The Small Business Guide to a Successful Business Plan

Volumes of books and publications have been written on business plan writing. Unfortunately, not all of it is in total agreement, adding further to the confusion. The goal of this document is to condense and simplify this information to help you prepare an effective and sales-winning business plan. Whether you write the plan yourself or seek out professional help, you will still need to complete this step...there are no shortcuts to this process. This helps to explain why so many small businesses fail to invest the time and effort needed to develop a business plan.

It is suggested that you take the time to read this material in its entirety. Every effort has been made to distill the information down to it simplest form for easy reading. Despite this effort, the following is still somewhat lengthy and will require a real commitment on your part to complete. However; the time and effort you put forth to complete this document will put you one step closer to realizing your business goals and objectives. It all begins or ends here. The choice is yours.

WHY A BUSINESS PLAN?

Developing a business plan is like having a road map to a new destination-- it's designed to get you there safety, using the most direct route. Likewise, your business plan is a road map to guide you to your goal... and eventual success. Without it, you may end up on a wrong road that can take you away from your original objective, and to financial uncertainty.

What goes into developing a sound business plan?

There are two prime ingredients needed to develop a successful business plan: time and effort. All too often, many individuals plunge headlong into a business venture without taking the time to think through the process. In many instances, important details are overlooked that can jeopardize the success of the project. By taking the time to think the project through, you can anticipate and plan for obstacles and hurtles that might otherwise sideline you venture. In this way, you can develop a business plan that can navigate you around problems and on to your goal without depleting your resources.

The primary task in developing a business plan is to determine what steps, strategies, tools, personnel and financing must be in place to reach your goal...and in what time frame. This is not easy to do. It requires you to project yourself into the future, visualizing each step required to reach your goal. You are in fact designing a blueprint that details each procedure in the project, much in the same way an architect designs a building. A review of the steps involved in the design and construction of a home will provide an excellent overview of what it takes to develop a successful business plan.

Location, Location, Location

All construction projects begin with selection of a location or building site. Poor site selection can result in a number of problems, including increased construction costs, limited availability of skilled labor and materials and possible zoning issues. The same is true of business. Where you locate your business will play a major role in shaping the success of the venture. It will determine the size and makeup of your market, the quality and availability of the support services you will need, and long-term growth potential of your venture. These issues must be reviewed and addressed in your business plan.

Codes and Licenses

Before any building project takes shape, the architect or engineer must determine what codes restrictions must be satisfied, whether local or national. These might include zoning restrictions, environmental concerns and building code requirements. The same is true in business. You must first determine what permits, licensing or certificates are required for you to conduct business at your desired location...whether it's downtown Nashville or a URL address on the Internet. Again, your business plan should also disclose any and all licensing, permits or certification needed to conduct business, and what steps you have taken to satisfy these requirements.

Building Materials

Careful selection of building materials is vital to the success of any construction project. For example, virtually any building can withstand a wind load of 3 - 5 miles per hour. On the other hand, a structure made of questionable building materials may collapse under the force of 70-mph winds. Likewise in business, the success of any venture is dependent largely on the quality and scope of the products or services offered. When faced with little or no competition, a business might do well for a time. On the other hand, this same business may falter from the weight of a serious competitor. For this reason, your business plan should detail the competitive climate of your intended market and how well your products and services stack up to the competition. Additionally, your plan should also outline the steps or strategies that will be implemented to maintain a competitive standing in the marketplace.

Construction Timetable

A construction timetable or schedule is critical to the success of any building project. It is used to coordinate each construction phase in order to ensure timely and on-budget completion of the project. The same is true of a business plan. It should detail each phase of the business venture along a specific timeline. This will enable you and investors to establishment a budget for the project and determine specific goals or benchmarks to evaluate the success of the venture. Is the venture time-sensitive or is it a long-term endeavor? Your business plan should clearly spell out the timetable of the your venture. This will help prevent premature expectations on the part of potential investors or lenders.

