«A Guide for Established Businesses Special thanks to Tri-County Community College Small Business Center, Murphy, NC Business Plan ...»
How important is price as a competitive factor?
What are your payment and customer credit policies?
Location You will describe your physical location in the Operational Plan section of your business plan. Here in the Marketing Plan section, analyze your location as it affects your customers.
If customers come to your place of business:
• Is it convenient? Parking? Interior spaces? Not out of the way?
• Is it consistent with your image?
• Is it what customers want and expect?
Where is the competition located? Is it better for you to be near them (like car dealers or fast-food restaurants) or distant (like convenience food stores)?
Distribution Channels How do you sell your products or services?
Explain the daily operation of the business, its location, equipment, people, processes, and surrounding environment.
Production How and where do you produce your products or services?
Explain your methods of:
• Production techniques and costs
• Product development Location Describe the locations of production, sales, storage areas, and buildings.
Do you lease or own your premises?
Describe access to your buildings (walk in, parking, freeway, airport, railroad, and shipping).
What are your business hours?
If you are trying to get an expansion loan, include a drawing or layout of your proposed facility.
Describe the following:
• Licensing and bonding requirements
• Health, workplace, or environmental regulations
• Special regulations covering your industry or profession
• Zoning or building code requirements
• Insurance coverage
• Trademarks, copyrights, or patents (pending, existing, or purchased) Personnel
• Number of employees
• Type of labor (skilled, unskilled, professional)
• Where do you find new employees?
• Quality of existing staff
• Are schedules and procedures in place?
• Do you have written job descriptions for employees? If not, take time to write some. Written job descriptions really help internal communications with employees.
• Do you use contract workers as well as employees?
• What kind of inventory do you keep: raw materials, supplies, finished goods?
• Average value in stock; that is, what is your inventory investment?
• Rate of turnover and how it compares with industry averages?
• Seasonal buildups?
Type and amount of inventory furnished.
Credit and delivery policies.
History and reliability.
Do you expect shortages or short-term delivery problems?
Are supply costs steady or fluctuating? If fluctuating, how do you deal with changing costs?
Should you be searching out new sources of supply, or are you satisfied with present suppliers?
Credit Policies Do you sell on credit? If so, do you really need to? Is it customary in your industry and expected by your clientele?
Do you carefully monitor your payables (what you owe to vendors) to take advantage of discounts and to keep your credit rating good?
You need to carefully manage both the credit you extend and the credit you receive.
Managing Your Accounts Receivable If you do extend credit, what are your policies about who gets credit and how much?
How do you check the creditworthiness of new applicants?
What terms will you offer your customers; that is, how much credit and when is payment due?
Do you offer prompt payment discounts? (It is best to do this only if it is usual and customary in your industry.) Do you know what it costs you to extend credit? This includes both the cost of capital tied up in receivables and the cost of bad debts.
Have you built the costs into your prices?
You should do an aging at least monthly to track how much of your money is tied up in credit given to customers and to alert you to slow payment problems. A receivables aging looks like the following table.
Accounts payable aging This helps you plan whom to pay and when. Paying too early depletes your cash, but paying late can cost you valuable discounts and damage your credit. (Hint: If you know you will be late making a payment, call the creditor before the due date. It tends to relax them.) Are prompt payment discounts offered by your proposed vendors? Do you always take them?
Who manages the business on a day-to-day basis?
What experience does that person bring to the business? What special or distinctive competencies?
Is there a plan for continuation of the business if this person is lost or incapacitated?
If you have more than 10 employees, prepare an organizational chart showing the management hierarchy and who is responsible for key functions. Include position descriptions for key employees.
Professional and Advisory Support
List the following:
• Board of directors and management advisory board
Owners often have to draw on personal assets to finance the business. This statement will show you what is available. Bankers and investors usually want this information as well. They will ask owners to cosign or personally guarantee any business loans.
Document your assumptions, notes, definitions, and any special financial situation.
Include details of notes, securities, contracts, etc. on the bottom of a personal financial spreadsheet. Include one such spreadsheet for each principal.
A solid analysis of the past must precede any serious attempt to forecast the future. A financial history and ratios spreadsheet will allow you to put a great deal of financial information from other statements on a single page for ease of comprehension and analysis. You may also enter industry average ratios for comparison.
In the Appendices, put year-end balance sheets, operating statements, and business income tax returns for the past three years, plus your most current balance sheet and operating statement.
Debt Schedule This table gives in-depth information that the financial statements themselves do not usually provide. Include a debt schedule in the following format for each note payable on your most recent balance sheet.
The financial plan consists of a 12-month profit and loss projection, a four-year profit and loss projection (optional), a cash-flow projection, a projected balance sheet, and a breakeven calculation.
