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  • 1. “ An essential book to help entrepreneurs.”NOLO ® DALLAS MORNING NEWS10TH EDITION AL OMHow to Write a L L O - R F F RM D S ON CBusinessPlan • Write a winning proposal • Prepare cash flow and profit & loss forecasts • Get backers to invest THE LEADING BUSINESS PLAN BOOK FOR 25 YEARS Mike McKeever Free Legal Updates at Nolo.com
  • 2. The Story Emma Cofod Dear friends, Founded in 1971, and based in an old clock factory in Berkeley, California, Nolo has always strived to offer clear legal information and solutions. Today we are proud to offer a full range of plain-English law books, legal forms, software and an award-winning website. Everything we publish is relentlessly researched and tested by a dedicated group of in-house legal editors, who together have more than 150 years’ experience. And when legal changes occur after publication, we promptly post free updates at Nolo.com. Tens of millions of Americans have looked to Nolo to help solve their legal and business problems. We work every day to be worthy of this trust. Ralph Warner Nolo co-founder
  • 3. Products & ServicesBooks & SoftwareGet in-depth information. Nolo publishes hundreds of great booksand software programs for consumers and business owners. They’re allavailable in print or as downloads at Nolo.com.Legal EncyclopediaFree at Nolo.com. Here are more than 1,400 free articles and answers tocommon questions about everyday legal issues including wills, bankruptcy,small business formation, divorce, patents, employment and much more.Plain-English Legal DictionaryFree at Nolo.com. Stumped by jargon? Look it up in America’s mostup-to-date source for definitions of legal terms.Online Legal DocumentsCreate documents at your computer. Go online to make a will or livingtrust, form an LLC or corporation or obtain a trademark or provisionalpatent at Nolo.com. For simpler matters, download one of our hundredsof high-quality legal forms, including bills of sale, promissory notes,nondisclosure agreements and many more.Lawyer DirectoryFind an attorney at Nolo.com. Nolo’s unique lawyer directory providesin-depth profiles of lawyers all over America. From fees and experienceto legal philosophy, education and special expertise, you’ll find all theinformation you need to pick a lawyer who’s a good fit.Free Legal UpdatesKeep up to date. Check for free updates at Nolo.com. Under “Products,”find this book and click “Legal Updates.” You can also sign up for our freee-newsletters at Nolo.com/newsletters/index.html.
  • 4. The Trusted Name (but don’t take our word for it)“ In Nolo you can trust.” THE NEW YORK TIMES“ Nolo is always there in a jam as the nation’s premier publisher of do-it-yourself legal books.” NEWSWEEK“ Nolo publications…guide people simply through the how, when, where and why of the law.” THE WASHINGTON POST“ [Nolo’s]…material is developed by experienced attorneys who have a knack for making complicated material accessible.” LIBRARY JOURNAL“ When it comes to self-help legal stuff, nobody does a better job than Nolo…” USA TODAY“ The most prominent U.S. publisher of self-help legal aids.” TIME MAGAZINE“ Nolo is a pioneer in both consumer and business self-help books and software.” LOS ANGELES TIMES
  • 5. 10th editionHow to Write aBusiness Plan by Mike McKeever
  • 6. TENTH EDITION JANUARY 2011Editor RICHARD STIMCover Design SUSAN PUTNEYProduction MARGARET LIVINGSTONProofreading CATHY CAPUTOCD-ROM Preparation ELLEN BITTERIndex MEDEA MINNICHPrinting DELTA PRINTING SOLUTIONS, INC.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. The 10th edition has been completely updated with the laws, banking regulations, andresources”--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. Smallbusiness--Planning. 5. Small business--Finance. I. Title. HD30.28.M3839 2010 658.15’224--dc22 2010021162Copyright © 1984, 1986, 1988, 1992, 1999, 2002, 2004, 2007, 2008, and 2010 by Mike McKeever.All rights reserved. The NOLO trademark is registered in the U.S. Patent and Trademark Office.Printed in the U.S.A.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or byany means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission.Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use.For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. Call800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, California 94710. Please note We believe accurate, plain-English legal information should help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state.
  • 7. Dedication This book is dedicated to the memory of my late grandmother, Elizabeth Eudora Woodall Darby, whose influence 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 first editor, Ralph “Jake” Warner, showed patience working with a first-time author. My second editor, Lisa Goldoftas, ­ hallenged the grammar c 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 finally, 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. The 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 profit from your wisdom and generosity. Mike P. McKeever Santa Rosa, California
  • 8. 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 financial 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 ­ ssessed the a strengths and weaknesses of hundreds of companies. As senior financial 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 financial advisor to an online retail business. You can contact him at mckeever.mp@gmail.com.
  • 9. Downloading Forms and Other MaterialsThe printed version of this book comes with a CD-ROM that containslegal forms and other material. You can download that material by going towww.nolo.com/back-of-book/sbs.html. You’ll get editable versions of theforms, which you can fill in or modify and then print.
  • 10. 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 PotentialYour SmallofBusinessto Start or 4 Expand Sources Money ...................................................................................................49 Introduction..........................................................................................................................................51 . Ways to Raise Money........................................................................................................................51
  • 11. 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
  • 12. 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
  • 13. 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.................................................................................................................260Index
  • 14. Your Legal Companion “Nine to five ain’t takin’ me where I’m Writing a plan is a journey through thebound.” mind of one person. Even in partnerships —Neil Diamond, from “Thank the Lord for the and corporations, usually one person hasNighttime” the vision and energy to take an idea and turn it into a business by writing a business “You’ve got to be careful if you don’t plan. For that reason, I have addressed thisknow where you’re going because you book to the business owner as a singlemight not get there.” individual rather than a husband-and-wife —Yogi Berra team, group, committee, partnership, orA corporation. And you’ll find that the same re you concerned about whether financial and analytical tools necessary to you can put together a first-rate convince potential lenders and investors business plan and loan appli­ that your business idea is sound can alsocation? Don’t worry. help you decide whether your idea is the How to Write a Business Plan contains right business for you.detailed forms and step-by-step instruc­tions designed to help you prepare a well-thought-out, well-organized plan. Coupled What Kind of Plan Do You Need?with your positive energy and will tosucceed, you’ll be able to design a business You can use How to Write a Businessplan and loan package that you will be Plan to write whatever type of plan bestproud to show to the loan officer at your suits your needs:bank, the Small Business Administration, • Complete business plan. A completeor your Uncle Harry. business plan is especially helpful After working with hundreds of business for people who are starting a newowners, I have observed an almost business. This form of plan is alsouniversal truth about business planning: excellent for convincing prospective
  • 15. 2  |  how to write a business plan backers to support your business. Revenue Forecast, Profit and Loss You’ll be more successful in raising Forecast, Capital Spending Plan, the money you need if you answer all Cash Flow Forecast, Appendix, and of your potential backers’ questions. Supporting Documents. A complete plan should include the following elements: Title Page, Plan quick plan Summary, Table of Contents, Problem The “quick plan” icon appears at the Statement, Business Description, beginning of each chapter containing quick plan Business Accomplishments, Marketing components and guides you to the sections Plan, Sales Revenue Forecast, Profit and you’ll need. Loss Forecast, Capital Spending Plan, Cash Flow Forecast, Future Trends, • Customized plan. You can start with a Risks Facing Your Business, Personnel quick plan and add components from Plan, Business Personality, Staffing the complete business plan to suit your Schedule, Job Descriptions, Specific needs. When deciding what to include Business Goals, Personal Financial and what to exclude, ask yourself: Statement, Personal Background, Appendix, and Supporting Documents. n Which of my statements are the strongest? • Quick plan (one-day plan). If you know your business, are familiar with n Which statements do my backers and able to make financial projections, want to see? and have done the necessary research, Note that the appendixes contain blank you may be able to create a plan in forms as well as business plans for a small one day. But understand that a quick service business, a manufacturing business, plan is a stripped-down version of and a project development. All the forms a business plan. It won’t convince (except for the Loan Interest Calculation either you or your prospective backers Chart) and business plans are included on that your business idea is sound. It is the CD-ROM located at the back of the appropriate only if your business idea book. The forms—for calculating sales is very simple or someone has already forecasts, personal financial information, committed to backing your venture. A profit and loss forecasts, and cash flow stripped-down quick plan has these forecasts—are provided in Microsoft Excel few components: Title Page, Plan spreadsheet format and include helpful Summary, Table of Contents, Problem formulas for making calculations. The “CD” Statement, Business Description, icon appears whenever forms or business Business Accomplishments, Sales plans are reproduced on the CD. (Note:
  • 16. your legal companion |  3If a series of #### symbols appear in a Getting Startedbox in a spreadsheet, that means that youwill need to widen the column in order to Before you sit down to write your plan,display the numbers.) you’ll want to gather together these essentials: • a word processorMeet Antoinette • a calculator or computer spreadsheet programIn an effort to make sense out of the • a good supply of 8½" by 11" paperthousands of types of small businesses, • several pencils and a good eraser, andI have roughly divided them into five • access to a photocopy machine.main ones: retail, wholesale, service,manufacturing, and project development. Now, here’s a word about revisions andAll the financial tools I present can be changing your plan. I firmly believe inused by all five. However, for the sake of writing your first thoughts on paper andsimplicity, I follow one particular retail letting them rest for a day or two. Thenbusiness—a dress shop. In so doing, I you can edit, expand, and revise later toillustrate most of the planning concepts get a more perfect statement. In this book,and techniques necessary to understand I show examples of Antoinette’s writingand raise money for any business. process. (I’m grateful she’s such a good As you read through the text you’ll sport.)meet Antoinette Gorzak, a friend of mine. Most people discover about halfwayAntoinette wants to open a dress shop, through writing their plan that they wantand she has allowed me to use her plans to change either their assumptions or someand thought processes as an example of of the plan they’ve already written. Mya complete and well-prepared business best advice is this: Complete the plan allplan for a retail store. You’ll find parts of the way through on your original set ofher plan presented in different chapters as assumptions. That way you can see thewe discuss the various components of a financial impact of your ideas, and it willcomplete business plan. 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.
  • 17. 4  |  how to write a business planAnd a Few More Words 415-816-2982 and I’ll listen or help if I can. You can also email me at mckeever.mp@As I write this, the book has been in print gmail.com. Please mention “Nolo Busi­for over 25 years and has sold more than ness Plan Book” in the subject line of your150,000 copies. I have heard that it has been email, otherwise I might delete it as a spampirated in some parts of the former Soviet message. Finally, to avoid always using theUnion. Since it first came out I have taught, pronoun “he” when referring to individualslectured, and consulted on business plans in in general, and to further avoid clumsya wide variety of forums. I have taken that neologisms like “s/he” and awkwardexperience and reformulated the exercises phraseologies like “he/she” and “he orin the book to make them more effective as she,” I have compromised by the randomwell as easier and quicker to use. use of “he” in some instances and “she” I remain friends with many of the people in others. I hope I have arrived at a fairI met through the book and occasionally balance. Also, keep in mind that whereverhelp them over rough spots in their possible, this book uses plain language, notplanning, which is the most gratifying part jargon. As a result, you may find that I haveof the experience for me. My business is often substituted simple terminology forhelping people write business plans that traditional business plan lingo. ●find money for their businesses. Call me at
  • 18. 1 C h a p t e rBenefits of Writing aBusiness PlanWhat Is a Business Plan?............................................................................................................................................ 6Why 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............................................................................................................................... 8Issues Beyond the Plan............................................................................................................................................... 8 Bookkeeping and Accounting ................................................................................................................... 8 Taxes.......................................................................................................................................................................... 8 Securities Laws..................................................................................................................................................... 9 Your Management Skill................................................................................................................................... 9 Issues Specific to Your Business ................................................................................................................ 9
  • 19. 6  |  how to write a business plan“Marry in haste, repent at leisure.” your proposal ­ eriously. Even some s (proverb) landlords require a sound business plan before they will lease you space. Before making a commitment to you, they want to“A stitch in time saves nine.” see that you have thought through critical (proverb) ­ssues facing you as a business owner and i that you really understand your business. They also want to make sure your business has a good chance of succeeding.What Is a Business Plan? In my experience, about 35% to 40% of the people currently in business doA business plan is a written statement that not know how money flows through theird­ escribes and analyzes your business and business. Writing a business plan with thisgives detailed projections about its future. book teaches you where money comesA business plan also covers the financial from and where it goes. Is it any wonderaspects of starting or expanding your that your backers want to see your planbusiness—how much money you need and before they consider your financial request?how you’ll pay it back. There are as many potential lenders and Writing a business plan is a lot of work. i ­nvestors as there are prospective businessSo why take the time to write one? The owners. If you have a thoroughly thought-best answer is the wisdom gained by out business and financial plan thatliterally millions of ­ usiness owners just b demonstrates a good ­ikelihood of success llike you. Almost without ­ xception, each e and you are persistent, you will findbusiness owner with a plan is pleased she the money you need. Of course, it mayhas one, and each owner without a plan take longer than you expect and requirewishes he had written one. more work than you expect, but you will ultimately be ­ uccessful if you believe in s your business.Why Write a Business Plan?Here are some of the specific andimmediate ­ enefits you will derive from b Helps You Decide to Proceed or Stopwriting your business plan. One major theme of the book may surprise you. It’s as simple as it is important. You, as the prospective business owner, are theHelps You Get Money most important person you must convinceMost lenders or investors require a written of the soundness of your proposal. There­business plan before they will consider fore, much of the work you are asked to do
  • 20. Chapter 1  | benefits of writing a business plan |  7here serves a dual purpose. It is designed pass through your plan. Then you read anto provide answers to all the questions that article about the declining exchange ratioprospective lenders and investors will ask. of U.S. dollars to Korean currency. AfterBut it will also teach you how money flows doing some homework about exchangethrough your business, what the strengths rate fluctuations, you decide to increaseand weaknesses in your business concept your profit margin on the jackets to coverare, and what your realistic chances of anticipated declines in dollar purchasingsuccess are. power. This change shows you that your The detailed planning process described prices are still competitive with otherin this book is not infallible—nothing is jackets and that your average profits willin a small business—but it should help you i ­ncrease. And you are now covered for anyuncover and correct flaws in your business likely decline in exchange rates.concept. If this analysis demonstrates thatyour idea won’t work, you’ll be able to avoidstarting or expanding your business. This is Improves Your Odds of Successextremely important. It should go without One way of looking at business is thatsaying that a great many businesspeople it’s a gamble. You open or expand aowe their ultimate success to an earlier business and gamble your and the bank’sdecision not to start a business with built-in or investor’s money. If you’re right, youproblems. make a profit and pay back the loans and everyone’s happy. But if your estimate is wrong, you and the bank or investors canLets You Improve Your lose money and experience the discomfortBusiness Concept that comes from failure. (Of course, a bankWriting a plan allows you to see how probably is protected because it has titlechanging parts of the plan increases profits to the collateral you put up to get the loan.or accomplishes other goals. You can tinker See Chapter 4 for a complete discussion.)with individual parts of your business with Writing a business plan helps beat theno cash outlay. If you’re using a computer odds. Most new, small businesses don’tspreadsheet to make financial projections, last very long. And, most small businessesyou can try out different alternatives even don’t have a business plan. Is that onlymore quickly. This ability to fine-tune your a coincidence, or is there a ­ onnection cplans and business design increases your between these two seemingly unconnectedchances of success. facts? My suggestion is this: Let someone For example, let’s say that your idea is to else prove the connection wrong. Whystart a business importing Korean leather not be prudent and improve your odds byjackets. Everything looks great on the first writing a plan?
  • 21. 8  |  how to write a business planHelps You Keep on Track business. Experienced lenders, investors, and entre­ reneurs want a plan that takes pMany business owners spend countless these issues into account. Of course, thishours handling emergencies, simply book can’t cover everything. Here arebecause they haven’t learned how to plan some of the key business components thatahead. This book helps you anticipate are left out of this initial planning process.problems and solve them ­ efore they bbecome disasters. A written business plan gives you a clear Bookkeeping and Accountingcourse toward the future and makes your This book discusses the numbers anddecision making easier. Some problems concepts you as the business owner needand opportunities may represent a change in order to open and manage your smallof direction worth following, while others business. You have the ­esponsibility rmay be distractions that referring to your to create bookkeeping and accountingbusiness plan will enable you to avoid. The systems and make sure they functionblack and white of your written business a ­ dequately. (Some suggestions for settingplan will help you face facts if things don’t up a system are contained in Chapter 6.)work out as expected. For example, if One of the items generated by youryou planned to be making a living three accounting system will be a balancemonths after start-up, and six months later sheet. A balance sheet is a snapshot at ayou’re going into the hole at the rate of particular moment in time that lists the$100 per day, your business plan should money value of everything you own andhelp you see that changes are necessary. everything you owe to someone else.It’s all too easy to delude yourself intokeeping a business going that will nevermeet its goals if you approach things with ­ Taxesa “just another month or two and I’ll be While there are a few mentions of taxthere” attitude, rather than ­ omparing your c issues throughout the book, most of theresults to your goals. planning ­nformation doesn’t discuss how i taxes will be ­ alculated or paid. The book c focuses its efforts on making a profit andIssues Beyond the Plan a positive cash flow. If you make a profit,I have written this book to provide you’ll pay taxes and if you don’t make ayou with an overview of the issues that profit, you’ll pay fewer taxes. A CPA or taxdetermine success or failure in a small advisor can help you with tax strategies.
  • 22. Chapter 1  | benefits of writing a business plan |  9Securities Laws your management skills. If you have any doubts about your management ability,If you plan to raise money by selling check out the resources in Chapter 12. Alsoshares in a corporation or limited see Chapter 11 for a thought-stimulatingpartnership, you’ll fall ­ nder state or u discussion of management.federal securities regulations. You can,however, borrow money or take in ageneral partner without being affected by Issues Specific to Your Businesssecurities laws. A complete discussion of How successfully your business relatesthese issues is beyond the scope of this to the market, the business environment,book. For now, take note that you must and the competition may be affected bycomply with securities regulations after you patents, franchises, ­oreign competition, fcomplete your plan and before you take location, and the like. Of ­ ecessity, this nany money into your business from selling book focuses on principles commonshares or partnership interests. to all businesses and does not discuss the specific items that distinguish your business from other ­ usinesses. For bYour Management Skill example, this book doesn’t discuss howThis book shows you how to write a very to price your products to meet yourgood business plan and loan application. competition; I assume that you haveHowever, your ultimate success rests on enough knowledge about your chosenyour ability to implement your plans—on business to answer that ­ uestion. ● q
  • 23. 2 C h a p t e rDo You Really Want toOwn a Business?Introduction..................................................................................................................................................................12Self-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..................................................................................................................................16How to Use the Self-Evaluation Lists...............................................................................................................17Reality Check: Banker’s Analysis.........................................................................................................................17 Banker’s Ideal......................................................................................................................................................17 Measuring Up to the Banker’s Ideal.......................................................................................................18 Use the Banker’s Ideal....................................................................................................................................18
  • 24. 12  |  how to write a business planIntroduction Power. When it is your business, you can have your employees do it your way. There“Hope springs eternal in the human is a little Ghengis Khan in us all, so don’tbreast,” said English poet and essayist be surprised if power is one of your goals.Alexander Pope several centuries ago. If it is, think about how to use this goal inHe wasn’t describing people expanding a constructive way.or starting a business, but he may as Right Livelihood. From natural foodswell have been. Everyone who goes into to solar power to many types of servicebusiness for themselves hopes to meet businesses, a great many cause-drivenor surpass a set of personal goals. While small businesses have done very well byyour particular configuration is sure to doing good.be unique, perhaps you will agree with If owning a small business can helpsome of the ones I have compiled over the a person accomplish these goals, it’syears from talking to hundreds of budding small wonder that so many are started.entrepreneurs. Unfortunately, while the potential for great Independence. A search for freedom and success exists, so do many risks. Runningindependence is the driving force behind a small business may require that youmany businesspeople. Wasn’t it Johnny sacrifice some short-term comforts forPaycheck who wrote the song “Take This long-term benefits. It is hard, demandingJob and Shove It?” work that requires a wide variety of skills Personal Fulfillment. For many people, few people are born with. But even if youowning a business is a genuinely fulfilling possess (or more likely acquire) the skillsexperience, one that lifetime employees and determination you need to successfullynever know. run a business, your business will need Lifestyle Change. Many people find that one more critical ingredient: Money.while they can make a good income You need money to start your business,working for other people, they are missing money to keep it running, and money tosome of life’s precious moments. With the make it grow. This is not the same thingflexibility of small business ownership, you as saying you can guarantee success incan take time to stop and smell the roses. your small business if you begin with Respect. Successful small business a fat wallet. Now, let me confess to oneowners are respected, both by themselves major bias here. I believe that mostand their peers. small business owners and founders are Money. You can get rich in a small better off starting small and borrowing,business, or at least do very well or otherwise raising, as little money asfinancially. Most entrepreneurs don’t get possible. Put another way, there is no suchwealthy, but some do. If money is your thing as “raising plenty of capital to ensuremotivator, admit it.
  • 25. Chapter 2  | do you really want to own a business? |  13success.” Unless you, as the prospective you don’t have the skills and temperamentbusiness founder, learn to get the most to run it. Simply put, I’ve learned thatmileage out of every dollar, you may go no business, whether or not it has soundbroke and will surely spend more than financial backing, is likely to succeedyou need to. But that doesn’t mean that unless you, as the prospective owner,you should try to save money by selling make two decisions correctly:cheap merchandise or providing marginal • You must honestly evaluate yourself toservices. In today’s competitive economy, decide whether you possess the skillsyour customers want the best you can give and personality needed to succeed in athem at the best price. They will remember small business.the quality of what they get from you long • You must choose the right business.after they have forgotten how much they (How to select the right business ispaid. covered extensively in Chapter 3.) In practical terms, that means you A small business is a very personalmust buy only the best goods for your endeavor. It will honestly reflect yourcustomers. Anything that affects the image opinions and attitudes, whether or not youyour business has in your customer’s mind design it that way. Think of it this way: Theshould be first-rate. It also means that you shadow your business casts will be yourshouldn’t spend money on things that don’t shadow. If you are sloppy, rude, or naivelyaffect the customer. For example, unless trusting, your business will mirror theseyou’re a real estate broker your customers attributes. If your personal characteristicsprobably won’t care if you drive an old, are more positive than those, your businessbeat-up car to an office in a converted will be more positive, too. To put thisbroom closet, as long as you provide them concretely, suppose you go out for thean honest product or service for an honest Sunday paper and are met by a storeprice. Save the nice car and fancy office, clerk who is groggy from a hangover anduntil after your business is a success. badmouths his girlfriend in front of you. Chances are that next Sunday will find you at a different newsstand.Self-Evaluation Exercises I’m not saying you need to be psycho­ logically perfect to run a small business.Here’s a question to ponder: Are you the But to succeed, you must ask peopleright person for your business? Because for their money every day and convincerunning a business is a very demanding a substantial number of them to give itendeavor that can take most of your time to you. While providing your goods orand energy, your business probably will services, you will create intimate personalsuffer if you’re unhappy. Your business can relationships with a number of people. Itbecome an albatross around your neck if
  • 26. 14 | HOW TO WRITE A BUSINESS PLANmakes no difference whether you refer topeople who give you money as clients, Antoinette Gorzak:customers, patients, members, students, My Strong and Weak Pointsor disciples. It makes a great deal of Strong Points (in no particular order)difference to your chances of ultimate 1. Knowledge of all aspects of women’ssuccess if you understand that these fashion businesspeople are exchanging their money for the 2. Ability to translate abstract objectivesconviction that you are giving them their into concrete stepsmoney’s worth. 3. Good cook The following self-evaluation exercises 4. Faithful friend and kind to animalswill help you assess whether you have 5. When I set a goal, I can be relentless inwhat it takes to successfully run a small achieving itbusiness. Take out a blank sheet of paper 6. Ability to make and keep goodor open a computer file. business friends—I have had many repeat customers at other jobs.Your Strong and Weak Points Weak Points 1. ImpatienceTake a few minutes to list your personal 2. Dislike of repetitive detailand business strengths and weaknesses. 3. Romantic (is this a weak point inInclude everything you can think of, even business?)if it doesn’t appear to be related to your 4. Tendency to postpone working onbusiness. For instance, your strong points problemsmay include the mastery of a hobby, your 5. Tendency to lose patience with foolspositive personality traits, and your sexual (sometimes I carry this too far—charisma, as well as your specific business especially when I’m tired).skills. Take your time and be generous. To provide you with a little help, Iinclude a sample list for Antoinette Gorzak,a personal friend who has what she hopes Your list of strong and weak pointsis a good business idea: a slightly different will help you see any obvious conflictsapproach to selling women’s clothing. between your personality and the businessYou’ll get to know her better as we go you’re in or want to start. For example,along. Her strengths, weaknesses, fantasies, if you don’t like being around peopleand fears are surely different from yours. but plan to start a life insurance agencySo, too, almost certainly, is the business with you as the primary salesperson, youshe wants to start. So be sure to make your may have a personality clash with yourown lists—don’t copy Antoinette’s. business. The solution might be to find
  • 27. ChApter 2 | DO YOU REALLY WANT TO OWN A BUSINESS? | 15another part of the insurance business that deficiency. For example, let’s say you wantdoesn’t require as much people contact. to start a trucking business. You have a Unfortunately, many people don’t good background in maintenance, truckrealize that their personalities will have a repair, and long distance driving, and youdirect bearing on their business success. know how to sell and get work. SoundsAn example close to the experience of good so far—but, let’s say you don’t knowfolks at Nolo involves bookstores. In the the first thing about bookkeeping or cashyears since Nolo began publishing, they flow management and the thought of usinghave seen all sorts of people, from retired a computer makes you nervous. Becauselibrarians to unemployed Ph.D.s, open some trucking businesses work on largebookstores. A large percentage of these dollar volumes, small profit margins, andstores have failed because the skills needed slow-paying customers, your backers willto run a successful bookstore involve more expect you to learn cash flow managementthan a love of books. or hire someone qualified to handle that part of the business.General and Specific SkillsYour Business Needs Antoinette Gorzak: General and Specific Skills My Business NeedsBusinesses need two kinds of skills to 1. How to motivate employeessurvive and prosper: Skills for business in 2. How to keep decent recordsgeneral and skills specific to the particular 3. How to make customers andbusiness. For example, every business employees think the business is specialneeds someone to keep good financial 4. How to know what the customersrecords. On the other hand, the tender want—today and, more important intouch and manual dexterity needed by the clothing business, to keep half-a-glassblowers are not skills needed by the step aheadaverage paving contractor. 5. How to sell Next, take a few minutes and list the 6. How to manage inventoryskills your business needs. Don’t worry 7. How to judge people.about making an exhaustively completelist, just jot down the first things that cometo mind. Make sure you have some generalbusiness skills as well as some of the moreimportant skills specific to your particular Your Likes and Dislikesbusiness. Take a few minutes and make a list of the If you don’t have all the skills your things you really like doing and those youbusiness needs, your backers will want don’t enjoy. Write this list without thinkingto know how you will make up for the
  • 28. 16 | HOW TO WRITE A BUSINESS PLANabout the business—simply concentrate on CAUTiONwhat makes you happy or unhappy. if your list contains several things you If you enjoy talking to new people, really don’t like doing and nothing at all thatkeeping books, or working with comput- you like doing, it may be a sign that you haveers, be sure to include those. Put down all a negative attitude at this time in your life. Ifthe activities you can think of that give you so, you may wish to think carefully about yourpleasure. Antoinette’s list is shown as an decision to enter or expand a business at thisexample. time. Chances are your negative attitude will As a business owner, you will spend reduce your chances of business success.most of your waking hours in the business,and if it doesn’t make you happy, youprobably won’t be very good at it. If this Specific Business Goalslist creates doubts about whether you’re Finally, list your specific business goals.pursuing the right business, I suggest Exactly what do you want your businessyou let your unconscious mind work on to accomplish for you? Freedom from 9 the problem. Most likely, you’ll know the to 5? Money—and if so, how much? Moreanswer after one or two good nights’ sleep. time with the children? Making the world or your little part of it a better place? It’s Antoinette Gorzak: your wish list, so be specific and enjoy My Likes and Dislikes writing it. Things I Like to Do 1. Be independent and make my own Antoinette Gorzak: decisions My Specific Business Goals 2. Keep things orderly. I am almost 1. Have my own business that gives compulsive about this me a decent living and financial 3. Take skiing trips independence 4. Work with good, intelligent people 2. Work with and sell to my friends 5. Cook with Jack and acquaintances as well as new 6. Care about my work. customers Things I Don’t Like to Do 3. Introduce clothing presently 1. Work for a dimwit boss unavailable in my city and provide a 2. Feel like I have a dead-end job real service for working women 3. Make people unhappy. 4. Be part of the growing network of successful businesswomen 5. Be respected for my success.
  • 29. Chapter 2  | do you really want to own a business? |  17How to Use the Self- price required to be successful as a small businessperson. If you are still eager toEvaluation Lists have a business, you have said, “Yes, IAfter you’ve completed the four self- am willing to make short-term sacrificesevaluation lists, spend some time reading to achieve long-term benefits and to dothem over. Take a moment to compare the whatever is necessary—no matter theskills needed in your business to the list of inconvenience—to reach my goals.”skills you have. Do you have what it takes? Show them to your family and, if you’rebrave, to your friends or anyone who Reality Check: Banker’s Analysisknows you well and can be objective. Banks and institutions that lend moneyOf course, before showing the lists to have a lot of knowledge about the successanyone, you may choose to delete any rate of small businesses. Bankers are oftenprivate information that isn’t critical to your overly cautious in making loans to smallbusiness. If you show your lists to someone businesses. For that very reason it makeswho knows the tough realities of running sense to study their approach, even thougha successful small business, so much the it may seem discouraging at first glance.better. You may want to find a formerteacher, a fellow employee, or someoneelse whose judgment you respect. Banker’s Ideal What do they think? Do they point outany obvious inconsistencies between your Bankers look for an ideal loan applicant,personality or skills and what you want who typically meets these requirements:to accomplish? If so, pay attention. Treat • For an existing business, a cash flowthis exercise seriously and you will know sufficient to make the loan payments.yourself better. Oh, and don’t destroy your • For a new business, an owner who haslists. Assuming you go ahead with your a track record of profitably owning andbusiness and write your business plan, the operating the same sort of business.lists can serve as background material or • An owner with a sound, well-thought-even become part of the final plan. out business plan. You have accomplished several things if • An owner with financial reservesyou have followed these steps. You have and personal collateral sufficient tolooked inside and asked yourself some solve the unexpected problems andbasic questions about who you are and fluctuations that affect all businesses.what you are realistically qualified to do. Why does such a person need a loan,As a result, you should now have a better you ask? He or she probably doesn’t,idea of whether you are willing to pay the which, of course, is the point. People who lend money are most comfortable
  • 30. 18  |  how to write a business planwith people so close to their ideal loan has no relationship to hot dog selling. Incandidate that they don’t need to borrow. this situation, you might be able to get aHowever, to stay in business themselves, loan if you hire people who make up forbanks and other lenders must lend out the your lack of experience. At the very least,money deposited with them. To do this, you would need someone with a strongthey must lend to at least some people software marketing background, as well aswhose creditworthiness is less than perfect. a person with experience managing retail sales and service businesses. Naturally, both of those people are most desirableMeasuring Up to the Banker’s Ideal if they have many years of successfulWho are these ordinary mortals who slip experience in the software marketingthrough bankers’ fine screens of approval? business, preferably in California.And more to the point, how can youqualify as one of them? Your job is to show Use the Banker’s Idealhow your situation is similar to the banker’sideal. It’s helpful to use the bankers’ model A good bet is the person who has in your decision-making process. Use aworked for, or preferably managed, a skeptical attitude as a counterweight tosuccessful business in the same field as your optimism to get a balanced view ofthe proposed new business. For example, your prospects. What is it that makes youif you have profitably run a clothing store think you will be one of the minority offor an absentee owner for a year or two, small business owners who will succeed? Ifa lender may believe you are ready to do you don’t have some specific answers, youit on your own. All you need is a good are in trouble. Most new businesses fail,location, a sound business plan, and a little and the large majority of survivors do notcapital. Then, watch out Neiman-Marcus! genuinely prosper. Further away from a lender’s ideal is Many people start their own businessthe person who has sound experience because they can’t stand working formanaging one type of business, but others. They don’t have a choice. Theyproposes to start one in a different field. must be either boss or bum. They areLet’s say you ran the most profitable hot more than willing to trade security fordog stand in the Squaw Valley ski resort, the chance to call the shots. They meet aand now you want to market computer good chunk of their goals when they leavesoftware in the Silicon Valley of California. their paycheck behind. This is fine as farIn your favor is your experience running a as it goes, but in my experience, the moresuccessful business. On the negative side is successful small business owners havethe fact that computer software marketing other goals as well.
  • 31. Chapter 2  | do you really want to own a business? |  19 A small distributor we know has a well- me, I’ll still do everything I can to keep mythought-out business and a sound business promise to my customer, even if it costs meplan for the future. Still, he believes that money.” This sort of personal commitmenthis own personal commitment is the most enables this successful business owner toimportant thing he has going for him. make short-term adjustments to meet hisHe puts it this way: “I break my tail to long-range goals. And while it would belive up to the commitments I make to my an exaggeration to say he pays this pricecustomers. If a supplier doesn’t perform for gladly, he does pay it. ●
  • 32. 3 C h a p t e rChoosing the Right BusinessIntroduction..................................................................................................................................................................22Know Your Business..................................................................................................................................................22Be Sure You Like Your Business...........................................................................................................................24Describe Your Business............................................................................................................................................24 Identify Your Type of Business..................................................................................................................25 Problem Statement.........................................................................................................................................27 Business Description.......................................................................................................................................27Taste, Trends, and Technology: How Will the Future Affect Your Business?................................30 Taste.........................................................................................................................................................................31 Trends.....................................................................................................................................................................31 Technology..........................................................................................................................................................32 . Write a Future Trends Statement............................................................................................................34Break-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
  • 33. 22  |  how to write a business plan quick plan My answer is always the same—start a If you’ve chosen the quick plan venture that you know intimately already.method to prepare a business plan (see Intro- I don’t believe any business exists that isduction), you need to read and complete only so foolproof that anyone can enter andthese sections of Chapter 3: make a sure profit. On the other hand, a • “Problem Statement” skilled, dedicated owner often can make • “Business Description” a venture successful when others have • “Forecast Sales Revenue.” failed. ­ emember, your potential customers R will exchange their money only for the conviction that you are giving them theirIntroduction money’s worth. And that means you’ll needThis chapter helps you determine whether to know what you’re doing. While thisyou have chosen the “right” business for point should appear obvious, sadly—it isn’t.you—one that you know, like, and will Many people enter businesses theywork hard for and that makes economic know little or nothing about. I did it oncesense. Most experienced businesspeople myself. I opened an automobile tune-upcomplete several steps as a rough and shop at a time when, seemingly, theyready template to decide whether to couldn’t miss. I knew a good deal aboutcomplete a plan. If your business passes all running a small business, had a personalitythese steps with flying colors, it means it’s well suited for it, and could borrow enougha good idea to write a full business plan money to begin. The end of what turned(although it doesn’t guarantee success). out to be a very sad story is that it tookOn the other hand, if your proposal doesn’t me two years and $30,000 to get rid of thepass, you’ll probably want to modify or business. Why? ­ ecause in my hurry to Bchange your plans altogether. make a profit, I overlooked several crucial If you’re like most people, chances are facts. The most important of these was thatyour business will pass some tests easily I knew virtually nothing about cars and Iand fail some of the others. Antoinette didn’t really want to learn. Not only was Ifaces just that problem in this chapter. Pay unable to roll up my sleeves and pitch incareful attention to how she ­ pproaches a when it was needed, I didn’t even knowthat dilemma; her method of proceeding enough to properly hire and supervisemay help you in your decision. mechanics. In short, I made a classic mistake—I started a business in a “hot” field because someone was foolish enoughKnow Your Business to lend me the money.One of the most common questions people How can you apply my lesson to yourask me is this: What business should I start? situation? Let’s say you’ve heard pasta
  • 34. Chapter 3  | choosing the right business |  23shops make lots of money and you want layout, as well as keep a coherent set ofto start one. First, if at all possible, get a books. If it’s your elegant little restaurantjob working in one, even if you work for and the food isn’t perfect, you’re the onefree. Learn everything you can about ­ verye who ­ ither ­mproves it in a hurry or goes e iaspect of the business. After a few months, broke. If you don’t like getting your handsyou should be an expert in every aspect dirty, choose a clean ­ usiness. bof pasta making, from mixing eggs andflour, flattening the dough, and slicing itinto strips. Ask yourself whether you enjoy Are You Choosing a Risky Business?the work and whether you are good at it.If you answer “Yes,” go on to the second When considering the businesses you know,important question: Is the business a it is helpful to know how well they typicallypotential money maker? You should have fare. For instance, these businesses havea pretty good ­ nswer to this question after a higher than average failure rates:working in the field for a few months. • computer stores If you’re unable to find employment • laundries and dry cleanersin the pasta business, make a tour of • floristsdelicatessens and shops that make their • used car dealershipsown pasta. Interview the owners. To get • gas stationsreliable answers, it’s best to do this in a • local trucking firmsdifferent locale from the one in which • restaurantsyou plan to locate. Small business owners • infant clothing storesare ­ ften quite willing to share their o • bakeriesknowledge once they are sure you will not • machine shopscompete with them. • car washes I remember reading a management • e-commercephilosophy that said that a good manager • grocery and meat stores.doesn’t have to know every job, only If your business idea is on this list, ithow to get other people to do them. doesn’t mean you should abandon itThat approach may work well in a large automatically. However, it should remindcorporation, but for a small business, it’s you to be extra ­ ritical and careful when cdangerously naive. In short, don’t start your preparing your plan. I’ve known successfulsmall ­ enture until you know it from the v businesspeople in every category listed, justground up. I mean this literally. If you’re as I have known people who have failed inopening a print shop, you should be able each of them.to run the presses and do paste-up and
  • 35. 24  |  how to write a business planBe Sure You Like Your Business because your business idea is yours, you have an emotional attachment to it. YouDoes the business you want to own should. Your belief in your idea will helprequire skills and talents you already you wade through all the unavoidable muckpossess? If you have the necessary skills, and mire that lies between a good ideado you enjoy exercising them? Think about and a profitable business. However, yourthis for a good long time. The ­ verage a ego involve­ ent can also entail a loss of msmall busi­ ess owner spends more time n perspec­ive. I’ve seen people start hopeless twith his venture than with his family. This endeavors and lose small fortunes becausebeing so, it makes sense to be at least as they were so enamored with their “brilliantcareful about choosing your endeavor ideas” that they never examined honestly theas you are about picking your mate. A negative factors that doomed their venturesfew of us are sufficiently blessed that we from the start.can meet someone on a blind date, settledown a week later, and have it work outwonderfully. However, in relationships, Describe Your Businessas in business, most of us make betterdecisions if we approach them with a little What is your good idea? What businessmore care. do you want to be in? It’s time to look at Be sure you aren’t so blinded by one the specifics. Let’s say you want to openpart of a small business that you overlook a restaurant. What will you serve? Whatall others. For example, suppose you love will your sample menu look like? Whatmusic and making musical instruments. equipment will you need? Note thatRunning your own guitar shop sounds like including french fries means you’ll haveit would be great fun. Maybe it would be, to install french-fryers, grease traps in thebut if you see yourself contentedly making sewer line, hoods and fire extinguishingguitars all day in a cozy little workroom, systems. On the other hand, by not servingyou’d better think again. Who is going to fried foods you will save a lot of moneymeet customers, keep the books, answer in the kitchen, but maybe you’ll go brokethe phone, and let potential customers when all the grease addicts go next door.know you are in ­ usiness? If you hate all b Or suppose you want to sell DVDs,these activities, you either have to work games, or digital cameras. Do you plan towith someone who can handle them, or do have a service department? If so, will yousomething else. make house calls, or only accept repairs Here’s one last thing to think about when at your store? What sort of security systemc­ onsidering how much you like your busi­ will you install to protect your inventory?ness idea. In fact, it’s a danger that threatens What about selling ­ omponent sound calmost every potential entre­ reneur. Precisely p systems or home entertainment centers?
