A Business Plan Is Absoutely Essential to the Establishment of a New Business and the Continued

BUSINESS PLANS

D. Dale Gaudet

SCORE

July 2005

A business plan is essential to the creation of a new business venture as well as the continued profitable operation of an established business. The conduct of a business in the absence of a current, comprehensive and pragmatic business plan is at best an invitation to sub-par performance and at worst the result of failure of the business and the loss of money to the investors and lenders.

A business plan serves as the managerial and financial blueprint for a start-up business or the profitable operation of an on-going venture. It outlines the business purpose, function, management, finances, expectations and capitalization. The ultimate objective of a commercial business is to repay debt and provide a reasonable return on the owners’ investment. A business plan is intended to convincingly demonstrate to lenders and investors that the enterprise will accomplish these two objectives. It is important that the two parties to a business – the investors (owners) and the lenders – be convinced of the potential viability of the business. A prospective business owner who prepares an overly optimistic business plan solely to obtain a business loan or attract investors, places himself and others at great risk. If the plan must be embellished to obtain a loan or capital, it is likely that the business will not only be unable to repay debt but will likewise not be able to deliver a proper return on the owners’ investment. In fact, it may result in a significant loss to the owners/investors. If for no other reason then, it is vital that a business plan be realistic, comprehensive, objective and above all else, honest.

All business plans contain certain basic items of information such as the business objective, the product or service to be delivered, the sales and marketing potential, the qualifications of management and financial projections. Essential to all business plans are the monthly and annual budgets and cash flow projections which indicate whether the business will be sufficiently profitable and generate enough cash to repay debt and provide a reasonable return to the owners. Although business plan guides or templates are generally available, there is no such thing as a generic business plan. Each plan must be unique and designed to describe the particular business for which it is written. Fortunately, many excellent business plans have been written in recent years and are now available to new entrepreneurs as samples. The United States Small Business Administration, on its web site sba.gov, provides more than sixty such samples, covering almost every type of small business venture as well as other information valuable to the small business owner. The Service Corps of Retired Executives (SCORE) likewise provides helpful information on its national website, score.org. The Baton Rouge chapter of SCORE provides advice and counseling to local entrepreneurs. Another website rich with resources for the small businessperson is smallbusiness.findlaw.com. More information may be obtained by calling 225 381 7130 or visiting the local web site, scorebr.org.

Because of their uniqueness, business plans may take on many forms. What follows is one type of business plan. It consists of six sections – The Executive Summary; The Company Profile; The Product or Service; The Operating Requirements; The Sales and Marketing Plan; The Financial Plan and The Management Profile.

Under each of these sections are listed those questions, issues, factors and financial reports that should be considered and perhaps addressed in the section. Depending on the size and complexity of the firm, some factors may not be necessary however, all should be considered. If a factor is pertinent to a business, it should be addressed in the appropriate section.

Finally, a business plan should be comprehensive but brief. It should not contain unnecessary verbiage or graphics. Again, keep in mind that the purpose of a business plan is to convince investors and lenders to provide funds for the firm’s development. This is best accomplished with factual, honest information, not hyperbole. Eliminate the fluff. Stick to the facts.

The following will serve as a comprehensive business checklist even if a business plan is not prepared.

A TYPE BUSINESS PLAN

I. THE EXECUTIVE SUMMARY

The executive summary is a condensation of the six sections of the business plan. It should not exceed two pages – preferably one page.

The first paragraph describes the company, its business, history and ownership.

Paragraph two explains the product(s) or service(s) that the company will offer.

The marketing and sales effort is condensed in paragraph three.

The operating requirements are summarized in paragraph four.

Paragraph five describes the total funding required, the sources of the money (investors and lenders), how the funds will be used and the term over which the loan(s) will be repaid.

If both a term loan and a line of credit are requested, the terms and conditions of each should be explained in paragraph six.

A description and estimated value of the collateral offered to secure the loan should disclosed in paragraph seven.

Although the executive summary is the first section of the business plan, it should prepared last.

