solutions for small business
business
planning and
financial
forecasting

This document has been developed for the Internet by the Ministry of Competition,
Science and Enterprise, Province of British Columbia and Western Economic
Diversification, Federal Government of Canada.
Ministry of Competition, Science and Enterprise
www.gov.bc.ca/cse/
Western Economic Diversification
www.wd.gc.ca
Revised March 2002

Human Resources 9
Contents
Professionals and Mentors 9
The Business Plan 1
Legal & Administrative 9
Introduction 1
The Financial Plan 10
Why do a Business Plan 1
Introduction 10
What is in a business plan? 2
The Break-even 10
The reader reads what the writer writes 2
The Balance Sheet 12
Introduction (Executive Summary) 3
The Income Statement Forecast 14
Business Concept 3
The Sales Forecast 14
Plan Objective - Key Goals 3
The Cost of Goods Forecast 14
Management / Ownership 3
The Overheads Forecast 15
Product / Service 4
The Cash Flow Forecast 16
Key Products 4
Why Do a Cash Flow Forecast? 16
Key Services 4
Receipts 17
Product Risks 4
Disbursement 17
Industy & Market Research 4
How to do your Cash Flow 17
Industry Research 4
Start-up - For business 18
Target Market - Customer Research 4
start-ups only 18
Competitive Analysis 6
A - Receipt 18
Marketing 6
B - Disbursements for Inventory 18
Price Strategy 6
Purchases and Sub-Contracted /
Physical Distribution 7
Piecework Labour
Location 7
C - Disbursements for
Promotion 7
Overhead Expenses 19
Internet 8
D - Disbursements for Capital
Operations 8
Purchases 19
Production Plan 8
solutions for small business the business plan i

E - Repayments of Bank Loans, Notes
and Investors 19
F - The Cash Flow Calculation 19
Financing Your Business 19
Bank Financing 19
Statement of Personal Net Worth 20
Personal Loan Guarantees 21
Program & Financing 21
Appendices 23
Some final thoughts 24
ii solutions for small business the business plan

Canada-B.C. Business Services is another
Foreword
joint partnership between Western Economic
Diversification and the Ministry of
This publication is part of the Solutions for
Competition, Science and Enterprise. The
Small Business series sponsored by Western
program offers specialists who can advise on
Economic Diversification and the British
taxation, statistics and business planning as
Columbia Ministry of Competition, Science
well as a wide range of business information
and Enterprise.
and interactive business planning tools.
Both agencies are committed to supporting
Canada-B.C. Business Services has offices in
the needs of small businesses and further
Vancouver and Victoria as well as outreach
information about small business programs
centres throughout the province in the offices
and services is available on each agency’s web
of Community Futures Development
site (www.wd.gc.ca and www.gov.bc.ca/cse/).
Corporations and Government Agents. For
The Solutions series is also available on both locations, or for more information, check
web sites as well as on the web site of Canada- (www.smallbusinessbc.ca).
B.C. Business Services
(www.smallbusinessbc.ca). The four
publications in the series are:
• Business Planning and Financial Forecasting
• Exploring Business Opportunities: a guide
for entrepreneurs
• Resource Guide for British Columbia
Businesses: information and guidelines
• Starting Your Home-based Business: a
manual for success
iii solutions for small business the business plan

Why do a Business Plan?
1
You should do a business plan for a
number of important reasons. Some of
those reasons include:
• Your own thinking process is
solidified through the planning
The Business Plan process. The planning outline leads
you through a series of questions and
issues that you may have forgotten
Introduction
about when just thinking about your
You want to start a business – or expand your
business. Remember that you are
existing business. You have a great idea, super
an investor in your own business.
attitude and the entrepreneurial spirit. So you
You are the first person who must
head down to your local bank; you sit down
be convinced of the validity of your
in front of the credit manager and start to
business concept.
explain this brilliant idea when she interrupts
you, “That sounds great, but where is your • Your bank will need to be convinced
business plan?” of the viability of your business, or
your business expansion. The
This scenario is played out every day in business plan is a communications
Canada. People with ideas – in many cases tool. Inform and influence the reader
good ideas – who want to plunge into the towards some action – providing a
business without having even done the loan, extending credit or investing
business plan. The purpose of this publication in your business.
is to explain in simple terms the concept of • Your business plan provides some
the business plan and to show you how to guideposts in running your business.
put your own plan together. There is all sorts You will set goals and then, once you
of help available to you – including the are in business, you can measure those
other books in the Solution Series, courses goals against the actual performance.
from your local college or school board and Goals should be specific, measurable,
of course the Interactive Business Planner. achievable, realistic and time limited –
It is found at www.smallbusinessbc.ca. SMART.
solutions for small business the business plan 1