  • 36. Chapter 3  | choosing the right business |  25What about competition from nearby • Retail. Retail businesses buyr­etailers? merchandise from a variety of Answers to these types of questions will wholesalers and sell it ­ irectly to dbe crucial to the success of your venture consumers. Some ­etailers provide rand to ­ riting your business plan. Let me w service and repair facilities, whiletell you from hard, personal experience most do not. Most ­etailers just take rthat you need a written document—even in the goods and mark up the price,if you’re sure you know exactly what your sometimes doubling their purchasebusiness will do. price to arrive at a sales price. With this foundation document to refer Supermarkets, mail order catalogueto, you are less likely to forget your good m ­ erchants, online stores (e-tailers),plans and resolutions in the heat of getting ­ computer stores, dress shops,your business under way. Any changes you department stores, and conveniencelater make can be made both consciously marts are retailers.and with consideration. • Wholesale. Wholesalers buy merchan­ To write a complete description of your dise from manufacturers or brokersp­ roposed business, simply follow the and resell the goods to retailers.suggestions on the next few pages. Normally, a wholesaler maintains an inventory of a number of lines. A whole­ aler normally does not sIdentify Your Type of Business sell to consumers, in order to avoidFind the business category listed below competing with his retailer ­ ustomers. cthat most closely matches your business. Whole­ alers ­ sually offer delivery s uYou’ll use the ­ escription that follows as d service and credit to customers. This ­a reference when you describe your own type of busi­ ess is characterized by nbusiness. low gross profit ­ argins (sometimes m varying between 15% and 33% of the caution whole­ aler’s selling price) and high s inventory investment. Each of the business categories Wholesalers typically buy in largerequires different skills to run efficiently. Many lots and sell in smaller lots. Likesmall businesses involve one or two types of retailers, they seldom make anybusiness in the same endeavor. But if your idea changes to the products. Most whole­will involve you in several types of business, salers aren’t well known to the generalit may be too complicated for you to run public.efficiently. As a general rule, small businesses • Service. People with a particularwork best when their owners know exactly skill sell it to consumers or to otherwhat they are about and strive for simplicity.
  • 37. 26  |  how to write a business plan businesses, ­ epending on the skill. d the finished product before she begins The end product of a service business work. When the project is complete, is normally some sort of advice or the the developer sells her interest in the completion of a task. Occasionally, a project, normally directly to the user or service business sells products as an consumer. ancillary function. For example, a baby To understand project developers, diaper cleaning service may also sell consider a woman building a single- diapers and baby accessories. Service family house on speculation. She business ­ ustomers normally come c buys the lot, secures permits, hires a from repeats and referrals. It’s common contractor, gets a loan, builds a house, to have to meet state licensing and sells it. She is then ready to go on requirements. to another project. Other examples of Hairdressers, carpet cleaners, con­ project developers include someone sultants, housecleaners, accountants, who buys, restores, and sells antique building ­ ontractors, and architects are c cars and someone who purchases examples of service businesses. dilapidated buildings at a bargain • Manufacturing. Manufacturers assemble price, fixes them up, and sells them. components or process raw materials into products usable by consumers or tip other businesses. This type of business Software development note: Soft­ are w ranges from an artisan who makes craft development differs from soft­ are production w items to Toyota. The most difficult part and sales in that software developers create of the manufacturing business is to find a product that another entity produces and a product, or even better, a series of markets. For example, Fred Jones creates a products, that have acceptance in the bookkeeping program for employment agencies marketplace and generate a steady sales on his own time. Then he sells or licenses volume. Or, as one businessperson put production and marketing rights to the Acme it: “Production without sales is scrap.” Programs Co. for $1,000 cash and 5% of future • Project development. Developers sales. Fred is the project ­ eveloper and Acme is d c ­ reate and finish a saleable com­ the manufacturer. If Fred also produces copies modity by assembling resources for and markets them himself, he acts as both a one-time project. Normally, the developer and manufacturer. developer knows the market value of
  • 38. ChApter 3 | CHOOSING THE RIGHT BUSINESS | 27Problem Statement Problem Antoinette’sSuccessful businesses share a common Dress Shop Will Solveattribute: They do something useful fortheir customers. One way to determine Professional working women like to buywhat is useful for your customers is to fashionable, slightly conservative clothingidentify and describe the problem that your at moderate prices. They prefer shoppingbusiness will solve. For example, a window at convenient times and patronizing storeswashing service solves the customer’s twin that offer a wide selection of merchandise.problems of wanting clean windows and These women like to talk to sales clerkslacking either the time or physical ability who understand fashion and know theirto clean windows himself. If you accurately store’s merchandise; few clerks in the localunderstand your customers’ problems and department stores have this knowledge.needs, your business will have a better At the present time, many of these womenchance of success. travel 45 miles to shop because no local For example, here’s a problem faced by store meets their needs or carries today’sa customer of a pizza-by-the-slice stand: most popular labels.“I’m hungry and I don’t have much timeor money, but I’m tired of hamburgers andwant a change of pace. Also, I’d like to beable to specify the exact ingredients I want Business Descriptionin my meal. And, it would be really swell Next, describe how your business willto have a glass of wine or beer with the solve your customers’ problem. Take yourmeal.” time and do a thorough job. It’s very likely Now, think about your customers for that the first time you attempt this task,a minute. What is the problem that you questions will occur to you that you didn’tsolve for them? Write out your description consider previously. If so, figure out aof the problem your business solves for its good answer and rewrite your description.customers. This statement will become part The important thing is not how long itof your completed business plan. 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.
  • 39. 28  |  how to write a business planEach of the choices you make in your 9. Who will handle critical tasks likebusiness description will affect the amount selling, ordering, bookkeeping, ­of money you’ll need to start or ­ xpand e marketing, and shipping?and how much sales revenue you can 10. How will I advertise and promote mye­ xpect. business? ­ Consider the following series of 11. What are the competition’s strengthsquestions when writing your business and weaknesses?description. If you answer both the general 12. How am I different from the compe­business questions and each question that ti­ion, as seen through the eyes of tapplies to your business, you’ll present my customers? (Make sure that youyour business accurately and fairly. answer this question from a customer’s For an example of a well-thought‑out perspective and not from an owner’sbusiness, refer to the accompanying point of view.)sample, which contains the first draft ofAntoinette’s Dress Shop’s business descrip­ Specific Business Questionstion. You will find three additional business Some issues your business faces can bedescriptions in Appendixes A, B, and C at categorized by business type. Make surethe back of the book. your business ­ escription addresses both d the general business questions that applyGeneral Business Questions to your business and the questions specificThese questions apply to most small busi- to your type of business.nesses. Feel free to skip any questions thatdon’t pertain to you. caution 1. What problem do I solve for my If you plan to conduct operations customers? in more than one category, be sure to use the 2. Who is my typical (target) customer? specific questions for each type of business 3. How will I communicate with my that applies. target customer? 4. What products and/or services will I provide? Are there any products or Retail services my customers may expect me 1. How will I keep abreast of fashion and to provide that I don’t plan to provide? taste in my field? 5. Where will my business be located? 2. Does my location have enough drive- 6. Where will I buy the products I need? by or walk-by traffic to support my 7. What hours will I operate? business, or must I rely on heavy 8. Who will work for me and how will advertising for sales? they be paid?
  • 40. ChApter 3 | CHOOSING THE RIGHT BUSINESS | 29 Business Description for Antoinette’s Dress Shop Antoinette’s Dress Shop will be a women’s schedule fashion shows for our customer base retail clothing store designed to serve the as a marketing device. growing market of professional working Antoinette’s will offer a relaxed atmosphere women. Our store will buy clothing and with personalized attention and unlimited accessories from the most popular labels fitting-room time. Our store will feature a that provide consistent quality and service. contemporary design and inviting feeling. Antoinette’s Dress Shop will resell them “as All our employees will be knowledgeable is” to our target market. Antoinette’s will about fashion in general and about the specialize in fashionable, reasonably priced clothing we sell. Antoinette’s will be located clothing suitable to this city’s working in approximately 2,000 square feet in the environment. The store will sell a limited line downtown mall and will maintain regular of sportswear or leisure wear. We will carry mall hours of Monday through Friday from business suits, pantsuits, and dresses for 11:00 a.m. until 9:00 p.m. and Saturdays daytime wear, together with accessories like from 10:00 a.m. until 6:00 p.m. These hours purses and belts. We will make prompt minor will be a convenience to our customer base. alterations at no charge. The store will not offer delivery on a regular Antoinette’s will regularly publish a basis, although we will offer Federal Express newsletter containing clothing tips for working shipments when requested and we will women, which we will send to customers on maintain a website together with an active our email list. We will maintain a file on each email correspondence with customers so they customer that contains their size and style can express their feelings about any concerns. and color preferences. Antoinette’s will3. Is it better to be in a shopping center Wholesale with high rents and operating restrictions, 1. Which product lines will I carry in or in a separate location with lower inventory and which will I order as costs and less drive-by or walk-by required? traffic? 2. Will I carry accounts for my customers4. How much inventory will I buy in or work on cash only? comparison to my expected sales 3. Are there any exclusive distributorships revenues? (This is a critical question in available to me? the retail field and deserves your close 4. Will I have to market all the products attention.) myself or will the manufacturers have marketing programs?
  • 41. 30  |  how to write a business planService 3. Am I sure of the time factors? What will1. Are my credentials and skills equal to or happen if it takes longer than expected better than others in my field? to complete and sell the project?2. Can I sell my service as well as I can 4. What portions of the work will I contract perform it? with others to perform?3. Will I take work on speculation or will I 5. Is there a definite buyer for my project? insist on cash for each job? If not, what costs will I incur before it’s4. Do I have a client list to begin with or sold? will I start cold?5. Am I better off associating with others or being independent? Taste, Trends, and Technology:Manufacturing How Will the Future1. Does my manufacturing process create Affect Your Business? toxic or polluting materials? If so, how Let’s assume you have a good description will I deal with them and what regula­ of your proposed business, and the tory agencies handle them? business is an extension of something you2. Is there a pool of readily available, like and know how to do well. Perhaps afford­ ble skilled labor where I want to a you have been a chef for ten years and locate? have always dreamed of opening your3. Will I make products for inventory or per own restaurant. So far, so good—but order? you aren’t home free yet. There is4. Will I make one product only or a line another fundamental question that needs of ­ roducts? p answering: Does the world need, and is it5. If I succeed on a small scale, do I plan willing to pay for, the product or service to sell out to a larger company or try to you want to sell? For example, do the compete ­ ationally or internationally? n people in the small town where you live6. Is my competition from small or large really want an Indonesian restaurant? If firms? your answer is “Yes” because times areProject Development good and people have extra money, ask1. Am I sure of the selling price of my yourself what is likely to happen if the project? economy goes into a slump ten minutes2. Am I sure of my projected costs? What after you open your doors. will happen if my costs are higher than To make this point more broadly, let’s estimated? use a railroad train as a metaphor for our economic ­ ociety. And let’s have you, as s a potential new businessperson, stand
  • 42. Chapter 3  | choosing the right business |  31by the tracks. How do you deal with the rapidly? If so, you are likely to go broke notrain when it arrives? You can get on and matter how good a manager you are andride. You can continue to stand by the how much you love your business.tracks and watch the train disappear in thed­ istance. Or you can stand in the middle ofthe tracks and get run over. Trends To continue this metaphor, let’s now It’s one thing to understand that people’sassume the economic train has three tastes have changed and will undoubtedlyengines: taste, trends, and technology. change again and again, but it’s a lotTogether they pull the heavy steel cars harder to accurately predict what will bewhich can give you a comfortable ride or popular in a few years. I wish there wereflatten you. Let’s take a moment to think a central source of information aboutmore about each of these engines. predicting future trends in any field, but there isn’t. You have the task of looking into the future and deciding where it isTaste going and how that ­ ffects what you do aPeople’s tastes drive many of the changes today. Fortunately, a little ­esearch can do rour ­ ociety speeds through. For example, s wonders. Here are some tips on how toin the 1970s, many of us changed our taste proceed.in automobiles from large gas guzzlers Read everything you can about yourto small, well-built cars. American manu­ field of interest. Attend trade shows andfacturers didn’t recognize this change in talk to people in small businesses at thetaste until they almost went broke. The cutting edge of the field. Talk to peopleJapanese were in the right place with small, in similar businesses. Read back issues ofr­eliable cars and realized great prosperity. magazines aimed at your proposed field. Consider popular music as another Your goal is to know enough about yourexample. Music styles change every few proposed business to spot the trends thatyears, and some bright businesspeople will continue into the next decade. Forsucceed by selling clothing and other example, if you’re interested in openingacces­ ories associated with each new s a night club from the 1950s featuring amusic style. piano bar, mixed drinks, and lots of room What does this mean to you? Look at for smokers, you should know that theyour business idea again. How does it fit consumption of hard liquor and cigaretteswith today’s tastes? Is your business idea has gone down sharply in recent years andpart of a six-month fad? Are you going that nonsmoking lounges with wine andinto something that was more popular five imported beer are doing very well. Puttingyears ago than it is now and is ­ eclining d this information together with other factors,
  • 43. 32  |  how to write a business plansuch as your anticipated location and target beyond your reach unless you plan to havecustomers, should give you a pretty good your small business grow in a hurry. Manyidea of what drinks you should offer. You companies expect to lose money for yearsmight decide to serve a number of ­ arieties v during product development and approvalof fine wine and imported beer and ­orget f before developing a big hit. However,about a hard liquor license altogether. there are often ways creative small business owners can find to participate in new technological trends. For ­ xample, many eTechnology computer software companies startedTechnology is your innovative kitchen with little more than a good idea and aappliance, your home ­ omputer, NASA’s c computer. Or to think even smaller—new spacecraft, and even the proverbial but not ­ ecessarily less profitably—lots nbetter mousetrap. For example, lots and of carpenters have done well makinglots of people are working feverishly to ergonomically correct furniture for computercome up with better video games, laser work stations.toothbrushes, wrist­ atches, TVs, and the w Pay attention to new developments inlike. Sometimes it takes years to perfect your chosen field and think about how youan item. That can be good news for small can take advantage of them. The explosionbusiness owners, as there is plenty of time in mobile devices has popu­arized applica­ lto prepare to profit. tions (or “apps”) that enable users to Of course, there is a downside to new accomplish many functions previouslytechnology, too. It often involves high asso­ iated with desk bound computers. crisk. There’s no guarantee of success Can your business benefit from creatingjust because the product is new. In fact, such an app? Can you modify your soft­something like 80% of the new ­ roducts p ware or website development business tointroduced into the marketplace die a accommodate the massive app market?quick death. Remember HD-DVD players, In short, new technology is a mightythe Edsel, and eight-track tape players? engine that can pull the economy in new What should you do to take advantage directions at terrific speed. Be sure you areof new technologies? First, recognize riding on the train and not picking daisiesthat large-scale new technology ventures on the tracks in front of it.require vast amounts of money and will be
  • 44. Chapter 3  | choosing the right business |  33 E-Business BasicsFrom the initial dot-com boom in the late In this model, the online retailer pays the1990s through the subsequent “dot bomb” manufacturer’s invoice at a wholesale cost andin 2001, through the post 2001 rebound and collects cash via the customer’s credit card2008 mortgage meltdown, the only “constant” before an electronic purchase order is issuedin the in online business world is “constant to the manufacturer.change.” And online retail business also requires One thing is certain: the pre-2001 approach intensive management and sometimesof just exploiting a hot domain name and requires a bit more vigilance than a typicalbuying up cyber “real estate” no longer retail store. These businesses often workguarantees success. Today, successful online on lower than average gross profit margins.companies track the same metrics as their Since many online shoppers use the shoppingoffline counterparts—that is, they carefully bots mentioned earlier, savvy retailers makewatch revenues, costs, and profit and loss sure their products are found by the searchanalysis. For example, one savvy Internet engines. Finally, online retailers must eitherentrepreneur eventually closed his retail know, or must hire others who know, websitesporting goods store because employees—too programming as well as online banking andbusy shipping orders to Internet customers— fulfillment operations—all of which arewere neglecting brick-and-mortar customers. necessary to generate profits. Some trends for success have emerged: a Online retail sales have been growingsuccessful online retailer commonly carries a steadily and are forecast to continue growing.wider assortment of goods than a traditional The same is true for online companies thatbrick-and-mortar store. Online retailers cater provide services. Google, for example, earnsto an international market that operates steady profits from its online advertising pro-around the clock. Many online retailers try to gram where a business pays a fee for each clickkeep inventory investment as low as possible through to the sponsored link. One advantageby having some of their suppliers ship orders of this program is that a merchant can trackdirectly from the manufacturer’s location to the cost effectiveness of the program on athe retail customer (known as “drop shipping”). daily basis (and stop or start it at any time).
  • 45. 34 | HOW TO WRITE A BUSINESS PLANWrite a Future Trends Statement Future Trends AffectingWith this discussion of taste, trends, and Antoinette’s Dress Shoptechnology, I have attempted to focus yourattention on the broad movements in the There are two conflicting trends affecting my economy that can affect your business business. First, more women are entering theidea. Also, remember that there are similar workforce. However, women increasinglytrends in your local community. It’s at least must work to pay for family necessitiesas important that you pay attention to rather than to make money for extras. Forthese. For example, perhaps you live in a my business, this means that professionalfarming community with no manufacturing working women will appreciate even moreindustries and many migrant workers. It is in the years ahead the extra service andunlikely that a high fashion clothing store convenience that we offer.would do well there, but you might do Second, as the baby boom matures, thevery well selling a new lighter, stronger, number of women in the age group thatcheaper work boot, or chain saw, or stump enters the workforce is declining. This meanspuller. that I cannot count on an ever-expanding Write down your first thoughts about population base for my business.what trends affect your business and where To accommodate these trends, I plan tothey will be in five years. Nobody expects pay attention to my customers’ changinga perfect forecast, but most financial tastes as they grow older. I also intend tobackers want to know that you have find new ways to market to the smallerthought through how your business will fit number of younger women entering theinto the world in the next few years. 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
  • 46. Chapter 3  | choosing the right business |  35this tendency in yourself, it’s extra tool for new business ventures. They won’timportant that you prepare a financial write a complete business plan unless theirforecast carefully and pay attention to what break-even forecast shows that the salesit tells you. This step tells you whether revenue they expect to obtain far exceeds ­your idea is a sure winner or a sure loser what they need just to pay all the bills.or, like most ideas, whether it needs work Otherwise, they know their business willand polishing to make it presentable. not last very long. How can you tell if your business ideawill be profitable before you implement cautionit? The honest answer is, you can’t. This You can use this technique as a “quickessential fact makes business scary. It also and dirty” profit analysis, but don’t use it as amakes it adventurous. After all, if it were substitute for the full profit and loss forecasta sure thing, everyone would go into p ­ resented in Chapter 6. A break-even forecastbusiness. is a great screening tool, but you need a more Just because you can’t be sure you will c ­ omplete analysis before spending any money.make money doesn’t mean you shouldthrow up your hands and ignore thewhole problem. You can and should make tipsome educated guesses. I like to call them Project development note: TheSWAGs (“Scientific,” Wild Ass Guesses). break-even analysis described below doesThe challenging part is to make your profit not apply to a project development, sinceestimate SWAGs as realistic as possible and only one sale ­ ccurs. This exercise is designed othen make them come true. for a continuing business with ongoing sales The best way to make a SWAG about revenue. Before they begin, developers mustyour business profitability is to do a break- know how much profit they will make aftereven forecast. Although a break-even the project is completed. A developer preparesanalysis or forecast can never take the a break-even forecast every time she calculatesplace of a complete business plan, it can the likely sale proceeds and subtractshelp you decide if your idea is worth estimated costs. Developers can skip thispursuing. section, unless they need a refresher course on Most financial backers expect you to break-even analyses.know how to apply break-even analyses toyour business. Your backer may ask what To complete a break-even forecast ofyour profits will be if sales are slightly your business, you’ll make four separatehigher or lower than your forecast. estimates: Many experienced entrepreneurs use a • Sales revenue. This consists of the totalbreak-even forecast as a primary screening d ­ ollars from sales activity that you
  • 47. 36  |  how to write a business plan bring into your business each month, part of your business plan. Much of your week, or year. hope for success rides on how accurately • Fixed costs. These are sometimes called you estimate sales revenue. “overhead,” and you must pay them Keep in mind that you’re honestly trying regardless of how well you do. Fixed to decide if your business will be profit­ costs don’t vary much from month to able. This means that you must base your month. They ­nclude rent, insurance, i forecast on the volume of business you and other set ­ xpenses. e really expect—not on how much you need • Gross profit for each sale. This is defined to make a good profit. If you estimate sales as how much is left from each sales too high, your business won’t have enough dollar ­ fter paying for the direct costs a money to operate. But if you ­ stimate sales e of that sale. For example, if Antoinette too low, you won’t be prepared or able to pays $100 for a dress that she sells for handle all the business you get. $300, her gross profit for that sale is Here are some methods different $200. types of businesses use to forecast sales • Break-even sales revenue. This will be revenues. the dollar amount your business needs each week or month to pay for both cd-rom direct product costs and fixed costs. It ­ A copy of the Sales Revenue Fore­ will not ­nclude any profit. i cast is also included on the CD-ROM in Excel spreadsheet format (known as .xls). You can caution find it under the filename SalesRevenue.xls. Math alert: The following section Note that formulas have been embedded­ equires that you make some simple math­r in the spreadsheet document so that it willematical calculations, which you’ll use to ana­ automatically calculate revenue totals.lyze your business before writing a completeplan. If the very thought of math makes tipyour head spin, you’ll probably want to findsomeone to help you. You may decide to round off your forecasts to the nearest $1,000 instead of writing out each single dollar amount. ForForecast Sales Revenue instance, a monthly sale of $33,333 wouldYour first task is to estimate your most become $33,000. After all, these are guesses,likely sales revenue by month for your first and it’s hard to guess at single dollar amountstwo years of ­ peration. This is both the o when you’re in the five-figure area.hardest thing to do and the most important
  • 48. Chapter 3  | choosing the right business |  37Retail Sales Revenue Forecast number of people in the area gives them the average sales per person from groceryThe simplest way to forecast retail sales stores.revenue is to find the annual sales revenue Then they compare the average sales perper square foot of a comparable store. ­ erson with state averages. If it’s higher, it pThen multiply that dollar figure by your might mean that people living in the areaestimated floor space to derive an estimate have a higher-than-average income. Theyof your annual sales revenue. can verify that by ­eferring to the United r States Census, which lists average incomeExample: per family and per person for ­ very census e A similar business shows $200 of sales tract. If the income per person is ­ verage a per square foot per year. If you have or below average, and sales per person are 1,000 square feet of floor space, your higher than average, it probably means that estimated annual sales revenue will people come from surrounding areas to be $200,000 (1,000 × $200). Naturally, do their shopping. If the sales per person your estimate should take into account are lower than average in the area, it everything that makes you ­ ifferent d might mean that income is below average from the other store. or that people leave the area to do their shopping. On the basis of this sort of data, Some chain stores, such as supermarkets together with an analysis of competitionand drugstores, have refined the art of and demographics, supermarket executivesestimating sales to a science. Of course, can develop relatively accurate estimates ofthey have the ­ dvantage of learning from a sales volume for a new store.their experience with their other stores.Even so, they occasionally make bad Service Business Sales Revenue Forecastestimates. To estimate sales revenue for a service Supermarket executives first gather business, you’ll need a good understandingstatistics on how much the average of what steps you go through to generateperson living in town spends every week a billable sale. Then make a forecast ofin grocery stores. In some states, these how many times you expect to go throughnumbers are available by obtaining total all those steps every week or month andsales volume of grocery stores from the how much revenue you’ll derive from thosestate sales tax agency; normally that data steps.is broken down by county. They estimate Don’t forget to allow time for internalhow many people live in the area for matters and marketing. If you’re a solewhich sales volume statistics are gathered. proprietor, you’ll need to allow somewhereD­ ividing the sales volume data by the between 20% and 40% of your time
  • 49. 38  |  how to write a business plan Sales Revenue Forecast for Antoinette’s Dress Shop Antoinette wants to open a 2,000-square-foot decide how the sales revenue will occur dress store in a downtown shopping mall. The each month. She could simply divide this shopping mall manager says that revenue for $400,000 by 12 months and get $33,333 per women’s ­ lothing stores in the mall average c month. But in the dress business, Antoinette between $200 and $250 per foot per year. knows, this would be inaccurate. In women’s After checking with other clothing retail- clothing, there are four sales seasons: spring, ers, reading trade magazines, visiting similar early summer, fall, and Christmas. The kind stores in other cities, and integrating her own of shop Antoinette plans to open is slow in experience in the business, Antoinette decides midsummer and in January and February. that she can achieve the $250-per-foot-per-year Antoinette also figures that sales will be a little figure. This means her annual sales should be lower than the average for the first few months $500,000 (2,000 × $250). To be conservative, until her advertising campaign catches on. she plans for the first year’s sales to be about Antoinette’s monthly sales add up to 20% below that level to allow for her business $401,000 for the first year, so she reduces the to build. This means that first-year sales will be December figure by $1,000 to make a nice, about $400,000, or $200 per foot. round $400,000. For the second year, she Because Antoinette must forecast monthly increases revenues to $504,000 to allow for sales for the first two years, she now has to 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 40,000 grand opening & seasonal peak 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
  • 50. ChApter 3 | CHOOSING THE RIGHT BUSINESS | 39for nonbillable activities. If you have just above, and combine some of theemployees or partners, you’ll want to make concepts to estimate your sales volume. Ifsimilar allowances for them. you know as much about your business The sales revenue forecasting process as you should, it shouldn’t be difficult tofor Central Personnel Agency shows the develop a reasonable estimate. If you’rekind of logical process you’ll need to go having great difficulty, the chances arethrough. (Central’s complete business plan that you need to learn more about youris provided in Appendix A.) business.Manufacturing or Wholesale Business exAmple:Sales Revenue Forecast Patty plans to import and wholesale modems for Acme computers. AcmeIf you plan to be in a manufacturing or has told her that they have sold 100,000 wholesale business, read the sections computers to date and projections show“Retail Sales Revenue Forecast” and about 1,000 per month for the next three “Service Business Sales Revenue Forecast,” Sales Revenue Forecast for Central Personnel Agency I like to allow room for mistakes in my fore- This means that to fill six to eight job orders cast, so this sales forecast seems like overkill; per month and meet my gross income goal, my experience shows the overage is needed. I need 25 to 30 good people on file. Finding Since it’s harder to find qualified people good people is the hard part. It takes me up than it is to find job openings, I’ll concentrate to 20 interviews to find one excellent person. on finding people after I build a backlog of Some of these interviews are done in a few openings. I estimate I can find about ten job minutes over the phone, but just the same, openings per week. I will allow myself two I allow one hour per interview. I can average weeks to find 20 job openings. After the first five to eight per day, and it will take me about 20, I’ll get plenty of openings by referrals and 60 days of interviewing to build a base of repeats. My income goal is to gross $3,000 qualified people. It takes an average of three to $4,000 per month, and I know that the good people sent out on interviews to fill one average job order filled is worth $500 to $600 job. Of course, once I have a good person, I in gross fees, so filling only ten openings per send that person out on every interview I can. month should give me about $5,000 to $6,000 I anticipate three months of fairly low income in gross fees. before I begin to reach my income goals.
  • 51. 40  |  how to write a business plan years. Patty realizes she doesn’t know telephone, utilities, bookkeeping, and so what percentage of Acme owners will forth. Some costs will be paid each month want modems and decides to conduct and others will be paid once or twice a a mail survey of Acme owners ­ efore b year. If a cost is less than about 10% of completing her sales forecast. your total fixed costs, you can divide the cost by 12 and show an amount eachProject Development Sales month. If the cost is larger than 10% ofRevenue Forecast the total, record the cost in the month you expect to pay it. You can choose whetherProject developers are not required to to include a draw for yourself as part ofcomplete a monthly sales revenue forecast. the fixed costs. If you plan to take yourThey need to know the likely amount they compensation only if the business shows acan sell the project for before they begin profit, do not include your draw.work; all revenue comes when the project Your fixed-cost list should also includeis sold. some “discretionary costs”—expenses that change from time to time due to your conscious decision. For example,Forecast Fixed Costs your promotion expenses may changeFor most small businesses, the difference occasionally as you increase or decreasebetween success and failure lies with advertising to take advantage of slow orkeeping costs down. Many smart people busy times. ­nclude them in the fixed-cost Istart successful businesses in a spare room category even though the amount mayin their house, the corner of a warehouse, fluctuate from time to time.or a storefront in a low-rent neighborhood.Unfortunately, others sink their original cautioncapital into essentially cosmetic aspects of Certain expenses are not “fixed costs.”their business, such as fancy offices, and Do not include as fixed costs:then go broke. • the costs to actually open your business Make a list of the fixed or regular (covered in Chapter 7)monthly ­ xpenses of your business. Your e • loan repayments (covered in Chapter 7),objective is to develop a dollar amount of orexpense that you are committed to pay • the costs you pay for any goods you’llevery month. This is your “nut,” or the resell or use in the manufacturingdollar figure you must be able to pay to or development process (covered inkeep the business viable. Include rent, Chapter 6).utilities, salaries of employees, payrolltaxes, insurance payments, postage,
  • 52. ChApter 3 | CHOOSING THE RIGHT BUSINESS | 41 Forecast Gross Profit for Fixed Costs Forecast for Each Sales Dollar Antoinette’s Dress Shop How much of each sales dollar will be Antoinette estimates her fixed costs on a left after subtracting the costs of the goods monthly basis: sold? That number will pay fixed costs and Rent, including taxes, maintenance $ 3,850 determine your profit for your business. Wages, employees only (average At this stage, you are trying for a broad- including payroll taxes, etc.) 3,600 brush, quick and dirty forecast, so it’s okay Utilities 800 to make a rough estimate of your average gross profit. Advertising 1,000 Let’s look at how Antoinette calculates Telephone 600 her gross profit for her first year of busi- Supplies 900 ness. Antoinette plans to sell about half Insurance 1,500 her products at double the cost she pays. A dress she buys for $125 she sells for $250. Freight 700 That means that her gross profit per dress Accounting/Legal 600 sale is 50%. She plans to derive her selling Bad debts 500 price for sale dresses, mark-downs, and Miscellaneous 2,000 accessories by adding one-half of her cost Total per month $ 16,050 to her selling price; for example, if a belt cost her $10, she’ll sell it for $15. The calculations are similar for different type businesses. Service businesses will By completing this simple exercise, have higher gross profit margins thanAntoinette has gained important informa- retailers; most revenue is gross profittion. She now knows that she must sell because little merchandise is sold. Whole-enough every month so that she has at sale businesses will be similar to the retailleast $16,050 left after accounting for the example. Manufacturing businesses willmerchandise she sells. On an annual basis, be similar in appearance even though thethat’s $192,600 ($16,050 multiplied by 12). cost of goods will include materials fromAntoinette must also bear in mind that a variety of sources and any labor that isshe has not shown any salary or draw for paid per piece.herself. To prosper, she obviously must not Project developers have only variableonly cover fixed costs, but also must take costs in each project. There are usually noin enough to make a decent living. fixed costs since the developer’s business ends with the sale of the project. However,
  • 53. 42 | HOW TO WRITE A BUSINESS PLAN Gross Profit Calculation for Antoinette’s Dress Shop Regular Sale Dresses & 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 Profit (Selling Price less Total Cost) 124 4 N/A Gross Profit % (Gross Profit ÷ Selling Price) 49.6% 26.7% N/A (or 0.496) (or 0.267) Total Annual Sales $200,000 $200,000 $400,000 Total Annual Gross Profit $99,200 $53,400 $152,600 Average gross profit percentage = 38.2% ($152,600 ÷ $400,000 = 38.2%)if a project developer works on several Forecast Gross Profit for a Start-Up Businessprojects at the same time, he may have For a new business, calculate the averagesome fixed costs that continue after any gross profit for your business by followingparticular project is sold. For a project these steps:developer, the gross profit is the difference 1. For each product or service that you between the project’s selling price and all sell, list every individual item that goesthe project costs. into that product, including piece-rate labor and commissions. For example, TiP Antoinette buys dresses from outside The prices in the Sales Dresses & suppliers and resells them. The cost ofAccessories column illustrate gross profit the dress is the major component ofcalculations; they do not represent the selling the total product cost. She may add theprice of sale items. cost of the preprinted bag to derive the total cost of the sale.
  • 54. Chapter 3  | choosing the right business |  43 2. Once you have a complete list of all Forecast Gross Profit for an Existing Business the cost components for your products If you’re already operating and have a or services, add up the cost of each profit and loss statement for your business item. from prior months, your job is even easier. 3. Write the selling price of the item Simply subtract the total cost of sales from below the total cost of the item. the total revenue to get the gross profit 4. Subtract the total cost from the selling for the period. Then, convert the dollar price to derive the gross profit from gross profit figures to a percentage of each sale of that item. sales revenue by dividing total dollar gross 5. Divide the selling price into the profit by total sales for the period. The gross profit to derive the gross profit percentage gross profit figure you get will percentage for each product. be the percentage gross profit figure you 6. Repeat for each product you’ll sell; use for your break-even forecast. if you have more than four or five If you’re already operating and your individual products, then it’s better to expansion will change the percentage of group them by gross profit percentage total sales revenue that each product group rather than to make an estimate for brings, then you will need to forecast your each individual product. new average gross profit by following the 7. Write down how much total dollar procedure for a new business listed just sales you expect for each product or above. product group. 8. Multiply the gross profit percentage by the total dollar sales to derive the Forecast Your Break‑Even dollar gross profit from each product. Sales Revenue 9. Add together the total dollar gross profit figures to derive the total dollar Now that you have the fixed costs per gross profit from the year’s sales. month for your business and the average 10. Divide the dollar gross profit by the gross profit per sale, you can estimate annual sales revenue to derive the how much revenue you will need to just average gross profit percentage for the break even. You can use any period you year’s sales. wish, although most people use a month Completing this gives you an average or a year. As this chart shows, it’s simplegross profit percentage for your business. to calculate. Just divide the fixed costs by the average gross profits expressed as a decimal.
  • 55. 44  |  how to write a business plan How to Calculate Your Profit Break-Even Sales Revenue Forecast Perhaps you’re lucky enough that your A B C break-even sales forecast shows you’ll Fixed costs Average gross profit Break-even sales make more than you need to break even. per month percentage expressed revenue (A ÷ B) (or year) as a decimal 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:Example: Deborah needs $140,000 to break even Ronnie Ryann runs the Religious Sounds in her bookkeeping business. Her Round Table in Rye, New York. It’s a projected sales revenue shows that she small business, but she loves it dearly. will be bringing in $185,000 the first The gross profit on the CDs, tapes, and year—or $45,000 more than she needs videos she sells is 50%. This is the same to break even. To determine the profit, as saying that after adding up the cost she multiplies her average gross profit of the products, packaging, and postage percentage (0.692) by $45,000. Her (all variable costs), Ronnie is able to profit will be $31,140. sell at double this amount. Ronnie rents 1,000 square feet for $800 per month, pays her part-time clerk $950 per If Your Forecast Shows a Loss month, and budgets $650 per month for What will you do if your break-even sales u ­ tilities, taxes, and so forth. This means forecast shows that you’ll lose money? First her operating expenses (all fixed costs) of all, don’t panic. You’ll need to do some are $2,400 per month. (Her costs seem sober, serious, and meticulous thinking. low because some parts of New York Carefully check all your numbers and State are behind the inflation curve.) double-check your arithmetic. Incidentally, Therefore, Ronnie has to sell $4,800 many people doing this exercise for the of records per month to break even. first time make some simple mistake Her salary comes out of the money she in arithmetic that throws off the whole takes in over the $4,800. Fortunately, forecast. You might have someone with it will cost Ronnie very little in extra good math skills review your work. overhead to sell up to $10,000 of Let’s look at Antoinette’s situation and records per month, so if she can achieve see how her figures have turned out. this volume, she will get to keep close to half of it.
  • 56. Chapter 3  | choosing the right business |  45 her original sales forecast. What would Break-Even Sales Revenue Forecast happen if she increased her annual sales A B C forecast by $150,000 (to $550,000) and Average gross profit kept the same fixed costs and gross profit Fixed costs percentage expressed Break-even sales margin? That is more than the break-even per year as a decimal revenue (A ÷ B) sales and should be enough to give her $192,600 0.382 $504,188 a profit for her efforts. How much profit? Let’s see. Antoinette needs $504,188 in salesrevenue just to break even. That is $104,188 Break-Even Sales Revenue Forecastmore than she expects the first year and for Antoinette’s Dress Shop$4,188 more than she expects for the Revision 1: Increase Sales Volume tosecond year. Despite her enthusiasm and $550,000determination, Antoinette’s first reaction to Annual sales $550,000this news is to panic and consider giving Annual fixed costs 192,600up. After some reflection, she reexaminesthe calculations to make sure she hasn’t Gross profit 0.382made a mistake in her arithmetic. Then she Break-even salesstarts considering her options. Should she ($192,600 ÷ 0.382) 504,188abandon her idea and work for someone Sales over break-evenelse? Should she proceed with her loan ($550,000 − $504,188) 45,812application and fudge figures to show a Profitprofit? Or is there some other alternative? ($45,812 × 0.382) $ 17,500 In any business, only these things canimprove profits: • you can increase the sales revenue by Antoinette concludes that a very aggres­ selling more of your product or service sive sales increase alone brings her a • you can reduce fixed costs small profit, but believes that the sales • you can increase the gross profit increase of $150,000 is very high. The percentage by raising selling prices or profit resulting from that sales increase is by lowering your product cost. probably not enough to justify the risk of Let’s see how Antoinette applies that that high an increase in the sales forecast.knowledge to her break-even analysis. If a sales increase of $40,000 or $50,000 First, Antoinette thinks about increasing would show that profit, she would besales. Maybe she was too conservative in
  • 57. 46  |  how to write a business planmore comfortable increasing sales. She just That fixed cost reduction shows a profitisn’t sure she can do as well as the most of $10,200, but it requires a reduction ofestablished women’s clothing store in the one-quarter of the fixed costs. Antoinettemall in her first year. After all, the range believes it will be very difficult to reduceof women’s clothing sales per square foot fixed costs that much. ­ erhaps a combina­ Pper year is $200 to $250, and she used the tion of fixed-cost reduction and sales$250 figure to project sales of $500,000 in increase will improve the profits enoughthe second year. and still be possible. Before she thinks As a second thought, and even though about that option, though, she completesshe has no idea how to accomplish it, she the break-even forecast analysis by seeingwonders what would happen to profits if what will happen if she can increase theshe reduced fixed costs by $50,000 per average gross profit to 50% while leavingyear (about one-quarter of the current the sales revenue and the fixed costs thetotal) and left the sales forecast at $400,000 same. She doesn’t know if she can reallyand her gross profit at 38.2%. do it, but wants to see what will ­ appen to h Let’s see what would happen. the numbers. Break-Even Sales Revenue Forecast Break-Even Sales Revenue Forecast for Antoinette’s Dress Shop for Antoinette’s Dress Shop Revision 2: Reduce Fixed Costs by $50,000 Revision 3: Increase Gross Margin to 50% Annual sales $400,000 Annual sales $400,000 Annual fixed costs Annual fixed costs 192,600 ($192,600 − 50,000) 142,600 Gross profit 0.5 Gross profit 0.382 Break-even sales Break-even sales ($192,600 ÷ 0.5) 385,200 ($142,600 ÷ 0.382) 373,300 Sales over break-even Sales over break-even ($400,000 − 385,200) 14,800 ($400,000 − 373,300) 26,700 Profit Profit ($14,800 × 0.5) $ 7,400 ($26,700 × 0.382) $ 10,200
  • 58. Chapter 3  | choosing the right business |  47 It seems that Antoinette needs to What You Have Accomplishedfind some combination of higher salesestimates, lower fixed costs, and higher We’ll follow Antoinette throughout hergross profit margin that will ­mprove i journey later in the book and see whatprofits so that she can make a living wage. combination of figures she settles on. ForBut the really critical part is this: She must now, let’s review what you’ve learned so far.be absolutely sure that she can meet all the You’ve decided whether to write a completeforecast changes she makes. plan for your business by completing these Antoinette was sure of her first forecasts; steps:u­ nfortunately, those forecasts produced • choosing a business you know wella loss for the first year of business. Now, • identifying a need you can fill (thewhile she can ­ anipulate the numbers m customer’s problem)to show a profit, the danger is that the • describing your business and how itnumbers may not be achievable. She may will fill that needbe able to create a good-looking business • deciding that your business is the rightplan but may be unable to meet those idea at the right timerevised projections. Or, just as dangerous, • deciding that you like your business, andshe may ­ ecome uneasy about the project’s b • forecasting enough profits to makesuccess. A lack of confidence may just writing a complete business planbe enough to take the edge off her drive worthwhile.and dedication and enough to make the In this chapter, you’ve been answeringproject fail. questions for yourself. Now that you’ve answered the questions positively, you can proceed to sell your idea and your answers caution to potential financial partners. The next Make sure that you have the same few chapters show you how to write alevel of confidence in the revised forecast that document that sells your idea. ●you had in the first forecast. Obviously, youcan fiddle with the numbers and show goodprofits, but the danger lies in making the goalsimpossible to reach. We all have a desire tomake things work, and making the numberswork is very easy to do. Just remember thatyou’ll have to live with the numbers you writedown for a very long time. Make sure they’reright.
