guide to preparing a retail business plan

8/3/2019 Guide to Preparing a Retail Business Plan

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GUIDETO

PREPARING

A

BUSINESS

PLAN

INTRODUCTION

Why shouldyougo to the troubleofcreatingawrittenbusinessplan? Thereare threemajor

reasons:

1. Theprocessofputtingabusinessplantogether,includingthethoughtyouputinbeforebeginning

to

write

it,

forces

you

to

take

an

objective,

critical,

unemotional

look

at

your

businessprojectinitsentirety.

2. Thefinishedproductyourbusinessplanisanoperatingtoolwhich,properlyusedwillhelpyoutomanageyourbusinessandworktowarditssuccess.

3. Thecompletebusinessplanisthemeansforcommunicatingyourideastoothersandprovidesnecessaryinformationtoyourlandlord,amongothers.

The importance of planning cannotbe overemphasized. By taking an objective look at your

business,youcanidentifyareasofweaknessandstrength,pinpointneedsyoumightotherwise

overlook,spot

problems

before

they

arise,

and

begin

planning

how

you

can

best

achieve

your

business goals. As an operating tool, yourbusiness plan helps you to establish reasonable

objectivesandfigureouthowtobestaccomplishthem. Italsohelpsyoutoredflagproblemsas

theyariseandaidsyouin identifyingtheirsource,thussuggestingwaystosolvethem. Itmay

evenhelpyoutoavoidsomeproblemsaltogether.

No business plan, no matter how carefully constructed and no matter how thoroughly

understoodwillbeofanyuseatallunlessyouuseit. Goingintobusinessisroughoverhalfof

allnewbusinessesfailwithinthefirsttwoyearsofoperation;over90percentfailwithinthefirst

10years. Amajorreasonforfailureislackofplanning. Thebestwaytoenhanceyourchancesof

successistoplanandfollowthroughonyourplanning.

Useyourplan. Dontputitinthebottomdrawerofyourdeskandforgetit.

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STATEMENTOFPURPOSE

The firstpageofyourplan should state theobjectivesof theplanas simply aspossible. The

statementsshouldbeabriefdescriptionofhowyou intend to support the investmentyouare

makinginthebusiness. Keepthestatementshortandbusinesslike. Itwillusuallybenolonger

thanhalfapage,butitmaybelongerifnecessary. Useyourownjudgment.

TABLEOFCONTENTS

TheTableofContentsshould followyourStatementofPurpose. Theremainderof theplan is

devotedtoelaboratingandsupportingtheStatementofPurpose.

Therearethreemainsectionsofyourplan:

I. TheBusinessII. FinancialDataIII. SupportingDemographics

Thesesections

may

be

broken

down

further

if

it

seems

necessary

to

do

so.

It

helps

the

reader

find

hisorherway througha lengthyproposal ifyoubreak theTableofContentsdown into sub

categories. TheStatementofPurposestateswhatyourdeal is. Yourreadermaywant to turn

immediatelytospecifics.

ASAMPLEFORMAT

I. THEBUSINESS...1A. ExecutiveSummary......1

B. DescriptionofBusiness....1C. Market.....1D. Competition....2E. Management..3F. Personnel....3G. Financing....4

II. FINANCIALDATA....6A. SourcesandApplicationsofFunding....6

B. CapitalEquipmentList.....7C. ProFormaBalanceSheet......8D. BreakevenAnalysis...9E. IncomeProjections..10

1.

Five

Year

Summary..10

2.DetailbyMonth,FirstYear.11

3.DetailbyYear,SecondThroughFifthYears....12

4.NotesofExplanation....13

F. ProFormaCashFlow....15

1. DetailbyMonth,FirstYear15

2. DetailbyYear,SecondThroughFifthYears...16

3. NotesofExplanation...17

III. SUPPORTINGDOCUMENTS

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PARTI.THEBUSINESS

This is themost importantpartofyourbusinessplan. Theobjectiveof thissection is to

makeaclearstatementof:

1. Whatthebusinessis(orwillbe);

2. What market do you intend to service, the size of the market and yourexpectedshare;

3. Whyyoucanservicethatmarketbetterthanyourcompetition;4. Whatmanagement and other personnel are available and required for the

operation;and

TheExecutiveSummaryshouldanswertheseandotherquestionsasoutlinedbelow.

Remember that technical support for yourbusiness ideawillbe foundprimarily in the

FINANCIAL DATA section and the SUPPORT DOCUMENTS. In this section (THE

BUSINESS),referencethesupportingdataasneeded.

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A. GUIDELINESFOREXECUTIVESUMMARYSECTIONThe followingchecklist isanoutlineyoucanuse tomake sure that importantpointsare

covered in your Executive Summary and your entire plan. These Guidelines are a

suggestion. Yourbusinessmayneedtostressdifferentpoints. Ifso,makesurethatthey

areincluded.

DescriptionofBusiness

1. Businessform: proprietorship,partnership,corporation?

2. Merchandising,manufacturingorservice?3. Whatistheproduct?4. Isitanewbusiness? Atakeover? AnExpansion?5. Whywillyourbusinessbeprofitable?6. Whenisyourbusinessopen?7. Isitaseasonalbusiness?8. What have your learned about your kind ofbusiness from outside sources

(tradesuppliers,banks,otherbusinesspeople,publications)?

TheMarket

1. Whoisyourmarket? DEFINEYOURMARKET.

2. Howareyougoingtosatisfyyourmarketswants?3. Howwillyouattractandholdyourshareofthemarket?4. Howareyougoingtopriceyourproduct?

Competition

1.

