Nolos How to Write a Business Plan
N O L O
“ An essential book to help entrepreneurs.”
DALLAS MORNING NEWS
Mike McKeever
10TH EDITION
How to Write a
Business
• Write a winning proposal
• Prepare cash fl ow and profi t & loss forecasts
• Get backers to invest
Plan
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THE LEADING
BUSINESS PLAN
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McKeever, Mike P.
How to write a business plan / by Mike McKeever. -- 10th ed.
p. cm.
Includes index.
Summary: “Contains the detailed forms and step-by-step instructions needed to prepare a well-thought-out, well-
organized business plan. e 10th edition has been completely updated with the laws, banking regulations, and
resources”--Provided by publisher.
ISBN-13: 978-1-4133-1280-5 (pbk.)
ISBN-10: 1-4133-1280-2 (pbk.)
ISBN-13: 978-1-4133-1297-3 (e-book)
ISBN-10: 1-4133-1297-7 (e-book)
1. Business planning. 2. New business enterprises--Planning. 3. New business enterprises--Finance. 4. Small
business--Planning. 5. Small business--Finance. I. Title.
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Dedication
is book is dedicated to the memory of my late grandmother,
Elizabeth Eudora Woodall Darby, whose inuence I acknowledged only
recently.
Acknowledgments
After more than a decade of working with many people, I am amazed at the
uniform spirit of goodwill and cooperation.
My rst editor, Ralph “Jake” Warner, showed patience working with a
rst-time author. My second editor, Lisa Goldoftas,
challenged the grammar
while gracefully deferring to my knowledge about the subject.
Also at Nolo: Steve Elias designed many charts; Adam Stanhope
educated me about computers; Mark Stuhr tuned sections on computer-
related material; Stephanie Harolde worked her word processing
wonders on the manuscript; Terri Hearsh designed the book; Eddie
Warner gave helpful suggestions on online information; and many more
folks at Nolo improved the book greatly.
A special thanks to a number of generous individuals, each of whom
knows a great deal about starting and operating a small business. Peg
Moran, Terri Hearsh, Roger Pritchard, Jason Wallach, Harry Keller,
Dan Peters, Sharyn Simmons, Larry Healy, and nally, Hugh Codding
and Leroy Knibb of Codding Investments. For these and all my readers,
clients, and students who have shared their hopes, dreams, and problems
with me over the years, thank you for your help. e best parts are
yours—all the mistakes are mine. Many of your stories and suggestions
appear here in disguised form. I hope all the readers will prot from
your wisdom and generosity.
Mike P. McKeever
Santa Rosa, California
About the Author
Mike P. McKeever’s education, work experience, business ownership,
writing, and teaching careers give him a broad and unique perspective
on business planning. He has a BA in Economics from Whittier College
and a Master’s in Economics from the London (England) School of
Economics, and has done postgraduate work in nancial analysis at the
USC Business School. Mike has taught classes at numerous community
colleges in entrepreneurship and small business management. He has
published articles on entrepreneurship for Dow Jones publications,
the Sloan Publications Business Journal, and numerous newspapers and
periodicals.
Mike has successfully purchased, expanded, and sold a number of
businesses, including a manufacturing company, tune-up shop, gas
station, retail store, and commercial building. He has worked for a
variety of companies ranging from small groceries to multimillion-dollar
manufacturers. As an independent business broker, he
assessed the
strengths and weaknesses of hundreds of companies. As senior nancial
analyst for a Fortune 500 company, he wrote and analyzed nearly 500
business plans.
Currently, Mike enjoys email correspondence with a few readers
relating to business plan issues. He also acts as consulting controller and
nancial advisor to an online retail business. You can contact him at
mckeever.mp@gmail.com.
Downloading Forms and Other Materials
e printed version of this book comes with a CD-ROM that contains
legal forms and other material. You can download that material by going to
www.nolo.com/back-of-book/sbs.html. You’ll get editable versions of the
forms, which you can ll in or modify and then print.
Table of Contents
Your Legal Companion ..................................................................................................................1
1
Benefits of Writing a Business Plan ..................................................................................5
What Is a Business Plan? ................................................................................................................... 6
Why Write a Business Plan? ............................................................................................................ 6
Issues Beyond the Plan ...................................................................................................................... 8
2
Do You Really Want to Own a Business? ..................................................................11
Introduction ..........................................................................................................................................12
Self-Evaluation Exercises .................................................................................................................13
How to Use the Self-Evaluation Lists .......................................................................................17
Reality Check: Banker’s Analysis .................................................................................................17
3
Choosing the Right Business ..................................................................................................21
Introduction ..........................................................................................................................................22
Know Your Business ..........................................................................................................................22
Be Sure You Like Your Business ..................................................................................................24
Describe Your Business ...................................................................................................................24
Taste, Trends, and Technology: How Will the Future Affect Your Business? ........30
Break-Even Analysis: Will Your Business Make Money? ................................................34
What You Have Accomplished ...................................................................................................47
4
Potential Sources of Money to Start or
Expand Your Small Business ...................................................................................................49
Introduction ..........................................................................................................................................51
Ways to Raise Money .......................................................................................................................51
Common Money Sources to Start or Expand a Business .............................................59
Additional Money Sources for an Existing Business .......................................................68
If No One Will Finance Your Business, Try Again .............................................................70
Secondary Sources of Financing for Start-Ups or Expansions ...................................72
Conclusion .............................................................................................................................................75
5
Your Resume and Financial Statement ......................................................................77
Introduction ..........................................................................................................................................78
Draft Your Business Accomplishment Resume .................................................................78
Draft Your Personal Financial Statement ..............................................................................85
6
Your Profit and Loss Forecast ............................................................................................101
Introduction .......................................................................................................................................102
What Is a Profit and Loss Forecast? .......................................................................................102
Determine Your Average Cost of Sales ...............................................................................103
Complete Your Profit and Loss Forecast ............................................................................106
Review Your Profit and Loss Forecast ..................................................................................119
7
Your Cash Flow Forecast and Capital Spending Plan ..............................121
Introduction .......................................................................................................................................122
Prepare Your Capital Spending Plan .....................................................................................123
Prepare Your Cash Flow Forecast ...........................................................................................125
Required Investment for Your Business ..............................................................................135
Check for Trouble ...........................................................................................................................136
8
Write Your Marketing and Personnel Plans .......................................................139
Introduction .......................................................................................................................................140
Marketing Plan .................................................................................................................................140
Personnel Plan ...................................................................................................................................152
9
Editing and Finalizing Your Business Plan ............................................................157
Introduction .......................................................................................................................................158
Decide How to Organize Your Plan ......................................................................................158
Write Final Portions of Your Plan ...........................................................................................159
Create the Appendix .....................................................................................................................165
Create Title Page and Table of Contents ............................................................................166
Complete Your Final Edit ............................................................................................................166
Consider Using a Business Consultant ................................................................................168
10
Selling Your Business Plan .....................................................................................................171
How to Ask for the Money You Need .................................................................................172
How to Approach Different Backers.....................................................................................174
What to Do When Someone Says “Yes” ............................................................................178
Plan in Advance for Legal Details ...........................................................................................179
11
After You Open—Keeping on the Path to Success ....................................183
Introduction .......................................................................................................................................184
Watch Out for Problem Areas .................................................................................................184
Getting Out of Business ...............................................................................................................189
12
Good Resources for Small Businesses .......................................................................193
Introduction .......................................................................................................................................194
Business Consultants .....................................................................................................................194
Books .....................................................................................................................................................196
Pamphlets............................................................................................................................................203
Magazines—Continuing Small Business Help .................................................................203
Computers and Business .............................................................................................................203
Online Business Resources ........................................................................................................206
Formal Education ............................................................................................................................209
Appendixes
A
Business Plan for a Small Service Business ..........................................................211
B
Business Plan for a Manufacturing Business .....................................................227
C
Business Plan for Project Development .................................................................245
D
How to Use the CD-ROM .......................................................................................................255
Installing the Files Onto Your Computer ...........................................................................256
Using the Business Plan Files .....................................................................................................257
Using the Spreadsheets ................................................................................................................258
Forms on the CD-ROM ................................................................................................................260
Index
“Nine to five ain’t takin’ me where I’m
bound.”
—Neil Diamond, from “ank the Lord for the
Nighttime”
“You’ve got to be careful if you don’t
know where you’re going because you
might not get there.”
—Yogi Berra
A
re you concerned about whether
you can put together a first-rate
business plan and loan appli-
cation? Don’t worry.
How to Write a Business Plan contains
detailed forms and step-by-step instruc-
tions designed to help you prepare a well-
thought-out, well-organized plan. Coupled
with your positive energy and will to
succeed, you’ll be able to design a business
plan and loan package that you will be
proud to show to the loan officer at your
bank, the Small Business Administration,
or your Uncle Harry.
After working with hundreds of business
owners, I have observed an almost
universal truth about business planning:
Writing a plan is a journey through the
mind of one person. Even in partnerships
and corporations, usually one person has
the vision and energy to take an idea and
turn it into a business by writing a business
plan. For that reason, I have addressed this
book to the business owner as a single
individual rather than a husband-and-wife
team, group, committee, partnership, or
corporation. And you’ll find that the same
financial and analytical tools necessary to
convince potential lenders and investors
that your business idea is sound can also
help you decide whether your idea is the
right business for you.
What Kind of Plan Do You Need?
You can use How to Write a Business
Plan to write whatever type of plan best
suits your needs:
•Complete business plan. A complete
business plan is especially helpful
for people who are starting a new
business. This form of plan is also
excellent for convincing prospective
Your Legal Companion
2 | HOW TO WRITE A BUSINESS PLAN
backers to support your business.
You’ll be more successful in raising
the money you need if you answer all
of your potential backers’ questions.
A complete plan should include the
following elements: Title Page, Plan
Summary, Table of Contents, Problem
Statement, Business Description,
Business Accomplishments, Marketing
Plan, Sales Revenue Forecast, Profit and
Loss Forecast, Capital Spending Plan,
Cash Flow Forecast, Future Trends,
Risks Facing Your Business, Personnel
Plan, Business Personality, Staffing
Schedule, Job Descriptions, Specific
Business Goals, Personal Financial
Statement, Personal Background,
Appendix, and Supporting Documents.
•Quick plan (one-day plan). If you
know your business, are familiar with
and able to make financial projections,
and have done the necessary research,
you may be able to create a plan in
one day. But understand that a quick
plan is a stripped-down version of
a business plan. It won’t convince
either you or your prospective backers
that your business idea is sound. It is
appropriate only if your business idea
is very simple or someone has already
committed to backing your venture. A
stripped-down quick plan has these
few components: Title Page, Plan
Summary, Table of Contents, Problem
Statement, Business Description,
Business Accomplishments, Sales
Revenue Forecast, Profit and Loss
Forecast, Capital Spending Plan,
Cash Flow Forecast, Appendix, and
Supporting Documents.
QUICK PLAN
e “quick plan” icon appears at the
beginning of each chapter containing quick plan
components and guides you to the sections
you’ll need.
•Customized plan. You can start with a
quick plan and add components from
the complete business plan to suit your
needs. When deciding what to include
and what to exclude, ask yourself:
n Which of my statements are the
strongest?
n Which statements do my backers
want to see?
Note that the appendixes contain blank
forms as well as business plans for a small
service business, a manufacturing business,
and a project development. All the forms
(except for the Loan Interest Calculation
Chart) and business plans are included on
the CD-ROM located at the back of the
book. The forms—for calculating sales
forecasts, personal financial information,
profit and loss forecasts, and cash flow
forecasts—are provided in Microsoft Excel
spreadsheet format and include helpful
formulas for making calculations. The “CD”
icon appears whenever forms or business
plans are reproduced on the CD. (Note:
YOUR LEGAL COMPANION | 3
If a series of #### symbols appear in a
box in a spreadsheet, that means that you
will need to widen the column in order to
display the numbers.)
Meet Antoinette
In an effort to make sense out of the
thousands of types of small businesses,
I have roughly divided them into five
main ones: retail, wholesale, service,
manufacturing, and project development.
All the financial tools I present can be
used by all five. However, for the sake of
simplicity, I follow one particular retail
business—a dress shop. In so doing, I
illustrate most of the planning concepts
and techniques necessary to understand
and raise money for any business.
As you read through the text you’ll
meet Antoinette Gorzak, a friend of mine.
Antoinette wants to open a dress shop,
and she has allowed me to use her plans
and thought processes as an example of
a complete and well-prepared business
plan for a retail store. You’ll find parts of
her plan presented in different chapters as
we discuss the various components of a
complete business plan.
Getting Started
Before you sit down to write your plan,
you’ll want to gather together these
essentials:
•awordprocessor
•acalculatororcomputerspreadsheet
program
•agoodsupplyof8½"by11"paper
•severalpencilsandagooderaser,and
•accesstoaphotocopymachine.
Now, here’s a word about revisions and
changing your plan. I firmly believe in
writing your first thoughts on paper and
letting them rest for a day or two. Then
you can edit, expand, and revise later to
get a more perfect statement. In this book,
I show examples of Antoinette’s writing
process. (I’m grateful she’s such a good
sport.)
Most people discover about halfway
through writing their plan that they want
to change either their assumptions or some
of the plan they’ve already written. My
best advice is this: Complete the plan all
the way through on your original set of
assumptions. That way you can see the
financial impact of your ideas, and it will
be much easier to make the right changes
in the second draft. If you start revising
individual parts of the plan before you
have the complete picture, you’ll waste
a lot of energy. If you’re like me, you’ll
rewrite and edit your plan several times
once you’ve finished the first run through.
4 | HOW TO WRITE A BUSINESS PLAN
And a Few More Words
As I write this, the book has been in print
for over 25 years and has sold more than
150,000copies.Ihaveheardthatithasbeen
pirated in some parts of the former Soviet
Union. Since it first came out I have taught,
lectured, and consulted on business plans in
a wide variety of forums. I have taken that
experience and reformulated the exercises
in the book to make them more effective as
well as easier and quicker to use.
I remain friends with many of the people
I met through the book and occasionally
help them over rough spots in their
planning, which is the most gratifying part
of the experience for me. My business is
helping people write business plans that
find money for their businesses. Call me at
415-816-2982andI’lllistenorhelpifIcan.
You can also email me at mckeever.mp@
gmail.com. Please mention “Nolo Busi-
ness Plan Book” in the subject line of your
email, otherwise I might delete it as a spam
message. Finally, to avoid always using the
pronoun “he” when referring to individuals
in general, and to further avoid clumsy
neologisms like “s/he” and awkward
phraseologies like “he/she” and “he or
she,” I have compromised by the random
use of “he” in some instances and “she”
in others. I hope I have arrived at a fair
balance. Also, keep in mind that wherever
possible, this book uses plain language, not
jargon. As a result, you may find that I have
often substituted simple terminology for
traditional business plan lingo.
●
1
C h A p t e r
Benefits of Writing a
Business Plan
What Is a Business Plan? ........................................................................................................................................... 6
Why Write a Business Plan? ....................................................................................................................................6
Helps You Get Money .....................................................................................................................................6
Helps You Decide to Proceed or Stop .................................................................................................... 6
Lets You Improve Your Business Concept ...........................................................................................7
Improves Your Odds of Success ................................................................................................................ 7
Helps You Keep on Track .............................................................................................................................. 8
Issues Beyond the Plan .............................................................................................................................................. 8
Bookkeeping and Accounting ................................................................................................................... 8
Taxes ......................................................................................................................................................................... 8
Securities Laws .................................................................................................................................................... 9
Your Management Skill ..................................................................................................................................9
Issues Specific to Your Business ................................................................................................................ 9
6 | HOW TO WRITE A BUSINESS PLAN
“Marry in haste, repent at leisure.”
(proverb)
“A stitch in time saves nine.”
(proverb)
What Is a Business Plan?
A business plan is a written statement that
describes and analyzes your business and
gives detailed projections about its future.
A business plan also covers the financial
aspects of starting or expanding your
business—how much money you need and
how you’ll pay it back.
Writing a business plan is a lot of work.
So why take the time to write one? The
best answer is the wisdom gained by
literally millions of business owners just
like you. Almost without exception, each
business owner with a plan is pleased she
has one, and each owner without a plan
wishes he had written one.
Why Write a Business Plan?
Here are some of the specific and
immediate benefits you will derive from
writing your business plan.
Helps You Get Money
Most lenders or investors require a written
business plan before they will consider
your proposal seriously. Even some
landlords require a sound business plan
before they will lease you space. Before
making a commitment to you, they want to
see that you have thought through critical
issues facing you as a business owner and
that you really understand your business.
They also want to make sure your business
has a good chance of succeeding.
Inmyexperience,about35%to40%
of the people currently in business do
not know how money flows through their
business. Writing a business plan with this
book teaches you where money comes
from and where it goes. Is it any wonder
that your backers want to see your plan
before they consider your financial request?
There are as many potential lenders and
investors as there are prospective business
owners. If you have a thoroughly thought-
out business and financial plan that
demonstrates a good likelihood of success
and you are persistent, you will find
the money you need. Of course, it may
take longer than you expect and require
more work than you expect, but you will
ultimately be successful if you believe in
your business.
Helps You Decide to Proceed or Stop
One major theme of the book may surprise
you. It’s as simple as it is important. You,
as the prospective business owner, are the
most important person you must convince
of the soundness of your proposal. There-
fore, much of the work you are asked to do
ChApter 1 | BENEFITS OF WRITING A BUSINESS PLAN | 7
here serves a dual purpose. It is designed
to provide answers to all the questions that
prospective lenders and investors will ask.
But it will also teach you how money flows
through your business, what the strengths
and weaknesses in your business concept
are, and what your realistic chances of
success are.
The detailed planning process described
in this book is not infallible—nothing is
in a small business—but it should help you
uncover and correct flaws in your business
concept. If this analysis demonstrates that
your idea won’t work, you’ll be able to avoid
starting or expanding your business. This is
extremely important. It should go without
saying that a great many businesspeople
owe their ultimate success to an earlier
decision not to start a business with built-in
problems.
Lets You Improve Your
Business
Concept
Writing a plan allows you to see how
changing parts of the plan increases profits
or accomplishes other goals. You can tinker
with individual parts of your business with
no cash outlay. If you’re using a computer
spreadsheet to make financial projections,
you can try out different alternatives even
more quickly. This ability to fine-tune your
plans and business design increases your
chances of success.
For example, let’s say that your idea is to
start a business importing Korean leather
jackets. Everything looks great on the first
pass through your plan. Then you read an
article about the declining exchange ratio
of U.S. dollars to Korean currency. After
doing some homework about exchange
rate fluctuations, you decide to increase
your profit margin on the jackets to cover
anticipated declines in dollar purchasing
power. This change shows you that your
prices are still competitive with other
jackets and that your average profits will
increase. And you are now covered for any
likely decline in exchange rates.
Improves Your Odds of Success
One way of looking at business is that
it’s a gamble. You open or expand a
business and gamble your and the bank’s
or investor’s money. If you’re right, you
make a profit and pay back the loans and
everyone’s happy. But if your estimate is
wrong, you and the bank or investors can
lose money and experience the discomfort
that comes from failure. (Of course, a bank
probably is protected because it has title
to the collateral you put up to get the loan.
See Chapter 4 for a complete discussion.)
Writing a business plan helps beat the
odds. Most new, small businesses don’t
last very long. And, most small businesses
don’t have a business plan. Is that only
a coincidence, or is there a connection
between these two seemingly unconnected
facts? My suggestion is this: Let someone
else prove the connection wrong. Why
not be prudent and improve your odds by
writing a plan?
8 | HOW TO WRITE A BUSINESS PLAN
Helps You Keep on Track
Many business owners spend countless
hours handling emergencies, simply
because they haven’t learned how to plan
ahead. This book helps you anticipate
problems and solve them before they
become disasters.
A written business plan gives you a clear
course toward the future and makes your
decision making easier. Some problems
and opportunities may represent a change
of direction worth following, while others
may be distractions that referring to your
business plan will enable you to avoid. The
black and white of your written business
plan will help you face facts if things don’t
work out as expected. For example, if
you planned to be making a living three
months after start-up, and six months later
you’re going into the hole at the rate of
$100perday,yourbusinessplanshould
help you see that changes are necessary.
It’s all too easy to delude yourself into
keeping a business going that will never
meet its goals if you approach things with
a “just another month or two and I’ll be
there” attitude, rather than comparing your
results to your goals.
Issues Beyond the Plan
I have written this book to provide
you with an overview of the issues that
determine success or failure in a small
business. Experienced lenders, investors,
and entre preneurs want a plan that takes
these issues into account. Of course, this
book can’t cover everything. Here are
some of the key business components that
are left out of this initial planning process.
Bookkeeping and Accounting
This book discusses the numbers and
concepts you as the business owner need
in order to open and manage your small
business. You have the responsibility
to create bookkeeping and accounting
systems and make sure they function
adequately. (Some suggestions for setting
upasystemarecontainedinChapter6.)
One of the items generated by your
accounting system will be a balance
sheet. A balance sheet is a snapshot at a
particular moment in time that lists the
money value of everything you own and
everything you owe to someone else.
Taxes
While there are a few mentions of tax
issues throughout the book, most of the
planning information doesn’t discuss how
taxes will be calculated or paid. The book
focuses its efforts on making a profit and
a positive cash flow. If you make a profit,
you’ll pay taxes and if you don’t make a
profit, you’ll pay fewer taxes. A CPA or tax
advisor can help you with tax strategies.
ChApter 1 | BENEFITS OF WRITING A BUSINESS PLAN | 9
Securities Laws
If you plan to raise money by selling
shares in a corporation or limited
partnership, you’ll fall under state or
federal securities regulations. You can,
however, borrow money or take in a
general partner without being affected by
securities laws. A complete discussion of
these issues is beyond the scope of this
book. For now, take note that you must
comply with securities regulations after you
complete your plan and before you take
any money into your business from selling
shares or partnership interests.
Your Management Skill
This book shows you how to write a very
good business plan and loan application.
However, your ultimate success rests on
your ability to implement your plans—on
your management skills. If you have any
doubts about your management ability,
checkouttheresourcesinChapter12.Also
seeChapter11forathought-stimulating
discussion of management.
Issues Specific to Your Business
How successfully your business relates
to the market, the business environment,
and the competition may be affected by
patents, franchises, foreign competition,
location, and the like. Of necessity, this
book focuses on principles common
to all businesses and does not discuss
the specific items that distinguish your
business from other businesses. For
example, this book doesn’t discuss how
to price your products to meet your
competition; I assume that you have
enough knowledge about your chosen
business to answer that question.
●
2
C h A p t e r
Do You Really Want to
Own a Business?
Introduction .................................................................................................................................................................12
Self-Evaluation Exercises ........................................................................................................................................13
Your Strong and Weak Points ...................................................................................................................14
General and Specific Skills Your Business Needs ............................................................................15
Your Likes and Dislikes..................................................................................................................................15
Specific Business Goals .................................................................................................................................16
How to Use the Self-Evaluation Lists...............................................................................................................17
Reality Check: Banker’s Analysis ........................................................................................................................17
Banker’s Ideal .....................................................................................................................................................17
Measuring Up to the Banker’s Ideal ......................................................................................................18
Use the Banker’s Ideal ...................................................................................................................................18
12 | HOW TO WRITE A BUSINESS PLAN
Introduction
“Hope springs eternal in the human
breast,” said English poet and essayist
Alexander Pope several centuries ago.
He wasn’t describing people expanding
or starting a business, but he may as
well have been. Everyone who goes into
business for themselves hopes to meet
or surpass a set of personal goals. While
your particular configuration is sure to
be unique, perhaps you will agree with
some of the ones I have compiled over the
years from talking to hundreds of budding
entrepreneurs.
Independence. A search for freedom and
independence is the driving force behind
many businesspeople. Wasn’t it Johnny
Paycheck who wrote the song “Take This
Job and Shove It?”
Personal Fulfillment. For many people,
owning a business is a genuinely fulfilling
experience, one that lifetime employees
never know.
Lifestyle Change. Many people find that
while they can make a good income
working for other people, they are missing
some of life’s precious moments. With the
flexibility of small business ownership, you
can take time to stop and smell the roses.
Respect. Successful small business
owners are respected, both by themselves
and their peers.
Money. You can get rich in a small
business, or at least do very well
financially. Most entrepreneurs don’t get
wealthy, but some do. If money is your
motivator, admit it.
Power. When it is your business, you can
have your employees do it your way. There
is a little Ghengis Khan in us all, so don’t
be surprised if power is one of your goals.
If it is, think about how to use this goal in
a constructive way.
Right Livelihood. From natural foods
to solar power to many types of service
businesses, a great many cause-driven
small businesses have done very well by
doing good.
If owning a small business can help
a person accomplish these goals, it’s
small wonder that so many are started.
Unfortunately, while the potential for great
success exists, so do many risks. Running
a small business may require that you
sacrifice some short-term comforts for
long-term benefits. It is hard, demanding
work that requires a wide variety of skills
few people are born with. But even if you
possess (or more likely acquire) the skills
and determination you need to successfully
run a business, your business will need
one more critical ingredient: Money.
You need money to start your business,
money to keep it running, and money to
make it grow. This is not the same thing
as saying you can guarantee success in
your small business if you begin with
a fat wallet. Now, let me confess to one
major bias here. I believe that most
small business owners and founders are
better off starting small and borrowing,
or otherwise raising, as little money as
possible. Put another way, there is no such
thing as “raising plenty of capital to ensure
ChApter 2 | DO YOU REALLY WANT TO OWN A BUSINESS? | 13
success.” Unless you, as the prospective
business founder, learn to get the most
mileage out of every dollar, you may go
broke and will surely spend more than
you need to. But that doesn’t mean that
you should try to save money by selling
cheap merchandise or providing marginal
services. In today’s competitive economy,
your customers want the best you can give
them at the best price. They will remember
the quality of what they get from you long
after they have forgotten how much they
paid.
In practical terms, that means you
must buy only the best goods for your
customers. Anything that affects the image
your business has in your customer’s mind
should be first-rate. It also means that you
shouldn’t spend money on things that don’t
affect the customer. For example, unless
you’re a real estate broker your customers
probably won’t care if you drive an old,
beat-up car to an office in a converted
broom closet, as long as you provide them
an honest product or service for an honest
price. Save the nice car and fancy office,
until after your business is a success.
Self-Evaluation Exercises
Here’s a question to ponder: Are you the
right person for your business? Because
running a business is a very demanding
endeavor that can take most of your time
and energy, your business probably will
suffer if you’re unhappy. Your business can
become an albatross around your neck if
you don’t have the skills and temperament
to run it. Simply put, I’ve learned that
no business, whether or not it has sound
financial backing, is likely to succeed
unless you, as the prospective owner,
make two decisions correctly:
•Youmusthonestlyevaluateyourselfto
decide whether you possess the skills
and personality needed to succeed in a
small business.
•Youmustchoosetherightbusiness.
(How to select the right business is
covered extensively in Chapter 3.)
A small business is a very personal
endeavor. It will honestly reflect your
opinions and attitudes, whether or not you
design it that way. Think of it this way: The
shadow your business casts will be your
shadow. If you are sloppy, rude, or naively
trusting, your business will mirror these
attributes. If your personal characteristics
are more positive than those, your business
will be more positive, too. To put this
concretely, suppose you go out for the
Sunday paper and are met by a store
clerk who is groggy from a hangover and
badmouths his girlfriend in front of you.
Chances are that next Sunday will find you
at a different newsstand.
I’m not saying you need to be psycho-
logically perfect to run a small business.
But to succeed, you must ask people
for their money every day and convince
a substantial number of them to give it
to you. While providing your goods or
services, you will create intimate personal
relationships with a number of people. It
14 | HOW TO WRITE A BUSINESS PLAN
makes no difference whether you refer to
people who give you money as clients,
customers, patients, members, students,
or disciples. It makes a great deal of
difference to your chances of ultimate
success if you understand that these
people are exchanging their money for the
conviction that you are giving them their
money’s worth.
The following self-evaluation exercises
will help you assess whether you have
what it takes to successfully run a small
business. Take out a blank sheet of paper
or open a computer fi le.
Your Strong and Weak Points
Take a few minutes to list your personal
and business strengths and weaknesses.
Include everything you can think of, even
if it doesn’t appear to be related to your
business. For instance, your strong points
may include the mastery of a hobby, your
positive personality traits, and your sexual
charisma, as well as your specifi c business
skills. Take your time and be generous.
To provide you with a little help, I
include a sample list for Antoinette Gorzak,
a personal friend who has what she hopes
is a good business idea: a slightly different
approach to selling women’s clothing.
You’ll get to know her better as we go
along. Her strengths, weaknesses, fantasies,
and fears are surely different from yours.
So, too, almost certainly, is the business
she wants to start. So be sure to make your
own lists—don’t copy Antoinette’s.
Antoinette Gorzak:
My Strong and Weak Points
Strong Points (in no particular order)
1. Knowledge of all aspects of women’s
fashion business
2. Ability to translate abstract objectives
into concrete steps
3. Good cook
4. Faithful friend and kind to animals
5. When I set a goal, I can be relentless in
achieving it
6. Ability to make and keep good
business friends—I have had many
repeat customers at other jobs.
Weak Points
1. Impatience
2. Dislike of repetitive detail
3. Romantic (is this a weak point in
business?)
4. Tendency to postpone working on
problems
5. Tendency to lose patience with fools
(sometimes I carry this too far—
especially when I’m tired).
Your list of strong and weak points
will help you see any obvious confl icts
between your personality and the business
you’re in or want to start. For example,
if you don’t like being around people
but plan to start a life insurance agency
with you as the primary salesperson, you
may have a personality clash with your
business. The solution might be to fi nd
ChApter 2 | DO YOU REALLY WANT TO OWN A BUSINESS? | 15
another part of the insurance business that
doesn’t require as much people contact.
Unfortunately, many people don’t
realize that their personalities will have a
direct bearing on their business success.
An example close to the experience of
folks at Nolo involves bookstores. In the
years since Nolo began publishing, they
have seen all sorts of people, from retired
librarians to unemployed Ph.D.s, open
bookstores. A large percentage of these
stores have failed because the skills needed
to run a successful bookstore involve more
than a love of books.
General and Specifi c Skills
Your Business Needs
Businesses need two kinds of skills to
survive and prosper: Skills for business in
general and skills specifi c to the particular
business. For example, every business
needs someone to keep good fi nancial
records. On the other hand, the tender
touch and manual dexterity needed by
glassblowers are not skills needed by the
average paving contractor.
