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Business Planning GuideMaking your business dream a reality

Copyright Colonial Savings 2007

Your Business Plan

If you’ve been dreaming of beginning your own business, the

planning has already begun and Colonial Savings is here to

help. With the right idea and the perfect plan, you can launch

your dream right into success.

This Business Planning Guide is the first step in the right

direction to establishing your business. This plan will analyze

your business proposal, develop a plan specific to your

business and develop financial projections with coherent

assumptions.

Why is a business plan important?

• The process of developing a business plan forces us to look with an objective and critical eye on our intended business.

• It is a way to communicate our ideas in written form and the basis for our financing proposal.

• The product of this process should help us manage a successful business.

The key to success is to plan and to follow what we have planned.

Organizing a Business Plan

Your business plan should unfold the details of your intended

business and provide purpose.

Cover:

- Should identify the business and the document

- Should provide contact information

- Should identify who prepared the business plan

- Must be clean, attractive and brief


In a brief and practical way, establish your business Purpose

by specifying the intended purpose for the document.

If it is being used as a loan proposal:

1. Who is requesting the loan?

2. What type of business organization is it?

Partnership, Corporation or Sole Proprietorship

2. What is the size of the loan request?

3. What is the purpose of the loan?

4. How will the business benefit?

5. How will the loan be repaid?

6. Why is this a reasonable proposal?


The contents of your business plan should include details

about your business, financial information and supporting

Documentation. Begin by establishing your business objectives

that will constitute the written policy for the business.

1. What is, or will be, the business?

2. What market does it serve? (size, market share)

3. What are your competitive advantages?

4. Why this location?

5. Who will be your management and personnel?

6. Why will this loan or investment help the business?


Describe your business completely by answering these

questions as a guideline:

1. Is it a retail, manufacturing or service business?

2. Is it new, an expansion or the purchase of an established business?

3. What legal form of business organization is being used?

4. Why will it be profitable?

5. When do you plan to establish the business?

6. How do you plan to operate? (hours, seasons)


For a new business:

1. Why will you succeed?

2. What experience do you have?

3. Do you know other similar businesses?

4. What makes it special? (comparative and competitive advantages)

5. What do you know about suppliers? (supply chain, credit terms, assistance)

6. Terms of contracts? (lease, franchise or licensing)

7. What credit terms will you offer your customers?


Purchasing a new business:

1. By whom and when was it started?

2. Why are they selling now?

3. How did you arrive at the price?

4. What is the current sales trend?

5. If a downward trend, how do you plan to reverse it? Why will you succeed?

6. How will you improve profitability?


Other considerations if you are purchasing a business:

- Have you examined the inventory?

- Have you met with creditors?

- How old are the accounts receivable?

- How liquid are the investments?

- How ages is the equipment?

Is the equipment in good condition or obsolete?

- Will you assume responsibility for incurred liabilities?

- Are there any tax or IRS obligations?


Establish your market by answering these questions:

1. What is your market?

2. What is the real size of that market?

3. What market share can you grab and when?

4. What potential for growth is the market?

5. As the market grows, will your share of it grow or shrink?

6. How will you serve the market?

7. How will you determine the prices or fees to be competitive and still make a profit?

8. How will you attract and retain market share?

9. How will you grow?


Market continued:

10. What prices do you intend to charge? Are they competitive?

11. Why will a customer bay them?

12. Are they profitable?

13. Do you have advantages that will allow you to charge a higher price?


An important topic to include is the credit terms for your

customers:

1. Will you offer credit?

2. Is it required?

3. How will you make the credit decision?

4. Can you afford to provide financing?

5. Can you withstand credit losses? Do you expect any?


Establish who the competition is by stating:

1. Who are the main competitors?

2. How will your business be better than theirs?

3. How are their businesses doing?

4. Why?

5. How are they like your business and how are they different?

6. What have you learned about how customers interact?


Location is key in business success and rent is a function of

space and advertising.

What to do?

- Don’t always take the lower price

- Consider access to the target markets

- Analyze traffic studies

- Consult business development organizations

- Examine census data

- Analyze available economic reports


Location continued

- What is the address?- Describe the building or space- Will you own or lease?- Are improvements required? If so:

Plans and specifications

Cost estimates and time required

Contractors and bids

- How is the neighborhood?- Zoning and permit issues- Why was this location chosen?- How will location impact the business and its operating

expenses?


Management incompetence 45%

Experience mismatch 20%

Management inexperience 18%

Inexperience in business type 9%

Negligence or inattention 3%

Fraud 2%

Disaster 1%

Total 98%

Management incompetence is the number one reason for business failure.


You must consider five factors in making decisions about

Management:

1. The resume of the owners or principals

2. Experience relevant to the business

3. Duties and responsibilities

4. Salary and compensation

5. Resources available to the business


The personal history of management should be included on

their resume and discuss:

- What is their knowledge of the business- Prior management experience- Formal and informal education that may be relevant to

the business- Personal information such as why they are pursuing this

business, special aptitude for the business and why they expect to be successful.


Their relevant experience of management should include:

- Direct experience in the type of business- Direct experience managing this type of business- Management or administrative experience acquired

elsewhere


Duties and responsibilities should reinforce the strengths and

mitigate the weaknesses, but never lie. Make time to plan and

to review those plans.

1. The most important jobs are:- Purchasing- Sales- Personnel- Production- Logistics

2. Planning


Salary and Compensation

- All members of the management team must have a salary- This wage must be fair and allow them to cover reasonable

family expenses- Once proposed, all should adjust to this income

The reward will be received when the profits

are distributed and business is successful.


When establishing your personnel ask yourself these

questions:

- What are the current needs?

- What are the needs in five years?

- What skills must they have?

- Are they available in the market?