  • 59. 4 C h a p t e rPotential Sources of Money toStart or Expand Your Small BusinessIntroduction..................................................................................................................................................................51Ways to Raise Money...............................................................................................................................................51 . Loans.......................................................................................................................................................................51 Equity Investments..........................................................................................................................................54 Loans and Equity Investments Compared..........................................................................................58Common 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..........................................................................................................................................67Additional 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........................................................................................................................70If No One Will Finance Your Business, Try Again......................................................................................70Secondary Sources of Financing for Start-Ups or Expansions............................................................72 Small Business Administration.................................................................................................................72 . Small Business Investment Companies (SBICs)................................................................................73 USDA Rural Development...........................................................................................................................73
  • 60. 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 ......................................74Conclusion......................................................................................................................................................................75
  • 61. Chapter 4  | potential sources of money to start or expand your small business |  51Introduction LoansThis chapter helps your writing process A loan is a simple concept: Someonebecause it gives you an idea of what gives you money in exchange for yourlenders and investors want to see in a promise to pay it back. The lender could befinished plan. Your ability to understand a bank, friend, family member, or anyoneyour financiers’ motives can mean the else willing to lend you money. The lenderdifference between getting a loan or will almost always charge ­nterest, which iinvestment and coming up empty-handed. compensates the lender for the risk that youIf you already have financial backing, you won’t pay back the loan. Usually, the lendercan skip this chapter. has you sign some papers (called a note and Many people and institutions are loan agreement) spelling out the details oflooking for sound loans and investments. your loan agree­ ent. (See Chapter 10 for mFrom their side of the fence, it can often examples.)seem extremely difficult to find a good While these basic concepts are simple,one. Many potential financiers have not ­ veryone seems to clearly understand ebeen frightened by news stories about them. For example, some people put asmall ­ usiness financial problems, con b great deal of energy into arranging toartists selling phony tax shelters, business borrow money, but think little about thebankruptcies, and so on. hard work that goes into repaying it. The What does this mean to you? Simply important thing to understand is that thethat you must both create a sound business lender expects you to pay the money back.plan and present it, and yourself, in a It’s only fair that you honor your promise ifway that appeals to lenders’ and investors’ you ­ ossibly can. pneeds for security and profit. Your business may be so successful that If you have a good business idea and you can pay back the loan sooner thanare ­ atient and persevering, you should p the original note calls for and save somebe able to find financing. It was Calvin interest expense in the process. SomeCoolidge who, sometime in the 1920s, said, state laws allow repayment of the entire“The business of America is business.” It’s principal at any time with no penalty.no less true today. However, laws in some states allow the lender to charge a penalty of lost interest if the borrower pays the loan back soonerWays to Raise Money than called for. Make sure you read the loan documents and ask about prepaymentBefore you can sensibly plan to raise penalties. Your lender may be willing tomoney, you need to know how it’s cross a prepayment penalty clause out ofcommonly done. the agreement if you ask.
  • 62. 52  |  how to write a business plan As for the manner in which loans are amount becomes due and payable.repaid, there are about as many variations Although this type of repaymentas there are loans. Here are the most schedule sounds ­ nwieldy, it can be utypical: very useful if you can’t make large • Fully amortized loan. This type of loan payments now, but expect that to repayment provides for principal change in the near future. and interest to be paid off in equal monthly payments for a certain number of months. When you’ve made all the Problems With Cosigned Loans payments, you don’t owe anything else. Bankers sometimes request that you find The amount of the interest rate and a cosigner for your loan. This is likely if you the number of years or months you have insufficient collateral or a poor or agree to make payments can change nonexistent credit history. Perhaps someone your monthly payments a great deal; who likes your idea and has a lot of property, pay close attention to these ­ etails. d but little cash, will cosign for a bank loan. For example, if you borrow $10,000 A cosigner agrees to make all payments for five years at 10% interest, you will you can’t make. It doesn’t matter if the agree to make 60 monthly payments cosigner gets anything from the loan—she’ll of $212.48, for a total repayment of still be responsible. And if you can’t pay, the $12,748.80. That means you will pay lender can sue both you and the cosigner. $2,748.80 in interest. Now let’s say you The exception is that you’re off the hook borrow $10,000 for five years at 20% if you declare Chapter 7 bankruptcy, but interest. Your monthly payments will the cosigner isn’t. Cosigning a loan is a big be $264.92 and you will end up paying obligation, and it can strain even the best of $15,895, including $5,895 in interest. friendships. If someone cosigns your loan, • Balloon payment loan. This loan you might want to consider rewarding your (sometimes called an interest-only angel for taking this risk. loan) calls for repayment of relatively From my own experience, I cosigned a small amounts for a ­ reestablished p car loan for an employee once, and I’ll think period of time. You then pay the twice before I do it again. I didn’t lose any entire remaining amount off at once. money, but the bank called me every time a This last large payment is called a payment was 24 hours late, and a couple of “balloon payment,” because it’s so times I thought I might have to pay. I didn’t much larger than the others. Most like being financially responsible for a car balloon payment loans ­equire r that I had never driven and might never see interest-only payments for a number again. of years until the entire principal
  • 63. Chapter 4  | potential sources of money to start or expand your small business |  53Secured Loans often only accept real property, stocks and bonds, and vehicles as collateral. ItemsLenders often protect themselves by taking of personal property, such as jewelry,a ­ ecurity interest in something valuable s furniture, artwork, or collections usuallythat you own, called “collateral.” If you don’t qualify. All lenders really want is forpledge collateral, the lender will hold title you to pay back the loan, plus interest. Ifto your house, your inventory, accounts ­ they have to foreclose on your house, itreceivable, or other valuable property until makes them look, and probably feel, bad.the loan is paid off. Loans with ­ ollateral c Here’s an example of a loan secured byare called “secured” loans. real estate and used to open a business. If you don’t repay a secured loan, thelender sells your collateral and pockets Example:the unpaid ­ alance of your loan, plus any b Mary needs to borrow $50,000 to opencosts of sale. Not surprisingly, if you have a take-out bagel shop. She owns avaluable property to ­ ecure a loan, a lender s house worth $200,000 and has a firstwill be much more willing to advance you mortgage with a remaining balance ofmoney. But you also risk losing your house $100,000. Uncle Albert has offered toor other collateral if you can’t pay back the lend Mary the amount she needs at aloan. favorable interest rate, taking a second A lender will expect you to maintain mortgage on Mary’s house as collateralsome ownership stake in the asset. This will for the loan. Mary agrees and ­ orrows bnormally be 10% to 30%, depending on the $50,000, obligating herself to repaytype of asset and the type of lender. That in five years with interest at 10%, bymeans you can’t ­ xpect to get a loan for the e making 60 payments of $1,062.50. Ifsame amount as your collateral is worth. Mary can’t make all the payments, the If you default on a loan and proceeds second mortgage gives Uncle Albert thefrom the sale of the collateral are not right to foreclose on Mary’s home andenough to pay off the loan, the lender can sell it to recover the money he loanedsue you for the remaining amount. The her. Uncle Albert feels secure, since hebest advice is this: Be very cautious when is confident the house will sell for atconsidering a secured loan. Make sure you least $150,000, and the only other lienknow your obligations if the business fails against the house is the $100,000 firstand the loan can’t be repaid. mortgage. If a foreclosure did occur, Lenders like collateral, but it never Mary would, of course collect anysubstitutes for a sound business plan. They difference between the selling price anddon’t want to be selling houses or cars the balance of the two mortgages.to recoup their money. In fact, lenders
  • 64. 54  |  how to write a business planUnsecured Loans To understand a little more about your potential backers, let’s look at the dilemmaLoans without collateral are called they face when they consider investing in a“unsecured” loans. The lender has nothing small business like yours. On one extreme areto take if you don’t pay. However, the the very safe investments that produce a lowlender is still entitled to sue you if you fail profit. At the other ­ xtreme lie investments eto repay an unsecured loan. If he wins, he that promise a very high profit but thatcan go after your bank account, property, also carry a high risk of losing the entireand business. investment. Lenders typically don’t make unsecured Your new business proposal will be farloans for a new business, although a sound less safe than an insured bank deposit.business plan may sway them. Remember, This means that to attract money, youthe lender’s maximum profit from the loan must offer investors the possibility of fairlywill be the interest he charges you. Since high returns. While investors will not findhe won’t participate in the profits, naturally your proposal as risky as casino gambling,he is going to be more concerned with the smart ones will know that, statistically,security. putting money into a new small business isn’t a whole lot safer. In addition to theEquity Investments possibility of a big gain, investors will want to minimize their risks by lookingAn equity investor buys a portion of your for any security-enhancing feature yourbusiness and becomes part owner. The investment proposal offers, such as yourequity investor shares in your profits when skill at making businesses succeed or youryou succeed. Depending on the legal business’s profitable track record.form of owner­ hip, she only shares in s You will want to offer investors theyour losses up to the amount of her ­nitial i possibility of a good financial return,invest­ ent. Put another way, most equity m a sense of security, and, if possible,investors’ risk is limited to the money they a little more. Often, this is a ­ ision of vput up, which can be lost if the business engaging in a business designed tofails. e ­ nhance some particularly worthwhile Investors expect you to think of their objective such as health, education, ormoney as a tool; you will use their tool environmental ­ oncerns. Or it can be cfor a while, and then you will give it simply an opportunity to help someoneback. Your business plan should include with enthusiasm and drive. One of thea forecast of when and how that will best ways to convince a potential lenderhappen. Failing to discuss a repayment or investor that his money is secure iss­ trategy in your plan can cause a potential to convince him that you are an honest,i­nvestor to wonder about your motives.
  • 65. Chapter 4  | potential sources of money to start or expand your small business |  55sincere person. At least as many ­ usinesses bfail to get financed because potential ­ Should You Guarantee a Return?investors don’t like the person making the Very few investment proposals offer thesales pitch as fail because they don’t like investor any guarantees. Nevertheless, somethe pitch ­tself. i equity investors want a guaranteed return In fact, when they like you and your in addition to a share of the profits. If youidea, some investors and banks want to guarantee a return, you will pay back themake sure that you have something to lose original investment plus a profit on theother than just your pride if the business investment, even if the deal goes sour. Doingfails. They will want to see that you are this is great if the project makes the profitbacking your ideas with your hard-earned you think it will. But it’s a risk for you sincedollars. Be prepared to put up most of your you’ll have to get the money to pay off theown money to get the business open. This investor from some other source if yourlets them know that you will do everything business fails.in your power to make the business work; If you are willing to guarantee thesometimes, your dollar commitment can repayment and the profits, you may be abletake the place of any other guarantees. to get an investor to accept the return of her investment plus a reasonable profit ofReturn on Equity Investments: What’s Fair 20% or 30% on her investment, within a yearEvery investor has her personal require­ or two time frame.ments and every deal is different. The Guaranteed investments are rare, and Iimportant thing is that both parties under­ ­ uggest you avoid the temptation to offer sstand the risks and think it is a good a guarantee. Most entrepreneurs with thedeal. Here are some suggestions that ability and assets to offer a guarantee canhave worked well for others in situations secure ­ nancing at a lower cost from more fiwhere the potential investors weren’t conventional sources. Perhaps they canwell acquainted with the entrepreneur. pledge their assets for a straight bank loan orObviously, if your investors are family sell their assets and obtain money that way.members, close friends, or people whowish to support your business for politicalor ­ ersonal reasons, they may be willing to p If you are starting a new business andaccept a lower rate of return. 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 ­ rofits. You, p
  • 66. 56  |  how to write a business planthe promoter, may get as little as 25% of than the same company that plans to openthe profits plus a reasonable salary for your a new office in another state. It’s a higherwork to make the project go. Of course, it risk if the same company plans to enter ais rare that a person who starts a business completely new line of business, such asdoesn’t invest at least some of his own management consulting.money, so the ­nvestors’ percentage would inormally be adjusted downward. Legal Forms of Owning Equity Investments Another alternative for a start-up busi­ An equity investor chooses among threeness where investors bear the entire risk options in sharing ownership in yourof loss is for the founder to work in the small business. These are the only optionsbusiness on a daily basis and receive a available, even if the consideration for thesmall wage as a project ­ xpense. The first e ownership share is something other thanprofits are used to pay back all the money cash, such as labor, materials, and so forth:advanced. Profits are split on an agreed • General partnerships. A general partnerpercentage. If the investor puts up all joins you in owning the business. Hethe money, this might be 50/50; if the shares in your profits and losses ininvestor puts up less, his share should proportion to his partnership share.also be less. Sometimes these profit splits General partnerships work best whenterminate after a specific number of years, all partners work full-time in theand sometimes they continue indefinitely. business. Equity investors normallyOccasionally, the parties agree on a prefer not to become general partners,formula to establish a price for which one b ­ ecause they don’t want day-to-dayparty may buy out the other party in the i ­nvolvement in your business. Also, byfuture. law, if the partnership loses money, If you’re expanding an established busi­ the investing general partner mustness, the returns can be adjusted toward pay back part or all of the losses.normal bank loan rates if the expansion Everybody has heard ­ tories of sappears conservative. Invest­ ent profits m partnerships that went sour, with direwill have to be considerably higher than consequences. These were usuallybank rates if the project appears risky. g ­ eneral partnerships. If you areThe main thing that increases risk for interested in forming a partnership,an established business is changing its limited or general, or learning morenormal course of business. For example, an about them, see Form a Partnership,established employee leasing company that by Denis Clifford and Ralph Warnerplans to expand its receivables in the face (Nolo).of increasing demand is more conservative
  • 67. Chapter 4  | potential sources of money to start or expand your small business |  57 • Limited Liability Companys (LLCs). LLCs build a showroom, potential ­ uyers b are becoming more popular for small will probably find you. However, if business owners. They offer the you’re trying to build a factory to mass liability protection of a corporation, p ­ roduce a new and relatively untried but are cheaper and easier to create type of pooper-scooper, you will and maintain. The relationship of almost ­ ertainly have more difficulty. c you (as the entrepreneur) to your If you conduct business in a legal investors is similar in many ways to and ethical manner, the corporation the relationship in the corporate form can shield you and your shareholders (discussed below). Limited Liability from personal liability for business Partnerships (LLPs) offer similar losses. However, officers and direc­ benefits but are usually reserved for tors of a corporation can be held professionals like doctors and dentists. personally liable for any corporate acts If you are considering either an LLC or that break the law or breach their duty LLP, consult with your accountant or to the shareholders to act responsibly. attorney before proceeding. If you are interested in forming a • Corporations. One of the most popular corporation, I recommend Incorporate methods of selling equity investments Your Business: A Legal Guide to is to form a corporation and sell Forming a Corporation in Your State, shares of stock. The shareholders’ or How to Form Your Own California potential losses are ­ypically limited t Corporation, both by ­ nthony A to the purchase price of their shares. Mancuso (Nolo). These books show A corporation is a legal entity that you how to set up your own small is separate from you. You form a profit corporation and also go into c ­ orporation by paying fees and filing considerable detail on ­imited liability, l forms at a state office. A corporation electing Subchapter S tax status, lets you keep management control of issuing shares, holding your first Board the business; as long as you retain 51% of Directors meeting, etc. of the shares of stock, you can call the By the way, Nolo (www.nolo.com), the shots. publisher of this book, provides many How much people are willing to ways to assist you when it comes to corpo­ pay for your stock depends mostly on rations and LLCs including assistance with what they think of your prospects. If state filings, helpful books, and lots of you have a firm, exclusive contract to free information. Visit the site and click sell a popular, new type of computer “Business, LLCs and Corporations” on the peripheral and only need money to left side of the home page.
  • 68. 58  |  how to write a business plan Corporations and Red Tape Corporations bring several complications— payments to shareholders made only but most entrepreneurs consider the costs a ­ fter corporate taxes have been paid. and inconvenience a small price to pay for the Dividends then become personal income ability to raise the capital they need. I only to the shareholders and are taxed at summarize a few issues here: personal rates. • Record keeping in corporations. Keep­ • Selling shares in your corporation. Both ing your shareholders informed and your federal and state regulatory authorities ­ orporation in good standing means that c have many rules and regulations you have to perform certain legal acts governing sales of corporate shares or and pay various taxes and fees. It’s more limited partnership interests. The bottom complicated and expensive than doing line of all these regulations is this: You business as a sole proprietor. can’t take any money into your venture • Taxes and corporations. You can take until you comply with the appropriate money out of your corporation in only rules. These rules try to protect investors two ways: salaries and dividends. Both from crooks and con artists and also try payments have to be approved by your to make it relatively easy to raise money Board of ­ irectors and entered into the D for legitimate ventures. ­ efore selling any B minutes of the company. Salaries become security, or soliciting for the sale of any your personal income and are taxed at security, make sure you have complied your ­ ersonal rates. Dividends are p with the appropriate regulations. Loans and Equity caution Investments Compared Lenders and landlords normallyrequire that corporate officers personally To raise money for your new business, youguarantee any loans or leases that the corpo­ must decide whether you prefer to borrowration enters into until it has a several-year money or sell part of your project to antrack record and a strong financial position. equity investor. ­ ften, you may not have OSo, you can expect to be held personally many options. The person with moneyresponsible for company debts even though to lend or invest will obviously have a lotyou form a corporation and are ­ rotected from p to say about it. But you should know theroutine business losses. trade-offs you normally make by preferring one to the other:
  • 69. Chapter 4  | potential sources of money to start or expand your small business |  59 • Loan advantages. The lender has no Loans are better for businesses if the profit participation or management say cash flow allows for realistic repayment in your business. Your only obligation schedules and the loans can be obtained is to repay the loan on time. Interest without jeopardizing ­ ersonal assets. p payments (not principal payments) are Equity investments are often the best way a deductible business expense. Loans to finance start-up ventures because of the from close friends or relatives can have flexible repayment schedules. flexible repayment terms. If you don’t already know an accountant • Loan disadvantages. You may have to s ­ pecializing in small business affairs, you make loan repayments when your will be wise to find one. Your personal tax need for cash is greatest, such as situation, the tax situation of the people during your business’s start-up or who may invest, and the tax status of the expansion. Also, you may have to type of business you plan to open are all assign a security interest in your likely to influence your choice. property to obtain a loan, thereby placing personal assets at risk. Under most circumstances you can be sued Common Money Sources to personally for any unpaid balance of Start or Expand a Business the loan, even if it’s unsecured. • Equity investment advantages. You Most small businesses are started or can be flexible about repayment expanded with money from one of seven require­ ents. ­nvestors sometimes m I readily available sources. They are in order are partners and often offer valuable of frequency: advice and assistance. If your business 1. the savings of the person starting the loses money or goes broke, you b ­ usiness probably won’t have to repay your 2. money from close friends and i ­nvestors. relatives • Equity investment disadvantages. Equity 3. scaling back cash requirements and investors require a larger share of the substituting creative cost-cutting for profits. Your shareholders and partners financial ­ quity e have a legal right to be informed about 4. selling or borrowing against equity in all significant business events and a other property right to ethical management; they can 5. money from supporters or others sue you if they feel their rights are interested in what you are doing compromised. 6. bank loans, and 7. venture capital.
  • 70. 60  |  how to write a business plan I recommend never financing a business As the entrepreneur with capital, you hirewith only borrowed money, even if it’s people, purchase equipment, and ideallypossible. If you’re starting a new business create profits. It’s a long and honoredand use your own money or sell equity, tradition. Henry Ford, John D. Rockefeller,you can make your ­nevitable start-up i and, more recently, Steve Jobs of Applemistakes cheaply and survive to borrow Computer all started with at least somemoney later, when you know how better to money from their own pockets and endeduse it. up ­ reating industrial empires. While c My general rule is that you should chances are your goals are more modest,borrow less than half of the money you the idea is pretty much the same.need, especially if you’re starting a new If you finance a business with your ownbusiness. If you’re expanding an existing money, you won’t have to worry aboutbusiness, make sure that you can handle making loan payments or keeping investorsthe cash payments necessary to repay the happy. Think of it this way: The more youloan even if business isn’t as good as you borrow, the more you increase your fixedhope. In other words, it’s usually more operating costs—making it more difficultdangerous to borrow too much than too to survive the slow periods and mistakeslittle. If you have to raise nearly all the almost every business faces.money from others, I recommend selling Another reason to start a businessequity instead of borrowing. with savings is that you enhance your Now let’s look at each of the most likely borrowing capacity for the future. Thefunding sources for new and expanding inventory, fixtures, and equipment youbusinesses in more depth. purchase with your cash investment are treated as assets should you later apply for a ­ usiness expansion loan. bMoney From Your Personal Savings Of course, not everybody is luckyMost businesses are financed, at least in enough to be able to start or expand apart, with personal savings. Sure, it’s hard business entirely from savings. But thereto save money, but this form of financing are at least two ways you may be able tohas so many advantages, it’s worth increase the amount of money you can putsome effort. Incidentally, savings don’t into your business.necessarily come from a bank account orpiggy bank. Lots of entrepreneurs sell or Living Expense Deferralrefinance a house or some other valuable People who need just a little more cashproperty to come up with cash. than they have sometimes take a risky— Starting a business with your savings but not unheard of—step. This mightis the quintessence of the capitalist idea.
  • 71. Chapter 4  | potential sources of money to start or expand your small business |  61more appropriately be called “Borrowing expense deferral plans. Otherwise, you mayfrom the Future,” as it involves deliberately find yourself trying to read a foreclosure noticefalling behind in monthly living expenses in a dark room.or taking cash advances from credit cards.This way of getting extra money involvesrisk, and it’s not for everybody. Trade Credit You may have a credit card or two that Arranging for trade credit involves borrow­has more credit available; by running your ing from the companies from whom youcredit line to the maximum, sometimes you will buy your merchandise or raw ­ aterials. mcan obtain some cash from an unexpected This form of borrowing rarely works forsource or buy material for the business. service businesses, because salaries areOf course, the interest rates are high, and the biggest expense and ­ mployees are eyou flirt with bankruptcy if you can’t make usually not interested in lending you theirpayments. Still, several people I know have salaries. However, I do know of a ­ umber nused this method to help start a business. of new businesses where friends and family If you have a good payment record with members pitched in for free in the earlythe telephone company, gas and electric days; it never hurts to ask.company, landlord, bank, and so forth, If you’re in the retail, wholesale, oryou should be able to skip several months’ manufacturing business, arranging forpayments without ­ eriously damaging your s trade credit can help considerably. Incredit rating. Of course, you’ll have to catch most businesses, you typically orderup again fast. In the meantime, you can use supplies and pay for them 30 to 60 daysthe money to help get your business going. a ­ fter you receive them. The problem for You may be able to fall behind a month new businesses is that it’s also standardor two on your mortgage payments and practice for suppliers to demand cashgenerate some quick cash that way. How­ up front from start-ups. This policy isn’tever, the mortgage holder will take the immutable, however. Often, if you presentproperty back from you after a few your business plan to potential ­ uppliers, smonths. Don’t use this method unless you can arrange to order at least someyou’re very sure that you can become supplies and merchandise on credit. Aftercurrent again quickly. all, your supplier has an interest in helping you ­ ucceed so that you will buy his s caution merchandise for many years to come. This scheme should be tried only if The key to maintaining good relationsyou’re sure you’ll be able to come up with the with suppliers while borrowing from themmoney when you need it. As with everything is to keep them informed of what you’reelse, common sense should be applied to living doing and why. This communication rule is
  • 72. 62  |  how to write a business planparticularly important for new businesses. if it’s available. It gives you time to getIf you arrange credit and can only pay a your business established with a ­ inimum mpart of your first bill in 30 days, pay that of pressure. If you’ve any doubt aboutamount and ask the supplier for a short your angels’ financial position, makeextension. sure they consult their banker, attorney, Some suppliers may offer extended pay­ or financial advisor before advancingment terms to get your business. Occasion­ you the money. Also, check with a taxally a supplier will ship merchan­ ise in a d advisor if you receive a substantial giftslow part of the season and let you pay for in one year from any individual, sinceit ­ everal months later, in the busy season. s there may be tax implications. Generally,Before you try any of this, check with property you receive as a gift, bequest, oryour suppliers’ sales reps about company inheritance is not included in your income.p­ olicies. Your suppliers are invaluable to However, if property you receive this wayyour business, and you want to keep them later produces income such as interest,on your side. dividends, or rentals, that income is taxable to you. For additional information, refer to IRS Publication 17, Your Federal IncomeFriends, Relatives, and Tax. You can find this publication online atBusiness Acquaintances the IRS website www.irs.gov.The type of financing provided by close Finally, write down the terms of the loanfriends and relatives does not normally or transaction and make sure everyonevary much from that provided by strangers. thoroughly understands them. After all,The help may be in the form of a gift, a you want to feel like you can go to familyloan, or an equity investment. The big reunions even if your business fails.differences are usually the availability ofmoney in the first place and the interest cautionrate or investment return. Think twice before you accept. With friend- or relative-provided Think about what a business reversal couldfinancing, however, the commercial model do to your personal relationship, even if yourisn’t the only one. A common alternative relative or friend says they don’t need theis the loan-gift hybrid. Here a relative money. I know families that have been tornor friend lends you money at ­ ither a e apart because a ­ orrower didn’t meet the blow interest rate, or with no interest at agreements she made with a lender. Besides, aall, telling you to pay it back when you loan from a relative or close friend that comescan and to treat it as a gift if you can’t. with emotional strings probably isn’t worthObviously, this type of help is invaluable the cost.
  • 73. Chapter 4  | potential sources of money to start or expand your small business |  63 bank, assuming relatives or friends don’t Your Money Machine need to see it. This is a mistake. Make sure those people close to you get the benefit of Here is a task you can start right now that all your hard work. A good business plan will save you time and frustration. Begin may even help them see you in a new light writing a list of all your relatives, friends, and encourage them to make a financial business ­ cquaintances, supporters, a commitment. professional ­ dvisors, and so on. This list will a be one of the primary sources of money for your new or growing venture, since people Creative Cost-Cutting who know you already are most likely to be Although not really a funding source, one interested in your business. of the most effective ways to finance a small business is to make do with less. If your initial business ­ roposal calls for p One advantage of dealing with your $50,000, think about how you can reducerelatives and friends is that they already spending on nonessential items. ­ erhaps Pknow your strengths and weaknesses. you can begin your consulting business inThey are likely to be more understanding your home or share expensive equipmentthan a banker if you have start-up with an established business rather thanproblems and make a few late loan pay­ buying it.ments. Nevertheless, you’ll be wise to Of course, there will be many situationstreat people close to you in a businesslike where you will need a fair amount ofmanner. money to get started—it’s hard to cook Don’t make the money a test of whether without a stove, paint without a ladder,they love you or not. If your close relatives or program without a computer. Thefeel they can decline the investment oppor­ important principle is not that you shouldtunity without hurting your feelings, both avoid raising outside money, but that youof you will be happier in the long run. should borrow or raise equity capital onlyPay attention to criticism and suggestions, if you absolutely can’t do without it. Forespecially if they come from people with more on this concept, I recommend Honestbusiness experience. If they don’t wish Business, by Michael Phillips and Sallito invest or lend you money, accept their Rasberry (Random House).reasons at face value—you might not liketheir hidden reasons. Some people looking for business Equity in Other Assetsfinancing will write a business plan and You may choose to raise money by sellingloan package and then show it only to the existing assets or by pledging your equity
  • 74. 64  |  how to write a business planin them as collateral for a loan. Remember, As with the discussion about familycollateral is something you own that you members, people who care about whatgive your lender title to until you pay back you do may well be willing to support youall the money you borrowed, plus interest. on better terms than would a commercialIf you fail to repay the loan, the lender investor. No matter what your business orkeeps the collateral. Basically, equity is business idea, think about who you knowthe difference between the market value or can get to know and who really caresof property you own and what you owe about what you plan to do. Share your ideaagainst it, plus any costs necessary to turn with these people and be ready to listen tothe asset into cash. them. You’ll surely get lots of good ideas, and you may be surprised at how easy it isExample: to raise money for what people perceive as Eric owns a car worth $9,000, but owes an honest and needed endeavor. the bank $4,000. His equity in the car is $5,000. To convert the equity to cash, he could try to sell the car for $9,000 cash Banks and pay off the bank loan, leaving him When asked why he robbed banks, Willie $5,000. If he borrows against the car, Sutton said, “Because that’s where the he’d probably be lent less than $5,000, money is.” For the same reason, banks since banks don’t like to finance 100% are high on the list of potential sources of an asset’s value. people ask about for business funding. Unfortunately, as far as a small business is concerned, banks act cautiously whenSupporters lending out money. This makes sense whenMany types of businesses tend to have you remember that it isn’t their money.loyal and devoted followers—in many ways This discussion applies to financialtheir customers care about the business institutions that lend to businesses andas much as the owners do. Examples are individuals. Recent banking deregulationas myriad and varied as the likes, loves, has made it more difficult to locate whichand desires of the human community. A of the various departments of institutionshealth food restaurant, an exercise club, such as the Bank of America, Wells Fargo,a ­ otorcycle shop, a family counseling m and others actually make loans, but thefacility, a solar heating business, a religious same fundamentals apply when you finallybookstore, or a kayak manufacturing shop locate the right department and person.all could work, assuming you can find your Banks always want to see a written busi-audience. ness plan along with your loan application. Banks are financial intermediaries. They
  • 75. Chapter 4  | potential sources of money to start or expand your small business |  65pay interest to ­ ccount holders to attract a The good news about banks is thatd­ eposits, which they lend out to people money generally costs less from bankslike you. When lending, they charge than from other professional lenders, suchenough interest to pay for their cost of as mortgage loan ­ rokers. If the bank bfunds and produce a profit. Any transaction lending officer likes your business plan andyou have with a bank will be a loan and will loan application, and you have sufficientcome with a repayment schedule. Banks try collateral, she may give you an interest-to minimize risks by making sure you have only loan for a short time, with the optionenough assets to pay them back, even if of ­ onverting it to an amortized loan later. cyour business does badly. They don’t make That means you can delay larger principalequity investments in businesses. payments until your business has a chance Some commercial banks work closely to generate a positive cash flow.with the Small Business Administration(SBA) (www.sba.gov) in offering loan Example 1:guarantee programs. If you want a loan Katherine O’Malley Pertz-Walter hasbut don’t qualify under the bank’s normal saved $20,000 to start the Rack-a-Fraxguidelines, the banker may suggest that Fastener Company, but she needs anyou apply for an SBA guaranteed loan. additional $10,000. After a careful studyIf you’re approved, the SBA guarantees of her business plan, a banker grantsthe bank that you will repay the loan her an interest-only loan with paymentsand the bank lends you the money. to be made quarterly for one year andWhile this program can work for start- takes a second mortgage on her homeups, it is most used by business owners as collateral. At the end of the year, shewanting to expand a successful business. must repay the entire principal. HerAsk your banker if he knows about the i ­nterest rate will probably be somethingSBA guarantee program. (See below for like the prime rate (interest rate chargedbackground on the SBA.) the bank’s favored customers) plus 3%. Commercial banks sometimes lend to a If the prime rate is 12%, she’ll be payings­ tart-up business, but they almost always about 15% interest, and her quarterlyask for ­ ollateral to secure the loan. The c interest payment will be $375. At themost banks will usually lend a start-up end of the year, she will be obligated tois half the cash needed. In addition, they repay the $10,000 in one lump sum.usually require that you do not ­ orrow all bor most of your cash from someone else;they want you to have as much to lose asthey do.
  • 76. 66  |  how to write a business planExample 2: he understood how his business would To continue this story, let’s ­ ssume that a work. After the initial shock of his bank at the end of the first year, Ms. Pertz- interview wore off, Peter went to work. Walter asks the bank to convert the Putting his plan down on paper and loan to a three-year payment schedule, doing a budget encouraged him to deal including principal and interest. Based with a number of details he had never on her favorable first-year results, the thought about before. When he did, he bank agrees to amortize the loan rather changed his plan considerably. than demand immediate ­epayment. r Finally, Peter presented his plan to She now has to make 36 equal monthly the bank loan committee. This time payments of $341.75. After she makes they offered to lend him $25,000, those 36 payments, the loan will be paid provided he put up the other $25,000 off completely. and give the bank a second trust deed on his house and title to all equipmentExample: purchased for the shop. The bank also Now let’s forget about Rack-a-Frax and asked that Peter buy a life insurance switch to the story of a friend of mine. policy for $25,000, naming the bank Peter Wong wanted to start a garage as beneficiary. He negotiated the specializing in Italian cars in Santa Fe, second trust deed on his house out of New Mexico. He estimated that he the requirements and then agreed to needed a total of $50,000 to get his take the package. The terms were 36 business started. He had $25,000 cash monthly payments at a floating interest saved from his job as chief ­ echanic m rate that was calculated at the prime at an independent Ferrari garage and rate plus 3%. $30,000 equity in a house. He thought he By this time, Peter and the banker, was home free and confidently walked whose name was Fred, had established into a local bank to ask for a $25,000 a good ­elationship. When the business r loan. got off to a slow start, Peter kept Fred An hour later he walked back out informed of the problems and his plans with his head spinning. The banker to deal with them. Fred let Peter delay asked him a number of questions about three payments in a row with no penalty. monthly sales ­ rojections, cash flow, p Eventually, when the ­ usiness began to b and cash for a parts inventory. Peter do well and Peter wanted to expand, hemmed and hawed. It came down Fred worked out a financing ­ ackage, p to this: The banker didn’t want to talk this time taking as collateral Peter’s to Peter seriously until he produced a accounts receivable and inventory. written business plan demonstrating that
  • 77. Chapter 4  | potential sources of money to start or expand your small business |  67Venture Capitalists Eventually, it occurred to Jack to quit his job and open a localA venture capitalist is anyone who invests motorcycle store. He talked to severalequity money in a business in the hope of manufacturers and was ­ ncouraged. efuture profits. While this can include any The only problem was, he would needbusiness investor, from your Aunt Rose $50,000 to swing it. As he only hadto the largest investment banker in New $20,000, he was about to give up theYork, the term often connotes a group of idea when some of his biker buddiesbusinesses that look for hot companies offered to help raise the cash. Jackin which they can make large profits. found six people willing to investTypically, this group won’t consider any $5,000 each in a limited ­ artnership. pinvestment smaller than $500,000 and Each of these friends was, in ­eality, a rprefers companies specializing in the small-scale venture capitalist, bettingemerging technological fields, where a a portion of his savings on the notionlot of money is needed to get started and that Jack would succeed and they wouldwhere it’s possible to achieve enormous participate in his financial success.returns. Computers, genetic engineering, Jack’s Cycles opened for business andand medical technology are familiar is doing well. All the limited partnersexamples. were paid back their initial investments Most readers of this book will be plus the agreed-upon return set out ininterested in starting or expanding small or their limited partnership agreement, andmedium-sized ­ ervice, retail, wholesale, or s Jack is now the sole owner. The onlylow-technology manufacturing businesses. sad part of it is that Jack is too busy toLarge-scale venture capitalists traditionally ride much anymore.do not invest in these ­ reas. Fortunately, arelatives, friends, business ­ cquaintances, a Many cities have venture capital clubs,and local businesspeople with a little comprising groups of individual investorsmoney to invest can all be pint-sized interested in helping businesses startventure capitalists. Many do very well at it. and grow. These clubs often serve as an introductory service—you ­eceive a few rExample: minutes to discuss your business at a club Jack Boots loved to ride dirt motor bikes meeting. If any investors want to pursue on the weekends. He was frustrated that the discussion further, they make an no retailer in his county carried either appoint­ ent with you privately. You can m a good selection of off-road bikes or use these groups to expand the list you the right accessories. He and his friends are making of investment prospects. You sometimes had to drive 200 miles to buy may also be able to obtain ­ omputerized c supplies.
  • 78. 68  |  how to write a business planlists of venture capitalists and ­nvestor i receive a monthly cash flow of $200 formagazines in which you can advertise an annual return of 24%. When addedyour proposition. Often, these clubs are to the partner’s investment share in theformed and disbanded rapidly; ask the inventory of the shop, this would makelocal Chamber of Commerce or your local a $10,000 investment worth $20,000 inbankers if there is an ­ ctive club in your a three years.area. When thinking about raising moneyby selling a share in your business, it’s Additional Money Sourcesimportant that you have a hard-headed for an Existing Businesspicture of what you’re getting into. Amateurventure capitalists or equity investors If you’ve been in business for at least threegamble on your idea for your expansion or or four years and can show a history ofnew venture. They invest money hoping profitable operations, a whole new worldthat you’ll make them rich, or at least of financing ­ ptions opens up to you. The oricher. If you intend to look for equity major advantage you have over a start-up isinvestors, your business plan needs enough that you can prove what you say, whereaseconomic and marketing research to show a start-up can’t. Be careful if you’ve beeninvestors that your idea has the potential in business for less than three years orof making a substantial profit. You’ll also can’t show a profitable history—financingneed to show potential investors exactly sources may consider you a start-up andhow they’ll profit by investing in your put you in a higher risk category.business. Take your latest two or three years’ financial statements with you as part ofExample: your business plan when you talk to any Jack Boots spelled out his profit distri­ financing source. That way, the lender or bution plans in his limited partnership investor can see where you’ve been and document: Investors received 50% of where you’re planning to go. the ­ rofits paid monthly according to p Here is a list of readily available their relative share of investment after financing sources for expanding your small he paid himself a nominal, agreed-upon business. Consider each potential source salary for running the store. In addition, of money carefully—each has unique they qualified to buy merchandise at a advantages and disadvantages as they substantial discount. They also owned a apply to your business. Approach whatever share of the assets of the business. Jack source makes the most sense for your estimated that a $10,000 investor would business first; you can try others if the first one doesn’t work.