Next, take a few minutes and list the
skills your business needs. Don’t worry
about making an exhaustively complete
list, just jot down the fi rst things that come
to mind. Make sure you have some general
business skills as well as some of the more
important skills specifi c to your particular
business.
If you don’t have all the skills your
business needs, your backers will want
to know how you will make up for the
defi ciency. For example, let’s say you want
to start a trucking business. You have a
good background in maintenance, truck
repair, and long distance driving, and you
know how to sell and get work. Sounds
good so far—but, let’s say you don’t know
the fi rst thing about bookkeeping or cash
fl ow management and the thought of using
a computer makes you nervous. Because
some trucking businesses work on large
dollar volumes, small profi t margins, and
slow-paying customers, your backers will
expect you to learn cash fl ow management
or hire someone qualifi ed to handle that
part of the business.
Antoinette Gorzak: General and Specifi c
Skills My Business Needs
1. How to motivate employees
2. How to keep decent records
3. How to make customers and
employees think the business is special
4. How to know what the customers
want—today and, more important in
the clothing business, to keep half-a-
step ahead
5. How to sell
6. How to manage inventory
7. How to judge people.
Your Likes and Dislikes
Take a few minutes and make a list of the
things you really like doing and those you
don’t enjoy. Write this list without thinking
16 | HOW TO WRITE A BUSINESS PLAN
about the business—simply concentrate on
what makes you happy or unhappy.
If you enjoy talking to new people,
keeping books, or working with comput-
ers, be sure to include those. Put down all
the activities you can think of that give you
pleasure. Antoinette’s list is shown as an
example.
As a business owner, you will spend
most of your waking hours in the business,
and if it doesn’t make you happy, you
probably won’t be very good at it. If this
list creates doubts about whether you’re
pursuing the right business, I suggest
you let your unconscious mind work on
the problem. Most likely, you’ll know the
answer after one or two good nights’ sleep.
Antoinette Gorzak:
My Likes and Dislikes
ings I Like to Do
1. Be independent and make my own
decisions
2. Keep things orderly. I am almost
compulsive about this
3. Take skiing trips
4. Work with good, intelligent people
5. Cook with Jack
6. Care about my work.
ings I Don’t Like to Do
1. Work for a dimwit boss
2. Feel like I have a dead-end job
3. Make people unhappy.
CAUTION
If your list contains several things you
really don’t like doing and nothing at all that
you like doing, it may be a sign that you have
a negative attitude at this time in your life. If
so, you may wish to think carefully about your
decision to enter or expand a business at this
time. Chances are your negative attitude will
reduce your chances of business success.
Specifi c Business Goals
Finally, list your specifi c business goals.
Exactly what do you want your business
toaccomplishforyou?Freedomfrom9
to 5? Money—and if so, how much? More
time with the children? Making the world
or your little part of it a better place? It’s
your wish list, so be specifi c and enjoy
writing it.
Antoinette Gorzak:
My Specifi c Business Goals
1. Have my own business that gives
me a decent living and fi nancial
independence
2. Work with and sell to my friends
and acquaintances as well as new
customers
3. Introduce clothing presently
unavailable in my city and provide a
real service for working women
4. Be part of the growing network of
successful businesswomen
5. Be respected for my success.
ChApter 2 | DO YOU REALLY WANT TO OWN A BUSINESS? | 17
How to Use the Self-
Evaluation Lists
After you’ve completed the four self-
evaluation lists, spend some time reading
them over. Take a moment to compare the
skills needed in your business to the list of
skills you have. Do you have what it takes?
Show them to your family and, if you’re
brave, to your friends or anyone who
knows you well and can be objective.
Of course, before showing the lists to
anyone, you may choose to delete any
private information that isn’t critical to your
business. If you show your lists to someone
who knows the tough realities of running
a successful small business, so much the
better. You may want to find a former
teacher, a fellow employee, or someone
else whose judgment you respect.
What do they think? Do they point out
any obvious inconsistencies between your
personality or skills and what you want
to accomplish? If so, pay attention. Treat
this exercise seriously and you will know
yourself better. Oh, and don’t destroy your
lists. Assuming you go ahead with your
business and write your business plan, the
lists can serve as background material or
even become part of the final plan.
You have accomplished several things if
you have followed these steps. You have
looked inside and asked yourself some
basic questions about who you are and
what you are realistically qualified to do.
As a result, you should now have a better
idea of whether you are willing to pay the
price required to be successful as a small
businessperson. If you are still eager to
have a business, you have said, “Yes, I
am willing to make short-term sacrifices
to achieve long-term benefits and to do
whatever is necessary—no matter the
inconvenience—to reach my goals.”
Reality Check: Banker’s Analysis
Banks and institutions that lend money
have a lot of knowledge about the success
rate of small businesses. Bankers are often
overly cautious in making loans to small
businesses. For that very reason it makes
sense to study their approach, even though
it may seem discouraging at first glance.
Banker’s Ideal
Bankers look for an ideal loan applicant,
who typically meets these requirements:
•Foranexistingbusiness,acashow
sufficient to make the loan payments.
•Foranewbusiness,anownerwhohas
a track record of profitably owning and
operating the same sort of business.
•Anownerwithasound,well-thought-
out business plan.
•Anownerwithnancialreserves
and personal collateral sufficient to
solve the unexpected problems and
fluctuations that affect all businesses.
Why does such a person need a loan,
you ask? He or she probably doesn’t,
which, of course, is the point. People
who lend money are most comfortable
18 | HOW TO WRITE A BUSINESS PLAN
with people so close to their ideal loan
candidate that they don’t need to borrow.
However, to stay in business themselves,
banks and other lenders must lend out the
money deposited with them. To do this,
they must lend to at least some people
whose creditworthiness is less than perfect.
Measuring Up to the Banker’s Ideal
Who are these ordinary mortals who slip
through bankers’ fine screens of approval?
And more to the point, how can you
qualify as one of them? Your job is to show
how your situation is similar to the banker’s
ideal.
A good bet is the person who has
worked for, or preferably managed, a
successful business in the same field as
the proposed new business. For example,
if you have profitably run a clothing store
for an absentee owner for a year or two,
a lender may believe you are ready to do
it on your own. All you need is a good
location, a sound business plan, and a little
capital. Then, watch out Neiman-Marcus!
Further away from a lender’s ideal is
the person who has sound experience
managing one type of business, but
proposes to start one in a different field.
Let’s say you ran the most profitable hot
dog stand in the Squaw Valley ski resort,
and now you want to market computer
software in the Silicon Valley of California.
In your favor is your experience running a
successful business. On the negative side is
the fact that computer software marketing
has no relationship to hot dog selling. In
this situation, you might be able to get a
loan if you hire people who make up for
your lack of experience. At the very least,
you would need someone with a strong
software marketing background, as well as
a person with experience managing retail
sales and service businesses. Naturally,
both of those people are most desirable
if they have many years of successful
experience in the software marketing
business, preferably in California.
Use the Banker’s Ideal
It’s helpful to use the bankers’ model
in your decision-making process. Use a
skeptical attitude as a counterweight to
your optimism to get a balanced view of
your prospects. What is it that makes you
think you will be one of the minority of
small business owners who will succeed? If
you don’t have some specific answers, you
are in trouble. Most new businesses fail,
and the large majority of survivors do not
genuinely prosper.
Many people start their own business
because they can’t stand working for
others. They don’t have a choice. They
must be either boss or bum. They are
more than willing to trade security for
the chance to call the shots. They meet a
good chunk of their goals when they leave
their paycheck behind. This is fine as far
as it goes, but in my experience, the more
successful small business owners have
other goals as well.
ChApter 2 | DO YOU REALLY WANT TO OWN A BUSINESS? | 19
A small distributor we know has a well-
thought-out business and a sound business
plan for the future. Still, he believes that
his own personal commitment is the most
important thing he has going for him.
He puts it this way: “I break my tail to
live up to the commitments I make to my
customers. If a supplier doesn’t perform for
me, I’ll still do everything I can to keep my
promise to my customer, even if it costs me
money.” This sort of personal commitment
enables this successful business owner to
make short-term adjustments to meet his
long-range goals. And while it would be
an exaggeration to say he pays this price
gladly, he does pay it.
●
3
C h A p t e r
Choosing the Right Business
Introduction .................................................................................................................................................................22
Know Your Business .................................................................................................................................................22
Be Sure You Like Your Business ..........................................................................................................................24
Describe Your Business ...........................................................................................................................................24
Identify Your Type of Business .................................................................................................................25
Problem Statement ........................................................................................................................................27
Business Description ......................................................................................................................................27
Taste, Trends, and Technology: How Will the Future Affect Your Business? ...............................30
Taste ........................................................................................................................................................................31
Trends ....................................................................................................................................................................31
Technology ..........................................................................................................................................................32
Write a Future Trends Statement ...........................................................................................................34
Break-Even Analysis: Will Your Business Make Money? ........................................................................34
Forecast Sales Revenue .................................................................................................................................36
Forecast Fixed Costs ......................................................................................................................................40
Forecast Gross Profit for Each Sales Dollar ........................................................................................41
Forecast Your Break-Even Sales Revenue ............................................................................................43
What You Have Accomplished ..........................................................................................................................47
22 | HOW TO WRITE A BUSINESS PLAN
QUICK PLAN
If you’ve chosen the quick plan
method to prepare a business plan (see Intro-
duction), you need to read and complete only
these sections of Chapter 3:
• “ProblemStatement”
• “Business
Description”
• “Forecast
SalesRevenue.”
Introduction
This chapter helps you determine whether
you have chosen the “right” business for
you—one that you know, like, and will
work hard for and that makes economic
sense. Most experienced businesspeople
complete several steps as a rough and
ready template to decide whether to
complete a plan. If your business passes all
these steps with flying colors, it means it’s
a good idea to write a full business plan
(although it doesn’t guarantee success).
On the other hand, if your proposal doesn’t
pass, you’ll probably want to modify or
change your plans altogether.
If you’re like most people, chances are
your business will pass some tests easily
and fail some of the others. Antoinette
faces just that problem in this chapter. Pay
careful attention to how she approaches
that dilemma; her method of proceeding
may help you in your decision.
Know Your Business
One of the most common questions people
ask me is this: What business should I start?
My answer is always the same—start a
venture that you know intimately already.
I don’t believe any business exists that is
so foolproof that anyone can enter and
make a sure profit. On the other hand, a
skilled, dedicated owner often can make
a venture successful when others have
failed.
Remember, your potential customers
will exchange their money only for the
conviction that you are giving them their
money’s worth. And that means you’ll need
to know what you’re doing. While this
point should appear obvious, sadly—it isn’t.
Many people enter businesses they
know little or nothing about. I did it once
myself. I opened an automobile tune-up
shop at a time when, seemingly, they
couldn’t miss. I knew a good deal about
running a small business, had a personality
well suited for it, and could borrow enough
money to begin. The end of what turned
out to be a very sad story is that it took
metwoyearsand$30,000togetridofthe
business. Why? Because in my hurry to
make a profit, I overlooked several crucial
facts. The most important of these was that
I knew virtually nothing about cars and I
didn’t really want to learn. Not only was I
unable to roll up my sleeves and pitch in
when it was needed, I didn’t even know
enough to properly hire and supervise
mechanics. In short, I made a classic
mistake—I started a business in a “hot”
field because someone was foolish enough
to lend me the money.
How can you apply my lesson to your
situation? Let’s say you’ve heard pasta
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 23
shops make lots of money and you want
to start one. First, if at all possible, get a
job working in one, even if you work for
free. Learn everything you can about every
aspect of the business. After a few months,
you should be an expert in every aspect
of pasta making, from mixing eggs and
flour, flattening the dough, and slicing it
into strips. Ask yourself whether you enjoy
the work and whether you are good at it.
If you answer “Yes,” go on to the second
important question: Is the business a
potential money maker? You should have
a pretty good answer to this question after
working in the field for a few months.
If you’re unable to find employment
in the pasta business, make a tour of
delicatessens and shops that make their
own pasta. Interview the owners. To get
reliable answers, it’s best to do this in a
different locale from the one in which
you plan to locate. Small business owners
are often quite willing to share their
knowledge once they are sure you will not
compete with them.
I remember reading a management
philosophy that said that a good manager
doesn’t have to know every job, only
how to get other people to do them.
That approach may work well in a large
corporation, but for a small business, it’s
dangerously naive. In short, don’t start your
small venture until you know it from the
ground up. I mean this literally. If you’re
opening a print shop, you should be able
to run the presses and do paste-up and
layout, as well as keep a coherent set of
books. If it’s your elegant little restaurant
and the food isn’t perfect, you’re the one
who either improves it in a hurry or goes
broke. If you don’t like getting your hands
dirty, choose a clean business.
Are You Choosing a Risky Business?
When considering the businesses you know,
it is helpful to know how well they typically
fare. For instance, these businesses have
higher than average failure rates:
• computerstores
• laundriesanddrycleaners
• orists
• usedcardealerships
• gasstations
• localtruckingrms
• restaurants
• infantclothingstores
• bakeries
• machineshops
• carwashes
• e-commerce
• groceryandmeatstores.
If your business idea is on this list, it
doesn’t mean you should abandon it
automatically. However, it should remind
you to be extra critical and careful when
preparing your plan. I’ve known successful
businesspeople in every category listed, just
as I have known people who have failed in
each of them.
24 | HOW TO WRITE A BUSINESS PLAN
Be Sure You Like Your Business
Does the business you want to own
require skills and talents you already
possess? If you have the necessary skills,
do you enjoy exercising them? Think about
this for a good long time. The average
small busi ness owner spends more time
with his venture than with his family. This
being so, it makes sense to be at least as
careful about choosing your endeavor
as you are about picking your mate. A
few of us are sufficiently blessed that we
can meet someone on a blind date, settle
down a week later, and have it work out
wonderfully. However, in relationships,
as in business, most of us make better
decisions if we approach them with a little
more care.
Be sure you aren’t so blinded by one
part of a small business that you overlook
all others. For example, suppose you love
music and making musical instruments.
Running your own guitar shop sounds like
it would be great fun. Maybe it would be,
but if you see yourself contentedly making
guitars all day in a cozy little workroom,
you’d better think again. Who is going to
meet customers, keep the books, answer
the phone, and let potential customers
know you are in business? If you hate all
these activities, you either have to work
with someone who can handle them, or do
something else.
Here’s one last thing to think about when
considering how much you like your busi-
ness idea. In fact, it’s a danger that threatens
almost every potential entre preneur. Precisely
because your business idea is yours, you
have an emotional attachment to it. You
should. Your belief in your idea will help
you wade through all the unavoidable muck
and mire that lies between a good idea
and a profitable business. However, your
ego involve ment can also entail a loss of
perspec tive. I’ve seen people start hopeless
endeavors and lose small fortunes because
they were so enamored with their “brilliant
ideas” that they never examined honestly the
negative factors that doomed their ventures
from the start.
Describe Your Business
What is your good idea? What business
do you want to be in? It’s time to look at
the specifics. Let’s say you want to open
a restaurant. What will you serve? What
will your sample menu look like? What
equipment will you need? Note that
including french fries means you’ll have
to install french-fryers, grease traps in the
sewer line, hoods and fire extinguishing
systems. On the other hand, by not serving
fried foods you will save a lot of money
in the kitchen, but maybe you’ll go broke
when all the grease addicts go next door.
Or suppose you want to sell DVDs,
games, or digital cameras. Do you plan to
have a service department? If so, will you
make house calls, or only accept repairs
at your store? What sort of security system
will you install to protect your inventory?
What about selling component sound
systems or home entertainment centers?
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 25
What about competition from nearby
retailers?
Answers to these types of questions will
be crucial to the success of your venture
and to writing your business plan. Let me
tell you from hard, personal experience
that you need a written document—even
if you’re sure you know exactly what your
business will do.
With this foundation document to refer
to, you are less likely to forget your good
plans and resolutions in the heat of getting
your business under way. Any changes you
later make can be made both consciously
and with consideration.
To write a complete description of your
proposed business, simply follow the
suggestions on the next few pages.
Identify Your Type of Business
Find the business category listed below
that most closely matches your business.
You’ll use the description that follows as
a reference when you describe your own
business.
CAUTION
Each of the business categories
requires different skills to run efficiently. Many
small businesses involve one or two types of
business in the same endeavor. But if your idea
will involve you in several types of business,
it may be too complicated for you to run
efficiently. As a general rule, small businesses
work best when their owners know exactly
what they are about and strive for simplicity.
• Retail. Retail businesses buy
merchandise from a variety of
wholesalers and sell it directly to
consumers. Some retailers provide
service and repair facilities, while
most do not. Most retailers just take
in the goods and mark up the price,
sometimes doubling their purchase
price to arrive at a sales price.
Supermarkets, mail order catalogue
merchants, online stores (e-tailers),
computer stores, dress shops,
department stores, and convenience
marts are retailers.
• Wholesale. Wholesalers buy merchan-
dise from manufacturers or brokers
and resell the goods to retailers.
Normally, a wholesaler maintains
an inventory of a number of lines.
A whole saler normally does not
sell to consumers, in order to avoid
competing with his retailer customers.
Whole salers usually offer delivery
service and credit to customers. This
type of busi ness is characterized by
low gross profit margins (sometimes
varyingbetween15%and33%ofthe
whole saler’s selling price) and high
inventory investment.
Wholesalers typically buy in large
lots and sell in smaller lots. Like
retailers, they seldom make any
changes to the products. Most whole-
salers aren’t well known to the general
public.
• Service. People with a particular
skill sell it to consumers or to other
26 | HOW TO WRITE A BUSINESS PLAN
businesses, depending on the skill.
The end product of a service business
is normally some sort of advice or the
completion of a task. Occasionally, a
service business sells products as an
ancillary function. For example, a baby
diaper cleaning service may also sell
diapers and baby accessories. Service
business customers normally come
from repeats and referrals. It’s common
to have to meet state licensing
requirements.
Hairdressers, carpet cleaners, con-
sultants, housecleaners, accountants,
building contractors, and architects are
examples of service businesses.
• Manufacturing. Manufacturers assemble
components or process raw materials
into products usable by consumers or
other businesses. This type of business
ranges from an artisan who makes craft
items to Toyota. The most difficult part
of the manufacturing business is to find
a product, or even better, a series of
products, that have acceptance in the
marketplace and generate a steady sales
volume. Or, as one businessperson put
it: “Production without sales is scrap.”
• Project development. Developers
create and finish a saleable com-
modity by assembling resources for
a one-time project. Normally, the
developer knows the market value of
the finished product before she begins
work. When the project is complete,
the developer sells her interest in the
project, normally directly to the user or
consumer.
To understand project developers,
consider a woman building a single-
family house on speculation. She
buys the lot, secures permits, hires a
contractor, gets a loan, builds a house,
and sells it. She is then ready to go on
to another project. Other examples of
project developers include someone
who buys, restores, and sells antique
cars and someone who purchases
dilapidated buildings at a bargain
price, fixes them up, and sells them.
TIP
Software development note: Soft ware
development differs from soft
ware production
and sales in that software developers create
a product that another entity produces and
markets. For example, Fred Jones creates a
bookkeeping program for employment agencies
on his own time. en he sells or licenses
production and marketing rights to the Acme
Programs Co. for $1,000 cash and 5% of future
sales. Fred is the project developer and Acme is
the manufacturer. If Fred also produces copies
and markets them himself, he acts as both
developer and manufacturer.
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 27
Problem Statement
Successful businesses share a common
attribute: They do something useful for
their customers. One way to determine
what is useful for your customers is to
identify and describe the problem that your
business will solve. For example, a window
washing service solves the customer’s twin
problems of wanting clean windows and
lacking either the time or physical ability
to clean windows himself. If you accurately
understand your customers’ problems and
needs, your business will have a better
chance of success.
For example, here’s a problem faced by
a customer of a pizza-by-the-slice stand:
“I’m hungry and I don’t have much time
or money, but I’m tired of hamburgers and
want a change of pace. Also, I’d like to be
able to specify the exact ingredients I want
in my meal. And, it would be really swell
to have a glass of wine or beer with the
meal.”
Now, think about your customers for
a minute. What is the problem that you
solve for them? Write out your description
of the problem your business solves for its
customers. This statement will become part
of your completed business plan.
Problem Antoinette’s
Dress Shop Will Solve
Professional working women like to buy
fashionable, slightly conservative clothing
at moderate prices. ey prefer shopping
at convenient times and patronizing stores
that off er a wide selection of merchandise.
ese women like to talk to sales clerks
who under stand fashion and know their
store’s merchandise; few clerks in the local
department stores have this knowledge.
At the present time, many of these women
travel 45 miles to shop because no local
store meets their needs or carries today’s
most popular labels.
Business Description
Next, describe how your business will
solve your customers’ problem. Take your
time and do a thorough job. It’s very likely
that the fi rst time you attempt this task,
questions will occur to you that you didn’t
consider previously. If so, fi gure out a
good answer and rewrite your description.
The important thing is not how long it
takes to do this, but that you end up
with a realistic, well-thought-out business
description. After all, it’s cheaper to answer
questions and solve problems on paper
than it is with real money.
Your business description should explain
exactly what you will provide for the
customer as well as what you’ll exclude.
28 | HOW TO WRITE A BUSINESS PLAN
Each of the choices you make in your
business description will affect the amount
of money you’ll need to start or expand
and how much sales revenue you can
expect.
Consider the following series of
questions when writing your business
description. If you answer both the general
business questions and each question that
applies to your business, you’ll present
your business accurately and fairly.
For an example of a well-thought-out
business, refer to the accompanying
sample, which contains the first draft of
Antoinette’s Dress Shop’s business descrip-
tion. You will find three additional business
descriptions in Appendixes A, B, and C at
the back of the book.
General Business Questions
These questions apply to most small busi-
nesses. Feel free to skip any questions that
don’t pertain to you.
1.WhatproblemdoIsolveformy
customers?
2. Who is my typical (target) customer?
3. How will I communicate with my
target customer?
4. What products and/or services will
I provide? Are there any products or
services my customers may expect me
to provide that I don’t plan to provide?
5. Where will my business be located?
6.WherewillIbuytheproductsIneed?
7. What hours will I operate?
8.Whowillworkformeandhowwill
they be paid?
9.Whowillhandlecriticaltaskslike
selling, ordering, bookkeeping,
marketing, and shipping?
10.HowwillIadvertiseandpromotemy
business?
11.Whatarethecompetition’sstrengths
and weaknesses?
12.HowamIdifferentfromthecompe-
ti tion, as seen through the eyes of
my customers? (Make sure that you
answer this question from a customer’s
perspective and not from an owner’s
point of view.)
Specific Business Questions
Some issues your business faces can be
categorized by business type. Make sure
your business description addresses both
the general business questions that apply
to your business and the questions specific
to your type of business.
CAUTION
If you plan to conduct operations
in more than one category, be sure to use the
specific questions for each type of business
that applies.
Retail
1.HowwillIkeepabreastoffashionand
taste in my field?
2. Does my location have enough drive-
by or walk-by traffic to support my
business, or must I rely on heavy
advertising for sales?
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 29
Business Description for Antoinette’s Dress Shop
Antoinette’s Dress Shop will be a women’s
retail clothing store designed to serve the
growing market of professional working
women. Our store will buy clothing and
accessories from the most popular labels
that provide consistent quality and service.
Antoinette’s Dress Shop will resell them “as
is” to our target market. Antoinette’s will
specialize in fashionable, reasonably priced
clothing suitable to this city’s working
environment. e store will sell a limited line
of sportswear or leisure wear. We will carry
business suits, pantsuits, and dresses for
daytime wear, together with accessories like
purses and belts. We will make prompt minor
alterations at no charge.
Antoinette’s will regularly publish a
newsletter containing clothing tips for working
women, which we will send to customers on
our email list. We will maintain a fi le on each
customer that contains their size and style
and color preferences. Antoinette’s will
schedule fashion shows for our customer base
as a marketing device.
Antoinette’s will off er a relaxed atmosphere
with personalized attention and unlimited
fi tting-room time. Our store will feature a
contemporary design and inviting feeling.
All our employees will be knowledgeable
about fashion in general and about the
clothing we sell. Antoinette’s will be located
in approximately 2,000 square feet in the
downtown mall and will maintain regular
mall hours of Monday through Friday from
11:00 a.m. until 9:00 p.m. and Saturdays
from 10:00 a.m. until 6:00 p.m. ese hours
will be a convenience to our customer base.
e store will not off er delivery on a regular
basis, although we will off er Federal Express
shipments when requested and we will
maintain a website together with an active
email correspondence with customers so they
can express their feelings about any concerns.
3. Is it better to be in a shopping center
with high rents and operating restrictions,
or in a separate location with lower
costs and less drive-by or walk-by
traffi c?
4. How much inventory will I buy in
comparison to my expected sales
revenues? (This is a critical question in
the retail fi eld and deserves your close
attention.)
Wholesale
1.WhichproductlineswillIcarryin
inventory and which will I order as
required?
2. Will I carry accounts for my customers
or work on cash only?
3. Are there any exclusive distributorships
available to me?
4. Will I have to market all the products
myself or will the manufacturers have
marketing programs?
30 | HOW TO WRITE A BUSINESS PLAN
Service
1.Aremycredentialsandskillsequaltoor
better than others in my field?
2. Can I sell my service as well as I can
perform it?
3. Will I take work on speculation or will I
insist on cash for each job?
4. Do I have a client list to begin with or
will I start cold?
5. Am I better off associating with others
or being independent?
Manufacturing
1.Doesmymanufacturingprocesscreate
toxic or polluting materials? If so, how
will I deal with them and what regula-
tory agencies handle them?
2. Is there a pool of readily available,
afford able skilled labor where I want to
locate?
3. Will I make products for inventory or per
order?
4. Will I make one product only or a line
of products?
5. If I succeed on a small scale, do I plan
to sell out to a larger company or try to
compete nationally or internationally?
6.Ismycompetitionfromsmallorlarge
firms?
Project Development
1.AmIsureofthesellingpriceofmy
project?
2. Am I sure of my projected costs? What
will happen if my costs are higher than
estimated?
3. Am I sure of the time factors? What will
happen if it takes longer than expected
to complete and sell the project?
4. What portions of the work will I contract
with others to perform?
5. Is there a definite buyer for my project?
If not, what costs will I incur before it’s
sold?
Taste, Trends, and Technology:
How Will the Future
Affect Your Business?
Let’s assume you have a good description
of your proposed business, and the
business is an extension of something you
like and know how to do well. Perhaps
you have been a chef for ten years and
have always dreamed of opening your
own restaurant. So far, so good—but
you aren’t home free yet. There is
another fundamental question that needs
answering: Does the world need, and is it
willing to pay for, the product or service
you want to sell? For example, do the
people in the small town where you live
really want an Indonesian restaurant? If
your answer is “Yes” because times are
good and people have extra money, ask
yourself what is likely to happen if the
economy goes into a slump ten minutes
after you open your doors.
To make this point more broadly, let’s
use a railroad train as a metaphor for our
economic society. And let’s have you, as
a potential new businessperson, stand
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 31
by the tracks. How do you deal with the
train when it arrives? You can get on and
ride. You can continue to stand by the
tracks and watch the train disappear in the
distance. Or you can stand in the middle of
the tracks and get run over.
To continue this metaphor, let’s now
assume the economic train has three
engines: taste, trends, and technology.
Together they pull the heavy steel cars
which can give you a comfortable ride or
flatten you. Let’s take a moment to think
more about each of these engines.
Taste
People’s tastes drive many of the changes
our society speeds through. For example,
inthe1970s,manyofuschangedourtaste
in automobiles from large gas guzzlers
to small, well-built cars. American manu-
facturers didn’t recognize this change in
taste until they almost went broke. The
Japanese were in the right place with small,
reliable cars and realized great prosperity.
Consider popular music as another
example. Music styles change every few
years, and some bright businesspeople
succeed by selling clothing and other
acces sories associated with each new
music style.
What does this mean to you? Look at
your business idea again. How does it fit
with today’s tastes? Is your business idea
part of a six-month fad? Are you going
into something that was more popular five
years ago than it is now and is declining
rapidly? If so, you are likely to go broke no
matter how good a manager you are and
how much you love your business.
Trends
It’s one thing to understand that people’s
tastes have changed and will undoubtedly
change again and again, but it’s a lot
harder to accurately predict what will be
popular in a few years. I wish there were
a central source of information about
predicting future trends in any field, but
there isn’t. You have the task of looking
into the future and deciding where it is
going and how that affects what you do
today. Fortunately, a little research can do
wonders. Here are some tips on how to
proceed.
Read everything you can about your
field of interest. Attend trade shows and
talk to people in small businesses at the
cutting edge of the field. Talk to people
in similar businesses. Read back issues of
magazines aimed at your proposed field.
Your goal is to know enough about your
proposed business to spot the trends that
will continue into the next decade. For
example, if you’re interested in opening
anightclubfromthe1950sfeaturinga
piano bar, mixed drinks, and lots of room
for smokers, you should know that the
consumption of hard liquor and cigarettes
has gone down sharply in recent years and
that nonsmoking lounges with wine and
imported beer are doing very well. Putting
this information together with other factors,
32 | HOW TO WRITE A BUSINESS PLAN
such as your anticipated location and target
customers, should give you a pretty good
idea of what drinks you should offer. You
might decide to serve a number of varieties
of fine wine and imported beer and forget
about a hard liquor license altogether.
Technology
Technology is your innovative kitchen
appliance, your home computer, NASA’s
new spacecraft, and even the proverbial
better mousetrap. For example, lots and
lots of people are working feverishly to
come up with better video games, laser
toothbrushes, wrist watches, TVs, and the
like. Sometimes it takes years to perfect
an item. That can be good news for small
business owners, as there is plenty of time
to prepare to profit.
Of course, there is a downside to new
technology, too. It often involves high
risk. There’s no guarantee of success
just because the product is new. In fact,
somethinglike80%ofthenewproducts
introduced into the marketplace die a
quick death. Remember HD-DVD players,
the Edsel, and eight-track tape players?
What should you do to take advantage
of new technologies? First, recognize
that large-scale new technology ventures
require vast amounts of money and will be
beyond your reach unless you plan to have
your small business grow in a hurry. Many
companies expect to lose money for years
during product development and approval
before developing a big hit. However,
there are often ways creative small business
owners can find to participate in new
technological trends. For example, many
computer software companies started
with little more than a good idea and a
computer. Or to think even smaller—
but not necessarily less profitably—lots
of carpenters have done well making
ergonomically correct furniture for computer
work stations.
