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This document is also available to download: Business Plan [Microsoft Word]
Your Business Plan...
• Provides you a game plan to follow.
• Provides you an organized system for researching your business.
• Provides insight into your business to facilitate management and funding.
• Drastically increases your chance for success!
Writing the Business Plan
To write a business plan, start with the marketing plan (V). It is most important to have a clear understanding of your customer, their wants, your industry, regional and national economics, and your competition before planning or changing your marketing strategy.
Secondly, write your operating plan. Coupled with your marketing plan, this will provide insights into costs you will incur.
The last section of your feasibility study consists of developing a cash flow projection for your business. Developing your cash flow will include developing sales, cost of goods sold, and operating expense projections. If the initial business plan appears financially viable, then proceed in developing the pro forma income statement and balance sheet. If not, it is time to rethink the plan. Once the basic plan is formed, complete the remaining sections of the business plan.
Outline for Writing a Business Plan
Table of Contents
- Executive Summary
- Use of Funds
- General Company Description
- Products and Services
- Marketing Plan
- Operating Plan
- Management and Organization
- Financial Plan
- Timeline
- Exit Strategy
- Appendix
1. Executive Summary
Write this last. Summarize your entire plan in two pages or less. Be enthusiastic and concise. Include business goals and objectives, and the amount of funding desired if applying for a loan or other investment.
Your "Executive Summary" and presentation will likely determine if the rest of your plan will be considered further for funding.
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2. Source and Use of funds
This section is generally presented in a table format with a brief explanation for clarity.
Include: source of funds, use of funds, terms desired, and collateral offered.
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3. General Company Description
• Mission Statement
Your mission statement should be considered a basic guide for your business and provide a foundation for decision making. The mission statement starts with your business name followed by your tag line. Next, the mission statement should include many of the following statements: the moral/ethical position of the enterprise, the desired public image, the key strategic influence for the business, a description of the target market, a description of the products/services, a description of the geographic domain, and a description of your expectations of growth and profitability. To complete the business description, answer the following: Give a brief company history. What does your company do?* What are your products and services?* Who are your customers?* Where are you located? What are your key strengths? Is your industry or market growing? Who are the owners? What is the ownership structure and why? Is the site owned or leased? Are changes planned for the company? (*may be covered in Mission Statement).
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4. Products and Services
What are your products (or services)? What are your distribution channels? Who are your major competitors? What is your competitive advantage - quality, unique features, or proprietary ownership? What is the pricing/leasing structure for your products and/or services?
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5. Marketing Plan
Be as specific as possible. Use statistics and numbers, and note your sources. The goal of your research is to relate your strategy to the discussions of product, economics, customers, competition, and location. Too many marketing plans are enthusiastic fluff.
• Product
Describe the product or service from your customer’s point of view. What do customers like and dislike about your products, services, and company? Why do they patronize you? What services are offered as part of the product, delivery, service, warranty, support, and/or refund offers?
• Economics
What are the characteristics of your industry? Is it growing/declining/changing? What is the size of your market? What is your share of the market? Is it growing? What is the demand for your product?
Are more firms entering? What are the barriers to entry? Is it becoming more competitive? Are profits being squeezed?
• Customers
Identify your customers, their characteristics, and their location. Why do they patronize you? What do they like about your company?
• Competition
List your major competitors. Describe their size, location, and reputations. Compare your goods and services with theirs. What are their major advantages? What are yours?
• Location
What are your location needs? What kind of space will you need? Why is the area desirable? Why is the building desirable? Is it easily accessible? Is the street lighting adequate? Are market shifts or demographic shifts occurring?
• Strategy
What is your pricing policy? Why? How do you promote, advertise, and sell? How do you distribute or deliver your products/services? What customer services will you offer? Be sure to relate your strategy to prior discussions of product, economics, customers, and competition.
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6. Operating Plan
All businesses have a process they use to provide goods and services. Think of the following production section as if your business is a factory and you need to define the process from the order taking to the delivery.
• Production Plan
Methods of production, product development, quality control, and inventory control.
• Customer Service Plan
Describe the process you will use to insure that customers leave with their needs met, wanting to return, and to tell a friend about their good experience. This could be a brief outline to use in training employees.
• Personnel
How many employees will you have? What are the types of employees you will have? Define your pay and personnel policies. Do you have position descriptions and training programs?
