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  1. 1. Business Planning Guide Making your business dream a reality Copyright Colonial Savings 2007
  2. 2. Your Business Plan <ul><li>If you’ve been dreaming of beginning your own business, the </li></ul><ul><li>planning has already begun and Colonial Savings is here to </li></ul><ul><li>help. With the right idea and the perfect plan, you can launch </li></ul><ul><li>your dream right into success. </li></ul><ul><li>This Business Planning Guide is the first step in the right </li></ul><ul><li>direction to establishing your business. This plan will analyze </li></ul><ul><li>your business proposal, develop a plan specific to your </li></ul><ul><li>business and develop financial projections with coherent </li></ul><ul><li>assumptions. </li></ul>
  3. 3. Why is a business plan important? <ul><li>The process of developing a business plan forces us to look with an objective and critical eye on our intended business. </li></ul><ul><li>It is a way to communicate our ideas in written form and the basis for our financing proposal. </li></ul><ul><li>The product of this process should help us manage a successful business. </li></ul>The key to success is to plan and to follow what we have planned.
  4. 4. Organizing a Business Plan <ul><li>Your business plan should unfold the details of your intended </li></ul><ul><li>business and provide purpose. </li></ul><ul><li>Cover: </li></ul><ul><li>- Should identify the business and the document </li></ul><ul><li>- Should provide contact information </li></ul><ul><li>- Should identify who prepared the business plan </li></ul><ul><li>- Must be clean, attractive and brief </li></ul>
  5. 5. Organizing a Business Plan <ul><li>In a brief and practical way, establish your business Purpose </li></ul><ul><li>by specifying the intended purpose for the document. </li></ul><ul><li>If it is being used as a loan proposal: </li></ul><ul><li>1. Who is requesting the loan? </li></ul><ul><li>2. What type of business organization is it? </li></ul><ul><li> Partnership, Corporation or Sole Proprietorship </li></ul><ul><li>2. What is the size of the loan request? </li></ul><ul><li>3. What is the purpose of the loan? </li></ul><ul><li>4. How will the business benefit? </li></ul><ul><li>5. How will the loan be repaid? </li></ul><ul><li>6. Why is this a reasonable proposal? </li></ul>
  6. 6. Organizing a Business Plan <ul><li>The contents of your business plan should include details </li></ul><ul><li>about your business, financial information and supporting </li></ul><ul><li>Documentation. Begin by establishing your business objectives </li></ul><ul><li>that will constitute the written policy for the business. </li></ul><ul><li>1. What is, or will be, the business? </li></ul><ul><li>2. What market does it serve? (size, market share) </li></ul><ul><li>3. What are your competitive advantages? </li></ul><ul><li>4. Why this location? </li></ul><ul><li>5. Who will be your management and personnel? </li></ul><ul><li>6. Why will this loan or investment help the business? </li></ul>
  7. 7. Organizing a Business Plan <ul><li>Describe your business completely by answering these </li></ul><ul><li>questions as a guideline: </li></ul><ul><li>Is it a retail, manufacturing or service business? </li></ul><ul><li>Is it new, an expansion or the purchase of an established business? </li></ul><ul><li>What legal form of business organization is being used? </li></ul><ul><li>Why will it be profitable? </li></ul><ul><li>When do you plan to establish the business? </li></ul><ul><li>How do you plan to operate? (hours, seasons) </li></ul>
  8. 8. Organizing a Business Plan <ul><li>For a new business: </li></ul><ul><li>Why will you succeed? </li></ul><ul><li>What experience do you have? </li></ul><ul><li>Do you know other similar businesses? </li></ul><ul><li>What makes it special? (comparative and competitive advantages) </li></ul><ul><li>What do you know about suppliers? (supply chain, credit terms, assistance) </li></ul><ul><li>Terms of contracts? (lease, franchise or licensing) </li></ul><ul><li>What credit terms will you offer your customers? </li></ul>