  • 79. Chapter 4  | potential sources of money to start or expand your small business |  69Trade Credit rental yards in that they have a supply of equipment on hand that they rent out.After you establish a reliable record of Sometimes these companies offer repairprompt payment with your suppliers, and trade-in privileges in addition to short-normally they will consider extending term rentals.additional credit for your ­ xpansion e Other leasing companies—called fullplans. Let them know of your plans well finance leasing companies—do not takein advance; if you begin delaying your physical possession of any equipment. Youpayments to finance your expansion find the equipment you want, and they buywithout notifying them, they may get it for you. Full finance leasing companiesannoyed. They have an interest in seeing have no equipment inventory and offeryou grow; after all, you’ll be buying more no return or repair services. They ­ orrow bfrom them in the future. Sometimes they money from a bank, so you’ll have to paywill even introduce you to their bankers back the equipment cost plus interest andand investors if you approach them with a a ­easing company service fee over a fixed lwell-thought-out ­ usiness plan. b time. Normally, you have the option of buying the equipment for an additional price at the end of the lease term. FullCommercial Banks finance leasing companies base their creditRemember those banks that were so hard decisions on your company’s ­ nancial fito get money from when you started your condition. They will want to see lots ofbusiness? Well, once you can show a financial records from your company andprofit­ ble history, they become a lot more a may ­equest that you pledge some of your rfriendly. As an established businessperson personal assets to guarantee the lease. Ofyou can often secure ­ exibility from banks fl course, make sure you understand whatthat you might not expect. For example, they you agree to before you sign anything.may lend you money and take a securityi­nterest in your accounts receivable. Orthey may take a security interest in your Accounts Receivableinventory, equipment, or other business Factoring Companiesassets. Factoring companies—also called factors— buy your accounts receivable at a discount.Equipment Leasing Companies Then, they collect your accounts at full face value. This can be a very expensiveLeasing companies own equipment that way to raise cash—I only recommend itthey rent to businesses and individuals. as a last resort. Some factors ­equire that rSome leasing ­ ompanies are similar to c your accounts pay them directly ­nstead i
  • 80. 70  |  how to write a business planof paying you. This can cause problems broker or finder can look at your businesswith ­ ustomers, who’ll assume that you c plan and know if he has a good chance ofare ­ aving ­ erious cash flow problems. h s finding money for you.Approach­­actors with caution and make f Finders simply introduce you to possiblesure you understand the implications of the ­ ackers; they cannot negotiate on your bagreement before you sign it. behalf, and they are not licensed. Money Factors can buy your receivables with or brokers are ­icensed and can negotiate lwithout recourse—that is, your guarantee on your behalf. Fees for both finders andof payment to the factor. Factoring with brokers are comparable. I recommendrecourse means that the factor pays you a that you work with people who workhigher percentage of the receivable in cash on a ­ ontingency fee basis only and do cand makes raising cash less ­ xpensive. e not ­equire up-front fees. While some rBut you can be seriously damaged if a big worthwhile finders and brokers require anaccount fails to pay its bill and you have to up-front fee, there are some nonlegitimatemake good on your guarantee. people who take the up-front fees and disappear. Also, I recommend that you obtain references from any broker or finderVenture Capitalists and that you verify the references.Some venture capitalists specialize in Total fees, including both up-front andfunding businesses after they have a track c ­ ontingency, can range up to 10% or 15%record and are willing to take a smaller of the money raised, so be cautious andreturn as a result. The industry is changing, remember that everything is negotiable.and more venture capitalists are looking You can contact finders and brokers inat a wider range of possibilities and client the financial section of your newspaper’scompanies. Often a venture capitalist will classified advertising section.specialize in a market area and companysize or stage of growth. The possibilitieshave increased, and so has the work If No One Will Financeinvolved in finding just the right backers. Your Business, Try Again Let’s say that you’ve been unsuccessfulMoney Brokers and Finders in your attempts to raise money for your business from the primary sources listedMoney brokers and finders develop and above, or you have raised some money, butmaintain lists of investors and lenders still need more. What do you do next? Theinterested in businesses. For a fee, they first step is to go back to the people whowill circulate your financing proposal to initially seemed ­nterested but ultimately ipotential money sources. A legitimate
  • 81. Chapter 4  | potential sources of money to start or expand your small business |  71turned you down and find out why. This her money to go to school severalis not a waste of time. If you get the same years before. This time Aunt Hillaryanswer from several people, you will said, “Sorry, but no.” One afternoon aknow what you have to work on. And few months later Sue ran into Hillarythen there is the possibility that someone’s at her niece’s birthday party. Hillarycircumstances have changed and they have asked how she was doing with plansmore funds now. Remember, it took the for the school. Sue told her she wasman who invented dry paper copying 21 still short $10,000 and was going to tryyears to raise the money to get the first the Small Business Administration asphotocopier made. soon as she made one or two changes If a bank lending officer, or even two in her business plan. Aunt Hillary askedor three, turned you down but you still about the changes. Sue told her thatthink borrowing is a good way to fund an experienced teacher had suggestedyour business, try other ­ending officers l she charge slightly more per hour, startat other banks. A friend of mine got a with a good second-hand piano instead$15,000 unsecured loan to improve some of a new one, and try to work out aagricultural property just by going to five referral arrangement with a local pianodifferent banks. The first banker laughed store. This way she could pay herselfhim out of the office, the second banker more salary and wouldn’t need to takelistened to his story for five minutes and another job to make ends meet. Hillarythe third for ten minutes. By the time asked to see the changes when theyhe got to the fifth bank, he knew what were complete.q­ uestions the banker was going to ask and After Sue showed the revised plan towas ready with some solid answers. The her Aunt Hillary, she offered to lend herbanker was impressed and he got the loan. the money. Sue was both delighted andIn fact, for this very reason, it’s not a bad curious. When she asked, Aunt Hillaryidea to try a longshot bank first and the said there were two reasons for hermost likely one last. (See ­ hapter 10 for C change of heart. First, she was pleasedideas on how to present your ­ usiness plan b that the more realistic sales projectionsto bankers.) left Sue enough money to live on so she would be able to keep her enthusiasmExample: for the hard job of creating a new Sue Lester tried all the usual sources to business. ­ econd, she had sold a small S get the $20,000 she needed to open a piece of land for more than expected piano school. One person she talked to and now had the money to lend. was her Aunt Hillary, who had loaned
  • 82. 72  |  how to write a business planSecondary Sources of Financing for at least two years, that the borrower work in the business full-time, and thatfor Start-Ups or Expansions the borrower have some real or ­ ersonal pLet’s assume you have tried all of the property available to offer as collateral.primary sources of financing small Some bankers are strongly interestedbusinesses at least twice, and have been in working with loans guaranteed by theturned down each time. Is it time to SBA since the bank can make a fee byhead for the showers? Not if you really processing the loans and later selling themwant to start your business. If everyone to other financial institutions. Since theturns you down, you have no choice bank’s fee is based on the size of the loan,but to get creative. ­ emember Knute R such banks are typically only interestedRockne’s exhortation, “Winners never quit in processing loan requests for more thanand quitters never win.” Here are some $50,000.suggestions. Many banks treat SBA loan origination as a profit center and aggressively seek out borrowers. Some of these banks offerSmall Business Administration assistance in completing the SBA forms for aMany years ago Congress recognized fee and offer quick turnaround on decisions.both that small businesses provide most If any banks in your area offer this service,of the employment and growth in the make an appointment with a loan officercountry and that they have a great deal of specializing in SBA loans. Chances are, hetrouble borrowing money because large will be able to estimate your chances ofcorporations tend to hog too much of success based on reading your businessthe loan money from banks. As a result, plan. Loan approvals sometimes take placeCongress created the Small Business as soon as a week or so after you completeAdministration (SBA) and several other all the paperwork. The SBA’s past repu­government organizations ­ pecifically to s tation of being hard to deal with and nothelp small businesses compete with larger very cooperative seems to be changing!corporations for loans. That’s true for the guarantee program, at While the SBA can make direct loans least.to small businesses, it usually guarantees Your chances of receiving a direct loanloans from ­ ommercial banks. The SBA c in a reasonable time from the SBA willwill guarantee 85% of a bank loan up to be greatly ­ nhanced if you qualify for a e$750,000 if the loan meets SBA criteria. preference category. For example, if youThese criteria are not as difficult as some are disabled or a veteran, requirementsreaders may think. Typical requirements are slightly less restrictive. Ask your localinclude that the borrower show profits SBA bank or SBA office about some of the direct loan programs.
  • 83. Chapter 4  | potential sources of money to start or expand your small business |  73 There are also small private business USDA Rural Developmentlending companies that perform a functionsimilar to a bank’s function in assisting This loan program is aimed at busi­small businesses ­ btain SBA financing. To o nesses that provide jobs in rural America.get names and addresses of organizations Business loans through the U.S. Depart­in your area, write the SBA, ­ inancial F ment of Agriculture’s Rural DevelopmentAssistance Division, Office of Lender program (formerly the Farmers’ HomeR­ elations, Non-Bank Lender Section, 409 Administration or FmHA) are guaranteed in3rd Street, SW, Washington, DC 20416, or towns with a population of 50,000 or lesscheck the SBA website at www.sba.gov. or in suburban areas where the population density is no more than 100 per square mile. Use of the loans varies considerably;Small Business Investment loans have been made to enable a groceryCompanies (SBICs) clerk to buy the store he worked in and for someone to buy a McDonald’s fast foodA Small Business Investment Company franchise. Rural Development loans are(SBIC) is a corporation established with normally made through a local bank. Forthe assistance of the SBA to lend money information on these loans click “Loans”to small businesses. Some SBICs serve at the USDA Rural Development websiteminority enterprises, and are called Minor­ (www.rurdev.usda.gov). At the website youity Small Business Investment Companies can also locate the nearest USDA Service(MSBICs). An SBIC can borrow up to four Center. Loans under this program oftentimes its invested capital from the SBA. take months to complete, so allow plentyIt then lends out these funds to other of lead time.busi­ esses, aiming to make a profit on neach loan trans­ ction. There are some a400 of these across the country, each Economic Developmentwith different investment goals and Administration (EDA)objectives. For more information on busi­ness financing, click “Small Business The EDA, which is part of the DepartmentPlanner” on the SBA home page (www. of Commerce, makes or guarantees loanssba.gov). The SBA site also offers a list of to businesses in redevelopment areas—citySBIC addresses and areas of investment areas with high unemployment. Eligiblespecialty. And, you can call their helpline areas are listed in a publication availableat 800-827-5722 or email them at quarterly from the regional EDA director.answerdesk@sba.gov. Contact your local SBA office to ­ocate l the regional EDA director. If you’re in one of the designated redevelopment areas,
  • 84. 74  |  how to write a business planthis ­ rogram bears looking into. For more p Insurance Companiesinformation, check online at www.eda.gov. and Pension Funds You may have heard about the possibilityFederal, State, and Local Programs of ­ orrowing money from insurance bOther federal programs are published in companies or pension funds. Normally,the ­ atalog of Federal Domestic Assistance, C neither is a viable lending source for smallavailable from the U.S. Government businesses. Some insurance companiesPrint­ng Office, ­ ashington, DC 20402, i W have a small fund they can invest inor at your ­ibrary, or online at http:// l businesses, especially if you can offer abookstore.gpo.gov. There always seems combination of loans and investments.to be a variety of ­ rograms available from p However, most small businesses will findthe federal government, so this ­ irectory d money from less restrictive sources longis worth checking if you’re ­nterested in i before they make an application to angovernment money. insurance company. All states and many local governmentshave a number of aid programs available Advertising Your Project andto help businesses create jobs. These are Selling Stock to the General Publicnormally called ­ evelopment Agencies or DDevelopment Administrations. You can Advertising and selling corporate stockfind out about them by contacting your to the general public through a publiclocal Chamber of Commerce or by ­ sking a a offering is very different from selling stockbanker. to your friends, ­elatives, and business r acquaintances. Unless your corporation qualifies for an exemption, you mustOverseas Private Investment register every issuance of corporate stockCorporation (OPIC) with the federal Securities and ExchangeOPIC is a self-funded U.S. government Commission (SEC) and the state securitiesagency that makes direct loans and agency. Registration takes time and costsloan guarantees and insures private money. Following any of these proceduresbusinesses against political risks in requires a knowledgeable attorney—don’tdeveloping countries. The ideal candidate try it without help. It can be an expensive,for assistance is an American company time-consuming process that can easilythat enters into partnership with a well- cost $200,000 in attorney fees, accountantestablished foreign business. To learn fees, and printing expenses just to meetmore about this agency, check online at government filing costs.www.opic.gov or call 202-336-8400.
  • 85. Chapter 4  | potential sources of money to start or expand your small business |  75 Fortunately, however, smaller corpo­ by the registration procedures of therations usually qualify for state and securities laws. Most states have enactedfederal securities laws exemptions. For their own versions of these popular federalexample, SEC rules permit the private exemptions.sale of securities without registration if For more information about SEC smallall of the share­ olders reside in one state h business exemptions, visit the SEC websiteand all of the sales are made in the state. at www.sec.gov. The Question and AnswerThis is called the “intrastate offering” Portion of the Small Business Informationexemption. Another federal exemption section contains a great deal of useful infor­allows a “private offering” of shares mation, in easy-to-understand language.without registration. A private offeringcan be a sale, without advertising, to alimited number of people (35 or fewer Conclusionis often used as a yardstick even though There you have it—the primary and somethe federal statute does not mention a secondary sources of finding money to startnumber). Another way to qualify for a your business. If you really believe in yourprivate offering exemption is to only idea, complete the business plan outlinedsell, without advertising, to persons who, in the rest of this book. Then contact allbecause of their net worth or income the sources listed above. If you have aearning capacity, can reasonably be good plan and refuse to take “No” for anexpected to take care of themselves­ that — a ­ nswer, you will find the money you need.is, they can adequately assess the risk and The Chinese say the longest journey beginsbear the cost of investing in the business, with a single step. Let’s get started.  ●without needing the protections afforded
  • 86. 5 C h a p t e rYour Resume andFinancial StatementIntroduction..................................................................................................................................................................78Draft Your Business Accomplishment Resume..........................................................................................78Draft 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
  • 87. 78  |  how to write a business plan quick plan when you begin your business. But don’t If you’ve chosen the quick plan fool yourself into thinking that goodmethod to prepare a business plan (see credentials alone will get a loan from theI­ntroduction), you need to read and complete first person you approach. When it comesonly this section of Chapter 5: “Draft Your right down to it, few people will partBusiness Accomplishment Resume.” 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.Introduction If you’re like most people, your glowingIn this chapter you’ll draft two important a ­ ccomplishments are sprinkled withdocuments for your business plan: past mistakes and failures. Everybody • a special business accomplishment resume makes mistakes, including your backers. that focuses on those abilities you’ll Be honest in your resume but don’t go need to start or expand your business, overboard. You don’t need to give a litany and of every sin you have committed, including • a financial statement, which details the the time you skipped algebra class in the value of your material possessions. seventh grade. Only provide details of your errors when they’re relevant to your business plan. For ­ xample, if you ran a eDraft Your Business business for five years and eventually wentAccomplishment Resume bankrupt, you’ll need to mention that. Be prepared to talk with prospectiveInvestors and lenders want to be certain investors and lenders about everything youthat you have the experience, education, present in your resume. The best way toand desire to make your business a build trust in a financial relationship is tosuccess. Your resume shows your backers communicate with full disclosure. The worstthat you can achieve your objectives. This thing you can do is to lie about or try toisn’t a traditional resume that lists past jobs cover up a negative. (See Chapter 10 forand the years or months you held each. suggestions about how to discuss your pastMore correctly, you’ll develop a statement mistakes.)of ­ verything you have accomplished that e Now that that’s out of the way, let’shas a ­ irect bearing on your business d deal with the important, positive informa­objectives. tion: How do you demonstrate that you’re Although you may not have owned or qualified to run a business? As with any­e­ xpanded a business before, you have thing else, there are some tricks to writingaccomplished some demanding tasks that a resume that will interest a potentialare similar to the tasks you’ll undertake i ­nvestor.
  • 88. Chapter 5  | your resume and financial statement |  79 First, make a list of every job and Include experiences and achievements thatexperience in which you produced positive support your case and exclude those thataccomplishments for any organization, are too general or off the point. ­ mphasize Eeven if you were a volunteer or working your knowledge of how your potentialfor yourself. Since you’re not writing a business works and your knowledge ofstandard resume, dates of employment are and ­espect for financial realities. ro­ ptional. You may be able to create this list Now that you understand the processby cutting and pasting old resumes, or you and the objective, write a first draft of yourmight just start from scratch. Also, it’s okay business ­ ccomplishment resume. You ato include personal information about your may have to rewrite it several times to gethobbies and family status in this resume. the right perspective. ­ epending on your DYour financial backers want to know you experience, your resume probably shouldas a person. be between one and three pages long. Ask Under each organization, list the busi­ someone to read your drafts to make sureness ­ reas you worked in—for instance, a you’re convincing the reader that you’re thesales, management, delivery, credit, and right person for the job. You needn’t proveso on. Now, set out the specific things you you can walk on water, but you shouldaccomplished for that organization while show a good understanding of businesscarrying out your responsibilities. This realities.information will become the raw materialfrom which you choose the accomplish­ Example 1:ments most likely to support your proposal. Here’s an example of an inadequate Remember, this isn’t the place to be statement for a credit manager’s job.humble. Getting a new business off the This description doesn’t give a potentialground is no project for the meek. Maybe i ­nvestor any information about theyou reduced costs for your employer by credit manager’s ability to run aredesigning a delivery route. Perhaps you business:designed a better canoe or came up witha new marketing strategy that increased Credit Manager, XYZ Company:sales of tortilla chips. Maybe you figured Supervised two clerks and the accountsout how to improve the efficiency of a receivable and billing sections.computer system or revised a recipe tomake brownies taste better. Example 2: Once you’ve completed your first list of Here is a much better version thataccomplishments, write a statement that details the credit manager’s positiveshows how your specific accomplishments a ­ ccomplishments for the company.relate to your ability to run your business. It shows that the credit manager
  • 89. 80  |  how to write a business plan understands and can improve critical tained the 0.5% loss percentage in business factors: the following years. As part of this, we successfully brought 15 lawsuits Credit Manager, XYZ Company: with no new staff. Managed a credit department of ten 4. Through sales conferences, news­ people, consisting of an accounts letters, and frequent phone contact, receivable section, a billing ­ ection, s worked closely with the sales force and a delinquent accounts section. to ensure that new accounts were Reorganized both our collection creditworthy. During this time, XYZ department and our credit-granting sales grew from $3 million to $7 process to accomplish the following: million. 1. Collected $200,000 in delinquent accounts that had previously been The following two resumes—Jim consigned to the “unlikely to ever Phillips’s and Sally Baldwin’s—share two collect” category. This was a result of important attributes: my decision to keep in closer contact • knowledge of the particular business with customers. the individual wants to start, and 2. Reduced accounts receivable from • specific business accomplishments. an ­ verage of 90 days to an average a In this respect they are somewhat of 38 days, considerably below the different from many typical job application industry norm, again primarily by resumes. For example, a potential employer getting to know our customers better. might be concerned about whether your 3. Reduced bad debt losses from 4% of independent personality will fit in well in sales to 0.5% of sales in two years a job environment, where these ­esumes r by streamlining the credit applica­ focus on concrete accomplishments. tion process and credit checking Jim Phillips wants to start a retail procedures as well as requiring our computer store. Here’s how he drafts his sales reps to personally vouch for resume. c ­ ustomers’ creditworthiness. Main­
  • 90. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 81 Resume James T. “Jim” PhillipsWORK EXPERiENCEManager, The Computer Store, San Jose (2007 to present)Manager of chain retail computer and electronic store with annual sales of three million dollars.• Hired, managed, and fired sales and support staff of 15-20 to meet sales goals established by chain management.• Developed promotional plans and merchandising strategy, which resulted in the store exceeding sales and profitability goals by at least 10% each year.• Created a computerized inventory plan used by all stores in the 62-store chain. Received Manager of the Month award seven times. .• Conceived and implemented a quarterly newsletter (Compufacts) that was mailed to 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).• Increased sales of all three, enabling them to xpand and hire more programmers. e• Developed a comprehensive knowledge of the software marketing process. 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.• Saved the company approximately $2.3 million by designing a better rogram to handle p both automatic banking and collection of receivables.• Helped design a new freight car location computer program, which esulted in an increase r in car utilization from 60% to 65%.BookkeepingI had several part-time jobs doing bookkeeping while attending programming school.EDUCATiONBachelor of Arts Degree, History, San Jose State College, 1987Master of Arts Degree, History, University of California, Berkeley, 1990Certified Programmer, ACME Programming School, 1996HOBBiESActive in Boy Scouts and United Way; handicap golfer.
  • 91. 82 | HOW TO WRITE A BUSINESS PLAN The next resume typifies people who big profits or learn the business skillssee their potential business as offering a needed to handle fast growth.chance for self-expression as well as profit. Sally Baldwin loves to work with fabricIndividuals in an art or craft field often and color and has become expert atwant to begin a business primarily to work helping people create a pleasant livingin an area they love. Normally this sort of and work environment. She needs moneybusiness starts and stays small because the to open her own small interior decoratingbusiness owners want to keep their hands business.on a cherished activity rather than achieve 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. • Last year I sold over $500,000 worth of projects. The projects consisted of seven complete remodeling jobs, including three offices, one house, two apartments, and a small pet hospital. • Keep up with all aspects of the business such as new trends, materials, and uppliers. I s 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. • Maintain a substantial list of contacts in the design field, including potential ustomers, c 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. • Sold nearly one million dollars worth of company merchandise and won Salesperson of the Year award. • My sales normally required several visits to the customer’s home or place of work and I 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.
  • 92. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 83 The following statement is typical of needs to convince a lender that his generala person with good general business business experience substitutes, at least inexperience but no work history in the part, for his lack of frankfurter finesse. Heparticular business he wants to start. accomplishes this by demonstrating thatStephen Brinkle is an attorney who wants he knows enough to hire a manager withto start a gourmet, vegetarian, and low-fat enough experience to squeeze the mustardhot dog stand in downtown Chicago. He 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 fire the manager and locate more qualified mechanics. After doing that, the business became profitable and I sold it at a profit. 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 profitable. 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.
  • 93. 84 | HOW TO WRITE A BUSINESS PLAN If you don’t possess all the skills needed plan. Because Stephen Brinkle doesn’tto run your business, you’ll also want to have experience in selling food, hehire people to fill in the gaps. If possible, includes a resume for his key employee,those resumes should be included in your 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. The 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
  • 94. Chapter 5  | your resume and financial statement |  85Draft Your Personal tipFinancial Statement Co-owned property note: If you own an item with others and the other owners willYou can skip the rest of this chapter unless not sign for the loan, enter only the value ofyou are seeking a loan or investors for your your share of the assets and correspondingbusiness. liability. If all parties will sign for the loan, enter Your personal financial statement will the full amount. Describe the ownership typelist your personal assets, liabilities, income, (joint ­ enancy, community property, tenants in tand expenses. It tells your backers a lot common, partnership, or separate property). Ifabout your ability to handle money. Don’t you’re not sure how you own property, look atbe discouraged if your financial condition ­ the deed or other title document.is weak. Your backers want to know aboutyou, the good and the bad, and theyunder­ tand that you need money. s Determine Your Assets Preparing this statement in a formlenders are used to seeing involves several Your task is to briefly describe andsteps, which this chapter will take you estimate the current value of everythingthrough step by step. As you’ll see, the task you own, even if you owe money againstis not much harder than filling out a credit it. If you’re not sure how much a particularapplication. item is worth, make an estimate now and Drawing up a good personal financial verify it later. Give the market value—statement isn’t difficult, but it does involve the price for which you could sell theattention to detail. I recommend that you particular piece of property today.do a rough draft first. If you already own or have an interest cd-romin an existing business, you may wish A copy of the Personal Financialto include a separate statement of the Statement is included on the CD-ROM inbusiness’s net worth or balance sheet Excel spreadsheet format. You can find itand profit and loss statement. If you under the filename FinancialStatement.xls.own all or a portion of a business and Note that formulas have been embeddeddon’t plan to submit a separate statement in the spreadsheet document so that it willon the business, include your share of automatically calculate relevant totals.the business on this personal financialstatement.
  • 95. 86  |  how to write a business plan caution Corporate bonds are listed in the Keep assets separate from income. newspaper in relation to their face or parAn asset is a money item or something that value, with a price of 100 being equalyou could sell, like a car or a house. Income to par. To calculate the value of youris money you receive periodically, such as corporate bonds, multiply the price listeda paycheck. Some assets produce regular by their face value and divide by 100.income—for example, stocks and bonds If you can’t find the listing for yourthat pay dividends, patents with royalty securities in your local paper, check online,agreements, and promissory notes you own. read the Wall Street Journal at your library,Only list your assets here; you’ll list your or call your broker and ask.income later. tip Cash and Cash Equivalents: List the Note about unlisted securities: Callapproximate cash balance in each of your your broker for the value of any stocks thatfinancial accounts. Include accounts in are not publicly traded and enter them underbanks, savings and loans, thrifts, credit Other Assets, below.unions, or any other institutions. Identifyeach by institution name, account type, Cash Value of Life Insurance: If you ownand number. Also list money market funds, whole life insurance policies, they mayc­ ertificates of deposit (including maturity include a cash surrender value, whichdate), and cash in your safe deposit box, will probably be less than the face valueburied in the back yard, or any other place of the property. Obtain the value fromyou keep cash. your insurance agent. If you own term Marketable Securities: List any stocks, i ­nsurance, there will be no cash value, somutual funds, and bonds you own that are don’t list the policies.publicly traded. Show the number of shares Accounts and Notes Receivable: List onlyor the amount (face value) of bonds, the those business assets and other assetsexchange on which they are listed, and the that are not shown on a separate financialcurrent market value. The value of stocks statement for your business or secured byis the number of shares owned multiplied real property. List each note (loan) peopleby the bid price per share listed in a owe you and show the unpaid balance andnewspaper business section. payment schedule, as well as a ­ escription d The current cash value for savings or of any property securing the note. Brieflybank bonds is listed on the table printed state your relationship to the payer andon each bond according to the number of indicate if the payment of the loan isyears since it was ­ssued. i questionable.
  • 96. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 87 Personal Financial Statement ASSETSCash and Cash EquivalentsChecking and Savings Accounts (include Money Market Accounts) Currentinstitution Name Account Type and # BalanceBank of Centerville Checking Acct. #1114443231 $ 1,876Thrift Savings Savings Account #556472 3,000 Total Checking and Savings Accounts $ 4,876Time Deposit Accounts (include Certificates of Deposit) Maturity Currentinstitution Name Account # Date BalanceCharles Chubb Co. 00-12345 1-25-20 $ 2,000 Total Time Deposit Accounts $ 2,000Cash 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
  • 97. 88 | HOW TO WRITE A BUSINESS PLAN Marketable Securities (Include Mutual Funds) No. of Shares/ Exchange Current Amt. of Bonds Name of Stock/Bond Listed 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 Cash Surrender Policy Description and Company 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
  • 98. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 89Real 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 $ 155,000Personal 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 $ 12,000Other Assets (Include interests in Partnerships and Private-Held Stock) Description Current Value N/A $ 0 Total Other Assets $ 0 Total Assets $ 201,773
  • 99. 90  |  how to write a business plan Trust Deeds and Mortgages: Itemize any as “household ­urniture,” “appliances,” fp­ roperties you have sold or lent money or “power tools.” You don’t need to beagainst for which you are carrying back overly detailed. Don’t forget householda mortgage (deed of trust). Also list notes items, valuable clothing, jewelry, ­ lectronic eyou hold that are secured by real property. equipment, musical instruments, and sportsLoans against property you own will be equipment.listed under Liabilities, below. Show the Estimate the current market value. Forstreet address of the property, type of cars, start with the high Edmund’s Usedimprovements (house, duplex, etc.), name Car or Kelley Blue Book price. Jewelry,of payer, payment terms, and the current antiques, and other ­ ollectibles should be cunpaid balance. State your relationship to appraised if you plan to show them asthe payer and the status of the note. a significant part of your assets. Make a Real Estate: Describe each piece of ballpark figure of less-valuable groups ofreal estate you own. State whether it is property; garage sale prices should suffice.unimproved, a personal residence, a rental, Other Assets: List any assets that weren’tor whatever. Include the street address or covered elsewhere. Items such as annuities,parcel number of each property. Estimate IRAs, vested portions of pensions or profitthe market value of your property by sharing retirement plans, business interestschecking newspaper listings for your (value of partnerships, etc.), unlistedneighborhood, calling a local realtor, or securities, trusts, life estates, copyrights,comparing the ­ecent sale prices of similar r patents, trademarks, and so forth should beproperty. If you own valuable property listed in this section.other than your house, it’s best to include a Remember not to list the incomewritten appraisal. generated by your assets. If you own real estate with others and Total Assets: Finally, add up the values ofthe co-owners are not going to cosign your all your property listed on the form. Thebusiness loan, describe how title is held, result is your total assets.such as, “John Jones as separate property”or “John Jones and Mary Smith in jointtenancy.” Determine Your Liabilities Personal Property: Personal property In your Personal Financial Statement—is anything you own that is not real Liabilities and Net Worth you’ll write downestate. Separately itemize each of the everything you owe to others. To a consid­more valuable items like cars, boats, and erable degree, the information on this formcollections, describing each item in as will be the flip side of what you just did.much detail as possible. Less-valuable That is, if you showed a house as an asset,property can be grouped together, such you will now list the mortgage on that same house as a liability.
  • 100. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 91 Personal Financial Statement LiABiLiTiES & NET WORTHCredit Cards and Revolving Credit Accounts Name of Creditor Amount OwedVISA (Bank of Centerville) $ 1,600American Local 290 Total Credit Cards and Revolving Credit Accounts $ 1,890Unsecured Loans Bank (or other lender) Terms Amount OwedMerchant’s Bank interest only quarterly at prime + 2%, due 9/1/xx $ 5,000 Total Unsecured Loans $ 5,000Loans Secured by Real Estate Bank (or other lender) Terms Amount OwedBank of Centerville First trust deed and note on personal residence: $ 87,583 Fixed rate (10%); 30 years ending 20xxAbner 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
  • 101. 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
  • 102. Chapter 5  | your resume and financial statement |  93 Credit Cards and Revolving Credit Account: Total Liabilities: Add up all the amountsList bank cards and revolving accounts at you owe others. The result is your totalstores and with gasoline companies, and liabilities.fill in the outstanding balance. Unsecured Loans: List any unsecured cautionnotes to banks, individuals, credit unions, Check for consistency. Before you gosavings and loans, or any other person or on, carefully compare the information on yourinstitution. These are commonly called assets and liabilities lists. Make sure they aresignature loans because all the lender gets consistent. For instance, make sure that youis your signature on your promise to repay show assets for which you show liabilities andthe loan—you don’t pledge any collateral. vice versa.Examples include student loans and loansfrom relatives. State the lender and terms ofpayment, including any balloon payments Determine Your Net Worthand when the loan will be paid in full, aswell as the outstanding balance. To calculate your net worth, simply Loans Secured by Real Estate: List each subtract your total liabilities from yournote and deed of trust you owe. State the total assets. (If you are using the Personalproperty by which it is secured and the Financial Statement form included on theterms of payment, including any balloon CD-ROM, the spreadsheet program willpayment and when the note will be paid in automatically calculate this amount.)full, as well as the unpaid balance. In the last blank, add together your total Loans Secured by Personal Property: List l ­iabilities and net worth. This figure shouldany loans secured by equipment, vehicles, match your total assets. If it doesn’t, you’vebusiness inventory, or anything other made a ­ athematical error. mthan real estate. Show the payee, unpaidbalance, security, terms of payment, cautionincluding any balloon payment, and when If your total liabilities are morethe note will be paid in full. than your total assets, your net worth will Loans Against Life Insurance Policies: If you be a ­ egative figure and you’ll need to place nborrowed against a whole life insurance brackets around the number. Of course, peoplepolicy, list the insurance company, terms, with a negative net worth frequently haveand outstanding balance. difficulty ­ orrowing money and may have to b Other Liabilities: List whatever else you consider ­ nother form of financing, such as acurrently owe. This may include unpaid selling equity in the business. (See Chapter 4medical bills, tax liabilities, unpaid lawyer for information about raising money.)bills, unpaid alimony or child support, anddebts to bookies.
  • 103. 94  |  how to write a business planDetermine Your Annual Income Rental Property Income: If you rent out real property or valuable personal propertyThe next part of the Personal Financial like a truck or piano, list the annual rentalStatement shows your income from payments here. Include relevant details,all sources. These ­ gures show the fi such as your plans to raise the rent in sixannual total of each income source, so months.don’t confuse this with the asset section Dividends and Interest: List the sourcecompleted earlier. However, if you show and ­ nnual amount you expect to receive. aany ­ncome from an asset in this section, i Make sure that the information shownmake sure you also list that asset in the here corresponds to information youasset section. This form should reflect your have shown in the Assets portion of yourcurrent situation and show your present Personal Financial Statement. For ­ xample, esalary, even if you’ll quit your job to start if you list dividend income from severalthe new business. stocks and bank accounts here, they must be listed in the Assets portion. tip Income From Business or Profession: If you Note about cosigners: If someone a ­ lready own a business, list the annualelse will guarantee the loan with you—such as income.your spouse—fill in the requested information Other Income: Describe any otherfor that person as well. source of income, such as payments from judgments, payments from business Gross Salary and Wages: List all the sources investments other than your main business,of your income, including wages, earnings trust fund payments, and so forth. It’sfrom your business, and independent generally a good idea to list alimony andcontractor work. child support payments you receive, since Income From Receivables and Loan it increases your ability to repay any loan.Repayments: If anyone owes you money, Total Annual Income: Add up the incomelist the annual payments you receive. If you receive from all sources and fill in theyou have substantial income from loans, total.you may list interest income and ­ rincipal prepayments separately. Otherwise show theentire repayment amount.
  • 104. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 95 Personal Financial Statement ANNUAL iNCOMEGross Salary and WagesSource Annual AmountConsolidated Console, Inc. $ 35,000Primavera Community College 4,500Pine Tree Unified School District 20,000 Total Gross Salary and Wages $ 59,500income From Receivables and Loan RepaymentsPerson Owing Terms Annual AmountJack Sprate, nephew 8% interest; unsecured, $106.25/mo. $ 1,275 Total Receivable and Loan Repayment Income $ 1,275Rental Property incomeSource Annual Amount27 Fruitvale St., New City, IL $ 3,600 Total Rental Property Income $ 3,600Dividends and interestSource Annual AmountGeneral Computer (50 shares) $ 780Thrift Savings (interest on savings account–$3,000 at 5%) 150 Total Dividends and Interest $ 930
  • 105. 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
  • 106. Chapter 5  | your resume and financial statement |  97Determine Your Annual Insurance Premiums: List everything youLiving Expenses expect to pay for the year that won’t be covered through your job. Common typesThe goal of this part of the form is to make of insurance include life, health, disability,an accurate estimate of how much it costs property, and automobile.you to live. Business expenses should be Living Expenses: Estimate your othercovered under a separate profit and loss regular personal living expensesstatement for the ­ usiness. b that weren’t covered ­ arlier, such as e Real Estate Loan Payments or Rent: List utilities, child care, medical and dentalyour mortgage holder or landlord and your costs, transportation, food, clothing,monthly payment. Indicate whether you entertainment, and travel. Either providerent or own. Fill in the annual total of all an itemized list or a general category ofyour rental or real estate loan payments, expenses.including principal and interest. Other Expenses: List child and/or Property Taxes and Assessments: List your spousal support obligations and anyyearly liabilities if you own real property. other expense not listed above, like artAlso list business non-real-estate property, collection purchases or vacation trips.such as ­nventory or equipment, if it is i Include professional associations that havetaxed every year and the taxes are not continuing education expenses and clubshown on statements for your business. membership fees. Federal and State Income Taxes: Show your Total Annual Expenses: Now add upt­otals from last year’s income tax forms. If all your expenses. (If you are usingthis year’s taxes will be very different from the Personal Financial Statement formlast year’s, make an estimate. Especially if included on the CD-ROM, the spreadsheetyou’re an independent contractor, you may program will automatically calculate yourwant an accountant to help you prepare expenses.) If your total is greater than youryour estimated taxes for the year. annual income total above, examine the Other Loan Payments: List payments for information carefully before you considerall of the non-real-estate loans, notes, borrowing money with a fixed repaymentcharge accounts, and credit cards you schedule.listed in the Liabilities part of the form.Use last year’s numbers unless they havechanged substantially; if they have, appenda sheet and explain.
  • 107. 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
  • 108. ChApter 5 | YOUR RESUME AND FINANCIAL STATEMENT | 99insurance Premiumsinsurance Company Type of Policy Annual PaymentReliable Insurance Whole life $ 1,164 Total Insurance Premiums $ 1,164Living Expenses Description Annual Payment Food, clothing, entertainment, etc. $ 22,000 Total Living Expenses $ 22,000Other Expenses Description Annual Payment Child support payments per year $ 3,150 Total Other Expenses $ 3,150 Total Annual Expenses $ 46,372Date: Signature:
  • 109. 100  |  how to write a business planComplete Your Personal In addition, lenders usually obtainFinancial Statement a personal credit check from a credit information agency on your track record inIf you have not already done so, print making payments. That shows what billsout your spreadsheet. Make sure you sign you pay and when, as well as any unpaidand date your completed form; you’ll be bills. Credit reports also list your ­ urrent csurprised at how fast things change. employment, lawsuits in which you’re As noted above, many financial institu- i ­nvolved, and bankruptcies filed in thetions prefer their own form, which they last ten years. It’s a good idea to requestwill supply you. However, chances are your own copy of your credit report beforethat you won’t have to redo your Personal you meet with any prospective lenders.Financial Statement or, if you do, it will That way, you’ll know what they willbe easy. see and will be prepared to discuss it. If your credit file contains some inaccurate or ­ isleading information, you have the mVerifying the Accuracy of right to challenge that information. (ForYour Financial Statement information on how to go about this, seePotential lenders probably will want to Solve Your Money Troubles: Debt, Credit &verify your financial statements. Tax Bankruptcy, by Robin Leonard (Nolo).)returns for the last two or three years are Most of the time, lenders will acceptnormally adequate to back up your income your ­ stimates of your personal assets eand expense statements. If your ­ ctual a and liabilities on your Personal Financialincome is somewhat greater than your tax Statement, since it is a crime to knowinglyreturns show, be ready to verify your assets make false financial statements.in some other way. But don’t worry too Banks will also verify your cash depositsmuch about this sort of disparity unless it by contacting the relevant institutions. Also,is large. In an age of overly high taxation, lenders will want evidence of your title toyour lender will not be ­ urprised if your s property they take as security for a loan.  ●actual income is a shade higher than yourreported income. His probably is, too.
  • 110. 6 C h a p t e rYour Profit and Loss ForecastIntroduction...............................................................................................................................................................102What Is a Profit and Loss Forecast?................................................................................................................102Determine Your Average Cost of Sales . ..................................................................................................... 103Complete Your Profit and Loss Forecast....................................................................................................106Review Your Profit and Loss Forecast............................................................................................................119 Your Profit and Loss Forecast and Income Tax Return.............................................................119
  • 111. 102  |  how to write a business plan quick plan tip If you’ve chosen the quick plan Project development note: If you planmethod to prepare a business plan (see to do a project development, skip the rest ofI­ntroduction), you need to read and complete this chapter and go on to Chapter 7. Then turnthe section “Complete Your Profit and Loss to Appendix C, where you will find a projectForecast,” below. development example. If you have any difficulties completing yourProfit and Loss Forecast, go back to Chapter As you begin dealing with all the details3 and read the section entitled “Break-Even i ­nherent in financial projections, it is easyAnalysis: Will Your Business Make Money?” to lose perspective and forget the largerbefore completing this step. If you’ve chosen picture—that is, what all your work isa quick plan, you should be able to complete supposed to prove. If this happens, pausethis step easily. for a moment and remember that, for yourself and your potential backers, you’re simply figuring out:Introduction • how much money you need • what you will spend it on, andYour next job is to forecast how much • how you will pay it back.money you’ll need. You can’t makerealistic financial ­ rojections in a vacuum; pthey must be integrated into a thought-through plan. As a result, you’ll need to What Is a Profit andmake a number of decisions about how Loss Forecast?your business will operate and forecasts A profit and loss forecast is a projectionof financial results. But don’t let this of how much you will sell and howintimidate you. You’ve probably been much profit you will make. This is thethinking about the financial side of your foundation of your business plan. It givesbusiness for some time. You will inevitably you and your potential backers the basicneed to make some assumptions and even information necessary to decide whethera guess or two. Of course, you should your business will succeed. Basically,make your projections as accurate as a profit and loss forecast forces you topossible; shoot for an accuracy rate of plus estimate how many dollars you will take inor minus 10%. and how many dollars you will spend for some future period. While other extremely important factors affect your ­ usiness, such b as your cash flow (Chapter 7), you’ll be in good shape if you can confidently predict
  • 112. Chapter 6  | your profit and loss forecast |  103that the money coming in will exceed the In a given period, you make profitsmoney going out by a healthy margin. when sales revenues exceed your total In Chapter 3, you completed a rough cost of sales and fixed expenses. To put itbreak-even analysis for your business. That another way, sales revenue minus both costanalysis helped you decide whether you of sales and fixed expenses equals profitschose the right business. Now we are going or losses for a given time ­ eriod. pto take a closer look at those numbers Our job here is to examine closely alland develop them into a ­ omprehensive c the above numbers and, once you are con-forecast of your business’s future profits. (If vinced they are right, to present them on ayou did not complete or don’t remember month-by-month basis for two years. Twothe work you did then, review the section years is enough time to see if any short-in Chapter 3 entitled “Break-Even Analysis: term problems or long-range trends beginWill Your Business Make Money?”) developing. Of course, you can change the Your business’s profits result from three time frame if necessary. For instance, ifs­ pecific dollar figures: you are starting a beer stand for the annual • Sales revenue. This is all the money you county fair or a vineyard with a five-year take into your business each month, growing cycle, a different time frame will week, or year. It is also called “gross make sense for you. sales,” “sales income,” or simply “sales.” • Cost of sales. This is your direct cost cd-rom of the product or service you sell. A copy of the Profit and Loss Fore­ Sometimes it is called “direct product cast is included on the CD-ROM in Excel cost,” “variable cost,” “incremental spread­ heet format. You can find it under the s cost,” or “direct cost.” filename ProfitForecast.xls. Note that formulas • Fixed expenses. These are sometimes have been embedded in the spreadsheet called “overhead,” and you must pay document so that it will automatically them regardless of how well you do. calculate relevant totals. Fixed expenses don’t vary much from month to month. They include rent, insurance, and other set expenses. They are also called “fixed costs,” Determine Your Average “operating expenses,” “expenses,” or Cost of Sales “ ­discretionary costs” (discussed in the Your first step in your profit and loss section in Chapter 3 entitled “Break- projection is to determine your average Even Analysis: Will Your Business cost of sales—that is, your direct cost of Make Money?”). the products or services you sell. You’ll use the Sales Revenue Forecast you completed in Chapter 3 to make this estimate.