Pay attention to new developments in
your chosen field and think about how you
can take advantage of them. The explosion
in mobile devices has popu larized applica-
tions (or “apps”) that enable users to
accomplish many functions previously
asso ciated with desk bound computers.
Can your business benefit from creating
such an app? Can you modify your soft-
ware or website development business to
accommodate the massive app market?
In short, new technology is a mighty
engine that can pull the economy in new
directions at terrific speed. Be sure you are
riding on the train and not picking daisies
on the tracks in front of it.
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 33
E-Business Basics
From the initial dot-com boom in the late
1990s through the subsequent “dot bomb”
in 2001, through the post 2001 rebound and
2008 mortgage meltdown, the only “constant”
in the in online business world is “constant
change.”
One thing is certain: the pre-2001 approach
of just exploiting a hot domain name and
buying up cyber “real estate” no longer
guarantees success. Today, successful online
companies track the same metrics as their
offline counterparts—that is, they carefully
watch revenues, costs, and profit and loss
analysis. For example, one savvy Internet
entrepreneur eventually closed his retail
sporting goods store because employees—too
busy shipping orders to Internet customers—
were neglecting brick-and-mortar customers.
Some trends for success have emerged: a
successful online retailer commonly carries a
wider assortment of goods than a traditional
brick-and-mortar store. Online retailers cater
to an international market that operates
around the clock. Many online retailers try to
keep inventory investment as low as possible
by having some of their suppliers ship orders
directly from the manufacturer’s location to
the retail customer (known as “drop shipping”).
In this model, the online retailer pays the
manufacturer’s invoice at a wholesale cost and
collects cash via the customer’s credit card
before an electronic purchase order is issued
to the manufacturer.
And online retail business also requires
intensive management and sometimes
requires a bit more vigilance than a typical
retail store. ese businesses often work
on lower than average gross profit margins.
Since many online shoppers use the shopping
bots mentioned earlier, savvy retailers make
sure their products are found by the search
engines. Finally, online retailers must either
know, or must hire others who know, website
programming as well as online banking and
fulfillment operations—all of which are
necessary to generate profits.
Online retail sales have been growing
steadily and are forecast to continue growing.
e same is true for online companies that
provide services. Google, for example, earns
steady profits from its online advertising pro-
gram where a business pays a fee for each click
through to the sponsored link. One advantage
of this program is that a merchant can track
the cost effectiveness of the program on a
daily basis (and stop or start it at anytime).
34 | HOW TO WRITE A BUSINESS PLAN
Write a Future Trends Statement
With this discussion of taste, trends, and
technology, I have attempted to focus your
attention on the broad movements in the
economy that can affect your business
idea. Also, remember that there are similar
trends in your local community. It’s at least
as important that you pay attention to
these. For example, perhaps you live in a
farming community with no manufacturing
industries and many migrant workers. It is
unlikely that a high fashion clothing store
would do well there, but you might do
very well selling a new lighter, stronger,
cheaper work boot, or chain saw, or stump
puller.
Write down your fi rst thoughts about
what trends affect your business and where
they will be in fi ve years. Nobody expects
a perfect forecast, but most fi nancial
backers want to know that you have
thought through how your business will fi t
into the world in the next few years.
Future Trends Aff ecting
Antoinette’s Dress Shop
erearetwoconictingtrendsaectingmy
business. First, more women are entering the
workforce. However, women increasingly
must work to pay for family necessities
rather than to make money for extras. For
my business, this means that professional
working women will appreciate even more
in the years ahead the extra service and
convenience that we off er.
Second, as the baby boom matures, the
number of women in the age group that
enters the workforce is declining. is means
that I cannot count on an ever-expanding
population base for my business.
To accommodate these trends, I plan to
pay attention to my customers’ changing
tastes as they grow older. I also intend to
fi nd new ways to market to the smaller
number of younger women entering the
workforce.
Break-Even Analysis: Will
Your Business Make Money?
Some people have a bigger problem than
others when opening a new business.
These are folks who are positively enam-
ored with their business concept and
are desperately eager to begin. They are
so smitten and eager to start, they have
no patience with the economic realities
involved in their business. If you recognize
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 35
this tendency in yourself, it’s extra
important that you prepare a financial
forecast carefully and pay attention to what
it tells you. This step tells you whether
your idea is a sure winner or a sure loser
or, like most ideas, whether it needs work
and polishing to make it presentable.
How can you tell if your business idea
will be profitable before you implement
it? The honest answer is, you can’t. This
essential fact makes business scary. It also
makes it adventurous. After all, if it were
a sure thing, everyone would go into
business.
Just because you can’t be sure you will
make money doesn’t mean you should
throw up your hands and ignore the
whole problem. You can and should make
some educated guesses. I like to call them
SWAGs (“Scientific,” Wild Ass Guesses).
The challenging part is to make your profit
estimate SWAGs as realistic as possible and
then make them come true.
The best way to make a SWAG about
your business profitability is to do a break-
even forecast. Although a break-even
analysis or forecast can never take the
place of a complete business plan, it can
help you decide if your idea is worth
pursuing.
Most financial backers expect you to
know how to apply break-even analyses to
your business. Your backer may ask what
your profits will be if sales are slightly
higher or lower than your forecast.
Many experienced entrepreneurs use a
break-even forecast as a primary screening
tool for new business ventures. They won’t
write a complete business plan unless their
break-even forecast shows that the sales
revenue they expect to obtain far exceeds
what they need just to pay all the bills.
Otherwise, they know their business will
not last very long.
CAUTION
You can use this technique as a “quick
and dirty” profit analysis, but don’t use it as a
substitute for the full profit and loss forecast
presented in Chapter 6. A break-even forecast
is a great screening tool, but you need a more
complete analysis before spending any money.
TIP
Project development note: e
break-even analysis described below does
not apply to a project development, since
only one sale
occurs. is exercise is designed
for a continuing business with ongoing sales
revenue. Before they begin, developers must
know how much profit they will make after
the project is completed. A developer prepares
a break-even forecast every time she calculates
the likely sale proceeds and subtracts
estimated costs. Developers can skip this
section, unless they need a refresher course on
break-even analyses.
To complete a break-even forecast of
your business, you’ll make four separate
estimates:
• Sales revenue. This consists of the total
dollars from sales activity that you
36 | HOW TO WRITE A BUSINESS PLAN
bring into your business each month,
week, or year.
• Fixed costs. These are sometimes called
“overhead,” and you must pay them
regardless of how well you do. Fixed
costs don’t vary much from month to
month. They include rent, insurance,
and other set expenses.
• Gross profit for each sale. This is defined
as how much is left from each sales
dollar after paying for the direct costs
of that sale. For example, if Antoinette
pays$100foradressthatshesellsfor
$300,hergrossprotforthatsaleis
$200.
• Break-even sales revenue. This will be
the dollar amount your business needs
each week or month to pay for both
direct product costs and fixed costs. It
will not include any profit.
CAUTION
Math alert: e following section
requires that you make some simple math-
ematical calculations, which you’ll use to ana-
lyze your business before writing a complete
plan. If the very thought of math makes
your head spin, you’ll probably want to find
someone to help you.
Forecast Sales Revenue
Your first task is to estimate your most
likely sales revenue by month for your first
two years of operation. This is both the
hardest thing to do and the most important
part of your business plan. Much of your
hope for success rides on how accurately
you estimate sales revenue.
Keep in mind that you’re honestly trying
to decide if your business will be profit-
able. This means that you must base your
forecast on the volume of business you
really expect—not on how much you need
to make a good profit. If you estimate sales
too high, your business won’t have enough
money to operate. But if you estimate sales
too low, you won’t be prepared or able to
handle all the business you get.
Here are some methods different
types of businesses use to forecast sales
revenues.
CDROM
A copy of the Sales Revenue Fore-
cast is also included on the CD-ROM in Excel
spreadsheet format (known as .xls). You can
find it under the filename SalesRevenue.xls.
Note that formulas have been embedded
in the spreadsheet document so that it will
automatically calculate revenue totals.
TIP
You may decide to round off your
forecasts to the nearest $1,000 instead of
writing out each single dollar amount. For
instance, a monthly sale of $33,333 would
become $33,000. After all, these are guesses,
and it’s hard to guess at single dollar amounts
when you’re in the five-figure area.
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 37
Retail Sales Revenue Forecast
The simplest way to forecast retail sales
revenue is to find the annual sales revenue
per square foot of a comparable store.
Then multiply that dollar figure by your
estimated floor space to derive an estimate
of your annual sales revenue.
exAmple:
Asimilarbusinessshows$200ofsales
per square foot per year. If you have
1,000squarefeetofoorspace,your
estimated annual sales revenue will
be$200,000(1,000×$200).Naturally,
your estimate should take into account
everything that makes you different
from the other store.
Some chain stores, such as supermarkets
and drugstores, have refined the art of
estimating sales to a science. Of course,
they have the advantage of learning from
their experience with their other stores.
Even so, they occasionally make bad
estimates.
Supermarket executives first gather
statistics on how much the average
person living in town spends every week
in grocery stores. In some states, these
numbers are available by obtaining total
sales volume of grocery stores from the
state sales tax agency; normally that data
is broken down by county. They estimate
how many people live in the area for
which sales volume statistics are gathered.
Dividing the sales volume data by the
number of people in the area gives them
the average sales per person from grocery
stores.
Then they compare the average sales per
person with state averages. If it’s higher, it
might mean that people living in the area
have a higher-than-average income. They
can verify that by referring to the United
States Census, which lists average income
per family and per person for every census
tract. If the income per person is average
or below average, and sales per person are
higher than average, it probably means that
people come from surrounding areas to
do their shopping. If the sales per person
are lower than average in the area, it
might mean that income is below average
or that people leave the area to do their
shopping. On the basis of this sort of data,
together with an analysis of competition
and demographics, supermarket executives
can develop relatively accurate estimates of
sales volume for a new store.
Service Business Sales Revenue Forecast
To estimate sales revenue for a service
business, you’ll need a good understanding
of what steps you go through to generate
a billable sale. Then make a forecast of
how many times you expect to go through
all those steps every week or month and
how much revenue you’ll derive from those
steps.
Don’t forget to allow time for internal
matters and marketing. If you’re a sole
proprietor, you’ll need to allow somewhere
between20%and40%ofyourtime
38 | HOW TO WRITE A BUSINESS PLAN
Sales Revenue Forecast for Antoinette’s Dress Shop
Antoinette wants to open a 2,000-square-foot
dress store in a downtown shopping mall. e
shopping mall manager says that revenue for
women’s clothing stores in the mall average
between $200 and $250 per foot per year.
After checking with other clothing retail-
ers, reading trade magazines, visiting similar
stores in other cities, and integrating her own
experience in the business, Antoinette decides
that she can achieve the $250-per-foot-per-year
figure. is means her annual sales should be
$500,000 (2,000 × $250). To be conservative,
she plans for the first year’s sales to be about
20% below that level to allow for her business
to build. is means that first-year sales will be
about $400,000, or $200 per foot.
Because Antoinette must forecast monthly
sales for the first two years, she now has to
decide how the sales revenue will occur
each month. She could simply divide this
$400,000 by 12 months and get $33,333 per
month. But in the dress business, Antoinette
knows, this would be inaccurate. In women’s
clothing, there are four sales seasons: spring,
early summer, fall, and Christmas. e kind
of shop Antoinette plans to open is slow in
midsummer and in January and February.
Antoinette also figures that sales will be a little
lower than the average for the first few months
until her advertising campaign catches on.
Antoinette’s monthly sales add up to
$401,000 for the first year, so she reduces the
December figure by $1,000 to make a nice,
round $400,000. For the second year, she
increases revenues to $504,000 to allow for
normal growth.
Sales Revenue Forecast Year 1: March 1, 2010 to February 28, 2011
Month Revenue
Month 1: March 20% below average due to just opening $ 27,000
Month 2: April 10% below average due to just opening 30,000
Month 3: May 20% above average because of cumulative effects of
grand opening & seasonal peak
40,000
Month 4: June An average month 33,000
Month 5: July 10% below average due to seasonal slowdown 30,000
Month 6: August 10% below average due to summer slowdown 30,000
Month 7: September 10% above average due to back to school 37,000
Month 8: October 10% above average due to fall season 37,000
Month 9: November 20% above average due to fall season 40,000
Month 10: December 40% above average due to Christmas 47,000
Month 11: January 30% below average since everybody’s broke after Christmas 23,000
Month 12: February 20% below average 27,000
Year One Total: $ 401,000
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 39
for nonbillable activities. If you have
employees or partners, you’ll want to make
similar allowances for them.
The sales revenue forecasting process
for Central Personnel Agency shows the
kind of logical process you’ll need to go
through. (Central’s complete business plan
is provided in Appendix A.)
Manufacturing or Wholesale Business
Sales Revenue Forecast
If you plan to be in a manufacturing or
wholesale business, read the sections
“Retail Sales Revenue Forecast” and
“Service Business Sales Revenue Forecast,”
just above, and combine some of the
concepts to estimate your sales volume. If
you know as much about your business
as you should, it shouldn’t be diffi cult to
develop a reasonable estimate. If you’re
having great diffi culty, the chances are
that you need to learn more about your
business.
exAmple:
Patty plans to import and wholesale
modems for Acme computers. Acme
hastoldherthattheyhavesold100,000
computers to date and projections show
about1,000permonthforthenextthree
Sales Revenue Forecast for Central Personnel Agency
I like to allow room for mistakes in my fore-
cast, so this sales forecast seems like overkill;
my experience shows the overage is needed.
Since it’s harder to fi nd qualifi ed people
than it is to fi nd job openings, I’ll concentrate
on fi nding people after I build a backlog of
openings. I estimate I can fi nd about ten job
openings per week. I will allow myself two
weeks to fi nd 20 job openings. After the fi rst
20, I’ll get plenty of openings by referrals and
repeats. My income goal is to gross $3,000
to $4,000 per month, and I know that the
average job order fi lled is worth $500 to $600
in gross fees, so fi lling only ten openings per
month should give me about $5,000 to $6,000
in gross fees.
is means that to fi ll six to eight job orders
per month and meet my gross income goal,
I need 25 to 30 good people on fi le. Finding
good people is the hard part. It takes me up
to 20 interviews to fi nd one excellent person.
Some of these interviews are done in a few
minutes over the phone, but just the same,
I allow one hour per interview. I can average
fi ve to eight per day, and it will take me about
60 days of interviewing to build a base of
qualifi ed people. It takes an average of three
good people sent out on interviews to fi ll one
job. Of course, once I have a good person, I
send that person out on every interview I can.
I anticipate three months of fairly low income
before I begin to reach my income goals.
40 | HOW TO WRITE A BUSINESS PLAN
years. Patty realizes she doesn’t know
what percentage of Acme owners will
want modems and decides to conduct
a mail survey of Acme owners before
completing her sales forecast.
Project Development Sales
Revenue Forecast
Project developers are not required to
complete a monthly sales revenue forecast.
They need to know the likely amount they
can sell the project for before they begin
work; all revenue comes when the project
is sold.
Forecast Fixed Costs
For most small businesses, the difference
between success and failure lies with
keeping costs down. Many smart people
start successful businesses in a spare room
in their house, the corner of a warehouse,
or a storefront in a low-rent neighborhood.
Unfortunately, others sink their original
capital into essentially cosmetic aspects of
their business, such as fancy offices, and
then go broke.
Make a list of the fixed or regular
monthly expenses of your business. Your
objective is to develop a dollar amount of
expense that you are committed to pay
every month. This is your “nut,” or the
dollar figure you must be able to pay to
keep the business viable. Include rent,
utilities, salaries of employees, payroll
taxes, insurance payments, postage,
telephone, utilities, bookkeeping, and so
forth. Some costs will be paid each month
and others will be paid once or twice a
year.Ifacostislessthanabout10%of
your total fixed costs, you can divide the
costby12andshowanamounteach
month.Ifthecostislargerthan10%of
the total, record the cost in the month you
expect to pay it. You can choose whether
to include a draw for yourself as part of
the fixed costs. If you plan to take your
compensation only if the business shows a
profit, do not include your draw.
Your fixed-cost list should also include
some “discretionary costs”—expenses
that change from time to time due to
your conscious decision. For example,
your promotion expenses may change
occasionally as you increase or decrease
advertising to take advantage of slow or
busy times. Include them in the fixed-cost
category even though the amount may
fluctuate from time to time.
CAUTION
Certain expenses are not “fixed costs.”
Do not include as fixed costs:
• the
coststoactuallyopenyourbusiness
(covered in Chapter 7)
• loan
repayments(coveredinChapter7),
or
• the
costsyoupayforanygoodsyou’ll
resell or use in the manufacturing
or development process (covered in
Chapter6).
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 41
Fixed Costs Forecast for
Antoinette’s Dress Shop
Antoinette estimates her fi xed costs on a
monthly basis:
Rent, including taxes, maintenance $ 3,850
Wages, employees only (average
including payroll taxes, etc.) 3,600
Utilities 800
Advertising 1,000
Telephone 600
Supplies 900
Insurance 1,500
Freight 700
Accounting/Legal 600
Bad debts 500
Miscellaneous 2,000
Total per month
$
16,050
By completing this simple exercise,
Antoinette has gained important informa-
tion. She now knows that she must sell
enough every month so that she has at
least$16,050leftafteraccountingforthe
merchandise she sells. On an annual basis,
that’s$192,600($16,050multipliedby12).
Antoinette must also bear in mind that
she has not shown any salary or draw for
herself. To prosper, she obviously must not
only cover fi xed costs, but also must take
in enough to make a decent living.
Forecast Gross Profi t for
Each Sales Dollar
How much of each sales dollar will be
left after subtracting the costs of the goods
sold? That number will pay fi xed costs and
determine your profi t for your business.
At this stage, you are trying for a broad-
brush, quick and dirty forecast, so it’s okay
to make a rough estimate of your average
gross profi t.
Let’s look at how Antoinette calculates
her gross profi t for her fi rst year of busi-
ness. Antoinette plans to sell about half
her products at double the cost she pays. A
dressshebuysfor$125shesellsfor$250.
That means that her gross profi t per dress
saleis50%.Sheplanstoderiveherselling
price for sale dresses, mark-downs, and
accessories by adding one-half of her cost
to her selling price; for example, if a belt
costher$10,she’llsellitfor$15.
The calculations are similar for different
type businesses. Service businesses will
have higher gross profi t margins than
retailers; most revenue is gross profi t
because little merchandise is sold. Whole-
sale businesses will be similar to the retail
example. Manufacturing businesses will
be similar in appearance even though the
cost of goods will include materials from
a variety of sources and any labor that is
paid per piece.
Project developers have only variable
costs in each project. There are usually no
fi xed costs since the developer’s business
ends with the sale of the project. However,
42 | HOW TO WRITE A BUSINESS PLAN
Gross Profi t Calculation for Antoinette’s Dress Shop
Regular
Dresses
Sale Dresses &
Accessories Total
Average Costs each $125 $10 N/A
Bags, wrap 1 1 N/A
Average Total Cost 126 11 N/A
Average Selling Price 250 15 N/A
Gross Profi t (Selling Price less Total Cost) 124 4 N/A
Gross Profi t % (Gross Profi t ÷ Selling Price) 49.6%
(or 0.496)
26.7%
(or 0.267)
N/A
Total Annual Sales $200,000 $200,000 $400,000
Total Annual Gross Profi t $99,200 $53,400 $152,600
Average gross profi t percentage = 38.2% ($152,600 ÷ $400,000 = 38.2%)
if a project developer works on several
projects at the same time, he may have
some fi xed costs that continue after any
particular project is sold. For a project
developer, the gross profi t is the difference
between the project’s selling price and all
the project costs.
TIP
e prices in the Sales Dresses &
Accessories column illustrate gross profi t
calculations; they do not represent the selling
price of sale items.
Forecast Gross Profi t for a Start-Up Business
For a new business, calculate the average
gross profi t for your business by following
these steps:
1.Foreachproductorservicethatyou
sell, list every individual item that goes
into that product, including piece-rate
labor and commissions. For example,
Antoinette buys dresses from outside
suppliers and resells them. The cost of
the dress is the major component of
the total product cost. She may add the
cost of the preprinted bag to derive
the total cost of the sale.
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 43
2. Once you have a complete list of all
the cost components for your products
or services, add up the cost of each
item.
3. Write the selling price of the item
below the total cost of the item.
4. Subtract the total cost from the selling
price to derive the gross profit from
each sale of that item.
5. Divide the selling price into the
gross profit to derive the gross profit
percentage for each product.
6.Repeatforeachproductyou’llsell;
if you have more than four or five
individual products, then it’s better to
group them by gross profit percentage
rather than to make an estimate for
each individual product.
7. Write down how much total dollar
sales you expect for each product or
product group.
8.Multiplythegrossprotpercentage
by the total dollar sales to derive the
dollar gross profit from each product.
9.Addtogetherthetotaldollargross
profit figures to derive the total dollar
gross profit from the year’s sales.
10.Dividethedollargrossprotbythe
annual sales revenue to derive the
average gross profit percentage for the
year’s sales.
Completing this gives you an average
gross profit percentage for your business.
Forecast Gross Profit for an Existing Business
If you’re already operating and have a
profit and loss statement for your business
from prior months, your job is even easier.
Simply subtract the total cost of sales from
the total revenue to get the gross profit
for the period. Then, convert the dollar
gross profit figures to a percentage of
sales revenue by dividing total dollar gross
profit by total sales for the period. The
percentage gross profit figure you get will
be the percentage gross profit figure you
use for your break-even forecast.
If you’re already operating and your
expansion will change the percentage of
total sales revenue that each product group
brings, then you will need to forecast your
new average gross profit by following the
procedure for a new business listed just
above.
Forecast Your Break-Even
Sales Revenue
Now that you have the fixed costs per
month for your business and the average
gross profit per sale, you can estimate
how much revenue you will need to just
break even. You can use any period you
wish, although most people use a month
or a year. As this chart shows, it’s simple
to calculate. Just divide the fixed costs by
the average gross profits expressed as a
decimal.
44 | HOW TO WRITE A BUSINESS PLAN
Break-Even Sales Revenue Forecast
A B C
Fixed costs
per month
(or year)
Average gross profit
percentage expressed
as a decimal
Break-even sales
revenue (A ÷ B)
exAmple:
Ronnie Ryann runs the Religious Sounds
Round Table in Rye, New York. It’s a
small business, but she loves it dearly.
The gross profit on the CDs, tapes, and
videosshesellsis50%.Thisisthesame
as saying that after adding up the cost
of the products, packaging, and postage
(all variable costs), Ronnie is able to
sell at double this amount. Ronnie rents
1,000squarefeetfor$800permonth,
paysherpart-timeclerk$950per
month,andbudgets$650permonthfor
utilities, taxes, and so forth. This means
her operating expenses (all fixed costs)
are$2,400permonth.(Hercostsseem
low because some parts of New York
State are behind the inflation curve.)
Therefore,Ronniehastosell$4,800
of records per month to break even.
Her salary comes out of the money she
takesinoverthe$4,800.Fortunately,
it will cost Ronnie very little in extra
overheadtosellupto$10,000of
records per month, so if she can achieve
this volume, she will get to keep close
to half of it.
How to Calculate Your Profit
Perhaps you’re lucky enough that your
break-even sales forecast shows you’ll
make more than you need to break even.
If so, you can easily calculate your profit.
Simply multiply your projected sales
revenue that is over the break-even point
by your average gross profit percentage.
exAmple:
Deborahneeds$140,000tobreakeven
in her bookkeeping business. Her
projected sales revenue shows that she
willbebringingin$185,000therst
year—or$45,000morethansheneeds
to break even. To determine the profit,
she multiplies her average gross profit
percentage(0.692)by$45,000.Her
protwillbe$31,140.
If Your Forecast Shows a Loss
What will you do if your break-even sales
forecast shows that you’ll lose money? First
of all, don’t panic. You’ll need to do some
sober, serious, and meticulous thinking.
Carefully check all your numbers and
double-check your arithmetic. Incidentally,
many people doing this exercise for the
first time make some simple mistake
in arithmetic that throws off the whole
forecast. You might have someone with
good math skills review your work.
Let’s look at Antoinette’s situation and
see how her figures have turned out.
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 45
Break-Even Sales Revenue Forecast
A B C
Fixed costs
per year
Average gross profit
percentage expressed
as a decimal
Break-even sales
revenue (A ÷ B)
$192,600 0.382 $504,188
Antoinetteneeds$504,188insales
revenuejusttobreakeven.Thatis$104,188
more than she expects the first year and
$4,188morethansheexpectsforthe
second year. Despite her enthusiasm and
determination, Antoinette’s first reaction to
this news is to panic and consider giving
up. After some reflection, she reexamines
the calculations to make sure she hasn’t
made a mistake in her arithmetic. Then she
starts considering her options. Should she
abandon her idea and work for someone
else? Should she proceed with her loan
application and fudge figures to show a
profit? Or is there some other alternative?
In any business, only these things can
improve profits:
•youcanincreasethesalesrevenueby
selling more of your product or service
•youcanreducexedcosts
•youcanincreasethegrossprot
percentage by raising selling prices or
by lowering your product cost.
Let’s see how Antoinette applies that
knowledge to her break-even analysis.
First, Antoinette thinks about increasing
sales. Maybe she was too conservative in
her original sales forecast. What would
happen if she increased her annual sales
forecastby$150,000(to$550,000)and
kept the same fixed costs and gross profit
margin? That is more than the break-even
sales and should be enough to give her
a profit for her efforts. How much profit?
Let’s see.
Break-Even Sales Revenue Forecast
for Antoinette’s Dress Shop
Revision 1: Increase Sales Volume to
$550,000
Annual sales $550,000
Annual fixed costs 192,600
Gross profit 0.382
Break-even sales
($192,600 ÷ 0.382) 504,188
Sales over break-even
($550,000 − $504,188) 45,812
Profit
($45,812 × 0.382) $ 17,500
Antoinette concludes that a very aggres-
sive sales increase alone brings her a
small profit, but believes that the sales
increaseof$150,000isveryhigh.The
profit resulting from that sales increase is
probably not enough to justify the risk of
that high an increase in the sales forecast.
Ifasalesincreaseof$40,000or$50,000
would show that profit, she would be
46 | HOW TO WRITE A BUSINESS PLAN
more comfortable increasing sales. She just
isn’t sure she can do as well as the most
established women’s clothing store in the
mall in her first year. After all, the range
of women’s clothing sales per square foot
peryearis$200to$250,andsheusedthe
$250guretoprojectsalesof$500,000in
the second year.
As a second thought, and even though
she has no idea how to accomplish it, she
wonders what would happen to profits if
shereducedxedcostsby$50,000per
year (about one-quarter of the current
total)andleftthesalesforecastat$400,000
andhergrossprotat38.2%.
Let’s see what would happen.
Break-Even Sales Revenue Forecast
for Antoinette’s Dress Shop
Revision 2: Reduce Fixed Costs by $50,000
Annual sales $400,000
Annual fixed costs
($192,600 − 50,000) 142,600
Gross profit 0.382
Break-even sales
($142,600 ÷ 0.382) 373,300
Sales over break-even
($400,000 − 373,300) 26,700
Profit
($26,700 × 0.382) $ 10,200
That fixed cost reduction shows a profit
of$10,200,butitrequiresareductionof
one-quarter of the fixed costs. Antoinette
believes it will be very difficult to reduce
fixed costs that much. Perhaps a combina-
tion of fixed-cost reduction and sales
increase will improve the profits enough
and still be possible. Before she thinks
about that option, though, she completes
the break-even forecast analysis by seeing
what will happen if she can increase the
averagegrossprotto50%whileleaving
the sales revenue and the fixed costs the
same. She doesn’t know if she can really
do it, but wants to see what will happen to
the numbers.
Break-Even Sales Revenue Forecast
for Antoinette’s Dress Shop
Revision 3: Increase Gross Margin to 50%
Annual sales $400,000
Annual fixed costs 192,600
Gross profit 0.5
Break-even sales
($192,600 ÷ 0.5) 385,200
Sales over break-even
($400,000 − 385,200) 14,800
Profit
($14,800 × 0.5) $ 7,400
ChApter 3 | CHOOSING THE RIGHT BUSINESS | 47
It seems that Antoinette needs to
find some combination of higher sales
estimates, lower fixed costs, and higher
gross profit margin that will improve
profits so that she can make a living wage.
But the really critical part is this: She must
be absolutely sure that she can meet all the
forecast changes she makes.
Antoinette was sure of her first forecasts;
unfortunately, those forecasts produced
a loss for the first year of business. Now,
while she can manipulate the numbers
to show a profit, the danger is that the
numbers may not be achievable. She may
be able to create a good-looking business
plan but may be unable to meet those
revised projections. Or, just as dangerous,
she may become uneasy about the project’s
success. A lack of confidence may just
be enough to take the edge off her drive
and dedication and enough to make the
project fail.
CAUTION
Make sure that you have the same
level of confidence in the revised forecast that
you had in the first forecast. Obviously, you
can fiddle with the numbers and show good
profits, but the danger lies in making the goals
impossible to reach. We all have a desire to
make things work, and making the numbers
work is very easy to do. Just remember that
you’ll have to live with the numbers you write
down for a very long time. Make sure they’re
right.
What You Have Accomplished
We’ll follow Antoinette throughout her
journey later in the book and see what
combination of figures she settles on. For
now, let’s review what you’ve learned so far.
You’ve decided whether to write a complete
plan for your business by completing these
steps:
•choosingabusinessyouknowwell
•identifyinganeedyoucanll(the
customer’s problem)
•describingyourbusinessandhowit
will fill that need
•decidingthatyourbusinessistheright
idea at the right time
•decidingthatyoulikeyourbusiness,and
•forecastingenoughprotstomake
writing a complete business plan
worthwhile.
In this chapter, you’ve been answering
questions for yourself. Now that you’ve
answered the questions positively, you can
proceed to sell your idea and your answers
to potential financial partners. The next
few chapters show you how to write a
document that sells your idea.
