Business Plans Part 4 Taken from http://www.bplans.com/hurdleonline http://www.sba.gov/starting/indexbusplans.html
Assignments to Date <ul><li>Preliminary Mini Plan </li></ul><ul><ul><li>Mission/Objectives  </li></ul></ul><ul><ul><li>Key...
Simplified Business Plan Outline <ul><li>Executive Summary </li></ul><ul><li>Company Summary </li></ul><ul><li>Product Des...
Strategy and Implementation “Strategy is focus”   <ul><li>What are you main marketing and sales priorities?  </li></ul><ul...
Strategy Pyramid Example Strategy Tactics Program(s)
Strategy and Implementation  Making it Real   -   Milestones Table
Financial Plan Components <ul><li>Important assumptions </li></ul><ul><li>Key financial indicators </li></ul><ul><li>Break...
How Tables and Charts are Linked
Points About Cash “Cash is King” <ul><li>Profitable companies go broke because their money is tied up in assets  </li></ul...
Cash vs. Profits Starting Numbers Income Balance Sales $0 Assets Cost of Sales $0 Bank Balance $100 Profit $0 Total $100 L...
Cash vs. Profits Sell a Widget Income Balance Sales $150 Assets Cost of Sales $100 Bank Balance $150 Profit $50 Total $150...
Cash vs. Profits Sell Another Income Balance Sales $300 Assets Cost of Sales $200 Bank Balance $200 Profit $100 Total $200...
Cash vs. Profits And Still Another  Income Balance Sales $450 Assets Cost of Sales $300 Bank Balance $250 Profit $150 Tota...
Cash vs. Profits Adding Realism -   Selling on Terms Income Balance Sales $150 Assets Cost of Sales $100 Bank Balance $0 P...
Cash vs. Profits Buying on Terms Income Balance Sales $150 Assets Cost of Sales $100 Bank Balance $0 Profit $50 Total $250...
Cash vs. Profits Buying on Terms & Short Term Debt Income Balance Sales $450 Assets Cost of Sales $300 Bank Balance $0 Pro...
Cash vs. Profits Lesson: Business looks a lot better with $400 in starting capital Income Balance Sales $450 Assets Cost o...
Case Examples Baseline: Computer store $6 million annual sales 8% net profit on sales Cash Flow Cash Balance Looks good, m...
Case Examples Only change is adding 15 days, on average, to receive money on invoices Reduced cash balance
Case Examples Only change from baseline is going from two to three month inventory I owe money!!
Profit and Loss Statement <ul><li>What owners are most interested in </li></ul><ul><li>Uses sales forecast and personnel p...
Profit and Loss Example (Income Statement) You will have to produce one of these over a three year period. Also will have ...
Returning to Cash and Balance Sheet Focus <ul><li>Different point of view than profit and loss </li></ul><ul><li>We are fo...
Sample Case See “Cash is King” section of Hurdles for information on entries Cash Balance Balance Sheet Numbers in thousands
Definitions for Previous Slide “ Retained Earnings” – earnings re-invested in company, earnings not paid out as dividends....
Key  Cash Flow Points <ul><li>Profits are very important to cash (though this does not tell the whole story) </li></ul><ul...
Balance Sheet Start-up cost
Business Ratios Different barometers on how healthy a business is. For a person, a barometer is: Net Worth = Assets (what ...
Business Ratios Gross Margin = sales – cost of sales Net Profit Margin = net profit/sales  Return on Assets = net profit/t...
Executive Summary <ul><li>Most important of your chapter summaries – the doorway to the rest of the plan </li></ul><ul><li...