II. THE COMPANY PROFILE

What is the purpose and business of the company? What products and services will it provide?

What is the company’s form of business organization – sole proprietorship,

partnership, corporation, LLC, etc.?

When was the company founded and by whom?

Who are the owners and investors?

How much money has been invested in the company and by whom?

Who are the principal managers and employees? What are their qualifications?

Where is the company’s principal place of business? Describe the facilities?

What is the company’s geographic market area?

III THE PRODUCT OR SERVICE

What kind of product does the company sell or what kind of service does it

provide? Describe the product or service fully unless it is generic, i.e. a retail food store or plumbing service.

Will the company sell only one product or deliver only one service or will it sell a variety of products or offer many services?

If the company sells a product, will it manufacture it, assemble it from

components purchased or will it sell a completed product?

If the company provides a service, will the staff provide the service or will it

outsourced to another provider?

What will be the cost to acquire the product or service? See what follows.

If the product is manufactured by the company, what is the cost to produce each unit? This includes materials; labor and labor associated fringe benefits. If the product is assembled from parts acquired, what is the cost to acquire and assemble the parts?

If the company sells a completed product, what is the cost to acquire the product – the wholesale price?

If the company provides a service, what is the labor cost and fringe benefits to

provide each service? – How much does it cost to provide the service?

These costs are variable (they change from time to time) and are used to

determine the price at which each item or service will sell. The price

charged for service may be by the hour or by the job. Whichever, it should

be greater than the cost to provide the service. The price for merchandise

sold must be greater than the cost to acquire. The difference between the

cost (whether for merchandise or labor) and the price charged by the

company is called margin. Initially, cost will be determined by prevailing

rates – wholesale price for merchandise and hourly wage rates for service.

If and when these costs rise, the price must be raised proportionally. It is

vitally important that management monitor the margin to maintain a

profitable spread. Cost and price are very important and must be carefully

calculated and explained in the business plan.

Who are the wholesale suppliers of products that the company will sell and

what is the source of labor for a service business? Comment on the reliability of both.

III. THE OPERATING REQUIREMENTS

What real property (real estate) will be required? Is it a home based business, a retail establishment, a manufacturing facility? What are the zoning restrictions? Has the property been acquired? Is it owned? Leased? What are the lease terms? What is the size? Is it adequate?

What equipment, furniture, fixtures, vehicles, computers are required?

Who will handle data processing? Is he/she knowledgeable?

What insurance will be required – liability, casualty (fire, physical damage, etc,), automobile, health and hospitalization, workman’s comp, employee dishonesty, etc.? Has an insurance agent been consulted?

What licenses, permits and certificates will be required?

If a franchise, what are the terms and conditions?

Will a personnel policy be prepared? Will the policy provide safeguards against employee litigation and enforce regulation compliance? Have all the labor laws and regulations been addressed? Has the local governmental labor department been consulted?

Does the company have a Federal Tax ID number?

Have provisions been made to collect and remit taxes – state and local sales, employee withholding, unemployment, state and federal income and FICA? Has an accountant been consulted?

Who will manage the day-to-day operations? Is he/she qualified?

Who will manage the accounting and financial management functions? Is he/she knowledgeable and experienced?

Has an attorney been consulted?

What internal controls will be established to prevent fraud?

Are there any environmental issues? Is the site environmentally clean?

Will the business operation create any environmental hazards?

IV. THE SALES AND MARKETING PLAN

What is the size of the market for the product or service? Express in dollars of units sold, jobs completed, etc. What is the growth potential for the market?

What are the market trends? Is the market receptive to new or more

products or services?

What are the characteristics and demographics of the typical customer – age, education, average income, family size, location, buying habits, etc.?

What is the market share of the company’s competitors?

From which competitor(s) will the company capture customers?

What is the significance of price, quality, performance, service and product or service warranty to the overall market? Will the company provide the best price, quality, performance, service and warranty? Is the product generic, fungible, unique?

How will the product or service be distributed?