  9. 9. Organizing a Business Plan <ul><li>Purchasing a new business: </li></ul><ul><li>By whom and when was it started? </li></ul><ul><li>Why are they selling now? </li></ul><ul><li>How did you arrive at the price? </li></ul><ul><li>What is the current sales trend? </li></ul><ul><li>If a downward trend, how do you plan to reverse it? Why will you succeed? </li></ul><ul><li>How will you improve profitability? </li></ul>
  10. 10. Organizing a Business Plan <ul><li>Other considerations if you are purchasing a business: </li></ul><ul><li>- Have you examined the inventory? </li></ul><ul><li>- Have you met with creditors? </li></ul><ul><li>- How old are the accounts receivable? </li></ul><ul><li>- How liquid are the investments? </li></ul><ul><li>- How ages is the equipment? </li></ul><ul><li>Is the equipment in good condition or obsolete? </li></ul><ul><li>- Will you assume responsibility for incurred liabilities? </li></ul><ul><li>- Are there any tax or IRS obligations? </li></ul>
  11. 11. Organizing a Business Plan <ul><li>Establish your market by answering these questions: </li></ul><ul><li>What is your market? </li></ul><ul><li>What is the real size of that market? </li></ul><ul><li>What market share can you grab and when? </li></ul><ul><li>What potential for growth is the market? </li></ul><ul><li>As the market grows, will your share of it grow or shrink? </li></ul><ul><li>How will you serve the market? </li></ul><ul><li>How will you determine the prices or fees to be competitive and still make a profit? </li></ul><ul><li>How will you attract and retain market share? </li></ul><ul><li>How will you grow? </li></ul>
  12. 12. Organizing a Business Plan <ul><li>Market continued: </li></ul><ul><li>What prices do you intend to charge? Are they competitive? </li></ul><ul><li>Why will a customer bay them? </li></ul><ul><li>Are they profitable? </li></ul><ul><li>Do you have advantages that will allow you to charge a higher price? </li></ul>
  13. 13. Organizing a Business Plan <ul><li>An important topic to include is the credit terms for your </li></ul><ul><li>customers: </li></ul><ul><li>Will you offer credit? </li></ul><ul><li>Is it required? </li></ul><ul><li>How will you make the credit decision? </li></ul><ul><li>Can you afford to provide financing? </li></ul><ul><li>Can you withstand credit losses? Do you expect any? </li></ul>
  14. 14. Organizing a Business Plan <ul><li>Establish who the competition is by stating: </li></ul><ul><li>Who are the main competitors? </li></ul><ul><li>How will your business be better than theirs? </li></ul><ul><li>How are their businesses doing? </li></ul><ul><li>Why? </li></ul><ul><li>How are they like your business and how are they different? </li></ul><ul><li>What have you learned about how customers interact? </li></ul>
  15. 15. Organizing a Business Plan <ul><li>Location is key in business success and rent is a function of </li></ul><ul><li>space and advertising. </li></ul><ul><li>What to do? </li></ul><ul><li>- Don’t always take the lower price </li></ul><ul><li>- Consider access to the target markets </li></ul><ul><li>- Analyze traffic studies </li></ul><ul><li>- Consult business development organizations </li></ul><ul><li>- Examine census data </li></ul><ul><li>- Analyze available economic reports </li></ul>
  16. 16. Organizing a Business Plan <ul><li>Location continued </li></ul><ul><li>- What is the address? </li></ul><ul><li>Describe the building or space </li></ul><ul><li>Will you own or lease? </li></ul><ul><li>Are improvements required? If so: </li></ul><ul><ul><li>Plans and specifications </li></ul></ul><ul><ul><li>Cost estimates and time required </li></ul></ul><ul><ul><li>Contractors and bids </li></ul></ul><ul><li>How is the neighborhood? </li></ul><ul><li>Zoning and permit issues </li></ul><ul><li>Why was this location chosen? </li></ul><ul><li>How will location impact the business and its operating expenses? </li></ul>
  17. 17. Organizing a Business Plan <ul><li>Management incompetence 45% </li></ul><ul><li>Experience mismatch 20% </li></ul><ul><li>Management inexperience 18% </li></ul><ul><li>Inexperience in business type 9% </li></ul><ul><li>Negligence or inattention 3% </li></ul><ul><li>Fraud 2% </li></ul><ul><li>Disaster 1% </li></ul><ul><li>Total 98% </li></ul>Management incompetence is the number one reason for business failure.