Your business plan has three elements. Here are a few tips on the actual writing of
the plan:
It prepares you – the entrepreneur for starting
the business. To Do
• Try to keep it under twenty pages,
It explains your business and proves the
exclusive of the appendix.
viability of the business to outside parties.
• Use bullet points and numbered lists
It spells out your business goals in clear wherever possible.
SMART terms.
• Use, but do not overuse, graphs,
diagrams and photographs.
What is in a business plan?
• Have a neutral third party read the
There are as many kinds of business plans as
there are kinds of businesses. There are dozens plan – especially someone without a
of planning guides and planning outlines, background in your industry.
books, audio tapes, computer programs and • Please – for the reader’s sake include
online planning services. All of them have a table of contents and page numbers
things in common and all have differences. in your plan.
(In researching this publication, the author
never ran across two business planning Avoid
outlines that were identical.) The business • Big words and long sentences. They
outline presented here is very simple. It has a only serve to confuse the reader.
reader friendly flow. It is not written in stone. • Technical words and unnecessary
If there are areas you need to add, then add jargon. If you need to introduce
them. If there are areas that need to be
a technical term, then you should
deleted, then delete them. If you are writing
define the term.
for a bank, then find out which sections are
• Using acronyms and initials to express
important to the bank. Most banks have
words is another common error.
excellent information on getting a business
You may be very familiar with the
loan.
acronym but your reader might not.
The reader reads what the writer writes If an acronym has become as common
You cannot assume that the reader of your as a word, such as scuba or laser, then
plan knows anything beyond what you have use them. If they are still technical,
stated in the plan. You may know what you such as URL then you may need to
mean. The question is have you clearly
define the acronym and its meaning.
explained it to the reader? As you go through
this outline, constantly ask yourself if you are Now that you have some background on
making yourself clear to a reader who is not the concept of the plan, we can look at the
familiar with your industry or your business. elements of the business plan.
Your business plan is often your only
representation to an outside party such as
the bank!
2 solutions for small business the business plan

Introduction Plan Objective – Key Goals
(Executive Summary) • Tell the reader what you want (i.e. a
business loan for a specific amount
Purpose: The purpose of the executive summary
to purchase equipment.)
is to get the readers attention by summarising
• State your sales, production and
the key elements of the business plan. It must be
profit goals.
short, to the point and very well written.
• If this is for a bank loan, comment
on goals such as anticipated time
This is arguably the most important part of
to positive cash flow and the ability
the business plan. The Introduction must
to service debt. (Note you cannot
encourage your reader to keep reading. It is a
complete this section until the rest
good idea to write as much of the Introduction
of the plan is complete.)
as you can at the outset of the planning process.
This initial writing will help you to focus
Management / Ownership
your attentions on the goals of the plan. You
• Describe the technical qualifications
should then rewrite the Introduction after
of each principal in this enterprise.
you have completed the rest of the business
• Describe the business qualifications
plan. This way the specifics of the plan, and
of each principal in this enterprise.
the changes made during the planning process
are accounted for. • Tell the reader your business structure
(i.e. proprietorship, partnership, and
Business Concept incorporation.)
• Describe what your business does in • Provide a fact sheet with contact
general terms. information such as name, address,
• Describe what differentiates your telephone, e-mail etc.
business from others.
• Briefly describe your business history
if applicable.
• Provide any other information that
will excite the reader about your
business.
solutions for small business the business plan 3

Product / Service Industry & Market Research
Purpose: The purpose of the product / service Purpose: The purpose of the Industry & Market
section is to detail exactly what your business does Research section is to prove that the market is large
for the customer and what makes these offerings enough, in your area, given the competition to
desirable to the customer. support the survival and growth of your business.
Key Products (Goods Businesses) Industry Research
• Describe each product you sell. This • Describe your industry. The less
is your product mix. well known the industry, the more
description necessary.
• If you cannot list each product,
break the business down into logical • Describe the state of the industry.
categories. Is it a new industry, growth industry,
competitive industry, or a stable
• Describe the key product features,
mature industry?
and how your products are different
from those of your competition. • Document industry trends on a world
(Functionality, durability, ease of or national size. Sales, number of
use etc.) customers, number of units sold,
trends in related industries are all
• Describe product protection such as
good industry indicators.
patents, copyrights and trademarks.
• Describe the key customers for your
Key Services (Service Businesses) specific industry.
• Describe each type of service you • Provide other national / international
offer. (Be specific) economic indicators that encourage
• Describe the service features in terms the health of your industry.
important to the customer. • Examine risks to the entire industry
• Describe any service protection such caused by legislation, technological
as copyrights or trademarks. change or any threat to the industry
as a whole.
Product Risks
Target Market – Customer Research
• If there are any risks associated with
your product or service such as The Target Market is the groupings of
product liability, professional liability, consumers or businesses most likely to
or ease of duplication by competition, purchase your products or services. The first
state them and show how you will group you plan to target is your Primary Target
avoid these risks. Market; the second is your Secondary Target
Market. It is very important that you
understand your target market – after all these
are the customers you need to keep happy!
4 solutions for small business the business plan

Consumer Markets Business Markets
Who is the customer? • Age • Industry Type
• Gender • Size of Customer
(Provide both the description
• Income • Annual Sales
and the information in this
section.) • Family Status Estimate the number of
companies using directories or
Be sure to include how many
Yellow Pages.
customers there are in each
grouping
Where is the customer? Target the geographic radius of The geography of business to
your customer base by city, business markets tends to be
region province or country. larger than consumer markets.
When do they buy? Is there a particularly busy If you are selling to seasonal
season for your product or service businesses, the timing can be
i.e. Christmas? everything i.e. wholesaling.
What do they buy? • Necessity • Inventory Item (i.e. item that
is resold)
• Luxury Item
• Consumable Item
• High involvement /
Big ticket
• Low involvement / consumable
• Capital Item
Why do they buy? How does your product or service How does your product enhance
help the consumer? the performance of
this business?
How much do they buy? Determine how much is spent on Estimate the commercial
your product by your customers. expenditure by the industries
in your target area.
Note: If you are using indirect distribution, it may be necessary to describe both your customer as a
target market, and the end user as a target market.
• Provide the results of any customer survey work you have done
• Provide the sources of information for any of the above
solutions for small business the business plan 5