  • 113. 104  |  how to write a business plan One way to derive your average cost psychologist, chances are you will commonlyof sales is to estimate your annual sales sell some of your product or services for lessrevenue for each product or service. Then than standard prices. This may be because youcalculate each product’s annual cost of need to move out last year’s styles or becausesales. Finally, add up the numbers to get an you need to sell broken cookies or becauseannual average. you provide counseling cheaper to low-income groups. More Detailed Method to Determine Average Cost of Sales Example: Antoinette Gorzak plans to sell dresses Another way to calculate your average cost for an average price of $250, and her of sales is to make a separate monthly sales research shows they will cost $125 each. r ­ evenue and cost of sales forecast for each Her cost of each sale for dresses before of your major product or service lines. If you she allows for labor and other overhead c ­ omplete a separate monthly forecast for will be 50% of the selling price. If she each of your product or service lines, you plans to give her customers anything will have a very detailed forecast. However, with the purchase, say a specially many people balk at this level of detail in printed shopping bag and an imprinted forecasting and wish to proceed with the dress box, she should include the cost less-detailed method demonstrated in this of these items as part of her cost of section. Either way is ­ cceptable. a sales. Maybe this will make her cost of each sale 51% or 52% instead of 50%. Since Antoinette sells accessories in caution a ­ ddition to dresses she needs to allow Whether you make one annual cost of for ­ ifferent gross profit margins for the dsales forecast or a number of detailed forecasts, additional merchandise.don’t forget about the inevitable percentage A cost-of-sales averaging chart forof merchandise you will have to move at Antoinette’s Dress Shop might lookmarked-down prices. Whether you’re in the like this:book business, bake cookies, or are a child
  • 114. Chapter 6  | your profit and loss forecast |  105 percentages. Instead, it is weighted Annual Average Cost of Sales Chart: according to the amount of expected Antoinette’s Dress Shop sales ­evenue and is derived by dividing r the total cost of sales by the expected Forecast Cost Total sales revenue ($247,400 ÷ $400,000). Sales per Cost of Item Revenue Sale* Sales An average cost of sales of 60% is reasonable for many profitable retailers. Dresses $ 200,000 50.4% $ 100,800 Even though it is wise to be a little Accessories & conservative, Antoinette uses 60% Sale Items 200,000 73.3% 146,600 as her cost of sales when forecasting TOTAL $ 400,000 $ 247,400 profits. You can use the procedure in the Total Average Cost of Sales = 61.8% ($247,400 ÷ $400,000) example above to estimate your average cost of sales if you’re in the retail, *These percentages come from Chapter 3, manufacturing, or wholesale businesses. where she calculated gross profit. To get Simply modify the item categories to fit cost of sales percentage, simply subtract your business. For example, a restaurant gross profit percentage from 100%. The would have categories for food, non­ remainder is cost of sales. alcoholic drinks, ­iquor, beer/wine, l and possibly take-out orders. Another Here’s how Antoinette completed this example, for a bar and restaurant, is chart. First, she estimated how much shown below. sales revenue for each of the product categories the shop would receive in the Annual Average Cost of Sales Chart: first year; that enabled her to ­ omplete c Bar and Restaurant the first column of the chart. Next, she obtained her cost of Forecast Cost Total sales percentage by using the figure Sales per Cost of she developed in Chapter 3. She then Item Revenue Sale Sales multiplied the sales revenue for each Food $ 300,000 38% $ 114,000 product category by the cost of sales Liquor 60,000 29% 17,400 p ­ ercentage for that category; that Beer/Wine 40,000 75% 30,000 enabled her to complete the total cost of TOTAL $ 400,000 $ 161,400 sales column of the chart. The average total cost of sales Total Average Cost of Sales = 40% figure (61.8% in Antoinette’s example) ($161,400 ÷ $400,000) is not an average of the cost per sale
  • 115. 106  |  how to write a business plan By definition, service businesses caution sell services or labor and do not sell Include piece-rate and commission merchandise. Occasionally they may costs. Note that some businesses pay workers bill a client for a service they ­ urchase p on a piece-rate or commission basis. All your outside the firm or bill for a service costs that vary with each sale should be in cost that has some incidental costs. The of sales instead of fixed expenses. cost of sales ­ ortion of a service p business’s total costs will be low. For When you’ve completed your cost of e ­ xample, a consulting firm may incur sales ­ alculations, you are ready to prepare c outside typing, photocopying, and your Profit and Loss Forecast. report binding expenses that will vary somewhat with every sale. Most e ­ xpenses, such as salaries and rent, will Complete Your Profit be fixed costs and won’t appear on this chart. Service ­ usinesses should follow b and Loss Forecast the example below of the consulting Follow the line-by-line ­nstructions below i business. to complete your form. Annual Average Cost of Sales Chart: cd-rom Consulting Firm Note for computer users: A formatted copy of the Profit and Loss Forecast Forecast Cost Total Sales per Cost of is provided on the CD-ROM at the back of Item Revenue Sale Sales this book in Microsoft Excel format under the Publications, filename ProfitForecast.xls. phone, travel $ 100,000 20% $ 20,000 Contract 1. Sales Revenue. You have completed this services e ­ stimate already. Simply enter the total (typing, etc.) 50,000 75% 37,500 sales revenue dollars for each month Studies, for two years from the Sales Revenue Consultations 527,000 0% 0 Forecast you completed in Chapter 3. TOTAL $ 677,000 $ 57,500 Total Average Cost of Sales = 8.5% caution ($57,500 ÷ $677,000) 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
  • 116. Chapter 6  | your profit and loss forecast |  107forecast. Make sure you don’t do it backwards the gross profit numbers and enter them on aby writing down enough sales revenue to summary form line 3. You will have preparedshow the profits you want. Otherwise, you’ll separate forms for each product line forhave to explain to your backers each month the first three lines (sales revenue, cost ofwhy things aren’t as good as you said they sales, and gross profit) and a summary sheetwould be. showing total gross profit, ­ perating expenses, o and profit.2. Cost of Sales. Enter your monthly dollar cost of sales. To get these figures, 3. Gross Profit. Subtract cost of sales (line 2) multiply your monthly sales revenue from sales revenue (line 1) to get gross forecast by the average cost of sales profit. It’s the amount of money that percentage. Returning to our dress shop remains after you’ve paid your direct example, Antoinette would multiply her costs of the products sold. This money monthly sales figure estimate by 60% is available to pay the ­ usiness’s fixed b (or 0.6). For example, if March sales are expenses and your profits. If gross forecast at $30,000, the cost of sales for profit is larger than fixed expenses March would be $18,000 (0.6 × $30,000 for that month, you will have a profit. = $18,000). But if gross profit is smaller than fixed expenses, you will have a loss that cd-rom month. For example, looking at the dress shop If you are using the Profit & Loss e ­ xample for March, Antoinette arrivesForecast form on the CD-ROM, you can enter at gross profit by subtracting the costthe Cost of Sales percentage in Column B in of sales of $18,000 from the forecastthe spreadsheet (where it is marked “(%here)” sales revenue of $30,000 and enteringin red). Then enter the relevant Sales Revenue the result of $12,000. She’ll do the samein Column C. The spreadsheet program will thing for each subsequent month.automatically calculate your Gross Profits. 4. Fixed Expenses. The categories listed onNote, if a series of #### symbols appear in a the form are the most common fixedbox in a spreadsheet that means that you need expenses, but feel free to add or modifyto widen the column in order to display the items to suit your business. All fixednumbers. expense items reduce your profit so that you pay less business ­ncome tax. i caution 4a. Wages/Salaries. Most small businesses keep some employees on a fixed weekly If you made separate forecasts of or monthly work schedule regardlesssales revenue, cost of sales, and gross profit of how business fluctuates. Manyfor each product line, then add together all
  • 117. 108 | HOW TO WRITE A BUSINESS PLAN Profit and Loss Forecast: Year One for Antoinette’s Dress Shop Month 1 2 3 4 5 Mar Apr May Jun Jul 1. Sales Revenue $30,000 $33,800 $45,000 $ 37,500 $33,800 2. Less: Cost of Sales ( 60 %) (18,000) (20,300) ( 27,000 ) ( 22,500) ( 20,300) 3. Gross Profit ( 40 %) 12,000 13,500 18,000 15,000 13,500 4. Fixed Expenses: a. Wages/Salaries 3,168 3,168 3,168 3,168 3,168 b. Payroll Tax 432 432 432 432 432 c. Rent/Lease 3,850 3,850 3,850 3,850 3,850 d. Marketing & Advertising 1,000 1,000 1,000 1,000 1,000 e. Insurance 500 500 500 500 500 f. Accounting/Books 200 200 200 200 200 g. Interest Expense 0 0 0 0 0 h. Depreciation 0 0 0 0 0 i. Utilities 800 800 800 800 800 j. Telephone 600 600 600 600 600 k. Supplies 200 200 200 200 200 l. Bad Debts 100 100 100 100 100 m. Freight 200 200 200 200 200 n. Miscellaneous 1,000 1,000 1,000 1,000 1,000 5. Less: Total Fixed Expenses (12,050) (12,050) (12,050) (12,050) (12,050) 6. Profit/(Loss) $ (50) $ 1,450 $ 5,950 $ 2,950 $ 1,450
  • 118. ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 109 Date Completed: 1/25/xx 6 7 8 9 10 11 12 Year Total Aug Sept Oct Nov Dec Jan Feb$ 33,800 $ 41,200 $ 41,200 $45,000 $ 52,500 $ 26,200 $30,000 $ 450,000( 20,300) ( 24,700) ( 24,700) ( 27,000) ( 31,500) ( 15,700) ( 18,000) ( 270,000) 13,500 16,500 16,500 18,000 21,000 10,500 12,000 180,000 3,168 3,168 3,168 3,168 3,168 3,168 3,168 38,016 432 432 432 432 432 432 432 5,184 3,850 3,850 3,850 3,850 3,850 3,850 3,850 46,200 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000 500 500 500 500 500 500 500 6,000 200 200 200 200 200 200 200 2,400 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 800 800 800 800 800 800 800 9,600 600 600 600 600 600 600 600 7,200 200 200 200 200 200 200 200 2,400 100 100 100 100 100 100 100 1,200 200 200 200 200 200 200 200 2,400 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000 (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (12,050) (144,600)$ 1,450 $ 4,450 $ 4,450 $ 5,950 $ 8,950 $ (155) $ (50) $ 35,400
  • 119. 110  |  how to write a business plan businesses call in some temporary figure for wages and salaries by 14% employees as needed. All such wages (0.14). For example, if employees receive are a fixed expense. To fill out line 4a, $4,560 in wages and salaries in May, the you’ll need to know how many people payroll tax is $638 ($4,560 × 0.14 = $638). you’ll hire, how many hours per month In other words, the employees in this each will work, and how much you’ll example cost the employer $5,198 in May pay each person. If you plan to pay ($4,560 + $638 = $5,198) even though the yourself a regular wage, regardless of employees’ gross pay is only $4,560. how profitable the business is, include These tax rates change from time to your salary as well. time. You can call the IRS for current Fill in the gross amount, before rates. Most states have additional taxes employee withholding deductions, you not included here that vary from state to will pay every month for wages and state. (Workers’ compensation insurance salaries. (If you don’t know, or aren’t is covered in line 4e, ­ elow.) b sure how this works, turn to Chapter 8 4c. Rent/Lease. Rent is the next major item for a complete discussion.) to consider, unless you plan to operate out of your home or some other space caution that will not result in additional out- of-pocket costs. If you’re not renting Certain wages aren’t fixed expenses. commercial space, however, bear inSome small manufacturing businesses pay mind that local zoning laws may affectworkers on a piece-rate basis or hire employees you. You’ll want to check out zoningwhen ­ rders are high and lay them off when o ordinances before going ahead withbusiness is slow. Others don’t pay a salary at all, your plans.but compensate workers with a commission If you don’t already have a spot infor each sale. In all of these situations, the mind, check building availability andportion of the wages that changes with each costs by talking to a commercial realadditional unit of production should be estate broker and people who occupyconsidered a variable cost of sale. Those costs space similar to the one you have inbelong in the cost-of-sales category and not mind. You should know what kind ofthe fixed-expense category. location you want by now—for instance whether you need high visibility or4b. Payroll Tax. As an employer, you’ll whether an obscure, low-cost location is pay the federal government taxes of just as good. You should also know how approximately 14% of your employees’ large a space you need, what plumbing, wages and salaries. It is your contribution electrical, and lighting you want, and to your employees’ Social Security how much storage you need. Sometimes program. Multiply each month’s dollar
  • 120. Chapter 6  | your profit and loss forecast |  111 cheap rent doesn’t turn out to be such no ­urther obligation once the new f a bargain if you have to build walls or tenant begins paying rent. i ­nstall a bathroom and a loading area, Be sure you know exactly what your or if a poor location means you get few rent will include. Commercial leases customers. often require the tenant to pay for a number of things that a landlord tip commonly pays for in residential rentals. For example, some shopping Leasehold improvements note: center leases require you to pay a proAny time you build something like a wall or a rata share of property taxes, buildingbathroom, it is considered a capital outlay, not maintenance, and fire ­nsurance on the ia fixed expense. (Capital expenses are covered building, as well as a pro rata share ofin Chapter 7.) Do not show the expenditure the parking and common area charges.as a current operating expense. Only the A friend of mine who rented a smalldepreciation is a fixed expense. You can write building for a retail nursery businessoff or depreciate leasehold improvements put it this way: “That blankety-blankover the term of the lease in most cases. (If landlord sold me the building; he justyou don’t know what ­ epreciation is, look d kept the title.” So, as part of makingat line 4h, below. For more help, check with your financial projection, be sure youyour CPA.) know exactly what charges, if any, the realtor or landlord expects you to pay Normally you will want to sign a in ­ ddition to the rent. By the way, no a lease for a business space rather than matter what you determine the rent to to accept a month-to-month tenancy. be, expect to put up the first and last Business leases generally protect the month’s rent and ­ ften a security deposit o tenant more than the landlord, ­ lthough a when you sign the lease. Don’t include it may not seem so if you read all those those deposits here. (See Chapter 7 for fine print clauses. You’ll be sure that you treatment of preopening ­ xpenses.) e can stay at the location long enough to Many leases that last longer than a year build your business around it, and you’ll contain a method to protect the landlord know what your rental costs will be. But from inflation. Some are tied to a cost- what happens if your business fails or of-living ­ndex, which means your rent i you discover the location is poor? You’ll goes up each year at the same amount be responsible for paying the rent until as the inflation rate. Others contain a the space is rented to someone else, percentage of sales clause, where you which could take a long time in some pay a set rent or a percentage of your areas. Assuming someone else will pay gross sales, whichever is higher. at least as much as you do, you’ll have
  • 121. 112  |  how to write a business planExample: a dozen big signs. Business became so Bob Smith signed a shopping center good, he had to expand his seating area lease for his optometry office. His lease and hire more cooks. He was feeling called for a base rent of $2,400 or 6% pretty happy about life when his son, of monthly sales, whichever was more, whom he thought was a positive wizard, plus a set charge of $400 for taxes, came home from ­ ollege. The son, an c maintenance, and insurance. If sales economics major, was appalled at all the exceeded $40,000 per month ($2,400 new signs and seating. ÷ 0.06), he would be obligated to “Dad, what are you doing spending pay the landlord more rent. Bob was so much on advertising? Don’t you pleased to sign the lease because his know there’s a depression going on and sales projections ($32,000 per month) everybody’s going broke? If you don’t indicated he would be making a healthy pull in your horns a bit, you will never profit if his sales volume reached make it.” $40,000 a month, so he would not mind “No kidding,” John replied, and paying a higher rent. Of course, this took down the signs and stopped the sort of lease is not a good idea if the construction program. Soon business amount of sales needed to trigger a dwindled away to nothing and John substantially higher rent is too low. In went broke. Bob’s situation, for example, if he was The lesson of this story is simple: required to pay more rent if monthly When the signs went up, business sales reached $28,000, he probably improved. When they came down, would have looked elsewhere. there wasn’t enough income to buy ketchup. One way or another, success­ ful businesses get the word out. When you have figured out your total (Incidentally, the son went on to get his monthly rent from a lease quotation degree and opened his own business from your expected landlord or from consulting firm.) a survey of market rents, fill in that There are small libraries full of amount. books about how to market a business4d. Marketing and Advertising. Here’s a story or product. I recommend especially about advertising. Back in the early Marketing Without Advertising, by 1930s, John Axelrod opened a hot dog Michael Phillips and Salli Rasberry stand on the main road into Pine Valley. (Nolo). Such books used to focus almost Business was fair. When he put up a exclusively on paid advertising. More small sign, business got a little better. recently, broader concepts of marketing Then he added several more signs and have come into prominence. Network things got a lot better. Finally, he put up
  • 122. Chapter 6  | your profit and loss forecast |  113 marketing, or selling to friends and store in the area and supply them with acquaintances, has become an identified free literature on oboe cleaning. alternative to more traditional selling Many successful businesses allow a set strategies. Guerrilla marketing involves p ­ ercentage of gross sales for promotion, getting the word out to the people often 3% to 5% of sales revenue as a and groups who are most apt to need budget figure. They allocate half that your goods or ­ ervices, rather than s amount for a continuing, low-level effort advertising your product or service to to let people know about their product the community as a whole. “Guerrilla” or service and schedule the other half to refers to the use of unconventional advertise sales and special events. methods to spread product or service Think about what you will need to information. For example, guerrilla do to tell people about your business. marketers may pay students or part-time Will your business need cards? Flyers? workers to hang out in bars or coffee Newspaper ads? A good-sized ad in the houses and talk about their product in a yellow pages? Sample merchandise sent favorable way. to media outlets so they can review your If you get creative, there are all sorts product? Window displays? Mailings? of ways you can reach the people most A part-time marketing expert to help likely to want your product or service, you pull this together? Avoid expensive for little or no cost. For example, if you p ­ romotions that you haven’t tried before. invent a better ­ oftware program (or s For example, if you get an idea that develop a consulting business in your involves mailing out 100,000 flyers, special field), you could advertise on the ­ plan for a test by mailing only 5,000. If radio—or you could target your market it works, go for the rest. If not, use the by finding a computer bulletin board of money you saved for something else. people who need your product. Your A great deal of money spent on next step might be to get someone to conventional advertising is wasted. write about your business for a computer New businesses especially are prone to magazine or newsletter. Similar spend too much in the wrong places. opportunities exist in ­ very business. e So use your common sense. Talk with If you open an oboe repair shop, for friends in business. Check with trade example, one of the first jobs is to associations to see what they suggest figure out inexpensive ways to let every as a good budget number for telling o ­ boist within a hundred-mile radius potential customers about your business. know of your existence. One way might Once you’ve set a budget for special be to contact every wind instrument promotions and ­ ontinuing low-level c instructor, school band leader, and music advertising, write both amounts in the Profit and Loss Forecast.
  • 123. 114  |  how to write a business plan related topic trying to raise enough to pay your For more help, look ahead to Chapter premiums.8. In that chapter, you’ll write a detailedmarketing plan for your business that includes cautionboth preopening promotions and continuing Some people try to avoid themarketing costs. responsibility of paying workers’ compensation insurance or payroll taxes by calling their4e. Insurance. You must have at least some employees ­ independent contractors.” This can “ insurance in this litigation-happy society. cause serious problems with back taxes if the Your lease may require you to keep fire, IRS rules against you. Also, if the independent flood, or earthquake insurance on the contractor is injured while working for you, building. If the public comes into your the workers’ compensation appeals board will business, public ­iability and property l almost always rule in favor of the employee damage insurance is a necessity. This and against independent contractor status, will protect you from the ­ erson who p unless your worker genuinely has her own slips and falls on your floor mat. If business. This means you may end up paying you employ anyone, you also need huge sums if one of your workers becomes workers’ compensation insurance, since ­ isabled while you don’t have insurance. In d you are absolutely liable if one of your other words, trying to save a few pennies on employees injures herself while at work. this ­nsurance is just not worth the risk. i You will probably also want to carry insurance on your valuable inventory Once you arrive at a good estimate and fixtures. And if you manufacture for your total insurance bill, inquire any product that could possibly harm about deferred payment programs. Most anyone, such as food or machinery, you companies that offer them often require will want to consider product liability that you pay 20% of the total premium insurance. up front each year and the balance in Talk to an independent insurance ten payments. For purposes of your broker who specializes in business Profit and Loss Forecast, divide the total insurance to get an idea of what annual insurance payment by 12 and coverage you’ll need and how much it enter those figures. will cost. Then shop around warily. Lots 4f. Accounting/Books. You can do your own of over-enthusiastic insurance people books if you like working with numbers. will try to sell you far more insurance Chances are, however, you’ll be so busy than you need. Although you need some with the business, you won’t have time. insurance to protect against obvious One good approach is to budget for a risks, you don’t need to starve to death CPA to set up your books initially and
  • 124. Chapter 6  | your profit and loss forecast |  115 to hire a part-time bookkeeper to do When designing a bookkeeping system day to day upkeep. If you are starting for your business, remember that it small, your initial cost should be under costs a lot of time and money to change $500 and your monthly cost under $200 it—make sure it really fits you and your to keep the records up to date and to business. (See Chapter 12 for a further prepare routine employee withholding discussion of ­ omputers in business.) c tax returns, statements, etc., assuming Make as good an estimate as you can you close the register each day. Once a and enter this figure on your Profit and year you will pay the CPA another few Loss Forecast. You can take the year hundred dollars to review this work and total and divide it by 12, or you can help you prepare your yearly returns. If enter the amounts when you think they your business is going to be fairly good- will be paid. sized from the start, your figures will be 4g. Interest. This line of your Profit and larger. Loss ­ orecast concerns the interest F If you’re interested in keeping your portion of the payments you make on own books, you’ll probably want to look any money you ­ orrow. Unless you have b into reliable accounting software such an interest-only loan with a balloon as Intuit’s QuickBooks (www.intuit.com), payment at the end, your ­nterest i or M.Y.O.B. Plus (www.myob.com). The payment will vary from month to month program you need depends on how big even though you pay the same monthly your business might grow to be, what amount. extra features like statements or payroll you want the computer to provide, and Example: so forth. You can research the different Joanie Ricardo borrows $50,000 from programs yourself, but remember to the bank to open a Gelato’s Ice Cream keep in mind the features you may need store in Providence, Rhode Island. She later on after your business has grown. agrees to repay it in 36 equal monthly Or you can look into an outside service, ­ installments of $1,660.80, including 12% which may recommend a program to fit interest on the ­ npaid balance. While u your business and computer, set up the Joanie’s monthly payments ­emain r books, and run parallel for a month or equal, the portion of the payment two to make sure that you don’t lose any that is credited to principal increases data. The systems can be very handy every month, while the portion of and timesaving if you have no strong her payment going ­oward interest t attachment to a ­ aper record, or are p decreases. willing to print out the documents you may want.
  • 125. 116 | HOW TO WRITE A BUSINESS PLAN But, let’s say that you don’t know how about how much money you’ll much money you’ll borrow at this time. need to borrow and the cash flow After all, one of the main reasons for available to make repayments. (See doing a business plan is to decide how your Plan Summary discussion in much money you’ll need to finance your Chapter 9.) business. In that case you have three There are loan progress charts choices: and computer programs that show • You can complete the Profit and approximately how much of any Loss Forecast in this chapter, and payment is interest and how much is the Cash Flow Forecast in the next principal. chapter, making your best guess about how much you’ll borrow and CD-ROM what your payments will be. Nolo, the publisher of this book, • You can complete the forecasts provides a calculator that will create a chart without showing any loans or similar to the one shown below. You can payments. Then use the results to access it at www.nolo.com/legal-calculators. decide how much money you’ll Enter the information in the form and the borrow and revise the forecasts to program will calculate interest payments over include loan payments. the loan period. • You can complete both forecasts without showing any loans at all. Then you can include a discussion Loan interest Calculation Chart A B C D E F Balance (from column Monthly interest paid Principal Paid New balance Month F above) payment (B × % ÷ 12) (C − D) (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
  • 126. Chapter 6  | your profit and loss forecast |  117 caution longer than your depreciation shows, You can’t write in the entire loan which is why depreciation can be seenpayment amount on your Profit and Loss as a friendly federal gesture.Forecast, because the IRS does not consider Often, equipment is depreciated overprincipal ­ epayments fixed expenses that can r three to five years and buildings overreduce your taxable income. 15 to 30 years for tax purposes. It’s not your choice, however; the IRS publishes very ­ xplicit rules and lists of what can e tip be depreciated and how fast. These lists Note of sanity: You don’t need to and rules change frequently, so you’llbe perfect in forecasting your interest costs. probably need to check with your taxJust make your best informed guess. You can advisor about depreciation and fixedalso check with your banker, CPA, realtor, or assets.bookstore for loan repayment tables. Make You can depreciate all fixed assets thatsure the sum of your interest payments here last longer than one year. Remember,and the principal payments from Chapter 7 you don’t show the purchase priceequal the total loan payment. as an expense on the Profit and Loss Statement if you depreciate an item.4h. Depreciation. Depreciation is a gift to If the asset will last less than one year, the businessperson from Uncle Sam. Ask you simply show the entire purchase not what your country can do for you— price in the expense column for the year this is it. ­ epreciation is an amount D you bought the equipment and do not you can subtract from your profits depreciate it. Inventory of goods available when you pay taxes. It ­ ompensates c for resale and consumable supplies are you for the fact that your business examples of purchases that are expensed equipment and buildings are wearing immediately because they last less than out. The government allows you to one year. assume that your fixed assets wear out over some period of years, meaning Example: that for tax purposes, your ­ ssets are a Chuck Leong expects to spend $20,000 worth less at the end of that period. for fixed assets to open his business. Your depreciation allowance simply lets Items include a new toilet, several new you show a percentage of this wear as walls, a cash register, a small computer, an expense on your tax return each and store fixtures. Assuming Chuck’s year. In a sense, it is a sinking fund for accountant agrees that five years is the equipment replacement, or would be if proper time frame to use for deprecia- you put the depreciation amount in the tion, he can take $333 as an ­ xpense for e bank. In actuality, the stuff usually lasts depreciation each month ($20,000 ÷ 60 months).
  • 127. 118  |  how to write a business plan4i.–4n. Other Expenses. Inevitably, you will e ­ ncounter a number of other expenses, Common Expenses depending on your business. Spend Here are some of the more common some time thinking about these using expenses that businesses incur on a regular the accompanying list as a starting point. basis: Then list all the other costs you expect • Attorneys, consultants, tax advisors to incur on Lines 4i to 4n. If you expect • Auto and truck expenses any of these to be recurring ­ xpenses, e • Bad debts include your monthly estimate for each. • Commissions (probably should be For expenses that occur once or twice a placed in cost of sales or as a deduction year, ­ ivide the annual total by 12 and d from sales revenue if commissions are enter an amount each month. paid regularly; if paid only occasionally,Total Fixed Expenses. Add up lines 4a include them in fixed expenses) through 4n and fill in the total for each • Dues and publications month. • Employee benefit programsProfit/(Loss). From the Gross Profit (line 3), • Equipment rental subtract the Total Fixed Expenses (line • Freight in on merchandise acquired 5) and fill in the result. Make sure that (also sometimes placed in cost of sales; you place brackets around each negative freight out to customers is usually paid number—that will identify it as a loss. for by the customer)Year Total. Finally, add up each of the rows • Janitorial (lines 1 through 6). Enter the yearly • Laundry totals under the Year Total column. • Licenses and taxes including permit Check your arithmetic by seeing if the fees (not income taxes, which are monthly profit figures add up to the calculated after profits are known) same figure you get for your yearly total. • Office supplies If they don’t match, double-check your • Payments to investors a ­ ddition to find the error. If they match, • Postage, fax, telephone c ­ ongratulations! • Repairs and maintenance • Security and alarm systems • Travel and entertainment • Utilities.
  • 128. Chapter 6  | your profit and loss forecast |  119Review Your Profit one. Or, put another way, there are almost as many answers as there are business­and Loss Forecast people. My personal response is, I look forYou’ve now completed your first run a yearly profit (including my wages andthrough a Profit and Loss Forecast. Date return on investment) equal to the amountit so you won’t get confused if you do of cash needed to start the business.another draft. I hope it looks positive. If I need $40,000 to start a business, aHow­ ver, if like many people you find you e conservative profit forecast would show aneed to increase profitability to make the yearly profit of at least $40,000.business a good economic idea, go back One way to approach the issue of profit­through all your assumptions. How can ability is to look at your profit forecast fromyou realistically reduce costs or increase an investor’s viewpoint. A $35,400 profitvolume? Incorporate into your forecast only for the dress shop won’t seem like muchthose changes you’re sure are sound. Now to them. They will be ­ oncerned that the clook at the profit figures again. Do they dress shop owner will have a difficult timeshow enough profit to make a good living, earning a living and making it throughpay back your money source, and leave the inevitable slow times. An investor orsome margin for error? If they do, and lender will probably want her to be able toyou’re sure the figures are right, you will convincingly demonstrate she has a planwant to go ahead with your business idea. to increase sales enough to raise the profitIf the adjusted figures still do not show forecast to a more respectable level—say,enough profit, it may be wise to look for the $46,200 she shows in the second year.another business idea or change your basicbusiness assumptions. Notice that Antoinette’s business looks Your Profit and Loss Forecastmore profitable in her Profit and Loss and Income Tax ReturnForecast than it did in her preliminary Figuring out your business’s income taxanalyses in Chapter 3. That’s because she return ­nvolves more calculations than we iincreased her first year’s sales estimate have shown so far. One major differencefrom $400,000 to $450,000 and reduced involves cost of sales, which we haveher fixed costs from $16,050 to $12,050 per viewed as a simple percentage of sales formonth. The net effect of these changes was forecasting purposes. You’ll need to ­ollow fa slight increase in profit. She knows these more complicated rules when computingnumbers will be hard to achieve, but she is your business income tax return. Readconfident that she can make her goals. below to learn how to spot employee How much profitability is enough to theft. You can skip this discussion if yourjustify going ahead with your business? business has no ­nventory. iThat’s both a good question and a touchy
  • 129. 120  |  how to write a business plan Here’s how to do it the right way. First, 2. From that amount, subtract the dollartake a physical count of all your merchan­ value of the inventory at the end ofdise for resale every year or every few the period.months. Even if you have a computerized 3. The difference is the cost of sales forinventory system that can tell you how the period.much inventory you have at any time, it’s Here’s an example that demonstratesa good idea to take a physical inventory how you do this:every six or 12 months to reconcile thereal inventory with the computer inventory.Once you have a complete listing of the Cost of Salesdescription and count of all the goods Beginning Inventory fromin your store at a particular date, then physical count $ 10,000you apply the best figures you have for Add: Purchases during period + 30,000what the merchandise cost you when Subtotal: Goods available for sale 40,000you bought. Multiplying the unit cost of ­each item on your shelves by the number Less: Ending Inventory from physical count – 15,000of items you have and adding purchasesduring the period gives you the cost of the Cost of Goods Sold during period $ 25,000goods available for sale. While there are anumber of different theories on which costfigure to use (the latest or the earliest), the This calculation has more use thancritical thing is to make sure you do it the merely filling out IRS forms: It can let yousame way ­ very time. Then, you can make e know when someone is stealing from you.accurate comparisons from year to year. Of Suppose you have a good estimate of whatcourse, if you have a service business or the cost of sales percentage should be,business with no inventory, the inventory either from past statements or from a goodvaluation discussion is moot. understanding of your business. Suppose After you have developed a total dollar further that you expect a cost of sales ofvalue of the goods you have on hand, you 61.5% and that you actually had a cost ofcan calculate your real cost of sales this sales of 77.3%. What does that mean? Itway: could mean that some of the merchandise 1. Add together the goods you pur­ you buy for resale is leaving the store chased during the period and the without any money entering your register. inventory amount at the beginning At any rate, it means that you need to do of the period. (This total represents some serious research to find out what is the dollar value of the goods you had really happening. ● available to sell during the period.)
  • 130. 7 C h a p t e rYour Cash Flow Forecast andCapital Spending PlanIntroduction............................................................................................................................................................... 122Prepare Your Capital Spending Plan............................................................................................................. 123 .Prepare Your Cash Flow Forecast................................................................................................................... 125Required Investment for Your Business...................................................................................................... 135 .Check for Trouble.................................................................................................................................................... 136 Antoinette’s Inventory Problem........................................................................................................... 136 Typical Problems Retailers Face............................................................................................................. 137
  • 131. 122  |  how to write a business plan quick plan Your Cash Flow Forecast is different If you’ve chosen the quick plan from your Profit and Loss Forecast becausemethod to prepare a business plan (see money comes into and flows out of yourI­ntroduction), you need to read and complete business at different times than yourthese sections of Chapter 7: Profit and Loss Forecast shows. A formal • “Prepare Your Capital Spending Plan” Cash Flow Forecast is required by most • “Prepare Your Cash Flow Forecast” potential backers, who want to know that • “Required Investment for Your Business.” you understand and can manage that time difference.Introduction Example: Rita Singh plans to open a small tie-dyeIn Chapter 6, you drafted your estimated manufacturing business. Since severalProfit and Loss Forecast. While it tells you a of her likely customers are chain stores,lot about the big financial picture, it leaves Rita knows that she will have to sell andyou ignorant of many details. If you overlook ship their orders before the stores payone critical detail, you may go broke, even her. The stores often can take severalthough your business seems profitable months to pay their bills. Wisely, Ritaviewed from afar. carefully prepares a Cash Flow Forecast The crucial detail a business owner must to make sure she can afford to sell onm­ anage is called “cash flow.” Cash flow is credit.another term for the money coming intoand going out of your business. Positive In your Cash Flow Forecast, you’ll refinecash flow occurs when the money coming any guesses you’ve made about howinto your business ­ xceeds the money e much money you need to start or expandflowing out, and negative cash flow is your business. You’ll develop an amountthe opposite. In the day-to-day world of of money you are comfortable with—anstarting and operating your business, you amount you can explain to prospectivewill be at least as concerned about short- investors. In other words, you need to beterm cash flow as you will be about long- as ­ ccurate as you can be in this forecast. aterm profitability. After all, you don’t want The money you need to start or expandyour creditors to sue you because you can’t your business can be separated into twopay your bills even though your sales are categories:increasing rapidly. One new business owner • Capital investment. This is the cashI know even wears a T-shirt that says: you need to spend before you begin“Happiness is positive cash flow.” or expand your business.
  • 132. Chapter 7  | your cash flow forecast and capital spending plan |  123 • Initial working capital. This consists of Prepare Your Capital the cash reserves you need to keep your ­ usiness afloat before you begin b Spending Plan to show profits every month. Your capital spending plan includes all Commonly, cash flow from monthly the things you have to buy before yoursales is not enough to cover monthly business begins bringing in sales revenue,expenses for the first few months after a including opening ­nventory, fixtures and inew business opens. If your Cash Flow equipment, business ­icenses, deposits for lForecast shows a negative picture for this the building lease, and whatever else youperiod, you need to have extra money set need.aside for initial working capital. Your initial Open a computer file or take out aworking capital keeps the doors open until clean sheet of paper and write “CAPITALcash flow from monthly business becomes SPENDING PLAN” at the top. Now, makepositive. If your Cash Flow Forecast shows a list of all the things you’ll have to buyyou’ll run a cash deficit for several months, before you open. This will enable youdon’t be too concerned. Just be sure you to make a good estimate of the cash youhave enough initial working capital to need to open your doors.cover it. But if your Cash Flow Forecast The list shown below sets out manyshows a continuing cash deficit, or a common items businesses need todeficit that rises over time, your business purchase before they are ready to open.may have some fatal flaw and you should Some of the items you’ll buy will bereexamine the whole idea before making considered capital items, which depreciateany commitments. over their useful lives. All preopening Growth, too, can create problems. Many expenses represent your capital investmentb­ usinesses that grow quickly suffer severe in the business, regardless of whether theycash flow shortages because money from are treated as capital items or expensesales does not come in fast enough to items. If you have doubts about whethercover the investment needed to expand. If an item can be depreciated, ask youryou find yourself in this situation, you will a ­ ccountant.need to reduce your growth rate or find Now assign specific dollar amountsextra sources of money. (See the cash flow to each item on this list. If you’re unsurediscussion below.) about the cost of an item, ask the person So, let’s put a close-up lens on our from whom you’ll buy the item for ancamera and focus on cash forecasting. estimate or a quote. Try for plus or minusHere again, it’s necessary to get out your 10%. Remember that you’re trying for ancalculator or computer and play with some accurate estimate here, so use the numbersnumbers. you think are right. Most experienced
  • 133. 124  |  how to write a business plan Common Items in a Capital Spending Plan Here’s a list of common items businesses Expense items generally are shown as either need to buy before opening. Note that they fixed expenses or costs of sale at the time fall into two categories—capital items and they are purchased because they last less expense items. than one year. They include: Capital items generally have a useful life of • opening inventory (sometimes you more than one year and can be depreciated for can get a deferred payment schedule tax purposes. They include: from suppliers, but you will usually • permanent signs, heaters, air con- have to pay for many, if not most, ditioners, cooking and refrigeration goods before you sell them) equipment • lease deposits • equipment, including machinery, large • tax deposits tools, and other expensive items • business licenses and permits • racks and display fixtures for retail • opening marketing and promotion selling areas • insurance • office furniture • telephone installation • leasehold improvements or any • utility deposits alterations you make to the building, • office supplies and stationery including walls, bathrooms, and • legal fees, costs to incorporate, and carpeting CPA fees to establish your business • computers, typewriters, fax • contingency reserve. machines, ­ dding machines, cash a registers, phone systems, and other small equipment you purchase.businesspeople will add another 10% to Your capital spending plan should20% of the total as a ­ ontingency to allow c reflect the exact amounts you will spendfor poor guesses and other foul-ups. If you as accurately as possible. For example, itthink you need such a contingency and was okay for Antoinette to use estimates ofhaven’t included it already, add it in now. costs when she thought about her businessAdd up all the items you’ve listed to get an in general terms, but now she needs toestimate of the cash you need to open your be precise. She should have shoppedb­ usiness. around for the best deals by now and
  • 134. Chapter 7  | your cash flow forecast and capital spending plan |  125know them. If a potential lender asks herwhy she’s spending $3,000 each for dress Capital Spending Plan: Jeffer’sracks, she can say, “The used ones from Associates Consultingthe auctioneer are terminally rusty and the Item Amountdiscount ones are shoddy. I want my ­mage ito be high quality, and this is the best Desk, conference tables, chairs $ 6,000deal on good racks.” As the accompanying Fax machine 1,000example shows, Antoinette knows the Computer system: PC, laser printer,business she is about to open. software 4,000 Although she doesn’t include an Copy machine 2,000itemized list of fixtures, office equipment, Typewriter 700and leasehold ­mprovements in her i Telephone system 1,000summary, she has detailed lists available. Misc. decorative accessories 500 Misc. deposits for utilities, business Capital Spending Plan: license 2,000 Antoinette’s Dress Shop Opening marketing and advertising 2,000 Supplies, stationery 1,000 Item Amount Working capital estimate 10,000 Fixtures in selling area include cash Total capital required to open $ 30,200 registers, sewing machines, dress racks (see list) $ 30,000 Leasehold improvements, bid from Jones Construction includes signs, lights, decorations 80,000 Prepare Your Cash Flow Forecast Rent deposit, two months’ rent 7,500 Once you complete your capital spending Opening inventory 30,000 plan, you’ll know how much money you need to open your doors. The next step is Contingency 15,000 to estimate how much additional money Total capital required to open $ 162,500 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 For a second example, here’s a one-man the monthly profit (or loss) figures youconsulting firm’s opening cash needs. As developed in your Profit and Loss Forecastyou can see, he plans to start with extra in Chapter 6. You’ll then make adjustmentscash; he has allocated $10,000 for working each month to the monthly profits tocapital. account for the time differences in collecting and spending money.
  • 135. 126 | HOW TO WRITE A BUSINESS PLAN Cash Flow Forecast: Year One for Antoinette’s Dress Shop Cash In/(Out) Month 1 2 3 4 5 Mar Apr May Jun Jul 1. Profit/(Loss) [P & L line 6] $ (50) $ 1,450 $ 5,950 $ 2,950 $ 1,450 2. Less: Credit Sales— 25 % on credit × Sales Revenue [P & L line 1] ( 7,500) ( 8,450) ( 11,250) ( 9,375) ( 8,450) 3. Plus: Collections of Credit Sales 2 months after sale 0 0 7,500 8,450 11,250 4. Plus: Credit Purchases— 50 % of purchases on credit × Cost of Sales [P & L line 2] 9,000 10,150 13,500 11,250 10,150 5. Less: Payments for Credit Purchases 2         months after purchase ( 0 ) ( 0 ) ( 9,000) ( 10,150) ( 13,500) 6. Plus: Withholding        % of total wages (if paying taxes quarterly) 0 0 0 0 0 7. Less: Quarterly withholding payments (if paying taxes quarterly) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) 8. Plus: Depreciation 0 0 0 0 0 9. Less: Principal Payments ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) 10. Less: Extra Purchases ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) 11. Other Cash Items in/(out) 0 0 0 0 0 12. Monthly Net Cash 1,450 3,150 6,700 3,125 900 13. Cumulative Net Cash $ 1,450 $ 4,600 $ 11,300 $ 14,425 $ 15,325
  • 136. ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 127 Date Completed: 1/25/xx 6 7 8 9 10 11 12 Year Total Aug Sept Oct Nov Dec Jan Feb$ 1,450 $ 4,450 $ 4,450 $ 5,950 $ 8,950 $ (1,550) $ (50) $ 35,400( 8,450) ( 10,300) ( 10,300) ( 11,250) ( 13,125) ( 6,550) ( 7,500) ( 112,500) 9,375 8,450 8,450 10,300 10,300 11,250 13,125 98,450 10,150 12,350 12,350 13,500 15,750 7,850 9,000 135,000( 11,250) ( 10,150) ( 10,150) ( 12,350) ( 12,350) ( 13,500) ( 15,750) ( 118,150) 0 0 0 0 0 0 0 0( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) 0 0 0 0 0 0 0 0( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 )( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) ( 0 ) 0 0 0 0 0 0 0 0 1,275 4,800 4,800 6,150 9,525 (2,500) (1,175) $ 38,200$ 16,600 $ 21,400 $ 26,200 $ 32,350 $ 41,875 $ 39,375 $ 38,200
  • 137. 128  |  how to write a business plan Open the blank Cash Flow Forecast forms cautionincluded on the CD-ROM and follow the If any of your figures are losses, placestep-by-step instructions below. You’ll be brackets around them. Otherwise, your ­ ntire ecompleting a forecast for the first two years Cash Flow Forecast will be seriously ­naccurate. iof your business. Complete every line foreach of the 24 months before going on to 2. Credit Sales. Skip ahead to line 4 ifthe next line. you don’t plan to sell merchandise or services on credit. If you sell merchan­ cd-rom dise or services on credit, the customer A formatted copy of the Cash receives the goods or services rightFlow Forecast is provided on the CD-ROM away. Even though you incur costs,at the back of this book in Microsoft Excel you don’t get paid right away. Creditformat under the filename CashFlow.xls. sales create bills people owe you; theyThe spreadsheet program will automatically are called your “accounts receivable”calculate your Monthly Net Cash, Cumulative because you will receive the moneyNet Cash, and Yearly Totals. Note, if a series of soon. (When you buy goods on credit,#### symbols appear in a box in a spreadsheet you create bills you owe others. Thesethat means that you need to widen the are called your “accounts payable”column in order to display the numbers. If because you will pay them soon.)you use a spreadsheet program that cannot Most businesses that sell to otherconvert the Excel format, you set up the form businesses should plan for some salesin your program using the same categories on credit. Most businesses that sell onlyas the completed Cash Flow Forecast in this or primarily to retail consumers can planchapter. (Make sure that the column and row to sell mostly for cash, including checksheadings are the same.) and credit cards.1. Profit/(Loss). To begin, take out the Profit tip and Loss Forecast you completed in Credit card note: For purposes of this Chapter 6 and copy the monthly profit/ discussion, sales on credit cards are the same (loss) from line 6 onto the first line of the as cash sales, except for the processing fees Cash Flow Forecast form. The profits or the bank charges you. If you use an electronic losses you show have already taken into terminal, the money is credited to your bank account the normal expenses of running a ­ ccount right away, and if you use a paper a business like rent, wages and salaries, i ­mprinter, the money is deposited to your and so forth. You won’t have to worry account in a few days. about those costs in this forecast.