Plan

to

keep

an

eye

on

the

competition.

2. Whoareyournearestcompetitors?3. Howistheirbusiness?4. Whathaveyoulearnedfromtheiroperations?

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LocationofBusiness

1. Plantokeepaneyeonanydemographicshiftsinyourarea.

2. Whyisthisadesirablearea? Adesirablebuilding?Management

1. Howdoesyourbackground/businessexperiencehelpyouinthisbusiness?

Also,foryourownbenefit,whatweaknessesdoyouhaveandhowwillyou

compensateforthem,i.e.whatrelatedworkexperiencehaveyouhad?

2. Whoisonthemanagementteam?3. Whatarethedutiesofeachindividualonthemanagementteam?4. Arethesedutiesclearlydefined?How?5. Whatadditionalresourceshaveyouarrangedtohaveavailabletohelpyou

andyourbusiness?

Personnel

1. Planfortrainingpersonnelforbothoperationsandmanagement.

2. Wages: Salaryorhourly? Overtime? Fringebenefits? Taxes?3. Whatareyourpersonnelneedsnow?4. Whatwillyourneedsbeinfiveyears?

ApplicationandExpectedEffectofInvestment

1. Howwilltheinvestment(loanorinjectionofothernewfunds)makeyour

businessmoreprofitable?

2. Shouldyoubuyorleaseequipment?

3.

Do

you

need

this

money?

Establish

a

procedure

for

making

borrowing

decisions. Planyourborrowing.

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B. DESCRIPTIONOFBUSINESS

Theobjectiveofthissectionistoexplain

owhatyourbusinessis;

o howyouaregoingtorunit;

o andwhyyouthinkyourbusinesswillbesuccessful.

Decidingwhat yourbusiness is andwhat itwillbe in five years is themost

importantdecisionyouwillhavetomake. Asmallbusinessmaybeinvolvedinmore

thanoneactivity: Ifso,thejudgmentofwhatthecentralactivityis(orwhatthecentral

activities are) is crucial. Your entireplanning effort isbasedon yourperceptionof

whatbusinessyouarein.

TheDescriptionofBusinessincludes:

1. Thetypeofbusiness: Isyourbusinessprimarilymerchandisingorservice?

2. Thestatusofbusiness: Isyourbusinessastarup? Anexpansionofagoingconcern? Atakeoverofanexistingbusiness?

3. Thebusinessform: Soleproprietorship,partnership,corporation?4. Whyisyourbusinessgoingtobeprofitable?5. Whenwillyourbusinessopen?6. Whathoursofthedayanddaysoftheweekwillyoube(areyou)inoperation?7. Ifyoursisaseasonalbusiness,orifthehourswillbeadjustedseasonally,make

surethattheseasonalityisreflectedinyourrepliesto5&6.

ForANewBusiness

Yourdescriptionofthebusinessshouldcontainresponsestothefollowing(aswellasthe

sevenitemspreviouslylisted):

1. Whywillyoubesuccessfulinthisbusiness?

2. Whatisyourexperienceinthisbusiness?3. Haveyouspokenwithotherpeopleinthiskindofbusiness?4. Whatwillbespecialaboutyourbusiness?

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Many businesses fail to take advantage of the insights and experience of possible

competitors. Theyareyourbestsinglesourceofinformationandwilloftengiveyoumuch

valuableadvicefornothingmorethanachancetoshowtheirexpertise. Talkingwiththem

(and observing their business practices) will also help you define what the special

advantagesofyourownbusinesswillbe.

5. Haveyouspokenwithprospectivetradesupplierstofindoutwhatmanagerialand/ortechnicalhelptheywillprovide?

6. Haveyouaskedabouttradecredit?

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C. THEMARKET

In order to generate a consistent and increasing sales flow, you must become

knowledgeableaboutyourmarketthepeoplewhowillbebuyingyourservice,product,

ormerchandise.

Thebasicmarketingconsiderationsare:

1. Whoisyourmarket?

2. Whatisthepresentsizeofthemarket?3. Whatpercentofthemarketwillyouhave?4. Whatisthemarketsgrowthpotential?5. Asthemarketgrows,doesyourshareincreaseordecrease?6. Howareyougoingtosatisfyyourmarket?7. Howareyougoing topriceyourservice,product,ormerchandise tomakea

fairprofitand,atthesametime,becompetitive?

DEFINEYOURMARKET

Inmarketingterminology,defineyourtargetmarket. Definingthetargetmarketisdonein

alogicalfashionbyconsidering:

owhoneedsyourservice?

owhoneedsyourproduct?

owhobuysthekindofmerchandiseyoustock?

Itmaybenecessarytochangeyourservice,product,ormerchandisemixtomeettheneeds

ofthemarketyouhavetargeted(Item6)ormakerationalpriceadjustments(Item7).

Yourtargetmarket,themarketyouhaveselectedtoserve,mustbemeasured. Havingtoo

fewcustomersputsyououtofbusiness. Althoughyourbusinesswill receivecash from

foursources(1)sales,(2)loanproceeds,(3)saleoffixedassets,and(4)proceedsofnew

investment

it

will

ultimately

rely

on

SALES

as

the

main

source

of

money.

If

there

are

no

sales,thereisnobusiness.

YoucanobtaininformationaboutthesizeofyourmarketfromtheChamberofCommerce,

tradepublications,marketing consultants, otherbusiness persons, schools, and colleges.

AnexcellentsourceofinformationistheFederalCensusReportwhichincludesyourarea.

Itisbesttogethelpinassessingthemarketfromsuchsourcesratherthantryingtoguess

bywatchingpassing traffic andhoping for thebest. Goodmarketing strategymustbe

planned,anditmustbebasedongoodinformation.