Skilled Labor

A wide variety of skilled and certified labor is required to build a home. Is this true of your venture? Do you possess all the skill and experience needed to make a success of your project? Will you need to hire the services of consultants or other skilled professionals to ensure the success of your venture? In either case, your business plan should detail the experience and skills you bring to this project and what additional help, if any, is required for this venture to reach its intended goals.

Financing

No construction project, no matter how well designed or conceived, can survive without proper budgeting and adequate financing. Your business venture is no exception. A well-designed business plan should contain a detailed spreadsheet outlining monthly cash flow and anticipated sales over a two-, three- or five-year period. The length of the time period will depend on the kind of financing you are seeking and your repayment schedule. For example, if you are seeking a loan with five-year terms and your spreadsheet calculations show a healthy profit margin and steady growth after two years, you may not need to have five-year projections in your plan.

Putting it all together

On the following pages we will explore, in greater detail, each building step in designing a successful business plan. This will be accomplished using a workbook designed to collect all the information and details needed to complete the business plan. It is suggested that you not attempt to complete the interview in one sitting. Take your time. In all likelihood, you will need to research or give more thought to some of the questions before answering. There is no shortcut to this process. The time and effort you put into answering these questions is directly proportional to the quality and completeness of your finished plan. Take the time needed to do this right. It will save you a lot of time and money, and spare you considerable headaches later on down the road.

EXECUTIVE SUMMARY

Very often, an architect will have a three dimensional model of a building plan constructed to give a client a better feel for what the finished product will look like. In many ways, your executive summary serves the same function--it provides potential investors or lenders with an overview or model of your proposed venture. And, as in the case of the architect, a three-dimensional model can't be built until the building plans have been completed. Likewise, a well-designed executive summary should not be prepared until the content portion of the business plan is completed.

Executive summary components

What goes into your executive summary? In a word...everything. It is a scaled-down version of your complete business plan much in the same way that an architectural model is a scaled representation of the finished building or structure.

When writing your executive summary, assume that the reader knows nothing about your industry or the market you are targeting. Start from ground zero. Is your venture designed to fill a specific niche or void in the market? If so, describe this need or potential opportunity from a consumer's perspective. This will enable you to put the reader in the consumers' shoes, allowing them to see the real merits of the product or service you are offering. This is especially true if you are launching a new venture. The following is an introductory paragraph of an executive summary for a same-day courier service:

Despite the availability of overnight letter and package delivery services, many businesses and individuals find themselves in situations where a letter or package must be delivered to a destination the same day. This is especially true in those instances where customers miss the overnight carrier's drop off deadline. Proof of this can be seen by the recent decision of Federal Express to offer a later package drop off time of 12:00 midnight at select locations for $30-- $15 more than their standard overnight rate. Now for the same $30 rate, consumers can have same day service to select major cities throughout the United States with Jetway Express Service.

The purpose of this proposal is to secure $5,200,000 in capital or a line of credit for operational expenses and to charter a small fleet of corporate jets to service six major cities over the next two years.

In Summary

Your executive summary should also explain how much capital you are looking to raise and how the money will be used to ensure the success of the venture. Do you have tangible assets that the lender or investor can attach and sell to help recover their investment or are you seeking venture capital. If the latter is true, be prepared to offer a sizable amount of equity in your company or venture to the potential investor. If the risk is substantial, expect to part with 60% or more in equity and be prepared to have the investor, or someone appointed by the investor, sit on your board of directors. In either case, your executive summary should spell out a repayment schedule and the interest rate--expect to pay a few points above prime if you are dealing with traditional lending institutions, and substantially more if you are talking to private investors.