Competitive Analysis Marketing (Market Strategies)
• List the direct competitors in your
Purpose: The purpose of the Marketing section is
local market. These are firms who
to demonstrate how you plan to tap your market.
offer exactly what you offer. List
This includes pricing, distribution, sales and
the current number and the number
promotional strategies.
in existence for the past three-year
period.
Price Strategy
• List the indirect competitors in your
• What are your prices for different
local market. These are firms who
products and services?
offer substitute products.
• How did you arrive at those prices?
• Analyse any competitors who have
(Charge going rate, industry standard
gone out of business in the past and if
mark-up etc.)
possible why.
• Do you have any “price packages”?
• Explain how your firm will compete
• What is your price image? (Bargain,
with these competitors to prove how
middle of the road, high end) Is this
you can survive in their markets.
consistent with your target market?
• Examine risks that could occur when
• How do your prices compare with
you enter the market. For example
your competition?
what if your key competitor cuts their
• Have you accounted for mark-downs
price when you open your business?
and off price promotions?
• Show how your products / services or
how your company is different from
your competition. (This is called
positioning your product.)
6 solutions for small business the business plan

Physical Distribution Promotion
Describe which of the following distribution Your promotional strategy is made up of three
systems you plan to use in your business: main areas. Not all businesses use all three so
only include the parts relevant to your
• Direct Distribution – selling directly situation.
from producer / provider to the
Advertising Plan (Paid Advertising)
customer.
• Provide a list of the media you plan
• Wholesale Distribution – selling to a to use. You may include newspapers,
retailer who sells to the customer. magazines, radio, television, direct
• Brokers or Agents – using a third mail or Internet advertising.
party to sell the product – usually on • Develop a monthly advertising
a commission basis. This can be done schedule with planned budgeted
for goods (Manufacturers Agents) or amounts.
for services (Speaker’s Bureau).
• If you have written any ads or
• Hybrid Distribution – Using more brochures, include them as appendices
than one of the above. to the business plan.
• Internet Sales – See Internet
Strategies Section. Public Relations Plan
• Include media sources you plan to
Location (For retail, restaurant and use to promote your business.
location dependant businesses) • Include press releases in the
• Neighbourhood Location (use map). appendices to the business plan.
Traffic counts and supporting
• If you are using a Public Relations
information such as population radius
firm indicate the name of the firm
is helpful.
in this section.
• Site Location – place in mall or
centre, or city block. Show the other
tenants and access / egress for parking
if applicable.
• Facility Location – including a
diagram of the business layout.
• Signage both inside and outside
the business.
• Check for location risks. A median
placed in the middle of your road will
cut off access to your business. Check
with your city-planning department
before signing a lease.
solutions for small business the business plan 7

Personal Selling Plan Operations
• Describe how you will prospect and
Purpose: The purpose of the Operations section
find new customers.
is to indicate how you plan to operate the
• Describe how you will fulfil these
business. That means how you provide the
prospects with information.
services or provide the products.
• If you have letters of agreement,
contracts or other sales tools, it is Production Plan
sometimes advisable to include them The production plan demonstrates your ability
as appendices to the business plan. to produce products. This section may not
apply in service businesses.
Internet
Production Flow Chart
The Internet is becoming increasingly
(Manufacturing businesses)
important to today’s business world. Industry
• Provide a flow chart / process diagram
Canada uses a consumer benefit model known
showing the entire production process
as ICET. You should define your Internet
from start to finish.
strategy in the same way with the following:
• List and budget production
equipment required for the business.
• Information Gathering – This
includes the information provided to
Procurement (Businesses that
the consumer about your business,
manufacture or sell products)
products and services.
• Sources of supply and order lead time
• Communication – This includes more
• Terms & Conditions of sale
specific forms of two-way
• Alternate sources of supply (this
communications such as customer
addresses procurement risk)
service and feed back mechanisms.
• Inventory control systems
• Entertainment – This is the
• Physical space requirements (Unless
multimedia aspect approach to your
covered in location sections)
site. This includes animation, sound
clips and video clips. Sub Contractors (These can include both
• Transactions – This is the ability to goods and services)
actually order and pay for products • Provide a list of sub-contractors
over the Internet. • Show exactly what these sub-
contractors do and where they fit into
the production of the business
• Show alternative sub contractors
(This addresses sub-contract risk)
8 solutions for small business the business plan

Human Resources (If you have more Professionals and Mentors – where
than five staff members) the entrepreneur turns for help
• Accountant
• Organizational Chart (Show
• Lawyer
reporting structure)
• Banking Services
• Job Descriptions (Show what
• Business Advisors and Mentors (It can
people do)
be helpful to provide brief one
• Job Specifications (Show the skills and
paragraph biographies on key business
knowledge required to do each job.)
advisors.)
• Recruiting – Where will you find
good people?
Legal & Administrative
• Management – How will you treat • Legal Form (proprietorship,
those good people? partnership, corporation, cooperative.)
• Compensation – How much will you • Share Distribution (Corporation
pay your people? This includes base Only)
wages, commissions, bonuses and
• Directors & Officers (Corporation
other incentives. (Don’t forget your
Only)
statutory benefits of EI, CPP, WCB &
• Buy Sell Agreement (Corporation and
Holiday pay, in addition to any
Partnerships Only)
benefits you plan to add.)
• List of key legal agreements such as
• Human Resources Risks. Look at
contracts, leases, agreements, franchise
contingent plans for loss of key
agreements, personal loan guarantees
personnel, labour shortages or strikes.
etc. (The actual documentation is
often put into the appendix of the
business plan.)
• Insurance / Risk management
solutions for small business the business plan 9