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Whenyouhaveafeelingforyourmarket,thefollowingquestionscanberaised:

8. Howwillyouattractandkeepthismarket?9. Howcanyouexpandyourmarket?

Items8 and9are elaborationsof Item6. Item6 shouldbepartofyourbasic company

policy. Items8and9bringinsuchideasashowandwheretoadvertise,thesuitabilityof

yourlocation,andtheattractivenessandcomfortofyourstorefortheclienteleyouhopeto

acquire.

Thesecondaspectofyourmarketingstrategy(Item7,above)concernsprice:

10. Whatpricedoyouanticipategettingforyourproduct?11. Isthepricecompetitive?12. Whywillsomeonepayyourprice?13. Howdidyouarriveattheprice?14. Whatspecialadvantagesdoyouofferthatmayjustifyahigherprice(youdont

necessarilyhavetoengageindirectpricecompetition)?

Inordertomakeaprofit,abusinessmustmakemoreonsalesthanitspends(bothdirectly,

asincostofgoodssold,andindirectly,asinoverheadandsellingcosts). Manybusinesses

flounderbecausetheylosesightofthissimpletruth.

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D.COMPETITION

Ifyouhavedecidedonyour targetmarketand it is largeenough tobeprofitableandcontains

reasonable expansionpossibilities, thenext step is to check out your competition,bothdirect

(similaroperations)andindirect. Considerthesequestions:

1. Whoareyourthreenearestcompetitors?

2. Howwillyouroperationbebetterthantheirs?3. Howistheirbusiness: steady? increasing?decreasing?Why?4. Howaretheiroptionssimilaranddissimilartoyours?5. Whataretheirstrengthsand/orweaknesses?6. Whathaveyoulearnedfromwatchingtheiroperations?

Theobjectiveofthissectionistoenableyoutomakeyourbusinessmoreprofitablebypickingup

thegoodcompetitivepracticesandavoiding theerrorsofyourcompetitors. Carefullyviewing

thecompetitionwillsometimesleadyoutoalteryourbasicbusinessstrategyorchangeexisting

operationstocompetemoreeffectively. Thisshouldbeanongoingpracticesincemarketsshift

andsuccessattractscompetition.

InItem

1,

the

number

of

competitors

(three)

is

aminimum.

There

may

be

more,

both

direct

and

indirect. Makesureyoukeepabreastofthecompetitiononaregularbasisat leastquarterly,

preferablymoreoften.

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E. MANAGEMENT

Accordingtovariousstudiesoffailuresofsmallbusiness,roughly98%ofbusinessesfailbecause

ofmanagerialweakness; less than 2%of the failures aredue to factorsbeyond control of the

personsinvolved.

Yourbusinessplanmust take this into account. You shouldmake sure thatyour landlord is

awareofwhatstepsyouhavetakenoraretakingtocorrectanyweaknessesinyourmanagerial

staff(yourselfandanyothermanagerialpersonsinvolved);ifyouaretouseyourbusinessplan

toitsfullestextent,youshouldusethissegmenttohighlightbothstrengthsandweaknessesof

managementforyourownsake.

InpreparingtheMANAGEMENTsection,therearefiveareastobecovered:

1. PersonalHistoryofPrinciples

2. RelatedWorkExperience3. DutiesandResponsibilities4. Salaries5. ResourcesAvailabletothebusiness

Theaimistospotareasofpotentialweaknessbeforeproblemscausedbythemariseandputyou

outofbusiness.

1. PersonalHistoryofPrinciples

Thissegmentshouldincluderesponsestothefollowingquestions:

1.Whatisyourbusinessbackground?

2. Whatmanagementexperiencehaveyouhad?3. What education have you had (including both formal and informal learning

experiences)whichhavebearingonyourmanagerialabilities.

4. Personal data: age;where you live and have lived; special abilities and interests;reasons

for

going

into

business.

Thepersonaldataneedntbe a confession,but it should reflectwhereyourmotivation comes

from. Withouta lotofmotivation,yourchancesofsuccessareslight. Itpays tobe ruthlessly

honestwithyourselfevenifyoudontputtheresultsonpaper.

5. Areyouphysicallyuptothejob? Staminacounts.6. Whyareyougoingtobesuccessfulatthisventure?

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Keepinmindthatyourfamilywillbeaffectedbyyourdecisiontogointobusinessforyourself

andtrytoassessthepotentialfallout;whiletheymaybesupportivenow,willtheycontinueto

be?

7. ApersonalfinancialstatementmustbeincludedasasupportingdocumentinyourBusinessplan.

2. RelatedWorkExperience

Thissegmentisadetailedresponsetotheexperiencefactorsmentionedearlier. Itincludes(butis

notlimitedto)responsestothefollowing:

1. Directoperationalexperienceinthistypeofbusiness;

2. Managerialexperienceinthistypeofbusiness;3. Managerialexperienceacquiredelsewherewhetherintotallydifferentkindsof

businessesor

as

an

offshoot

of

club

or

team

membership,

civic

activities,

church

work,orsomeother.

3. DutiesandResponsibilities

Onceyouhavewrittendowntheexperienceandskills(andhaveafeelfortheweaknesses)ofthe

proposedmanagement,thissegmentbecomesmuchsimpler. Followtherule:

ALWAYSBUILDONSTRENGTHSANDSEEKTO

ALLEVIATEWEAKNESSES

Attemptingto

make

asales

manager

out

of

your

star

salesman

may

also

be

folly.

Use

skills

to

advantage.