COMPANY OVERVIEW

This section of the plan provides the reader with a detailed look at the structure of the business entity behind the proposed business venture. This section is designed to overcome and address any concerns the reader might have about the operation of the company and its track record in the industry. Turning again to the construction industry for an illustration, consider the questions and concerns a client might have in selecting a construction company to head up their building project. Naturally, the client would want to know if this project is well within the scope and experience of the construction company. Have they ever handled a project of this size and magnitude? Can they deliver the project on schedule and within budget? These are the same concerns and questions that will be dancing in your reader's mind while reviewing this section of your plan.

Is this a start-up venture?

If this is a start-up venture, this section will need careful writing, as the company has no prior track record to refer to in the plan. It will be important to focus on the mission statement and the organizational structure of the company. Share with the reader the company's strengths and assets, whether they are equipment or the experience of your staff. You will also want include a discussion about the financial status of your company, any problems you may be encountering and what it will take to overcome these obstacles. Don't be afraid to share any weaknesses or shortcomings you might have with the reader. By openly sharing this information with the reader you are building a foundation of trust. You are also saying to the reader that you are aware of your limitations and have a plan of action to overcome them. Besides, your reader may discover this information without you volunteering it.

Staff profiles

Before any investor or lender puts money in a financial venture, they want to know whom they're doing business with. In addition to your credit scores and personal assets, they want to take a look at your professional experience and everyone else on your management team. These career profiles should be brief and highlight the professional experience and skills of your management team. Be sure to spotlight any accomplishments or awards received in the industry.

The following is an example of a company overview for our fictional company, Jetway Express Service:

Jetway Express Service is a for profit S-corporation registered in Davidson county, Tennessee on February 5, 2000. The corporate officers consist of Robert Williams, president; Jeff Taylor, vice president; Alice Cummings, treasurer and Denise Smith, secretary. The corporation was formed with an initial investment of $50,000, which was used to set up corporate offices at 1200 10th Avenue North, Suite 506 in downtown Nashville.

Jetway Express Service was created to provide same-day shipping service to local area businesses and consumers. The decision to start this venture was based on Robert Williams' experience as a regional operations manager for Federal Express. His observations, over a five-year period, indicated a growing number of drop-off packages just minutes before the cut-off time at each manned location. This lead to the decision by Federal Express to offer extended service hours to accommodate late drop-offs. Seeing a potential market of overnight package customers who were unable to make the drop-off deadline, Williams decided to offer a regional same-day delivery service. Target customers for this service would include hospitals (donor organ delivery), lawyers, advertising agencies, banks, and news media.

To measure the sales potential of this service offering, a promotional mailing was to sent to each target industry. The response rate was very favorable, across the board, indicating strong potential for regular business in each target industry. To adequately service this potential demand, it will be necessary for Jetway Express Service to charter a small number of jet aircraft until the company can purchase and maintain its own fleet.

In Summary

The mission of the Company Overview is build confidence in your investor or financial institution that your company has the manpower, market savvy and management structure to generate substantial profits within your target market. To do this successfully, you must be able to preempt any questions or doubts that might surface. This means anticipating any questions and answering them before they are tossed on the table. This will enable you to take charge of your presentation and the impression you make on your potential investor and/or lender.

Be sure to include a professional profile of your management team and their qualifications. Also include details about company ownership and what role your board of directors (if you have an advisory board) will play in shaping management decisions that will impact day-to-day operations. Is your advisory board just window dressing or do they bring valuable experience and problem-solving skills to the table? Remember, you must sell your potential investor or lender on the contributions that will be made by each person on your team. Otherwise, they might ask you to remove this individual before financing the venture.

Your Company Overview should take the reader on a tour of the business. The more comfortable they are with the way you run your business, the more likely you are to receiving financing. Do your homework! Are there other businesses in your industry that are recognized market leaders? Learn how they run their business and see if there are a few areas in your company that need additional fine-tuning. If so...break out the tools.

MARKET INSIGHTS

Where is this steady stream of profits going to come from? This is the question that will be on the mind of your reader as they scan over your business plan. Don't have your reader making assumptions about your market. Remember, you are supposed to be the market expert. Even if you are not an expert in your field, be able to provide evidence to support your claims about the sales potential of your market.