There are some key definitions necessary to
2
determine the break-even for the business.
They are:
Fixed Costs (Overhead) are costs that do not
vary directly with sales. Utilities, salaries,
The Financial Plan advertising, office supplies and telephone are just
a few examples. They do not have to be the same
every month. What is important is that you pay
Introduction
them regardless of sales made.
The financial plan is critical to the success of
your business plan – especially if it is for the Variable Costs (Cost of Goods) are the actual
purpose of getting a bank loan. The Cash costs of making the product or providing the
Flow Forecast is arguably the most important service. They can include materials, shipping and
part of the plan – however, each of the other contract labour.
documents is important from a planning
Capacity governs your output. It can be
perspective.
measured in units of production, billable hours,
or sales volume.
The Break-even
The break-even point in your business is the
To calculate the break-even in units – we use
point at which your sales revenue is equal to
the following formula:
your total expenses. At that point you neither
make money, nor do you loose any. The break-
Fixed Costs
even lets you know what it is going to take in
= Break-even
sales just to survive. It provides a good
in units
(Unit Price – Variable Cost)
indication of the viability of a business project.
The break-even can also be used to evaluate a
This method is known as Total Absorption
business expansion or any other business
Costing, because dividing the total cost by the
expenditure. You are simply asking how much
units sold absorbs the fixed costs. This allows
additional revenue will be required to cover
us to compute the break-even for this business.
the additional cost.
Every business plan – be it for growth or
for start-up – needs to establish project and
business costs before proceeding.
Note: For planning purposes treat the entire term
loan payment, both principal and interest, as a
fixed cost to the business.
10 solutions for small business the business plan

Illustrative Example Notice that the break-even is not a point, but
it varies for each different price point. If she
Jan is a home-based potter who makes custom
can get $425 per case for her mugs, she needs
mugs by the case. Her capacity is no more
to be able to produce and sell eight mugs per
than 15 cases of mugs per week. She has
week. We can plot this on a graph as follows:
calculated the variable cost for each case,
including clay, glaze and packaging to be $50
per case. It costs Jan $3,000 per week to run
her business, including her wage. The cost per
case, when we include the $3,000 per week in
fixed costs, changes depending on the number
of cases produced each week. This is calculated
in the table below.
Units Fixed Variable Price
Produced Costs Costs Per Unit
5 $3,000 $250 $650
6 $3,000 $300 $550
7 $3,000 $350 $479
The area above the line is profit and the area
8 $3,000 $400 $425
below the line represents loss.
9 $3,000 $450 $383
10 $3,000 $500 $350
Break Even with a Gross Profit Margin
11 $3,000 $550 $323
Sometimes, a company does not sell products,
12 $3,000 $600 $300
if it sells so many different products that doing
13 $3,000 $650 $281
a break-even for each unit does not make
14 $3,000 $700 $264
sense. When this is the case, such as in a retail
15 $3,000 $750 $250
business, we calculate the break-even in
revenue rather than in units. This is done with
the following formula:
Fixed Costs
Where:
= Break-even Sales
Gross Margin
(Price – Cost)
= Gross Margin
Price
There are industry standard financial ratios
available from Statistics Canada for many
small businesses. These ratios include the gross
profit margin, expressed as a percent of sales.
solutions for small business the business plan 11

Illustrative Example The Balance Sheet
Sarah wants to start a retail gift store. She The Balance Sheet is a snap shot of the
estimates her monthly fixed costs at $9,000 per business at any point in time. In the case of
month. She determines that the industry a business start-up, it is often the starting
standard Gross Margin for a gift store is 45%. balance sheet. A balance sheet is made up
She calculates her break-even as follows: of three parts.
Assets: Things a business owns
Fixed Costs
= Break-even Sales
Gross Margin Liabilities: Debts a business owes
Equity: The owners’ investment and
$9,000 re-investment in the business
= $20,000 per month
45%
Everything that the business owns, its assets
Sarah must be convinced that this location have to have been paid for. Therefore we get
is able to sell at least $20,000 per month the following formula.
(or $240,000 per year) before she starts her
Assets = Liabilities + Equity
business. Her market research, physical
location, promotional plans and physical
size must all support this level of sales capacity This is extremely important as it gives the
or the business will not work. reader a picture of how the business is being
financed through the owners’ money (equity)
The break-even is a great first step in evaluating or through the creditors money (liabilities).
business opportunities. It is not that the In a business start-up you should look at the
objective is to break-even, but that the assets required to get the business started –
break-even is the first objective to achieve and then ask yourself how you will finance
in reaching a profitable business. that start-up. If you do not have the money
to invest into the business, you will have to
borrow the remainder.
12 solutions for small business the business plan

