The Business Plan Startup Business Series Part 3 of 3

6bb54580-e74a-41d5-8b4c-7dca2e781c55

VII.                  Management and Organization

Who will manage 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’ll have more than 10 employees, create an organizational chart showing the management hierarchy and who is responsible for key functions.

Include position descriptions for key employees. If you are seeking loans or investors, include resumes of owners and key employees.

Professional and Advisory Support

List the following:

  • Board of directors
  • Management advisory board
  • Attorney
  • Accountant
  • Insurance agent
  • Banker
  • Consultant or consultants
  • Mentors and key advisors

VIII.              Personal Financial Statement

Include personal financial statements for each owner and major stockholder, showing assets and liabilities held outside the business and personal net worth. Owners will often have to draw on personal assets to finance the business, and these statements will show what is available. Bankers and investors usually want this information as well.

IX.          Startup Expenses and Capitalization

You will have many expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them.

Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach we recommend.

Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 percent of the total of all other start-up expenses.

Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.

X.           Financial Plan

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 break-even calculation. Together they constitute a reasonable estimate of your company’s financial future. More important, 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

Many business owners think of the 12-month profit and loss projection as the centerpiece of their plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful.

Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year.

Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.

Research Notes: Keep careful notes on your research and assumptions, so that you can explain them later if necessary, and also so that you can go back to your sources when it’s time to revise your plan.

Four-Year Profit Projection (Optional)

The 12-month projection is the heart of your financial plan. This section is for those who want to carry their forecasts beyond the first year.

Of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year.

Projected Cash Flow

If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash.

The point of this worksheet is to plan how much you need before startup, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterward. It will enable you to foresee shortages in time to do something about them—perhaps cut expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by surprise.

There is no great trick to preparing it:  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).

You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases.

You should also track cash outlays prior to opening in a pre-startup column. You should have already researched those for your startup expenses plan.

Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start-up capital. This plan will also predict just when and how much you will need to borrow.

Explain your major assumptions, especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, 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? When?

Are there irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory buildup, that should be budgeted?

Loan payments, equipment purchases, and owner’s draws usually do not show on profit and loss statements but definitely do take cash out. Be sure to include them.

And of course, depreciation does not appear in the cash flow at all because you never write a check for it.

Opening Day Balance Sheet

A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management.  A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity.

Use a startup expenses and capitalization spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet.

Optional:  Some people want to add a projected balance sheet showing the estimated financial position of the company at the end of the first year. This is especially useful when selling your proposal to investors.

Break-Even Analysis

A break-even analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit.

Expressed as a formula, break-even is:

Breakeven Sales          = Fixed Costs
1- Variable Costs

 

(Where fixed costs are expressed in dollars, but variable costs are expressed as a percent of total sales.)

Include all assumptions upon which your break-even calculation is based.

XI.               Appendices

Include details and studies used in your business plan; for example:

  • Brochures and advertising materials
  • Industry studies
  • Blueprints and plans
  • Maps and photos of location
  • 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
  • List of assets available as collateral for a loan

XII.           Refining the Plan

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 using this plan to present to lenders, include:

o    Amount of loan

o    How the funds will be used

o    What this will accomplish—how will it make the business stronger?

o    Requested repayment terms (number of years to repay). You will probably not have much negotiating room on interest rate but may be able to negotiate a longer repayment term, which will help cash flow.

o    Collateral offered, and a list of all existing liens against collateral

For Investors

  • Investors have a different perspective. They are looking for dramatic growth, and they expect to share in the rewards:

o    Funds needed short-term

o    Funds needed in two to five years

o    How the company will use the funds, and what this will accomplish for growth.

o    Estimated return on investment

o    Exit strategy for investors (buyback, sale, or IPO)

o    Percent of ownership that you will give up to investors

o    Milestones or conditions that you will accept

o    Financial reporting to be provided

o    Involvement of investors on the board or in management

For Type of Business

Manufacturing

  • Planned production levels
  • Anticipated levels of direct production costs and indirect (overhead) costs—how do these compare to industry averages (if available)?
  • Prices per product line
  • Gross profit margin, overall and for each product line
  • Production/capacity limits of planned physical plant
  • Production/capacity limits of equipment
  • Purchasing and inventory management procedures
  • New products under development or anticipated to come online after startup

Service Businesses

  • Service businesses sell intangible products. They are usually more flexible than other types of businesses, but they also have higher labor costs and generally very little in fixed assets.
  • What are the key competitive factors in this industry?
  • Your prices
  • Methods used to set prices
  • System of production management
  • Quality control procedures. Standard or accepted industry quality standards.
  • How will you measure labor productivity?
  • Percent of work subcontracted to other firms. Will you make a profit on subcontracting?
  • Credit, payment, and collections policies and procedures
  • Strategy for keeping client base

High Technology Companies

  • Economic outlook for the industry
  • Will the company have information systems in place to manage rapidly changing prices, costs, and markets?
  • Will you be on the cutting edge with your products and services?
  • What is the status of research and development? And what is required to:

o    Bring product/service to market?

o    Keep the company competitive?

  • How does the company:

o    Protect intellectual property?

o    Avoid technological obsolescence?

o    Supply necessary capital?

o    Retain key personnel?

High-tech companies sometimes have to operate for a long time without profits and sometimes even without sales. If this fits your situation, a banker probably will not want to lend to you. Venture capitalists may invest, but your story must be very good. You must do longer-term financial forecasts to show when profit take-off is expected to occur. And your assumptions must be well documented and well argued.

Retail Business

  • Company image
  • Pricing:

o    Explain markup policies.

o    Prices should be profitable, competitive, and in accordance with company image.

  • Inventory:

o    Selection and price should be consistent with company image.

o    Inventory level: Find industry average numbers for annual inventory turnover rate (available in RMA book). Multiply your initial inventory investment by the average turnover rate. The result should be at least equal to your projected first year’s cost of goods sold. If it is not, you may not have enough budgeted for startup inventory.

  • Customer service policies: These should be competitive and in accord with company image.
  • Location: Does it give the exposure that you need? Is it convenient for customers? Is it consistent with company image?
  • Promotion: Methods used, cost. Does it 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?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: