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How to Write a Business Plan
- 1. How to Writea Business Plan
- 2. AS BTDC Services • Training • Consulting • Market Research • Innovation
- 3. In Your Packets… • Attendee Record • Copy of presentation • Business Blueprints • Business plan outline • Sample business plan – janitorial service • Course evaluation form
- 4. Goals for today’ssession • Develop understanding of why it’s important to have a business plan and how it’s used in managing a business. • Discuss in detail each element of a business plan. • Understand the tools and resources necessary for completing business plan. • Ask questions. • Talk about next steps after this class.
- 5. Reasons to havea business plan • It is an organized, inclusive way to think about each functional aspect of your business. • Writing clarifies and disciplines your thinking. • It provides benchmarks against which to evaluate the progress of your business. • It is a management tool; you can consult it to make important business decisions. • It helps you “market” your business to others: lenders, landlords, suppliers, key employees.
- 6. What is abusiness plan • Cover Page • Products & Services • Table of Contents • Market Analysis • Executive Summary • Management & Organization • Financing Proposal • Operational Plan • Company Description • Financial Plan & Projections • Industry Analysis • Appendix
- 7. Cover page • Owner’s name & business name • Company logo • Phone numbers • Mailing address & physical address • Email & website address • Confidentiality statement
- 8. Table of Contents • Include a table of contents as a quick reference to each topic discussed in your plan. • You can have multiple topics referenced on a single page.
- 9. Executive S ummary • Most important section of the • Company Description business plan • Products & Services • Likely only part ever read by some users • Target Customer • Clear, concise summary of the • Marketing Strategy plan • Competitive Position • Write LAST! • Management Team • Limit length to 1 or 2 pages • Financial Summary • Financing Proposal
- 10. Financing Proposal • Loanamount requested • Terms of Loan • Utilization of Loan Proceeds • Collateral for Loan • Owner’s Equity Contribution
- 11. Commercial Lending Decision •Banks make lending decisions based on: – Management ability – Repayment ability – Owner’s equity – Collateral
- 12. Company Description • Namerecognized by • Mission statement • Product or service offered • Legal status and ownership
- 13. Industry Analysis • Demonstrateyour knowledge! • Competitive “landscape” • What drives demand? • Fragmented or concentrated? • Labor or capital intensive? • Major players? • Products, Operations, Technology • What mix of products/services are sold? • What percent of revenue comes from each? • How are they sold, what is the role of technology? • Sales per employee? Per square foot floor space?
- 14. Industry Analysis (cont’) • Sales & Marketing – how do firms typically market themselves? Location, advertising, website? • Finance & Regulation – is cyclical cash flow management an issue? Is regulation pending? • Business Challenges – what keeps managers “up at night?” • Industry Opportunities – where is the industry trending? Where are the niches?
- 15. S WOT Analysis •Strengths • Opportunities • Weaknesses • Threats
- 16. Products & Services • Describe the products and/or services you intend to sell. • How will you “position” your offerings?* • Customer distribution channels – how will you sell to the end user? • How do you intend to price your offerings (generally), and why? *Positioning is the process of distinguishing yourself from competitors in specific ways in order to be the preferred provider for certain market segments.
- 17. Market Analysis • TargetMarket • Competitor Analysis • Location Decision • Marketing and Sales Strategy • Supporting Market Research Let’s talk about each of these in briefly!
- 18. Target Market • Demographicdescription of target customer? • Gender, age, race? • Children, family size • Income, net worth, homeowner? • Geographic location of customer – trade area? • Market segmentation system • Rich description – combines demographics with buying behavior, lifestyle choices • Geodemographics – plot Tapestry segments on your trade area • Example descriptions, map
- 19. Example of MarketS egmentation S ystem
- 20. Competitor Analysis • Alwayscompetition. No competition means no market for product! • Describe your major competitors • Where are they located – Locator report • What is their share of sales – Dun & Bradstreet • Research them if possible - Company profiles • Look for niche opportunities – entrepreneurs most successful – example hardware store
- 21.