Thescarcestassetyouwillhaveistime. Tomakethemostofit,makesurethatyoubudgetyour

timecarefullybyspellingout,inadvance,

owhodoeswhat;

owhoreportstowhom;and

owherethefinancialdecisionsgetmade.

Include:

1.

Time

for

planning

and

reviewing

plans

2. Majoroperatingduties(purchasing,sales,personnel,promotion,production,andsoforthasappropriateforyourbusiness.

3. Planning.

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Thepurposeofyourplanistomakeyourbusinessrunmoresmoothly. Ifyoufindyouspenda

lotoftimesolvingyesterdaysproblems,stop,getoutoftheshop,sitdownandstartplanningso

youdontperpetuallyrunincircles.

Allocating duties and responsibilities is critical. If the chain of command is unclear to your

employees,youwillhavetheworstkindsofpersonnelproblems. Thisisamajorresponsibilityof

managementandmustnotbeevadedundertheguiseofwecanworkitoutlaterwhenwesee

wheretheproblemsare.

4. Salaries

Asimplestatementofwhatthemanagementwillbepaidissufficient. Justremember,cutthefat

fromyourpersonalbudget,add15% forcontingencies,and then stick to it. Be realisticabout

salaries,but dontbe greedy. The payoff comes in the future after thebusinessbecomes

successful.

Knowingwhatyouneed,asdistinguishedfromthinkingyouknowwhatyouneed,takeseffort

butone

sure

way

to

damage

asmall

business

is

to

bleed

it

for

family

necessities.

If

your

business

cantaffordtopayalivingwage,andyouhavenootherincomeorsavings,youhadbetterthink

yourdealoveragain.

5. Resourcesavailabletothebusiness

ALLbusinesses,nomatterhowtiny,need:

1. Anaccountant

2. Alawyer3. Aninsurancebroker

Ifyoudonthavethese,getthemimmediately!!

Othersourcesofassistanceinclude:

4. BusinessInformationCenters5. ChambersofCommerce,RegionalPlanningCommissionsandCouncils

6.Business,

trade,

civic

organizations

often

have

a

pool

of

talent

available

to

their

members

7. SmallBusinessAdministrationtechnicalassistance,ACEandSCOREprograms8. Consultants9. Colleges,universities,schools

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F. PERSONNEL

Businessesstandorfallonthestrengthoftheirpersonnel. Goodemployeescanmakeamarginal

dealgo;pooremployeescandestroythebestbusiness. Studieshaveconsistentlyshownthatout

of100customerswhostoppatronizingtheaveragestore,over70dosobecausetheydidntget

prompt,courteousattention. Herearesomequestionstothinkaboutindeterminingyourhiring

needs:

1. Whatareyourpersonnelneedsnow? Inthenearfuture? Infiveyears?

2. Whatskillsmusttheyhave?3. Arethepeopleyouneedavailable?4. Fullorparttime?5. Salariesorhourlywages?6. Fringebenefits?7. Overtime?8. Willyouhavetotrainpeople? Ifso,atwhatcosttothebusiness(bothtimeofmore

experiencedworkersandmoney)?

Becarefultrainingpersonnelcanbeahiddencostthatyouhavenotcountedon.

Oneexcellentpersonnel control is thejobdescription. Hirepeopleonlywhen itwill result in

addedprofitabilitytoyourbusiness,andthinkbeforehiringwhetherthejobisreallynecessary.

If it is,thencarefulselectionofapersontofillthejobwillmorethanrepay thetimeandeffort

involved inhiring thebestperson for thatjob. Therearestandardapplication formsyoumay

finduseful in theselectionprocess. Youshouldalsocheckwith theSBA for theirbookletson

personnelmanagementaswellasyourlocalDepartmentofEmployeeSecurityandperhapsgeta

copyofPersonnelfortheSmallBusinessfromtheSmallBusinessReporter,Department3120,

BankofAmerica,SanFrancisco,California94120.

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G. FINANCING

This section is important,whether you are seeking a loan or planning to finance your deal

yourself. Indetermininghowmuchmoneyyoullneedandforwhatpurposesitwillbeused,do

not rely on guesseswhen exact prices or firm estimates are available. If youmustmake an

estimate,specifyhowyouarrivedatyourfigures. Itmaybehelpfultomakeathreecolumnlist:

BareBones

What you canjust scrape

by with secondhand,

makeshift the bare

minimum.

Examples:

Bicycle with large basket

(Schwinn52at$12.50)

Useddeskat$7.00

Reasonable

What you will most likely

getsomenewsomeused,

somefancyandsomeplain.

Examples:

Pickuptruckwith

camper(usedFordat

$1,885)

Renovateddeskat$25

Optimal

What youd like if money

were no problem and you

werent worried about

makingaprofit.

Examples:

Custommade El Dorado(Cadillaccustomat$18,500)

Customteakdeskat$750

FillouttheBareBonesandOptimalcolumnsfirst,thenmakeyourreasonablechoice. Itmaybe

importanttoyoutohavealuxuryitemortwo,butweighthecost. Thistabularworksheetis

particularlyusefulforastartupbusinessandcanbeusedwheneverapurchaseofadditional

equipmentiscontemplated.

Makesurethatthissectioncontainsresponsestothefollowing:

1. Howistheloanorinvestmenttobespent? Thiscanbefairlygeneral(workingcapital

andnewequipment,inventory,supplies).

2. Whatis(are)theitemoritemstobebought?

3. Whoisthesupplier?

4. Whatistheprice?

5. Whatisthespecificmodelnameand/ornumberofyourpurchase(s)?

6. Howmuchdidyou(willyou)payinsalestax,installationcharges,and/orfreightfees?

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Youshouldconsiderthepossibleadvantagesofleasingsomeofthecapitalequipmentyouneed.