●
4
C h A p t e r
Potential Sources of Money to
Start or Expand Your Small Business
Introduction .................................................................................................................................................................51
Ways to Raise Money ...............................................................................................................................................51
Loans ......................................................................................................................................................................51
Equity Investments .........................................................................................................................................54
Loans and Equity Investments Compared .........................................................................................58
Common Money Sources to Start or Expand a Business ....................................................................59
Money From Your Personal Savings ......................................................................................................60
Friends, Relatives, and Business Acquaintances .............................................................................62
Creative Cost-Cutting ...................................................................................................................................63
Equity in Other Assets ..................................................................................................................................63
Supporters ...........................................................................................................................................................64
Banks ......................................................................................................................................................................64
Venture Capitalists .........................................................................................................................................67
Additional Money Sources for an Existing Business ...............................................................................68
Trade Credit ........................................................................................................................................................69
Commercial Banks ..........................................................................................................................................69
Equipment Leasing Companies ...............................................................................................................69
Accounts Receivable Factoring Companies ......................................................................................69
Venture Capitalists .........................................................................................................................................70
Money Brokers and Finders .......................................................................................................................70
If No One Will Finance Your Business, Try Again .....................................................................................70
Secondary Sources of Financing for Start-Ups or Expansions ...........................................................72
Small Business Administration .................................................................................................................72
Small Business Investment Companies
(SBICs) ...............................................................................73
USDA Rural Development ..........................................................................................................................73
50 | HOW TO WRITE A BUSINESS PLAN
Economic Development Administration (EDA) ...........................................................................73
Federal, State, and Local Programs ........................................................................................................74
Overseas Private Investment Corporation (OPIC) ........................................................................74
Insurance Companies and Pension Funds .........................................................................................74
Advertising Your Project and Selling Stock to the General Public ......................................74
Conclusion .....................................................................................................................................................................75
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 51
Introduction
This chapter helps your writing process
because it gives you an idea of what
lenders and investors want to see in a
finished plan. Your ability to understand
your financiers’ motives can mean the
difference between getting a loan or
investment and coming up empty-handed.
If you already have financial backing, you
can skip this chapter.
Many people and institutions are
looking for sound loans and investments.
From their side of the fence, it can often
seem extremely difficult to find a good
one. Many potential financiers have
been frightened by news stories about
small business financial problems, con
artists selling phony tax shelters, business
bankruptcies, and so on.
What does this mean to you? Simply
that you must both create a sound business
plan and present it, and yourself, in a
way that appeals to lenders’ and investors’
needs for security and profit.
If you have a good business idea and
are patient and persevering, you should
be able to find financing. It was Calvin
Coolidgewho,sometimeinthe1920s,said,
“The business of America is business.” It’s
no less true today.
Ways to Raise Money
Before you can sensibly plan to raise
money, you need to know how it’s
commonly done.
Loans
A loan is a simple concept: Someone
gives you money in exchange for your
promise to pay it back. The lender could be
a bank, friend, family member, or anyone
else willing to lend you money. The lender
will almost always charge interest, which
compensates the lender for the risk that you
won’t pay back the loan. Usually, the lender
has you sign some papers (called a note and
loan agreement) spelling out the details of
yourloanagreement.(SeeChapter10for
examples.)
While these basic concepts are simple,
not everyone seems to clearly understand
them. For example, some people put a
great deal of energy into arranging to
borrow money, but think little about the
hard work that goes into repaying it. The
important thing to understand is that the
lender expects you to pay the money back.
It’s only fair that you honor your promise if
you possibly can.
Your business may be so successful that
you can pay back the loan sooner than
the original note calls for and save some
interest expense in the process. Some
state laws allow repayment of the entire
principal at any time with no penalty.
However, laws in some states allow the
lender to charge a penalty of lost interest
if the borrower pays the loan back sooner
than called for. Make sure you read the
loan documents and ask about prepayment
penalties. Your lender may be willing to
cross a prepayment penalty clause out of
the agreement if you ask.
52 | HOW TO WRITE A BUSINESS PLAN
As for the manner in which loans are
repaid, there are about as many variations
as there are loans. Here are the most
typical:
• Fully amortized loan. This type of loan
repayment provides for principal
and interest to be paid off in equal
monthly payments for a certain number
of months. When you’ve made all the
payments, you don’t owe anything else.
The amount of the interest rate and
the number of years or months you
agree to make payments can change
your monthly payments a great deal;
pay close attention to these details.
Forexample,ifyouborrow$10,000
forveyearsat10%interest,youwill
agreetomake60monthlypayments
of$212.48,foratotalrepaymentof
$12,748.80.Thatmeansyouwillpay
$2,748.80ininterest.Nowlet’ssayyou
borrow$10,000forveyearsat20%
interest. Your monthly payments will
be$264.92andyouwillenduppaying
$15,895,including$5,895ininterest.
• Balloon payment loan. This loan
(sometimes
called an interest-only
loan) calls for repayment of relatively
small amounts for a preestablished
period of time. You then pay the
entire remaining amount off at once.
This last large payment is called a
“balloon payment,” because it’s so
much larger than the others. Most
balloon payment loans require
interest-only payments for a number
of years until the entire principal
amount becomes due and payable.
Although this type of repayment
schedule sounds unwieldy, it can be
very useful if you can’t make large
payments now, but expect that to
change in the near future.
Problems With Cosigned Loans
Bankers sometimes request that you find
a cosigner for your loan. is is likely if you
have insufficient collateral or a poor or
nonexistent credit history. Perhaps someone
who likes your idea and has a lot of property,
but little cash, will cosign for a bank loan.
A cosigner agrees to make all payments
you can’t make. It doesn’t matter if the
cosigner gets anything from the loan—she’ll
still be responsible. And if you can’t pay, the
lender can sue both you and the cosigner.
e exception is that you’re off the hook
if you declare Chapter 7 bankruptcy, but
the cosigner isn’t. Cosigning a loan is a big
obligation, and it can strain even the best of
friendships. If someone cosigns your loan,
you might want to consider rewarding your
angel for taking this risk.
From my own experience, I cosigned a
car loan for an employee once, and I’ll think
twice before I do it again. I didn’t lose any
money, but the bank called me every time a
payment was 24 hours late, and a couple of
times I thought I might have to pay. I didn’t
like being financially responsible for a car
that I had never driven and might never see
again.
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 53
Secured Loans
Lenders often protect themselves by taking
a security interest in something valuable
that you own, called “collateral.” If you
pledge collateral, the lender will hold title
to your house, your inventory, accounts
receivable, or other valuable property until
the loan is paid off. Loans with collateral
are called “secured” loans.
If you don’t repay a secured loan, the
lender sells your collateral and pockets
the unpaid balance of your loan, plus any
costs of sale. Not surprisingly, if you have
valuable property to secure a loan, a lender
will be much more willing to advance you
money. But you also risk losing your house
or other collateral if you can’t pay back the
loan.
A lender will expect you to maintain
some ownership stake in the asset. This will
normallybe10%to30%,dependingonthe
type of asset and the type of lender. That
means you can’t expect to get a loan for the
same amount as your collateral is worth.
If you default on a loan and proceeds
from the sale of the collateral are not
enough to pay off the loan, the lender can
sue you for the remaining amount. The
best advice is this: Be very cautious when
considering a secured loan. Make sure you
know your obligations if the business fails
and the loan can’t be repaid.
Lenders like collateral, but it never
substitutes for a sound business plan. They
don’t want to be selling houses or cars
to recoup their money. In fact, lenders
often only accept real property, stocks and
bonds, and vehicles as collateral. Items
of personal property, such as jewelry,
furniture, artwork, or collections usually
don’t qualify. All lenders really want is for
you to pay back the loan, plus interest. If
they have to foreclose on your house, it
makes them look, and probably feel, bad.
Here’s an example of a loan secured by
real estate and used to open a business.
exAmple:
Maryneedstoborrow$50,000toopen
a take-out bagel shop. She owns a
houseworth$200,000andhasarst
mortgage with a remaining balance of
$100,000.UncleAlberthasofferedto
lend Mary the amount she needs at a
favorable interest rate, taking a second
mortgage on Mary’s house as collateral
for the loan. Mary agrees and borrows
$50,000,obligatingherselftorepay
inveyearswithinterestat10%,by
making60paymentsof$1,062.50.If
Mary can’t make all the payments, the
second mortgage gives Uncle Albert the
right to foreclose on Mary’s home and
sell it to recover the money he loaned
her. Uncle Albert feels secure, since he
is confident the house will sell for at
least$150,000,andtheonlyotherlien
againstthehouseisthe$100,000rst
mortgage. If a foreclosure did occur,
Mary would, of course collect any
difference between the selling price and
the balance of the two mortgages.
54 | HOW TO WRITE A BUSINESS PLAN
Unsecured Loans
Loans without collateral are called
“unsecured” loans. The lender has nothing
to take if you don’t pay. However, the
lender is still entitled to sue you if you fail
to repay an unsecured loan. If he wins, he
can go after your bank account, property,
and business.
Lenders typically don’t make unsecured
loans for a new business, although a sound
business plan may sway them. Remember,
the lender’s maximum profit from the loan
will be the interest he charges you. Since
he won’t participate in the profits, naturally
he is going to be more concerned with
security.
Equity Investments
An equity investor buys a portion of your
business and becomes part owner. The
equity investor shares in your profits when
you succeed. Depending on the legal
form of owner ship, she only shares in
your losses up to the amount of her initial
invest ment. Put another way, most equity
investors’ risk is limited to the money they
put up, which can be lost if the business
fails.
Investors expect you to think of their
money as a tool; you will use their tool
for a while, and then you will give it
back. Your business plan should include
a forecast of when and how that will
happen. Failing to discuss a repayment
strategy in your plan can cause a potential
investor to wonder about your motives.
To understand a little more about your
potential backers, let’s look at the dilemma
they face when they consider investing in a
small business like yours. On one extreme are
the very safe investments that produce a low
profit. At the other extreme lie investments
that promise a very high profit but that
also carry a high risk of losing the entire
investment.
Your new business proposal will be far
less safe than an insured bank deposit.
This means that to attract money, you
must offer investors the possibility of fairly
high returns. While investors will not find
your proposal as risky as casino gambling,
the smart ones will know that, statistically,
putting money into a new small business
isn’t a whole lot safer. In addition to the
possibility of a big gain, investors will
want to minimize their risks by looking
for any security-enhancing feature your
investment proposal offers, such as your
skill at making businesses succeed or your
business’s profitable track record.
You will want to offer investors the
possibility of a good financial return,
a sense of security, and, if possible,
a little more. Often, this is a vision of
engaging in a business designed to
enhance some particularly worthwhile
objective such as health, education, or
environmental concerns. Or it can be
simply an opportunity to help someone
with enthusiasm and drive. One of the
best ways to convince a potential lender
or investor that his money is secure is
to convince him that you are an honest,
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 55
sincere person. At least as many businesses
fail to get financed because potential
investors don’t like the person making the
sales pitch as fail because they don’t like
the pitch itself.
In fact, when they like you and your
idea, some investors and banks want to
make sure that you have something to lose
other than just your pride if the business
fails. They will want to see that you are
backing your ideas with your hard-earned
dollars. Be prepared to put up most of your
own money to get the business open. This
lets them know that you will do everything
in your power to make the business work;
sometimes, your dollar commitment can
take the place of any other guarantees.
Return on Equity Investments: What’s Fair
Every investor has her personal require-
ments and every deal is different. The
important thing is that both parties under-
stand the risks and think it is a good
deal. Here are some suggestions that
have worked well for others in situations
where the potential investors weren’t
well acquainted with the entrepreneur.
Obviously, if your investors are family
members, close friends, or people who
wish to support your business for political
or personal reasons, they may be willing to
accept a lower rate of return.
Should You Guarantee a Return?
Very few investment proposals offer the
investor any guarantees. Nevertheless, some
equity investors want a guaranteed return
in addition to a share of the profits. If you
guarantee a return, you will pay back the
original investment plus a profit on the
investment, even if the deal goes sour. Doing
this is great if the project makes the profit
you think it will. But it’s a risk for you since
you’ll have to get the money to pay off the
investor from some other source if your
business fails.
If you are willing to guarantee the
repayment and the profits, you may be able
to get an investor to accept the return of
her investment plus a reasonable profit of
20% or 30% on her investment, within a year
or two time frame.
Guaranteed investments are rare, and I
suggest you avoid the temptation to offer
a guarantee. Most entrepreneurs with the
ability and assets to offer a guarantee can
secure financing at a lower cost from more
conventional sources. Perhaps they can
pledge their assets for a straight bank loan or
sell their assets and obtain money that way.
If you are starting a new business and
do not plan to guarantee the return of the
investment, you’ll almost always need to
offer investors a high possible return. If
you don’t put up any money, investors may
expect as much as 75% of the profits. You,
56 | HOW TO WRITE A BUSINESS PLAN
the promoter, may get as little as 25% of
the profits plus a reasonable salary for your
work to make the project go. Of course, it
is rare that a person who starts a business
doesn’t invest at least some of his own
money, so the investors’ percentage would
normally be adjusted downward.
Another alternative for a start-up busi-
ness where investors bear the entire risk
of loss is for the founder to work in the
business on a daily basis and receive a
small wage as a project expense. The first
profits are used to pay back all the money
advanced. Profits are split on an agreed
percentage. If the investor puts up all
themoney,thismightbe50/50;ifthe
investor puts up less, his share should
also be less. Sometimes these profit splits
terminate after a specific number of years,
and sometimes they continue indefinitely.
Occasionally, the parties agree on a
formula to establish a price for which one
party may buy out the other party in the
future.
If you’re expanding an established busi-
ness, the returns can be adjusted toward
normal bank loan rates if the expansion
appears conservative. Invest ment profits
will have to be considerably higher than
bank rates if the project appears risky.
The main thing that increases risk for
an established business is changing its
normal course of business. For example, an
established employee leasing company that
plans to expand its receivables in the face
of increasing demand is more conservative
than the same company that plans to open
a new office in another state. It’s a higher
risk if the same company plans to enter a
completely new line of business, such as
management consulting.
Legal Forms of Owning Equity Investments
An equity investor chooses among three
options in sharing ownership in your
small business. These are the only options
available, even if the consideration for the
ownership share is something other than
cash, such as labor, materials, and so forth:
• General partnerships. A general partner
joins you in owning the business. He
shares in your profits and losses in
proportion to his partnership share.
General partnerships work best when
all partners work full-time in the
business. Equity investors normally
prefer not to become general partners,
because they don’t want day-to-day
involvement in your business. Also, by
law, if the partnership loses money,
the investing general partner must
pay back part or all of the losses.
Everybody has heard stories of
partnerships that went sour, with dire
consequences. These were usually
general partnerships. If you are
interested in forming a partnership,
limited or general, or learning more
about them, see Form a Partnership,
by Denis Clifford and Ralph Warner
(Nolo).
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 57
• LimitedLiabilityCompanys(LLCs). LLCs
are becoming more popular for small
business owners. They offer the
liability protection of a corporation,
but are cheaper and easier to create
and maintain. The relationship of
you (as the entrepreneur) to your
investors is similar in many ways to
the relationship in the corporate form
(discussed below). Limited Liability
Partnerships (LLPs) offer similar
benefits but are usually reserved for
professionals like doctors and dentists.
If you are considering either an LLC or
LLP, consult with your accountant or
attorney before proceeding.
• Corporations. One of the most popular
methods of selling equity investments
is to form a corporation and sell
shares of stock. The shareholders’
potential losses are typically limited
to the purchase price of their shares.
A corporation is a legal entity that
is separate from you. You form a
corporation by paying fees and filing
forms at a state office. A corporation
lets you keep management control of
thebusiness;aslongasyouretain51%
of the shares of stock, you can call the
shots.
How much people are willing to
pay for your stock depends mostly on
what they think of your prospects. If
you have a firm, exclusive contract to
sell a popular, new type of computer
peripheral and only need money to
build a showroom, potential buyers
will probably find you. However, if
you’re trying to build a factory to mass
produce a new and relatively untried
type of pooper-scooper, you will
almost certainly have more difficulty.
If you conduct business in a legal
and ethical manner, the corporation
can shield you and your shareholders
from personal liability for business
losses. However, officers and direc-
tors of a corporation can be held
personally liable for any corporate acts
that break the law or breach their duty
to the shareholders to act responsibly.
If you are interested in forming a
corporation, I recommend Incorporate
Your Business: A Legal Guide to
Forming a Corporation in Your State,
or How to Form Your Own California
Corporation, both by Anthony
Mancuso (Nolo). These books show
you how to set up your own small
profit corporation and also go into
considerable detail on limited liability,
electing Subchapter S tax status,
issuing shares, holding your first Board
of Directors meeting, etc.
By the way, Nolo (www.nolo.com), the
publisher of this book, provides many
ways to assist you when it comes to corpo-
rations and LLCs including assistance with
state filings, helpful books, and lots of
free information. Visit the site and click
“Business, LLCs and Corporations” on the
left side of the home page.
58 | HOW TO WRITE A BUSINESS PLAN
Corporations and Red Tape
Corporations bring several complications—
but most entrepreneurs consider the costs
and inconvenience a small price to pay for the
ability to raise the capital they need. I only
summarize a few issues here:
• Record keeping in corporations. Keep-
ing your shareholders informed and your
corporation in good standing means that
you have to perform certain legal acts
and pay various taxes and fees. It’s more
complicated and expensive than doing
business as a sole proprietor.
• Taxes and corporations. You can take
money out of your corporation in only
two ways: salaries and dividends. Both
payments have to be approved by your
Board of Directors and entered into the
minutes of the company. Salaries become
your personal income and are taxed at
your personal rates. Dividends are
payments to shareholders made only
after corporate taxes have been paid.
Dividends then become personal income
to the shareholders and are taxed at
personal rates.
• Selling shares in your corporation. Both
federal and state regulatory authorities
have many rules and regulations
governing sales of corporate shares or
limited partnership interests. e bottom
line of all these regulations is this: You
can’t take any money into your venture
until you comply with the appropriate
rules. ese rules try to protect investors
from crooks and con artists and also try
to make it relatively easy to raise money
for legitimate ventures. Before selling any
security, or soliciting for the sale of any
security, make sure you have complied
with the appropriate regulations.
CAUTION
Lenders and landlords normally
require that corporate officers personally
guarantee any loans or leases that the corpo-
ration enters into until it has a several-year
track record and a strong financial position.
So, you can expect to be held personally
responsible for company debts even though
you form a corporation and are
protected from
routine business losses.
Loans and Equity
Investments Compared
To raise money for your new business, you
must decide whether you prefer to borrow
money or sell part of your project to an
equity investor. Often, you may not have
many options. The person with money
to lend or invest will obviously have a lot
to say about it. But you should know the
trade-offs you normally make by preferring
one to the other:
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 59
• Loan advantages. The lender has no
profit participation or management say
in your business. Your only obligation
is to repay the loan on time. Interest
payments (not principal payments) are
a deductible business expense. Loans
from close friends or relatives can have
flexible repayment terms.
• Loan disadvantages. You may have to
make loan repayments when your
need for cash is greatest, such as
during your business’s start-up or
expansion. Also, you may have to
assign a security interest in your
property to obtain a loan, thereby
placing personal assets at risk. Under
most circumstances you can be sued
personally for any unpaid balance of
the loan, even if it’s unsecured.
• Equity investment advantages. You
can be flexible about repayment
require ments. Investors sometimes
are partners and often offer valuable
advice and assistance. If your business
loses money or goes broke, you
probably won’t have to repay your
investors.
• Equity investment disadvantages. Equity
investors require a larger share of the
profits. Your shareholders and partners
have a legal right to be informed about
all significant business events and a
right to ethical management; they can
sue you if they feel their rights are
compromised.
Loans are better for businesses if the
cash flow allows for realistic repayment
schedules and the loans can be obtained
without jeopardizing personal assets.
Equity investments are often the best way
to finance start-up ventures because of the
flexible repayment schedules.
If you don’t already know an accountant
specializing in small business affairs, you
will be wise to find one. Your personal tax
situation, the tax situation of the people
who may invest, and the tax status of the
type of business you plan to open are all
likely to influence your choice.
Common Money Sources to
Start or Expand a Business
Most small businesses are started or
expanded with money from one of seven
readily available sources. They are in order
of frequency:
1.thesavingsofthepersonstartingthe
business
2. money from close friends and
relatives
3. scaling back cash requirements and
substituting creative cost-cutting for
financial equity
4. selling or borrowing against equity in
other property
5. money from supporters or others
interested in what you are doing
6.bankloans,and
7. venture capital.
60 | HOW TO WRITE A BUSINESS PLAN
I recommend never financing a business
with only borrowed money, even if it’s
possible. If you’re starting a new business
and use your own money or sell equity,
you can make your inevitable start-up
mistakes cheaply and survive to borrow
money later, when you know how better to
use it.
My general rule is that you should
borrow less than half of the money you
need, especially if you’re starting a new
business. If you’re expanding an existing
business, make sure that you can handle
the cash payments necessary to repay the
loan even if business isn’t as good as you
hope. In other words, it’s usually more
dangerous to borrow too much than too
little. If you have to raise nearly all the
money from others, I recommend selling
equity instead of borrowing.
Now let’s look at each of the most likely
funding sources for new and expanding
businesses in more depth.
Money From Your Personal Savings
Most businesses are financed, at least in
part, with personal savings. Sure, it’s hard
to save money, but this form of financing
has so many advantages, it’s worth
some effort. Incidentally, savings don’t
necessarily come from a bank account or
piggy bank. Lots of entrepreneurs sell or
refinance a house or some other valuable
property to come up with cash.
Starting a business with your savings
is the quintessence of the capitalist idea.
As the entrepreneur with capital, you hire
people, purchase equipment, and ideally
create profits. It’s a long and honored
tradition. Henry Ford, John D. Rockefeller,
and, more recently, Steve Jobs of Apple
Computer all started with at least some
money from their own pockets and ended
up creating industrial empires. While
chances are your goals are more modest,
the idea is pretty much the same.
If you finance a business with your own
money, you won’t have to worry about
making loan payments or keeping investors
happy. Think of it this way: The more you
borrow, the more you increase your fixed
operating costs—making it more difficult
to survive the slow periods and mistakes
almost every business faces.
Another reason to start a business
with savings is that you enhance your
borrowing capacity for the future. The
inventory, fixtures, and equipment you
purchase with your cash investment are
treated as assets should you later apply for
a business expansion loan.
Of course, not everybody is lucky
enough to be able to start or expand a
business entirely from savings. But there
are at least two ways you may be able to
increase the amount of money you can put
into your business.
Living Expense Deferral
People who need just a little more cash
than they have sometimes take a risky—
but not unheard of—step. This might
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 61
more appropriately be called “Borrowing
from the Future,” as it involves deliberately
falling behind in monthly living expenses
or taking cash advances from credit cards.
This way of getting extra money involves
risk, and it’s not for everybody.
You may have a credit card or two that
has more credit available; by running your
credit line to the maximum, sometimes you
can obtain some cash from an unexpected
source or buy material for the business.
Of course, the interest rates are high, and
you flirt with bankruptcy if you can’t make
payments. Still, several people I know have
used this method to help start a business.
If you have a good payment record with
the telephone company, gas and electric
company, landlord, bank, and so forth,
you should be able to skip several months’
payments without seriously damaging your
credit rating. Of course, you’ll have to catch
up again fast. In the meantime, you can use
the money to help get your business going.
You may be able to fall behind a month
or two on your mortgage payments and
generate some quick cash that way. How-
ever, the mortgage holder will take the
property back from you after a few
months. Don’t use this method unless
you’re very sure that you can become
current again quickly.
CAUTION
is scheme should be tried only if
you’re sure you’ll be able to come up with the
money when you need it. As with everything
else, common sense should be applied to living
expense deferral plans. Otherwise, you may
find yourself trying to read a foreclosure notice
in a dark room.
Trade Credit
Arranging for trade credit involves borrow-
ing from the companies from whom you
will buy your merchandise or raw materials.
This form of borrowing rarely works for
service businesses, because salaries are
the biggest expense and employees are
usually not interested in lending you their
salaries. However, I do know of a number
of new businesses where friends and family
members pitched in for free in the early
days; it never hurts to ask.
If you’re in the retail, wholesale, or
manufacturing business, arranging for
trade credit can help considerably. In
most businesses, you typically order
suppliesandpayforthem30to60days
after you receive them. The problem for
new businesses is that it’s also standard
practice for suppliers to demand cash
up front from start-ups. This policy isn’t
immutable, however. Often, if you present
your business plan to potential suppliers,
you can arrange to order at least some
supplies and merchandise on credit. After
all, your supplier has an interest in helping
you succeed so that you will buy his
merchandise for many years to come.
The key to maintaining good relations
with suppliers while borrowing from them
is to keep them informed of what you’re
doing and why. This communication rule is
62 | HOW TO WRITE A BUSINESS PLAN
particularly important for new businesses.
If you arrange credit and can only pay a
partofyourrstbillin30days,paythat
amount and ask the supplier for a short
extension.
Some suppliers may offer extended pay-
ment terms to get your business. Occasion-
ally a supplier will ship merchan dise in a
slow part of the season and let you pay for
it several months later, in the busy season.
Before you try any of this, check with
your suppliers’ sales reps about company
policies. Your suppliers are invaluable to
your business, and you want to keep them
on your side.
Friends, Relatives, and
Business
Acquaintances
The type of financing provided by close
friends and relatives does not normally
vary much from that provided by strangers.
The help may be in the form of a gift, a
loan, or an equity investment. The big
differences are usually the availability of
money in the first place and the interest
rate or investment return.
With friend- or relative-provided
financing, however, the commercial model
isn’t the only one. A common alternative
is the loan-gift hybrid. Here a relative
or friend lends you money at either a
low interest rate, or with no interest at
all, telling you to pay it back when you
can and to treat it as a gift if you can’t.
Obviously, this type of help is invaluable
if it’s available. It gives you time to get
your business established with a minimum
of pressure. If you’ve any doubt about
your angels’ financial position, make
sure they consult their banker, attorney,
or financial advisor before advancing
you the money. Also, check with a tax
advisor if you receive a substantial gift
in one year from any individual, since
there may be tax implications. Generally,
property you receive as a gift, bequest, or
inheritance is not included in your income.
However, if property you receive this way
later produces income such as interest,
dividends, or rentals, that income is taxable
to you. For additional information, refer to
IRSPublication17,Your Federal Income
Tax. You can find this publication online at
the IRS website www.irs.gov.
Finally, write down the terms of the loan
or transaction and make sure everyone
thoroughly understands them. After all,
you want to feel like you can go to family
reunions even if your business fails.
CAUTION
ink twice before you accept.
ink about what a business reversal could
do to your personal relationship, even if your
relative or friend says they don’t need the
money. I know families that have been torn
apart because a
borrower didn’t meet the
agreements she made with a lender. Besides, a
loan from a relative or close friend that comes
with emotional strings probably isn’t worth
the cost.
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 63
Your Money Machine
Here is a task you can start right now that
will save you time and frustration. Begin
writing a list of all your relatives, friends,
business acquaintances, supporters,
professional advisors, and so on. is list will
be one of the primary sources of money for
your new or growing venture, since people
who know you already are most likely to be
interested in your business.
One advantage of dealing with your
relatives and friends is that they already
know your strengths and weaknesses.
They are likely to be more understanding
than a banker if you have start-up
problems and make a few late loan pay-
ments. Nevertheless, you’ll be wise to
treat people close to you in a businesslike
manner.
Don’t make the money a test of whether
they love you or not. If your close relatives
feel they can decline the investment oppor-
tunity without hurting your feelings, both
of you will be happier in the long run.
Pay attention to criticism and suggestions,
especially if they come from people with
business experience. If they don’t wish
to invest or lend you money, accept their
reasons at face value—you might not like
their hidden reasons.
Some people looking for business
financing will write a business plan and
loan package and then show it only to the
bank, assuming relatives or friends don’t
need to see it. This is a mistake. Make sure
those people close to you get the benefit of
all your hard work. A good business plan
may even help them see you in a new light
and encourage them to make a financial
commitment.
Creative Cost-Cutting
Although not really a funding source, one
of the most effective ways to finance a
small business is to make do with less.
If your initial business proposal calls for
$50,000,thinkabouthowyoucanreduce
spending on nonessential items. Perhaps
you can begin your consulting business in
your home or share expensive equipment
with an established business rather than
buying it.
Of course, there will be many situations
where you will need a fair amount of
money to get started—it’s hard to cook
without a stove, paint without a ladder,
or program without a computer. The
important principle is not that you should
avoid raising outside money, but that you
should borrow or raise equity capital only
if you absolutely can’t do without it. For
more on this concept, I recommend Honest
Business, by Michael Phillips and Salli
Rasberry (Random House).
Equity in Other Assets
You may choose to raise money by selling
existing assets or by pledging your equity
64 | HOW TO WRITE A BUSINESS PLAN
in them as collateral for a loan. Remember,
collateral is something you own that you
give your lender title to until you pay back
all the money you borrowed, plus interest.
If you fail to repay the loan, the lender
keeps the collateral. Basically, equity is
the difference between the market value
of property you own and what you owe
against it, plus any costs necessary to turn
the asset into cash.
exAmple:
Ericownsacarworth$9,000,butowes
thebank$4,000.Hisequityinthecaris
$5,000.Toconverttheequitytocash,he
couldtrytosellthecarfor$9,000cash
and pay off the bank loan, leaving him
$5,000.Ifheborrowsagainstthecar,
he’dprobablybelentlessthan$5,000,
sincebanksdon’tliketonance100%
of an asset’s value.
Supporters
Many types of businesses tend to have
loyal and devoted followers—in many ways
their customers care about the business
as much as the owners do. Examples are
as myriad and varied as the likes, loves,
and desires of the human community. A
health food restaurant, an exercise club,
a motorcycle shop, a family counseling
facility, a solar heating business, a religious
bookstore, or a kayak manufacturing shop
all could work, assuming you can find your
audience.
As with the discussion about family
members, people who care about what
you do may well be willing to support you
on better terms than would a commercial
investor. No matter what your business or
business idea, think about who you know
or can get to know and who really cares
about what you plan to do. Share your idea
with these people and be ready to listen to
them. You’ll surely get lots of good ideas,
and you may be surprised at how easy it is
to raise money for what people perceive as
an honest and needed endeavor.
Banks
When asked why he robbed banks, Willie
Sutton said, “Because that’s where the
money is.” For the same reason, banks
are high on the list of potential sources
people ask about for business funding.
Unfortunately, as far as a small business
is concerned, banks act cautiously when
lending out money. This makes sense when
you remember that it isn’t their money.
