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Saturday, 11 March 2017 10:03

Writing the Business Plan (Part 2) Featured

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Writing the Business Plan – Continued (Part 2)

*The following information was taken from East Bay SCORE’s manual, “How to Start and Manage Your Small Business”. All references lead to the full copy of the guide which is free to download.

Your Sales Forecast

Prepare a detailed sales forecast for three years. The first year should be by month, and subsequent years can be by quarter or year. If you have various products with varying margins, you need to show this breakdown. The SCORE templates listed under Resources below include a Sales Forecast schedule in the Financial Planning set of linked spreadsheets. Refer to chapter 10, Financial Statements, of this manual for a sample template.

You will be making assumptions as the sales forecast is probably the hardest part of the plan to prepare on a credible basis, and it will be tested by anyone who reads the plan. Showing a modest market share is one way. Knowing a lot about your market and its demographics is another. If you don’t force the sales number too high, you can be pleasantly surprised (and the lender too) when you exceed the forecast. Your growth from year to year should seem reasonable to you, and based on the fact that your advertising, promotion, and reputation are beginning to take hold.

Caution: Many new ventures tend to overestimate their sales volumes. You can make a lot of adjustments along the way in order to become profitable, but the least logical is to assume you can increase sales without either reducing margins or increasing expenses related to the promotion. Be very careful to make reasonable and verifiable sales assumptions as they are the lynchpin of your profit plan. The seven factors that can influence your sales numbers (both up and down):

  1. The characteristics of the product.
  2. Pricing (is the customer getting the value he expects?)
  3. Presentation (which includes your place of business, packaging, your service, and how you and your people are perceived by the marketplace) In essence, how satisfying the customer found the experience of dealing with your company to be.
  4. Suppliers (availability of product, cost, quality, reliability).
  5. Competition (including pricing, terms, discounts, giveaways, promotions, warranties, service levels, quality, special strengths, etc.)
  6. Seasonality
  7. External Issues (rise in interest rates, fires, floods, quakes, severe weather, power outages, etc).

Refer to chapter 6 – Marketing and Advertising - of the manual for additional help.

6. Operational Plan

At this point, you will discuss your business strategy which addresses “how you are going to do it”. You should include in this section the following:

  • A description of the operation you need to put in place, including all the resources required to fulfill the sales forecasted in the previous chapter, including facility, equipment, manpower, technology, etc. and the cost of each.
  • An outline of your record keeping system. How are you planning to keep track of important business elements, such as sales, cash, payroll, purchases, expenditures, costs, inventories, taxes, etc. Your system will provide the data required for the monthly operating statements and data any lender will require.

7. Management and Organization

Describe your management team in detail.

This is the “who is going to do it” portion of the plan, and since experience is a prerequisite of most lenders and investors, be sure to emphasize the credibility of your team to handle the tasks ahead. You can include a brief profile of each of your staff, and put their detailed resumes in the Appendix at the end of the plan. If you are hiring some expertise in the form of consulting, mention that.

If you intend to have a board of directors, advisors, an accountant, tax advisor, consultants, etc. mention why they will be important to the plan.

Prepare an organization chart for your business, and display it in this space. Show who reports to whom, and who has responsibility for attaining specific portions of the planned objectives:

8. Financial Plan

This is the scorecard that measures the attainment of the financial projections contained in the plan. Clearly, you must be able to measure the results on an ongoing basis if comparisons are to be made. The Financial Plan contains the following components:

  • Income Statement (P& L) - for three years (Refer to chapter 10 for templates) A summarized version shows the following:

Every management decision you make (other than where to play golf, or how much to
contribute to a fund raiser or charity) will show up in either Sales, COGS or Operating
Expenses.

Examples:

  • If you raise prices, your sales volume will go up, and your margin % will go up.
  • If you reduce your inventory, sales can go down.
  • If inventory is sold at a discount, margins will go down, but fixed expenses can go down too if the cash was used to pay down a loan.
  • If you lower prices, sales will go down, as will margins.

Typical variable costs are: Prices paid for goods and services that go into your product, labor that goes into the product, commissions paid for attaining sales, inbound or outbound freight that you pay for, inventory shrinkage, scrap produced, waste or any outside service performed on the product (packaging, painting, etc).

Typical Fixed costs are: rent, utilities, insurance, advertising, promotional expenses, salaries, interest, supplies, phone, copier, fax, accounting services, professional fees and dues and subscriptions.

Break Even Analysis (Refer to chapter 10 for template)

It is crucial that you understand when your business will break even and not until then can you begin reducing debt. Only after that point will you begin to show profitability and any return on capital invested.