Mostimportantly,askyourself:

7. Howwilltheinvestment(loanorequity)makeyourbusinessmoreprofitable?Interest isanexpensewhichreducesprofits. Ifyouproposeborrowingmoneyorinvestingyour

own,youmustknowhowthemoneyisgoingtoworkforyou.

MAKESUREITEARNSMORETHANITCOSTS

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PART II. FINANCIALDATA

Projections or forecasts are an integral part of your FINANCIAL DATA, and are critical to

accuratelyevaluatingthefeasibilityofyourdealandtoplanningjusthowlargeaninvestmentis

required toget thebusiness toa stable levelofoperation. Yourassumptionsmustbecarefully

thought out and explained. Behonesthere for your ownbenefit. Overoptimism can lead to

failure.

ThefollowingitemsshouldappearintheFINANCIALDATAsection:

A. SourcesandApplicationsofFundingB. CapitalEquipmentListC. BalanceSheetD. BreakevenAnalysisE. ProFormaIncomeStatementsF. ProFormaCashFlowAnalysis

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A. SOURCESANDAPPLICATIONSOFFUNDINGThissubsectionisanessentialpartofyourBUSINESSPLAN. Itisarestatementoftheinformation

in part G. FINANCING.Major anticipated expenditures shouldbe supportedby copies of

contracts, lease and/or purchase agreements, or similar documents and included in the

APPENDIX.

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SAMPLE

CashFlow

SourcesandApplicationsofFunding

SOURCES

BankLoans:

1. MortgageLoan.$22,000

2. TermLoan...10,700

3. ReservedLoan.3,3004. OwnersInvestment.5,000

TOTAL..$41,000

APPLICATIONS

PurchaseEquipment.$22,000

TenantImprovements...4,000

Inventory700

WorkingCapital.6,000

ReserveforContingencies.8,300

TOTAL...$41,000

Tobe

secured

By

AssetsoftheBusiness

SignaturesofthePrincipals

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B. CAPITALEQUIPMENTLIST

YourBUSINESSPLANshouldcontainaCapitalEquipmentListtohelpmaintaincontrolover

depreciable assets, insure against letting your reserve for replacement of capital equipment

becometoolow(orbeusedasaslushfund),andassistinthecreationofacostaccountingsystem.

Capitalequipmentisthatequipmentwhichyouusetoprovideaservice,orusetosell,store,and

delivermerchandise. It isnotequipment thatyouwilluseandwearoutorconsumeasyoudo

business (thisdoesnot include itemswhichareexpected toneedreplacementannuallyormore

frequently).

Examples of capital equipment are office furniture andbusinessmachines (desks, typewriters,

addingmachines),storefixtures(displaycases,refrigerationunits,permanentfixturessuchasair

conditioners, lighting fixtures),andvehiclesutilized fordeliveries. Noneof this typeof item is

expected towear outbefore a period of years. These goods aredepreciable, and their cost is

expressedasdepreciationexpenseontheincomestatement.

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C. BALANCESHEET

BALANCESHEETSaredesignedtoshowhowtheassets,liabilities,andnetworthofacompany

are distributed at a given point in time. The format is standardized to facilitate analysis and

comparisondonotdeviatefromit.

Balancesheetsforcompanies,greatandsmall,containthesamecategories. Thedifferenceisone

ofdetail. Yourbalancesheetshouldbedesignedwithyourbusinessinformationneeds inmind.

Thesewilldifferaccording to thekindofbusinessyouare in, thesizeofyourbusiness,and the

amountofinformationwhichyouraccountingsystemmakesavailable.

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SAMPLE

Retailer

December31,20

BalanceSheet

ASSETS

CurrentAssets

Fixedassets

LessAccumulated

Depreciation

NetFixedAssets

TotalAssets

Footnotes

LIABILITIES

CurrentLiabilities

LongtermLiabilities

TotalLiabilities

NetWorth

TotalLiabilities

andNetWorth

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The Categories can be defined more precisely. However, the order of the subcategories is

importantandshouldbefollowed. Theyarearrangedinorderofdecreasingliquidity(forassets)

anddecreasingliquidityimmediacy(forliabilities).

Abriefexplanationofeachprincipalcategoryfollows:

1. CurrentAssets: cash,governmentsecurities,marketablesecurities,notesreceivable(other

thanfromofficersoremployees),accountsreceivable,inventories,prepaidexpenses,any

other itemwhichwillorcouldbe converted into cash in thenormal courseofbusiness

withinoneyear.

2. FixedAssets: land,plant,equipment,leaseholdimprovements,otheritemswhichhavean

expectedusefulbusiness lifemeasured inyears. Depreciation isapplied to those fixed

assetswhich (unlike land)willwearout. The fixedassetvalueofadepreciable item is

shownasthenetofcostminusaccumulateddepreciation.

3. Other Assets: intangible assets such as patents, royalty arrangements, copyrights,

exclusiveusecontracts,notesreceivablefromofficersandemployees.

4. CurrentLiabilities: accountspayable,notespayable,accruedexpenses(wages,salaries),

taxespayable,currentportionoflongtermdebt,otherobligationscomingduewithinthe

year.

5. LongtermLiabilities: mortgages, trustdeeds, intermediate and longtermbank loans,

equipmentloans.

6.

NetWorth:

owners

equity,

retained

earnings.

