Business Plans

Part 4Taken from http://www.bplans.com/hurdleonline

http://www.sba.gov/starting/indexbusplans.html

Assignments to Date• Preliminary Mini Plan

– Mission/Objectives – Keys to success – Target Market – Competitive Advantage – Basic Strategies – Initial break-even chart

• Company Summary & Product Description– Start-up Funding Table

• Market Analysis Summary & Management Summary– Sales Forecast and Assumptions– Personnel Plan

Simplified Business Plan Outline

• Executive Summary

• Company Summary

• Product Description

• Market Analysis Summary

• Strategy and Implementation Summary

• Management Summary

• Financial Plan

Strategy and Implementation“Strategy is focus”

• What are your main marketing and sales priorities?

• Keep this list short

• Use “Strategy Pyramid” to make it real

Strategy Pyramid Example

Strategy

Tactics

Program(s)

Strategy and Implementation Making it Real - Milestones Table

Financial PlanComponents

• Important assumptions• Key financial indicators• Breakeven• Profit and loss• Projected cash flow (most critical projection)• Projected balance sheet• Business ratios

How Tables and Charts are Linked

Points About Cash“Cash is King”

• Profitable companies go broke because their money is tied up in assets

• Need to understand the difference between profit and cash (can spend cash)

• The time to solve cash flow problems is up front

• An understanding of this is important to your business plan

Cash vs. ProfitsStarting Numbers

Income BalanceSales $0 AssetsCost of Sales $0 Bank Balance $100Profit $0 Total $100

LiabilitiesCapital

Paid-In $100Earnings $0

Total $100

“Paid-In” – initial cash that I invested in company.

Assets = Capital + Liabilities

Need to match

Cash vs. ProfitsSell a Widget

Income BalanceSales $150 AssetsCost of Sales $100 Bank Balance $150Profit $50 Total $150

LiabilitiesCapital

Paid-In $100Earnings $50

Total $150

“Cost of Sales” is how much the widget costs me.

Initial sales cost covered by my initial capital investment of $100.

Cash vs. ProfitsSell Another

Income BalanceSales $300 AssetsCost of Sales $200 Bank Balance $200Profit $100 Total $200

LiabilitiesCapital

Paid-In $100Earnings $100

Total $200

Cash vs. ProfitsAnd Still Another

Income BalanceSales $450 AssetsCost of Sales $300 Bank Balance $250Profit $150 Total $250

LiabilitiesCapital

Paid-In $100Earnings $150

Total $250

What’s wrong with this picture?

A bit too simple......these are IDEAL customers.

Cash vs. ProfitsAdding Realism - Selling on Terms

Income BalanceSales $150 AssetsCost of Sales $100 Bank Balance $0Profit $50

Total $150LiabilitiesCapital

Paid-In $100Earnings $50

Total $150

Accounts Receivable $150

Bank balance is $0 because the customer has not paid their bill yet.

Accounts Receivable – you are extending credit to a customer

Need to match

Cash vs. ProfitsBuying on Terms

Income BalanceSales $150 AssetsCost of Sales $100 Bank Balance $0Profit $50

Total $250Liabilities

CapitalPaid-In $100Earnings $50

Total $250

Accounts Receivable $150Inventory $100

Accounts Payable $100Total Liabilities $100

Accounts Payable – money that you owe others. Business looks good, so I bought a widget “on terms” ( $100 ) from my supplier, and placed this widget in inventory.

Cash vs. ProfitsBuying on Terms & Short Term Debt

Income BalanceSales $450 AssetsCost of Sales $300 Bank Balance $0Profit $150

Total $550Liabilities

CapitalPaid-In $100Earnings $150

Total $550

Accounts Receivable $450Inventory $100

Accounts Payable $100

Total liabilities $300Short-term debt $200

Received an order for two widgets. My supplier now wants cash up-front for these widgets. Have to borrow $200 to finance these two widgets, and still keep one widget in inventory. I expect to pay it back quickly. Short term debt is debt to be paid off in less than one year.

Cash vs. ProfitsLesson: Business looks a lot better with $400 in

starting capitalIncome Balance

Sales $450 AssetsCost of Sales $300 Bank Balance $300Profit $150

Total $850Liabilities

CapitalPaid-In $400Earnings $150

Total $850

Accounts Receivable $450Inventory $100

Accounts Payable $100

Total liabilities $300Short-term debt $200

$550 in working capital

Have money in the bank

Case ExamplesBaseline:Computer store$6 million annual sales8% net profit on sales

Cash Flow

Cash Balance

Looks good, money in bank

“Cash Balance” – cash in bank

“Cash Flow” – how much cash flows in/out of bank each month. A positive cash flow in a month increases cash balance for next month; a negative cash flow decreases cash balance for next month.

Case ExamplesOnly change is adding 15 days, on average, to receive money on invoices

Reduced cash balance

Case ExamplesOnly change from baseline is going from two to three month inventory

I owe money!!

Profit and Loss Statement

• What owners are most interested in• Uses sales forecast and personnel plan numbers• Good idea to link the profit and loss to other

sheets so revisions in numbers are automatically updated

• You will do a pro forma profit and loss – one that projects the future– You have to estimate future revenues and cost

Profit and Loss Example(Income Statement)

You will have to produce one of these over a three year period.

Also will have to produce a cash flow statement and balance sheet.

Returning to Cash and Balance Sheet Focus

• Different point of view than profit and loss• We are following the money in and money out• Sources of money

– Cash sales– Payments from receivables– New loan money– New investment

• Expenditures– Buying widgets in cash– Paying interest– Paying bills– Paying loans

Sample CaseSee “Cash is King” section of Hurdles for information on entries

Cash Balance Balance Sheet

Numbers in thousands

Definitions for Previous Slide“Retained Earnings” – earnings re-invested in company, earnings not paid out as dividends.

“paid-in capital” – capital received from investors in return for stock. Paid-in capital does not occur only at start-up. Can always seek out more capital. Need more capital if you want to grow as you have to build buildings, buy widgets, etc, and you might not have the cash to do this.

Key Cash Flow Points

• Profits are very important to cash (though this does not tell the whole story)

• An increase in assets decreases cash• An increase in liabilities increases cash• Extra dollars in receivables or inventory as assets are

dollars that you don’t have in cash• Dollars that you have in payables are dollars you have in

cash

Balance SheetStart-up cost

Business Ratios

Different barometers on how healthy a business is.

For a person, a barometer is:

Net Worth = Assets (what you own) – Liabilities (what you owe).

Positive is good.

Business RatiosGross Margin = sales – cost of sales

Net Profit Margin = net profit/sales

Return on Assets = net profit/total assets

Return on Equity (ROI) = net profit/net worth

Current Ratio = short-term assets/short-term liabilities

Quick Ratio = (short-term assets – inventories)/short-term liabilities

Net Working Capital = short-term assets – short-term liabilities

Interest Coverage = profit before interest and taxes/total interest payments

Acid test = (short-term assets – accounts receivable – inventory)/short term liabilities

Executive Summary

• Most important of your chapter summaries – the doorway to the rest of the plan

• One-page, written last• Example format:

– Opening paragraph– One highlight graphic– A list of two to four measurable objectives

Ex. Net income more than 10% of sales by the third year

– A mission statement defining your business concept– A list of two to three keys to success

SummaryImplementation of Plan Must Be Communicated