X Proprietorship
Balance Sheet
December 31, 2000
Assets Liabilities
Current Assets Current Liabilities
Cash $ 2,000 Trade Payables $ 2,000
Inventory 15,000 Wages Payable 3,000
Accounts Receivable 12,000 Line of Credit 4,000
Total Current Assets $ 29,000 Total Current Liabilities $ 9,000
Capital Assets Long Term Debt
Vehicle $ 20,000 Term Loan $ 10,000
Less Accumulated Depreciation (5,000) Note Payable 6,000
Book Value (Vehicle) 15,000 Total Long Term Debt $ 16,000
Equipment 15,000 Total Liabilities $ 25,000
Less Accumulated Depreciation (3,000) Equity
Book Value (Equipment) 12,000 Owners Equity $ 31,000
Total Capital Assets $ 27,000 Total Liabilities & Owners Equity $ 56,000
Total Assets $ 56,000
solutions for small business the business plan 13

can then develop a sales forecast using the
The Income Statement Forecast
following equation:
The purpose of the Income Statement Forecast
is to project the revenues and expenses of your
Total Sales = Number of units sold x Price per unit
business over a given period of time – usually
one year. Other terms for this are budgeted
A business owner will do a sales forecast for
income statement or pro forma income statement.
each product in the business. The sum of these
There are three things that need to be
forecasts becomes the overall sales forecast.
predicted to forecast your income statement:
the sales projection, the cost of goods
Forecasting with the sales method
projection and the overhead’s projection.
Sometimes a business cannot use unit sales, as
it would be impossible to predict the unit sales
The Sales Forecast
for each of 5,000 items in a gift store. In this
The sales forecast is probably the most
case, some business owners will go directly
difficult part of the business to forecast –
to revenue forecast. If the business is broken
especially for a starting business. Sometimes,
down into logical departments or categories,
the break-even can provide a starting point for
then forecast the revenue in each area for the
creating the sales forecast. It is important to
total sales forecast.
remember that a sales forecast is not like the
weather – something that you try to guess –
The Cost of Goods Forecast
but rather a goal you set for the business that
The cost of goods forecast relates directly
you proactively try to achieve.
to the sales forecast. The cost of producing
goods varies directly with the level of sales.
In the case of an existing business, you should
To calculate the cost of goods forecast, you
look at the sales history. You should see if
may use either the percent to sales method,
your sales are trending up or down, and then
or the unit costing method.
account for new products to be added, or
old products to be taken away. The sales
Unit Costing Method
forecast must reflect your business strategies
This method is exactly like the unit sales
and objectives.
forecast, except instead of using price, you
use cost per unit.
Forecasting using the unit method
List all the products or services you plan to
sell. You will need to forecast the number of Cost of Goods = Number of units sold x Cost per unit
units of each type you plan to sell. Different
businesses and industries use different unit
Just as in the unit forecast, you must do this
measures. (E.g., for a craftsperson, a unit may
for each unit sold. The sum of the cost of
be one wooden item; for a researcher, a unit
goods is then part of the income statement.
could be one hour of time.) You will have to
estimate the selling price for each unit. You
14 solutions for small business the business plan

The percentage cost method The next step is to make cost estimates for
each area. You may do them monthly, or
In retail businesses – where mark-ups and
annually, however, you will eventually need to
mark-downs predominate it is common to
know your monthly expenditure in each area
use the cost complement to calculate the
for your cash flow forecast. Some of your
cost of goods. The cost complement is the
forecasts will be a matter of calling a supplier
percent of the revenue, or the selling price,
and asking for a quote – insurance is an
which represents the cost of goods. For
example of this kind of overhead. Sometimes,
example, if an item costs $12.00 and is
you will have to make a management decision
priced at $20.00 then the cost complement
about how much you will plan to spend in
is $12.00 / $20.00 = 60%. (If the cost
order to achieve your revenue objectives.
complement is 60% then the Gross Profit
If you have history, you should use history
Margin is 40%.) You can use the historical
as a guide, making sure that increases and
cost complement or industry standards to
decreases in cost are consistent with your
forecast the cost of goods and gross profit of
revenue objectives.
your income statement.
The Overheads Forecast You should make a brief note to the reader of
the plan, describing the key expense forecasted
The overheads forecast is an estimate of your
items. (i.e. you may have a quote from a
expenses for the year. This list should be
broker for your insurance projection.) This is
similar to the list developed for the fixed costs
especially true if, in an existing business, there
of your break-even analysis. Typical overhead
is a large change in the statement.
expenses include:
• Advertising and Promotion
• Automobile
• Bank & Finance Charges
• Communications
• Depreciation
• Insurance
• Entertainment & Meals
• Occupancy
• Mail & Office Supplies
• Professional Fees
• Professional Development
• Wages & Benefits
• Travel & Accommodations
• Other
• Owners’ Drawing or Wage
solutions for small business the business plan 15