Summary Implementation of Plan Must Be Communicated
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Business Plan Lecture No. 4

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Business Plan Lecture No. 4

  1. 1. Business Plans Part 4 Taken from http://www.bplans.com/hurdleonline http://www.sba.gov/starting/indexbusplans.html
  2. 2. Assignments to Date <ul><li>Preliminary Mini Plan </li></ul><ul><ul><li>Mission/Objectives </li></ul></ul><ul><ul><li>Keys to success </li></ul></ul><ul><ul><li>Target Market </li></ul></ul><ul><ul><li>Competitive Advantage </li></ul></ul><ul><ul><li>Basic Strategies </li></ul></ul><ul><ul><li>Initial break-even chart </li></ul></ul><ul><li>Company Summary & Product Description </li></ul><ul><ul><li>Start-up Funding Table </li></ul></ul><ul><li>Market Analysis Summary & Management Summary </li></ul><ul><ul><li>Sales Forecast and Assumptions </li></ul></ul><ul><ul><li>Personnel Plan </li></ul></ul>
  3. 3. Simplified Business Plan Outline <ul><li>Executive Summary </li></ul><ul><li>Company Summary </li></ul><ul><li>Product Description </li></ul><ul><li>Market Analysis Summary </li></ul><ul><li>Strategy and Implementation Summary </li></ul><ul><li>Management Summary </li></ul><ul><li>Financial Plan </li></ul>
  4. 4. Strategy and Implementation “Strategy is focus” <ul><li>What are you main marketing and sales priorities? </li></ul><ul><li>Keep this list short </li></ul><ul><li>Use “Strategy Pyramid” to make it real </li></ul>
  5. 5. Strategy Pyramid Example Strategy Tactics Program(s)
  6. 6. Strategy and Implementation Making it Real - Milestones Table
  7. 7. Financial Plan Components <ul><li>Important assumptions </li></ul><ul><li>Key financial indicators </li></ul><ul><li>Breakeven </li></ul><ul><li>Profit and loss </li></ul><ul><li>Projected cash flow (most critical projection) </li></ul><ul><li>Projected balance sheet </li></ul><ul><li>Business ratios </li></ul>
  8. 8. How Tables and Charts are Linked
  9. 9. Points About Cash “Cash is King” <ul><li>Profitable companies go broke because their money is tied up in assets </li></ul><ul><li>Need to understand the difference between profit and cash (can spend cash) </li></ul><ul><li>The time to solve cash flow problems is up front </li></ul><ul><li>An understanding of this is important to your business plan </li></ul>
  10. 10. Cash vs. Profits Starting Numbers Income Balance Sales $0 Assets Cost of Sales $0 Bank Balance $100 Profit $0 Total $100 Liabilities Capital Paid-In $100 Earnings $0 Total $100 “ Paid-In” – initial cash that I invested in company. Assets = Capital + Liabilities Need to match
  11. 11. Cash vs. Profits Sell a Widget Income Balance Sales $150 Assets Cost of Sales $100 Bank Balance $150 Profit $50 Total $150 Liabilities Capital Paid-In $100 Earnings $50 Total $150 “ Cost of Sales” is how much the widget costs me. Initial sales cost covered by my initial capital investment of $100.
  12. 12. Cash vs. Profits Sell Another Income Balance Sales $300 Assets Cost of Sales $200 Bank Balance $200 Profit $100 Total $200 Liabilities Capital Paid-In $100 Earnings $100 Total $200
  13. 13. Cash vs. Profits And Still Another Income Balance Sales $450 Assets Cost of Sales $300 Bank Balance $250 Profit $150 Total $250 Liabilities Capital Paid-In $100 Earnings $150 Total $250 What’s wrong with this picture? A bit too simple......these are IDEAL customers.
  14. 14. Cash vs. Profits Adding Realism - Selling on Terms Income Balance Sales $150 Assets Cost of Sales $100 Bank Balance $0 Profit $50 Total $150 Liabilities Capital Paid-In $100 Earnings $50 Total $150 Accounts Receivable $150 Bank balance is $0 because the customer has not paid their bill yet. Accounts Receivable – you are extending credit to a customer Need to match
  15. 15. Cash vs. Profits Buying on Terms Income Balance Sales $150 Assets Cost of Sales $100 Bank Balance $0 Profit $50 Total $250 Liabilities Capital Paid-In $100 Earnings $50 Total $250 Accounts Receivable $150 Inventory $100 Accounts Payable $100 Total Liabilities $100 Accounts Payable – money that you owe others. Business looks good, so I bought a widget “on terms” ( $100 ) from my supplier, and placed this widget in inventory.
  16. 16. Cash vs. Profits Buying on Terms & Short Term Debt Income Balance Sales $450 Assets Cost of Sales $300 Bank Balance $0 Profit $150 Total $550 Liabilities Capital Paid-In $100 Earnings $150 Total $550 Accounts Receivable $450 Inventory $100 Accounts Payable $100 Total liabilities $300 Short-term debt $200 Received an order for two widgets. My supplier now wants cash up-front for these widgets. Have to borrow $200 to finance these two widgets, and still keep one widget in inventory. I expect to pay it back quickly. Short term debt is debt to be paid off in less than one year.