Do your know your market?

Knowing your market is a key element to the success of your business. Would you trust your building project to a contractor with no knowledge of local building codes? Of course not. Why then would you expect an investor or lender to finance your venture if you don't have a solid grasp on your industry or target market? What evidence do you have to support your market claims and potential sales projections? Are they numbers you pulled from the sky or can you offer some tangible proof or meaningful assumptions to support your claims. One way to collect this information is through market research.

Market Research -- Doing your homework

Homework is no fun. Having your business venture bite the dust for lack of financing is no picnic either. If you want to stay in the game, you have to do your homework...market research. Market research is an important component of every successful business venture. It enables you to clearly define the demographics of your target group(s). These defining characteristics include such factors as age, gender, economic status, lifestyle, geography, and other parameters. This information will help you in determining the most effective advertising vehicle(s) to use to market your product or service as outlined in your marketing strategy. In addition, market research can help you assess competition and spot emerging trends in your industry. Arming yourself with this information will provide you with a realistic basis (hard data) for forecasting sales and strategic planning.

There are two types of market research-- secondary and primary research. Secondary research is information collected from existing sources while primary research is market information you've gathered yourself. The tools used to collect this information may include surveys, focus group studies, interviews or direct solicitations.

The primary goal of this market research is to: (a) Identify your best customer. (b) Determine the best way (advertising vehicle) to reach this potential customer. (c) Determine the best pricing for your product or service. (d) Learn how to keep repeat customers and determine what other products or services can you offer them. (e) Why did they select you over the competition? (f) What are the strengths and weaknesses of the competition?

If you can answer the previous questions, you are well on your way to writing a successful business plan-- one that will help you secure the capital and financing needed to reach your target goals.

Secondary Research

There are a variety of resources available to provide demographic and geographic characteristics of potential customers or trends in your industry. Many of these resources are available at your local library or on the Internet. You can also turn to market research professionals who will do the work for you on a fee basis. The price can range from a few hundred dollars to several thousand dollars. Rest assured that a potential investor or lender will look more favorably on a business plan where a serious investment was made to gather vital market research. Any investment you make to gather this data, especially if substantial, will count toward your equity position in the company. Secondary research sources include:

œ U.S. Census Bureau

œDun & Bradstreet

œ Thomas Register

œ Hoovers Company Information

œ www.workingsolo.com/biztools/articles/testbizidea.html

œ Library of Congress Business Reference Services

œ US Chambers of Commerce

œ SRDS (Standard Rate and Data Service)

œ Internet search engines (Altavista, Excite, Lycos, Yahoo, Infospace, Superpages, Zip2)

œ www.claritas.com

(See appendix for detailed listing. Published separately)

The following example is taken from a new magazine proposal submitted to a leading trade magazine publisher. The research conducted was from magazine advertising rate cards and back issues of the publication at the local library.

MARKET SIZE

The viability and growth potential of DIGIT Systems & Technology can be evaluated by the success of vertical market publications such as Publish!, Personal Publishing and In-plant Printer & Electronic Publisher. A review of the subscriber base and advertising revenue of each publication will provide an excellent indication of the success potential of DIGIT Systems & Technology.

Publish!

Publish! Is a monthly consumer magazine devoted to desktop and personal computer publishing. Editorial departments feature coverage on page-makeup and typesetting systems that interface with personal computers. The cover price of Publish! Is $3.95 with an annual subscription rate of $39.90. The average net paid circulation (March 1988) is 100,000 copies. Since March 1987, the publication's circulation skyrocketed from 25,000 to 100,000 copies, resulting in a 58% increase in ad revenues. The following is an analysis of advertising pages from March 1987 to March 1988.