  • 138. 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 M & M Copy Shop Cash Flow Forecast Credit Sales Calculation, Six Months ($000s) customers than it would if you received cash for every sale. Here’s how to figure out how much cash you’ll need. First, Jan Feb Mar Apr May Jun estimate what portion of your total Forecast sales sales will be for credit. For example, if revenue $ 11.0 $ 10.9 $ 12.6 $ 13.1 $ 15.6 $ 16.8 you think that about one-third of your % sales on sales will be for credit, that means that credit 40% 40% 40% 40% 40% 40% about 33% of your monthly sales dollars Forecast will not be ­ ollected in the month in c credit sales $ 4.4 $ 4.4 $ 5.0 $ 5.2 $ 6.2 $ 6.7 which the sale is made. Make a note of that percentage now on the Cash Flow Forecast form in the heading for line 2. 3. Collections of Credit Sales. Skip this item Look at the Profit and Loss Forecast if you don’t plan to sell merchandise or you completed in Chapter 6. Multiply services on credit. Your cash receipts are each month’s Sales Revenue dollars (line reduced when a sale is made for credit 1 of the Profit and Loss Forecast) by the instead of cash. On the other hand, your credit percentage that you forecast for cash receipts increase when you collect your business. Then enter each of those the money from a credit sale you made monthly figures on line 2 of your Cash earlier. This Cash Flow Forecast shows Flow Forecast. you exactly how much your receipts will be reduced and increased as a ­esult of rExample: your credit policies. Even though your Mickey and Michele run a photocopy customers don’t pay you right away, they and fax service. They estimate that eventually pay you. Your job is to figure about 40% of their total sales revenue out when they’ll do so. If you grant your will be on credit and the remaining 60% c ­ ustomer your normal 30-day terms, will be for cash. On line 2 of the Cash it ­ sually takes 60 days to get paid. u Flow Forecast, they’ll enter these credit Here’s why. You make a sale on day sales: $4,400 for January; $4,400 for one, then write a statement at the end of February; and so forth throughout the the month and mail it to the customer. forecast. He pays it 30 days after he gets the statement. Of course, some people pay sooner and some people pay later. In a well-run business with good paying customers that grants 30 days to pay bills, the average turnaround will be 45 to 60 days.
  • 139. 130  |  how to write a business plan Make an estimate of the number of Now that you see how it works, months you anticipate as an average lag complete your monthly Cash Flow time between a sale and the collection Forecast for two years, writing in the of the bill. Most ­ usinesses use two b cash collections in the month you collect months. It’s easier to use whole months the money on line 3. for this purpose than to use portions of 4. Credit Purchases. Make an estimate of months. If you think 45 days is the likely how the timing of your purchases will answer, use two months—don’t use one affect your cash flow. Most businesses and one-half months. Enter the number buy merchandise from their suppliers on of months in the heading for line 3. credit and delay paying them for a time. Most suppliers will grant you 30 days toExample: pay your bills on a fairly routine basis, If Mickey and Michele collect bills in if they approve your credit application. an average of two months, the credit That way, you get to use their money sales that were just subtracted from for a while, just like your customers use monthly sales will be added back your money if you sell on credit. two months later. In this example, the Here’s how to complete this section business starts up in January and there of the Cash Flow Forecast. First, make an are no outstanding accounts from the estimate of the percentage of your total previous year. As you can see, the delay goods and ­ ervices you expect to buy s in collections means that the M & M on credit. (See the section entitled Copy Shop will have an $8,800 cash “Break-Even Analysis: Will Your flow reduction in January and February. Business Make Money?” in Chapter 3, This means they need at least $9,000 in on how to make ­ ducated guesses, or e working capital to sustain them during SWAGs.) Write the ­ ercentage figure in p the first two months. the heading for line 4. Next you’ll calculate the dollar costs of ­ urchases your business will buy on p M & M Copy Shop Cash Flow Forecast credit each month. To derive that figure, Credit Sales and Collections, Six Months ($000s) multiply each month’s cost of sales by the estimated percentage of credit purchases. Jan Feb Mar Apr May Jun And write the answer on line 4. Note Credit Sales $ 4.4 $ 4.4 $ 5.0 $ 5.2 $ 6.2 $ 6.7 that they increase cash flow. Collections of credit sales 0 0 4.4 4.4 5.0 5.2
  • 140. Chapter 7  | your cash flow forecast and capital spending plan |  131Example: If you’re in doubt, figure it this way: It Mickey and Michele estimated that usually takes about 60 days to make an they’d buy approximately 60% of their inventory of what you’ve sold, reorder purchases on credit. Their January the merchandise, receive and restock cost of sales is $3,600, so the credit the merchandise, and pay the invoice purchases come to $2,160 ($3,600 × or statement. If that’s true for you, then 0.6 = $2,160). They round this figure the merchandise you sell in January will to $2,200. Here’s how it looks for a be reordered and paid for by March. few months at the M & M Copy Shop. Here’s a word of caution, though: On line 4 of their Cash Flow Forecast, Many suppliers have tightened their they’ll enter their credit purchases: terms considerably. It is not unusual $2,200 for January; $2,200 for February; for suppliers to expect payment within $2,500 for March; and so forth. ten days of the date you receive the merchandise. M & M Copy Shop Cash Flow Forecast Credit Purchases, Six Months ($000s) caution Know suppliers’ credit policies. If Jan Feb Mar Apr May Jun you’re not sure of your suppliers’ policies, it’s Forecast cost of a good idea to check them out before you sales $ 3.6 $ 3.6 $ 4.2 $ 4.3 $ 5.1 $ 5.5 complete this forecast. A mistake here can % brought result in a dramatically incorrect cash forecast. on credit 60% 60% 60% 60% 60% 60% Credit purchases $ 2.2 $ 2.2 $ 2.5 $ 2.6 $ 3.1 $ 3.3 Example: Here’s how it works for the M & M Copy Shop, which expects a two-month 5. Payments for Credit Purchases. Here you delay between ordering and paying for show when you pay for the purchases merchandise: you’ve made on credit. These payments are subtracted from profits on the M & M Copy Shop Cash Flow Forecast Cash Flow Forecast. Make an estimate Credit Sales and Collections, Six Months ($000s) of how long you will take between the time you sell merchandise and Jan Feb Mar Apr May Jun the time it is reordered and paid for. Line 4: Write your estimate of how many Credit purchases $ 2.2 $ 2.2 $ 2.5 $ 5.2 $ 3.1 $ 3.3 months will elapse between ­ elling s Line 5: Paying your merchandise and paying for the for credit replacement in the heading for line 5. purchases 0 0 2.2 2.2 2.5 2.6
  • 141. 132  |  how to write a business plan Now, enter the dollar amount of credit resource p ­ urchases you entered on line 4, but in These are approximate tax figures, a later month, in a similar fashion to the for your planning purposes. Later, you’ll need M & M Copy Shop. to learn more about the tax rules. Some good6. Withholding Taxes. Most businesses information resources include Tax Savvy for must pay their employees’ taxes every Small Business, by Frederick W. Daily (Nolo), month. That means that every month and IRS Publication 15 Circular E, Employer’s you send the IRS the amount of wages Tax Guide, available, along with other publi­ you’ve withheld from your employees’ cations, at the IRS website (www.irs.gov). paychecks plus the amount you’re required to contribute to their Social In addition, the government also Security. If you make these tax payments expects you to collect money from your every month, they don’t affect your cash employees for their portion of income flow, so they won’t show up on your and Social Security taxes and pay Cash Flow Forecast. the government directly. While every Some businesses qualify to pay with­ employee is different because of their holding taxes every three months rather individual tax situations, the average than every month. To qualify for the employee has about 15% of their total quarterly payment program, you must wages or salary withheld from every owe the IRS less than $2,500 every paycheck for federal withholding. This is quarter. If you do not qualify for the money that belongs to the employee that quarterly option or wish to pay every you must mail to the IRS. month, skip ahead to line 8. If you wish If you will pay a total withholding to explore the quarterly option, read of less than $2,500 every quarter, you the following discussion of withholding may choose to pay taxes quarterly rather taxes. than monthly. Make sure you verify your When you completed the Profit and employees’ actual withholding rates Loss Forecast, you added at least 14% before deciding on this option. to the total wages and salaries you pay each month as an additional expense Example: (Profit and Loss Forecast, line 4b, With­ Let’s say that you plan to hire one holding Taxes). That’s your ­ pproximate a full-time sales clerk in your business m ­ andatory contribution to your for a total salary of $1,500 per month employees’ Social Security fund and or $4,500 per quarter. Multiplying 29% federal unemployment insurance. You’ll by the quarterly salary (0.29 × $4,500 write a check to the government to pay = $1,300) gives an answer of $1,300, that amount. which is less than $2,500. In that
  • 142. Chapter 7  | your cash flow forecast and capital spending plan |  133 case, you qualify and may choose the If you wrote nothing in line 4h of quarterly ­ ption. o your Profit and Loss Forecast, you can leave this line blank and skip to line 9. 9. Principal Payments. In your Profit and caution Loss Forecast you calculated how much Please note that paying these taxes interest you’d pay every month. You’llevery three months instead of every month is also make regular payments on thea dangerous option because it means that you principal of your loan, which are shownwill be using your employees’ money in your in your Cash Flow Forecast. To get thebusiness. By far the simplest, safest, and best amount of the principal payment, justway to pay the government is to pay the total subtract the interest payment, taken fromwithholding amount every month. line 4g of your Profit and Loss Forecast, from the total loan payment. (Review the 7. Withholding Tax Payments. Skip this item chart in Chapter 6, line 4g, if you have if you’ll be paying your employees’ taxes trouble.) monthly instead of quarterly. Otherwise, If you have a loan with interest-only add together three months’ worth of payments and a large principal payment withholding from line 6 and enter the every few months or at the end of the total amount every third month on line loan, it’s ­ ssential that you write in the e 7. That is the amount you must write scheduled ­ rincipal payments. That way, p every three months to the IRS. If this you’ll be able to plan for them and avoid little exercise seems confusing to you, the nasty surprise of having to make a take your confusion as a sign that you large loan payment you forgot about. should not attempt this option. You’ll be much better off simply paying the caution withholding taxes every month. 8. Depreciation. As discussed previously, Interest and principal. Be sure that depreciation is a fictitious expense the interest expense from the Profit and you charge the business for using up Loss Forecast (Chapter 6, “Profit and Loss fixed assets. Look at your Profit and Forecast: Year One,” line 4g) and the principal Loss Forecast, which you prepared in repayment line from your Cash Flow Forecast Chapter 6. If you included an amount add up to your total monthly payment. for depreciation in line 4h of your Profit and Loss Forecast and reduced your 10. Extra Purchases. Let’s say that you plan profits accordingly, you must enter the to have a big sale sometime during the same numbers here to get your monthly year and need to buy extra merchandise cash flow. for the sale. These extra purchases are above and beyond normal inventory
  • 143. 134  |  how to write a business plan replacement, so they won’t be ­ overed c If the monthly cash flow figure is a by the amounts you have written for n ­ egative figure, make sure you place purchases resulting from your cost of a bracket around it. Do that as you sales. Include those extra purchases complete each month’s calculations; here. otherwise, you’ll forget which numbers11. Other Cash Items. Here is where you are positive and which are negative and place any cash receipt or expenditure you’ll have to do all the arithmetic again. that is not covered in the Profit and Year Total. Add up each of the rows (lines Loss Forecast or elsewhere in your Cash 1 through 13). Enter the yearly totals Flow Forecast. For ­ xample, perhaps e under the Year Total column. Check you anticipate an investment in your your arithmetic by seeing if the total business in a few months and you need monthly net cash figures add up to the to show the positive cash infusion. Or same figure as your yearly total. If your you might plan to buy a new piece of answer is the same whether you add equipment sometime down the road. vertically or horizontally, your math is If your total is negative, make sure you correct. If not, you’ve made a mistake put brackets around it. Otherwise, your somewhere. Cash Flow Forecast will be incorrect.12. Monthly Net Cash. Take a moment to caution review your work to make sure you Don’t use line 13 to check your math. have understood the cash flow effect of It won’t work in the second and later years each of the entries and that they are all because those years start with a previous on the right lines. Make a ­ nal check to fi balance. be sure that any negative ­ umbers have n brackets around them. 13. Cumulative Net Cash. This line shows Then add and subtract the various how the monthly negative or positive entries on the Cash Flow Forecast form monthly net cash numbers add across to derive the monthly net cash for to derive the total cash required for each of the 24 months. Positive cash working capital. Most ­ usinesses b numbers represent additions to your will show several months of ­ egative n bank account, while negative cash cash flow followed by months of n ­ umbers represent money you’ll have positive cash flow. By adding the to add to the business. Remember that monthly ­ gures together, you’ll see the fi numbers with brackets around them maximum negative cash—that’s the are subtracted from the total and that amount you’ll need for working capital. numbers without brackets are added to For month one, simply copy the net the total. cash amount listed in line 12 for that
  • 144. Chapter 7  | your cash flow forecast and capital spending plan |  135 month. To get month two’s cumulative Required Investment net cash, add ­ogether month one’s t cumulative net cash (line 13) and month for Your Business two’s net cash (line 12). For month This chapter’s objective is to develop the three, add month two’s cumulative net amount of money you need to start or cash (line 13) to month three’s net cash expand your ­ usiness. That amount of b (line 12). Continue that process for the money is the sum of two numbers: entire 24 months. Remember that when • the total dollars you developed from you add two negative numbers together, the Capital Spending Plan, and you get a larger negative number—you • the largest negative figure you do not get a positive number. developed on line 13 (Cumulative Net Cash) of the monthly Cash FlowExample: Forecast. The M & M Copy Shop chart shows how Make this calculation for your business. to accumulate these figures. Note how You’ll use this figure later, when you write the cumulative cash flow increases the your plan summary and spell out your n ­ egative amount when each individual need for funds to start or expand your month’s net cash flow is negative. Then, business. when the ­ndividual monthly figures turn i positive, the cumulative negative figure Example 1: b ­ ecomes smaller as the positive cash For the M & M Copy Shop, the maxi­ flow reduces the cumulative negative mum negative cash flow of $4,500 was figure. Finally, in the fifth month, the reached in the third month (assuming cumulative figure becomes a small that ­uture individual monthly cash f positive. This means that the fourth and flow figures continued to be positive fifth months of positive cash flow have figures). That is the amount of working offset the first three months of negative capital that M & M Copy Shop needs to cash flow. begin operation. Mickey and Michele add together the amount listed in their Capital Spending Plan to $4,500 to M & M Copy Shop Cash Flow Forecast d ­ erive the amount of cash they need to Cumulative Net Cash ($000s) open their business. 1 2 3 4 5 Line 12: Example 2: Monthly Net Cash (2.5) (1.8) (0.2) 1.9 3.9 Antoinette’s Cash Flow Forecast Line 13: Cumulative Net shows a positive cash flow from the Cash (2.5) (4.3) (4.5) (2.6) 1.3 beginning because her sales revenue
  • 145. 136  |  how to write a business plan starts out high. That means her total Cash Flow Forecast rest for a day or two cash investment will be limited to the before looking for the problem. amount from her Capital Spending Plan No forecasting technique can ensure or $162,500. She chooses not to reduce that your business will succeed. In addition that amount by subtracting any of her to the problems outside your business that first year’s cash flow from the total so the future may bring (discussed in Chapter she can have a salary for herself. 3), you may have built into your plan some money problems that are lurking there, waiting to sabotage your efforts. Your onlyCheck for Trouble protection against problems like these is to know your business thoroughly. Sad to say,You have completed most of the founda­ what you don’t know can hurt you.tions on which your business will be built.The Cash Flow Forecast ties together allthe previous work and allows you, or your Antoinette’s Inventory Problembackers, to see exactly how your business Antoinette estimated her first year’s saleswill function. I hope that you have gained at $450,000 and her cost of sales at 60%.an understanding of the relationship She also figured her opening inventory atb­ etween sales, expenses, cost of sales, $30,000. Unfortunately, this means she hasprofits, and cash flow by completing your to turn her inventory 9.0 times per yearCash Flow Forecast. If so, that under­ ($450,000 × 0.60 ÷ $30,000), just to meetstanding will help you a great deal in the her plan. This is not very likely.future. If you still aren’t clear about thoserelationships, it is worth a little time to tipreview your forecasts. It’s important that Calculate inventory turnover byyou understand where the money comes dividing annual cost of sales by inventory atfrom and where it goes. If necessary, take cost. If annual sales revenue is $450,000 andyour forecasts to a business advisor or a cost of sales is 60%, then annual cost of salesfriend who understands cash flow analysis is $270,000 ($450,000 × 0.60 = $270,000).and ask her to explain them to you. Inventory of $30,000 at cost divided into Don’t be surprised if the answers you 270,000 equals 9.0 inventory turns per year.develop aren’t the ones you expected. Itmay mean that the business won’t work or Antoinette should probably plan for athat you need to polish your plans a little. ­ more realistic inventory turnover of 3.5It could just mean that you have made a times per year, which is typical in hermistake in arithmetic. It’s best to let the business. To do this and end up with $450,000 in sales, she would need an
  • 146. Chapter 7  | your cash flow forecast and capital spending plan |  137inventory of $77,000 ($450,000 × 0.60 into bankruptcy, wondering why sales÷ 3.5). This would raise her initial cash never met projections.requirement by $47,000. With that much What about Antoinette and her inventorycash investment needed, her business idea p ­ roblem? I shall continue with Antoinette’sprobably is not worth pursuing unless she original assumptions, including those forcan generate a good deal more profit than inventory turnover. This book is simplyher Profit and Loss Forecast ­ndicates. This i not set up to go back and revise all herwould undoubtedly mean raising sales numbers. Second, I want Antoinette’sprojections, and otherwise trying to force problem (the fatal flaw in her plan)profits into a questionable business. If your to really sink in. I hope Antoinette’sretail business has an inventory turnover predicament will give you a vague feelingof three to four times per year, you’ll be of unease as you continue to read her plan.doing pretty well. Many retailers are able to The lesson is this: Just because a businessaverage only one or two turns per year. plan appears to be thorough and looks Many people who plan new retail good on paper, that’s no guarantee that itbusinesses expect to start with a fairly will be successful. It pays to be skeptical.small inventory because they don’t havemuch capital to invest. This will verylikely cause problems if the sales figures Typical Problems Retailers Facethey expect this inventory to produce You can skip the rest of this chapter ifare too high. For example, if you plan to you’re not planning to run a retail business.sell widgets, but can only buy a starting Otherwise, you’ll find the followinginventory of $10,000 at cost, it would seem discussion extremely ­ seful. uunlikely that you could produce sales of Here’s what Antoinette should have$200,000 per year. Even assuming you known about inventory. Inventory manage­doubled the price of the widgets, this ment separates the professionals from thewould mean turning your inventory over amateurs in the retail business. Inventoryten times in the year. For most businesses, is usually the biggest single investment ait simply isn’t realistic to expect inventory retailer makes. Commonly, it happens thatto turn over even seven or eight times a a retailer shows a high taxable income, butyear. no cash. Why? Because all her cash went Many retailers make a similar mistake; into ­ncreasing the inventory. isome catch the mistake at this stage, The goals of inventory management are:some catch the mistake when they have a • to have a wide enough selection ofbusiness consultant ­eview their plan, and r new, fresh merchandise to appeal tosome never catch it. They just sink slowly customers
  • 147. 138  |  how to write a business plan • to quickly reduce or eliminate items odd size clothes, you are very aware of this that move slowly, and merchandising policy. I wear shirts with • to keep the overall investment 37-inch sleeves because I’m six feet, four in inventory in line with profit inches tall, and it has only been in the last expectations. 20 years that some department stores carry Good retailers keep current with the this size. That’s because retailers used tomerchandise customers want now. They think that 37-inch-sleeve shirts never sold.make it a point to always have the popular Then the baby boom generation came ofitems in stock. No self-respecting popular age, with many men needing larger sizes,music store would be caught dead without and it ­ ecame economical to serve these bthe top ten CDs and Blu-Ray discs in folks.stock. Good retailers quickly mark down Good retail managers accomplish allslow-moving items for a quick sale. They of these ends and also keep the totalthen use the cash from selling these dead dollar investment in line with profititems to buy new and popular ones. For goals by carefully managing ­ inventory “example, there is nothing ­ adder than a s turnover”—how many times per year yousmall bookstore still trying to sell last year’s completely replace the stock. For example,hardcover bestseller when the drugstore if your average cost of sales is 50% anddown the street already has the paperback your sales are $300,000 and your inventoryversion. is $40,000, you turn over your inventory A good retailer has a wide enough 3.75 times per year ($300,000 × 0.50 ÷selection to appeal to customers. In a $40,000). As before, many retail managersbookstore’s case, this might mean a strong strive for three to four turns per year. Somebacklist in several areas of local interest. businesses, like gasoline stations, may turnGood inventory management also means over their inventory every week. Make suredeciding that some customers just aren’t your plans reflect your industry standardworth catering to. For example, if you wear and good, common sense. ●
  • 148. 8 C h a p t e rWrite Your Marketing andPersonnel PlansIntroduction...............................................................................................................................................................140Marketing Plan..........................................................................................................................................................140 Review Chapter 3 Work.............................................................................................................................140 Competition Analysis .................................................................................................................................141 Differentiate Your Business From the Competition................................................................... 142 Describe Your Target Customer............................................................................................................ 142 Decide How to Reach Customers........................................................................................................ 143 . Create a Marketing Budget...................................................................................................................... 145 Write Your Marketing Plan...................................................................................................................... 147 Discuss the Risks Facing Your Business............................................................................................. 147Personnel Plan........................................................................................................................................................... 152 Analyze Your Business Personality....................................................................................................... 152 Write Your Staffing Schedule.................................................................................................................. 153 Write Job Descriptions............................................................................................................................... 153 Write Your Personnel Plan....................................................................................................................... 155
  • 149. 140  |  how to write a business planIntroduction assumptions that will influence your marketing plan:Decisions you make about marketing and • Problem Statement. This identifies thepersonnel can spell the difference between problem you’ll solve for your customeryour future success or failure. This and provides the underlying reasonchapter helps you answer these important people will frequent your business.questions about your business: • Business Description. This states exactly • Who is your competition and how are what your business does for your you different? customers. After all, if you don’t • Who are your potential customers and provide a valuable product or service, how can you contact them? you won’t have many customers. • Exactly what steps will you take to • Taste, Trends, and Technology: How reach your sales projections? Will the Future Affect Your Business? • How can you hire the right people for This covers the developments you your business? expect for the next few years and • How can you make sure that your how they will affect your business. employees work effectively? Even a “perfect” business can become obsolete overnight due to future developments.Marketing Plan • Sales Revenue Forecast. This shows your ­ stimates of future sales revenue eMarketing is a broad term that covers many for your business. To finish yourspecific issues. Your marketing plan will marketing plan, you’ll need to spell outcover areas ranging all the way from deter­ the specific actions you will take tomining how your business fits into the achieve your forecast sales revenues.national and local economies to deciding Take a moment before proceedingwhat color your logo should be. The any further and reread your work frommarket plan you’ll develop in this section Chapter 3 to decide if it still represents anwill outline the specific steps you’ll take accurate statement of how you view yourto generate the sales dollars you forecast business. If the statements are not accurateearlier. and complete, stop here and rewrite them. Make sure they correspond to your currentReview Chapter 3 Work thinking.In Chapter 3, you were deciding whetheror not you chose the right business. As partof that work, you made some important
  • 150. ChApter 8 | WRITE YOUR MARKETING AND PERSONNEL PLANS | 141Competition Analysis write a short statement of each competitor’s main strengths and weaknesses. RememberWhen customers consider patronizing your to place yourself in the mind of yourbusiness, they first consider whether or customers when you do this exercise.not you can solve their problem. But they In the accompanying example, note thatdon’t stop there. They also compare your Antoinette grouped her competitors insteadbusiness with other businesses. of treating each store separately, because It’s helpful for you to make a similar some stores are very similar. You mightcomparison so that you understand how choose to group your competition or listyour customers think. This exercise, as any more than three competitors.exercise in the marketing area, requiressome mental gymnastics. Your job is toplace yourself in your customers’ frame Antoinette’s Dress Shop:of mind and objectively compare your Strengths and Weaknessesbusiness to the competition. of Three Competitors Sometimes business owners let theirpersonal prejudices taint their opinion of Department stores. Bagnin’s, Jerry’s,a competitor. If your competitor provides Glendale’s.a larger selection of merchandise or better Principal strengths: Wide selection ofservice and lower prices than you, it won’t merchandise.matter much to your customers that you Principal weaknesses: High prices,don’t like the other business’s television ads inconvenient hours, no alterations.or think it has ugly delivery trucks. Think for a moment about the decisions Latest fashion stores. Wild Thing, Marian’s,your customers face. What specific Golden Frog.methods can they use or places can they Principal strengths: Fashion conscious,go to solve their problem? Incidentally, frequent new styles, low prices.some of these places and methods may not Principal weaknesses: Casual wearinvolve a competing business. Customers only, don’t cater to mature women, nodo things for themselves or get their alterations.needs solved from friends, community, and Specialty stores. Lady Esquire.government agencies or other sources. First, identify the most likely three Principal strengths: Sells our styleways your customers are going to solve merchandise to our type customers.their needs in addition to your business, Principal weaknesses: High prices,and make a note of each. These are your employees have reputation as snobs,principal competitors. To be thorough, alterations take a long time.
  • 151. 142 | HOW TO WRITE A BUSINESS PLANDifferentiate Your BusinessFrom the Competition Antoinette’s Dress Shop: How My Business DiffersYour next job is to describe how your From the Competitionbusiness differs from the competition’sstrong and weak points. Again, remember Antoinette’s will offer a wide selection ofto carefully look at your business from the merchandise to our target customers, as docustomer’s perspective. the department stores and specialty shops. If you’re not sure how your pricing We will offer low prices and convenientpolicies compare to the competition, here hours for the working woman. Antoinette’sare some guidelines. Most people associate will take particular pride in more efficienthigh prices with high quality and extra services such as special orders and altera-service, while they associate low prices tions as well as a stable, helpful, andwith low or average quality and minimum knowledgeable sales staff.service. Make sure you provide extra To summarize, Antoinette’s takes thequality and service if your prices are higher worry out of clothes shopping by providingthan your competition—or make sure a good selection, good prices, good service,that your prices are lower if your quality and helpful people who know their field.is average and your service is minimum.Check your assumptions by making a pricesurvey of the competition. Remember that customers may take for Describe Your Target Customergranted that you have the same strong The next step is to describe your targetpoints as the competition; if so, you customer in specific, individual terms. Ascan leave those out of your description. you know, business is a very personalCustomers hope that you do not share the endeavor. When you sell services orsame weak points as the competition. But merchandise, you sell to one person at aif you do share some weak points, it is time. As a matter of fact, most people don’tprobably a good idea to mention the ones like being treated like members of a groupyou have in common. instead of individuals. That’s why the most successful restaurants have owners or maitre d’s who remember your name and ask about your family or your interests whenever you patronize their business. Additionally, most of us are more comfortable talking with one person than making speeches to a large group. So it
  • 152. ChApter 8 | WRITE YOUR MARKETING AND PERSONNEL PLANS | 143makes sense to address your advertising,promotions, and other marketing activities Antoinette’s Dress Shop:to a single person instead of a group. Target Customer Of course, no two customers are exactly Terry is 32 years old and has a collegethe same. But if you can personalize your education; she is married and has a son,marketing program to a typical customer, Jimmy, in elementary school. She works asit will be more effective because it will a salesperson for a large corporation andseem more friendly to your customers. makes about $65,000 per year. Her husbandThe easiest way to do that is to create a Peter makes a little more than she does, butmythical target customer and individualize the family needs her income to support thethat target customer so that you consider lifestyle they have chosen.her a friend. Be as specific and as personal Terry’s work is not a hobby for her; sheas you can. If you have friends you hope is very serious about it. Her work makes herwill be your customers, describe one travel frequently and she calls home at leastof your friends. Include age, education, twice a day when she’s on the road. Sinceoccupation, income, hobbies, family status, the business world is very competitive inreading preferences, favorite television the era of downsizing companies, she mustshows, favorite music, and so forth. present a good image while maintaining a In the accompanying sample, Antoinette strict budget.describes her friend and target customer, Terry keeps current with the latestTerry Chen. With Terry in mind, it is very movies and enjoys dinner out with Petereasy for Antoinette to write ads, letters, once or twice a week. She watches mostlyand flyers and to decide how and where children’s programs on television in orderto promote her business. For example, to spend time with Jimmy, whenever thetelevision ads are unlikely to reach Terry TV is on. She reads business journals andsince she has so little time to watch TV. economic reports and occasionally readsRadio ads during commute time can be some fashion magazines. Mostly, she getseffective, but may cost too much. her fashion sense from seeing current styles in the workplace. Her greatest regret is thatDecide How to Reach Customers she has so little time for Jimmy and Peter.Once you describe your target customer,it’s easier to create a list of possible waysto reach that person. One of your jobs asa businessperson is to decide which of allthe possible methods of communicationwill give you the most exposure for the
  • 153. 144  |  how to write a business planleast cost in money or time. There arean infinite number of communication Ways to Reach Yourmethods. These methods range from Target Customerpersonal visits to each customer to mass Here are some common methods business­media advertising, with a wide range of people use to reach customers:possibilities in between. We list some in • Take each prospect to lunch.“Ways to Reach Your Target Customer,” • Visit or telephone each prospectbelow, as a stimulus to your thinking. regularly. There are lots of alternative strategies • Handwrite and send a personalyou can use to reach your market. For greeting card to every prospect.example, businesses with a few large- • Write a technical article in a tradedollar customers will have different choices journal.than businesses with many smaller-dollar • Attend or make presentationscustomers. Technical consulting businesses at trade or industry shows andtend to fall in the category of having a few conventions.customers with large contracts, whereas • Create and distribute or mail a regularfast food restaurants or retail stores newsletter.have many ­ ustomers who make small c • Appear on radio and television showspurchases. about your field. Above all, remember that the most • Write a newspaper or magazineeffective way to reach and keep customers column about your field.in the long run is by word of mouth. All • Write a personalized letter to eachthe marketing and ­ dvertising you do a prospect.can only entice your customer to try your • Mail brochures or flyers to eachbusiness the first time. After that, she will prospect.come back to your business if she likes • Advertise in print—daily newspapers,what she received, and she’ll tell all her magazines, or weekly papers.friends. But be aware that customers are • Advertise on radio and television.even more likely to let friends know if a • Place leaflets on car windshields orbusiness doesn’t meet their ­ xpectations. e home doorknobs. To complete this next exercise, write • Put notices on supermarket bulletindown the five or so methods you think will boards.reach most of your customers. Remember • Enter notices in computerizedto select methods that are appropriate for networks.the overall number of people in your target • Join service clubs and take part inmarket. For instance, if your target market community affairs.is every married woman in the U.S.A.,
  • 154. ChApter 8 | WRITE YOUR MARKETING AND PERSONNEL PLANS | 145you will probably use mass media as aneffective communication method. On the Antoinette’s Dress Shop:other hand, if your target market is the Costs of Reaching Mypresidents of the 100 largest companies in Target Customersyour trade area, you are more likely to use I have about 20,000 potential customers inindividual contacts than mass media. the greater New City trading area. I don’t Once you’ve chosen the communication anticipate reaching customers beyond thismethods you like best, figure out how area.much it will cost to reach your customers 1. I like direct mail, since I can developusing each of the five methods. lists of active businesswomen in Note that some of Antoinette’s more the area. I’d like to bulk-mail a flyer sensible ideas don’t take any money announcing our opening for about 30¢at all, just some time to convince the to 50¢ each, for a total cost of $6,000magazines and papers to carry her material to $10,000.and the time to produce it. Perhaps you 2. Limited ads in the New City Monthlycan develop some similar ideas for your will run about $300 to $500 per monthbusiness. for a few months. 3. When anyone comes into the shop, I’llCreate a Marketing Budget ask for her name and address and later I’ll send notices of fashion shows andNow that you have a wish list of things fashion tips. The cost will depend onyou’d like to do, it’s time to decide which the size of my list and the frequency ofof the promotional ideas you can afford mailings.and which are too costly. In Chapter 7 4. I can place announcements of myyou prepared a Capital Spending Plan and fashion shows in the two daily papersestimated how much money you’d allow serving the area at no cost.for an opening promotion to let people 5. I’ll see if one of the local papers willknow you’re in business. In Chapter 6 you carry a column I’ll write for free onprepared a Profit and Loss Forecast that fashion tips.took into account your monthly marketing 6. I’ll join all the professional women’scosts. If you allowed enough money to groups in the area and become a visibleprovide the sort of promotion you want, spokesperson for my shop.you can finish writing your marketing plannow. However, if you didn’t allow enoughmoney, or if you’re not sure how muchmoney is enough, you’ll want to stop here
  • 155. 146  |  how to write a business planfor a moment and think about it. Ask quotes for now. Just balance your wishyourself these questions: list against your ­ udget to develop your b • How much money do I need for an marketing plan. opening promotion? I suggest that you • Have I allowed enough money in my allow enough money to tell all your monthly expense budget for ongoing target customers one time that you are advertising and promotion? Take a open for business. If you tell them all look at the advertising expenses you once, they can decide when to come forecast in the Profit and Loss Forecast see you. And if you have designed in Chapter 6. If that amount needs your business so that it truly addresses changing, you’ll need to change both a customer need and is different from your Profit and Loss Forecast and the the competition, your target customers Cash Flow Forecast (Chapter 7). If that’s will be very alert to your opening. Even your situation, do it after you complete if they don’t see your first message, they this chapter. But, if you’re not sure will hear about you by word of mouth. about how much money to allow for If your opening promotion plan monthly advertising and promotion, go exceeds your budget, you’ll need to go back and reread the discussion about back and revise your Capital Spending a ­ dvertising in Chapter 6, “Complete Plan to allow for the promotional Your Profit and Loss Forecast” line 4d, expense. If that’s your situation, “Marketing and Advertising.” complete this chapter, then go back to To create a marketing plan, start by Chapter 7 and revise the cash totals. listing each of the promotional items you • Are my methods of promotion cost- decided on for your preopening promotion effective? Once you’ve estimated the together with their costs. Then add up the cost of reaching all your target customers preopening promotional costs and fill in the with the first ­ essage, compare that m total. cost with the amount of money in your Next, list each of the promotional items budget. Your job is to get the most you plan to use during the first two years exposure for the least outlay. Making that of your business together with the monthly final decision may mean that you have cost of each. to refine your promotion cost estimates Those two groups of specific actions from rough guesses into bids and quotes and costs, preopening promotion and from suppliers. Normally, unless you’re monthly marketing, advertising, and pro­ really unsure of promotional costs, you mo­ional costs, will become the blue­ rint t p shouldn’t take the time to obtain those for your marketing plan.
  • 156. ChApter 8 | WRITE YOUR MARKETING AND PERSONNEL PLANS | 147 hard choices about which marketing tools Antoinette’s Dress Shop: to drop and by how much to increase the Marketing Budget marketing budget. We’ll leave her now to solve that problem in peace and quiet Preopening promotion while we move along to the next step. 1. Mail 10,000 pieces announcing grand opening $ 5,000 If you’re in the same predicament, take your time to balance costs and 2. Advertisement in New City Monthly, one month (including effectiveness the best you can, and then graphics) 500 move ahead to the next step. 3. Publicity from papers, New City Monthly, no cost—but much time to write articles and contact Write Your Marketing Plan editors 0 By now, you have asked some tough Total preopening costs $ 5,500 questions and faced some critical issues. Monthly advertising You may wish to combine the major points 1. Newsletter every two months to of the exercises into a summary narrative, mailing list—approximate cost or you may wish to present the results of per month $ 650 each exercise independently. 2. Monthly column in daily paper, If you summarize the work into a no cost—but time to write narrative, your plan will read more easily column 0 and look more professional. However, 3. Advertising for sale every three the potential downside to combining the months, estimated monthly 250 answers into a narrative format is that 4. Join service clubs, estimated you may inadvertently leave out a point monthly lunch and membership of major interest to your backers. If you fees 100 do elect to combine the answers into Total monthly cost $ 1,000 a narrative, be careful to cover all the points in each exercise. Use Antoinette’s marketing plan as a guide. Despite Antoinette’s well-thought-out marketing plan, her original budgetallowed nothing for an opening promotion Discuss the Risks Facingand $1,000 per month for ngoing o Your Businessadvertising. She could, however, decide Every business faces risks. The peopleto take some of the $15,000 contingency whom you will ask for money will wantand use it for preopening promotions. It to see that you can not only face realitylooks like Antoinette needs to make some but also deal with possible difficulties.
  • 157. 148  |  how to write a business planThe following discussion outlines risks Slow Times. Every business experiencessmall business owners typically face. Once ups and downs. Is your business small andyou’ve analyzed these factors, you’ll be simple enough, or capitalized adequatelyready to write a summary of the risks that enough, to ride out slow times? Or do youapply to your own business. ­ have some other ­ trategy, such as staying s Competition. Most businesses have open long hours in the busy season andcompetition. How will your business closing during times of the year whendiffer in significant and positive ways from business is dead?your competition? If your competition is Owner’s Expertise. Nobody knows every­strong, don’t minimize that fact, but figure thing. How do you plan to compen­ ate sout ways you will adjust to or use that for the knowledge you’re short on? Forstrength. For example, if you plan to open example, if you’ve never kept a set ofa ­estaurant next to an extremely popular r books, you may need to hire a part-timeone, part of your strategy might be to bookkeeper and an accountant to makecater to the overflow. Another might be to sure the bookkeeping system is adequate.open on days or evenings when the other Or you may need to buy a computer andrestaurant is closed. an accounting program and devote some Pioneering. If you anticipate no direct time to mastering your new tools.competition, your business probablyinvolves selling a new product or service, Example:or one that is new to your area. How will Doreen Cook wanted to establish heryou avoid going broke trying to develop a own restaurant. She had cooked formarket? other restaurant owners for years and Cycles and Trends. Many businesses have knew the practical side of puttingcycles of growth and decline often based good food on the table. However,on outside factors such as taste, trends, or she had little patience with financialtechnology (discussed in Chapter 3). What matters and was honest enough tois your forecast of the cycles and trends admit she didn’t want to learn how toin your business? For example, if your keep books. To solve this problem,forecast tells you that the new electronic she invited George, her CPA, to be herproduct you plan to manufacture may junior partner, with full responsibility fordecline in three years when the market financial management. She and Georgeis saturated, can you earn enough money emphasized this ­ onnection in her cin the meantime to make the venture business plan and loan package, whichworthwhile? George designed. In addition, George was invaluable in lining up a list of potential lenders.