  18. 18. Organizing a Business Plan <ul><li>You must consider five factors in making decisions about </li></ul><ul><li>Management: </li></ul><ul><li>1. The resume of the owners or principals </li></ul><ul><li>2. Experience relevant to the business </li></ul><ul><li>3. Duties and responsibilities </li></ul><ul><li>4. Salary and compensation </li></ul><ul><li>5. Resources available to the business </li></ul>
  19. 19. Organizing a Business Plan <ul><li>The personal history of management should be included on </li></ul><ul><li>their resume and discuss: </li></ul><ul><ul><li>What is their knowledge of the business </li></ul></ul><ul><ul><li>Prior management experience </li></ul></ul><ul><ul><li>Formal and informal education that may be relevant to the business </li></ul></ul><ul><ul><li>Personal information such as why they are pursuing this business, special aptitude for the business and why they expect to be successful. </li></ul></ul>
  20. 20. Organizing a Business Plan <ul><li>Their relevant experience of management should include: </li></ul><ul><ul><li>Direct experience in the type of business </li></ul></ul><ul><ul><li>Direct experience managing this type of business </li></ul></ul><ul><ul><li>Management or administrative experience acquired elsewhere </li></ul></ul>
  21. 21. Organizing a Business Plan <ul><li>Duties and responsibilities should reinforce the strengths and </li></ul><ul><li>mitigate the weaknesses, but never lie. Make time to plan and </li></ul><ul><li>to review those plans. </li></ul><ul><li>The most important jobs are: </li></ul><ul><ul><li>Purchasing </li></ul></ul><ul><ul><li>Sales </li></ul></ul><ul><ul><li>Personnel </li></ul></ul><ul><ul><li>Production </li></ul></ul><ul><ul><li>Logistics </li></ul></ul><ul><li>Planning </li></ul>
  22. 22. Organizing a Business Plan <ul><li>Salary and Compensation </li></ul><ul><li>All members of the management team must have a salary </li></ul><ul><li>This wage must be fair and allow them to cover reasonable family expenses </li></ul><ul><li>Once proposed, all should adjust to this income </li></ul><ul><li>The reward will be received when the profits </li></ul><ul><li>are distributed and business is successful. </li></ul>
  23. 23. Organizing a Business Plan <ul><li>When establishing your personnel ask yourself these </li></ul><ul><li>questions: </li></ul><ul><li>- What are the current needs? </li></ul><ul><li>- What are the needs in five years? </li></ul><ul><li>- What skills must they have? </li></ul><ul><li>- Are they available in the market? </li></ul><ul><li>- Do you need full-time or part-time employees? </li></ul><ul><li>- Do you need salaried or hourly workers? </li></ul><ul><li>- What benefits will be offered? </li></ul><ul><li>- What are the training needs? </li></ul>
  24. 24. Organizing a Business Plan <ul><li>You can outline your required investments using this as a </li></ul><ul><li>guide whether you are considering a loan or will finance it </li></ul><ul><li>yourself. </li></ul><ul><li>Make a list for each and determine the ideal mix: </li></ul><ul><li>The required minimum necessary </li></ul><ul><li>The reasonable What can be achieved. </li></ul><ul><li>Some new, some used. </li></ul><ul><li>The ideal What you would get if there </li></ul><ul><li>were no money issues and profits were not relevant. </li></ul>
  25. 25. Organizing a Business Plan <ul><li>Answer the following questions about your investment: </li></ul><ul><li>How will the money be used? </li></ul><ul><li>What must be purchased? </li></ul><ul><li>Who will supply it? </li></ul><ul><li>What price will be charged? </li></ul><ul><li>What model and how many? (a list of equipment is useful) </li></ul><ul><li>What related expenses must be incurred? </li></ul><ul><li>Compare leasing and purchase options. </li></ul><ul><li>How will this help make the business more profitable? </li></ul>
  26. 26. Organizing a Business Plan <ul><li>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. </li></ul>