• Credit Policies
Do you sell on credit? What are the terms? How do you perform a credit check? What are your collection policies?
• Inventory
How much inventory do you have? What is its value? List your major suppliers. Do they extend credit? Who pays freight? Do they give discounts?
• Legal Environment
Research and understand all licensing, bonding, permits, insurance, zoning, government regulations, patent, trademark, and copyright issues which may affect you. Visit the U.S. Patent and Trademark web site for more information.
Visit the Washington State Department of Licensing web site for information about licensing in Washington state.
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7. Management and Organization
Who has management responsibilities? Include the resumes of all key managers. Include position descriptions for all key employees. List important advisors such as your attorney, accountant, banker, insurance agent, and advisory board or board of directors.
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8. Financial Plan
• Personal Financial Statements
Include personal financial statements of all owners and major stockholders.
• Startup Expenses and Capital
Carefully research your startup expenses. Keep notes to document your numbers. Organize your figures by dividing startup expenses into major categories. We suggest:
Buildings/Real estate
Leasehold improvements
Capital equipment
Opening inventory
Location and administrative expenses
Advertising and promotion
Other expenses
Contingencies and working capital
The contingency category is a way of allowing for costs that cannot be foreseen no matter how thorough your planning. Experienced entrepreneurs suggest you add 15-20 percent to your estimated expenses to allow for contingency costs.
Working capital is money needed to operate and pay bills while the business gets going. A carefully prepared cash flow projection is the only good way to estimate working capital needs. Starting without adequate working capital will ensure early failure of the business.
Also show your sources of capital. Sources could include you, your partners or investors, private lenders, your bank, and equipment leases.
• Financial History
If yours is an established firm, include financial statements for at least the past three years as an appendix to the plan.
It is a good idea to include some key ratios in addition to the raw numbers. Current ratio, debt to net worth, return on equity, and inventory turnover are a few useful basic ratios.
Include an aging of accounts receivable showing the total amount customers owe you, and how much is current, 30 days past due, 60 days, 90 days, and more than 90 days past due. Do the same for accounts payable.
• Thirty-six-Month Cash Flow Projection
All your projections should be based on careful research, not casual guesswork. Keep notes detailing your major assumptions, and attach the notes to your projections. Your projections will show how you intend to prosper by having revenues exceed expenses. Now you must show that you can pay your bills while prospering. Bills are paid with cash, not with profits.
A cash flow projection is nothing more than a forward look at your checking account. The cash flow looks at the financial data in a slightly different way from the profit and loss statement.
The fundamental differences are:
- On the income side, a cash flow asks not when a sale is made, but rather when cash is actually collected from the customer.
- On the outgo side, the question is not when an expense is incurred, but rather when the check will have to be written to pay the bill.
- Some items show only on one of the two statements. Depreciation, for example, is a real business expense, but not an item of cash flow (you never write a check for depreciation). On the other hand, the principle part of a loan repayment is not an expense (only the interest portion is), but it definitely takes cash out of the business, and therefore needs to be shown on the cash flow projection.
Start by projecting sales month by month for the coming year. Break monthly sales into categories or departments. For example: product type, customer group, geographic territory, different contracts, different projects.
A projection built in this fashion will be more accurate than just guessing total sales for the month. Your Marketing Plan should be the basis for these projections.
Now estimate the Cost of Goods Sold (COGS) for each category of sales for each month. COGS are those expenses directly related to producing or purchasing the product/service you sell. For example, for retailers, COGS is the cost of buying merchandise; for manufacturers and construction, it is direct production, labor, and materials; for service businesses, it is production, labor, and materials. Breaking COGS down into departments will help you see which produce the most profit per sales dollar.
Now estimate operating expenses, month-by-month for the year. These necessary expenses are not directly related to buying or making your product/service. They are also known as overhead items. Examples are telephone, rent, insurance, taxes, and the salaries of office, sales, and management personnel. Use the same categories of expense you use (or plan to use) in the regular income statements. This makes it easier to draw on history in making projections, and to compare your actual statements to your plan.
By forecasting the status of your bank account, the cash flow tells you whether your working capital reserves are adequate to pay your bills. Budgeting does not create sales nor put money in the bank, but it can put you in control. When you can foresee the need and take action, you have gained control over your own destiny.