This discussion applies to financial
institutions that lend to businesses and
individuals. Recent banking deregulation
has made it more difficult to locate which
of the various departments of institutions
such as the Bank of America, Wells Fargo,
and others actually make loans, but the
same fundamentals apply when you finally
locate the right department and person.
Banks always want to see a written busi-
ness plan along with your loan application.
Banks are financial intermediaries. They
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 65
pay interest to account holders to attract
deposits, which they lend out to people
like you. When lending, they charge
enough interest to pay for their cost of
funds and produce a profit. Any transaction
you have with a bank will be a loan and will
come with a repayment schedule. Banks try
to minimize risks by making sure you have
enough assets to pay them back, even if
your business does badly. They don’t make
equity investments in businesses.
Some commercial banks work closely
with the
Small Business Administration
(SBA) (www.sba.gov)
in offering loan
guarantee programs. If you want a loan
but don’t qualify under the bank’s normal
guidelines, the banker may suggest that
you apply for an SBA guaranteed loan.
If you’re approved, the SBA guarantees
the bank that you will repay the loan
and the bank lends you the money.
While this program can work for start-
ups, it is most used by business owners
wanting to expand a successful business.
Ask your banker if he knows about the
SBA guarantee program. (See below for
background on the SBA.)
Commercial banks sometimes lend to a
start-up business, but they almost always
ask for collateral to secure the loan. The
most banks will usually lend a start-up
is half the cash needed. In addition, they
usually require that you do not borrow all
or most of your cash from someone else;
they want you to have as much to lose as
they do.
The good news about banks is that
money generally costs less from banks
than from other professional lenders, such
as mortgage loan brokers. If the bank
lending officer likes your business plan and
loan application, and you have sufficient
collateral, she may give you an interest-
only loan for a short time, with the option
of converting it to an amortized loan later.
That means you can delay larger principal
payments until your business has a chance
to generate a positive cash flow.
exAmple 1:
Katherine O’Malley Pertz-Walter has
saved$20,000tostarttheRack-a-Frax
Fastener Company, but she needs an
additional$10,000.Afteracarefulstudy
of her business plan, a banker grants
her an interest-only loan with payments
to be made quarterly for one year and
takes a second mortgage on her home
as collateral. At the end of the year, she
must repay the entire principal. Her
interest rate will probably be something
like the prime rate (interest rate charged
the bank’s favored customers) plus 3%.
Iftheprimerateis12%,she’llbepaying
about15%interest,andherquarterly
interest payment will be $375. At the
end of the year, she will be obligated to
repaythe$10,000inonelumpsum.
66 | HOW TO WRITE A BUSINESS PLAN
exAmple 2:
To continue this story, let’s assume that
at the end of the first year, Ms. Pertz-
Walter asks the bank to convert the
loan to a three-year payment schedule,
including principal and interest. Based
on her favorable first-year results, the
bank agrees to amortize the loan rather
than demand immediate repayment.
Shenowhastomake36equalmonthly
paymentsof$341.75.Aftershemakes
those36payments,theloanwillbepaid
off completely.
exAmple:
Now let’s forget about Rack-a-Frax and
switch to the story of a friend of mine.
Peter Wong wanted to start a garage
specializing in Italian cars in Santa Fe,
New Mexico. He estimated that he
neededatotalof$50,000togethis
businessstarted.Hehad$25,000cash
saved from his job as chief mechanic
at an independent Ferrari garage and
$30,000equityinahouse.Hethoughthe
was home free and confidently walked
intoalocalbanktoaskfora$25,000
loan.
An hour later he walked back out
with his head spinning. The banker
asked him a number of questions about
monthly sales projections, cash flow,
and cash for a parts inventory. Peter
hemmed and hawed. It came down
to this: The banker didn’t want to talk
to Peter seriously until he produced a
written business plan demonstrating that
he understood how his business would
work. After the initial shock of his bank
interview wore off, Peter went to work.
Putting his plan down on paper and
doing a budget encouraged him to deal
with a number of details he had never
thought about before. When he did, he
changed his plan considerably.
Finally, Peter presented his plan to
the bank loan committee. This time
theyofferedtolendhim$25,000,
providedheputuptheother$25,000
and give the bank a second trust deed
on his house and title to all equipment
purchased for the shop. The bank also
asked that Peter buy a life insurance
policyfor$25,000,namingthebank
as beneficiary. He negotiated the
second trust deed on his house out of
the requirements and then agreed to
takethepackage.Thetermswere36
monthly payments at a floating interest
rate that was calculated at the prime
rate plus 3%.
By this time, Peter and the banker,
whose name was Fred, had established
a good relationship. When the business
got off to a slow start, Peter kept Fred
informed of the problems and his plans
to deal with them. Fred let Peter delay
three payments in a row with no penalty.
Eventually, when the business began to
do well and Peter wanted to expand,
Fred worked out a financing package,
this time taking as collateral Peter’s
accounts receivable and inventory.
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 67
Venture Capitalists
A venture capitalist is anyone who invests
equity money in a business in the hope of
future profits. While this can include any
business investor, from your Aunt Rose
to the largest investment banker in New
York, the term often connotes a group of
businesses that look for hot companies
in which they can make large profits.
Typically, this group won’t consider any
investmentsmallerthan$500,000and
prefers companies specializing in the
emerging technological fields, where a
lot of money is needed to get started and
where it’s possible to achieve enormous
returns. Computers, genetic engineering,
and medical technology are familiar
examples.
Most readers of this book will be
interested in starting or expanding small or
medium-sized service, retail, wholesale, or
low-technology manufacturing businesses.
Large-scale venture capitalists traditionally
do not invest in these areas. Fortunately,
relatives, friends, business acquaintances,
and local businesspeople with a little
money to invest can all be pint-sized
venture capitalists. Many do very well at it.
exAmple:
Jack Boots loved to ride dirt motor bikes
on the weekends. He was frustrated that
no retailer in his county carried either
a good selection of off-road bikes or
the right accessories. He and his friends
sometimeshadtodrive200milestobuy
supplies.
Eventually, it occurred to Jack
to quit his job and open a local
motorcycle store. He talked to several
manufacturers and was encouraged.
The only problem was, he would need
$50,000toswingit.Asheonlyhad
$20,000,hewasabouttogiveupthe
idea when some of his biker buddies
offered to help raise the cash. Jack
found six people willing to invest
$5,000eachinalimitedpartnership.
Each of these friends was, in reality, a
small-scale venture capitalist, betting
a portion of his savings on the notion
that Jack would succeed and they would
participate in his financial success.
Jack’s Cycles opened for business and
is doing well. All the limited partners
were paid back their initial investments
plus the agreed-upon return set out in
their limited partnership agreement, and
Jack is now the sole owner. The only
sad part of it is that Jack is too busy to
ride much anymore.
Many cities have venture capital clubs,
comprising groups of individual investors
interested in helping businesses start
and grow. These clubs often serve as an
introductory service—you receive a few
minutes to discuss your business at a club
meeting. If any investors want to pursue
the discussion further, they make an
appoint ment with you privately. You can
use these groups to expand the list you
are making of investment prospects. You
may also be able to obtain computerized
68 | HOW TO WRITE A BUSINESS PLAN
lists of venture capitalists and investor
magazines in which you can advertise
your proposition. Often, these clubs are
formed and disbanded rapidly; ask the
local Chamber of Commerce or your local
bankers if there is an active club in your
area.
When thinking about raising money
by selling a share in your business, it’s
important that you have a hard-headed
picture of what you’re getting into. Amateur
venture capitalists or equity investors
gamble on your idea for your expansion or
new venture. They invest money hoping
that you’ll make them rich, or at least
richer. If you intend to look for equity
investors, your business plan needs enough
economic and marketing research to show
investors that your idea has the potential
of making a substantial profit. You’ll also
need to show potential investors exactly
how they’ll profit by investing in your
business.
exAmple:
Jack Boots spelled out his profit distri-
bution plans in his limited partnership
document:Investorsreceived50%of
the profits paid monthly according to
their relative share of investment after
he paid himself a nominal, agreed-upon
salary for running the store. In addition,
they qualified to buy merchandise at a
substantial discount. They also owned a
share of the assets of the business. Jack
estimatedthata$10,000investorwould
receiveamonthlycashowof$200for
an annual return of 24%. When added
to the partner’s investment share in the
inventory of the shop, this would make
a$10,000investmentworth$20,000in
three years.
Additional Money Sources
for an Existing Business
If you’ve been in business for at least three
or four years and can show a history of
profitable operations, a whole new world
of financing options opens up to you. The
major advantage you have over a start-up is
that you can prove what you say, whereas
a start-up can’t. Be careful if you’ve been
in business for less than three years or
can’t show a profitable history—financing
sources may consider you a start-up and
put you in a higher risk category.
Take your latest two or three years’
financial statements with you as part of
your business plan when you talk to any
financing source. That way, the lender or
investor can see where you’ve been and
where you’re planning to go.
Here is a list of readily available
financing sources for expanding your small
business. Consider each potential source
of money carefully—each has unique
advantages and disadvantages as they
apply to your business. Approach whatever
source makes the most sense for your
business first; you can try others if the first
one doesn’t work.
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 69
Trade Credit
After you establish a reliable record of
prompt payment with your suppliers,
normally they will consider extending
additional credit for your expansion
plans. Let them know of your plans well
in advance; if you begin delaying your
payments to finance your expansion
without notifying them, they may get
annoyed. They have an interest in seeing
you grow; after all, you’ll be buying more
from them in the future. Sometimes they
will even introduce you to their bankers
and investors if you approach them with a
well-thought-out business plan.
Commercial Banks
Remember those banks that were so hard
to get money from when you started your
business? Well, once you can show a
profit able history, they become a lot more
friendly. As an established businessperson
you can often secure flexibility from banks
that you might not expect. For example, they
may lend you money and take a security
interest in your accounts receivable. Or
they may take a security interest in your
inventory, equipment, or other business
assets.
Equipment Leasing Companies
Leasing companies own equipment that
they rent to businesses and individuals.
Some leasing companies are similar to
rental yards in that they have a supply
of equipment on hand that they rent out.
Sometimes these companies offer repair
and trade-in privileges in addition to short-
term rentals.
Other leasing companies—called full
finance leasing companies—do not take
physical possession of any equipment. You
find the equipment you want, and they buy
it for you. Full finance leasing companies
have no equipment inventory and offer
no return or repair services. They borrow
money from a bank, so you’ll have to pay
back the equipment cost plus interest and
a leasing company service fee over a fixed
time. Normally, you have the option of
buying the equipment for an additional
price at the end of the lease term. Full
finance leasing companies base their credit
decisions on your company’s financial
condition. They will want to see lots of
financial records from your company and
may request that you pledge some of your
personal assets to guarantee the lease. Of
course, make sure you understand what
you agree to before you sign anything.
Accounts Receivable
Factoring
Companies
Factoring companies—also called factors—
buy your accounts receivable at a discount.
Then, they collect your accounts at full
face value. This can be a very expensive
way to raise cash—I only recommend it
as a last resort. Some factors require that
your accounts pay them directly instead
70 | HOW TO WRITE A BUSINESS PLAN
of paying you. This can cause problems
with customers, who’ll assume that you
are having serious cash flow problems.
Approach factors with caution and make
sure you understand the implications of the
agreement before you sign it.
Factors can buy your receivables with or
without recourse—that is, your guarantee
of payment to the factor. Factoring with
recourse means that the factor pays you a
higher percentage of the receivable in cash
and makes raising cash less expensive.
But you can be seriously damaged if a big
account fails to pay its bill and you have to
make good on your guarantee.
Venture Capitalists
Some venture capitalists specialize in
funding businesses after they have a track
record and are willing to take a smaller
return as a result. The industry is changing,
and more venture capitalists are looking
at a wider range of possibilities and client
companies. Often a venture capitalist will
specialize in a market area and company
size or stage of growth. The possibilities
have increased, and so has the work
involved in finding just the right backers.
Money Brokers and Finders
Money brokers and finders develop and
maintain lists of investors and lenders
interested in businesses. For a fee, they
will circulate your financing proposal to
potential money sources. A legitimate
broker or finder can look at your business
plan and know if he has a good chance of
finding money for you.
Finders simply introduce you to possible
backers; they cannot negotiate on your
behalf, and they are not licensed. Money
brokers are licensed and can negotiate
on your behalf. Fees for both finders and
brokers are comparable. I recommend
that you work with people who work
on a contingency fee basis only and do
not require up-front fees. While some
worthwhile finders and brokers require an
up-front fee, there are some nonlegitimate
people who take the up-front fees and
disappear. Also, I recommend that you
obtain references from any broker or finder
and that you verify the references.
Total fees, including both up-front and
contingency,canrangeupto10%or15%
of the money raised, so be cautious and
remember that everything is negotiable.
You can contact finders and brokers in
the financial section of your newspaper’s
classified advertising section.
If No One Will Finance
Your Business, Try Again
Let’s say that you’ve been unsuccessful
in your attempts to raise money for your
business from the primary sources listed
above, or you have raised some money, but
still need more. What do you do next? The
first step is to go back to the people who
initially seemed interested but ultimately
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 71
turned you down and find out why. This
is not a waste of time. If you get the same
answer from several people, you will
know what you have to work on. And
then there is the possibility that someone’s
circumstances have changed and they have
more funds now. Remember, it took the
manwhoinventeddrypapercopying21
years to raise the money to get the first
photocopier made.
If a bank lending officer, or even two
or three, turned you down but you still
think borrowing is a good way to fund
your business, try other lending officers
at other banks. A friend of mine got a
$15,000unsecuredloantoimprovesome
agricultural property just by going to five
different banks. The first banker laughed
him out of the office, the second banker
listened to his story for five minutes and
the third for ten minutes. By the time
he got to the fifth bank, he knew what
questions the banker was going to ask and
was ready with some solid answers. The
banker was impressed and he got the loan.
In fact, for this very reason, it’s not a bad
idea to try a longshot bank first and the
mostlikelyonelast.(SeeChapter10for
ideas on how to present your business plan
to bankers.)
exAmple:
Sue Lester tried all the usual sources to
getthe$20,000sheneededtoopena
piano school. One person she talked to
was her Aunt Hillary, who had loaned
her money to go to school several
years before. This time Aunt Hillary
said, “Sorry, but no.” One afternoon a
few months later Sue ran into Hillary
at her niece’s birthday party. Hillary
asked how she was doing with plans
for the school. Sue told her she was
stillshort$10,000andwasgoingtotry
the Small Business Administration as
soon as she made one or two changes
in her business plan. Aunt Hillary asked
about the changes. Sue told her that
an experienced teacher had suggested
she charge slightly more per hour, start
with a good second-hand piano instead
of a new one, and try to work out a
referral arrangement with a local piano
store. This way she could pay herself
more salary and wouldn’t need to take
another job to make ends meet. Hillary
asked to see the changes when they
were complete.
After Sue showed the revised plan to
her Aunt Hillary, she offered to lend her
the money. Sue was both delighted and
curious. When she asked, Aunt Hillary
said there were two reasons for her
change of heart. First, she was pleased
that the more realistic sales projections
left Sue enough money to live on so she
would be able to keep her enthusiasm
for the hard job of creating a new
business. Second, she had sold a small
piece of land for more than expected
and now had the money to lend.
72 | HOW TO WRITE A BUSINESS PLAN
Secondary Sources of Financing
for Start-Ups or Expansions
Let’s assume you have tried all of the
primary sources of financing small
businesses at least twice, and have been
turned down each time. Is it time to
head for the showers? Not if you really
want to start your business. If everyone
turns you down, you have no choice
but to get creative. Remember Knute
Rockne’s exhortation, “Winners never quit
and quitters never win.” Here are some
suggestions.
Small Business Administration
Many years ago Congress recognized
both that small businesses provide most
of the employment and growth in the
country and that they have a great deal of
trouble borrowing money because large
corporations tend to hog too much of
the loan money from banks. As a result,
Congress created the Small Business
Administration (SBA) and several other
government organizations specifically to
help small businesses compete with larger
corporations for loans.
While the SBA can make direct loans
to small businesses, it usually guarantees
loans from commercial banks. The SBA
willguarantee85%ofabankloanupto
$750,000iftheloanmeetsSBAcriteria.
These criteria are not as difficult as some
readers may think. Typical requirements
include that the borrower show profits
for at least two years, that the borrower
work in the business full-time, and that
the borrower have some real or personal
property available to offer as collateral.
Some bankers are strongly interested
in working with loans guaranteed by the
SBA since the bank can make a fee by
processing the loans and later selling them
to other financial institutions. Since the
bank’s fee is based on the size of the loan,
such banks are typically only interested
in processing loan requests for more than
$50,000.
Many banks treat SBA loan origination
as a profit center and aggressively seek
out borrowers. Some of these banks offer
assistance in completing the SBA forms for a
fee and offer quick turnaround on decisions.
If any banks in your area offer this service,
make an appointment with a loan officer
specializing in SBA loans. Chances are, he
will be able to estimate your chances of
success based on reading your business
plan. Loan approvals sometimes take place
as soon as a week or so after you complete
all the paperwork. The SBA’s past repu-
tation of being hard to deal with and not
very cooperative seems to be changing!
That’s true for the guarantee program, at
least.
Your chances of receiving a direct loan
in a reasonable time from the SBA will
be greatly enhanced if you qualify for a
preference category. For example, if you
are disabled or a veteran, requirements
are slightly less restrictive. Ask your local
SBA bank or SBA office about some of the
direct loan programs.
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 73
There are also small private business
lending companies that perform a function
similar to a bank’s function in assisting
small businesses obtain SBA financing. To
get names and addresses of organizations
in your area, write the SBA, Financial
Assistance Division, Office of Lender
Relations,Non-BankLenderSection,409
3rdStreet,SW,Washington,DC20416,or
check the SBA website at www.sba.gov.
Small Business Investment
Companies
(SBICs)
A Small Business Investment Company
(SBIC) is a corporation established with
the assistance of the SBA to lend money
to small businesses. Some SBICs serve
minority enterprises, and are called Minor-
ity Small Business Investment Companies
(MSBICs). An SBIC can borrow up to four
times its invested capital from the SBA.
It then lends out these funds to other
busi nesses, aiming to make a profit on
each loan trans action. There are some
400oftheseacrossthecountry,each
with different investment goals and
objectives. For more information on busi-
ness financing, click “Small Business
Planner” on the SBA home page (www.
sba.gov). The SBA site also offers a list of
SBIC addresses and areas of investment
specialty. And, you can call their helpline
at800-827-5722oremailthemat
answerdesk@sba.gov.
USDA Rural Development
This loan program is aimed at busi-
nesses that provide jobs in rural America.
Business loans through the U.S. Depart-
ment of Agriculture’s Rural Development
program (formerly the Farmers’ Home
Administration or FmHA) are guaranteed in
townswithapopulationof50,000orless
or in suburban areas where the population
densityisnomorethan100persquare
mile. Use of the loans varies considerably;
loans have been made to enable a grocery
clerk to buy the store he worked in and
for someone to buy a McDonald’s fast food
franchise. Rural Development loans are
normally made through a local bank. For
information on these loans click “Loans”
at the USDA Rural Development website
(www.rurdev.usda.gov). At the website you
can also locate the nearest USDA Service
Center. Loans under this program often
take months to complete, so allow plenty
of lead time.
Economic Development
Administration
(EDA)
The EDA, which is part of the Department
of Commerce, makes or guarantees loans
to businesses in redevelopment areas—city
areas with high unemployment. Eligible
areas are listed in a publication available
quarterly from the regional EDA director.
Contact your local SBA office to locate
the regional EDA director. If you’re in one
of the designated redevelopment areas,
74 | HOW TO WRITE A BUSINESS PLAN
this program bears looking into. For more
information, check online at www.eda.gov.
Federal, State, and Local Programs
Other federal programs are published in
the Catalog of Federal Domestic Assistance,
available from the U.S. Government
PrintingOfce,Washington,DC20402,
or at your library, or online at http://
bookstore.gpo.gov. There always seems
to be a variety of programs available from
the federal government, so this directory
is worth checking if you’re interested in
government money.
All states and many local governments
have a number of aid programs available
to help businesses create jobs. These are
normally called Development Agencies or
Development Administrations. You can
find out about them by contacting your
local Chamber of Commerce or by asking a
banker.
Overseas Private Investment
Corporation (OPIC)
OPIC is a self-funded U.S. government
agency that makes direct loans and
loan guarantees and insures private
businesses against political risks in
developing countries. The ideal candidate
for assistance is an American company
that enters into partnership with a well-
established foreign business. To learn
more about this agency, check online at
www.opic.govorcall202-336-8400.
Insurance Companies
and Pension
Funds
You may have heard about the possibility
of borrowing money from insurance
companies or pension funds. Normally,
neither is a viable lending source for small
businesses. Some insurance companies
have a small fund they can invest in
businesses, especially if you can offer a
combination of loans and investments.
However, most small businesses will find
money from less restrictive sources long
before they make an application to an
insurance company.
Advertising Your Project and
Selling Stock to the General Public
Advertising and selling corporate stock
to the general public through a public
offering is very different from selling stock
to your friends, relatives, and business
acquaintances. Unless your corporation
qualifies for an exemption, you must
register every issuance of corporate stock
with the federal Securities and Exchange
Commission (SEC) and the state securities
agency. Registration takes time and costs
money. Following any of these procedures
requires a knowledgeable attorney—don’t
try it without help. It can be an expensive,
time-consuming process that can easily
cost$200,000inattorneyfees,accountant
fees, and printing expenses just to meet
government filing costs.
ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR EXPAND YOUR SMALL BUSINESS | 75
Fortunately, however, smaller corpo-
rations usually qualify for state and
federal securities laws exemptions. For
example, SEC rules permit the private
sale of securities without registration if
all of the share holders reside in one state
and all of the sales are made in the state.
This is called the “intrastate offering”
exemption. Another federal exemption
allows a “private offering” of shares
without registration. A private offering
can be a sale, without advertising, to a
limited number of people (35 or fewer
is often used as a yardstick even though
the federal statute does not mention a
number). Another way to qualify for a
private offering exemption is to only
sell, without advertising, to persons who,
because of their net worth or income
earning capacity, can reasonably be
expected to take care of themselves —that
is, they can adequately assess the risk and
bear the cost of investing in the business,
without needing the protections afforded
by the registration procedures of the
securities laws. Most states have enacted
their own versions of these popular federal
exemptions.
For more information about SEC small
business exemptions, visit the SEC website
at www.sec.gov. The Question and Answer
Portion of the Small Business Information
section contains a great deal of useful infor-
mation, in easy-to-understand language.
Conclusion
There you have it—the primary and some
secondary sources of finding money to start
your business. If you really believe in your
idea, complete the business plan outlined
in the rest of this book. Then contact all
the sources listed above. If you have a
good plan and refuse to take “No” for an
answer, you will find the money you need.
The Chinese say the longest journey begins
with a single step. Let’s get started.
●
5
C h A p t e r
Your Resume and
Financial Statement
Introduction .................................................................................................................................................................78
Draft Your Business Accomplishment Resume .........................................................................................78
Draft Your Personal Financial Statement .....................................................................................................85
Determine Your Assets ................................................................................................................................85
Determine Your Liabilities ..........................................................................................................................90
Determine Your Net Worth ......................................................................................................................93
Determine Your Annual Income ...........................................................................................................94
Determine Your Annual Living Expenses ...........................................................................................97
Complete Your Personal Financial Statement ..............................................................................100
Verifying the Accuracy of Your Financial Statement ................................................................100
78 | HOW TO WRITE A BUSINESS PLAN
QUICK PLAN
If you’ve chosen the quick plan
method to prepare a business plan (see
Introduction), you need to read and complete
only this section of Chapter 5: “Draft Your
Business Accomplishment Resume.”
Introduction
In this chapter you’ll draft two important
documents for your business plan:
• aspecialbusinessaccomplishmentresume
that focuses on those abilities you’ll
need to start or expand your business,
and
• anancialstatement, which details the
value of your material possessions.
Draft Your Business
Accomplishment Resume
Investors and lenders want to be certain
that you have the experience, education,
and desire to make your business a
success. Your resume shows your backers
that you can achieve your objectives. This
isn’t a traditional resume that lists past jobs
and the years or months you held each.
More correctly, you’ll develop a statement
of everything you have accomplished that
has a direct bearing on your business
objectives.
Although you may not have owned or
expanded a business before, you have
accomplished some demanding tasks that
are similar to the tasks you’ll undertake
when you begin your business. But don’t
fool yourself into thinking that good
credentials alone will get a loan from the
first person you approach. When it comes
right down to it, few people will part
with their money unless they also have
a positive feeling about you as a person.
Your task is to get them to trust and like
you as a businessperson.
If you’re like most people, your glowing
accomplishments are sprinkled with
past mistakes and failures. Everybody
makes mistakes, including your backers.
Be honest in your resume but don’t go
overboard. You don’t need to give a litany
of every sin you have committed, including
the time you skipped algebra class in the
seventh grade. Only provide details of
your errors when they’re relevant to your
business plan. For example, if you ran a
business for five years and eventually went
bankrupt, you’ll need to mention that.
Be prepared to talk with prospective
investors and lenders about everything you
present in your resume. The best way to
build trust in a financial relationship is to
communicate with full disclosure. The worst
thing you can do is to lie about or try to
coverupanegative.(SeeChapter10for
suggestions about how to discuss your past
mistakes.)
Now that that’s out of the way, let’s
deal with the important, positive informa-
tion: How do you demonstrate that you’re
qualified to run a business? As with any
-
thing else, there are some tricks to writing
a resume that will interest a potential
investor.
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 79
First, make a list of every job and
experience in which you produced positive
accomplishments for any organization,
even if you were a volunteer or working
for yourself. Since you’re not writing a
standard resume, dates of employment are
optional. You may be able to create this list
by cutting and pasting old resumes, or you
might just start from scratch. Also, it’s okay
to include personal information about your
hobbies and family status in this resume.
Your financial backers want to know you
as a person.
Under each organization, list the busi-
ness areas you worked in—for instance,
sales, management, delivery, credit, and
so on. Now, set out the specific things you
accomplished for that organization while
carrying out your responsibilities. This
information will become the raw material
from which you choose the accomplish-
ments most likely to support your proposal.
Remember, this isn’t the place to be
humble. Getting a new business off the
ground is no project for the meek. Maybe
you reduced costs for your employer by
redesigning a delivery route. Perhaps you
designed a better canoe or came up with
a new marketing strategy that increased
sales of tortilla chips. Maybe you figured
out how to improve the efficiency of a
computer system or revised a recipe to
make brownies taste better.
Once you’ve completed your first list of
accomplishments, write a statement that
shows how your specific accomplishments
relate to your ability to run your business.
Include experiences and achievements that
support your case and exclude those that
are too general or off the point. Emphasize
your knowledge of how your potential
business works and your knowledge of
and respect for financial realities.
Now that you understand the process
and the objective, write a first draft of your
business accomplishment resume. You
may have to rewrite it several times to get
the right perspective. Depending on your
experience, your resume probably should
be between one and three pages long. Ask
someone to read your drafts to make sure
you’re convincing the reader that you’re the
right person for the job. You needn’t prove
you can walk on water, but you should
show a good understanding of business
realities.
exAmple 1:
Here’s an example of an inadequate
statement for a credit manager’s job.
This description doesn’t give a potential
investor any information about the
credit manager’s ability to run a
business:
Credit Manager, XYZ Company:
Supervised two clerks and the accounts
receivable and billing sections.
exAmple 2:
Here is a much better version that
details the credit manager’s positive
accomplishments for the company.
It shows that the credit manager
80 | HOW TO WRITE A BUSINESS PLAN
understands and can improve critical
business factors:
Credit Manager, XYZ Company:
Managed a credit department of ten
people, consisting of an accounts
receivable section, a billing section,
and a delinquent accounts section.
Reorganized both our collection
department and our credit-granting
process to accomplish the following:
1. Collected $200,000 in delinquent
accounts that had previously been
consigned to the “unlikely to ever
collect” category. This was a result of
my decision to keep in closer contact
with customers.
2. Reduced accounts receivable from
an average of 90 days to an average
of 38 days, considerably below the
industry norm, again primarily by
getting to know our customers better.
3. Reduced bad debt losses from 4% of
sales to 0.5% of sales in two years
by streamlining the credit applica-
tion process and credit checking
procedures as well as requiring our
sales reps to personally vouch for
customers’ creditworthiness. Main-
tained the 0.5% loss percentage in
the following years. As part of this,
we successfully brought 15 lawsuits
with no new staff.
4. Through sales conferences, news-
letters, and frequent phone contact,
worked closely with the sales force
to ensure that new accounts were
creditworthy. During this time, XYZ
sales grew from $3 million to $7
million.
The following two resumes—Jim
Phillips’s and Sally Baldwin’s—share two
important attributes:
•knowledgeoftheparticularbusiness
the individual wants to start, and
•specicbusinessaccomplishments.
In this respect they are somewhat
different from many typical job application
resumes. For example, a potential employer
might be concerned about whether your
independent personality will fit in well in
a job environment, where these resumes
focus on concrete accomplishments.
Jim Phillips wants to start a retail
computer store. Here’s how he drafts his
resume.
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 81
Resume
James T. “Jim” Phillips
WORK EXPERIENCE
Manager, e Computer Store, San Jose (2007 to present)
Manager of chain retail computer and electronic store with annual sales of three million dollars.
• Hired,managed,andredsalesandsupportstaof15-20tomeetsalesgoalsestablished
by chain management.
• Developedpromotionalplansandmerchandisingstrategy,whichresultedinthestore
exceeding sales and profi tability goals by at least 10% each year.
• Createdacomputerizedinventoryplanusedbyallstoresinthe62-storechain.Received
Manager of the Month award seven times. .
• Conceivedandimplementedaquarterlynewsletter(Compufacts)thatwasmailedto
all 62 stores’ customers. Enabled us to maintain close contact with customers as well as
directly market to them.
Self-employed Software Sales Representative (2000 to 2007)
Acted as independent sales representative for three software developers: Softy, Inc. (Cupertino,
CA), Biosoft (Colorado Springs, CO), and Playtime (San Jose, CA).
• Increasedsalesofallthree,enablingthemtoexpandandhiremoreprogrammers.
• Developedacomprehensiveknowledgeofthesoftwaremarketingprocess.Helped
organize a money-back, no-questions-asked warranty program.