  17. 17. Cash vs. Profits Lesson: Business looks a lot better with $400 in starting capital Income Balance Sales $450 Assets Cost of Sales $300 Bank Balance $300 Profit $150 Total $850 Liabilities Capital Paid-In $400 Earnings $150 Total $850 Accounts Receivable $450 Inventory $100 Accounts Payable $100 Total liabilities $300 Short-term debt $200 $550 in working capital Have money in the bank
  18. 18. Case Examples Baseline: Computer store $6 million annual sales 8% net profit on sales Cash Flow Cash Balance Looks good, money in bank “ Cash Balance” – cash in bank “ Cash Flow” – how much cash flows in/out of bank each month. A positive cash flow in a month increases cash balance for next month; a negative cash flow decreases cash balance for next month.
  19. 19. Case Examples Only change is adding 15 days, on average, to receive money on invoices Reduced cash balance
  20. 20. Case Examples Only change from baseline is going from two to three month inventory I owe money!!
  21. 21. Profit and Loss Statement <ul><li>What owners are most interested in </li></ul><ul><li>Uses sales forecast and personnel plan numbers </li></ul><ul><li>Good idea to link the profit and loss to other sheets so revisions in numbers are automatically updated </li></ul><ul><li>You will do a pro forma profit and loss – one that projects the future </li></ul><ul><ul><li>You have to estimate future revenues and cost </li></ul></ul>
  22. 22. Profit and Loss Example (Income Statement) You will have to produce one of these over a three year period. Also will have to produce a cash flow statement and balance sheet.
  23. 23. Returning to Cash and Balance Sheet Focus <ul><li>Different point of view than profit and loss </li></ul><ul><li>We are following the money in and money out </li></ul><ul><li>Sources of money </li></ul><ul><ul><li>Cash sales </li></ul></ul><ul><ul><li>Payments from receivables </li></ul></ul><ul><ul><li>New loan money </li></ul></ul><ul><ul><li>New investment </li></ul></ul><ul><li>Expenditures </li></ul><ul><ul><li>Buying widgets in cash </li></ul></ul><ul><ul><li>Paying interest </li></ul></ul><ul><ul><li>Paying bills </li></ul></ul><ul><ul><li>Paying loans </li></ul></ul>
  24. 24. Sample Case See “Cash is King” section of Hurdles for information on entries Cash Balance Balance Sheet Numbers in thousands
  25. 25. Definitions for Previous Slide “ Retained Earnings” – earnings re-invested in company, earnings not paid out as dividends. “ paid-in capital” – capital received from investors in return for stock. Paid-in capital does not occur only at start-up. Can always seek out more capital. Need more capital if you want to grow as you have to build buildings, buy widgets, etc, and you might not have the cash to do this.
  26. 26. Key Cash Flow Points <ul><li>Profits are very important to cash (though this does not tell the whole story) </li></ul><ul><li>An increase in assets decreases cash </li></ul><ul><li>An increase in liabilities increases cash </li></ul><ul><li>Extra dollars in receivables or inventory as assets are dollars that you don’t have in cash </li></ul><ul><li>Dollars that you have in payables are dollars you have in cash </li></ul>
  27. 27. Balance Sheet Start-up cost
  28. 28. Business Ratios Different barometers on how healthy a business is. For a person, a barometer is: Net Worth = Assets (what you own) – Liabilities (what you owe). Positive is good.
  29. 29. Business Ratios Gross Margin = sales – cost of sales Net Profit Margin = net profit/sales Return on Assets = net profit/total assets Return on Equity (ROI) = net profit/net worth Current Ratio = short-term assets/short-term liabilities Quick Ratio = (short-term assets – inventories)/short-term liabilities Net Working Capital = short-term assets – short-term liabilities Interest Coverage = profit before interest and taxes/total interest payments Acid test = (short-term assets – accounts receivable – inventory)/short term liabilities
  30. 30. Executive Summary <ul><li>Most important of your chapter summaries – the doorway to the rest of the plan </li></ul><ul><li>One-page, written last </li></ul><ul><li>Example format: </li></ul><ul><ul><li>Opening paragraph </li></ul></ul><ul><ul><li>One highlight graphic </li></ul></ul><ul><ul><li>A list of two to four measurable objectives </li></ul></ul><ul><ul><ul><ul><li>Ex. Net income more than 10% of sales by the third year </li></ul></ul></ul></ul><ul><ul><li>A mission statement defining your business concept </li></ul></ul><ul><ul><li>A list of two to three keys to success </li></ul></ul>
  31. 31. Summary Implementation of Plan Must Be Communicated
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