Sample Income Statement on new projects. The cash flow is a 12-month
projection that forecasts the receipts and
X Proprietorship disbursements for your business. In a start-up
Income Statement
situation, it is preferable to have a start-up
Year Ending December 31, 2001
month to specifically show the reader the costs
Sales $84,100 incurred to start the business.
Less Cost of Goods $15,000
Gross Profit $69,100 Why Do a Cash Flow Forecast?
Too often business owners do a cash flow
Expenses forecast in their head. Putting the cash
Advertising $ 1,500 flow forecast on paper, however, will give you
Depreciation $ 8,000 the following:
Interest $ 2,000
• A format for planning the most effective
Rent $ 4,000
use of your cash (cash management).
Travel $ 600
• A schedule of anticipated cash receipts
Wages $ 7,000
– follow through to see that you
Total Expenses $23,100
achieve it!
Net Profit $46,000 • A schedule of priorities for the
(Gross Profit – Total Expenses)
payment of accounts – stick to it!
Less Owner’s Draw $15,000
• A measure of the significance of
Net Profit after Draw $31,000
unexpected changes in circumstances;
e.g., reduction of sales, strikes, tight
Note: The term draw in a Proprietorship refers
money situations, etc.
to the money that the owner takes out of the
company. The profits kept in the business are • A list, on paper, of all the bill paying
known as retained earnings. These earnings details which have been running
are reflected in the owners’ equity portion of around in your head, keeping you
the balance sheet. It should also be noted that awake nights. A cash flow is not an
in a proprietorship, income tax is paid on the instant cure for sleeplessness but it
net profit – not the owner’s draw. certainly helps. It also clears your
mind for more productive thinking.
• An estimate of the amount of money
The Cash Flow Forecast you need to borrow in order to finance
your daytoday operations. This is
A Cash Flow Forecast is probably your most
perhaps the most important aspect of
important financial tool. It is your cash flow
a completed cash flow forecast.
that shows you if, and when, you will run out
• An outline to show you and the
of cash essential to run your business. It allows
lender that you have enough cash to
you to take action before problems occur and
make your loan payments on time.
even to do “what if ” calculations before taking
16 solutions for small business the business plan

Receipts How to do your Cash Flow
Receipts occur when cash enters the business The cash flow is made up of three distinctive
for any reason. It is like making a deposit in parts. The receipts, the disbursements and the
your current account. The main reasons for cash flow calculation. Because of the
receipts are: complexity of the disbursements section, this
section has been broken down into a series of
• Cash sales
smaller sections. Each line is coded with a
• Collection of accounts receivable letter and a number. The letters form the
• Loan proceeds. This includes term following sections on your cash flow sheet:
loans, start-up loans, line of credit
and notes. A – Receipts
• Owners’ contributions. This includes
B – Disbursements for Inventory
both investments and shareholders’
Purchases and Sub-Contracted /
loans (Shareholders’ loans only
Piecework Labour
happen in incorporated companies.)
C– Disbursements for Overhead Expenses
Disbursements
D – Disbursements for Capital Purchases
Disbursements occur when cash leaves the
business for any reason. The main reasons for E – Repayments of Bank Loans, Notes,
disbursements are: and Investors
• Cash expenses or inventory purchases F – Cash Flow Calculation
• Payments of accounts or expenses
payable In addition, there are two schedules – the
monthly sales / accounts receivable forecast,
• Loan repayment (Either bank or
and the inventory purchases forecast. These
shareholders’ loans)
forecasts will be inserted into lines A1& A2
• Owner repayment (Dividends in a
and B1&B2 respectively.
corporation or drawings in a
proprietorship)
In cash flow, we talk about receipts,
disbursements and deficits or surpluses rather
than revenue, expenses and profits or losses.
solutions for small business the business plan 17

than your highest sales month. You build up
Start-up – For business
inventory so you can meet orders in peak
start-ups only
periods. You will need to do an inventory
The Start-up column is used in start-up forecast, based on your sales and your
situations only. It is used for all of the receipts production.
and disbursements that occur as a part of
Beginning of Month Inventory (B1.1) This
starting a business. This includes purchasing
is taken from either the balance sheet or
fixed assets, incurring start-up expenses, the
from the previous month’s end of period
initial investment to start the business and the
forecast.
initial bank loans. It is helpful for the reader to
separate start-up costs from on going costs. End of Month Inventory (B1.2) This is the
This way they will quickly see why you may target inventory level for the end of the
have large deficits in the early stages of month. It is based on the seasonal needs of
business development. the business and allows you to compensate
for rising and falling inventory levels.
Using Start-up makes your cash flow easier for
a reader to read. (You should be able to spot Cost of Material (B1.2) This is the cost of
the starting balance sheet right off of Start-up the material taken from inventory and sold
in a business start –up.) to customers. (Note it is accounted for at
material cost only).
A – Receipts
Purchases (B1.4) This is the amount of
The sales and accounts receivable section is
material required to replace material used
forwarded directly from Schedule 1. Any
and bring the inventory level to the end of
owners’ investments and loan proceeds are put
month target.
into the appropriate row. Note that some lines
of credit are forwarded in $5,000 increments. To calculate the purchases, use the following
Others are treated as overdrafts. Both methods formula:
can be used in section A. One example of End of Month Inventory (B1.2) + Material
other receipts is sales of a fixed asset. Used (B1.3)- Beginning of Period Inventory
(B1.1) = Purchases (B1.4)
B – Disbursements for Inventory
The End of month Inventory figure is
Purchases and Sub-Contracted /
then forwarded to the line Beginning of
Piecework Labour
Month Inventory for the next month. This
This section is forwarded directly from procedure is repeated for the entire 12-month
Schedule 2. cycle. If you have credit terms from your
suppliers, you should then make an
Sometimes you can replace all of the materials
adjustment for your accounts payable (B1).
you use up in a given month. When this is
This usually involves purchasing in one month
the case, your purchases are equal to your cost
and paying for it the next.
of materials for each month. Other companies
need to build up inventory. This can be
Piecework labour (B2) is forecast in
caused when your productive capacity is lower
conjunction with your monthly production.
18 solutions for small business the business plan