- 22. Location Decision • Doyou need a physical facility? • How does this facility contribute to the competitive advantage of the business? • Consider a smaller advertising budget and a better location. • Enlist an experienced broker or agent to assist you. • Use ASBTDC’s “Leasing Checklist.”
- 24. Marketing and Sales S trategy • The Marketing Mix – Product – Price – Place (distribution) – Promotion Balance 4 P’s to create perceived value and generate a positive response in target customer
- 25. Marketing and Sales S trategy • Discuss marketing vehicles you intend to use to educate consumers about your business. Be mindful of: – Fit – must reach target customer – Mix – use more than one method – Repetition – many exposures – Affordability – must fit within your budget
- 26. Marketing and Sales S trategy • Examples of Marketing Vehicles include: – Company website – Print media – Broadcast media – Online advertising – Direct mail – Sampling – Informal marketing/Networking
- 27. S upporting MarketResearch • Use market research to bolster sections of the business plan. • You can’t just make statements based on what you think. Do your homework! • Lenders understand the marketplace, particularly regarding loans they specialize in. • ASBTDC assists with market research -- competitor analysis, site selection, target marketing, industry research, demographics, and more.
- 28. Management & Organization •Assess your strengths and weaknesses. • Assemble an effective team: – Tax advisor/accountant – Banker/financial advisor – Business attorney – Technology consultant/web developer – Insurance agent/risk management – ASBTDC consultant
- 29. Management & Organization •Key positions in the business • Qualifications of key personnel • Organizational chart • Compensation and incentives
- 30. Operational Plan • Thissection covers the day-to-day operation of your business: – Facilities – Production plan, if applicable. – Inventory management – Supply and distribution – Order fulfillment and Customer service – Financial controls – Legal issues – Contingency planning
- 31. Operational Plan • Don’tneed to cover every detail. Address those issues that: – Are essential to the nature and success of your company. – Provide you with a distinct competitive edge. – Help you overcome a frequent problem in businesses of your type. • Mundane, but vitally important
- 32. Financial Plan &Projections • Pro forma financial statements – Startup costs – Balance sheet – Income statement – Cash flow statement • For existing business, include 3 years historical statements, if available.
- 33. S tart-up Costs •How much will you need? • Inventory • Equipment • Deposits • Working Capital •How much will it cost? • Suppliers/Dealers • Utilities • Internet
- 34. Balance S heet Assets = Liabilities + Equity • Assets - what you own • Liabilities - debts or obligations • Equity - investment and undistributed profits
- 35. ABC Company, Inc.Balance Sheet December 31, 1993 Assets Current Assets Cash $ 5,368 Marketable Securities 3,090 Accounts Receivable 235,382 Inventory 262,582 Prepaid Expenses 2,870 Total Current Assets $509,292 Property, Plant & Equipment Land $ 4,520 Building 78,540 Less: Accumulated Depreciation (30,696) Equipment 18,907 Less: Accumulated Depreciation ( 7,980) Total Property, Plant and Equipment $ 63,291 Total Assets $572,583
- 36. ABC Company, Inc.Balance Sheet December 31, 1993 Assets (con’t.) Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $224,235 Accrued Expenses 9,758 Income Tax Payable 2,040 Current Portion L/T Debt 3,000 Total Current Liabilities $239,033 Long-Term Liabilities Mortgage Payable $ 25,000 Bank Note Payable 5,000 Total Long Term Liabilities $ 30,000 Total Liabilities $269,033 Stockholder's Equity Common Stock ($1 Par) $ 10,500 Retained Earnings 293,050 Total Equity $303,550 Total Liabilities and Equity $572,583