• Three-Year Profit and Loss Projection
In many ways, this is the capstone of your whole business plan. This is where you show in detail how your company will make a profit. Remember that this statement includes non-cash costs such as depreciation etc. Include revenue less cost of goods sold, operating expenses, and income in a format appropriate for your industry.
• Projected Balance Sheet
Your plan should include a projected balance sheet showing assets (things owned), liabilities (debts), and owner’s equity. If yours is a startup business, the balance sheet should include an opening day statement. All firms should do projected year-end balance sheets. If you are using the business plan to apply for a loan, prepare a pro forma balance sheet projecting your financial position as of the day after receiving the loan.
• Break-Even Analysis
Break-Even is the sales level in dollars that would cover the fixed expenses and leave a zero profit. The two critical numbers in these calculations are the total fixed (operating) expenses and the percentage of gross profit margin. If your total fixed expense is $10,000 and your gross profit margin is 25 percent, your break-even sales volume must be $40,000. To calculate Percent Gross Margin, first, separate your expenses into fixed (ongoing operating) costs and variable costs. Subtract the total variable costs from sales to get Gross Margin. Divide GM by sales to get Percent Gross Margin. This represents the contribution per dollar of sales applied toward paying fixed costs. Finally, divide the Total Fixed Costs by the Percent Gross Margin (expressed as a decimal) to reveal the estimated break-even sales given your estimates of costs and sales for the given period of time. This is not a static number but will change as prices and costs change.
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9. Timeline
A timeline is simply a chronological listing of the critical events and actions necessary to start and operate your business. It should include at least the pre-start phase and the first year of operation specifically timed. Include and highlight critical events. Examples might include:
Start business plan - January 10,
Submit application to bank – March 25,
Place add in Yellow Pages – May 1.
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10. Exit Strategy
The exit strategy is a plan for how you will leave the business. This must take into consideration many personal and business goals. Most business owners want to develop and sell (or pass down their business to heirs). To sell they must develop “transferable value.” Many small business owners are “the business.” They have developed a business based on themselves. Therefore, the major value of the business is the value of the business’ hard assets once they are gone. However, if a business is developed that generates profit without the owners’ direct participation; a transferable value is present and can be used to value the business beyond hard assets. If an owner elects to “be the business,” there should be an outside investment and retirement plan in place to provide for retirement needs beyond the value of the hard assets. The type of capital investment also may dictate an exit strategy. Venture and Angel Capital frequently require direct sale or sale through a public offering to generate the returns expected. Further, death or disability, changes due to divorce, or other needs to divest should be addressed in the exit strategy.
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11. Appendix
These sections add detail that is too long to be included in the business plan. List the contents.
Other Considerations
This genetic business plan should be modified to suit your specific type of business and the audience for whom the plan is written. Please read the following for specifics.
Raising Capital
• For Bankers
Bankers want assurance of orderly repayment. If you intend using this plan to present to lenders, include: Amount of loan. How the funds will be used. What will this accomplish (how will it make the business stronger)? 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. Collateral offered, and 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. Funds needed short term. Funds needed in two to five years. How company will use funds and what this will accomplish for growth. Estimated return on investment. Exit strategy for investors (buyback, sale, or IPO). Percent of ownership you will give up to investors. Milestones or conditions you will accept. Financial reporting to be provided. Involvement of investors on the board or in management.
Refine the Plan 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 on line 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 collection policies. 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?
What is required to:
1. Bring product/service to market?
2. Keep the company competitive?
How does the company protect intellectual property, avoid technological obsolescence, supply necessary capital, and retain key personnel?
High tech companies sometimes have to operate for a long time without profits, and sometimes even without sales. If this fits you, then banks 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. Your assumptions must be well documented and well argued.
• Retail Business
Company image. Pricing: Explain markup policies. Prices should be profitable, competitive, and in accord with company image. Inventory: Selection and price should be consistent with company image. Inventory Level: Find industry average numbers for annual inventory turnover rate (available in RMA book). Multiply your initial inventory investment times 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, then you may not have enough budgeted for startup inventory. Customer service policies: should be competitive and in accord with company image. Location: Does it give the exposure 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?
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For questions or comments about this page, please contact
Bruce Davis, Small Business Development Center Director, 509-735-6222