7. Footnotes: you should provide displays of any extraordinary item (for example, a

schedule of payables). Contingent liabilities (such as a pending lawsuit) should be

includedinthissection.

Ifyouneed toprovidemoredetail,doso,butremember to follow thestandard format. Ifyour

balance sheet is assembledby an accountant,hewill specify that itwasdonewithorwithout

audit.

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D. BREAKEVENANALYSISABreakevenAnalysisprovidesyouwithasalesobjectivewhichisexpressedineitherthenumber

ofdollarsorunitsofproductionatwhichyourbusinesswillbebreakingeven,thatis,whereitis

neithermakingaprofitnorlosingmoney. Ifyouknowyourbreakevenpoint,youhaveadefinite

target thatyoucanplan to reachbycarefully reasoned steps. Manybusinesseshavedestroyed

themselvesbyignoringtheneedforabreakevenanalysis. Itisessentialtoremember:

INCREASEDSALESDONOTNECESSARILYMEANINCREASEDPROFITS

Calculating thebreakeven point canbe simple (for a oneproductbusiness) or complex (for a

multilinebusiness)butwhatever the complexity, thebasic technique is the same. Someof the

figuresyouneedtocalculatethebreakevenpointwillhavetobeestimates. It isagood ideato

makeyourestimatesconservativebyusingsomewhatpessimisticsalesandmarginfiguresandby

slightlyoverstatingyourexpectedcostfigures. Thebasicbreakevenformulais:

S=FC+VC

WhereS=Breakevenlevelofsalesindollars

FC=Fixedcostsindollars

VC=Variablecostsindollars

FIXEDCOSTSarethosewhichremainconstantnomatterwhatyoursalesvolumemaybe,*those

costswhichmustbemetevenifyoumakenosalesatall. Theseincludeoverhead(rent,insurance,

officeandadministrativecosts,salaries,etc.)andhiddencostssuchasinterestanddepreciation.

VARIABLECOSTS are those costs associatedwith sales including cost of goods sold, variable

laborcostsandsalescommissions.

Whenyou

want

to

calculate

aprojected

break

even

and

you

therefore

do

not

know

what

your

total

VCwillbe,itisnecessarytouseavariationoftheS=FC+VCformula. Ifyouknowwhatgross

Margin(profitonsales)youexpectasapercentofsales,thefollowingformulacanbeused:

S=FC/GM

WhereGM=GrossMarginasa%ofsales

If,insteadofcalculatingadollarbreakeven,youwanttodeterminehowmanyunitsyouneedto

selltobreakeven,yousimplydividethebreakevenderivedaboveindollarsbytheunitpriceto

getthenumberofunitstobesold.

*Thesecostsremainconstant inarelevantrange. However, ifatagreatly increasedsalesvolumeyouneedmorespace,

yourfixedcostswillrise. FandVhavebeennotatedontheextremelefthandmargintoindicatewhichtypesofcosts

arefixedandwhichareviable.

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EXAMPLE

BreakevenAnalysis

FixedCosts=$14,700(peran.)

VariableCosts= 79.3%

GrossMargin= 20.7%

Thus,BE=FC/GM

BE=$14,700

BE=$71,014.5

BE/Month=$5,917.87

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CustomersneededpermonthatBE:

Assumptions:

AverageUnitSellingPrice$3.00 $3.00

AverageCustomerRepeatSales=2X/Week 6.00

4.3weeks/monthThus:AverageCustomerSale/Month 25.80

Thus: CustomersneededatBE= 230/month

7.6/day

Breakeven analysis alsomaybe representedpictorially, and thediagramhelpswith forecasts,

budgets, and projections. Using a chart enables you to substitute different combinations of

numbers toobtaina roughestimateof theireffectsonyourbusiness. Ahelpful technique is to

makeworstcase,bestcase,andmostprobablecaseassumptions, tochart themand thenderive

moreaccuratefiguresbyapplyingtheformulassuggestedabove. Thiscanbeofspecialvalue if

you are contemplating a capital investment andwant a quick picture of the relativemerits of

buyingorleasinganitem.Tomakemaximumuseofyourbreakevenanalysis,utilizeitinareas

otherthan

sales;

you

have

more

control

over

your

expenditures

than

you

do

over

sales.*

*Breakevenanalysiscanbedirectlyappliedtoprofitplanningbymodifyingthebasicformula,S=FC+VC. Theformula

forthiscalculationis:S=FC+VC+P. Here,PstandsforProfit. Supposeyouwishtodeterminethevolumeofsalesat

whichyouwillmakeaparticularprofit.UsingP=SFCVC,youwillbeabletofiguretheamountofsalesyouneed.

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E. PROFORMAINCOMESTATEMENTINCOME STATEMENTS, also called PROFIT & LOSS STATEMENTS, are complimentary to

balancesheets. Thebalancesheetgivesastaticpictureofthecompanyatagivenpointintime.

Anincomestatementprovidesamovingpictureofthecompanyoveraparticularperiodoftime.

Income statements that are cast into the future are called INCOME PROJECTIONS. Income

projectionsare

forecasting

and

budgeting

tools

estimating

income

and

anticipating

expenses

in

theneartomiddlerangefuture. Formostsmallbusinesses,incomeprojectionscoveringthenext

threeyearsareadequate,however ifyour lease term is10years, it isrecommendeda tenyear

projectionbemade.

Youdonotneedacrystalballtomakeyourprojections. Whilenosetofpredictionswillbe100%

accurate, experience and practice tend tomake your projectionsmore precise. Even if your

projectionsarenotaccurate,theywillprovideyouwithasetofbenchmarkstotestyourprogress

towardshorttermgoals. Theybecomeyourbudget.