C– Disbursements for Overhead F – The Cash Flow Calculation
Expenses The cash flow calculation (detailed on your
The C section is the cash outflow of your cash flow sheet) is
overhead expenses. If you pay your entire
Starting Cash Balance + Total Receipts –
insurance in one month, then the entire
Total Disbursements = Ending Cash Balance
amount is disbursed in that month. Some
disbursements are the same every month, such
as rent. Some disbursements will be similar to Now you can adjust your cash flow and your
your sales pattern – advertising might be an business strategies, to ensure that you do not
example. Some disbursements are quarterly run out of cash – or exceed pre-arranged lines
such as income tax instalments or, in some of credit and overdrafts.
businesses, the GST. Note: it is a good idea to
disburse GST & PST into a separate holding
Financing Your Business
account until they need to be remitted to
government. This way the money is there when
There are two main types of financing –
you owe it rather than having been used up in
equity financing and debt financing. Equity
normal business operations.
means ownership. With equity financing,
an investor makes money available for use
D – Disbursements for Capital
in exchange for an ownership share in the
Purchases
business. This could be as a silent or limited
If you plan to purchase any capital assets at
partner (not actively involved in the business)
any time, account for these purchases in the
or as a shareholder. Whether equity financing
D section. If you do not pay for the asset right
is possible or a good option depends on the
away, remember to put the amount into the
business structure and relationship between
month in which you plan to write the cheque.
the borrower and lender.
E – Repayments of Bank Loans, Notes,
With debt financing, the lender charges
and Investors
interest for the use or ‘rental’ of money
The cash flow does not discriminate between
loaned, but does not get a share or equity in
principal and interest. The entire payment on
the business. Debt financing is familiar to
term loans will be brought forward to the cash
most people because it is the basis of most
flow. If there is interest on lines of credit or on
personal credit. Debt often comes from banks,
overdrafts they should be accounted for here.
but it can also come in the form of supplier
In the same way as some lines of credit are
credit (accounts payable) or in the form of
forwarded in $5,000 increments – they are
vendor credit – for capital purchases.
repaid in $5,000 increments. You should also
account for any repayment of shareholders’
Bank Financing
loans, owners’ draws not accounted for in
Many entrepreneurs will go to the bank for
wages, or dividends in the appropriate row of
part of their business financing. This can be
section E.
solutions for small business the business plan 19

financing the start-up of the business or Collateral: The value of internal and external
financing the growth of an existing business. security that may be liquidated. This is
Either way, bank financing plays a major part measured by taking the market value of the
in the development of small business. business assets and comparing this value to all
outstanding term debts. This determines what
Banks use many different kinds of financial might happen if the business defaults on the
instruments to finance business. The two main loan. Sometimes an asset outside of the
types are Lines of Credit and Term Loans. business will secure a business loan. This is
external security. An associated company may
Line of Credit is a loan similar to a personal hold the asset or it may be a personal asset of
overdraft. It is to finance temporary shortages the business owner. (See loan guarantees.)
in cash caused by inventory and accounts
Character: Aspects about the business owner
receivable. They are sometimes disbursed into
or owners, which lead you to believe in their
your chequing account in increments of
credit worthiness. Banks often use the business
$5,000. The interest rates are often variable
owners’ personal history to determine attitudes
and based on the prime lending rate. As a
towards credit. They will also look at the
rule lines of credit finance current assets.
technical and business skills presented in the
Term Loans are loans that are repaid over a business plan.
fixed period of time – usually more than one
Commitment: The financial commitment by
year. A business may have several term loans at
the owners in this business venture. This is
the same time – financing different projects or
measured by examining the equity or
assets. Term loans may or may not have fixed
shareholders loans in the business, and the
interest rates, depending on the terms and
retained earnings history of the business.
conditions. Usually, term loans are used
to finance capital assets, although sometimes
Statement of Personal Net Worth
term loans are taken out to increase cash levels
A statement of personal net worth is a measure
(current assets) in the business.
of the wealth of the owner or owners of the
business. It is similar to a balance sheet –
Lending Criterion
except those assets are measured at their
Many banks use the four “C’s” to evaluate loan
market value. The formula for net worth is:
proposals. They represent:
Net Worth = Assets (Market Value) – Liabilities
Cash Flow: The ability to repay the loan with
cash. This is measured using the Cash Flow
Forecast in your business plan.
20 solutions for small business the business plan

Personal Loan Guarantees Program & Financing
When a small corporation borrows money The program and financing is a description of
from a bank, the shareholders will often be the loan requirement and the asset purchase. It
required to sign what is known as a personal looks like a small balance sheet in that it states
loan guarantee. This is like the individual what you are going to purchase, and how you
co-signing a loan granted to the corporation. are going to pay for it.
It means that if the corporation (business)
Supposing that X Proprietorship wants to
defaults on the loan (that is banker’s language
purchase a $5,000 piece of equipment. They
for not repaying the loan) then the individual
decide to borrow $3,000 use $1,000 of the
shareholders must re-pay for the corporation.
businesses cash, and invest an additional
It is not unusual for the spouses of shareholders $1000 into the company. The starting balance
to sign guarantees as well. This prevents the sheet, program & financing and pro-forma
guarantor (the person who signs the guarantee) balance sheet would look like this:
from transferring their net worth to their
spouse. Personal loan guarantees are required
for most business loans. Always remember
that the guarantee is a legal document, and it
is advisable to see a lawyer before signing any
such document.
solutions for small business the business plan 21