Page Size

Full Page B/W
Half Page
Quarter Page
Full Page 4/C

March 1987

$3,495
$2,270
$1,310
$4,195

March 1988*

$5,995
$4,195
$2,250
$7,495

Total estimated ad revenue for the March 1988 issue is $384,893

*Based on April 1988 Rate Card

Primary Research

Identifying and locating prime customers is essential to the success of any business. Primary market research is a powerful information tool used to help accomplish this. Primary research data can come from a number of sources, including customer surveys, focus group studies, telemarketing, coupons, direct solicitation and interviews. Information collected from this research will enable you to profile your best customers, assess the quality of your product or service and measure the strengths and weaknesses of your competition.

An excellent example of primary research can be found in the barcode savings cards that supermarkets offer customers. To receive the "tremendous" savings that these cards offer, shoppers must first fill out a questionnaire that asks for your household income, if you own a home or rent, your marital status, and any other information they can extract from you. This information is then later used to profile customers by collecting product purchase data each time the card is scanned at the register. The data collected helps marketers paint a more realistic picture of their best customers, enabling them to make more accurate decisions on brand purchases, product pricing and selection of the most effective advertising media for reaching these customers

To help launch the publication DIGIT Systems and Technology, the publisher plans to purchase a mailing list of 50,000 computer users. The promotional plan includes a direct mail piece (see below) highlighting the editorial content of the magazine. Since it is important to determine the type of computer and software owned by the target subscriber, the direct mail piece features fill-in blanks requesting this information. This information would be used later to help create a reader profile for use in advertising sales and to help fine-tune the editorial content. Primary research collected from this promotional subscription mailing would be used in the business plan to help raise the venture capital to launch the publication.

In Summary

Knowing your market is essential to the success of your business venture. All too often businesses fail due to a lack of knowledge about their market. For example, 10 years ago service bureaus began springing up all over looking to cash in on the desktop publishing boom by offering pre-press services. Many failed to look at the growing trend in the industry towards direct-to-plate printing, a technology that eliminated the need for pre-press film imaging. Only those service bureaus who recognized the trend and took steps to diversify their business by offer additional services --web design, digital printing or digital photography-- will remain in business as more and more printers turn to direct-to-plate technology.

Your business plan should reflect real insight into your market and your target customers. Invest the time and money needed to collect this information using primary or secondary research. Use secondary research to help your identify potential customers. Once you have identified them, use primary research to determine the actual sales potential for your product or service and incorporate this information in your business plan. In addition, your business plan should reveal a marketing strategy for reaching these potential customers. This will be the focus of the next section.

MARKETING STRATEGY

Positioning -- getting into your customer's mind

You've done your secondary and/or primary research and have a firm grasp of your target market. The next step is developing a plan for reaching your target customers. This plan will include developing a sales message or strategy for "positioning" your product or service in the minds of your target market. "Positioning" is the message or impression you want left on the minds of potential customers when thinking about your product or service. For example, when asked to name two national rental car companies, most people will answer Hertz and Avis. On the other hand, we asked which rental car "tries harder," everyone answers Avis.

The goal of your positioning statement is to create a lasting image or impression on the minds of consumers that will set your product or service apart from the competition. Look for a single consumer benefit that your product or service offers and try to incorporate this into your tag line or slogan. This way, when consumers have to make a choice between your product or service and a competitor, they will call to mind the benefit that you offer. This will usually result in the consumer purchasing your product or service, even though your competition may be offering the very same benefit. People don't buy products or services with benefits they can't recall.

Media Selection -- reaching your best customers

Now that you know what to say to potential customers, you have to find the best way to say it. Should you use print ads in the local newspaper, radio or TV spots, or a simple direct mail effort? Regardless of which media you use to rollout your product or service, you should also incorporate an Internet presence into your marketing plan. More and more customers are turning to the Internet to research and make purchases. This is especially true of busy professionals who spend considerable time in front of a computer. Pick a media that reaches the largest number of prime prospects for your product or service. A media that enables you to "zoom in" on a select audience of consumers, such as cable TV, the Internet, special interest publications and direct mail, reaches a more targeted audience with minimal waste in ad dollars.