Thereisnothingsacredaboutincomeprojections. Asyoubeginyourbusinessandfindthemnot

exact,correctthemtomakeamorerealisticguide. However,atwhatpointyoushoulddothisisa

matterfor

your

judgment.

Do

not

expect

to

change

your

predictions

more

than

quarterly

or

even

semiannually. In a short period, certain trendswillbemagnified, and these distortionswill

usuallyevenoutinthelongrun. Ofcourse,ifyouomitamajorexpenseitemoranewsourceof

revenueyououghttomakeimmediatecorrections,butuseyourcommonsense.

The reasoning behind income projection is: Since most expenses are predictable and income

doesntfluctuatetoodrastically,thefuturewillbemuchmorelikethepast. If,forexample,you

havebeenoperatingasimilarbusinessatanotherlocationandyourgrossmarginhashistorically

been30%ofnetsales,itwill(unlessthereisstrongevidencetothecontrary)continuetobe30%of

netsales. Ifyouare inastartupsituation,youcan find incomeratios forbusinessessimilar to

yours (Dun & Bradstreet and RobertMarris Associates, for example). Thiswill improve the

accuracyofyourfinancialforecast.

It is important tobe systematic and thoroughwhen you list your expenses. The expense that

makes yourbusiness illiquid is often onewhich is overlooked, and therefore, unplanned for.

Therearesomeexpensesthatsimplycannotbeforeseen,andthebestwaytoallowforthemisto

be conservative in your estimates anddocument your assumptions. Try to slightlyunderstate

yourexpectedsalesandoverstateyourexpectedexpenses.

Itisfarbettertoexceedaconservativeprojectionthantobudgetoptimisticallyandthenfall

belowtheprojectedmargins.However,beingtoofarundercanalsocreateproblemssuchas

nothavingadequatecashtofinancegrowth. Basingincomeprojectionsonhopesisafrequent

causeofbusinessfailure. Berealistic;yourbudgetisintimatelytiedtoyourforecastedsalesand

expensefigures.

Incomeprojectionsarestandardizedtofacilitatecomparisonandanalysis. Theymustbedatedto

indicatetheperiodoftimetheycoverandshouldalsocontainnotestoexplainanyunusualitems

suchaswindfallprofits,litigationexpenseandjudgments,changesindepreciationschedules,

andsoforth. Anyassumptionsyoumakemustbefootnoted.

*ProFormasimplymeansprojected. Itrepresentswhatthebusinessisexpectedtolooklikeatsomespecifiedtimein

thefuture.

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SAMPLE

ProFormaIncomeStatement

October15,20 October14,20

(1) NETSALES

(2) Less: COSTOFGOODSSOLD

(3) GROSSMARGIN

(4) OPERATINGEXPENSE

Salaries&Wages

PayrollTaxes

&

Benefits

Rent

Utilities/CAM

Maintenance

OfficeSupplies

Postage

Automobile&Truck

MaintenanceDeliveryEquipment

Insurance

Legal&Accounting

Depreciation

Promotions/Advertising

Miscellaneous

OPERATINGEXPENSETOTAL

OTHEREXPENSE:

InterestPayments

(5) OTHEREXPENSETOTAL

(6) TOTALEXPENSE:

(7) PROFIT(LOSS)PRETAX

(8) TAXES

(9) NETPROFIT(LOSS)

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ExplanationofSample

(1) NETSALES: GrossSaleslessreturnsandallowances.

(2) COSTOFGOODSSOLD: Includescostofinventories.

(3) GROSSMARGIN: GROSSSALESminusCOSTOFGOODSSOLD. Representsthegross

profitonsaleswithouttakingindirectcostsintoaccount.

(4) OPERATING EXPENSE: These are primarily the costs (when added to OTHER

EXPENSE) whichmustbemetnomatterwhatthesaleslevelis. Theorderinwhichthey

are stated isnot so important. Thoroughness is. If some costsare trivial, lump them

togetherunderaheadingofMISCELLANEOUSbutbepreparedtobreakthemoutifthe

MISCELLANEOUScategorybecomesmorethananarbitrary1%ofGROSSSALES.

(5) OTHEREXPENSE: These arenonoperating expenses. Themost common is Interest

expense. ItishelpfultohavetheInterestexpenseprominentlydisplayedtohighlightthe

costofmoney.

(6) TOTALEXPENSE: Sumof(4)and(5).

(7) PROFIT (LOSS)PRETAX:GROSSMARGINminusTOTALEXPENSE. This is the tax

base,thefigureonwhichyourtaxiscalculated.

(8) TAXES: Consultyouraccountant.

(9) NETPROFIT(LOSS): (7)MINUS(8). Thisrepresentsthesuccessorlackthereofforyour

business. There are threeways tomake this figuremorepositive: increase sales, or

decreaseexpenses,orboth.

For themost useful projections: STATE YOUR ASSUMPTIONS CLEARLY. DONOT PUT

DOWNNUMBERSTHATYOUCANNOTRATIONALLYSUBSTANTIATE. Donotpuffyour

GROSS SALES figures tomake theNET PROFIT figure positive. Give yourself conservative

SALES figures and a pessimistic EXPENSE figure to make the success of your deal more

probable. BEREALISTIC.

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F. PROFORMACASHFLOWTheCASHFLOWprojection is themost criticalplanning tool foraneworgrowingbusiness.

Businessesneedcashforstartuporgrowth. Thecashflowanalysis: 1)showshowmuchcash

willbeneeded,2)whenitwillbeneeded,and3)whereitwillcomefrom.