  • 158. Chapter 8  | write your marketing and personnel plans |  149 Cash Flow. Seeing the money come and tipgo on a daily and weekly basis is very A note of philosophy: This is thedifferent from looking at a yearly Profit and stage when remorse or jitters may set in. YouLoss Forecast (Chapter 6). You also want to may be thinking, “Am I really doing this? Thinkbe sure that your business can survive long of all the things that could go wrong. I couldenough so you can ­ njoy your profits. If e lose everything!” Your purpose in writingyou filled out a Cash Flow Forecast such as a risk discussion is to force yourself to facethe one set out in Chapter 7, you should be your fears and concerns, not to scare yourselfable to demonstrate that you can survive out of going into business. If your rational,foreseeable cash flow problems. intellectual analysis tells you that the risk Write your risk analysis by first thinking factors are manageable, proceed as hard andof the main dangers your business faces. fast as you can. You don’t have time for uselessThis shouldn’t be hard, as you have and unnecessary worry. On the other hand, ifprobably been concerned about them for you really do get overwhelmed worrying aboutsome time. Some of these may be on the potential disasters, pay attention to yourlist set out above; others will be unique to anxieties. They may be telling you that youyour business. Once you have identified don’t have either the personality or knowledgethe ­ rincipal risks facing your business, p of your business to handle the risks you’ll takewrite out a plan to counter each. But don’t in a small business.bog yourself down worrying about all sortsof unlikely disasters. The purpose of this book is to help you ­ nderstand the dimensions of the u risks your ­ usiness faces, but you as the b potential business owner must put your money and belief on the line. Abe Lincoln said it: “Be sure you’re right, then go ahead.”
  • 159. 150 | HOW TO WRITE A BUSINESS PLAN Antoinette’s Dress Shop: Marketing Plan Antoinette’s Dress Shop will concentrate on 2. Latest fashion stores such as Wild Thing, developing a clientele consisting primarily Marian’s, and Golden Frog. of working women. We are particularly Some of our target consumers presently interested in professional women who shop at the department stores for the type expect to advance in their chosen career. of business clothes we will sell, and others These women require fashionable clothing at shop at fashion stores for casual clothing. reasonable prices. According to the Chamber However, we believe we can capture a lot of of Commerce, the greater trading areas of this business for a number of reasons. New City include some 20,000 women who Antoinette’s will appeal to customers who fit this description.1 Forecasters expect this are either shopping at one of the local stores market to continue to grow at the same 10% or going out of the area to meet their needs. growth rate it has enjoyed for the past five For instance, many professional women travel years. We believe the trend toward a higher as much as 35 miles to South City to shop at concentration of professional women in this Freida’s because their needs are simply not county may even accelerate because of the being met locally. increased concentration of professional and Generally speaking, the department management industries locating here.2 stores offer a wide mix of merchandise. Personal experience and market research3 However, it isn’t easy to find a large demonstrate that upwardly mobile working selection of appropriate business clothing at women prefer fashionable, but slightly reasonable prices in any of them. In addition, conservative, clothing at moderate or sale S. Bagnin and Glendale’s are only open one prices. These women prefer to shop where evening a week after 6 p.m., the time most they receive personal attention, especially working people prefer to shop. Further, the prompt, free alterations that traditionally department stores offer fairly impersonal have not been provided to women. Women services, with a constant turnover of in this group normally prefer to shop between personnel. Alterations are an additional charge 5 p.m. and 8 p.m. or on their lunch hour. and usually take a week or more to complete. Most of our target customers shop at two Our policy of offering free alterations within types of stores for their clothing: 24 hours is sure to appeal to women who 1. Department stores such as S. Bagnin, put in at least a 40-hour week in addition to Jerry’s, and Glendale’s. maintaining their homes. 1 Annual Survey of Business Conditions, New City Chamber of Commerce, January 19, 20xx 2 Bank of New City economic forecast for 20xx 3 See attached article from September 27, 20xx issue of Woman’s Monthly.
  • 160. ChApter 8 | WRITE YOUR MARKETING AND PERSONNEL PLANS | 151 Antoinette’s Dress Shop: Risk AnalysisLike every new business, Antoinette’s faces trouble meeting our sales revenue goals. Inseveral risks. I believe I can overcome each addition, by starting with relatively modestrisk with the actions discussed below. capital, we will have no large loan payments. The primary risk we face is that our Also, we have had several potential investorsconcept of an entire store selling business express an interest in the business. If ourclothing to working businesswomen is new to working capital reserves are exhausted,this area. No one else in New City is presently but the business demonstrates potential,doing exactly what we propose. Although we should be able to attract investors. [Butwe believe we have identified a market niche remember we discovered that, on the basis ofthat the competition has failed to adequately the Cash Flow Forecast, Antoinette’s businessexploit, our assumption remains to be proven has a fatal flaw (Chapter 7) and her entirehere in New City. On the positive side, the plan will need reworking from the beginning.]population base of our target customers is Finally, there is a slight risk that themore than adequate to support a store of population of younger working women inour size and we have based our volume and New City will decline. However, we do notprofit projections on average figures for the expect this to happen. White collar jobs haveindustry. In addition, the type of store we doubled here in the last decade and it seemspropose has been very successful elsewhere. reasonable to expect that the population ofNevertheless, we must demonstrate that working women will continue to grow andthis type store will work here. It must take that we will profit from that expansion. Thissufficient business away from stores with a projection is based on the fact that manybroader line of merchandise to make a profit. well-established firms have located here and A secondary risk is that we are thinly more are expected to do so. Nevertheless, ifcapitalized. If our sales volume fails to meet for any reason general industry declines, or aprojections in the first year, our small working significant number of local companies fail orcapital reserve may be inadequate to meet move overseas, we could face some problemsour cash-flow needs. On the positive side, and might have to change our marketinghowever, we believe our sales projections are strategy.conservative and that we will have little
  • 161. 152 | HOW TO WRITE A BUSINESS PLANPersonnel Plan Analyze Your Business PersonalityChances are that you’ll need some help Every business has a personality thatto run your business. It’s hard to over- customers and suppliers spot rightestimate the impact employees have on away. Your employees help create thatsmall businesses. First, your paperwork personality in their daily interactions withexplodes when you hire the first employee. customers, suppliers, and each other. YourMany government agencies regulate your job as the business owner is to deciderelations with your employees, and you’ll what personality you want your businessneed help if you’ve never employed to have. Once you are clear about youranyone before. Your accountant can business’s personality, you can easily lookhelp with payroll forms, and your local for employees who fit in well. Take out aemployment development agency can help blank sheet of paper or open a computerwith other regulations. file and write a statement of the personality Second, how to successfully hire, you want your business to have.manage, and fire people is a fine art,which this book can’t possibly cover. Ifyou have any doubts about your abilitiesin this area, make sure you get guidance Antoinette’s Dress Shop:from employment agencies, the local Business Personalityemployment development department, or a The impression I want my customers toprivate consultant. receive is that our store provides the best Fortunately there are some basic selection of merchandise in our clothingsteps you can take that will increase category. We also provide prices and serviceyour chances of making hiring decisions that take the worry, regrets, and hasslecorrectly. Many business owners fail to out of shopping. Our employees should bebe clear in their own minds about basic sincerely helpful and dedicated to solvingdetails affecting an employee; that’s a our customers’ problems. I want them to bemistake almost guaranteed to cause very knowledgeable so that our customerstrouble. consider us as their clothing advisors, in addition to the best store.
  • 162. ChApter 8 | WRITE YOUR MARKETING AND PERSONNEL PLANS | 153Write Your Staffing Schedule Write Job DescriptionsNow that you know what sort of people Next, open a new computer file or takeyou want to hire, your next job is to decide out several blank sheets of paper and titlehow many people you need. (You may each one “JOB DESCRIPTION.” Make surehave completed this already in Chapter 6, you have room for a separate description“Complete Your Profit and Loss Forecast,” for each person you plan to hire. Each jobline 4a.) description should include several items of The following example shows how information:Antoinette thought through her staffing • job titleschedule. You will make your decisions a • job dutieslittle differently, depending on the needs of • skills required, personality desired your particular business. • education required • supervisor, and • pay rate and monthly total wages/ salary, including benefits, if any. Antoinette’s Dress Shop: As an example, here’s how Antoinette Staffing Schedule completed a job description sheet for her My dress shop will need two people on sales clerks. the floor at peak times (lunch and after work). I can open the store at 11 a.m. and can usually be available to fill in if the store suddenly gets busy at an unexpected time, as well as doing the books and ordering when the store is not crowded. Therefore, I plan to hire one full-time clerk, with the title of assistant manager, to work 40 hours a week, and two full-time clerks, so that there is always one employee in the store. That’s a total of 120 hours per week of labor. The assistant manager will work from 12 p.m. to 8 p.m. Tuesday through Friday and from opening to closing on Saturday. The two clerks will be scheduled so that all the open hours are covered.
  • 163. 154 | HOW TO WRITE A BUSINESS PLAN Once you complete a job description Antoinette’s Dress Shop: for each employee, add together all the Job Description for Sales Clerk monthly total wages/salary amounts Job Title: Sales Clerk you’ll pay each employee. Verify your calculations against the numbers you used Job Duties: Sell clothing, interact with on line 4a of the Profit and Loss Forecast customers, and present a good image of my (Chapter 6). shop. Skills and Personality: The clerk must exAmple: have basic retail and cash handling skills Antoinette learns that sales clerks often and must demonstrate good math skills make minimum wage, even with one or before hiring. She must be friendly and well- more years’ experience, and that there dressed. She must know current fashions are lots of qualified people looking for and proper accessorizing as well as basics clerk positions. Assistant managers with about alterations. She must be adept at several years’ experience make about working with the occasional irate customer. $11 per hour. In each case, Antoinette Education: She must be at least a high plans to pay above the low end of school graduate. the wage range to assure she’ll find Supervisor: Since she will be supervised competent people and to minimize by both my assistant manager and by me, problems with turnover. she must be comfortable in situations with Accordingly, Antoinette plans to pay more than one person able to give orders. her sales clerks $8 per hour. Although she could probably hire an assistant Pay Rate and Monthly Wages: The clerk will manager for $10 per hour, she decides to work about 40 hours per week for a total pay $11 ecause she knows an excellent b of approximately 170 hours per month. I person whom she really likes and trusts. think I can hire a suitable clerk for about $8 If each of her two sales clerks and her per hour plus payroll taxes. That brings her manager work 40 hours per week, her monthly total to $1,376 ($8 × 40 hours × 4.3 weekly wage cost will be $1,020 ($8 + weeks). $8 + $11 = $27, which she multiplies by 40). Multiplying these weekly figures by 4.3 weeks to get an average month results in an average monthly wage cost of $4,644. Extra costs for mandatory employers’ contributions to Social Security, unemployment insurance, and
  • 164. Chapter 8  | write your marketing and personnel plans |  155 so forth will average out to about 14% of Write Your Personnel Plan each person’s salary. She uses this 14% figure since she plans no extra ­ enefits, b As we discussed before under the like health insurance or vacations, until marketing plan section, you may wish the business is a success and she can to summarize the information in these a ­ fford them. exercises into a narrative personnel plan. Just make sure you don’t forget some When you work out these numbers for i ­mportant information when you do that.your business, check them against your Here’s Antoinette’s written summary of herentries on lines 4a and 4b of your Profit personnel plan.and Loss Forecast.
  • 165. 156 | HOW TO WRITE A BUSINESS PLAN Antoinette’s Dress Shop: Personnel Plan Antoinette’s Dress Shop will employ a full- The sales clerks will be paid slightly above time assistant manager and two full-time prevailing wage. They must be personable, clerks. presentable, and have some prior retail sales The assistant manger will be Sally Walters experience. They will work evening hours (resume attached). I have known Sally for Thursday through Saturday and be available several years and believe we will work well to help Sally and me during peak selling together. Until recently, she was the assistant times. They will also assist in keeping the manager of the dress department of a large store attractive by stocking, cleaning, and department store, where she helped modern- developing window displays. Sally and I know ize the merchandise line. Her department several acceptable candidates and the local increased sales by 25% in two years. unemployment office indicates that many Sally will be paid $11 an hour to start, with more are available. a raise to $12 as soon as the business pays I will work six days a week at the start, the owner $3,000 per month and shows a but will consider closing the store on profit. My goal is to fully involve Sally in the Mondays if that proves to be a slow day. I business so that I will feel comfortable leaving will act as seamstress until business expands her in charge when I take time off or have significantly. If business expands more rapidly obligations outside the store. than forecast, additional part-time clerks Sally will work a 40-hour week primarily and a part-time seamstress will be hired as assisting customers. She will also assist in appropriate. ordering decisions. Sally will sometimes open Antoinette’s will not offer health insurance and close the shop and make bank deposits, or other employee benefits until the profit although she will not have to do so regularly. picture warrants them. She will work from 12 p.m. until 8 p.m. Tuesday through Friday and all day Saturday. ●
  • 166. 9 C h a p t e rEditing and FinalizingYour Business PlanIntroduction............................................................................................................................................................... 158Decide How to Organize Your Plan............................................................................................................... 158 Quick Plan (One-Day Plan)— Suggested Outline..................................................................................................................................... 158 Complete Plan—Suggested Outline................................................................................................... 158Write Final Portions of Your Plan.................................................................................................................... 159 Write Your Plan Summary........................................................................................................................ 159 Section Introductions................................................................................................................................. 162 Personal Goal Statement........................................................................................................................... 162Create the Appendix.............................................................................................................................................. 165Create Title Page and Table of Contents....................................................................................................166Complete Your Final Edit....................................................................................................................................166 Let Your Plan Rest.........................................................................................................................................167 Final Details......................................................................................................................................................167Consider Using a Business Consultant.........................................................................................................168
  • 167. 158  |  how to write a business plan quick plan you’re happy with the order in which the If you’ve chosen the quick plan various parts appear, chances are that yourmethod to prepare a business plan (see readers will be also.I­ntroduction), you need to read and completethese sections of Chapter 9: Quick Plan (One-Day Plan)— • “Decide How to Organize Your Plan” Suggested Outline • “Write Your Plan Summary” • “Create the Appendix” Title Page: Section: “Create Title Page and • “Create Title Page and Table of Contents” Table of Contents” of this chapter Plan Summary: Section: “Write Your Plan Summary” of this chapterIntroduction Table of Contents: Section: “Create Title Page and Table of Contents” of this chapterLenders and investors see lots of business Problem Statement: Chapter 3plans. You’ll want to make sure your plan Business Description: Chapter 3gets the­­ ttention it deserves by presenting a Business Accomplishments: Chapter 5it in the best possible manner. This chapter Sales Revenue Forecast: Chapter 3shows you how. Profit and Loss Forecast: Chapter 6 Capital Spending Plan: Chapter 7 Cash Flow Forecast: Chapter 7Decide How to Organize Appendix: Table of Contents: Section:Your Plan “Create the Appendix” of this chapter Appendix: Supporting Documents: Section:Each business plan has a unique structure “Create the Appendix” of this chapter.that to some degree is determined by theparticular ­ usiness and fundraising needs. b Although you’ll be writing a few more Complete Plan—Suggested Outlineshort sections in this chapter, you’llprobably want to take a few minutes now Title Page: Section: “Create Title Page andto get organized. Take out all the work Table of Contents” of this chapteryou’ve completed so far using this book. Plan Summary: Section: “Write Your PlanThen arrange the various components in Summary” of this chapterthe order suggested below for a complete Table of Contents: Section: “Create Title Pageplan or a quick plan, whichever you’ve and Table of Contents” of this chapterchosen. (See the Introduction for an Problem Statement: Chapter 3explanation of these ­ ifferent methods.) d Business Description: Chapter 3Of course, you can vary the sequence if a Business Accomplishments: Chapter 5different order makes more sense to you. If Marketing Plan: Chapter 8
  • 168. Chapter 9  | editing and finalizing your business plan |  159 Appendix: Supporting Documents: Section: Length of Your Plan “Create the Appendix” of this chapter. Some of you probably wonder how long a b ­ usiness plan should be. Should it be five pages or 500 pages? The best answer is that Write Final Portions of Your Plan your plan should completely and concisely Now that you have an overview of what cover all the issues that we raise in this your ­ nished plan will include, it’s time fi book. You may be able to place all that to begin writing the final sections. Every information on 15 to 20 pages or you may business plan needs a summary, which need more, especially if you provide several is covered below. In addition, you may appendixes. choose to write several short statements The key is to include all the information that will improve your plan and make it you need to tell your story and exclude any more cohesive. Those optional statements information that isn’t needed. Remember, are also covered below. more isn’t necessarily better. If you have any doubts about this, have a consultant review your plan’s length. Write Your Plan Summary The plan summary introduces and empha­ sizes the high points of your plan. ItSales Revenue Forecast: Chapter 3 includes a statement of the total amountProfit and Loss Forecast: Chapter 6 of money you seek. Because the summaryCapital Spending Plan: Chapter 7 is based on the rest of your plan, we’veCash Flow Forecast: Chapter 7 waited until now to cover it. Your job is toFuture Trends: Chapter 3 tell your readers who you are, what youRisks Facing Your Business: Chapter 8 want to do, how much money you need,Personnel Plan: Chapter 8 and how much money you expect to make, • Business Personality: Chapter 8 all on one page. • Staffing Schedule: Chapter 8 • Job Descriptions: Chapter 8 cautionSpecific Business Goals: Chapter 2 Pay attention! Many people willPersonal Financial Statement: Chapter 5 never read your entire package. They will makePersonal Background: (Your Strong and their preliminary decision about lending you Weak Points, General and Specific Skills, money or investing in your project on the Your Business Needs, Your Likes and basis of their first impression of your plan D ­ islikes): Chapter 2 summary. Others will ­ ecide to read the rest of dAppendix: Table of Contents: Section: your materials only if your summary engages “Create the Appendix” of this chapter
  • 169. 160  |  how to write a business plantheir interest. So put all your strong points in almost certainly not propose selling stockthe first few paragraphs, saving the details for to the public at large. Therefore, you willlater. Absolutely follow these rules: need to propose that investors will receive a • Keep it short. significant share of ownership of the business • Be specific. and perhaps some monthly or ­ nnual cash a payment as well. (For more details on equity Your plan summary needs a statement investments, see Chapter 4.)of the total cash you need to begin orexpand your business. This is the sum of Example:the preopening costs and the maximum An investment of $20,000 in John’s Roofnegative cash flow. (See Chapter 7.) Repair business will result in the investor receiving a 33% interest in the business.Example: Present plans are to distribute one-half of the This summary introduces Juanita’s annual profit of the company to the owners Waffle Warehouse. each year. Based on projections contained “My Waffle Warehouse requires in this proposal, this means a person who $45,000 in preopening costs, which invests $20,000 will receive $5,000 the first are detailed on the following pages. I year, $17,500 the second year, and $25,000 have researched my equipment costs each year thereafter. In addition, investors will carefully, resulting in a ­ otential savings p be entitled to have any necessary roof repairs of $15,000 by buying second-hand done to their homes or business buildings (reconditioned and guaranteed) cooking and those of immediate family members at equipment. Also, my grand opening 50% off the regular rate. costs are firm estimates resulting from verbal quotes from the ad agency recommended by the Waffle Warehouse Some people worry about their ability to franchising company. I am confident write in a businesslike style. If that applies that these are accurate estimates and I to you, you’ll probably want to follow the look forward to proceeding.” same three-step process as Antoinette: • First, list the positive facts you want to cover; you’ll probably need to review caution the work you’ve done to get that Businesses seeking investors. If you information.will solicit equity investors instead of applying • Second, rearrange the facts in a logicalfor a loan, you’ll need a statement delineating sequence that presents the most ­what investors will receive for their money positive facts in a coherent pattern.rather than information about how a loan • Finally, write the facts in simple prose.will be repaid. As a small business, you will
  • 170. ChApter 9 | EDITING AND FINALIzING YOUR BUSINESS PLAN | 161 Here is Antoinette’s preliminary outline Next, Antoinette rearranges theseof the most positive facts of her business highlights in a logical order. Here is howplan. Remember, at this stage she is only her second version looks.doing this exercise for herself, so she hasno need to be fancy. Antoinette’s Dress Shop Business Plan Summary: Antoinette’s Dress Shop Outline of Most Positive Facts Business Plan Summary: (2nd draft) Outline of Most Positive Facts 1. Open a dress shop catering to • Dress shop catering to working women professional working women/need • 20,000 potential customers in the city $162,500 to do it. and it’s a growing market 2. My market analysis demonstrates the • No competitor exploits market concept is sound and that I have more systematically than enough potential customers • Risks such as newness of my concept to (20,000) to make it work. our community appear moderate and 3. I have several unique marketing ideas I have a plan to overcome all identified that should attract customers. risks 4. No competitor targets our customers • I have a good friend with solid systematically. qualifications to be assistant manager 5. Both my qualifications and Sally’s prove • My background includes responsibility that I can do it. and knowledge in all critical areas 6. Financial projections show the loan can • My personal goals coincide with the be paid back with ease. financial success of the business 7. The money will be well-used for • Detailed financial projections show opening inventory, equipment, working that I can start the business and reach capital, and the other things necessary my goals with $162,500 for starting the business. • Creative marketing ideas include free 8. Conclusion: This business represents alterations, clothing tips for working my long-held dream and I am eager to women, occasional fashion shows. begin.
  • 171. 162  |  how to write a business plan Finally, Antoinette writes a narrative in those assumptions. Also list yoursummary, which is shown below. major ­ ssumptions about cost of sales a and fixed expenses that you used in creating the Profit and Loss Forecast.Section Introductions You may choose to make lists insteadWhen you look over your plan, you may of writing a prose ­ arrative. Finally, nnotice that some of the sections seem summarize the annual sales and profitincomplete or that one section doesn’t flow figures you forecast.into the next. If so, you have these options: • Capital Spending Plan and Cash Flow • write short introductions to those Forecast. This narrative should list sections that need more explanation the major ­ ssumptions you made a • rewrite the entire plan into a single in adjusting your monthly profits to comprehensive narrative, taking care to derive the monthly cash flow. Also cover ­ very important point, or e summarize the preopening costs you’ll • leave the plan as is—it’s possible that incur. Mention whether or not you will your circumstances make it appropriate sell on credit or seek extended terms to use rough drafts and financial docu- from your suppliers and how long it ments and nothing more. will be before your customers pay you Many of you will take a middle course and before you pay your suppliers.of ­ewriting some of your earlier work, r (See Chapter 7 for more details.)presenting some of it intact, and providingwritten introductions and summaries for Personal Goal Statementothers. If you write a narrative or introduc-tion, keep your writing as short as ­ ossible p You may include a statement of yourwhile presenting all your conclusions and personal goals. It is a tricky part ofassumptions. your plan, even though it’s a big help to Sections that typically benefit by short potential backers who don’t know younarrative introductions include: personally. Your lenders and backers want • Profit and Loss Forecast. You don’t you to be happy in your new venture, need a lengthy treatise, but you since you’ll be likely to work hard at it. should describe the assumptions you However, people who back you will also made about the ­ ignificant numbers. s want to be sure that you’re truly committed Explain how you derived the sales ­ to the financial success of your project. volume forecast you used to ­ reate c For instance, they won’t back a beekeeper the Profit and Loss Forecast; your who loves bees so much she can’t stand backers will be extremely interested to disturb them by removing honey from the hive.
  • 172. ChApter 9 | EDITING AND FINALIzING YOUR BUSINESS PLAN | 163 Antoinette’s Dress Shop Business Plan Summary[In her summary, Antoinette puts her best foot fund will be allocated as follows: furniture,forward and tries to answer any questions the fixtures, and leasehold improvementslender may ask.] $110,000, rent deposit $7,500, openingThis business plan requests a loan of $110,000 inventory $30,000, and contingency $15,000.to open a dress shop catering to working and Cash flow forecasts show a positive cash professional women in New City. flow from opening, so no allocation is made Today, many women identify themselves as for working capital.“professionals.” This is part of an evolution in My qualifications include three years ofwork force patterns and no local store caters experience as a clothing buyer and assistantto this group’s needs for moderately priced, merchandise manager for the local Rack-stylish work clothing—including carrying the a-Frax department store. I was able tothree most popular labels: Narak, YYY, and show a 35% sales increase in my principalPag. Antoinette’s will fill this gap. We will sell area of responsibility, the Designer Dressstylish, good quality, and moderately priced Department. During that time, I developedclothing to upwardly mobile women, provide many industry contacts which will befree alterations, and help our customers dress invaluable at Antoinette’s.well at a reasonable cost. Sally Walters will be my assistant Financial projections show first year reve- manager. She has five years’ experience innues of $450,000, with a profit of $35,000 the field, the last three as assistant managerbefore loan payments and a nominal personal of the dress department at Glendale’s. Wedraw. Second year revenues rise to $540,000 plan to open Antoinette’s by Labor Day inand profits increase to $46,000. Profits are the downtown shopping mall and have anadequate in both years to service the loan and informal commitment from the shoppingprovide me with a draw. To secure the loan, I center manager to lease space to us. We willwill consider a second trust deed on my home, both continue our activities in New Citywhich has equity of about $200,000. service clubs, especially those that feature I will combine loan proceeds with $50,000 women members.in savings to provide a $160,000 cash fund. TheDated Antoinette Gorzak
  • 173. 164 | HOW TO WRITE A BUSINESS PLAN Ideally, your personal goals and plan come true; enjoy the prestige andcommitments will tie into the business independence accruing to a successfulgoals exactly. In reality, you probably have business owner; provide a legacy forat least some personal goals that don’t have my children; and provide the means tomuch to do with business profitability. a richer and more fulfilling life for both myself and my family.”exAmple 1: “My reasons for starting this business Notice that in Example 2, “time to are to make a good living, prove I can work on cars” was translated to “provide be successful, enjoy the freedom of the means to a richer life.” Perhaps your independence, and have lots of free statement will neither be this lyrical nor time to work on my car collection. obfuscatory, but hopefully you get the In addition, I would like to create a picture. business that I can bequeath to my children.” Most people starting small businesses Antoinette Gorzak’sare tied to them full-time (if not more), Personal Goal Statementand it’s unrealistic to think that there I want to accomplish a number of goals bywill be a lot of time left to tinker with starting Antoinette’s Dress Shop.a car collection. Assuming our budding I want to prove that I can create aentrepreneur is willing to postpone successful and worthwhile business bymost of his tinkering until his business drawing on my educational backgroundis established, here’s how this statement and work experience. I feel that choosingcould be rewritten to sound a little better and selling good clothes at a fair price willto a potential backer. be an honest service to my customers and the community generally. I want to spendexAmple 2: my time working with customers and “My personal and business goals largely people in the clothing business who share coincide. Successful implementation of my values. this business plan will enable me to meet I want the chance to make a better the following personal goals: provide living than I can make by working for a good living for my family; work in others, along with the responsibility and a field I know and like; achieve the freedom to be my own boss. personal satisfaction of seeing my
  • 174. Chapter 9  | editing and finalizing your business plan |  165Create the Appendix Here are several things that you should ­ ommonly include in your appendix: cThis book covers the primary business • prior years’ financial statements if youbuilding blocks all businesses share. Of are expanding an existing businessnecessity, it leaves out any mention of (profit and loss statements and balanceitems that are specific to any one business. sheets from at least two prior years)Yet, in many cases, specific items are • copies of proposed lease agreementscritically important to the success or failure • copies of bids for any needed construc-of your business. Your job is to decide tion workwhich items to include in your business • plans for construction workplan. • drawings of business signs or logos For example, suppose that you are • a list of what will be purchased forestablishing a franchise business. You your opening inventorywant to include all the information about • key employees’ resumes, if available,the franchise you can, including copies andof the agreements and any information • copies of any newspaper stories orthe franchisor provides you about the other publicity you have receivedoperation. Or let’s say you have invented which relates to your business. This isa revolutionary new gadget. You’ll want to particularly important for people whoinclude a copy of the patent, patent search, are entering service ­ usinesses, where bor patent application to ­ upport your s they are their own main product.claims. Finally, organize your material in The key to deciding what to include is a logical ­ rder and include a table of owhether the information helps the reader contents for the ­ ppendix. aunderstand your proposal. Include proof ofstatements a lender or investor would belikely to question—for instance, horse­ hoeing sis a growth industry. Do not include supportfor obvious statements—for example,people like ice cream. Don’t be afraid toedit by cutting and pasting, as long as youdon’t unfairly change the meaning.
  • 175. 166 | HOW TO WRITE A BUSINESS PLAN • Title page. This is a separate page with Antoinette’s Dress Shop: the title of your business plan, the Table of Contents for Appendix date, and your name and address. • Table of Contents. This appears after 1. Annual Survey of Business Conditions, the Plan Summary and before the New City Chamber of Commerce, body of the plan. List the headings January 19, 20xx for the major sections of your plan as 2. Bank of New City Economic Forecast well as important subsections. After for 20xx you assemble your plan and number 3. Article from September 27, 20xx issue the pages, come back and put the of Woman’s Monthly concerning the appropriate page number next to each need for specialized clothes for the heading. working woman 4. Newspaper articles and picture of Antoinette when she put on a large and successful fashion show for working Complete Your Final Edit women at the Rack-a-Frax Department By now, your material should be assembled Store and ready for a final edit. It’s wise to make 5. Copy of proposed store lease (critical a working copy of the entire plan that pages only, others available on request) incorporates all the changes you’ve made 6. Planned fixture layout for Antoinette’s so far, either from a computer printout or Dress Shop by photocopying your earlier work. Read 7. Antoinette’s Dress Shop sign drawing through everything you’ve written to spot and bid, Smith Sign Co. any inconsistencies or obvious goofs. Make 8. Leasehold improvements bid for shop, any necessary corrections. Jones Construction Co. 9. Quote from Meyer Supply on dress CAUTiON racks and cash register. First impressions count. You won’t have time to show your potential backers a rough draft, followed by a final edit and more revisions. Somebody said that you only get oneCreate Title Page and chance to make a first impression; make yourTable of Contents first impression your best.Every business plan should have these twopages:
  • 176. Chapter 9  | editing and finalizing your business plan |  167Let Your Plan Rest sophisticated market. On the other hand, if you’re planning to establish a bait andPut your completed and organized business tackle shop on Pier 37, your plan won’tplan aside for a day or two. You want to need fancy graphs and charts.come back to it as fresh as possible. As one of the last steps, number the Assess the overall business message pages of the plan and place the numbersof your proposal. Does it make sense? in the Table of Contents. If your report isWould you lend money on the strength of thick, use divider pages with colored tabsit? Can you make it more convincing by to mark each major section, so readers canstrengthening some of its sections? Can find what they want quickly.you document all your claims? If someone It may seem obvious, but good writing,asks you to elaborate on your plan, are you good organization, and good spelling canready with facts and figures? make all the difference. If you’re uncertain Check for consistency one more time. about your plan, have it reviewed by aYour plan should say the same things professional writer. If you don’t know ain the financial section that it says in reasonably priced experienced writer,the business description, and so on. For check the local newspaper, an ad agency,example, if Antoinette says she will do free or the English department at the local highalterations, she must budget enough money school or college. For a modest fee, youfor a sewing machine. may well be able to improve your work substantially. But don’t go overboard—just make sure that your writing is clear and toFinal Details the point.Your plan needs a neat and businesslike You may want to check out a wordappearance to give the best impression. processing service in your area if youIf you are using a word processor, make haven’t already done so. Some of thesesure it has a laser or ­etter-quality printer. l services can offer effective and inexpensiveMost low-cost dot matrix printers do not ways to improve the visual appeal of yourproduce acceptable results. It should be plan at a reasonable price. Also, they mayplaced in a three-hole binder or folio. be able to offer suggestions about binding What about visuals, charts, colors, and your final plan. But above all, rememberso forth? Simply watch the sophistication that your plan’s content will speak thelevel of your business plan. If you’re loudest. Don’t make your document sogoing to market a new laser printer, fancy that it detracts from the message oryour plan will include elaborate ­ isuals v suggests that you like to spend too muchthat demonstrate your product’s abilities in inappropriate places.as well as your ability to compete in a
  • 177. 168  |  how to write a business plan When your plan is complete, make a consultant or CPA who specializes inpoint to hang onto the original; don’t give businesses similar to yours may be ableit away. Also, make sure you keep a list of to save you from a costly mistake or pointthe people who get copies and the dates out additional profit opportunities. At the ­they received them. very least, he should be able to suggest Finally, take yourself out for a terrific how to improve the way your informationdinner with someone whose company you is presented. If he gives you minorenjoy. You deserve it. suggestions for improvement, you can incorporate them easily. If the suggestions are more major, give some thought beforeConsider Using a making changes. Remember, this is yourBusiness Consultant business and your proposal and it’s up to you to make the final decisions. (SeeIt is often wise to have your plan reviewed Chapter 12 for a ­ iscussion of consultants.) dafter you think it is in good shape. Fora modest fee, a good small business
  • 178. ChApter 9 | EDITING AND FINALIzING YOUR BUSINESS PLAN | 169 Antoinette’s Discouraging MomentAntoinette was pleased with her plan after Antoinette was stunned. She expectedputting it together, reviewing it, and polishing to discover some minor flaws, not a it. She was convinced she had a winner. possibly fatal one. Nevertheless, after muchAlmost as an afterthought, she decided soul-searching, she was relieved to haveto have a business consultant review her uncovered the problem before, not after,business plan before taking it to the bank. she began her business. She decided thatShe was glad she did. In brief, here is what raising the extra money for inventory wasn’tthe consultant told her. “Antoinette, you an insurmountable problem. The questionhave written a fine business plan and have a was whether she could reasonably increasegood idea for a business, but your financial her sales projections enough to justify theprojections contain one serious error. I believe increased inventory. To make this decision, shethat you have underestimated the amount of decided to again talk to a number of womeninventory you will have to carry by $45,000 in the target audience to get a better idea ofto $50,000. Unfortunately, changing this how often they might patronize her store.number will influence all your other financial I shall leave the decision to you as toprojections and will mean you have to rethink whether Antoinette decides to proceed withyour entire plan.” her plans or decides to go back to work for The consultant then discussed the same a salary. After all, it’s much the same sort ofinventory turnover problem we discovered difficult choice you may have to make aboutin Chapter 7. The consultant suggested that your own business.Antoinette take a few days to decide if shewished to try and raise more money andrework her entire plan or drop the idea. ●
  • 179. 10 C h a p t e rSelling Your Business PlanHow to Ask for the Money You Need.......................................................................................................... 172 Write a Telephone Pitch............................................................................................................................ 172 Telephone for Appointments................................................................................................................. 172 Meet Your Backers........................................................................................................................................ 173 Ask for the Money . ..................................................................................................................................... 174 Leave Your Plan With Your Backer...................................................................................................... 174 . Follow Up........................................................................................................................................................... 174How to Approach Different Backers............................................................................................................. 174 Friends and Relatives . ................................................................................................................................ 174 Business Acquaintances............................................................................................................................. 175 Supporters......................................................................................................................................................... 175 Banks.................................................................................................................................................................... 176 Equity Investors (Venture Capitalists)............................................................................................... 177 . Government Agencies................................................................................................................................ 178What to Do When Someone Says “Yes” .................................................................................................... 178Plan in Advance for Legal Details.................................................................................................................... 179 Loans.................................................................................................................................................................... 179 Equity Investments....................................................................................................................................... 181
  • 180. 172  |  how to write a business planHow to Ask for the Telephone for AppointmentsMoney You Need Avoid lengthy telephone discussions whenOnce your business plan has been polished making the call; you simply want to setto perfection, you’re ready to use it as part up a personal appointment to discuss allof your campaign to get financing. If you the details and ask for the money. If you’rehaven’t done so already, you must decide not sure what to say, read the samplewhere you’d ideally like to get the money telephone script below. You can adapt it toyou need. You should know whether you suit your style and needs.prefer to get financing from a lender or an “Hello, Jack? This is Antoinette. How areinvestor. (This is discussed in Chapter 4.) you today? How’s the family? Say, Jack, the Before you call people and make reason I’m calling is that I have a great ideaappointments, give some thought to a few for a new ­ usiness and I’d like to meet bpreliminaries. Like it or not, you’re now a with you and show you my business plansalesperson. Your task is to sell your plan. to see what you think of it.Don’t let this discourage you, even if your “Can we get together next Thursdayexperience with selling has been negative. morning in your office? Oh, you’d like toThere are all sorts of good ways to sell hear a little more about my ideas beforethings, most of which depend on a good we meet.” (Antoinette briefly explains whyproduct and an honest, straightforward she wants to open her business—she canpresentation. I can’t tell you exactly how to read her list of reasons if she’s ­ ervous.) nsell yourself and your plan, but I can make “Well Jack, I’m glad to hear that you likea number of suggestions. my ideas.” (Before she discusses the loan she wants, she asks Jack for an appointment. IfWrite a Telephone Pitch she can personally meet with him, she will wait until then to ­ iscuss money.) dSince some of your preliminary selling will “What about next Thursday? Oh,be done over the telephone, you’ll want how much money do I need? I need ato be ­ repared. Write a short statement p good-sized loan that I can pay back inof what you’re doing and why. Simply three years. So we can get ­ogether next tlist your two or three ­ ajor reasons for m Thursday morning in your office? Good.entering or expanding this ­ articular p I’ll see you at 10:00 in the morning. Bye,business. Then write down how much Jack.”money you need and how much you’llpay the lenders or investors for using theirmoney.
  • 181. Chapter 10  | selling your business plan |  173Meet Your Backers Your relatives, on the other hand, may be interested in family solidarity and theShow up on time, well-prepared to answer prestige of a family-owned business as wellany questions that may arise. Then let your as making a good investment.natural enthusiasm help you explain your Offer investors/lenders a fair return, asbusiness idea fully. Your basic objective in much security as you’re comfortable with,the meeting is to­answer all the questions and a little romance. By romance, I meanyou are asked. If you can’t handle a to emphasize the fact that investing andquestion on the spot, do not make up an lending money are very personal activities.answer—promise to find the information. Your backer wants to feel good about youThen promptly write, phone, or visit with and your project. Your backer also wantsthe information later. to share in your enthusiasm. So, in ­ ddition a Talk about what the investment will do to presenting a potential lender or ­nvestor ifor your prospect. For example, bankers with a sound financial plan, make sure hewant to hear that their loan will be soundly knows what makes the project excitingsecured and paid back with no problem. for you. How to Handle Past Financial Problems What if you’ve previously declared bankruptcy students have an obligation to take what they or have had other credit problems, such as a can to partially balance the scales.” lawsuit for a delinquent student loan? Don’t Here’s a better way to handle the same try to camouflage it. The banker or investor s ­ ituation: will probably find out this sort of informa- “Yes, I did have a student loan and wasn’t tion from a credit reporting agency anyway, able to pay it back. I had a rough time adjust- so it will help you to be up front. However, ing to the working world for several years after you need to come up with a ­ lausible—and p I graduated and couldn’t come up with the true—explanation for your past credit prob- money in time. Since then, I have discovered lems. It should also reflect your determination work I like to do and am good at, as evidenced to meet your obligations in the future. by my recent work history. I have arranged a Here’s the wrong sort of explanation for a sensible monthly payment schedule, which I student loan lawsuit: have been honoring.” “Yes, I acknowledge that I took a student The second explanation shows that you loan and didn’t pay it back. I didn’t pay it back will play by conventional credit rules. It also because the militaristic system we live under tugs at the heartstrings a little, something that is shameful. It’s my firmly held conviction that never hurts a good cause.
  • 182. 174  |  how to write a business planAsk for the Money Follow UpHere’s one bit of essential advice about After a week or ten days, telephone allmeeting with your backers: You must ask of your potential backers and ask if theyfor the money. Don’t make the common have any ­ uestions. If they do, you can qmistake of discussing your plan in gener­ answer them on the telephone or make analities and then saying “Thank you” as you appointment to meet. Remember to ask forwalk out the door. the money you need. As part of every presentation, you mustask the potential source of funds if hewill invest in your venture or lend you the How to Approachmoney. Repeat this phrase: Different Backers “Thank you for listening to my businessplan. Will you invest/lend me the money I Chances are you have long since decidedneed to get started?” whom to approach first for a loan or invest­ If you are turned down, don’t hang your ment. For ­ xample, you might decide to etail between your legs and slink away in a first approach your father, then the Bankpuddle of embarrassed perspiration. Ask of Newcastle, then the Small Businesswhy. Sometimes the reasons why a person Administration. If you haven’t decidedwon’t help finance your business will be yet, review Chapter 4 and develop a list ofmore valuable to you than the money. p ­ riorities now. Below are some ways you might approach specific types of backers.Leave Your Plan With Your Backer Friends and RelativesGive your potential backer a copy of thebusiness plan after you’ve met with her. The first rule of borrowing money fromIf at all possible, don’t mail copies of people close to you is that you want to beyour business plan, or ­ ummaries of your s very sure they can afford to lend it to youplan, to people before you meet. Your and that you will be able to pay it back.presentation loses a great deal without Everyone who works with small businessyour personality and enthusiasm. It’s also financing can tell horror stories abouta good idea to number each copy of your business owners who had to deal withplan and keep track of who gets which both the failure of their enterprise and aplan. That way you can remember to bunch of ­ ngry relatives. Put simply, it’s afollow up with everybody. Also, if you’re no fun.selling stock in a private offering you needto keep track of who gets the plans.