Before investing heavily in any media, test it first. If you are running weekly ads in a newspaper, give it a month before pulling out. Try a three-month test if you're advertising in a monthly magazine. For TV and radio, if you're running 60 spots a month, give it two to three months before baling out. You're decision to stay with any media should not be based solely on the number of responses you receive; it should be based on the number of sales you make. In addition to sales, there are other deciding factors such as CPM (cost per thousand) and CPS (cost per sales) but this topic is outside of the scope of this document. A more detailed discussion on developing a marketing strategy and choosing the right advertising media will be offered in the book Marketing 201 -- Breaking the rules without getting caught.

Marketing Budget -- spending money to make money

Once you have decided on the media you will use to roll out your sales message, you then need to establish an advertising budget. This budget should be planned to provide yearlong exposure for your sales message. Whether it's an ad in the Yellow Pages, weekly ads in your local newspaper or a monthly mailing to new and existing customers, you need to budget for this. When it comes to marketing, consistency and constancy are what yield lasting results.

In Summary

Getting a firm handle on your market is key to the success of your business plan. Remember, you should never make assumptions about consumer spending based solely on your own buying preferences. When in doubt about consumer buying behavior, conduct surveys, do price testing, one-on-one interviews, focus group studies, etc. Having this information in your business plan will add real substance to your basic assumptions and sales projections.

OPERATIONAL STRATEGY

How well you manage your business is vital to its overall success. For example, you may be an excellent salesperson and have no difficulty moving product out the door. On the other hand, do you possess the skills and savvy it takes to motivate and manage people? If you have what it takes to run a successful business...prove it! Your business plan should reflect your keen insights into the day-to-day operations of the venture and what it takes to go the distance. You do this by putting it all down on paper... it's your blueprint for success.

Play-by-play vs. Action Highlights

It takes considerable concentration and lots of idle time to listen to a sports announcer's play-by-play account of a major sports event. Investors and bankers have a short attention span and no idle time to invest in a play-by-play account of your company's operational strategy. If you really want to wow them with details, invest that time and energy into your spreadsheet projections where you will have their attention.

Your operation strategy should be action highlights of key decisions and planned events that will have a significant impact on your business. These year-to-year action highlights should outline important business decisions and activities you have planned over the next three to five years. Don't feel the need to go into a lot of detail. The main purpose of this exercise is to show your reader that considerable thought, planning and research have been invested in this project and that its not the product of some chemically-induced intellectual inspiration.

The following are operational strategy highlights from a five-year business plan for a consumer/trade publication called DX.

First Year

Build Circulation
To achieve the magazine's rate base goal of 12,000 during the first year, active direct mail promotion efforts will be targeted at music and sound retailers, club owners and record stores. Interest among record stores to carry the magazine has been very positive.

The target goal for the first year is a nationwide network of 200 record shops and select audio retailers selling a minimum of 15 magazines per issue. To accomplish this, a promotional mailing will be sent out to record stores and DJ equipment retailers. Additional mailings throughout the year will also be used to support this effort.

In addition, complimentary copies of the magazine will be shipped to a select number of manufacturer rep firms for distribution to their dealers and record pools. Several rep firms both in the U.S. and Canada have agreed to forward the magazine to their dealers.

Fine Tune the Editorial Product
The primary editorial goal of DX during this time is to build the editorial staff and structure the editorial departments. To help in the selection of products for review, bind-in reply cards featuring product listings will enable readers to select those products they would like to see reviewed in forthcoming issues.

To aid in the planning of future articles, editorial surveys will mailed to select subscribers for input. These surveys will include a listing of article titles with a brief description of the editorial contents.

Increase Advertiser Participation
The major effort at this time will be to identify potential advertisers and familiarize them with the magazine. An in-house database of prospects will be maintained to track all sales calls, promotional mailings, ad insertions and sales leads.

