the loan. To determine whether your plan is economically feasible you need to pull together three sets of figures:

Then visit your lender and remember that he or she is your friend not your enemy. So meet regularly and share all your information. If the lender is ready to help you he or she needs to know not only your strengths but also your weaknesses.

Expected Sales and Expenses Figures

To determine whether or not your business can make its way in the market place you should estimate your sales and expenses for twelve months. The Income Projection Statement for one year is designed to help you in this task.

Cash Flow Projection

Estimates of future sales will not pay an owner-manager's bills. Cash must flow into the business at the proper times if bills are to be paid and a profit realized at the end of the year. To determine whether your projected sales and expenses figures are realistic you should prepare a Cash Flow Projection for the 12 months covered by your estimates of sales and expenses.

Current Balance Sheet Figures

A balance sheet shows the financial conditions of a business as of a certain date. It lists what a business has what it owes and the investment of the owner. A balance sheet enables you to see at a glance your assets and liabilities.

Use the blanks to draw up a current balance sheet for your company.

GETTING THE WORK DONE

Your manufacturing business is only part way home when you have planned your marketing and production. Organization is needed if your plant is to produce what you expect it to produce. It is also essential because as the owner-manager you'll probably have to delegate work responsibility and authority. A helpful tool in getting this done is an organizational chart. It shows at a glance who is responsible for the major activities of a business. However no matter how your operation is organized keep control of the financial management. Examples are given below to help you in preparing an organizational chart for your business.

In the beginning the president of a small manufacturing company probably does everything. (See Chart 1.)

As the company grows to perhaps fifty to one hundred employees the organization may begin to look something like Chart 2.

CHART 3
President
(Vice President)

In the above space or on a separate piece of paper draw an organizational chart for your business.

It is important that you recognize your weaknesses early in the game and plan to get assistance wherever you need it. This may be done by using consultants on an as-needed basis by hiring the needed personnel or by retaining a lawyer and accountant.

The work block below lists some of the areas you may want to consider. Adapt it to your needs and indicate who will take care of each function. (One name may appear more than once.)

Manufacturing ________________________________________________________

Marketing ___________________________________________________________

Research and technical backup ___________________________________________

Accounting ___________________________________________________________

Legal _______________________________________________________________

Insurance ___________________________________________________________

Other:
___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

MAKING YOUR PLAN WORK

To make your plan work you will need feedback. For example the year-end profit and loss (income) statement shows whether your business made a profit or loss for the past twelve months.

But you can't wait twelve months for the score. To keep your plan on target you need readings at frequent intervals. A profit and loss statement at the end of each month or at the end of each quarter is one type of frequent feedback. Beware of relying too heavily on the profit and loss statement. Since it only shows actual income and expenses for a given period you may find that at certain times you have more losses than profits. To keep a balanced perspective on your business you must continuously review and update your cash flow projection. This will help you to anticipate changing levels of income and expenses.

You must set up a management control system that will help you to ensure the right things are being done from day to day and from week to week. This system should give you precise information on inventory production quality sales collection of accounts receivable and disbursements. The simpler the system the better. Its purpose is to give you and your key people current information in time to correct deviations from approved policies procedures or practices. You are after facts with an emphasis on trouble spots.

Inventory Control

The purpose of controlling inventory is to provide maximum service to your customers. Your aim should be to achieve a rapid turnover on your inventory; the fewer dollars you tie up in raw materials and finished goods inventory the faster you can reinvest your capital to meet additional consumer needs.

In setting up inventory controls keep in mind that in addition to the cost of inventory there are also the costs of purchasing receiving and storing raw materials and the cost of keeping inventory records.

Production

In preparing this business plan you have estimated costs for your manufacturing operation. Use these figures to measure the cost of your day-to-day operations to ensure that profits are not eaten away through excessive worker hours processing time delays or down time. Periodic production reports will allow you to keep your finger on potential drains on your profits and should also provide feedback on your overhead expenses.

Quality Control

Poorly made products cause a company to lose customers. In addition when a product fails to perform satisfactorily shipments are held up inventory is increased and a severe financial strain can result. Moreover when quality is poor it's a good bet that waste and spoilage on the production line are greater than they should be.

A quality control system focuses on one question: What needs to be done to see that work is done right the first time? The details of the system -- checkpoints, reports and so on -- will depend on your type of production system. Also keep in mind any extensive quality control needed on raw materials -- this can be an added expense.

Sales

To keep on top of sales you need answers to questions such as How many sales were made? What was the dollar amount? What products were sold? At what price? What delivery dates were promised? What credit terms were given to customers?

It is also important that you set up an effective collection system for accounts receivable so you don't tie up your capital in aging accounts.

Disbursements

Your management controls should also give you information about the dollars your company pays out. In checking on your bills you do not want to be penny-wise and pound-foolish. You need to know that major items such as paying bills on time to get a supplier's discount are being handled according to your policies. Your review system should also give you the opportunity to make judgments on the use of funds. This will keep you on top of emergencies as well as routine situations. Your system should also monitor that tax monies such as payroll deductions are set aside and deposited at the proper time.