  • 183. Chapter 10  | selling your business plan |  175 If you want to ask a relative or friend for Business Acquaintancesa loan, much of your approach depends onthe people involved and your relationship One good way to approach businessto them. We can’t tell you much about acquaintances is by networking. Foreither of these ­ reas, but here are some a example, you might call your attorney orgeneral suggestions: accountant or someone you know who • Approach your friends in a respectful owns a small business and say, “I’ve got and organized way. Don’t spring your a great business proposal in the retail request on anyone in a social context. clothing business. I need about $40,000 • Don’t assume your relatives and and the investor will get a 25% annual friends know all your plans and return on the money they invest, paid accomplishments, even though monthly. Do you know anybody who they know you well. Make your might be interested?” presentation just as professional as for She might reply, “Well, I’m not interested your banker, even if it’s less formal. m ­ yself, but why don’t you try Joe Spats? • Tailor your presentation to your He just retired from the menswear business audience. For example, if you stop by and has been a little restless lately.” your brother’s place early Saturday Obviously, the next step is to call Joe, morning wearing your banker-meeting mention your mutual friend’s name, and best, he will probably laugh you out set up a meeting. If he’s not interested, ask of the kitchen. But bear in mind that if he knows anyone who might be. If you your brother will be as interested as a strike out with your accountant, attorney, banker in seeing your well-thought-out or business friend, try your uncle, the business plan. owner of the local hardware store with • Above all, give the person you’re whom you trade jokes, or the investor who talking to a graceful way not to lend put money into the bakery where you buy or invest. ­ emember, this is a business R coffee. proposition, not proof of someone’s feelings for you. Once everyone is Supporters assured an easy exit if they don’t have the money or desire to invest, you may Supporters are people who care—often find they will be relaxed enough to deeply—about the subject area of your give you a fair hearing. business. Your best approach is to try to enlist this enthusiasm and to honestly involve these people in your dream. ­ ften O it’s best to involve supporters at an early
  • 184. 176  |  how to write a business planstage so that you get the full benefit of owns a successful small business will havetheir good ideas. friendly contacts at a ­ocal bank, as will l If your business will have enthusiastic accountants or business consultants. See ifsupporters, whether it’s a music store or a you can arrange an introduction or at leastdentist’s office in a rural area where there get permission to use your contact’s name.is no dentist now, these people may offer If all else fails, call the receptionist and askfinancial help. Figure out ways to get the the name of the small business loan officer.word out in the correct circles. If people Once you have a name, telephonecare, they may respond favorably. for an ­ ppointment and briefly describe a the subject ­ atter you’ll want to discuss. m Show up on time with your business planBanks and loan package. Open the discussionThe main point to remember about banks by talking about your personal businessis that they lend money, they don’t invest and employment history. Highlight yourit. A banker will want to know all about community involvement while trying toyou and your business, but when it comes d ­ iscover common interests and acquain­to saying “Yes” or “No,” the security of the tances. Maybe you both have children inloan will be paramount. Little League, maybe you both belong When approaching a bank for the first to the Rotary Club or the Symphonytime, it is important to understand that Association or the Volun­eer Fire twithin all banks, responsibility for different Department. Who you are in the com­tasks is divided. You want to talk to the munity and what you have accomplished inloan officer in charge of small business other jobs or businesses is an important partloans, not the trust officer or the person of the loan ­ pplication process. ain charge of getting the automatic teller While it’s important to be businesslike,machine to work right. it’s also important to take your time. After Bankers, like almost everyone else, all, you want to avoid giving the bankerprefer dealing with people they know. the impression that you’re in a hurry or areThe ideal way to meet a bank lending desperate—he is not going to approve yourofficer is to know a bank vice president plan immediately under any circumstances.socially and have her refer you to the loan Expect lots of checking and probably aofficer. However, if you are like most mere series of meetings. But never forget that tomortals and don’t have any old school get a loan, you have to ask for it. As part ofties or country club connections, you will each meeting with the bank, ask politely buthave to be creative. Almost anyone who specifically about the status of your loan.
  • 185. Chapter 10  | selling your business plan |  177 Here are a few things to emphasize Equity Investorswhen talking to bankers: (Venture Capitalists) • Your other bank business. If you don’t already patronize the bank in question, I use the term “venture capitalist” a bit make sure the lending officer knows loosely to include people who invest you plan to do so if you get the loan. relatively small amounts of equity financing. • Security. Remember that the banker These may be relatives, ­ cquaintances, or a wants to lend money, not invest it. Tell anyone else with money to ­nvest in what i the banker how sure he is to get his looks to be a profitable business. money back with interest. If you can As you should know from reading offer collateral for the loan, emphasize the discussion in Chapter 4, the ­ rimary p it. (See the discussion of bank loans in distinction between a venture capitalist Chapter 4.) and a lender involves risk, security, and • Be realistic. Your banker wants to be­ amount of return. The venture capitalist a ­ ssured about your knowledge and is traditionally willing to take more risk enthusiasm about your business. But in exchange for a chance to make a large he also needs to know that you have profit. Here are some suggestions: your feet on the ground. If you puff • Prepare a summary of what you are too hard, the banker is almost sure to offering. In addition to the business be turned off. plan you have already designed, you • Be persistent. There are lots of need to tell the ­ quity investor both e banks. People who work with small what you are offering (partnership, businesses in your area can probably limited partnership, shares in a suggest the banks that are most likely corporation, etc.) and what the to lend to your type of business. If you projected return is. are turned down by one bank, make • Do not promise a certain return. sure you understand why you were Especially if your potential investor rejected. If it’s realistic, change the is unsophisticated, emphasize in items in your proposal that caused this writing that there is always some risk r ­ejection. Pay extra attention to aspects associated with a high potential return. of your plan that continue to receive Make certain the investor knows your negative comments. projections are just that—projections. In short, never guarantee a return that you may not be able to deliver. The person ­ utting up the money should p
  • 186. 178  |  how to write a business plan even understand there is a possibility What to Do When she may lose the entire investment if things go very badly. Someone Says “Yes” • Ask for names of others who might Your first job when someone indicates his invest. If a potential investor turns interest in lending you money or investing you down for any reason, ask if he in your plan is simple—don’t faint. It’s fine knows anyone else who might be to prepare for a ­ egative result so you are n interested in investing. Don’t be not too disappointed if you are rejected, surprised if someone suggests putting but remember also to be prepared for a deal together for you for a fee. This a positive reception. If your proposal is means he acts as a finder or broker as good, it will be funded sooner or later. discussed in Chapter 4. One good approach is to have a number of answers ready, depending on what the lender or investor offers. It’s a little likeGovernment Agencies being a major league baseball outfielder inThe hardest thing about getting money a close game, with several men on base.from the government is finding out which Depending on where the ball is hit, youprogram can help you. The second-hardest need several alternative plans. You can seething is finding out who in that agency some pretty funny plays when a fieldercan make a decision for or against your fails to think ahead and throws to theproposal. Compared to these two, filling wrong base.out the forms is easy. If you’re asking for a loan for a set Ask your bankers if they know any of amount of money at a certain interest ratethe ­ rograms. Most will have some exper­ p and the lender says “Yes,” presumably youience with at least one of the agencies, will, too. But, what if the lender offerssuch as the Small ­ usiness Admin­s­ration B i t you less than you want, asks for a higher(www.sba.gov), and can steer you in the interest rate, wants collateral, or proposesright direction. If you run into a wall, try a different financial formula entirely?your local elected representatives. They Make sure you understand exactly whathave aides whose job it is to help people the proposal is. Think through your risks,like you. If you find a ­ rogram that looks p especially if the lender wants collateral.good, be sure your elected representative Compare the terms—for instance, a smallknows about your application. (See the increase in interest rate could mean thatdiscussion of the SBA in Chapter 4.) you will end up paying more money for a longer period of time.
  • 187. Chapter 10  | selling your business plan |  179 Don’t answer on the spot. Take the Plan in Advance for Legal Detailsproposal home and see if you can live withit. If you can’t, meet with the person again Taking money into your business requiresand explain exactly what you can’t accept lots of legal documentation. You willand why. Then propose changes. If this present a more professional image if youdoesn’t result in agreement, start looking understand some of the basics.for other funding sources. It’s far better tosay “No” than to accept a bad deal. Anyone Loanswho has been in business for a whilewill tell you the times he turned down Whatever loan you arrange will have topoor business proposals were at least as be ­educed to writing. If you deal with a rimportant to his ultimate success as the bank or other institutional lender, it willones to which he said “Yes.” have the necessary forms. However, if your arrangement is with a friend, family Example: Charlie wanted a loan of member, or private investor, these details $20,000 to start a limousine service. will probably be up to you. The bank offered him $20,000, but If your loan is simple—a specific wanted equal monthly ­ ayments of p amount of money, at so much interest, $1,018 over two years. Charlie had to be paid at regular intervals—you can expected to make payments of $530 safely design it yourself. While a course in per month over five years. After he ran contract law is beyond the scope of this the ­ ifferent loan payments through d book, the sample notes provided may help his cash flow schedule, he discovered you focus on this task. that he couldn’t pay his own rent and However, if the loan involves compli­ grocery bill if he had to pay $1,018 cated ­ efault provisions, security, and d per month on the loan in the first two balloon payments, you and the person years. After he explained his problem you are dealing with would be wise to to the loan officer, the bank offered have it checked by an attorney. If you have Charlie interest-only payments for the done most of the work, this shouldn’t be first two years. That was a much better expensive; negotiate the fee in advance. deal and Charlie took it.
  • 188. 180 | HOW TO WRITE A BUSINESS PLANexAmple 1: exAmple 2: Promissory Note Promissory Note Robert Lee of 1411 South St., Homer, $8,639.00 July 30, 2010 Alaska, and Gertrude Fox of 123 Main St., For value received, the undersigned Fairfax, Alaska, agree that Gertrude Fox promises to repay to Sebastian Grazowtski, hereby lends Robert Lee the sum of Fifty-Six of New City, Oregon, the sum of EIGHT- Thousand ($56,000) Dollars to be repaid on THOUSAND SIx-HUNDRED AND THIRTY- the following terms: NINE DOLLARS ($8,639.00) including 1. Principal and interest of 10% per year interest at 12% per year. This money is to be will be paid in equal monthly installments paid in equal monthly payments of $315.00 on the first day of each month beginning (principal only) commencing on September the first day of September 2010 and 1, 2010 and continuing until November 1, continuing through the first day of August, 2011, at which time the monthly payments 2011. will increase to $440.61 per month until the 2. On September 1, 2011 the entire entire balance of principal and interest is unpaid balance of principal and interest paid. shall be due and payable in full. Should default be made in the payment 3. Should Robert Lee fail to pay an of any installment when due, then, at the installment on the date due, as set out in option of the holder of the note, the entire Paragraph 1 of this agreement, the whole amount of the principal and interest shall sum of the principal and interest then become immediately due and payable. In outstanding shall, at the option of Gertrude the event of any default on this note, the Fox or any subsequent holder of this note, holder shall be entitled to recover all costs immediately become due and payable. of collection of same, including reasonable 4. Should Robert Lee fail to meet any attorneys’ fees and costs. condition of this agreement, and should Gertrude Fox or any subsequent holder Date of this note take legal action to collect Sebastian Grazowtski it, Robert Lee shall be responsible for all Date attorneys’ fees and costs. Virginia Woo Date Robert Lee Date Gertrude Fox
  • 189. Chapter 10  | selling your business plan |  181Equity Investments Example: Wilhelmina Whalen needed $35,000If you plan to arrange for an equity to start a coffee shop. She decidedinvestment, you have considerable work to to form a small corporation and selldo beyond the scope of this book. In short, an investor 25% of the company foryou need to have a detailed plan for the $35,000. If the coffee shop succeeded,legal form of organization you prefer—a as she expected, the 25% investmentgeneral partnership, limited partnership, or would be worth $100,000 in three years.small corporation. Harrison Flyright liked Wilhelmina and Most entrepreneurs form corporations her business idea. He offered $25,000and sell shares to raise money. They are but wanted 50% of the company.regulated by both the federal Securities and Wilhelmina thought that was too highExchange Commission and by their state’s a price and said “No.” Sometime later,corporation department. All require confor- Harrison increased the amount tomity to numerous regulations designed to $32,000, and Wilhelmina agreed to giveprotect investors from dishonest promoters. him 49% of the stock, thereby retaining While the regulations are extensive, control of her business. As a Californiathey are designed to help the process. resident, Wilhelmina incorporated herFor example, some stock offerings can business using How to Form Your Ownbe exempt from expensive filings if they California ­ orporation, by Anthony Cinvolve a small number of shareholders Mancuso (Nolo). She issued 49% of theand a small amount of money. (Chapter 4 stock to Harrison in exchange for hisdiscusses corporations and partnerships in cash, and was off and ­unning. ● rmore detail.)
  • 190. 11 C h a p t e rAfter You Open—Keeping on thePath to SuccessIntroduction...............................................................................................................................................................184Watch Out for Problem Areas..........................................................................................................................184 It’s Lonely at the Top...................................................................................................................................184 Anticipate Problems Before They Arise............................................................................................ 185 You May Be the Problem and Not the Solution...........................................................................186 Plan Beyond Opening Day........................................................................................................................186 Know When You’ve Succeeded—Or Failed................................................................................... 187 Prepare for Success.......................................................................................................................................188Getting Out of Business.......................................................................................................................................189 Lock the Doors and Leave........................................................................................................................189 Sell the Business.............................................................................................................................................189 Close the Business and Negotiate With Your Creditors..........................................................190 Hold a Going Out of Business Sale......................................................................................................190 . Declare Bankruptcy......................................................................................................................................190
  • 191. 184  |  how to write a business planIntroduction of determination and drive to make things happen. As a result, you may focus soIf you have followed all the steps in this completely on the immediate goals at handbook, you have completed a thorough that you lose sight of the larger picture.plan for your business. You should feel Recognizing that you don’t know every­good about completing a hard, demanding thing is a good first step toward businesstask. It’s also important to remember that success. If you’re unsure of yourself incompleting your plan, finding the money any particular area, please take advantageyou need, and opening or expanding your of the advice and help that is there forbusiness are just the first three steps in the asking. That way, you’re less likelyyour journey. to be sabotaged by something you didn’t Many small business books take fairly know—and didn’t know you didn’t know.extreme approaches. Two common onescan be summarized as follows: 1. Here comes another lamb to the It’s Lonely at the Top slaughter—hopefully this book can As a business owner, you often make frighten him out of his dumb idea. decisions in a vacuum. Most of the time 2. Anybody can find fame and fortune in you won’t have immediate peers who a small business; just read this book understand your business and can also offer and get a big strongbox in which to you good, dispassionate advice. Probably store your surplus gold. you have to go it alone, and that can be I hope to steer a middle course by pretty tough.offering you both encouragement and You and your business become targetscaution. In my view, small business is for an army of job-seekers, governmentone of the last great frontiers of both regulators, charities, competitors, consul­individualism and opportunity, but like the tants, salespeople, insurance brokers, andprairies of yesteryear, there are more than so forth. All these people have their owna few rattlesnakes among the poppies. This goals and objectives, which may or maychapter contains some highly personal not coincide with yours. As a matter ofrecollections and observations on pitfalls survival, you must become skeptical aboutand diversions you may encounter on your what people claim they can do for you orway to business success. your business. This isn’t necessarily either bad or good, it’s just the way things are. You are the only one who can decide whatWatch Out for Problem Areas is good for your business.As a small business owner, you’ll have to You also have to manage relationswork hard to meet your goals. It takes a lot with your three primary sources of
  • 192. Chapter 11  | after you open—keeping on the path to success |  185business success: customers, suppliers, Things always go wrong in business.and employees. Again, each person in Your job is to notice troubles and problemsthese groups has her own set of goals and before they become major hurdles. If youobjectives. Your job is to reconcile all those don’t notice the mistake until others tellcompeting interests so that your business you about the unfortunate results, it mayprospers. be too late for an easy, inexpensive cure. Incidentally, I hope this doesn’t read like If your business is like most, you’lla nightmare to you, because it isn’t a night­ spend some time every day creatingmare. In fact, I think it’s one of the best solutions to problems. But, if you don’t likeparts about being in business for yourself. playing detective and prefer sailing alongAs a business owner, you decide the goals on smooth waters so much that you don’tand the steps to reach them. The compar­ see the first signs of storms, you may haveison is similar to the difference between a problem surviving for long.riding in the back seat of a car and driving Here’s one way to keep a handle onthe car. If you’re like me, you’re a lot more problems. Every month, make a line-by-comfortable when you’re driving the car. line comparison of your monthly actual profit and loss statement to the monthly Profit and Loss Forecast you made for Axiom: If you need approval from others to your business plan. That way, you’ll seef­unction at your best, you will be uncomfortable problems as they develop and beforeas a business owner. they become serious. For example, if Advice: Get tough. Learn how to set goals and your profits are down by $1,400 and yourreach them. Learn when to take others’ views advertising expenses are up by $2,000,into consideration and when to ignore them. you’ll want to spend some time analyzing why that happened and what you should do about it. Another way to spot problems beforeAnticipate Problems they become too large is to listen to whatBefore They Arise your customers, suppliers, and employeesYour business plan describes the risks say about your business. While some ofyour business faces. Periodically reread their comments may be self-serving, youthat risk discussion to see if you’d like to can’t afford to ignore all their complaintsadd anything to the list. If you’re like most and suggestions. Experience shows thatpeople, you’ll admit that there may be most customers will tell their friends aboutsomething you missed and that you don’t a problem they had with your businessknow what it is. long before they tell you. So, you may have to develop creative ways to encourage your customers to communicate with you.
  • 193. 186  |  how to write a business plan Axiom: The business owner constantly makes Axiom: Everybody has blind spots. Your blindsmall corrections to keep the business on course. spots can determine whether your business willThe business may fail if the owner falls asleep at succeed or fail.the wheel. Complacency kills. Advice: Ask a friend who knows you well Advice: Establish an information system that where your blind spots are. You can’t afford notlets you know when the business goes off course. to get help if they are critical.You may also choose to have an experiencedbusiness consultant review your businessperiodically. Plan Beyond Opening Day To illustrate the importance of planning for the operation of your business after itYou May Be the Problem opens, I’d like to share the experiences ofand Not the Solution Molly, a friend and former student, who“To live is to change, and to be perfect wanted to open a bath supply shop. Mollyis to have changed often.” (John Henry encountered a long series of depressingNewman, as quoted in First Data Resources obstacles on the way to getting the moneyad in Credit Card ­ anagement, January M to open her business. But since she was1992, Volume 4, Number 10.) Unfortu­ both stubborn and a fighter, each setbacknately, most people aren’t very good at made her even more determined. In truth,analyzing their own strengths and weak­ before long, getting the necessary moneynesses objectively and then changing their had become an obsession. Finally Mollybehavior to compensate. They just go succeeded. Unfortunately, at this pointahead doing what they’ve always done, she became strangely lethargic. Molly hadregardless of the outcome. put an enormous push into opening her Many businesses are started by people b ­ usiness, but she hadn’t prepared herselfwho are very good at a skill that people for the gritty day-to-day realities of owningdemand. But many of these people know a business. Now Molly lacked energy,little about the complexities of starting and innovative ideas, and the knowledge ofgrowing a business and can be hurt badly how to compete in a changing market­by their lack of knowledge about basic place. Her business closed in 12 months,management skills. which was just about how long it took to start it. She lost a lot of money and a lot of pride.
  • 194. Chapter 11  | after you open—keeping on the path to success |  187 four months? Do you triple the advertising Axiom: You need a flexible continuing budget and hope that sales will pick up? Ioperating plan for your business. hope not. A more sensible approach is to Advice: Make sure you can adapt your make another business plan, adjusted tobusiness plan to changing circumstances. the sales you are actually getting. This is psychologically difficult for many people to do. It’s all too easy to get hung up on proving that your original plans were right,Know When You’ve rather than accepting what the numbersSucceeded—Or Failed tell you.Success in a small business involvesmeeting your objectives, especially the one Example:that says you have a positive cash flow by Pierre, who had never run a business,a specific date. Normally it shouldn’t take bought a failed cafe. He was confidentlong to know whether your business will in his abilities to turn the cafe around,meet your objectives. since he had a degree in hotel manage­ Many people wait a year or two to ment and was an accomplished chef.see whether the business will succeed. I Pierre projected $30,000 a month inthink that’s a mistake. Instead, figure out sales and budgeted accordingly. Actualhow long it should take for your potential sales in that first three months werecustomers to hear about your opening $12,000, $18,000, and $16,000. Salesand then add a month or two. In a retail leveled off at the $14,000-per-monthbusiness, that’s usually no more than three level for the next several months,to six months, depending on the type of resulting in a first quarter loss of $60,000.business and how good a promoter you are. Pierre cut back to where he was onlyPut another way, your sales will probably losing $2,000 or $3,000 per month forlevel out three or four months after you the next three months, but stuck to theopen. People in service, wholesale, and idea that he could generate monthlysmall manufacturing businesses may expect sales of $30,000. In the meantime, hea longer start-up cycle. For example, a sold his house and his wife’s jewelryreal estate agency normally allows six to to keep up with the bills. Many people12 months for money to begin coming in. suggested that he make cutbacks soThat’s how long it takes to find clients, that he could make a profit on $14,000negotiate deals, and generally get known in per month or, as an alternative, sell thethe community. restaurant. So far, he has refused. If he What if your sales are less than you doesn’t take in $30,000 a month soon,expected after you have been operating he’ll go broke.
  • 195. 188  |  how to write a business plan Pierre’s approach is not one I would happens, be sure you relax and enjoy yourrecommend. Here is how I would tackle success for a while before you think aboutthis sort of problem. I would take the first your next step. Everyone needs to knowfour months’ total sales and divide by four how to take a vacation, especially smallto get a monthly average. Then I would business owners.design a Profit and Loss Forecast to make If you’re considering expanding, firsta profit at that level of sales. To do this, I take a long look at your business and yourwould have to cut back. I would also pay personal goals. Many wise people woulda lot of attention to both the quality of my rather make a decent profit with a smallfood and techniques to get the word out business than deal with the headaches of ain the community. For example, if Monday much bigger business.and Tuesday evenings were slow, I might Let me illustrate this point with theclose the restaurant and start a cooking story of Fred and Fritz, who opened aclass those nights. If my efforts to generate breakfast restaurant several years ago. Aftermore business failed, I would think about they learned the ropes, they made a goodclosing. profit. Best of all, they went home every day at 3 p.m. Then they opened a second breakfast restaurant and things were twice Axiom: You can fool yourself into waiting too as good. Next, they made plans to openlong for success. two more, on the theory that if two are Advice: Before you open your doors, establish good, four will be better. This meant theya time when you will review your business had to run the two existing restaurantsperformance to see if you are meeting your while building the new ones. Inevitably,goals. This forces you to compare your results to hired employees ended up managing theyour plan. If your business is not doing as well existing restaurants. About then, interestas it should be early, you still have a chance to rates went up and there was a recession.make changes before your money and energy Finally, they got all four restaurants open.run out. If you must close, it’s far better to close The only problem was that without theirwith a small loss than to hang on and end up in personal attention, business had droppedbankruptcy. 40% at the original locations and was less than half of what was expected at the two new ones. Within two years, they both lost their homes as well as their businesses andPrepare for Success were back to working for someone else.Now let’s assume your business succeeds. Not surprisingly, their new bosses thoughtWhy shouldn’t it? After all, you’ve planned it unreasonable for employees to go homecarefully and worked hard. When it at 3 p.m.
  • 196. Chapter 11  | after you open—keeping on the path to success |  189 Axiom: Bigger is not necessarily better. Sell the Business This may be a realistic option if your busi­ Advice: To make your business bigger, plan as ness makes a small profit, or sometimes evencarefully as you did when you began. Resist the if it doesn’t. Someone else may be satisfiedurge to overexpand. You will very likely continue with less than you are or may have visions ofto do well if you expand slowly and sensibly. how to make a better profit. If you can’t raise enough cash to pay your creditors and they aren’t willing to take less than the face amount of whatGetting Out of Business you owe them, you may have to declareWhat if your business is losing money and bankruptcy just to get rid of the business.you’ve already scaled down your expenses, Or, if you’re lucky, you may find someonetried innovative marketing techniques, willing to buy your business and try toand made sure you have a high-quality turn it around.product or service? You’ll need to either Make a balance sheet for your businessfundamentally change your business or similar to the Personal Financial Statementget out of it. You’ll be wise to make these you created in Chapter 5. A simplifiedtough decisions promptly if you keep version might look like the followinglosing money. If you decide to get out of example, although you will want muchbusiness, you have the following basic more detail.options. Example: Sally’s bookstore has been limpingLock the Doors and Leave along, almost breaking even for nearlyDisappearing is almost always a bad two years, and Sally can’t afford toidea unless you plan never to come back. keep the store open any longer. AfterWalking out creates more problems than it preparing a balance sheet, Sally seessolves, not to mention the hassles you will that if she can sell her business for atcause your landlord, your lender, your other least $16,000 cash, she can pay hercreditors, and your friends. creditors and come out clean.
  • 197. 190 | HOW TO WRITE A BUSINESS PLAN inventory of goods for resale is usually the Sally’s Book Shop: Balance Sheet retailer’s largest asset. There are firms that make a business of liquidating businesses, Assets or you can do it yourself. A liquidation Cash $ 200 sale can sometimes be a better idea than Inventory at cost 32,000 selling a business. Take Sally’s bookshop, Fixtures and equipment at for example. If she could sell her assets at estimated sales price 5,000 cost, she could pay all her creditors and Total Assets $ 37,200 end up with $21,000 in cash. Even if she only got 45¢ on the dollar, she would come Liabilities out clean. Auctioneers and liquidators Accounts payable $ 15,000 have lots of tricks to get the best prices for Income taxes and withholding everything. It’s worth investigating if you’re payable 1,000 thinking about a sale, especially if you Total Liabilities $ 16,000 have a lot of inventory. Declare BankruptcyClose the Business and Negotiate Federal bankruptcy laws are designedWith Your Creditors to help debt-burdened individuals and businesses get a fresh start. YouIf you’re losing money every month and declare bankruptcy by filing papers indon’t think your cash flow will improve a bankruptcy court. Your creditors aresoon, you can close your doors and immediately barred from trying to collectmake deals with your suppliers and other what you owe them. So, at least tempo-creditors. You can often negotiate to pay rarily, creditors, even the IRS, cannotmuch less than what you owe. You can legally empty your bank account, repossessoffer them a small lump sum payment or your property, or cut off your utilityyou can offer to make monthly payments. services. However, with court approval,Either choice can be a good option if certain creditors may be entitled toyou have the money or income to make repossess your property or resume theirpayments. collection efforts. If you own your business as a soleHold a Going Out of Business Sale proprietor, you’ll need to declare personal bankruptcy. Your personal debts as well asThis usually involves selling all your your business debts can be discharged—merchandise at or below cost. It frequently that is, wiped out—through the bank-makes sense for retailers, because ruptcy process.
  • 198. Chapter 11  | after you open—keeping on the path to success |  191 If your business is a partnership or If you are thinking about filing forcorporation, the business itself can go bankruptcy, you’ll need to research yourbankrupt. You won’t need to declare options. Your options will be affected bypersonal bankruptcy, however, unless issues such as:you have business-related debts for which • the dollar amount of your debtyou’re personally responsible. • whether you want to keep operating Depending on your particular circum­ the businessstances, you may have a number of • your personal liability—for example,different bankruptcy options available. you may have pledged your home orMost small business owners opt to either: cash for a loan, and • lose some of their personal or business • the type of property you own; some assets and cancel their debts, or of your personal property is yours to • arrange to make payments on past keep, regardless of your bankruptcy. bills from future income while keeping current on new bills and retaining their resource property. In many cases, past bills may For more about bankruptcy options be paid off at a fraction of their face for individuals, see Solve Your Money Troubles, value. by Robin Leonard (Nolo). For more about bankruptcy options for businesses, see How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo). ●
  • 199. 12 C h a p t e rGood Resources for Small BusinessesIntroduction...............................................................................................................................................................194Business Consultants.............................................................................................................................................194 SBA/SCORE.......................................................................................................................................................196 State and Local Agencies...........................................................................................................................196 Private Consultants......................................................................................................................................196Books..............................................................................................................................................................................196 Background Books........................................................................................................................................ 197 Choosing a Business..................................................................................................................................... 198 Finding Money................................................................................................................................................ 198 Marketing/Advertising...............................................................................................................................199 Personnel...........................................................................................................................................................200 . Business Location..........................................................................................................................................200 Corporations, Partnerships, and Legal Matters............................................................................200 Women in Business......................................................................................................................................202 General Business............................................................................................................................................202Pamphlets....................................................................................................................................................................203Magazines—Continuing Small Business Help.........................................................................................203Computers and Business.....................................................................................................................................203 How Will You Use a Computer?............................................................................................................204 What Software Do You Need?...............................................................................................................204 How Much Computer Do You Need—And How Much Can You Afford?....................205 PC or Mac?........................................................................................................................................................205 Where Should You Buy a Computer and Software?..................................................................206Online Business Resources ................................................................................................................................206 Should You Go Broadband?.....................................................................................................................206 Using Search Engines...................................................................................................................................207 Business-Oriented Websites....................................................................................................................207 Conferences and Newsgroups................................................................................................................208Formal Education....................................................................................................................................................209
  • 200. 194  |  how to write a business planIntroduction Check Out Nolo’sThe key to getting the help you need is Small Business Resourcesknowing in which knowledge or businesspractice areas you are weak. Once you’ve Nolo (www.nolo.com), the publisher ofpinpointed areas where you need help, this book, provides many ways to assistthink about how you like to learn. Some you when it comes to small businesspeople prefer classes and study groups, information—whether it’s researchingwhile others do better reading a book or which is the best business entity, forminga magazine. Some people benefit most by a corporation, partnership, or LLC, down­seeking out a trusted advisor who’ll take loading agreements, or providing lots of freethe time to analyze their situation and make information. Visit the site and click “Business,specific suggestions. LLCs and Corporations” on the left side of the As much as possible, the resources below home page.are presented in time-sensitive order. Youwill receive faster help from the first sourcelisted, business consultants, than you willfrom the last source, formal education. Business Consultants Regardless of how you choose to receive Business consultants are people who offerinformation and help, there are many advice about how to run other people’sexcellent resources available. As a wise businesses. Most have extensive businessconsumer, take care to get your money’s experience and want to help people likeand time’s worth. Just because some you succeed. Be careful though—thereperson or publication promises to help you are some inexperienced and unscrupulousdoesn’t necessarily mean you’ll get good people who call themselves businessresults. consultants. You’ll want to select a business consul­ tant based on your needs. The two basic categories consist of: • General business consultants. They look at a business from the owner’s perspective and try to solve any and all problems the business has. One of the best ways to use a general business
  • 201. Chapter 12  | good resources for small businesses |  195 consultant is to meet for an hour or two each month and talk about your Consulting Help plans and upcoming projects. Most Several small business consultants whom good consultants can suggest different I know and trust helped me with this ways to reach your goals that will save book. They are available to review business you time and money. plans for reasonable fees and for general • Specialists. These people are experts guidance. Roger Pritchard (roger.pritchard in specific fields like advertising, @mindspring.com) advises individual small marketing, sales, or employee benefits. businesses and partnerships in Berkeley, Specialists try to solve limited problems California. His business is called Financial as directed by the owner. For example, Alternatives and he can be reached at 510- you may hire an advertising agency to 527-5604. Additionally, most CPAs and tax help you introduce a new product. advisors can help you with your plan. If Use a consultant if you’re convinced that you’re not happy with the professionals inthe advice will bring in more money than it your area, I may be able to help. Call me atwill cost or you require expertise you don’t 415-816-2982 or email me at mckeever.mp@possess. Bear in mind that a consultant gmail.com. (Be sure to mention Nolocan only give you advice. If you don’t Business Plan Book in the subject line of thefollow that advice, then you’ve wasted your email so I don’t trash it as spam.)money and everyone’s time. Make sure that you like the consultantas a person; you probably won’t listen toadvice from someone with whom you’re cautionuncomfortable. Ask the consultant to out­ Consultant or future employee?line how he proposes to approach your Sometimes people use consulting as a way toproblem and about how much his approach find permanent employment. There’s nothingwill cost you. Your consultant should be wrong with that. Just make sure that you andopen to your feedback on his proposals. your consultant communicate completely ifIf you dislike most of what he proposes, you think that’s an issue. You may or may notyou’ll be better off finding another consul­ have any openings or interest in hiring thetant more in line with your thinking. consultant. You’ll want to be clear about the situation before you begin your work together.
  • 202. 196  |  how to write a business planSBA/SCORE State and Local AgenciesThis agency of the federal government Many state and local agencies offer adviceis organized specifically to help people and assistance in addition to their helplike you. The primary purpose of the with securing financing. In fact, counselingSmall Business Administration (SBA) is and consulting may be part of the package.to help small entrepreneurs find financial Refer to Chapter 4, for resources on how toassistance. (This is covered in Chapter 4.) locate them.The SBA also runs a consulting servicecalled the Service Corps of RetiredExecutives, or SCORE. This is an organized Private Consultantsgroup of retired business executives who To begin looking for a private general busi­offer free consulting to any business ness consultant or a specialist, start withowner. the local Chamber of Commerce, bankers, Most SCORE consultants are genuinely and the service clubs like Rotary or Kiwanisinterested in helping you prosper, and to find people with long com­ unity ties mthey have some valuable experience to and stability. Many class instructors andshare. The only cautionary note I offer is to college professors supple­ ent their income mmake sure that you like the consultant and by doing private consult­ng; if you take ithat he has some experience that will be a class from a person you like and wanthelpful to you. For instance, some SCORE some personal help, ask.consultants with long, illustrious careers inbig business may have little understandingof, or patience with, the problems of small Booksbusiness. If you don’t feel the consultantassigned to your case is a good match, The books covered in this section offerdon’t hesitate to ask for another. good information, take a helpful stance, For business owners on a tight budget, and are easily read by most people. This isthe help from SCORE can be invaluable. my list, not a comprehensive study of theMake the nearest SCORE office your first subject. If your local library and bookstoresstop in looking for help. Or, get more don’t have a particular book listed here,information or make use of their email try checking with your favorite bookstore’scounseling service at www.score.org. copy of Books in Print to see if the book is still available. If so, you can have your bookstore order it for you, or write directly to the publisher. Or, if you’re online, check with Amazon (www.amazon.com) or Barnes and Noble (www.barnesandnoble.com).
  • 203. Chapter 12  | good resources for small businesses |  197 Oh, and one more thing. Several of the • Small Time Operator, by Bernardbooks I list are also published by Nolo. Kamoroff (Bell Springs Publishing).That’s because Nolo concentrates on how- Gives you the basics of keepingto-do-it books and avoids the double-talk books, paying taxes, renting athat makes many business books virtually building, becoming an employer,unreadable. I recommend their approach and other important business detailshighly, especially if you don’t have a more thoroughly and better than anygraduate degree in business administration. other book. If you never buy anotherAfter all, a wise man once said that if business book, buy this one.you can’t explain something to a 12-year- • The E-Myth Revisited, by Michael E.old child, you probably don’t know your Gerber (HarperCollins). Containssubject thoroughly. practical advice about small business management. Also, the author manages a telephone consulting business thatBackground Books specializes in small businesses andHere are some general business books that employs 30 people; call 800-221-0266are particularly helpful for small business for information about managementowners. As you may already know, when consulting by telephone.you search for one of these books at • E-Myth Mastery: The Seven EssentialAmazon.com or at other online retailers, Disciplines for Building a World Classthe product page often contains helpful Company, by Michael E. Gerbersuggestions for similar books on the same (HarperCollins), which is anothersubject. equally well-recommended title from • Honest Business, by Michael Phillips, the E-Myth team. Salli Rasberry, and Peter Turner • The Small Business Handbook: A (Shambhala Pocket Editions). This Comprehensive Guide to Starting book might as well be entitled “Zen and Running Your Own Business, by and the Art of Small Business Success.” Irving Burstiner (Prentice Hall). This It is a remarkable book focusing on the book is just what the title says. I used personal and psychological qualities it it as a textbook in a small-business takes to succeed in a small business. management class with good results. Much of this book’s advice stands Its only fault is that it tries to cover conventional small-business wisdom all aspects of running a business, on its head. A must-read. which sometimes results in hitting the high spots, rather than the in-depth coverage many of these areas deserve.
  • 204. 198  |  how to write a business plan But each chapter has an extensive Your Own Successful e-Business, by bibliography of more detailed sources, Susan Sweeney (Maximum Press). which readers will find valuable. • Ultimate Start Up Directory, by James • Growing a Business, by Paul Hawken Stephenson (McGraw-Hill). This (Simon & Schuster). This is a well- directory lists 1,350 businesses that reviewed classic on moving beyond entrepreneurs might be interested in the start-up phase. starting. • How to Make Your Business Run • The Franchise Ratings Guide: 3,000 Without You, by Susan Carter (Nasus Franchisees Expose the Best & Worst Publishers). Provides another helpful Franchise Opportunities, by Gary approach to growing a small business. M. Kowalski (iUniverse, Inc.). More • Free Help From Uncle Sam to Start Your helpful advice on franchising. Own Business (Or Expand the One You • Adams Businesses You Can Start Have), by William Alarid and Gustav Almanac, by Richard Wallace (Adams Berle (Puma Publications). Guide to Media, 2006). Ideas and choices for getting help from many government starting a business. agencies. Includes a listing of programs • To Build the Life You Want, Create and which agency to contact. the Work You Love: The Spiritual Dimension of Entrepreneuring, by Marsha Sinetar (St. Martins). A spiritualChoosing a Business approach to finding satisfaction in yourIf you’re having trouble selecting a business business.idea, you’ll be interested in these books: • Do What You Love and the Money • 101 Best Businesses to Start, by Russell Will Follow, by Marsha Sinetar (DTP). Roberts and Philip Lief Group (Double­ I recommend this book, which has day). A comprehensive guide that become a cult classic on the relation­ includes cost and competitive factors ship between motivation and reward. on 101 businesses. • Success For Less; 100 Low Cost Finding Money Businesses You Can Start Today, by Robert Adams and Terry Adams If you need more help getting your (Entrepreneur Press). This book business idea funded, these books may contains up-to-date expert information provide some good ideas: on current small-business trends and • Pratt’s Guide to Venture Capital opportunities. Sources (Venture Economics, annual). • 101 Internet Businesses You Can Start The definitive list of venture capital from Home: How to Choose and Build sources.
  • 205. Chapter 12  | good resources for small businesses |  199 • Business Capital Sources: More Than public stock offerings, which can be an 1,500 Lenders of Money for Real Estate, expensive journey. Business, or Capital Needs, Business Capital Sources (International Wealth Success). Here’s a directory of lenders. Marketing/Advertising • Attracting Capital from Angels, by Brian • Marketing Without Advertising, by Hill (John Wiley & Sons). Angels can be Michael Phillips and Salli Rasberry the best money source—read this book (Nolo). An essential book about if you’re looking for an angel. advertising and marketing. An • Business Loans From Family & Friends, indispensable source to help you by Asheesh Advani (Nolo). This understand your business from the excellent book goes beyond most customer’s perspective. investment or small business guides to • Marketing High Technology, by William tell how to tap into resources of those H. Davidow (The Free Press, New you know. York). Although the book discusses • Financing Your Small Business: a few specific high-tech products, From SBA Loans and Credit Cards it is about the principles that define to Common Stock and Partnership a product, as opposed to a device, Interests. by James E. Burk and Richard from the customer’s perspective rather P. Lehman (Sourcebooks). Get a than from an inventor’s point of view. handle on the territory before starting. Absolutely necessary for anyone • How to Get the Financing for Your New considering a new product. Small Business: Innovative Solutions • Positioning: The Battle for Your Mind, from the Experts Who Do It Every Day, by Al Ries and Jack Trout (McGraw- by Sharon Fullen (Atlantic Publishing). Hill). This book invents the concept Here’s some practical help. of distinguishing you from your • How to Raise Capital: Techniques competition in the customer’s mind. It and Strategies for Financing and explains how that process works and Valuing your Small Business, by Jeffrey how positioning has become one of Timmons, Stephen Spinelli, and Andrew the most important factors in business Zacharakis (Oxford University Press). success. Here’s more down-to-earth help. • Total Customer Service: The Ultimate • Going Public: The Theory and Weapon, by William H. Davidow and Evidence on How Companies Raise Bro Uttal (Harper). A discussion of Equity Finance, by Tim Jenkinson, how customer service can provide a Alexander Ljungqvist, and Jay Ritter competitive advantage. (Kaplan Business). Get the overview of
  • 206. 200  |  how to write a business plan • The Guerrilla Marketing Handbook, by • The Fast Forward MBA in Hiring: Jay Conrad Levinson and Seth Godin Finding and Keeping the Best People, (Houghton Mifflin). The original guide by Max Messmer (Wiley). Your people to guerrilla marketing, since followed can make or break you—here’s how to by several spin-offs. get good ones. • The Elements of Copywriting: The Essential Guide to Creating Copy That Gets the Results You Want, by Gary Business Location Blake and Robert W. Bly (Longman). Running a business out of a home has its This text can help you create effective own special issues. You’ll be interested in: ad copy. • Working from Home: Everything • Write Great Ads, by Erica Levy Klein You Need to Know About Living and (Wiley). If you must advertise, read this Working Under the Same Roof, by Paul book before you write the copy. Edwards and Sarah Edwards (Jeremy P. T