P R E B U S I N E S S P L A N P R E P A R A T I O N

Business Start-Up Basics II

Presented by:

SBDC Business Advisors

Lisa Hutson Ana Badillo Susan Patton

Agenda

1. Determine financing needs a. Discuss Start up Costs b. Loan Requirements & Grants c. 5 C’s of Credit

2. Transition to Financial Plan a. Forecast Unit Sales b. Preliminary Pricing

a. Cost Driven b. Market Driven

c. Costs – COGS + O/H

3. Prepare Projections a. Start-up Costs b. Breakeven Analysis c. 1-3 Years

Look at Your Business Idea

Can this idea be turned into a business?

Is there a ‘real’ need for the product or service?

Who will buy? How much? How often? How much will they pay?

Is there competition? How much? Who/Where is it?

How much growth potential exists? Market share? Product/Service line expansion?

Can I afford to do this business now or ever?

What am I putting at risk?

If I decide not to do the deal, have I failed? Will I regret it later?

Quick Review of BBI

1. Are you an Entrepreneur? 2. Types of Business Structures 3. Business Plan Components 4. Market Research

Possible Start-Up Costs

Register with the State ($125) Starting Inventory Leasehold Improvements Professional Fees Equipment Computer, Printer, Software

Website Networking Trade Shows, Chamber

Salary

Do You Need Financing?

Private Funding (Family/Friends)

Private Investors

Stockholders

Venture Capitalists

Banks

Grants

Alternative Lending

Micro Lenders

Specialty

Brokers

How much money will you need and where will you get it?

Grants

- http://www.sba.gov/category/navigation-structure/loans-grants/grants

SBA does not provide grants for starting and expanding a business. Government grants are funded by

tax dollars and require very stringent compliance and reporting

measures.

Loan Requirements

Sufficient Credit Score

Business Plan (complete)

Collateral

Personal Finance Statement

Owner Injection of Funds

Cash Flow

Experience

5 C’s of Credit

Character

Capacity

Collateral

Capital

Conditions

Character

Previous Credit

Employment History

Time at Residence

Education Background

Capacity

Ability or capacity to repay

Based on personal cash flow

Income vs. expenses

Debt to income ratios

Collateral

Loan protected by collateral is safer to lender than one that is not

Unsecured vs. secured

Better the collateral, the better the lender likes the loan

Loan structure to match collateral/need

Capital

Personal net worth

Other assets to help you pay debt if you default

More assets at stake

Net worth = financial astute

Conditions

Terms of loan – interest rate, principle, etc.

Economic environment

Credit

Credit Bureaus – Experian,

Transunion & Equifax

What is included? Previous and current credit

Average and current balances

Late payments

Over the limit charges

Previous and current addresses & employers

Credit

Credit cards

3-5 credit cards is average per cardholder

$14,743 is average household credit card debt

14.83% is average APR

Credit

FICO Scores Range from 300-850

720 + is excellent

Under 680 is difficult to get financing

Things that impact your score: Payment history…30, 60, 90 days late (35%)

Average balance compared to credit limit (30%)

Length of credit history (15%)

Variety of debt sources (10%)

Recent activity (10%)

Credit

What is your credit score?

www.annualcreditreport.com

www.creditkarma.com

Credit

Lender must send a letter informing you why on a personal loan

Lender may not disclose “real” reasons on a business loan

Try alternatives

Try improving credit and apply later

Credit

Credit Repair Correct outdated & incorrect data

Dispute errors

Consistently make on time payments

Reduce your total debt

Variety of debt – not just credit cards

Be careful of closing old accounts

Maintain debt to credit ratio and length of credit

Pricing Parameters

Pricing your product or service correctly is one of the most important business decisions

Setting a price too high or too low could limit your business growth

Cover both variable and fixed expenses (Cost Basis)

Research what the competition charges (Market Basis)

Set prices that reflect the value you provide

Pricing Parameters

Cost Basis – takes costs and adds amount to make profit

Cost of Goods Sold • Material • Direct Labor • Delivery

Overhead • Rent/Utilities • Insurance • Office

• Current Shelf Price • Alternative Price (higher, lower,

sale…why?)

Market Basis – also known as competition based pricing

Breakeven Analysis

To determine the number of units sold to cover overhead and make profit

BE = fixed costs/(unit selling price – variable costs)

1. Determine companies fixed costs (won’t fluctuate with volume. i.e. rent &

utilities)

2. Determine variable costs (fluctuate with volume. i.e. COGS)

3. Determine price you will sell product or service

4. Calculate your companies Breakeven Point

Breakeven Example

• You sell a gourmet pizza for $20 • It costs you $6 in variable costs per pizza • Your companies fixed costs are $2200 per month (rent,

utilities, wages) BE = $2200/ ($20 - $6) BE = $2200/$14 BE = 157 You will need to sell 157 pizzas per month to break even

Financial Forms Breakeven Worksheet (by SCORE)

Breakeven AnalysisEnter your company name here

Cost Description Fixed Costs ($) Variable Expenses (%)