  27. 27. Organizing a Business Plan <ul><li>The financial information section should cover: </li></ul><ul><li>Sources and uses of cash </li></ul><ul><li>Critical equipment needs </li></ul><ul><li>Statement of financial condition (balance sheet) </li></ul><ul><li>Break-even analysis </li></ul><ul><li>Pro-Forma Income Statement </li></ul><ul><li>Pro-Forma Cash Flow Analysis </li></ul><ul><li>Deviation Analysis Actual vs. Budget </li></ul><ul><li>Historic Financials for an on-going business </li></ul>
  28. 28. Organizing a Business Plan FUNDS MANAGEMENT Net Income New Debt Sale of Assets New Equity Investment Debt Repayment Asset Purchase Dividends Equity Distribution CASH Collected Sales Less $ paid to suppliers, workers, inventory, taxes, services, etc. Net Operating Profit
  29. 29. Organizing a Business Plan <ul><li>Sources and uses of funds </li></ul><ul><li>In-Flows: </li></ul><ul><ul><li>Cash Beginning Balance </li></ul></ul><ul><ul><li>Collected sales </li></ul></ul><ul><ul><li>Cash from other sources </li></ul></ul><ul><ul><li>Cash from accounts receivable collected </li></ul></ul><ul><ul><li>Cash from sale of assets </li></ul></ul><ul><ul><li>Cash from equity investment </li></ul></ul><ul><ul><li>Cash from new loans </li></ul></ul><ul><ul><li>Cash from recovered charged-off accounts </li></ul></ul><ul><ul><li>Cash from sundry other sources </li></ul></ul><ul><ul><li>= Total Available Cash </li></ul></ul>
  30. 30. Organizing a Business Plan <ul><li>Sources and uses of funds </li></ul><ul><li>Out-Flows: </li></ul><ul><ul><li>Purchase of inventory </li></ul></ul><ul><ul><li>Salaries, wages and benefits paid </li></ul></ul><ul><ul><li>New equipment purchased </li></ul></ul><ul><ul><li>Insurance, services and fees paid </li></ul></ul><ul><ul><li>Advertising </li></ul></ul><ul><ul><li>Allowance for uncollectible accounts </li></ul></ul><ul><ul><li>Transportation and delivery </li></ul></ul><ul><ul><li>Taxes and duties paid </li></ul></ul><ul><ul><li>Interest and principal paid on debt </li></ul></ul><ul><ul><li>Dividends paid </li></ul></ul><ul><ul><li>Reserve for contingencies </li></ul></ul><ul><ul><li>= Total Cash Out-Flows </li></ul></ul>
  31. 31. Organizing a Business Plan <ul><li>Sources and uses of funds </li></ul><ul><li>Total Available Cash </li></ul><ul><li> - Total Cash Out-Flows </li></ul><ul><li>_____________________ </li></ul><ul><li>Ending Cash Balance </li></ul>
  32. 32. Organizing a Business Plan <ul><li>A list of critical equipment is absolutely necessary for the </li></ul><ul><li>business and should include accessories and critical parts </li></ul><ul><li>and supplies. </li></ul><ul><li>- Auxiliary Equipment: those that help the business </li></ul><ul><li> function better </li></ul><ul><li>- Other Equipment: vehicles, delivery and warehouse </li></ul>
  33. 33. Organizing a Business Plan <ul><li>Statement of Financial Condition </li></ul><ul><li>Assets Liabilities and Equity </li></ul><ul><li>Cash Current Liabilities </li></ul><ul><li>Accounts Receivable Long Term Liabilities </li></ul><ul><li>Inventory Total Liabilities </li></ul><ul><li>Fixed Assets Stockholders’ Equity </li></ul><ul><li>Accumulated Depreciation Total Liabilities and Equity </li></ul><ul><li>Net Fixed Asset </li></ul><ul><li>Total Assets </li></ul>
  34. 34. Organizing a Business Plan <ul><li>Analysis of Financials </li></ul><ul><li>Working capital </li></ul><ul><ul><li>Current Assets (turn to cash in less than 1 year) </li></ul></ul><ul><ul><li>Current Liabilities (to be paid in less than 1 year) </li></ul></ul><ul><li>Compare year to year </li></ul><ul><li>Ratio Analysis </li></ul><ul><ul><li>Current Ratio (current assets/current liabilities) </li></ul></ul><ul><ul><li>Quick Ratio </li></ul></ul><ul><ul><li>Leverage (total liabilities/stockholders’ equity) </li></ul></ul>
  35. 35. Organizing a Business Plan <ul><li>An increase in sales does not necessarily </li></ul><ul><li>imply an increase in profits. </li></ul><ul><li>Break-even Analysis will help you evaluate </li></ul><ul><li>where you need to be in your sales to produce a profit. </li></ul><ul><li>Fixed Costs </li></ul><ul><li>+ Variable Costs </li></ul><ul><li>Break-even Point in Sales </li></ul>