Initial Balance Sheet
Program & Pro-Forma
Financing Balance Sheet
Assets
Current Assets
Cash $ 2,000 -$ 1,000 $ 1,000
Inventory $ 15,000 $ 15,000
Accounts Receivable $ 12,000 $ 12,000
Total Current Assets $ 29,000 $ 28,000
Capital Assets
Book Value (Vehicle) $ 15,000 $ 15,000
Book Value Equipment $ 12,000 $ 5,000 $ 17,000
Total Capital Assets $ 27,000 $ 32,000
Total Assets $ 56,000 $ 60,000
Liabilities
Current Liabilities
Trade Payables $ 2,000 $ 2,000
Wages Payable $ 3,000 $ 3,000
Line of Credit $ 4,000 $ 4,000
Total Current Liabilities $ 9,000 $ 9,000
Long Term Debt
Term Loan $ 10,000 $ 3,000 $ 13,000
Note Payable $ 6,000 $ 6,000
Total Long Term Debt $ 16,000 $ 19,000
Total Liabilities $ 25,000 $ 28,000
Equity
Owner’s Equity $ 31,000 $ 1,000 $ 32,000
Total Liabilities & Owner’s Equity $ 56,000 $ 60,000
The program and financing and the statements of personal net worth must be provided along with the
business plan to ensure the creditworthy nature of the business venture.
22 solutions for small business the business plan

• Price lists (to support cost estimates)
Appendices
• Description of insurance coverage
(insurance policies, amount of
Purpose: The purpose of the appendices is to
coverage)
provide supporting documents for claims made in
• Accounts receivable summary (include
the business plan. They may not necessarily be
ageing schedule)
read, but are there for research purposes.
• Accounts payable summary (include
schedule of payments)
• Resume(s) of Principals
• Copies of legal agreements (contracts,
• Legal documents (including leases,
lease, franchise agreement, mortgage,
insurance etc.)
debentures)
• Letters of agreement / intent
• Appraisals (include recent appraisals
(potential orders, customer
of assets such as buildings, property,
commitments, letters of support)
and equipment or provide a market
• Sample Ads and brochures
evaluation of the business and an asset
• Collation of Market Surveys
list outlining the asset, the year
• Other purchased and amount paid)
• Financial statements for associated
Your banker or a potential investor may
companies (where appropriate)
request the following documents:
• Name of present lending institution
(branch, type of accounts)
• Personal net worth statement
(including personal property values, • Lawyer’s name (include address and
investments, cash, bank loans, charge phone/fax number)
accounts, mortgages, other liabilities; • Accountant’s name (include address
this will substantiate the value of your and phone/fax number)
personal guarantee if required for
security)
• List of inventory (type, age, value)
• List of leasehold improvements
(description, when made)
• List of fixed assets (description, age,
current market value of any
equipment; legal description of any
lands; description of any
encumbrances on assets to be pledged
for business purposes)
solutions for small business the business plan 23

The following information will be a specific Some final thoughts
part of a loan application:
Dwight Eisenhower once said: “In preparing
• Name lenders, amount of financing for battle, I have found that plans are useless, but
and payment periods for short-term planning is indispensable.” Starting a business is
and long-term loans a great undertaking. You want to be prepared.
So here are some tips to keep in mind while in
• Term loan applied for (amount, term,
the planning process:
when required)
• Owner’s equity (your level of
• Keep an open mind. Do not try to
commitment to the program)
make something work that cannot
• Line of credit applied for (new or
work, just because you like the idea.
increased, security offered)
• Be flexible – whilst developing the
• Present financing including term loans
business plan other ideas, markets,
outstanding and current operating
products or services may come to
line of credit
mind. Explore them.
• Total all amounts from
• Make your mistakes on paper – it
‘Owners/Investors/Shareholders’ and
is far cheaper than making them in
‘Lenders’ for total sources of
real life.
financing.
• Keep planning! It can be difficult
List uses of financing with amounts and totals. to plan when you are running your
These could include: business, but it is very useful to
re-examine your goals and objectives
• Land
on a regular basis. Don’t ever let the
• Buildings and facilities
business squeegee out the creative
• Equipment and machinery entrepreneur.
• Remodeling, renovations and
Leasehold Improvements
• Initial inventory
• Working capital (for operating
expenses)
• Non-liquid assets contributed by
owners
Note: The total amount in uses of financing
should be the same as the total for sources of
financing. Most of this information should
also have been determined in the financial
plan, but will often need to be re-stated for the
loan application.
24 solutions for small business the business plan

solutions for small business
This publication is part of the Solutions for Small Business series sponsored by Western
Economic Diversification and the B.C. Ministry of Competition, Science and Enterprise.
Both agencies are committed to supporting the needs of small businesses and further
information about small business programs and services is available on each agency's
web site (www.wd.gc.ca and www.gov.bc.ca/cse/).
The Solutions series is also available on both web sites as well as on the web site of
Canada-B.C. Business Services (www.smallbusinessbc.ca). The other titles in the series are:
Starting a Home- BC Business Exploring Business
based Business Resource Guide Opportunities
A Manual for Success Guidelines and A guide for
Requirements for Entrepreneurs
Business