Computer Programmer, Southern Atlantic Railroad Company (1991 to 2000)
Worked in FORTRAN, COBOL, and BASIC languages on IBM mainframe computer doing real-
time applications on freight car locations as well as miscellaneous business programming.
• Savedthecompanyapproximately$2.3millionbydesigningabetterprogramtohandle
both automatic banking and collection of receivables.
• Helpeddesignanewfreightcarlocationcomputerprogram,whichresultedinanincrease
in car utilization from 60% to 65%.
Bookkeeping
I had several part-time jobs doing bookkeeping while attending programming school.
EDUCATION
Bachelor of Arts Degree, History, San Jose State College, 1987
Master of Arts Degree, History, University of California, Berkeley, 1990
Certifi ed Programmer, ACME Programming School, 1996
HOBBIES
Active in Boy Scouts and United Way; handicap golfer.
82 | HOW TO WRITE A BUSINESS PLAN
The next resume typifi es people who
see their potential business as offering a
chance for self-expression as well as profi t.
Individuals in an art or craft fi eld often
want to begin a business primarily to work
in an area they love. Normally this sort of
business starts and stays small because the
business owners want to keep their hands
on a cherished activity rather than achieve
big profi ts or learn the business skills
needed to handle fast growth.
Sally Baldwin loves to work with fabric
and color and has become expert at
helping people create a pleasant living
and work environment. She needs money
to open her own small interior decorating
business.
Resume
Sally Baldwin
Commission Sales, Martha’s Interior Design Studio (2002 to present)
Work on commission for a full-line interior design studio. Prospect for people who wish
to redecorate, prepare a design plan for the project, purchase the supplies and materials
necessary, hire workers to install the design, and collect payments from customers.
• LastyearIsoldover$500,000worthofprojects. eprojectsconsistedofseven
complete remodeling jobs, including three offi ces, one house, two apartments, and a
small pet hospital.
• Keepupwithallaspectsofthebusinesssuchasnewtrends,materials,andsuppliers.I
take continuing education courses at the Design Institute in New York City, and attend
at least a dozen textile, furniture, and appliance trade shows per year.
• Maintainasubstantiallistofcontactsinthedesigneld,includingpotentialcustomers,
contractors, and suppliers.
Commission Sales, J.C. Dollar Interior Design Company (1995 to 2000)
Sold drapes and furniture for J.C. Dollar on commission. I was responsible for design,
installation, purchase of noncompany products, and account collection.
• SoldnearlyonemilliondollarsworthofcompanymerchandiseandwonSalespersonof
the Year award.
• Mysalesnormallyrequiredseveralvisitstothecustomer’shomeorplaceofworkandI
became expert at dealing with all sorts of people.
EDUCATION
Graduated high school in 1995, followed by one year at Mount McKinley Junior College
HOBBIES
Decorating on a low budget; collecting Raggedy Ann Dolls.
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 83
The following statement is typical of
a person with good general business
experience but no work history in the
particular business he wants to start.
Stephen Brinkle is an attorney who wants
to start a gourmet, vegetarian, and low-fat
hot dog stand in downtown Chicago. He
needs to convince a lender that his general
business experience substitutes, at least in
part, for his lack of frankfurter fi nesse. He
accomplishes this by demonstrating that
he knows enough to hire a manager with
enough experience to squeeze the mustard
and shake the ketchup.
Resume
Stephen Brinkle
ATTORNEY IN PRIVATE PRACTICE
Specialize in business law matters, along with some general civil law practice.
BUSINESS INVESTMENTS
I have successfully invested in a variety of small businesses, including an auto tune-up
shop and a sporting goods store, which I currently own (Bill’s Track and Court, 11 Van
Renseller Blvd., Chicago).
In some of my small business investments, I took an active role in management. For
example, in the tune-up shop, I had to fi re the manager and locate more qualifi ed
mechanics. After doing that, the business became profi table and I sold it at a profi t. In
Bill’s Track and Court, the manager and I agreed to concentrate on tennis and running
equipment. As a result, the store became considerably more profi table.
EDUCATION
B.A., Northwestern University, History, 1994
J.D., Northwestern Law School, 1998
Passed Illinois bar exam, 1999
HOBBIES
Squash
COMMUNITY INVOLVEMENT
Active in various charitable organizations specializing in relieving worldwide hunger.
84 | HOW TO WRITE A BUSINESS PLAN
If you don’t possess all the skills needed
to run your business, you’ll also want to
hire people to fi ll in the gaps. If possible,
those resumes should be included in your
plan. Because Stephen Brinkle doesn’t
have experience in selling food, he
includes a resume for his key employee,
who happens to be his nephew.
Jonathan “Johnny” Brinkle
5678 Palatine Boulevard
West Chicago, IL
(312) 556-1314
CAREER PLANS
Manage hot dog stand, become area manager if franchise plans develop.
WORK HISTORY
MANAGER, BURGER WORLD RESTAURANT (2008 to date)
Supervised three shifts (20 employees in all). Before I took over, Unit 211 had sales of less
than two-thirds the Burger World national averages. In two years I brought Unit 211 up to
surpass the national averages. My main strategy was to maintain tight quality control and
to improve the cleanliness and general appearance of the unit. Within six months after I
took over, we began getting top ratings for general appearance and cleanliness from Burger
World and many compliments from customers.
MANAGER TRAINEE, JACK IN THE BOX RESTAURANTS (2005 to 2008)
I was trained in fast food management at a number of Jack in the Box locations. e
principal training method was to rotate me through every job in the operation. I learned
to adjust cooking to demand so that customers always received freshly cooked food. I also
learned that the cleaner the restaurant, the more food you sell.
EDUCATION
Graduated Northside High School, 2004
PERSONAL
Single, no dependents
HOBBIES
Restoring a 1968 Ford Mustang; playing softball
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 85
Draft Your Personal
Financial Statement
You can skip the rest of this chapter unless
you are seeking a loan or investors for your
business.
Your personal financial statement will
list your personal assets, liabilities, income,
and expenses. It tells your backers a lot
about your ability to handle money. Don’t
be discouraged if your financial condition
is weak. Your backers want to know about
you, the good and the bad, and they
under stand that you need money.
Preparing this statement in a form
lenders are used to seeing involves several
steps, which this chapter will take you
through step by step. As you’ll see, the task
is not much harder than filling out a credit
application.
Drawing up a good personal financial
statement isn’t difficult, but it does involve
attention to detail. I recommend that you
do a rough draft first.
If you already own or have an interest
in an existing business, you may wish
to include a separate statement of the
business’s net worth or balance sheet
and profit and loss statement. If you
own all or a portion of a business and
don’t plan to submit a separate statement
on the business, include your share of
the business on this personal financial
statement.
TIP
Co-owned property note: If you own
an item with others and the other owners will
not sign for the loan, enter only the value of
your share of the assets and corresponding
liability. If all parties will sign for the loan, enter
the full amount. Describe the ownership type
(joint tenancy, community property, tenants in
common, partnership, or separate property). If
you’re not sure how you own property, look at
the deed or other title document.
Determine Your Assets
Your task is to briefly describe and
estimate the current value of everything
you own, even if you owe money against
it. If you’re not sure how much a particular
item is worth, make an estimate now and
verify it later. Give the market value—
the price for which you could sell the
particular piece of property today.
CDROM
A copy of the Personal Financial
Statement is included on the CD-ROM in
Excel spreadsheet format. You can find it
under the filename FinancialStatement.xls.
Note that formulas have been embedded
in the spreadsheet document so that it will
automatically calculate relevant totals.
86 | HOW TO WRITE A BUSINESS PLAN
CAUTION
Keep assets separate from income.
An asset is a money item or something that
you could sell, like a car or a house. Income
is money you receive periodically, such as
a paycheck. Some assets produce regular
income—for example, stocks and bonds
that pay dividends, patents with royalty
agreements, and promissory notes you own.
Only list your assets here; you’ll list your
income later.
Cash and Cash Equivalents: List the
approximate cash balance in each of your
financial accounts. Include accounts in
banks, savings and loans, thrifts, credit
unions, or any other institutions. Identify
each by institution name, account type,
and number. Also list money market funds,
certificates of deposit (including maturity
date), and cash in your safe deposit box,
buried in the back yard, or any other place
you keep cash.
Marketable Securities: List any stocks,
mutual funds, and bonds you own that are
publicly traded. Show the number of shares
or the amount (face value) of bonds, the
exchange on which they are listed, and the
current market value. The value of stocks
is the number of shares owned multiplied
by the bid price per share listed in a
newspaper business section.
The current cash value for savings or
bank bonds is listed on the table printed
on each bond according to the number of
years since it was issued.
Corporate bonds are listed in the
newspaper in relation to their face or par
value,withapriceof100beingequal
to par. To calculate the value of your
corporate bonds, multiply the price listed
bytheirfacevalueanddivideby100.
If you can’t find the listing for your
securities in your local paper, check online,
read the Wall Street Journal at your library,
or call your broker and ask.
TIP
Note about unlisted securities: Call
your broker for the value of any stocks that
are not publicly traded and enter them under
Other Assets, below.
Cash Value of Life Insurance: If you own
whole life insurance policies, they may
include a cash surrender value, which
will probably be less than the face value
of the property. Obtain the value from
your insurance agent. If you own term
insurance, there will be no cash value, so
don’t list the policies.
Accounts and Notes Receivable: List only
those business assets and other assets
that are not shown on a separate financial
statement for your business or secured by
real property. List each note (loan) people
owe you and show the unpaid balance and
payment schedule, as well as a description
of any property securing the note. Briefly
state your relationship to the payer and
indicate if the payment of the loan is
questionable.
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 87
Personal Financial Statement
ASSETS
Cash and Cash Equivalents
Checking and Savings Accounts (Include Money Market Accounts)
Institution Name Account Type and #
Current
Balance
Bank of Centerville Checking Acct. #1114443231 $ 1,876
Thrift Savings Savings Account #556472 3,000
Total Checking and Savings Accounts $ 4,876
Time Deposit Accounts (Include Certifi cates of Deposit)
Institution Name Account #
Maturity
Date
Current
Balance
Charles Chubb Co. 00-12345 1-25-20 $ 2,000
Total Time Deposit Accounts $ 2,000
Cash on Hand/Miscellaneous Cash (Drawers, Safety Deposit Box, Etc.)
Cash at home, travelers checks $ 500
Total Miscellaneous Cash $ 500
Total Cash and Cash Equivalents $ 7,376
88 | HOW TO WRITE A BUSINESS PLAN
Marketable Securities (Include Mutual Funds)
No. of Shares/
Amt. of Bonds Name of Stock/Bond
Exchange
Listed
Current
Market Value
50 sh. General Computer Stock NYSE $ 3,250
100 sh. Consolidated Radio NYSE 1,200
5,000 IMB Bonds 6,250
Total Value of Marketable Securities $ 10,700
Cash Value of Life Insurance
Policy Description and Company
Cash Surrender
Value
Reliable Life Company; whole life insurance policy $ 2,457
Total Life Insurance Cash Value $ 2,457
Accounts and Notes Receivable
Note/Account Description Current Balance
Jack Sprate, nephew; unsecured note, payable monthly $ 2,356
Total Accounts and Notes Receivable $ 2,356
Trust Deeds and Mortgages
Note Description Current Balance
Second deed of trust on former personal residence, single-family $ 9,786
home at 4445 Karma St., Modesto, CA, payable monthly.
Borrower is son-in-law, Dan Carnegie. Loan is current.
First mortgage on unimproved lot, payable monthly. Borrower is
2,098
my mother,
Gertrude Hubbard. Loan is current.
Total Trust Deeds/Mortgages $ 11,884
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 89
Real Estate
Description Market Value
Personal residence, three bedrm, two bath frame/stucco house, $ 140,000
33324 Being St., Modesto, CA (Approx. 15 years old)
Unimproved lot, New City, IL; Parcel #811-2-849. Owned in joint
15,000
tenancy with my mother, Gertrude Hubbard. Total current
market value is $30,000.
Total Value of Real Estate $ 155,000
Personal Property
Description Current Value
1958 Buick Century hardtop, good condition $ 2,500
2005 Honda Accord 4,000
Stamp collection 2,000
Household furniture 3,500
Total Value Personal Property $ 12,000
Other Assets (Include interests in Partnerships and Private-Held Stock)
Description Current Value
N/A $ 0
Total Other Assets $ 0
Total Assets $ 201,773
90 | HOW TO WRITE A BUSINESS PLAN
Trust Deeds and Mortgages: Itemize any
properties you have sold or lent money
against for which you are carrying back
a mortgage (deed of trust). Also list notes
you hold that are secured by real property.
Loans against property you own will be
listed under Liabilities, below. Show the
street address of the property, type of
improvements (house, duplex, etc.), name
of payer, payment terms, and the current
unpaid balance. State your relationship to
the payer and the status of the note.
Real Estate: Describe each piece of
real estate you own. State whether it is
unimproved, a personal residence, a rental,
or whatever. Include the street address or
parcel number of each property. Estimate
the market value of your property by
checking newspaper listings for your
neighborhood, calling a local realtor, or
comparing the recent sale prices of similar
property. If you own valuable property
other than your house, it’s best to include a
written appraisal.
If you own real estate with others and
the co-owners are not going to cosign your
business loan, describe how title is held,
such as, “John Jones as separate property”
or “John Jones and Mary Smith in joint
tenancy.”
Personal Property: Personal property
is anything you own that is not real
estate. Separately itemize each of the
more valuable items like cars, boats, and
collections, describing each item in as
much detail as possible. Less-valuable
property can be grouped together, such
as “household furniture,” “appliances,”
or “power tools.” You don’t need to be
overly detailed. Don’t forget household
items, valuable clothing, jewelry, electronic
equipment, musical instruments, and sports
equipment.
Estimate the current market value. For
cars, start with the high Edmund’s Used
Car or Kelley Blue Book price. Jewelry,
antiques, and other collectibles should be
appraised if you plan to show them as
a significant part of your assets. Make a
ballpark figure of less-valuable groups of
property; garage sale prices should suffice.
Other Assets: List any assets that weren’t
covered elsewhere. Items such as annuities,
IRAs, vested portions of pensions or profit
sharing retirement plans, business interests
(value of partnerships, etc.), unlisted
securities, trusts, life estates, copyrights,
patents, trademarks, and so forth should be
listed in this section.
Remember not to list the income
generated by your assets.
Total Assets: Finally, add up the values of
all your property listed on the form. The
result is your total assets.
Determine Your Liabilities
In your Personal Financial Statement—
Liabilities and Net Worth you’ll write down
everything you owe to others. To a consid-
erable degree, the information on this form
will be the flip side of what you just did.
That is, if you showed a house as an asset,
you will now list the mortgage on that
same house as a liability.
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 91
Personal Financial Statement
LIABILITIES & NET WORTH
Credit Cards and Revolving Credit Accounts
Name of Creditor Amount Owed
VISA (Bank of Centerville) $ 1,600
American Local 290
Total Credit Cards and Revolving Credit Accounts $ 1,890
Unsecured Loans
Bank (or other lender) Terms Amount Owed
Merchant’s Bank interest only quarterly at prime + 2%, due 9/1/xx
$
5,000
Total Unsecured Loans $ 5,000
Loans Secured by Real Estate
Bank (or other lender) Terms Amount Owed
Bank of Centerville First trust deed and note on personal residence: $ 87,583
Fixed rate (10%); 30 years ending 20xx
Abner Small Mortgage on unimproved lot; monthly interest
only at 18%, to be paid off January 1, 20xx 10,000
Total Loans Secured by Real Estate $ 97,583
92 | HOW TO WRITE A BUSINESS PLAN
Loans Secured by Personal Property
Bank (or other lender) Terms Amount Owed
Merchant’s Bank Secured by 1989 Honda: 48 mos; will
$
1,000
be paid off Sept. 20xx
Total Personal Property Loans $
1,000
Loans Against Life Insurance Policies
Insurance Company Terms Amount Owed
Reliable Life $5,000 against policy; 60 mos. at
$
3,987
6% interest
Total Insurance Policy Loans
$
3,987
Other Liabilities
Name of Creditor Terms Amount Owed
Mother-in-law Whenever I can repay—no worry
$
1,000
Total Other Liabilities $ 1,000
Total Liabilities $ 110,460
Total Net Worth (Total Assets Minus Total Liabilities) $ 91,313
Total Liabilities and Net Worth $ 201,773
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 93
Credit Cards and Revolving Credit Account:
List bank cards and revolving accounts at
stores and with gasoline companies, and
fill in the outstanding balance.
Unsecured Loans: List any unsecured
notes to banks, individuals, credit unions,
savings and loans, or any other person or
institution. These are commonly called
signature loans because all the lender gets
is your signature on your promise to repay
the loan—you don’t pledge any collateral.
Examples include student loans and loans
from relatives. State the lender and terms of
payment, including any balloon payments
and when the loan will be paid in full, as
well as the outstanding balance.
Loans Secured by Real Estate: List each
note and deed of trust you owe. State the
property by which it is secured and the
terms of payment, including any balloon
payment and when the note will be paid in
full, as well as the unpaid balance.
Loans Secured by Personal Property: List
any loans secured by equipment, vehicles,
business inventory, or anything other
than real estate. Show the payee, unpaid
balance, security, terms of payment,
including any balloon payment, and when
the note will be paid in full.
Loans Against Life Insurance Policies: If you
borrowed against a whole life insurance
policy, list the insurance company, terms,
and outstanding balance.
Other Liabilities: List whatever else you
currently owe. This may include unpaid
medical bills, tax liabilities, unpaid lawyer
bills, unpaid alimony or child support, and
debts to bookies.
Total Liabilities: Add up all the amounts
you owe others. The result is your total
liabilities.
CAUTION
Check for consistency. Before you go
on, carefully compare the information on your
assets and liabilities lists. Make sure they are
consistent. For instance, make sure that you
show assets for which you show liabilities and
vice versa.
Determine Your Net Worth
To calculate your net worth, simply
subtract your total liabilities from your
total assets. (If you are using the Personal
Financial Statement form included on the
CD-ROM, the spreadsheet program will
automatically calculate this amount.)
In the last blank, add together your total
liabilities and net worth. This figure should
match your total assets. If it doesn’t, you’ve
made a mathematical error.
CAUTION
If your total liabilities are more
than your total assets, your net worth will
be a negative figure and you’ll need to place
brackets around the number. Of course, people
with a negative net worth frequently have
difficulty borrowing money and may have to
consider
another form of financing, such as
selling equity in the business. (See Chapter 4
for information about raising money.)
94 | HOW TO WRITE A BUSINESS PLAN
Determine Your Annual Income
The next part of the Personal Financial
Statement shows your income from
all sources. These figures show the
annual total of each income source, so
don’t confuse this with the asset section
completed earlier. However, if you show
any income from an asset in this section,
make sure you also list that asset in the
asset section. This form should reflect your
current situation and show your present
salary, even if you’ll quit your job to start
the new business.
TIP
Note about cosigners: If someone
else will guarantee the loan with you—such as
your spouse—fill in the requested information
for that person as well.
Gross Salary and Wages: List all the sources
of your income, including wages, earnings
from your business, and independent
contractor work.
Income From Receivables and Loan
Repayments: If anyone owes you money,
list the annual payments you receive. If
you have substantial income from loans,
you may list interest income and principal
repayments separately. Otherwise show the
entire repayment amount.
Rental Property Income: If you rent out
real property or valuable personal property
like a truck or piano, list the annual rental
payments here. Include relevant details,
such as your plans to raise the rent in six
months.
Dividends and Interest: List the source
and annual amount you expect to receive.
Make sure that the information shown
here corresponds to information you
have shown in the Assets portion of your
Personal Financial Statement. For example,
if you list dividend income from several
stocks and bank accounts here, they must
be listed in the Assets portion.
Income From Business or Profession: If you
already own a business, list the annual
income.
Other Income: Describe any other
source of income, such as payments
from judgments, payments from business
investments other than your main business,
trust fund payments, and so forth. It’s
generally a good idea to list alimony and
child support payments you receive, since
it increases your ability to repay any loan.
Total Annual Income: Add up the income
you receive from all sources and fill in the
total.
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 95
Personal Financial Statement
ANNUAL INCOME
Gross Salary and Wages
Source Annual Amount
Consolidated Console, Inc. $ 35,000
Primavera Community College 4,500
Pine Tree Unifi ed School District 20,000
Total Gross Salary and Wages $ 59,500
Income From Receivables and Loan Repayments
Person Owing Terms Annual Amount
Jack Sprate, nephew 8% interest; unsecured, $106.25/mo. $ 1,275
Total Receivable and Loan Repayment Income $ 1,275
Rental Property Income
Source Annual Amount
27 Fruitvale St., New City, IL $ 3,600
Total Rental Property Income $ 3,600
Dividends and Interest
Source Annual Amount
General Computer (50 shares) $ 780
Thrift Savings (interest on savings account–$3,000 at 5%) 150
Total Dividends and Interest $ 930
96 | HOW TO WRITE A BUSINESS PLAN
Income From Business or Profession
Description Annual Amount
N/A $
Total Income From Business or Profession $ 0
Other Income
Description Annual Amount
Child Support (former husband) $ 2,500
Total Other Income $ 2,500
Total Annual Income $ 67,805
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 97
Determine Your Annual
Living
Expenses
The goal of this part of the form is to make
an accurate estimate of how much it costs
you to live. Business expenses should be
covered under a separate profit and loss
statement for the business.
Real Estate Loan Payments or Rent: List
your mortgage holder or landlord and your
monthly payment. Indicate whether you
rent or own. Fill in the annual total of all
your rental or real estate loan payments,
including principal and interest.
Property Taxes and Assessments: List your
yearly liabilities if you own real property.
Also list business non-real-estate property,
such as inventory or equipment, if it is
taxed every year and the taxes are not
shown on statements for your business.
Federal and State Income Taxes: Show your
totals from last year’s income tax forms. If
this year’s taxes will be very different from
last year’s, make an estimate. Especially if
you’re an independent contractor, you may
want an accountant to help you prepare
your estimated taxes for the year.
Other Loan Payments: List payments for
all of the non-real-estate loans, notes,
charge accounts, and credit cards you
listed in the Liabilities part of the form.
Use last year’s numbers unless they have
changed substantially; if they have, append
a sheet and explain.
Insurance Premiums: List everything you
expect to pay for the year that won’t be
covered through your job. Common types
of insurance include life, health, disability,
property, and automobile.
Living Expenses: Estimate your other
regular personal living expenses
that weren’t covered earlier, such as
utilities, child care, medical and dental
costs, transportation, food, clothing,
entertainment, and travel. Either provide
an itemized list or a general category of
expenses.
Other Expenses: List child and/or
spousal support obligations and any
other expense not listed above, like art
collection purchases or vacation trips.
Include professional associations that have
continuing education expenses and club
membership fees.
Total Annual Expenses: Now add up
all your expenses. (If you are using
the Personal Financial Statement form
included on the CD-ROM, the spreadsheet
program will automatically calculate your
expenses.) If your total is greater than your
annual income total above, examine the
information carefully before you consider
borrowing money with a fixed repayment
schedule.
98 | HOW TO WRITE A BUSINESS PLAN
Personal Financial Statement
ANNUAL EXPENSES
Real Estate Loan Payments or Rent
Mortgage Holder/Landlord Rent or Own? Annual Payment
Bank of Centerville, 1st deed on residence, monthly Own $ 10,740
payment $895
Abner Small, 1st deed on unimproved lot, split $380 Own 2,280
monthly payment with my mother, co-owner
Total Real Estate Loan Payments or Rent $ 13,020
Property Taxes and Assessments
Property Taxes/Assessments Annual Payment
Winchester County real estate taxes $ 1,250
Total Property Taxes and Assessments $ 1,250
Federal and State Income Taxes
Description Annual Payment
IRS $ 3,000
State 898
Total Income Taxes $ 3,898
Other Loan Payments
Creditor Annual Payment
VISA (Bank of Centerville) $ 1,600
American Local 290
Total Other Loan Payments $ 1,890
ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 99
Insurance Premiums
Insurance Company Type of Policy Annual Payment
Reliable Insurance Whole life $ 1,164
Total Insurance Premiums $ 1,164
Living Expenses
Description Annual Payment
Food, clothing, entertainment, etc. $ 22,000
Total Living Expenses $ 22,000
Other Expenses
Description Annual Payment
Child support payments per year $ 3,150
Total Other Expenses $ 3,150
Total Annual Expenses $ 46,372
Date: Signature:
100 | HOW TO WRITE A BUSINESS PLAN
Complete Your Personal
Financial
Statement
If you have not already done so, print
out your spreadsheet. Make sure you sign
and date your completed form; you’ll be
surprised at how fast things change.
As noted above, many financial institu-
tions prefer their own form, which they
will supply you. However, chances are
that you won’t have to redo your Personal
Financial Statement or, if you do, it will
be easy.
Verifying the Accuracy of
Your
Financial Statement
Potential lenders probably will want to
verify your financial statements. Tax
returns for the last two or three years are
normally adequate to back up your income
and expense statements. If your actual
income is somewhat greater than your tax
returns show, be ready to verify your assets
in some other way. But don’t worry too
much about this sort of disparity unless it
is large. In an age of overly high taxation,
your lender will not be surprised if your
actual income is a shade higher than your
reported income. His probably is, too.
In addition, lenders usually obtain
a personal credit check from a credit
information agency on your track record in
making payments. That shows what bills
you pay and when, as well as any unpaid
bills. Credit reports also list your current
employment, lawsuits in which you’re
involved, and bankruptcies filed in the
last ten years. It’s a good idea to request
your own copy of your credit report before
you meet with any prospective lenders.
That way, you’ll know what they will
see and will be prepared to discuss it. If
your credit file contains some inaccurate
or misleading information, you have the
right to challenge that information. (For
information on how to go about this, see
Solve Your Money Troubles: Debt, Credit &
Bankruptcy, by Robin Leonard (Nolo).)
Most of the time, lenders will accept
your estimates of your personal assets
and liabilities on your Personal Financial
Statement, since it is a crime to knowingly
make false financial statements.
Banks will also verify your cash deposits
by contacting the relevant institutions. Also,
lenders will want evidence of your title to
property they take as security for a loan.
●
6
C h A p t e r
Your Profit and Loss Forecast
Introduction ..............................................................................................................................................................102
What Is a Profit and Loss Forecast? ...............................................................................................................102
Determine Your Average Cost of Sales ......................................................................................................103
Complete Your Profit and Loss Forecast ...................................................................................................106
Review Your Profit and Loss Forecast ...........................................................................................................119
Your Profit and Loss Forecast and Income Tax Return ............................................................119
102 | HOW TO WRITE A BUSINESS PLAN
QUICK PLAN
If you’ve chosen the quick plan
method to prepare a business plan (see
Introduction), you need to read and complete
the section “Complete Your Profit and Loss
Forecast,” below.
If you have any difficulties completing your
Profit and Loss Forecast, go back to Chapter
3 and read the section entitled “Break-Even
Analysis: Will Your Business Make Money?”
before completing this step. If you’ve chosen
a quick plan, you should be able to complete
this step easily.
Introduction
Your next job is to forecast how much
money you’ll need. You can’t make
realistic financial projections in a vacuum;
they must be integrated into a thought-
through plan. As a result, you’ll need to
make a number of decisions about how
your business will operate and forecasts
of financial results. But don’t let this
intimidate you. You’ve probably been
thinking about the financial side of your
business for some time. You will inevitably
need to make some assumptions and even
a guess or two. Of course, you should
make your projections as accurate as
possible; shoot for an accuracy rate of plus
orminus10%.
TIP
Project development note: If you plan
to do a project development, skip the rest of
this chapter and go on to Chapter 7. en turn
to Appendix C, where you will find a project
development example.
As you begin dealing with all the details
inherent in financial projections, it is easy
to lose perspective and forget the larger
picture—that is, what all your work is
supposed to prove. If this happens, pause
for a moment and remember that, for
yourself and your potential backers, you’re
simply figuring out:
•howmuchmoneyyouneed
•whatyouwillspenditon,and
•howyouwillpayitback.
What Is a Profit and
Loss Forecast?
A profit and loss forecast is a projection
of how much you will sell and how
much profit you will make. This is the
foundation of your business plan. It gives
you and your potential backers the basic
information necessary to decide whether
your business will succeed. Basically,
a profit and loss forecast forces you to
estimate how many dollars you will take in
and how many dollars you will spend for
some future period. While other extremely
important factors affect your
business, such
as your cash flow (Chapter 7), you’ll be in
good shape if you can confidently predict
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 103
that the money coming in will exceed the
money going out by a healthy margin.
In Chapter 3, you completed a rough
break-even analysis for your business. That
analysis helped you decide whether you
chose the right business. Now we are going
to take a closer look at those numbers
and develop them into a comprehensive
forecast of your business’s future profits. (If
you did not complete or don’t remember
the work you did then, review the section
in Chapter 3 entitled “Break-Even Analysis:
Will Your Business Make Money?”)
Your business’s profits result from three
specific dollar figures:
• Salesrevenue.This is all the money you
take into your business each month,
week, or year. It is also called “gross
sales,” “sales income,” or simply “sales.”
• Costofsales.This is your direct cost
of the product or service you sell.
Sometimes it is called “direct product
cost,” “variable cost,” “incremental
cost,” or “direct cost.”
• Fixedexpenses.These are sometimes
called “overhead,” and you must pay
them regardless of how well you do.
Fixed expenses don’t vary much from
month to month. They include rent,
insurance, and other set expenses.
They are also called “fixed costs,”
“operating expenses,” “expenses,” or
“discretionary costs” (discussed in the
section in Chapter 3 entitled “Break-
Even Analysis: Will Your Business
Make Money?”).
In a given period, you make profits
when sales revenues exceed your total
cost of sales and fixed expenses. To put it
another way, sales revenue minus both cost
of sales and fixed expenses equals profits
or losses for a given time period.
Our job here is to examine closely all
the above numbers and, once you are con-
vinced they are right, to present them on a
month-by-month basis for two years. Two
years is enough time to see if any short-
term problems or long-range trends begin
developing. Of course, you can change the
time frame if necessary. For instance, if
you are starting a beer stand for the annual
county fair or a vineyard with a five-year
growing cycle, a different time frame will
make sense for you.
CDROM
A copy of the Profit and Loss Fore-
cast is included on the CD-ROM in Excel
spread
sheet format. You can find it under the
filename ProfitForecast.xls. Note that formulas
have been embedded in the spreadsheet
document so that it will automatically
calculate relevant totals.