Breaking Even

Break-even analysis is a management control device that shows how much you must sell under given conditions in order to cover your costs with no profit and no loss.

In preparing to start or expand a manufacturing business you should determine the approximate level of sales at which a new product will pay for itself and begin to bring in a profit.

Profit depends on sales volume selling price and costs. So to figure your break-even point first separate your fixed costs such as rent or depreciation allowance from your variable costs per unit such as direct labor. The formula is

Breakeven volume equals total fixed costs divided by
selling price minus variable cost per unit

For example Ajax Plastics has determined its fixed costs to be $100,000 and variable costs to be $50 per unit. If the selling price per unit is $100 then Ajax's break-even volume is

$100,000 divided by $100 minus 50 equals 2,000 units

Earlier you estimated your expected sales for each product and total sales. Compute the break-even point for each.

Product 1: _________ Product 2: ______ Total sales: ________

KEEPING YOUR PLAN CURRENT

The best business plan becomes outdated because conditions change. Sometimes the change is within your company -- for example several of your skilled operators quit their jobs. Sometimes the change is with customers -- their desires and tastes shift. For example a new idea can sweep the country in six months and die overnight. Sometimes the change is technological as when new raw materials or components are put on the market.

In order to adjust a business plan to account for such changes as owner-manager you must do the following:

You may be able to delegate parts of this work. For example you might assign your shop supervisor the task of watching for technical changes as reported in trade journals. Or you might expect your sales manager to keep you informed of significant changes occurring in your markets. But you cannot delegate the hardest part of this work. You cannot delegate the decisions as to what revisions will be made in your plan. As owner-manager you have to make those judgments on an ongoing basis.

When judgments are wrong cut your losses as soon as possible and learn from the experience.

The mental anguish caused by wrong judgments is part of the price paid for being your own boss. You get your rewards from the satisfaction and profits that result from correct judgments.

Sometimes serious problems can be anticipated and a course of action planned. For example what if sales are 25 percent lower than you anticipated or costs are 10 percent higher? You have prepared what you consider a reasonable budget. It might be a good idea to prepare a problem budget based on either lower sales higher costs or a combination of the two.

You will also have to exercise caution if your sales are higher than you anticipated. The growth in sales may only be temporary. Plan your expansion. New equipment and additional personnel could prove to be crippling if sales return to a previous lower level.

Keep in mind that few owner-managers are right 100 percent of the time. They can improve their batting average by operating with a business plan and by keeping that plan current.

U.S. Small Business Administration (SBA)

The SBA offers an extensive selection of information on most business management topics, from how to start a business to exporting your products.

SBA has offices throughout the country. Consult the U.S. Government section in your telephone directory for the office nearest you. SBA offers a number of programs and services, including training and educational programs, counseling services, financial programs and contract assistance. Ask about

For more information about SBA business development programs and services call the SBA Small Business Answer Desk at 1-800-U-ASK-SBA (827-5722) or visit our website, www.sba.gov.�

Federal Citizen Information Center (FCIC)
Http://www.pueblo.gsa.gov
1-800-333-4636
The CIO offers a consumer information catalog of federal publications.

Consumer Product Safety Commission (CPSC)
Publications Request
Washington, DC 20207
http://www.cpsc.gov/cpscpub/pubs/pub_idx.html
The CPSC offers guidelines for product safety requirements.

U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
http://www.usda.gov
The USDA offers publications on selling to the USDA. Publications and programs on entrepreneurship are also available through county extension offices nationwide.

U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Washington, DC 20230
http://www.osec.doc.gov/obl/
DOC's Business Liaison Center provides listings of business opportunities available in the federal government. This service also will refer businesses to different programs and services in the DOC and other federal agencies.

U.S. Department of Health and Human Services (HHS)
Substance Abuse and Mental Health Services Administration
1 Choke Cherry Road
Rockville, MD 20857
http://www.workplace.samhsa.gov
Helpline: 1-800-workplace. Provides information on Employee Assistance Programs Drug, Alcohol and other Substance Abuse.

U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor laws.

U.S. Department of Treasury
Internal Revenue Service (IRS)
1500 Pennsylvania Avenue NW
Washington DC 20230
http://www.irs.gov/business/index.html
The IRS offers information on tax requirements for small businesses.

U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
1200 Pennsylvania Avenue NW
Washington, DC 20480
http://epa.gov/sbo
Hotline: 1-800-368-5888
The EPA offers more than 100 publications designed to help small businesses understand how they can comply with EPA regulations.

U.S. Food and Drug Administration (FDA)
5600 Fishers Lane
Rockville MD 20857-0001
http://www.fda.gov
Hotline: 1-888-463-6332
The FDA offers information on packaging and labeling requirements for food and food-related products.

For More Information

A librarian can help you locate the specific information you need in reference books. Most libraries have a variety of directories, indexes and encyclopedias that cover many business topics. They also have other resources, such as

In addition to books and magazines, many libraries offer free workshops, free access to computers and the Internet, lend skill-building tapes and have catalogues and brochures describing continuing education opportunities.