TheCASHFLOWprojectionattempttobudgetthecashneedsofabusinessandshowstheflow

ofcash intoandoutof thebusinessoveraperiodof time. Cash flows into thebusiness from

sales, collectionof receivable, capital injections,etc.,and flowsout through cashpayments for

expenses.

This financial toolemphasizes thepoints in thecalendarwhenmoneywillbecoming intoand

goingoutof thebusiness. Theadvantageofknowingwhen cashoutlayswillbemade is the

abilitytoplanforthoseoutlaysandnotbeforcedtoresorttounexpectedborrowingtofulfillcash

needs. Byconstructingacashflowprojectionfortheneartointermediatefuture,youcanseethe

effectofan investment inyourbusinessmoreclearly thanyoucan froman income statement.

Often,youcanfindwaystofinanceyourbusinessoperationsortoonlyborrowaspecificamount

whichwill

help

you

to

keep

your

interest

expense

as

low

as

possible.

Cashisgeneratedprimarilybysales. However,notallsalesarecashsales. Perhapsthisdoesnot

applyinyourbusiness,butifyouofferanycredit(chargeaccounts,termpayments,tradecredit,

etc.)toyourcustomers,youmaywanttohaveameansoftellingwhenyoursalesturnintocash

inhand. Unlike the incomeprojection, thecash flowcan indicate this. Yourbusinessmaybe

subject to some seasonalbills, and again, a cash flowmakes the liquidityproblems attending

suchlargeoccasionalexpensesclear.

Acashflowdealsonlywithactualcashtransactions. Depreciation,anoncashexpense,doesnot

appearonacash flow. Loanrepayments (including interest),on theotherhand,dosince they

representacash

disbursement.

Afterithasbeendeveloped,thecashflowshouldbeusedasabudget. Iftheexpensesforagiven

item increaseover the amountallotted foragivenmonth,you should findoutwhyand take

correctiveactionassoonaspossible;ifthefigureisless,thenalsofindoutwhy. Byreviewingthe

movementofyourcashpositionyoucanbettercontrolyourbusiness. Ifexpensesarelowerthan

anticipated,itisnotnecessarilyagoodsign;itmaybethatabillwasntpaid.

On the other hand, the lowered expense may alert you to a new way of economizing.

Discrepanciesbetweenexpectedexpensesandrevenueandtheactualflowofcashareindicators

ofproblem or opportunity areas. If the sales figuresdont follow the cash flow, look for the

cause.

Perhaps

the

projections

are

too

low.

Your

CASH

FLOW

projection

is

not

a

universal

cure

whichwillmakeyourjobasmanagerorownersuperfluous. Itisatoolwhichyoumustuseand

useconsistently.

Incontrast tobalancesheetsand income statement, there isno standardized form to follow in

devisingacashflow.

The following sketch and outline canbeused as a guide for thedevelopment of a cash flow

projectionthatfitsyourbusiness.

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CashflowOutline:

Thefirstyearcashflowprojectionisbasicallyyourbudgetforthefirstyearofoperation.

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CashFlowSketch:

1. Cashatthebeginningofperiod

AddRevenues

2. Salesofproductstobecollected

currently

3. Cashtobereceivedfromothersources

4. Cashreceivedfrompriorperiodsales

5. Cashreceivedfromassetssold

6. Cashreceivedfromequityinvestment

7. Cashreceivedfromloans

8. Cashfrombaddebtsrecovered

9. Miscellaneouscashreceived

TotalCashReceived

SubtractExpenses

10. Newinventorypurchased

11. Salaries/Wagestobepaid

12. Fringebenefitstobepaid

13. NewEquipmenttobepurchased

14. processingequipment

15. office,salesequipment16. transportationequipment

17. Insurance

18. Fees

19. accounting

20. legal

21. Utilities

22. telephone

23. heat,light,power

24. Advertising

25. Principal&Interestondebt

26. Transportation

27. oil,gas

28. vehiclemaintenance

29. tires

30. Freight

31. Provisionforbaddebts

32.Taxes

to

be

paid

33. income(state,federal)

34. property/excise

35. payroll

36. sales

37. Dividendstobepaid

38. Provisionforunforeseencontingency

TotalExpenses

Cashatendofperiod

Thisisahandyadditiontoyourcashflow:

APPLICATIONOFFUNDSSTATEMENT

UseofFunds TotalAmountRequired FromEquity FromLoan

Inmostcases,spreadingtheuseofcashinthismannerformajoracquisitionswillmakeyour

decisionsstronger.

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G. HISTORICALFINANCIALREPORTS(ForexistingBusinesses)

Pleaseattachabalancesheetandincomestatement(independentlypreparedwithfootnotes,if

available)foreachofthethreemostrecentfullyearsofoperationofyourbusiness. Also,please

attachcopiesofyourthreemostrecentFederalTaxReturns.

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PARTIII.SUPPORTINGDOCUMENTS

Youwillwanttoincludeanydocumentswhichlendsupporttostatementsyouhavemadeinthe

body of thebuinessplan. Items includedherewillvary according to theneeds and stage of

developmentofyourparticularbusiness. Thefollowing listsuggestssomethingswhichmight

beincluded:

1. Resumesofprincipals,ownersandpartners(veryimportant).

2. Creditinformationoneachoftheabove.

3. Copiesofpersonaltaxreturnsforeachoftheabove.

4.Quotes

or

Estimates.

5. LettersofIntentfromprospectivecustomers.6. LettersofSupportfromcreditablepeoplewhoknowyou.7. LeasesorBuy/SellAgreements.8. LegalDocumentsrelevanttothebusiness.9. Marketdata.