- Do you need full-time or part-time employees?

- Do you need salaried or hourly workers?

- What benefits will be offered?

- What are the training needs?


You can outline your required investments using this as a

guide whether you are considering a loan or will finance it

yourself.

Make a list for each and determine the ideal mix:

The required minimum necessary

The reasonable What can be achieved.

Some new, some used.

The ideal What you would get if there

were no money issues and profits were not relevant.


Answer the following questions about your investment:

- How will the money be used?- What must be purchased?- Who will supply it?- What price will be charged?- What model and how many? (a list of equipment is useful)- What related expenses must be incurred?- Compare leasing and purchase options.- How will this help make the business more profitable?


In your summary, review the discussed ideas, integrate the various parts of the document

and leave the reader with a concise and convincing memory that backs your request.


The financial information section should cover:

1. Sources and uses of cash

2. Critical equipment needs

3. Statement of financial condition (balance sheet)

4. Break-even analysis

5. Pro-Forma Income Statement

6. Pro-Forma Cash Flow Analysis

7. Deviation Analysis Actual vs. Budget

8. Historic Financials for an on-going business


FUNDS MANAGEMENTNet Income

New Debt

Sale of Assets

New Equity Investment

Debt Repayment

Asset Purchase

Dividends

Equity Distribution

CASH

Collected SalesLess

$ paid to suppliers, workers, inventory, taxes, services, etc.

Net Operating Profit


Sources and uses of funds

In-Flows:1. Cash Beginning Balance

2. Collected sales

3. Cash from other sources

4. Cash from accounts receivable collected

5. Cash from sale of assets

6. Cash from equity investment

7. Cash from new loans

8. Cash from recovered charged-off accounts

9. Cash from sundry other sources

= Total Available Cash



Out-Flows:1. Purchase of inventory2. Salaries, wages and benefits paid3. New equipment purchased4. Insurance, services and fees paid5. Advertising6. Allowance for uncollectible accounts7. Transportation and delivery8. Taxes and duties paid9. Interest and principal paid on debt10. Dividends paid11. Reserve for contingencies

= Total Cash Out-Flows



Total Available Cash

- Total Cash Out-Flows

_____________________

Ending Cash Balance


A list of critical equipment is absolutely necessary for the

business and should include accessories and critical parts

and supplies.

- Auxiliary Equipment: those that help the business

function better

- Other Equipment: vehicles, delivery and warehouse


Statement of Financial Condition

Assets Liabilities and Equity

Cash Current Liabilities

Accounts Receivable Long Term Liabilities

Inventory Total Liabilities

Fixed Assets Stockholders’ Equity

Accumulated Depreciation Total Liabilities and Equity

Net Fixed Asset

Total Assets


Analysis of Financials

- Working capital- Current Assets (turn to cash in less than 1 year)- Current Liabilities (to be paid in less than 1 year)

- Compare year to year- Ratio Analysis

- Current Ratio (current assets/current liabilities)- Quick Ratio- Leverage (total liabilities/stockholders’ equity)


An increase in sales does not necessarily

imply an increase in profits.

Break-even Analysis will help you evaluate

where you need to be in your sales to produce a profit.

Fixed Costs

+ Variable Costs

Break-even Point in Sales


• Fixed Costs:– Remain Constant– Are incurred regardless

of sales– Are distributed among

all units sold.

• Variable Costs:– Fluctuate directly in

proportion to sales– Include:

• Direct labor

• Cost of goods sold

• Sales commission


Fixed costs for business

Gross profit as a

percentage of sales

=

Break-even Point

Break-even Point

Unit Price

=

Break-even Point in

number of units

Projections or Pro-Form Financials

Please consider the following:- They must be realistic.- You should project the first year on a monthly basis and 5 years going forward.- They should not be overly optimistic, neither should they be pessimistic.- You should not project chance events, or those uncertain as to date or amount.- You must take into consideration the reality of similar businesses.- Your assumptions should be based on your market analysis.- You must consider your cost estimates.- You must take into account the break-even point calculated previously.- Everyone working in the business should have a salary and it must be included.

Then they must adjust themselves to it.- You must include an allowance for unforeseen events.- Make sure you include debt service and any payments committed to investors.- Your should clearly state your assumptions.- Be pessimistic on costs and expenses.- Be conservative in projecting sales.- If you are evaluating an existing business, compare your projection against

historical figures and justify any differences.

Your Business Plan

Good planning is the key to business success

- Your planning must be done in an objective and serious manner.

- You should take time to compare the possible performance against the planning budget.

- You must regularly take time, away from pressure and telephone interruptions, to review and actualize the plans.

The Loan Proposal

Two Major Risks:

- The lender that will not turn down the proposal, but

cannot provide adequate financing.

- The banker that provides the wrong financing for the

right reasons.

The Loan Proposal

Types of LoansShort term loans

- Repaid within the current year- Finances working capital needs- Is documented through notes that are cancelled in less than 1 year- Finances cash needs of short duration- May be structured as a line of credit

Medium term loans - Repaid within 1 and 5 years from profits- Finances equipment purchases- Can finance working capital for a business experiencing fast growth- Requires collateral to support it- Should only be used when the need is evident and suitable

Long term loans - Requires more than 5 years to be fully repaid from profits- Finances fixed asset purchase - A faster repayment may weaken the business- Requires collateral support- Requires disciplined performance

The Loan Proposal

Some words of advice:

- Anticipate financial needs.- Be clear and concise in your statements.- Don’t request more than you need and can use.- Analyze the need and how it will be repaid.- If the banker does not agree; listen and analyze their

reasoning, but never accept a repayment schedule that you cannot meet.

Good planning is the key to success in business.

Copyright Colonial Savings 2007

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