Second Year

Circulation growth
The rate base goal for DX during its second year is 16,000. Once again, promotional mailings and trade show attendance will be used to build circulation. In addition, efforts will be directed at building subscriptions overseas. Ad placements in select overseas publications and trade shows will be used to accomplish this goal.

At this time, additional sales staff will be recruited to call on key accounts on the East Coast and Canada. In addition to direct mail advertising, flip chart and videotape presentations will be used on sales calls. Attendance at leading industry trade shows will also used to build advertiser participation.

An important goal to be realized at this time is increasing the magazine's frequency from bimonthly to monthly. To support this effort, additional editorial support staff will be recruited.

In Summary

The following are a few examples of important action highlights to include in your operational strategy.

œ Staff expansion

œ Relocation

œ Major expenditures

œ Changes in media selection and advertising strategies

œ Mergers and acquisitions

œ Chances in organizational structure

œ Patent filings and certifications

œ Legal proceedings that will have a significant impact on the business

œ Target goals

œ Planned trade and media events-- press conferences, trade and talk shows, etc.

œ Stock offers

No one can accurately predict the future and since you can't it would be also wise to include a time-line in your operational strategy for re-evaluating sales performance and future goals.

FINANCIAL PROJECTIONS

Your financial projections are the climax of your business plan...it's where the rubber meets the road. And, like tires, if your financial projections lack traction...your venture is going nowhere. To put real bite into your financial projections, you need solid research data as the basis for your sales assumptions. This data may be based on past sales history or primary research that you have conducted. Either way, you need some data or information on which to build your case.

Basic assumptions -- building your case

Whether you're putting a man on the moon or building your first house, the whole process begins with some basic assumptions: we have the technology, money and manpower to make it all happen. Likewise, your financial projections must be built around some basic assumptions. If these assumptions are flawed or inaccurate, your financial projections will have no legs to stand on.

If your assumptions are based on primary research you've conducted, you may want to include a brief summary of this information as an introduction to your financial data. This way, you and your reader are both on the same page and will, hopefully, arrive at the same conclusions.

Here is an example of a basic assumption in support of sales projections.

Basic Assumptions

Throughout the calendar years of 1999 and 2000, sales rose from $850,000 to $1,650,000--an increase of 94%. This increase in sales was attributed to the addition of three new sales associates to the marketing staff. The average annual sales volume generated by each associate during this period was $133,333.

Breaking-Even Analysis

A break-even analysis determines the number of gross sales necessary to meet all operational expenses-- your bottom line. This sales figure is important in helping to set realistic sales goals. This number can be computed using the formula below:

BE = FC € (1 - (VC € corresponding sales))

What is the break-even point for a business with total sales of $195,000, fixed costs (FC) of $60,000 and variable costs (VC) of $55,000, the break-even point (BE) is:

BE = FC € (1 - (VC € corresponding sales))

= 60,000 € (1 - (55 € 195))

= 60,000 € 0.71

= 85,507

Break-even = $85,507

Best-Case Scenario

A best-case scenario is a spreadsheet computation based on optimum sales conditions. This sales figure is useful in determining the maximum sales potential for any given venture. Manufacturers often use best-case scenarios to assess what impact production limitations might have on sales. Best-case scenarios are also an excellent way to determine the profit ceiling of a business venture in order to appraise its total worth. Best-case scenario computations are also an excellent way for potential investors and lenders to cross check for overly inflated sales projections.

Worst-Case Scenario

Investors like to know the downside of any venture in order to assess the risk. For this reason, you need to build in a contingency into your plan to minimize risk. Your worst-case scenario is based on the minimum number of sales that can be anticipated utilizing your backup plan. For example, your worst-case scenario might reflect product sales at a lower profit margin to stimulate product movement. Another worst-case scenario may factor in staff downsizing to lower overhead in response to sluggish sales. Again, the mission here is to show investors or lenders your plan for minimizing the downside.