Determine Your Average
Cost of Sales
Your first step in your profit and loss
projection is to determine your average
cost of sales—that is, your direct cost of
the products or services you sell. You’ll use
the Sales Revenue Forecast you completed
in Chapter 3 to make this estimate.
104 | HOW TO WRITE A BUSINESS PLAN
One way to derive your average cost
of sales is to estimate your annual sales
revenue for each product or service. Then
calculate each product’s annual cost of
sales. Finally, add up the numbers to get an
annual average.
More Detailed Method to
Determine Average Cost of Sales
Another way to calculate your average cost
of sales is to make a separate monthly sales
revenue and cost of sales forecast for each
of your major product or service lines. If you
complete a separate monthly forecast for
each of your product or service lines, you
will have a very detailed forecast. However,
many people balk at this level of detail in
forecasting and wish to proceed with the
less-detailed method demonstrated in this
section. Either way is acceptable.
CAUTION
Whether you make one annual cost of
sales forecast or a number of detailed forecasts,
don’t forget about the inevitable percentage
of merchandise you will have to move at
marked-down prices. Whether you’re in the
book business, bake cookies, or are a child
psychologist, chances are you will commonly
sell some of your product or services for less
than standard prices. is may be because you
need to move out last year’s styles or because
you need to sell broken cookies or because
you provide counseling cheaper to low-income
groups.
exAmple:
Antoinette Gorzak plans to sell dresses
foranaveragepriceof$250,andher
researchshowstheywillcost$125each.
Her cost of each sale for dresses before
she allows for labor and other overhead
willbe50%ofthesellingprice.Ifshe
plans to give her customers anything
with the purchase, say a specially
printed shopping bag and an imprinted
dress box, she should include the cost
of these items as part of her cost of
sales. Maybe this will make her cost of
eachsale51%or52%insteadof50%.
Since Antoinette sells accessories in
addition to dresses she needs to allow
for different gross profit margins for the
additional merchandise.
A cost-of-sales averaging chart for
Antoinette’s Dress Shop might look
like this:
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 105
Annual Average Cost of Sales Chart:
Antoinette’s Dress Shop
Item
Forecast
Sales
Revenue
Cost
per
Sale*
Total
Cost of
Sales
Dresses $ 200,000 50.4% $ 100,800
Accessories &
Sale Items 200,000 73.3% 146,600
TOTAL $ 400,000 $ 247,400
Total Average Cost of Sales = 61.8%
($247,400 ÷ $400,000)
*ese percentages come from Chapter 3,
where she calculated gross profit. To get
cost of sales percentage, simply subtract
gross profit percentage from 100%. e
remainder is cost of sales.
Here’s how Antoinette completed this
chart. First, she estimated how much
sales revenue for each of the product
categories the shop would receive in the
first year; that enabled her to complete
the first column of the chart.
Next, she obtained her cost of
sales percentage by using the figure
she developed in Chapter 3. She then
multiplied the sales revenue for each
product category by the cost of sales
percentage for that category; that
enabled her to complete the total cost of
sales column of the chart.
The average total cost of sales
gure
(61.8%inAntoinette’sexample)
is not an average of the cost per sale
percentages. Instead, it is weighted
according to the amount of expected
sales
revenue and is derived by dividing
the total cost of sales by the expected
salesrevenue($247,400÷$400,000).
Anaveragecostofsalesof60%is
reasonable for many profitable retailers.
Even though it is wise to be a little
conservative,Antoinetteuses60%
as her cost of sales when forecasting
profits.
You can use the procedure in the
example above to estimate your average
cost of sales if you’re in the retail,
manufacturing, or wholesale businesses.
Simply modify the item categories to fit
your business. For example, a restaurant
would have categories for food, non-
alcoholic drinks, liquor, beer/wine,
and possibly take-out orders. Another
example, for a bar and restaurant, is
shown below.
Annual Average Cost of Sales Chart:
Bar and Restaurant
Item
Forecast
Sales
Revenue
Cost
per
Sale
Total
Cost of
Sales
Food $ 300,000 38% $ 114,000
Liquor 60,000 29% 17,400
Beer/Wine 40,000 75% 30,000
TOTAL $ 400,000 $ 161,400
Total Average Cost of Sales = 40%
($161,400 ÷ $400,000)
106 | HOW TO WRITE A BUSINESS PLAN
By definition, service businesses
sell services or labor and do not sell
merchandise. Occasionally they may
bill a client for a service they purchase
outside the firm or bill for a service
that has some incidental costs. The
cost of sales portion of a service
business’s total costs will be low. For
example, a consulting firm may incur
outside typing, photocopying, and
report binding expenses that will
vary somewhat with every sale. Most
expenses, such as salaries and rent, will
be fixed costs and won’t appear on this
chart. Service businesses should follow
the example below of the consulting
business.
Annual Average Cost of Sales Chart:
Consulting Firm
Item
Forecast
Sales
Revenue
Cost
per
Sale
Total
Cost of
Sales
Publications,
phone, travel $ 100,000 20% $ 20,000
Contract
services
(typing, etc.) 50,000 75% 37,500
Studies,
Consultations 527,000 0% 0
TOTAL $ 677,000 $ 57,500
Total Average Cost of Sales = 8.5%
($57,500 ÷ $677,000)
CAUTION
Include piece-rate and commission
costs. Note that some businesses pay workers
on a piece-rate or commission basis. All your
costs that vary with each sale should be in cost
of sales instead of fixed expenses.
When you’ve completed your cost of
sales calculations, you are ready to prepare
your Profit and Loss Forecast.
Complete Your Profit
and Loss Forecast
Follow the line-by-line instructions below
to complete your form.
CDROM
Note for computer users: A
formatted copy of the Profit and Loss Forecast
is provided on the CD-ROM at the back of
this book in Microsoft Excel format under the
filename ProfitForecast.xls.
1. Sales Revenue. You have completed this
estimate already. Simply enter the total
sales revenue dollars for each month
for two years from the Sales Revenue
Forecast you completed in Chapter 3.
CAUTION
Here’s another chance to revise the
sales revenue numbers in case you think they
need work.
However, be sure you really believe
that you can generate all the revenues you
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 107
forecast. Make sure you don’t do it backwards
by writing down enough sales revenue to
show the profits you want. Otherwise, you’ll
have to explain to your backers each month
why things aren’t as good as you said they
wouldbe.
2. Cost of Sales. Enter your monthly dollar
cost of sales. To get these figures,
multiply your monthly sales revenue
forecast by the average cost of sales
percentage. Returning to our dress shop
example, Antoinette would multiply her
monthlysalesgureestimateby60%
(or0.6).Forexample,ifMarchsalesare
forecastat$30,000,thecostofsalesfor
Marchwouldbe$18,000(0.6×$30,000
=$18,000).
CDROM
If you are using the Profit & Loss
Forecast form on the CD-ROM, you can enter
the Cost of Sales percentage in Column B in
the spreadsheet (where it is marked “(%here)”
in red). en enter the relevant Sales Revenue
in Column C. e spreadsheet program will
automatically calculate your Gross Profits.
Note, if a series of #### symbols appear in a
box in a spreadsheet that means that you need
to widen the column in order to display the
numbers.
CAUTION
If you made separate forecasts of
sales revenue, cost of sales, and gross profit
for each product line, then add together all
the gross profit numbers and enter them on a
summary form line 3. You will have prepared
separate forms for each product line for
the first three lines (sales revenue, cost of
sales, and gross profit) and a summary sheet
showing total gross profit,
operating expenses,
and profit.
3. Gross Profit. Subtract cost of sales (line 2)
fromsalesrevenue(line1)togetgross
profit. It’s the amount of money that
remains after you’ve paid your direct
costs of the products sold. This money
is available to pay the business’s fixed
expenses and your profits. If gross
profit is larger than fixed expenses
for that month, you will have a profit.
But if gross profit is smaller than fixed
expenses, you will have a loss that
month.
For example, looking at the dress shop
example for March, Antoinette arrives
at gross profit by subtracting the cost
ofsalesof$18,000fromtheforecast
salesrevenueof$30,000andentering
theresultof$12,000.She’lldothesame
thing for each subsequent month.
4. Fixed Expenses. The categories listed on
the form are the most common fixed
expenses, but feel free to add or modify
items to suit your business. All fixed
expense items reduce your profit so that
you pay less business income tax.
4a. Wages/Salaries. Most small businesses
keep some employees on a fixed weekly
or monthly work schedule regardless
of how business fluctuates. Many
108 | HOW TO WRITE A BUSINESS PLAN
Profi t and Loss Forecast: Year One
Date Completed:
1/25/xx
for Antoinette’s Dress Shop
Month 1 2 3 4 5 6 7 8 9 10 11 12 Year Total
Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb
1. Sales Revenue $30,000 $33,800 $45,000 $ 37,500 $33,800 $ 33,800 $ 41,200 $ 41,200 $45,000 $ 52,500 $ 26,200 $30,000 $ 450,000
2. Less: Cost of Sales (
%) (18,000) (20,300) ( 27,000 ) ( 22,500) (20,300) ( 20,300) ( 24,700) ( 24,700) ( 27,000) ( 31,500) ( 15,700) ( 18,000) ( 270,000)
3. Gross Profi t (
%) 12,000 13,500 18,000 15,000 13,500 13,500 16,500 16,500 18,000 21,000 10,500 12,000 180,000
4. Fixed Expenses:
a. Wages/Salaries 3,168 3,168 3,168 3,168 3,168
3,168 3,168 3,168 3,168 3,168 3,168 3,168 38,016
b. Payroll Tax 432 432 432 432 432 432 432 432 432 432 432 432 5,184
c. Rent/Lease 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 46,200
d. Marketing & Advertising 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000
e. Insurance 500 500 500 500 500 500 500 500 500 500 500 500 6,000
f. Accounting/Books 200 200 200 200 200 200 200 200 200 200 200 200 2,400
g. Interest Expense 0 0 0 0 0 0 0 0 0 0 0 0 0
h. Depreciation 0 0 0 0 0 0 0 0 0 0 0 0 0
i. Utilities 800 800 800 800 800 800 800 800 800 800 800 800 9,600
j. Telephone 600 600 600 600 600 600 600 600 600 600 600 600 7,200
k. Supplies 200 200 200 200 200 200 200 200 200 200 200 200 2,400
l. Bad Debts 100 100 100 100 100 100 100 100 100 100 100 100 1,200
m. Freight 200 200 200 200 200 200 200 200 200 200 200 200 2,400
n. Miscellaneous 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000
5. Less: Total Fixed Expenses (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (144,600)
6. Profi t/(Loss) $ (50) $ 1,450 $ 5,950 $ 2,950 $ 1,450 $ 1,450 $ 4,450 $ 4,450 $ 5,950 $ 8,950 $ (155) $ (50) $ 35,400
60
40
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 109
Profi t and Loss Forecast: Year One
Date Completed:
1/25/xx
for Antoinette’s Dress Shop
Month 1 2 3 4 5 6 7 8 9 10 11 12 Year Total
Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb
1. Sales Revenue $30,000 $33,800 $45,000 $ 37,500 $33,800 $ 33,800 $ 41,200 $ 41,200 $45,000 $ 52,500 $ 26,200 $30,000 $ 450,000
2. Less: Cost of Sales (
%) (18,000) (20,300) ( 27,000 ) ( 22,500) ( 20,300) ( 20,300) ( 24,700) ( 24,700) ( 27,000) ( 31,500) ( 15,700) ( 18,000) ( 270,000)
3. Gross Profi t (
%) 12,000 13,500 18,000 15,000 13,500 13,500 16,500 16,500 18,000 21,000 10,500 12,000 180,000
4. Fixed Expenses:
a. Wages/Salaries 3,168 3,168 3,168 3,168 3,168
3,168 3,168 3,168 3,168 3,168 3,168 3,168 38,016
b. Payroll Tax 432 432 432 432 432 432 432 432 432 432 432 432 5,184
c. Rent/Lease 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 3,850 46,200
d. Marketing & Advertising 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000
e. Insurance 500 500 500 500 500 500 500 500 500 500 500 500 6,000
f. Accounting/Books 200 200 200 200 200 200 200 200 200 200 200 200 2,400
g. Interest Expense 0 0 0 0 0 0 0 0 0 0 0 0 0
h. Depreciation 0 0 0 0 0 0 0 0 0 0 0 0 0
i. Utilities 800 800 800 800 800 800 800 800 800 800 800 800 9,600
j. Telephone 600 600 600 600 600 600 600 600 600 600 600 600 7,200
k. Supplies 200 200 200 200 200 200 200 200 200 200 200 200 2,400
l. Bad Debts 100 100 100 100 100 100 100 100 100 100 100 100 1,200
m. Freight 200 200 200 200 200 200 200 200 200 200 200 200 2,400
n. Miscellaneous 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000
5. Less: Total Fixed Expenses (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (144,600)
6. Profi t/(Loss) $ (50) $ 1,450 $ 5,950 $ 2,950 $ 1,450 $ 1,450 $ 4,450 $ 4,450 $ 5,950 $ 8,950 $ (155) $ (50) $ 35,400
110 | HOW TO WRITE A BUSINESS PLAN
businesses call in some temporary
employees as needed. All such wages
are a fixed expense. To fill out line 4a,
you’ll need to know how many people
you’ll hire, how many hours per month
each will work, and how much you’ll
pay each person. If you plan to pay
yourself a regular wage, regardless of
how profitable the business is, include
your salary as well.
Fill in the gross amount, before
employee withholding deductions, you
will pay every month for wages and
salaries. (If you don’t know, or aren’t
surehowthisworks,turntoChapter8
for a complete discussion.)
CAUTION
Certain wages aren’t fixed expenses.
Some small manufacturing businesses pay
workers on a piece-rate basis or hire employees
when orders are high and lay them off when
business is slow. Others don’t pay a salary at all,
but compensate workers with a commission
for each sale. In all of these situations, the
portion of the wages that changes with each
additional unit of production should be
considered a variable cost of sale. ose costs
belong in the cost-of-sales category and not
the fixed-expense category.
4b. Payroll Tax. As an employer, you’ll
pay the federal government taxes of
approximately14%ofyouremployees’
wages and salaries. It is your contribution
to your employees’ Social Security
program. Multiply each month’s dollar
gureforwagesandsalariesby14%
(0.14).Forexample,ifemployeesreceive
$4,560inwagesandsalariesinMay,the
payrolltaxis$638($4,560×0.14=$638).
In other words, the employees in this
examplecosttheemployer$5,198inMay
($4,560+$638=$5,198)eventhoughthe
employees’grosspayisonly$4,560.
These tax rates change from time to
time. You can call the IRS for current
rates. Most states have additional taxes
not included here that vary from state to
state. (Workers’ compensation insurance
is covered in line 4e, below.)
4c. Rent/Lease. Rent is the next major item
to consider, unless you plan to operate
out of your home or some other space
that will not result in additional out-
of-pocket costs. If you’re not renting
commercial space, however, bear in
mind that local zoning laws may affect
you. You’ll want to check out zoning
ordinances before going ahead with
your plans.
If you don’t already have a spot in
mind, check building availability and
costs by talking to a commercial real
estate broker and people who occupy
space similar to the one you have in
mind. You should know what kind of
location you want by now—for instance
whether you need high visibility or
whether an obscure, low-cost location is
just as good. You should also know how
large a space you need, what plumbing,
electrical, and lighting you want, and
how much storage you need. Sometimes
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 111
cheap rent doesn’t turn out to be such
a bargain if you have to build walls or
install a bathroom and a loading area,
or if a poor location means you get few
customers.
TIP
Leasehold improvements note:
Anytime you build something like a wall or a
bathroom, it is considered a capital outlay, not
a fixed expense. (Capital expenses are covered
in Chapter 7.) Do not show the expenditure
as a current operating expense. Only the
depreciation is a fixed expense. You can write
off or depreciate leasehold improvements
over the term of the lease in most cases. (If
you don’t know what depreciation is, look
at line 4h, below. For more help, check with
yourCPA.)
Normally you will want to sign a
lease for a business space rather than
to accept a month-to-month tenancy.
Business leases generally protect the
tenant more than the landlord, although
it may not seem so if you read all those
fine print clauses. You’ll be sure that you
can stay at the location long enough to
build your business around it, and you’ll
know what your rental costs will be. But
what happens if your business fails or
you discover the location is poor? You’ll
be responsible for paying the rent until
the space is rented to someone else,
which could take a long time in some
areas. Assuming someone else will pay
at least as much as you do, you’ll have
no further obligation once the new
tenant begins paying rent.
Be sure you know exactly what your
rent will include. Commercial leases
often require the tenant to pay for
a number of things that a landlord
commonly pays for in residential
rentals. For example, some shopping
center leases require you to pay a pro
rata share of property taxes, building
maintenance, and fire insurance on the
building, as well as a pro rata share of
the parking and common area charges.
A friend of mine who rented a small
building for a retail nursery business
put it this way: “That blankety-blank
landlord sold me the building; he just
kept the title.” So, as part of making
your financial projection, be sure you
know exactly what charges, if any, the
realtor or landlord expects you to pay
in addition to the rent. By the way, no
matter what you determine the rent to
be, expect to put up the first and last
month’s rent and often a security deposit
when you sign the lease. Don’t include
those deposits here. (See Chapter 7 for
treatment of preopening expenses.)
Many leases that last longer than a year
contain a method to protect the landlord
from inflation. Some are tied to a cost-
of-living index, which means your rent
goes up each year at the same amount
as the inflation rate. Others contain a
percentage of sales clause, where you
pay a set rent or a percentage of your
gross sales, whichever is higher.
112 | HOW TO WRITE A BUSINESS PLAN
exAmple:
Bob Smith signed a shopping center
lease for his optometry office. His lease
calledforabaserentof$2,400or6%
of monthly sales, whichever was more,
plusasetchargeof$400fortaxes,
maintenance, and insurance. If sales
exceeded$40,000permonth($2,400
÷0.06),hewouldbeobligatedto
pay the landlord more rent. Bob was
pleased to sign the lease because his
salesprojections($32,000permonth)
indicated he would be making a healthy
profit if his sales volume reached
$40,000amonth,sohewouldnotmind
paying a higher rent. Of course, this
sort of lease is not a good idea if the
amount of sales needed to trigger a
substantially higher rent is too low. In
Bob’s situation, for example, if he was
required to pay more rent if monthly
salesreached$28,000,heprobably
would have looked elsewhere.
When you have figured out your total
monthly rent from a lease quotation
from your expected landlord or from
a survey of market rents, fill in that
amount.
4d. Marketing and Advertising. Here’s a story
about advertising. Back in the early
1930s,JohnAxelrodopenedahotdog
stand on the main road into Pine Valley.
Business was fair. When he put up a
small sign, business got a little better.
Then he added several more signs and
things got a lot better. Finally, he put up
a dozen big signs. Business became so
good, he had to expand his seating area
and hire more cooks. He was feeling
pretty happy about life when his son,
whom he thought was a positive wizard,
came home from college. The son, an
economics major, was appalled at all the
new signs and seating.
“Dad, what are you doing spending
so much on advertising? Don’t you
know there’s a depression going on and
everybody’s going broke? If you don’t
pull in your horns a bit, you will never
make it.”
“No kidding,” John replied, and
took down the signs and stopped the
construction program. Soon business
dwindled away to nothing and John
went broke.
The lesson of this story is simple:
When the signs went up, business
improved. When they came down,
there wasn’t enough income to buy
ketchup. One way or another, success-
ful businesses get the word out.
(Incidentally, the son went on to get his
degree and opened his own business
consulting firm.)
There are small libraries full of
books about how to market a business
or product. I recommend especially
Marketing Without Advertising, by
Michael Phillips and Salli Rasberry
(Nolo). Such books used to focus almost
exclusively on paid advertising. More
recently, broader concepts of marketing
have come into prominence. Network
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 113
marketing, or selling to friends and
acquaintances, has become an identified
alternative to more traditional selling
strategies. Guerrilla marketing involves
getting the word out to the people
and groups who are most apt to need
your goods or services, rather than
advertising your product or service to
the community as a whole. “Guerrilla”
refers to the use of unconventional
methods to spread product or service
information. For example, guerrilla
marketers may pay students or part-time
workers to hang out in bars or coffee
houses and talk about their product in a
favorable way.
If you get creative, there are all sorts
of ways you can reach the people most
likely to want your product or service,
for little or no cost. For example, if you
invent a better software program (or
develop a consulting business in your
special field), you could advertise on the
radio—or you could target your market
by finding a computer bulletin board of
people who need your product. Your
next step might be to get someone to
write about your business for a computer
magazine or newsletter. Similar
opportunities exist in every business.
If you open an oboe repair shop, for
example, one of the first jobs is to
figure out inexpensive ways to let every
oboist within a hundred-mile radius
know of your existence. One way might
be to contact every wind instrument
instructor, school band leader, and music
store in the area and supply them with
free literature on oboe cleaning.
Many successful businesses allow a set
percentage of gross sales for promotion,
often 3% to 5% of sales revenue as a
budget figure. They allocate half that
amount for a continuing, low-level effort
to let people know about their product
or service and schedule the other half to
advertise sales and special events.
Think about what you will need to
do to tell people about your business.
Will your business need cards? Flyers?
Newspaper ads? A good-sized ad in the
yellow pages? Sample merchandise sent
to media outlets so they can review your
product? Window displays? Mailings?
A part-time marketing expert to help
you pull this together? Avoid expensive
promotions that you haven’t tried before.
For example, if you get an idea that
involvesmailingout100,000yers,
planforatestbymailingonly5,000.If
it works, go for the rest. If not, use the
money you saved for something else.
A great deal of money spent on
conventional advertising is wasted.
New businesses especially are prone to
spend too much in the wrong places.
So use your common sense. Talk with
friends in business. Check with trade
associations to see what they suggest
as a good budget number for telling
potential customers about your business.
Once you’ve set a budget for special
promotions and continuing low-level
advertising, write both amounts in the
Profit and Loss Forecast.
114 | HOW TO WRITE A BUSINESS PLAN
RELATED TOPIC
For more help, look ahead to Chapter
8. In that chapter, you’ll write a detailed
marketing plan for your business that includes
both preopening promotions and continuing
marketing costs.
4e. Insurance. You must have at least some
insurance in this litigation-happy society.
Your lease may require you to keep fire,
flood, or earthquake insurance on the
building. If the public comes into your
business, public liability and property
damage insurance is a necessity. This
will protect you from the person who
slips and falls on your floor mat. If
you employ anyone, you also need
workers’ compensation insurance, since
you are absolutely liable if one of your
employees injures herself while at work.
You will probably also want to carry
insurance on your valuable inventory
and fixtures. And if you manufacture
any product that could possibly harm
anyone, such as food or machinery, you
will want to consider product liability
insurance.
Talk to an independent insurance
broker who specializes in business
insurance to get an idea of what
coverage you’ll need and how much it
will cost. Then shop around warily. Lots
of over-enthusiastic insurance people
will try to sell you far more insurance
than you need. Although you need some
insurance to protect against obvious
risks, you don’t need to starve to death
trying to raise enough to pay your
premiums.
CAUTION
Some people try to avoid the
responsibility of paying workers’ compensation
insurance or payroll taxes by calling their
employees “independent contractors.” is can
cause serious problems with back taxes if the
IRS rules against you. Also, if the independent
contractor is injured while working for you,
the workers’ compensation appeals board will
almost always rule in favor of the employee
and against independent contractor status,
unless your worker genuinely has her own
business. is means you may end up paying
huge sums if one of your workers becomes
disabled while you don’t have insurance. In
other words, trying to save a few pennies on
this insurance is just not worth the risk.
Once you arrive at a good estimate
for your total insurance bill, inquire
about deferred payment programs. Most
companies that offer them often require
thatyoupay20%ofthetotalpremium
up front each year and the balance in
ten payments. For purposes of your
Profit and Loss Forecast, divide the total
annualinsurancepaymentby12and
enter those figures.
4f. Accounting/Books. You can do your own
books if you like working with numbers.
Chances are, however, you’ll be so busy
with the business, you won’t have time.
One good approach is to budget for a
CPA to set up your books initially and
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 115
to hire a part-time bookkeeper to do
day to day upkeep. If you are starting
small, your initial cost should be under
$500andyourmonthlycostunder$200
to keep the records up to date and to
prepare routine employee withholding
tax returns, statements, etc., assuming
you close the register each day. Once a
year you will pay the CPA another few
hundred dollars to review this work and
help you prepare your yearly returns. If
your business is going to be fairly good-
sized from the start, your figures will be
larger.
If you’re interested in keeping your
own books, you’ll probably want to look
into reliable accounting software such
as Intuit’s QuickBooks (www.intuit.com),
or M.Y.O.B. Plus (www.myob.com). The
program you need depends on how big
your business might grow to be, what
extra features like statements or payroll
you want the computer to provide, and
so forth. You can research the different
programs yourself, but remember to
keep in mind the features you may need
later on after your business has grown.
Or you can look into an outside service,
which may recommend a program to fit
your business and computer, set up the
books, and run parallel for a month or
two to make sure that you don’t lose any
data. The systems can be very handy
and timesaving if you have no strong
attachment to a paper record, or are
willing to print out the documents you
may want.
When designing a bookkeeping system
for your business, remember that it
costs a lot of time and money to change
it—make sure it really fits you and your
business.(SeeChapter12forafurther
discussion of computers in business.)
Make as good an estimate as you can
and enter this figure on your Profit and
Loss Forecast. You can take the year
totalanddivideitby12,oryoucan
enter the amounts when you think they
will be paid.
4g. Interest. This line of your Profit and
Loss Forecast concerns the interest
portion of the payments you make on
any money you borrow. Unless you have
an interest-only loan with a balloon
payment at the end, your interest
payment will vary from month to month
even though you pay the same monthly
amount.
exAmple:
JoanieRicardoborrows$50,000from
the bank to open a Gelato’s Ice Cream
store in Providence, Rhode Island. She
agreestorepayitin36equalmonthly
installmentsof$1,660.80,including12%
interest on the unpaid balance. While
Joanie’s monthly payments remain
equal, the portion of the payment
that is credited to principal increases
every month, while the portion of
her payment going toward interest
decreases.
116 | HOW TO WRITE A BUSINESS PLAN
But, let’s say that you don’t know how
much money you’ll borrow at this time.
After all, one of the main reasons for
doing a business plan is to decide how
much money you’ll need to fi nance your
business. In that case you have three
choices:
•YoucancompletetheProtand
Loss Forecast in this chapter, and
the Cash Flow Forecast in the next
chapter, making your best guess
about how much you’ll borrow and
what your payments will be.
•Youcancompletetheforecasts
without showing any loans or
payments. Then use the results to
decide how much money you’ll
borrow and revise the forecasts to
include loan payments.
•Youcancompletebothforecasts
without showing any loans at all.
Then you can include a discussion
about how much money you’ll
need to borrow and the cash fl ow
available to make repayments. (See
your Plan Summary discussion in
Chapter9.)
There are loan progress charts
and computer programs that show
approximately how much of any
payment is interest and how much is
principal.
CDROM
Nolo, the publisher of this book,
provides a calculator that will create a chart
similar to the one shown below. You can
access it at www.nolo.com/legal-calculators.
Enter the information in the form and the
program will calculate interest payments over
the loan period.
Loan Interest Calculation Chart
A B C D E F
Month
Balance
(from column
F above)
Monthly
payment
Interest paid
(B × % ÷ 12)
Principal Paid
(C − D)
New balance
(B − E)
Starting amount: $ 50,000.00
June 20xx $ 50,000.00 $ 1,660.80 $ 500.00 $ 1,160.80 $ 48,839.20
July 20xx 48,839.20 1,660.80 488.39 1,172.41 47,666.79
Aug 20xx 47,666.79 1,660.80 476.67 1,184.13 46,482.66
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 117
CAUTION
You can’t write in the entire loan
payment amount on your Profit and Loss
Forecast, because the IRS does not consider
principal
repayments fixed expenses that can
reduce your taxable income.
TIP
Note of sanity: You don’t need to
be perfect in forecasting your interest costs.
Just make your best informed guess. You can
also check with your banker, CPA, realtor, or
bookstore for loan repayment tables. Make
sure the sum of your interest payments here
and the principal payments from Chapter 7
equal the total loan payment.
4h. Depreciation. Depreciation is a gift to
the businessperson from Uncle Sam. Ask
not what your country can do for you—
this is it. Depreciation is an amount
you can subtract from your profits
when you pay taxes. It compensates
you for the fact that your business
equipment and buildings are wearing
out. The government allows you to
assume that your fixed assets wear out
over some period of years, meaning
that for tax purposes, your assets are
worth less at the end of that period.
Your depreciation allowance simply lets
you show a percentage of this wear as
an expense on your tax return each
year. In a sense, it is a sinking fund for
equipment replacement, or would be if
you put the depreciation amount in the
bank. In actuality, the stuff usually lasts
longer than your depreciation shows,
which is why depreciation can be seen
as a friendly federal gesture.
Often, equipment is depreciated over
three to five years and buildings over
15to30yearsfortaxpurposes.It’snot
your choice, however; the IRS publishes
very explicit rules and lists of what can
be depreciated and how fast. These lists
and rules change frequently, so you’ll
probably need to check with your tax
advisor about depreciation and fixed
assets.
You can depreciate all fixed assets that
last longer than one year. Remember,
you don’t show the purchase price
as an expense on the Profit and Loss
Statement if you depreciate an item.
If the asset will last less than one year,
you simply show the entire purchase
price in the expense column for the year
you bought the equipment and do not
depreciate it. Inventory of goods available
for resale and consumable supplies are
examples of purchases that are expensed
immediately because they last less than
one year.
exAmple:
ChuckLeongexpectstospend$20,000
for fixed assets to open his business.
Items include a new toilet, several new
walls, a cash register, a small computer,
and store fixtures. Assuming Chuck’s
accountant agrees that five years is the
proper time frame to use for deprecia-
tion, he can take $333 as an expense for
depreciationeachmonth($20,000÷60
months).
118 | HOW TO WRITE A BUSINESS PLAN
4i.–4n. Other Expenses. Inevitably, you will
encounter a number of other expenses,
depending on your business. Spend
some time thinking about these using
the accompanying list as a starting point.
Then list all the other costs you expect
to incur on Lines 4i to 4n. If you expect
any of these to be recurring expenses,
include your monthly estimate for each.
For expenses that occur once or twice a
year,dividetheannualtotalby12and
enter an amount each month.