- 37. Income S tatement •Revenues(income) less expenses •Shows profitability over time •Sales projection tools (RMA, Hillsearch, Industry)
- 38. XYZ Company, Inc.Income Statement for the year ended Dec. 31, 1993 Income Sales $2,102,358 Cost of Sales Beginning Inventory $ 331,764 Purchases 1,469,825 Other Costs 136,003 Goods Available for Sale $1,937,592 Less: Ending Inventory (501,575) Cost of Sales $1,436,017 Gross Profit $ 666,341 Operating Expenses Advertising $ 4,341 Auto & Truck 8,264 Bad Debts 807 Bank Charges 110 Casual Labor 3,586 Commissions 41,298 Contributions 1,194 Depreciation 16,658 Dues & Subscriptions 1,925 Entertainment 10,181 Equipment Rent 6,601 Fuel 13,133 Insurance 50,788 Janitorial Service 4,299 Leasing 11,688
- 39. Income Statement con’t. Legal & Accounting 1,911 Miscellaneous 41,124 Office Supplies 12,711 Rent 19,246 Repairs & Maintenance 4,533 Salaries 238,674 Shop Supplies 10,097 Taxes - General 3,643 Taxes - Payroll 19,269 Telephone 14,119 Travel 8,981 Utilities 8,165 Total Operating Expenses $ 557,356 Net Operating Income $ 108,985 Other Income (Expense) Discounts Earned $ 2,915 Discounts Allowed (3,385) Interest Expense (43,759) Total Other Income (Expense) $ 44,529 Net Income $ 64,456
- 40. Cash Flow Projections •Focuson not only amount but timing •Allows for planning of potential cash shortfalls •Demonstrates ability to repay debt
- 41. Financial Plan &Projections • Techniques of financial analysis: – Break-even analysis – drive net cash flow to zero by altering input such as price or costs. – Sensitivity analysis – technique for determining the outcome of decision if a key prediction turns out to be wrong. – Contribution margin – total revenue less total variable cost, helpful in making decisions about pricing, adding or subtracting products, or sales commissions.
- 42. Financial Plan &Projections ( cont’) – Ratio analysis* • Quick ratio – liquidity measure • Inventory turnover – measure inventory management • Return on assets – how effectively assets used to generate profit • Collection period – how quickly firm collects accounts receivables *To be meaningful, most ratios must be compared to historical values of same firm, the firm’s forecasts, or ratios of similar firms.
- 43. Financial Plan &Projections • Tools available to help you – RMA (Risk Management Association) – Statement Studies of the Small Business – ProfitCents™ software – ASBTDC staff
- 44. S upporting Documents • Resumés for all principals • Personal financial statements for all principals • Letters of reference • Letter of intent from prospective suppliers/customers • Copies of leases, contracts, deeds, misc. legal documents • Marketing materials • Technical information • Manufacturing information • Floor plan sketches • Equipment schedule • Other information that supports/reinforces your plan
- 45. Appendix • Information supporting,confirming, and reinforcing conclusions in body of plan. • You might include: – Compelling market research findings – Resumes indicating special skills or abilities – Letters of reference – Personal financial statements – Impressive marketing materials
- 46. Next S teps •Work up a draft of your business plan. – Contact your ASBTDC for help with market research, financial projections, or any other area of concern. • Provide a copy of your plan to the ASBTDC and complete Request for Counseling. • After review, we will meet to discuss our comments and suggestions. • Fill out course evaluation.