Will web or e-mail marketing be available?

What types of advertising will be used? Why were they chosen? What are the relative costs of each? What will be the advertising frequency, schedule, etc.? Has an ad agency been consulted?

Will a company sales force or a distributor be used?

What sales incentives will be used? What will be the sales commission and

compensation structure?

Will sales training be conducted?

What direct marketing, trade magazine advertisements or promotional materials will be used?

14. What are the resources, market share, strength, weaknesses, recent

developments and financial condition of the company’s competitors? How

will the competition react to the company’s entry into the market?

Is location important to attract customers? If so, is the proposed location

customer friendly? Is it attractive and inviting? Is the signage prominent and appealing?

Is product or service warranty important? Have provisions been made to

provide?

V. THE FINANCIAL PLAN

1. If for a new business and if funding (money) is required, specify the total

amount of money required. This includes that which will be provided by

owners and investors whether in the form of cash or tangible property

and the amount which will need to be borrowed from a lender or lenders

2. If for a new business, identify how much will be supplied by the investors and

how much will be expected to be provided by the lenders.

3. If for a new business, specify how the money (both invested and

borrowed) will be used. For example: to purchase vehicles, equipment,

merchandise for resale, working capital, etc. A sources and uses of funds

schedule is a good format to present this information. See Appendix 1.

4. If for a new business, provide an opening-day balance sheet which will

identify the assets owned, the debt owed and the invested capital of the

company on the first day of business. See Appendix 2.

If for an established business, provide historical balance sheets and operating

statements for at least three prior years or since the business was established, whichever is less.

For all businesses, provide a one-year monthly budget and cash flow projection. This is perhaps the most important part of the business plan or loan request and requires careful thought and preparation. It is intended to demonstrate that the company will be sufficiently profitable and generate enough cash to repay current debt and provide a reasonable investment to the owners. It will also serve as a profit and loss statement projected one year

into the future. The budget serves as a feasibility study to determine if the venture will be successful. It is unusual for the budget of a newly established firm to report a profit after the first year of operation. It may take several years to produce profitability. It is therefore advisable to prepare budgets for the second and third years to determine if the venture will ultimately be profitable. It is important to determine if the business will become profitable before available money is exhausted. A breakeven analysis will serve this purpose. See Appendices 3, 4, 5 and 6.

The total sales (or revenue) and the cost of sales are the most vital

parts of the budget. Both must be supported by footnotes to the budget. The amount of sales may be substantiated by the price of the merchandise or the service times the number of items expected to be sold or the number of services by the hour or job that will be rendered. For a firm selling wide variety of merchandise, the number of expected customers times the expected average sales ticket will support the budgeted sales amount. There are a number of methods to estimate the cost of sales, one of which is simply a percentage of sales. The initial sales volume and the subsequent sales growth projections must be realistic. An overly optimistic or inadequately supported sales forecast will destroy the credibility of the business plan. See III (8) above.

For all businesses, prepare a balance sheet projected one year into the future. This must be consistent with the budget and cash flow projection. See Appendix 2.

9. Specify the type(s) of loan requested. A term loan is used to acquire capital

assets such as land, buildings, equipment, vehicles – items that are not for

resale and are to be used by the business. These loans are repaid in monthly

installments over a period of several years from the profits created by the

firm. Working capital loans are used to cover the temporary need for cash

for reasons such as the purchase of merchandise for resale, unexpected but

Non-recurring expenses, expenses in anticipation of income producing

operations such as a contract, etc. These loans are repaid from the sale of

merchandise or the collection of payment in connection with work

performed. Working capital loans are usually prearranged as lines of credit

with a lender and drawn against as the need arises and paid down when cash

is sufficient.

VI. THE MANAGEMENT PROFILE

Who will make the managerial decisions?

What is the education and experience of each?

A biographical outline from each is usually expected.

Loans made to the company will probably require the guarantee of the owners. The lender will require personal financial statements.

Will key-man insurance be required? Will a buy-sell agreement between the principal owners be required?

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