Total Fixed Expenses. Add up lines 4a
through 4n and fill in the total for each
month.
Profit/(Loss). From the Gross Profit (line 3),
subtract the Total Fixed Expenses (line
5) and fill in the result. Make sure that
you place brackets around each negative
number—that will identify it as a loss.
Year Total. Finally, add up each of the rows
(lines1through6).Entertheyearly
totals under the Year Total column.
Check your arithmetic by seeing if the
monthly profit figures add up to the
same figure you get for your yearly total.
If they don’t match, double-check your
addition to find the error. If they match,
congratulations!
Common Expenses
Here are some of the more common
expenses that businesses incur on a regular
basis:
• Attorneys,consultants,taxadvisors
• Autoandtruckexpenses
• Baddebts
• Commissions(probablyshouldbe
placed in cost of sales or as a deduction
from sales revenue if commissions are
paid regularly; if paid only occasionally,
include them in fixed expenses)
• Duesandpublications
• Employeebenetprograms
• Equipmentrental
• Freightinonmerchandiseacquired
(also sometimes placed in cost of sales;
freight out to customers is usually paid
for by the customer)
• Janitorial
• Laundry
• Licensesandtaxesincludingpermit
fees (not income taxes, which are
calculated after profits are known)
• Ocesupplies
• Paymentstoinvestors
• Postage,fax,telephone
• Repairsandmaintenance
• Securityandalarmsystems
• Travelandentertainment
• Utilities.
ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 119
Review Your Profit
and Loss Forecast
You’ve now completed your first run
through a Profit and Loss Forecast. Date
it so you won’t get confused if you do
another draft. I hope it looks positive.
How ever, if like many people you find you
need to increase profitability to make the
business a good economic idea, go back
through all your assumptions. How can
you realistically reduce costs or increase
volume? Incorporate into your forecast only
those changes you’re sure are sound. Now
look at the profit figures again. Do they
show enough profit to make a good living,
pay back your money source, and leave
some margin for error? If they do, and
you’re sure the figures are right, you will
want to go ahead with your business idea.
If the adjusted figures still do not show
enough profit, it may be wise to look for
another business idea or change your basic
business assumptions.
Notice that Antoinette’s business looks
more profitable in her Profit and Loss
Forecast than it did in her preliminary
analyses in Chapter 3. That’s because she
increased her first year’s sales estimate
from$400,000to$450,000andreduced
herxedcostsfrom$16,050to$12,050per
month. The net effect of these changes was
a slight increase in profit. She knows these
numbers will be hard to achieve, but she is
confident that she can make her goals.
How much profitability is enough to
justify going ahead with your business?
That’s both a good question and a touchy
one. Or, put another way, there are almost
as many answers as there are business-
people. My personal response is, I look for
a yearly profit (including my wages and
return on investment) equal to the amount
of cash needed to start the business.
IfIneed$40,000tostartabusiness,a
conservative profit forecast would show a
yearlyprotofatleast$40,000.
One way to approach the issue of profit-
ability is to look at your profit forecast from
aninvestor’sviewpoint.A$35,400prot
for the dress shop won’t seem like much
to them. They will be concerned that the
dress shop owner will have a difficult time
earning a living and making it through
the inevitable slow times. An investor or
lender will probably want her to be able to
convincingly demonstrate she has a plan
to increase sales enough to raise the profit
forecast to a more respectable level—say,
the$46,200sheshowsinthesecondyear.
Your Profit and Loss Forecast
and
Income Tax Return
Figuring out your business’s income tax
return involves more calculations than we
have shown so far. One major difference
involves cost of sales, which we have
viewed as a simple percentage of sales for
forecasting purposes. You’ll need to follow
more complicated rules when computing
your business income tax return. Read
below to learn how to spot employee
theft. You can skip this discussion if your
business has no inventory.
120 | HOW TO WRITE A BUSINESS PLAN
Here’s how to do it the right way. First,
take a physical count of all your merchan-
dise for resale every year or every few
months. Even if you have a computerized
inventory system that can tell you how
much inventory you have at any time, it’s
a good idea to take a physical inventory
everysixor12monthstoreconcilethe
real inventory with the computer inventory.
Once you have a complete listing of the
description and count of all the goods
in your store at a particular date, then
you apply the best figures you have for
what the merchandise cost you when
you bought. Multiplying the unit cost of
each item on your shelves by the number
of items you have and adding purchases
during the period gives you the cost of the
goods available for sale. While there are a
number of different theories on which cost
figure to use (the latest or the earliest), the
critical thing is to make sure you do it the
same way every time. Then, you can make
accurate comparisons from year to year. Of
course, if you have a service business or
business with no inventory, the inventory
valuation discussion is moot.
After you have developed a total dollar
value of the goods you have on hand, you
can calculate your real cost of sales this
way:
1.Addtogetherthegoodsyoupur-
chased during the period and the
inventory amount at the beginning
of the period. (This total represents
the dollar value of the goods you had
available to sell during the period.)
2. From that amount, subtract the dollar
value of the inventory at the end of
the period.
3. The difference is the cost of sales for
the period.
Here’s an example that demonstrates
how you do this:
Cost of Sales
Beginning Inventory from
physicalcount $ 10,000
Add: Purchases during period + 30,000
Subtotal: Goods available for sale 40,000
Less: Ending Inventory from
physical count – 15,000
Cost of Goods Sold during period $ 25,000
This calculation has more use than
merely filling out IRS forms: It can let you
know when someone is stealing from you.
Suppose you have a good estimate of what
the cost of sales percentage should be,
either from past statements or from a good
understanding of your business. Suppose
further that you expect a cost of sales of
61.5%andthatyouactuallyhadacostof
sales of 77.3%. What does that mean? It
could mean that some of the merchandise
you buy for resale is leaving the store
without any money entering your register.
At any rate, it means that you need to do
some serious research to find out what is
really happening.
●
7
C h A p t e r
Your Cash Flow Forecast and
Capital Spending Plan
Introduction .............................................................................................................................................................. 122
Prepare Your Capital Spending Plan ............................................................................................................. 123
Prepare Your Cash Flow Forecast ..................................................................................................................125
Required Investment for Your Business ...................................................................................................... 135
Check for Trouble ...................................................................................................................................................136
Antoinette’s Inventory Problem...........................................................................................................136
Typical Problems Retailers Face ............................................................................................................ 137
122 | HOW TO WRITE A BUSINESS PLAN
QUICK PLAN
If you’ve chosen the quick plan
method to prepare a business plan (see
Introduction), you need to read and complete
these sections of Chapter 7:
•“PrepareYourCapitalSpendingPlan”
•“Prepare
YourCashFlowForecast”
•“Required
InvestmentforYourBusiness.”
Introduction
InChapter6,youdraftedyourestimated
Profit and Loss Forecast. While it tells you a
lot about the big financial picture, it leaves
you ignorant of many details. If you overlook
one critical detail, you may go broke, even
though your business seems profitable
viewed from afar.
The crucial detail a business owner must
manage is called “cash flow.” Cash flow is
another term for the money coming into
and going out of your business. Positive
cash flow occurs when the money coming
into your business exceeds the money
flowing out, and negative cash flow is
the opposite. In the day-to-day world of
starting and operating your business, you
will be at least as concerned about short-
term cash flow as you will be about long-
term profitability. After all, you don’t want
your creditors to sue you because you can’t
pay your bills even though your sales are
increasing rapidly. One new business owner
I know even wears a T-shirt that says:
“Happiness is positive cash flow.”
Your Cash Flow Forecast is different
from your Profit and Loss Forecast because
money comes into and flows out of your
business at different times than your
Profit and Loss Forecast shows. A formal
Cash Flow Forecast is required by most
potential backers, who want to know that
you understand and can manage that time
difference.
exAmple:
Rita Singh plans to open a small tie-dye
manufacturing business. Since several
of her likely customers are chain stores,
Rita knows that she will have to sell and
ship their orders before the stores pay
her. The stores often can take several
months to pay their bills. Wisely, Rita
carefully prepares a Cash Flow Forecast
to make sure she can afford to sell on
credit.
In your Cash Flow Forecast, you’ll refine
any guesses you’ve made about how
much money you need to start or expand
your business. You’ll develop an amount
of money you are comfortable with—an
amount you can explain to prospective
investors. In other words, you need to be
as accurate as you can be in this forecast.
The money you need to start or expand
your business can be separated into two
categories:
• Capital investment. This is the cash
you need to spend before you begin
or expand your business.
ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 123
• Initial working capital. This consists of
the cash reserves you need to keep
your business afloat before you begin
to show profits every month.
Commonly, cash flow from monthly
sales is not enough to cover monthly
expenses for the first few months after a
new business opens. If your Cash Flow
Forecast shows a negative picture for this
period, you need to have extra money set
aside for initial working capital. Your initial
working capital keeps the doors open until
cash flow from monthly business becomes
positive. If your Cash Flow Forecast shows
you’ll run a cash deficit for several months,
don’t be too concerned. Just be sure you
have enough initial working capital to
cover it. But if your Cash Flow Forecast
shows a continuing cash deficit, or a
deficit that rises over time, your business
may have some fatal flaw and you should
reexamine the whole idea before making
any commitments.
Growth, too, can create problems. Many
businesses that grow quickly suffer severe
cash flow shortages because money from
sales does not come in fast enough to
cover the investment needed to expand. If
you find yourself in this situation, you will
need to reduce your growth rate or find
extra sources of money. (See the cash flow
discussion below.)
So, let’s put a close-up lens on our
camera and focus on cash forecasting.
Here again, it’s necessary to get out your
calculator or computer and play with some
numbers.
Prepare Your Capital
Spending Plan
Your capital spending plan includes all
the things you have to buy before your
business begins bringing in sales revenue,
including opening inventory, fixtures and
equipment, business licenses, deposits for
the building lease, and whatever else you
need.
Open a computer file or take out a
clean sheet of paper and write “CAPITAL
SPENDING PLAN” at the top. Now, make
a list of all the things you’ll have to buy
before you open. This will enable you
to make a good estimate of the cash you
need to open your doors.
The list shown below sets out many
common items businesses need to
purchase before they are ready to open.
Some of the items you’ll buy will be
considered capital items, which depreciate
over their useful lives. All preopening
expenses represent your capital investment
in the business, regardless of whether they
are treated as capital items or expense
items. If you have doubts about whether
an item can be depreciated, ask your
accountant.
Now assign specific dollar amounts
to each item on this list. If you’re unsure
about the cost of an item, ask the person
from whom you’ll buy the item for an
estimate or a quote. Try for plus or minus
10%.Rememberthatyou’retryingforan
accurate estimate here, so use the numbers
you think are right. Most experienced
124 | HOW TO WRITE A BUSINESS PLAN
Common Items in a Capital Spending Plan
Here’s a list of common items businesses
need to buy before opening. Note that they
fall into two categories—capital items and
expense items.
Capital items generally have a useful life of
more than one year and can be depreciated for
tax purposes. ey include:
• permanentsigns,heaters,aircon-
ditioners, cooking and refrigeration
equipment
• equipment,
includingmachinery,large
tools, and other expensive items
• racks
anddisplayxturesforretail
selling areas
• oce
furniture
• leasehold
improvementsorany
alterations you make to the building,
including walls, bathrooms, and
carpeting
• computers,
typewriters,fax
machines, adding machines, cash
registers, phone systems, and other
small equipment you purchase.
Expense items generally are shown as either
fixed expenses or costs of sale at the time
they are purchased because they last less
than one year. ey include:
• openinginventory(sometimesyou
can get a deferred payment schedule
from suppliers, but you will usually
have to pay for many, if not most,
goods before you sell them)
• lease
deposits
• tax
deposits
• business
licensesandpermits
• opening
marketingandpromotion
• insurance
• telephoneinstallation
• utility
deposits
• oce
suppliesandstationery
• legal
fees,coststoincorporate,and
CPA fees to establish your business
• contingency
reserve.
businesspeoplewilladdanother10%to
20%ofthetotalasacontingencytoallow
for poor guesses and other foul-ups. If you
think you need such a contingency and
haven’t included it already, add it in now.
Add up all the items you’ve listed to get an
estimate of the cash you need to open your
business.
Your capital spending plan should
reflect the exact amounts you will spend
as accurately as possible. For example, it
was okay for Antoinette to use estimates of
costs when she thought about her business
in general terms, but now she needs to
be precise. She should have shopped
around for the best deals by now and
ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 125
know them. If a potential lender asks her
whyshe’sspending$3,000eachfordress
racks, she can say, “The used ones from
the auctioneer are terminally rusty and the
discount ones are shoddy. I want my image
to be high quality, and this is the best
deal on good racks.” As the accompanying
example shows, Antoinette knows the
business she is about to open.
Although she doesn’t include an
itemized list of fixtures, office equipment,
and leasehold improvements in her
summary, she has detailed lists available.
Capital Spending Plan:
Antoinette’s Dress Shop
Item Amount
Fixtures in selling area include cash
registers, sewing machines, dress
racks (see list) $ 30,000
Leasehold improvements, bid from
Jones Construction includes signs,
lights, decorations 80,000
Rent deposit, two months’ rent 7,500
Opening inventory 30,000
Contingency 15,000
Total capital required to open $ 162,500
For a second example, here’s a one-man
consulting firm’s opening cash needs. As
you can see, he plans to start with extra
cash;hehasallocated$10,000forworking
capital.
Capital Spending Plan: Jeffer’s
Associates Consulting
Item Amount
Desk, conference tables, chairs $ 6,000
Fax machine 1,000
Computer system: PC, laser printer,
software 4,000
Copy machine 2,000
Typewriter 700
Telephone system 1,000
Misc. decorative accessories 500
Misc. deposits for utilities, business
license 2,000
Opening marketing and advertising 2,000
Supplies, stationery 1,000
Working capital estimate 10,000
Total capital required to open $ 30,200
Prepare Your Cash Flow Forecast
Once you complete your capital spending
plan, you’ll know how much money you
need to open your doors. The next step is
to estimate how much additional money
you’ll need to survive the first lean months.
The basic process we’ll use to make
a Cash Flow Forecast is to start with
the monthly profit (or loss) figures you
developed in your Profit and Loss Forecast
inChapter6.You’llthenmakeadjustments
each month to the monthly profits to
account for the time differences in collecting
and spending money.
126 | HOW TO WRITE A BUSINESS PLAN
Cash Flow Forecast: Year One
Date Completed:
1/25/xx
for Antoinette’s Dress Shop
Cash In/(Out)
Month 1 2 3 4 5 6 7 8 9 10 11 12 Year Total
Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb
1. Profi t/(Loss) [P & L line 6] $ (50) $ 1,450 $ 5,950 $ 2,950 $ 1,450 $ 1,450 $ 4,450 $ 4,450 $ 5,950 $ 8,950 $ (1,550) $ (50) $ 35,400
2. Less: Credit Sales—
% on credit
× Sales Revenue [P & L line 1] ( 7,500) ( 8,450) ( 11,250) ( 9,375) ( 8,450) ( 8,450) ( 10,300) ( 10,300) ( 11,250) ( 13,125) ( 6,550) ( 7,500) ( 112,500)
3. Plus: Collec tions of Credit Sales
months after sale 0 0 7,500 8,450 11,250 9,375 8,450 8,450 10,300 10,300 11,250 13,125 98,450
4. Plus: Credit Purchases—
% of
purchases on credit × Cost of Sales
[P & L line 2] 9,000 10,150 13,500 11,250 10,150 10,150 12,350 12,350 13,500 15,750 7,850 9,000 135,000
5. Less: Payments for Credit Purchases
months after purchase ( 0 ) ( 0 ) ( 9,000) ( 10,150) ( 13,500) ( 11,250) ( 10,150) ( 10,150) ( 12,350) ( 12,350) ( 13,500) ( 15,750) ( 118,150)
6. Plus: Withholding
% of total
wages (if paying taxes quarterly) 0 0 0 0 0 0 0 0 0 0 0 0 0
7. Less: Quarterly withholding
payments (if paying taxes quarterly) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )
8. Plus: Depreciation 0 0 0 0 0 0 0 0 0 0 0 0 0
9. Less: Principal Payments ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )
10. Less: Extra Purchases ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )
11. Other Cash Items in/(out) 0 0 0 0 0
0 0 0 0 0 0 0 0
12. Monthly Net Cash 1,450 3,150 6,700 3,125 900 1,275 4,800 4,800 6,150 9,525 (2,500) (1,175) $ 38,200
13. Cumulative Net Cash $ 1,450 $ 4,600 $ 11,300 $ 14,425 $ 15,325 $ 16,600 $ 21,400 $ 26,200 $ 32,350 $ 41,875 $ 39,375 $ 38,200
25
2
50
2
ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 127
Cash Flow Forecast: Year One
Date Completed:
1/25/xx
for Antoinette’s Dress Shop
Cash In/(Out)
Month 1 2 3 4 5 6 7 8 9 10 11 12 Year Total
Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb
1. Profi t/(Loss) [P & L line 6] $ (50) $ 1,450 $ 5,950 $ 2,950 $ 1,450 $ 1,450 $ 4,450 $ 4,450 $ 5,950 $ 8,950 $ (1,550) $ (50) $ 35,400
2. Less: Credit Sales—
% on credit
× Sales Revenue [P & L line 1] ( 7,500) ( 8,450) ( 11,250) ( 9,375) ( 8,450) ( 8,450) ( 10,300) ( 10,300) ( 11,250) ( 13,125) ( 6,550) ( 7,500) ( 112,500)
3. Plus: Collec tions of Credit Sales
months after sale 0 0 7,500 8,450 11,250 9,375 8,450 8,450 10,300 10,300 11,250 13,125 98,450
4. Plus: Credit Purchases—
% of
purchases on credit × Cost of Sales
[P & L line 2] 9,000 10,150 13,500 11,250 10,150 10,150 12,350 12,350 13,500 15,750 7,850 9,000 135,000
5. Less: Payments for Credit Purchases
months after purchase ( 0 ) ( 0 ) ( 9,000) ( 10,150) ( 13,500) ( 11,250) ( 10,150) ( 10,150) ( 12,350) ( 12,350) ( 13,500) ( 15,750) ( 118,150)
6. Plus: Withholding
% of total
wages (if paying taxes quarterly) 0 0 0 0 0 0 0 0 0 0 0 0 0
7. Less: Quarterly withholding
payments (if paying taxes quarterly) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )
8. Plus: Depreciation 0 0 0 0 0 0 0 0 0 0 0 0 0
9. Less: Principal Payments ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )
10. Less: Extra Purchases ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )
11. Other Cash Items in/(out) 0 0 0 0 0
0 0 0 0 0 0 0 0
12. Monthly Net Cash 1,450 3,150 6,700 3,125 900 1,275 4,800 4,800 6,150 9,525 (2,500) (1,175) $ 38,200
13. Cumulative Net Cash $ 1,450 $ 4,600 $ 11,300 $ 14,425 $ 15,325 $ 16,600 $ 21,400 $ 26,200 $ 32,350 $ 41,875 $ 39,375 $ 38,200
128 | HOW TO WRITE A BUSINESS PLAN
Open the blank Cash Flow Forecast forms
included on the CD-ROM and follow the
step-by-step instructions below. You’ll be
completing a forecast for the first two years
of your business. Complete every line for
each of the 24 months before going on to
the next line.
CDROM
A formatted copy of the Cash
Flow Forecast is provided on the CD-ROM
at the back of this book in Microsoft Excel
format under the filename CashFlow.xls.
e spreadsheet program will automatically
calculate your Monthly Net Cash, Cumulative
Net Cash, and Yearly Totals. Note, if a series of
#### symbols appear in a box in a spreadsheet
that means that you need to widen the
column in order to display the numbers. If
you use a spreadsheet program that cannot
convert the Excel format, you set up the form
in your program using the same categories
as the completed Cash Flow Forecast in this
chapter. (Make sure that the column and row
headings are the same.)
1. Profit/(Loss). To begin, take out the Profit
and Loss Forecast you completed in
Chapter6andcopythemonthlyprot/
(loss)fromline6ontotherstlineofthe
Cash Flow Forecast form. The profits or
losses you show have already taken into
account the normal expenses of running
a business like rent, wages and salaries,
and so forth. You won’t have to worry
about those costs in this forecast.
CAUTION
If any of your figures are losses, place
brackets around them. Otherwise, your entire
Cash Flow Forecast will be seriously
inaccurate.
2. Credit Sales. Skip ahead to line 4 if
you don’t plan to sell merchandise or
services on credit. If you sell merchan-
dise or services on credit, the customer
receives the goods or services right
away. Even though you incur costs,
you don’t get paid right away. Credit
sales create bills people owe you; they
are called your “accounts receivable”
because you will receive the money
soon. (When you buy goods on credit,
you create bills you owe others. These
are called your “accounts payable”
because you will pay them soon.)
Most businesses that sell to other
businesses should plan for some sales
on credit. Most businesses that sell only
or primarily to retail consumers can plan
to sell mostly for cash, including checks
and credit cards.
TIP
Credit card note: For purposes of this
discussion, sales on credit cards are the same
as cash sales, except for the processing fees
the bank charges you. If you use an electronic
terminal, the money is credited to your bank
account right away, and if you use a paper
imprinter, the money is deposited to your
account in a few days.
ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 129
It takes more money to start and run
your business if you offer credit to your
customers than it would if you received
cash for every sale. Here’s how to figure
out how much cash you’ll need. First,
estimate what portion of your total
sales will be for credit. For example, if
you think that about one-third of your
sales will be for credit, that means that
about 33% of your monthly sales dollars
will not be collected in the month in
which the sale is made. Make a note of
that percentage now on the Cash Flow
Forecast form in the heading for line 2.
Look at the Profit and Loss Forecast
youcompletedinChapter6.Multiply
each month’s Sales Revenue dollars (line
1oftheProtandLossForecast)bythe
credit percentage that you forecast for
your business. Then enter each of those
monthly figures on line 2 of your Cash
Flow Forecast.
exAmple:
Mickey and Michele run a photocopy
and fax service. They estimate that
about40%oftheirtotalsalesrevenue
willbeoncreditandtheremaining60%
will be for cash. On line 2 of the Cash
Flow Forecast, they’ll enter these credit
sales:$4,400forJanuary;$4,400for
February; and so forth throughout the
forecast.
M & M Copy Shop Cash Flow Forecast
Credit Sales Calculation, Six Months ($000s)
Jan Feb Mar Apr May Jun
Forecast
sales
revenue $ 11.0 $ 10.9 $ 12.6 $ 13.1 $ 15.6 $ 16.8
% sales on
credit 40% 40% 40% 40% 40% 40%
Forecast
credit
sales $ 4.4 $ 4.4 $ 5.0 $ 5.2 $ 6.2 $ 6.7
3. Collections of Credit Sales. Skip this item
if you don’t plan to sell merchandise or
services on credit. Your cash receipts are
reduced when a sale is made for credit
instead of cash. On the other hand, your
cash receipts increase when you collect
the money from a credit sale you made
earlier. This Cash Flow Forecast shows
you exactly how much your receipts will
be reduced and increased as a result of
your credit policies. Even though your
customers don’t pay you right away, they
eventually pay you. Your job is to figure
out when they’ll do so. If you grant your
customeryournormal30-dayterms,
itusuallytakes60daystogetpaid.
Here’s why. You make a sale on day
one, then write a statement at the end of
the month and mail it to the customer.
Hepaysit30daysafterhegetsthe
statement. Of course, some people pay
sooner and some people pay later. In
a well-run business with good paying
customers
thatgrants30daystopay
bills, the average turnaround will be 45
to60days.
130 | HOW TO WRITE A BUSINESS PLAN
Make an estimate of the number of
months you anticipate as an average lag
time between a sale and the collection
of the bill. Most businesses use two
months. It’s easier to use whole months
for this purpose than to use portions of
months. If you think 45 days is the likely
answer, use two months—don’t use one
and one-half months. Enter the number
of months in the heading for line 3.
exAmple:
If Mickey and Michele collect bills in
an average of two months, the credit
sales that were just subtracted from
monthly sales will be added back
two months later. In this example, the
business starts up in January and there
are no outstanding accounts from the
previous year. As you can see, the delay
in collections means that the M & M
CopyShopwillhavean$8,800cash
flow reduction in January and February.
Thismeanstheyneedatleast$9,000in
working capital to sustain them during
the first two months.
M & M Copy Shop Cash Flow Forecast
Credit Sales and Collections, Six Months ($000s)
Jan Feb Mar Apr May Jun
Credit Sales $ 4.4 $ 4.4 $ 5.0 $ 5.2 $ 6.2 $ 6.7
Collections of
credit sales 0 0 4.4 4.4 5.0 5.2
Now that you see how it works,
complete your monthly Cash Flow
Forecast for two years, writing in the
cash collections in the month you collect
the money on line 3.
4. Credit Purchases. Make an estimate of
how the timing of your purchases will
affect your cash flow. Most businesses
buy merchandise from their suppliers on
credit and delay paying them for a time.
Mostsupplierswillgrantyou30daysto
pay your bills on a fairly routine basis,
if they approve your credit application.
That way, you get to use their money
for a while, just like your customers use
your money if you sell on credit.
Here’s how to complete this section
of the Cash Flow Forecast. First, make an
estimate of the percentage of your total
goods and services you expect to buy
on credit. (See the section entitled
“Break-Even Analysis: Will Your
Business Make Money?” in Chapter 3,
on how to make educated guesses, or
SWAGs.) Write the percentage figure in
the heading for line 4.
Next you’ll calculate the dollar costs
of purchases your business will buy on
credit each month. To derive that figure,
multiply each month’s cost of sales by the
estimated percentage of credit purchases.
And write the answer on line 4. Note
that they increase cash flow.
ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 131
exAmple:
Mickey and Michele estimated that
they’dbuyapproximately60%oftheir
purchases on credit. Their January
costofsalesis$3,600,sothecredit
purchasescometo$2,160($3,600×
0.6=$2,160).Theyroundthisgure
to$2,200.Here’showitlooksfora
few months at the M & M Copy Shop.
On line 4 of their Cash Flow Forecast,
they’ll enter their credit purchases:
$2,200forJanuary;$2,200forFebruary;
$2,500forMarch;andsoforth.
M & M Copy Shop Cash Flow Forecast
Credit Purchases, Six Months ($000s)
Jan Feb Mar Apr May Jun
Forecast
cost of
sales $ 3.6 $ 3.6 $ 4.2 $ 4.3 $ 5.1 $ 5.5
% brought
on credit 60% 60% 60% 60% 60% 60%
Credit
purchases $ 2.2 $ 2.2 $ 2.5 $ 2.6 $ 3.1 $ 3.3
5. Payments for Credit Purchases. Here you
show when you pay for the purchases
you’ve made on credit. These payments
are subtracted from profits on the
Cash Flow Forecast. Make an estimate
of how long you will take between
the time you sell merchandise and
the time it is reordered and paid for.
Write your estimate of how many
months will elapse between selling
your merchandise and paying for the
replacement in the heading for line 5.
If you’re in doubt, figure it this way: It
usuallytakesabout60daystomakean
inventory of what you’ve sold, reorder
the merchandise, receive and restock
the merchandise, and pay the invoice
or statement. If that’s true for you, then
the merchandise you sell in January will
be reordered and paid for by March.
Here’s a word of caution, though:
Many suppliers have tightened their
terms considerably. It is not unusual
for suppliers to expect payment within
ten days of the date you receive the
merchandise.
CAUTION
Know suppliers’ credit policies. If
you’re not sure of your suppliers’ policies, it’s
a good idea to check them out before you
complete this forecast. A mistake here can
result in a dramatically incorrect cash forecast.
exAmple:
Here’s how it works for the M & M
Copy Shop, which expects a two-month
delay between ordering and paying for
merchandise:
M & M Copy Shop Cash Flow Forecast
Credit Sales and Collections, Six Months ($000s)
Jan Feb Mar Apr May Jun
Line 4:
Credit
purchases $ 2.2 $ 2.2 $ 2.5 $ 5.2 $ 3.1 $ 3.3
Line 5: Paying
for credit
purchases 0 0 2.2 2.2 2.5 2.6
132 | HOW TO WRITE A BUSINESS PLAN
Now, enter the dollar amount of credit
purchases you entered on line 4, but in
a later month, in a similar fashion to the
M & M Copy Shop.
6. Withholding Taxes. Most businesses
must pay their employees’ taxes every
month. That means that every month
you send the IRS the amount of wages
you’ve withheld from your employees’
paychecks plus the amount you’re
required to contribute to their Social
Security. If you make these tax payments
every month, they don’t affect your cash
flow, so they won’t show up on your
Cash Flow Forecast.
Some businesses qualify to pay with-
holding taxes every three months rather
than every month. To qualify for the
quarterly payment program, you must
owetheIRSlessthan$2,500every
quarter. If you do not qualify for the
quarterly option or wish to pay every
month,skipaheadtoline8.Ifyouwish
to explore the quarterly option, read
the following discussion of withholding
taxes.
When you completed the Profit and
LossForecast,youaddedatleast14%
to the total wages and salaries you pay
each month as an additional expense
(Profit and Loss Forecast, line 4b, With-
holding Taxes). That’s your approximate
mandatory contribution to your
employees’ Social Security fund and
federal unemployment insurance. You’ll
write a check to the government to pay
that amount.
RESOURCE
ese are approximate tax figures,
for your planning purposes. Later, you’ll need
to learn more about the tax rules. Some good
information resources include Tax Savvy for
Small Business, by Frederick W. Daily (Nolo),
and IRS Publication 15 Circular E, Employer’s
Tax Guide, available, along with other publi
-
cations, at the IRS website (www.irs.gov).
In addition, the government also
expects you to collect money from your
employees for their portion of income
and Social Security taxes and pay
the government directly. While every
employee is different because of their
individual tax situations, the average
employeehasabout15%oftheirtotal
wages or salary withheld from every
paycheck for federal withholding. This is
money that belongs to the employee that
you must mail to the IRS.
If you will pay a total withholding
oflessthan$2,500everyquarter,you
may choose to pay taxes quarterly rather
than monthly. Make sure you verify your
employees’ actual withholding rates
before deciding on this option.
exAmple:
Let’s say that you plan to hire one
full-time sales clerk in your business
foratotalsalaryof$1,500permonth
or$4,500perquarter.Multiplying29%
bythequarterlysalary(0.29×$4,500
=$1,300)givesananswerof$1,300,
whichislessthan$2,500.Inthat
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