Together, these spreadsheets constitute a reasonable estimate of your company's financial future. More important, however, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.
12-Month Profit and Loss Projection Explain the major assumptions used to estimate company income and expenses. Your sales projection should come from an annual sales forecast. Pay special attention to areas where historical performance varies markedly from your projections.
Four-Year Profit Projection (Optional) The 12-month projection is the heart of your financial plan. However, this worksheet is for those who want to carry their forecasts beyond the first year. It is expected of those seeking venture capital. Bankers pay more attention to the 12-month projection.
Of course, keep notes of your key assumptions, especially about things you expect to change dramatically over the years.
Projected Cash Flow The cash-flow projection is just a forward look at your checking account.
For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a check (for expense items).
Your cash flow will show you whether your working capital is adequate. Clearly if your cash on hand goes negative, you will need more. It will also show when and how much you need to borrow.
Explain your major assumptions, especially those that make the cash flow differ from a
profit and loss statement, such as:
• If you make a sale in month 1, when do you actually collect the cash?
• When you buy inventory or materials, do you pay in advance, upon delivery, or much later?
• How will this affect cash flow?
• Are some expenses payable in advance?
• Are there irregular expenses, equipment purchase, or inventory buildup that should be budgeted?
And of course, depreciation does not appear at all because you never write a check for it.
Projected Balance Sheet This is an estimate of what the balance sheet will look like at the end of the 12-month period covered in your projections.
In the business plan section related to your projected balance sheet, state the assumptions that you used for all major changes between your last historical balance sheet and the projection.
Breakeven Analysis A breakeven analysis determines the sales volume, at a given price, that is required to recover total costs.
Expressed as a formula, breakeven is as follows.
• Magazine or other articles
• Detailed lists of equipment owned or to be purchased
• Copies of leases and contracts
• Letters of support from future customers
• Any other materials needed to support the assumptions in this plan
• Market research studies
The generic business plan presented above should be modified to suit your specific type of business and the audience for which the plan is written.
For Raising Capital For Bankers Bankers want assurance of orderly repayment. If you intend to use this plan to present
to lenders, include:
• What will this accomplish (how will it make the business stronger)?
• Requested repayment terms (number of years to repay). You will probably not have much negotiating room on interest rate, but you may be able to negotiate a longer repayment term, which will help cash flow.
• Collateral offered, and a list of all existing liens against the collateral.
For Investors Investors have a different perspective from bankers. They are looking for dramatic growth, and they expect to share in the rewards. Include the following in the plan that
you present to potential investors:
Funds needed short term Funds needed in two to five years How the company will use the funds, and what this will accomplish for growth Estimated return on investment Exit strategy for investors (buyback, sale, or IPO) Percentage of ownership that you will give up to investors Milestones or conditions that you will accept Financial reporting that you will provide Involvement of investors on the board or in management
Refine Your Plan for the Type of Business Manufacturing
• Present production levels
• Present levels of direct production costs and indirect (overhead) costs
• Gross profit margin, overall and for each product line
• Possible production efficiency increases
• Production-capacity limits of existing physical plant
• Production capacity of expanded plant (if expansion is planned)
• Production-capacity limits of existing equipment
• Production capacity of new equipment (if new equipment is planned)
• Purchasing and inventory management procedures
• Anticipated modifications or improvements to existing products
• New products under development or anticipated Service Businesses Service businesses sell intangible products. They are usually more flexible than other types of business, but they also have higher labor costs and generally very little in fixed assets.
• System of production management
• Quality control procedures
• Standard or accepted industry quality standards
• How do you measure labor productivity?
• What percentage of total available hours do you bill to customers?
• Breakeven billable hours
• Percentage of work subcontracted to other firms
• Profit on subcontracting?
• Credit, payment, and collections policies and procedures
• Strategy for keeping client base
• Strategy for attracting new clients High-Tech Companies
• Economic outlook for the industry
• Does your company have information systems in place to manage rapidly changing prices, costs, and markets?
• Is your company on the cutting edge with its products and services?
• What is the status of R&D? And what is required to bring the product or service to market and to keep the company competitive?
If your company is not yet profitable or perhaps does not yet even have sales, you must do longer-term financial forecasts to show when profit take-off will occur. And your assumptions must be well documented and well argued.
• Customer service policies: These should be competitive and in accord with the company image.
• Location: Does it give the exposure you need? Is it convenient for customers? Is it consistent with company image?
• Promotion: What methods do you use and what do they cost? Do they project a consistent company image?
• Credit: Do you extend credit to customers? If yes, do you really need to, and do you factor the cost into prices?