Inventory or Materials -$ 0.0

Direct labor (includes payroll taxes) - 0.0

Other expenses - 0.0

Other expenses - 0.0

Salaries (includes payroll taxes) - 0.0

Supplies - 0.0

Repairs & maintenance - 0.0

Advertising - 0.0

Car, delivery and travel - 0.0

Accounting and legal - 0.0

Rent - 0.0

Telephone - 0.0

Utilities - 0.0

Insurance - 0.0

Taxes (Real estate, etc.) - 0.0

Interest - 0.0

Depreciation - 0.0

Other (specify) - 0.0

Other (specify) - 0.0

Miscellaneous expenses - 0.0

Principal portion of debt payment - 0.0

Owner's draw - 0.0

Total Fixed Expenses $ -

Total Variable Expenses 0.0

Breakeven Sales level = 0

Projections –Revenue and Cost of Goods

[Your Company Name]

Projections For the Year Ended [Mmmm Dd, 200X] Jan. Feb. Mar. Apr.

Revenue:

Gross Sales (Note 1) $0.00 $0.00 $0.00 $0.00

Less: Sales Returns and Allowances $0.00 $0.00 $0.00 $0.00

Net Sales $0.00 $0.00 $0.00 $0.00

Cost of Goods Sold:

Beginning Inventory $0.00 $0.00 $0.00 $0.00

Add: Purchases (Note 2) $0.00 $0.00 $0.00 $0.00

Less: Ending Inventory $0.00 $0.00 $0.00 $0.00

Cost of Goods Sold $0.00 $0.00 $0.00 $0.00

Gross Profit (Loss) $0.00 $0.00 $0.00 $0.00

Projections -Expenses

Expenses:(Note 3)

Advertising $0.00 $0.00 $0.00 $0.00

Amortization (Note 4) $0.00 $0.00 $0.00 $0.00

Bad Debts $0.00 $0.00 $0.00 $0.00

Bank Charges $0.00 $0.00 $0.00 $0.00

Charitable Contributions $0.00 $0.00 $0.00 $0.00

Commissions $0.00 $0.00 $0.00 $0.00

Contract Labor (Note 5) $0.00 $0.00 $0.00 $0.00

Credit Card Fees $0.00 $0.00 $0.00 $0.00

Delivery Expenses $0.00 $0.00 $0.00 $0.00

Depreciation (Note 6) $0.00 $0.00 $0.00 $0.00

Dues and Subscriptions $0.00 $0.00 $0.00 $0.00

Insurance $0.00 $0.00 $0.00 $0.00

Interest (Include in loan payments) $0.00 $0.00 $0.00 $0.00

Maintenance $0.00 $0.00 $0.00 $0.00

Miscellaneous $0.00 $0.00 $0.00 $0.00

Office Expenses $0.00 $0.00 $0.00 $0.00

Operating Supplies $0.00 $0.00 $0.00 $0.00

Payroll Taxes $0.00 $0.00 $0.00 $0.00

Permits and Licenses $0.00 $0.00 $0.00 $0.00

Postage $0.00 $0.00 $0.00 $0.00

Professional Fees (Note 7) $0.00 $0.00 $0.00 $0.00

Property Taxes $0.00 $0.00 $0.00 $0.00

Rent $0.00 $0.00 $0.00 $0.00

Repairs $0.00 $0.00 $0.00 $0.00

Telephone $0.00 $0.00 $0.00 $0.00

Travel $0.00 $0.00 $0.00 $0.00

Utilities $0.00 $0.00 $0.00 $0.00

Vehicle Expenses $0.00 $0.00 $0.00 $0.00

Wages (Note 8) $0.00 $0.00 $0.00 $0.00

Total Expenses $0.00 $0.00 $0.00 $0.00

Projections –Loans and Other Income

Loans:

Mortgage Payments $0.00 $0.00 $0.00 $0.00

Term Note Payments $0.00 $0.00 $0.00 $0.00

Line of Credit Payments $0.00 $0.00 $0.00 $0.00

Total Loan Payments $0.00 $0.00 $0.00 $0.00

Other Income:

Gain (Loss) on Sale of Assets $0.00 $0.00 $0.00 $0.00

Interest Income $0.00 $0.00 $0.00 $0.00

Total Other Income $0.00 $0.00 $0.00 $0.00

Net Disposable Income (Loss) $0.00 $0.00 $0.00 $0.00

Projections Notes

All businesses, whether startup or growing, will be required to supply prospective financial data. Most of the time, creditors will want to see what you expect your company to be able to do within the next three to five years. For the first year, you should supply monthly or quarterly projections. After that, you may be able to stretch it to quarterly and/or yearly projections for years two through five. Make sure that your projections match your funding requests; creditors will be on the lookout for inconsistencies. It's much better if you catch mistakes before they do. If you have made assumptions in your projections, be sure to summarize what you have assumed. This way, the reader will not be left guessing. Finally, include a short analysis of your financial information. Include a ratio and trend analysis for all of your financial statements (both historical and prospective). Since pictures speak louder than words, you may want to add graphs of your trend analysis (especially if they are positive).

Questions?

What’s next?

• BBI – Learn Steps of Starting Business and About Writing a Business Plan

• BBIII – Learn Basics of Balance Sheet, Profit & Loss Statement, Basic Chart of Accounts, etc.)

• How to request individual Business Counseling • www.lorainccc.edu/sdbc • 440-366-4370