Break even is where your Gross Profit Dollars exactly cover your fixed costs. The
formula is:

Total Fixed Costs (in $$)
((100 – Total Variable Costs%)/100)

In the prior example, the fixed costs were $16,500 and the margin was 35%. The division would result in a break-even of $47,143.00. The company actually did $50,000 so it was able to make a profit. Sales over break even were $2,857.00; the margin over break even at 35% yielded the $1000.00 shown as profit before tax.)

In the prior example, the fixed costs were $16,500 and the margin was 35%. The division would result in a break-even of $47,143.00. The company actually did $50,000 so it was able to make a profit. Sales over break even were $2,857.00; the margin over break even at 35% yielded the $1000.00 shown as profit before tax.)

Show the break-even point for the following company: Larry’s Sign Shop

The projected Sales for the year are $240,000.00, Sign materials are $60,000.00, the hired man who builds signs makes $24,000.00, Rent is $21,600.00, Insurance, utilities and professional fees are $18,000.00, Freight to get sign material in and to ship it out are $9,600.00, Advertising and promotional costs are $26,400.00, the bookkeeper gets $24,000.00, the sales agent gets 5% commission on sales he brings in, which are half of the total.

Answer: The break even point is $153,840.00 in Sales. His sales above break even are $86,160.00 multiplied by a margin of 58.5% gives you a profit before tax of $50,400.00.

Cash flow analysis (Refer to chapter 10 for templates) will show you at any given time the cash available from which to run the business. It will help you explore whether your business idea is viable, and how much cash you might need from outsiders to sustain your business until you break even. While revenue generated is the greatest source for cash in an operating business, you can affect this number by closely controlling fixed expenditures, margins, getting paid on time by your customers, closely controlling your inventory, and getting favorable terms from suppliers.

Monthly cash flow is a function of beginning cash, plus cash in, minus cash out. Expenditures usually go toward variable cost of sales, fixed expenses, and any equipment, furniture, fixtures, or improvements you might need.

Cash, and the availability of cash are the life blood of your business. This scarce resource needs to be managed with great care.

Balance Sheet (refer to chapter 10 for template) will provide you with the worth of the business at a specific point in time. The “balance” occurs when you match assets (current assets, such as cash, receivables and inventory along with fixed assets, such as furniture, fixtures, equipment, leasehold improvements), against current liabilities (accounts payable, taxes payable) and long term liabilities (such as loans payable) and owners equity (paid in by owners, and retained earnings which are liabilities for the company as they are owed to others). You can determine the amount of equity you have in the business by constructing your balance sheet.

Start-up Expenses and Capitalization This listing should spell out what the funds you contribute and those from outside will be used for. If you are going to a bank for a loan, or to any other financing source, you will need to know exactly the amount you need, and what it will be used for. Each expenditure must be identified, and they must all relate to an enhancement of the business, such as inventories, advertising, management information systems, rolling stock, etc. You don’t want to leave the impression that you are going to recover the money you have already invested, or pay yourself for time expended on behalf of the company. You are off to a fresh start with a lender and the objective is to make the new venture profitable and meet loan commitments.

9. Appendices

Should contain those documents that will add credibility to yourself, your management team, and consequently to the enterprise as a whole. These items can be Resumes, Credit Reports, Tax Returns, Personal Financial Statements, Copies of licenses and legal documents, Letters of Intent from customers or suppliers, Research or back up data. Let your judgment be your guide. What you include can speak favorably on your behalf.

In closing, your plan need not be excessively long – perhaps 10 to 15 pages. The plan is your company’s representative. It can be customized for different audiences. Continue to re-write it as conditions change. Make it look professional, check spelling and grammar. Promote your people and their skills. Sell your idea and the value proposition in your product or service. Remember that a market “niche” that sets you apart from the competition has great appeal. Be logical, honest, and make sure that your “numbers” are consistent throughout and that there are no contradictions.

This is part 2 of a 2 part series and was extracted from East Bay SCORE’s "How to Start and Manage Your Small Business." The full reference manual can be downloaded by clicking here.

East Bay SCORE, a resource partner of the U.S. Small Business Administration, provides free business counseling and low-cost workshops at multiple locations in Alameda, Contra Costa and Solano Counties. For more information, and to use our services, see our website (www.eastbayscore.org), email us at This email address is being protected from spambots. You need JavaScript enabled to view it., or call our office at 510-273-6611.

*This blog is intended to provide information to support startups and existing small businesses. A sincere effort is made to ensure accuracy, but no warranty, express or implied, is provided in that regard and East Bay SCORE and the author will not be liable for any errors or omissions in this blog.

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