  36. 36. Organizing a Business Plan <ul><li>Fixed Costs: </li></ul><ul><ul><li>Remain Constant </li></ul></ul><ul><ul><li>Are incurred regardless of sales </li></ul></ul><ul><ul><li>Are distributed among all units sold. </li></ul></ul><ul><li>Variable Costs: </li></ul><ul><ul><li>Fluctuate directly in proportion to sales </li></ul></ul><ul><ul><li>Include: </li></ul></ul><ul><ul><ul><li>Direct labor </li></ul></ul></ul><ul><ul><ul><li>Cost of goods sold </li></ul></ul></ul><ul><ul><ul><li>Sales commission </li></ul></ul></ul>
  37. 37. Organizing a Business Plan <ul><li>Fixed costs for business </li></ul><ul><li>Gross profit as a </li></ul><ul><li>percentage of sales </li></ul><ul><li>= </li></ul><ul><li>Break-even Point </li></ul>Break-even Point Unit Price = Break-even Point in number of units
  38. 38. Projections or Pro-Form Financials <ul><li>Please consider the following: </li></ul><ul><li>They must be realistic. </li></ul><ul><li>You should project the first year on a monthly basis and 5 years going forward. </li></ul><ul><li>They should not be overly optimistic, neither should they be pessimistic. </li></ul><ul><li>You should not project chance events, or those uncertain as to date or amount. </li></ul><ul><li>You must take into consideration the reality of similar businesses. </li></ul><ul><li>Your assumptions should be based on your market analysis. </li></ul><ul><li>You must consider your cost estimates. </li></ul><ul><li>You must take into account the break-even point calculated previously. </li></ul><ul><li>Everyone working in the business should have a salary and it must be included. Then they must adjust themselves to it. </li></ul><ul><li>You must include an allowance for unforeseen events. </li></ul><ul><li>Make sure you include debt service and any payments committed to investors. </li></ul><ul><li>Your should clearly state your assumptions. </li></ul><ul><li>Be pessimistic on costs and expenses. </li></ul><ul><li>Be conservative in projecting sales. </li></ul><ul><li>If you are evaluating an existing business, compare your projection against historical figures and justify any differences. </li></ul>
  39. 39. Your Business Plan <ul><li>Good planning is the key to business success </li></ul><ul><li>Your planning must be done in an objective and serious manner. </li></ul><ul><li>You should take time to compare the possible performance against the planning budget. </li></ul><ul><li>You must regularly take time, away from pressure and telephone interruptions, to review and actualize the plans. </li></ul>
  40. 40. The Loan Proposal <ul><li>Two Major Risks: </li></ul><ul><li>- The lender that will not turn down the proposal, but </li></ul><ul><li>cannot provide adequate financing. </li></ul><ul><li>- The banker that provides the wrong financing for the </li></ul><ul><li>right reasons. </li></ul>
  41. 41. The Loan Proposal <ul><li>Types of Loans </li></ul><ul><li>Short term loans </li></ul><ul><li>- Repaid within the current year </li></ul><ul><li>- Finances working capital needs </li></ul><ul><li>- Is documented through notes that are cancelled in less than 1 year </li></ul><ul><li>- Finances cash needs of short duration </li></ul><ul><li>- May be structured as a line of credit </li></ul><ul><li>Medium term loans </li></ul><ul><li>- Repaid within 1 and 5 years from profits </li></ul><ul><li>- Finances equipment purchases </li></ul><ul><li>- Can finance working capital for a business experiencing fast growth </li></ul><ul><li>- Requires collateral to support it </li></ul><ul><li>- Should only be used when the need is evident and suitable </li></ul><ul><li>Long term loans </li></ul><ul><li>- Requires more than 5 years to be fully repaid from profits </li></ul><ul><li>- Finances fixed asset purchase </li></ul><ul><li>- A faster repayment may weaken the business </li></ul><ul><li>- Requires collateral support </li></ul><ul><li>- Requires disciplined performance </li></ul>
  42. 42. The Loan Proposal <ul><li>Some words of advice: </li></ul><ul><li>Anticipate financial needs. </li></ul><ul><li>Be clear and concise in your statements. </li></ul><ul><li>Don’t request more than you need and can use. </li></ul><ul><li>Analyze the need and how it will be repaid. </li></ul><ul><li>If the banker does not agree; listen and analyze their reasoning, but never accept a repayment schedule that you cannot meet. </li></ul>Good planning is the key to success in business. Copyright Colonial Savings 2007