Pitfalls to Avoid

The following is a list of snares you need to steer clear of when writing your business plan. A careful review of this information will help you avoid these common pitfalls that many first-time business planners stumble into.

œ Avoid using financial forecasting as a substitute for business planning.

œ Don't ignore market or industry trends at national or regional levels.

œ Don't overstate market shares and growth, sales forecasts, and profit levels.

œ Give sufficient consideration to capital requirements.

œ Don't under estimate costs and delays that are likely to be encountered.

œ Don't disregard industry performance norms and response from the competition.

œ Don't ignore generally accepted financial guidelines and ratios.

œ Avoid making overly optimistic assumptions about the availability of loans, trade credit, grants, equity etc.

œ Avoid paying yourself a high salary during the first few years of the plan.

Items to include

There are several other documents you will want to include along with your financial projections. If yours is an existing business, you will need to include a current balance sheet and cash flow statement for the last three to five years. If you are a start-up venture, prepare projected annual balance sheets for three years. Your balance sheet should include the following items:

Current Assets -- Cash on hand and other assets that can be readily converted into cash such as stocks, bonds, insurance policies, etc.

Fixed Assets -- These include land, buildings, equipment, machinery, furniture, fixtures, etc.

Other Assets -- These items are used to generate income or are used in the general course of business such as office supplies, vehicles, and contracts.

Liabilities -- Claims that creditors have against the assets of the business. In short, debts owed by the business.

Current Liabilities -- Payments or debts that are due within a year. These might include vehicle installment loans, salaries and especially employer taxes such as unemployment insurance and workers compensation insurance.

Long-term (Fixed) Liabilities -- Debts or portions of debts that are not due for payment within a year. Payments on future income taxes for profits of the current year but are not due for payment until later.

Equity -- Those assets of your business minus its liabilities. This equity is the owner's investment plus any profits (or any losses) that have been left to accumulate in the business. If your business is incorporated, this will be reflected in the capital stock account as the paid-in value of shares issued to the owner(s) of the business.

Undistributed Profits -- This is recorded in the earned-surplus account. If your business is a proprietorship or partnership, these are the capital accounts entries under the name(s) of the owners. Any increases in owner's equity as a result of undistributed earning are also recorded here, as well as any decease in equity due to profit losses.

SUPPORTING DOCUMENTS

No business plan is ever rejected for providing too much information. On other hand, plans are often returned for lack of a few vital pieces of information. The following is a list of supporting documents you might want to include in your plan in an appendix:

Resumes -- In addition to the staff profiles of your management team, include resumes of your support staff, consultants or anyone else who will be actively involved in your business venture.

Credit Information -- A copy of your current report will be good to include. This will save the investor or lender the time and effort to pull a report, which may translate into a quicker loan or investment decision. Credit references from your vendors and suppliers are also highly recommended and may help smooth out any wrinkles in your credit report.

Quotes and Estimates -- Include any quotes or estimates in support of any expenses for outside products or services. This will help dispel any concerns over inflated numbers.

Contracts and Commitments -- If you have existing contracts or letters of intent from clients and prospective customers, be sure to include copies of these documents in your plan. These documents will go a long way in supporting your sales projections.

Deed, Leases or Buy/Sell Agreements -- Include any documents that support property or equipment ownership and any leasing or marketing agreements you have entered into.

Legal Documents -- Legal documents you may want to include in your plan are patents and copyrights, certificates and licenses, partnership agreements, franchise agreements, etc. If your business plan contains sensitive and proprietary information, you may want to include a non-disclosure and non-compete agreement which a prospective investor or lender will sign before viewing the plan. Exercise caution before asking a potential investor or lender to sign a non-disclosure and non-compete agreement as this may be viewed as a breach of trust. After all, you are asking them to "trust" you with their money.

Research Data -- Include any research or demographic data to support your market and sales projections. Without these "legs" to stand on, your whole presentation can fall flat on its face.