Editor's Notes
- #3 Training • ASBTDC training programs focus on providing current practical information on a wide variety of business topics. Seminars are taught by ASBTDC staff and volunteer speakers who are professionals in the community. Online training is also available. Register or access info at asbdc.ualr.edu/training. Consulting • One-to-one management consulting services emphasize educating the client while working together in finding practical solutions to their business problems. • Consultants review business plans for new ventures, prepare loan requests and offer advice on operating challenges for existing businesses. Consultant meetings are by appointment only. Market Research • High Quality Data and Analysis Mapping Software Identification of store locations and Underserved Market Niches Customer Identification Innovation-Based Business Assistance New Product Development & Commercialization Access to Federal R&D Guidance on Intellectual Property Consideration
- #5 The purpose of this course is to assist you in putting a draft together for an SBTDC consultant to review and critique. You and your consultant can discuss your draft and make a plan for how to improve. Your consultant may suggest other resources, like market research or more realistic financial projections. You should do all of this BEFORE you give your business plan to another important stakeholder, like a lender, to review. You will not leave here with a business plan, but you WILL leave with the tools to complete a business plan.
- #6 We have a natural tendency to focus on our strengths and what we are interested in, and avoid the rest. A business plan makes sure you are considering ALL the aspects of your business vital to its success – not just the ones you find interesting or are good at. Remember the old adage, “Put it in writing!” You may THINK you have the area covered, but it is not clear until you have to WRITE about it.
- #7 Now that I’ve convinced you of why its important, what exactly IS a business plan? It defines why a company exists, what it intends to achieve, and how it intends to do it in a clear and systematic way. We are going to walk through each of these sections individually. NOW… Take the sample Immaculate Cleaning Services business plan out of your packet. We will use this plan as our sample throughout this seminar.
- #8 Cover sheet from sample plan our staff wrote. This is original work – not from a software package.
- #9 I think everyone knows what a table of contents looks like. If you use Microsoft Word, the software will make one for you automatically. Remember, you want to make it easy for reader to quickly get to the information they need, or they often won’t read it at all.
- #10 You can be flexible in how you put executive summary together, but be sure and include a discussion of each of these bullets.
- #11 Small-Business Myths Busted Entrepreneur Magazine Patricia Simone, August 14, 2006 Myth No. 1: “The government has grants for startups.” The Real Story: Nothing could be further from the truth! The federal government does not have any programs that lend money directly to any business. (This slide can be taught by a lender, if available.) Your lender is a primary audience for the plan. Get the financing stuff right up front. How much are you requesting? What are the terms – length of term and interest rate. In other words, there are various programs, which one are you applying for? Exactly what will you use money for? Example of home automation business and buying Cadillac Escalade. Collateral? May be what you use proceeds for, in part. Equity/cash injection by owner.
- #12 (This slide can be taught by a lender, if available.)
- #13 Name could be doing business as, a brand, or an internet domain name. Give examples. Mission statement – descriptive, functional – not flowery language. Give example – good vs. bad. Ex: Good – Immaculate Cleaning Services Immaculate Cleaning Services will strive to provide clients with professional, first-class quality service and convenient scheduling. Ex: Bad – Dirty Cleaning Service Our company will do amazing work in your gorgeous home or sparse office. Legal – is it a partnership, corporation, what? Is it still an idea, does it exist on paper, or is it a physical storefront?
- #14 Work off a current First Research profile. Pick an industry you think may interest audience and get a current profile. Present some real snippets of interesting data.
- #15 Show you know something about the industry you’re proposing to invest your money (and the lender’s money!) in. Try to forecast trade area. What good is “global demand?” Challenging - ASBTDC can help (ESRI, Hillsearch). Seasonality: Does your product/service have a “busy season?” Example: Florist’s busy seasons are Christmas, Valentine’s Day, Mother’s Day Business Cycle: Construction is a leading economic indicator; it is cyclical. Counter-cyclical – discount stores, used cars. Non-cyclical – personal care items. Industry Maturity: new, expanding, stable, or declining. Ex: Department stores are in the declining phase. Discount stores and dollar stores are in the expanding phase. Barriers to Entry: How easy is it to enter the industry? Are there certain licensing requirements, permits, etc?
- #16 Can apply framework to anything – person, company, industry, country -- I could show you examples of each. SWOT Analysis is a classic analysis tool Widely applicable Respected approach Professional research available Any knowledgeable reader will understand and respect this approach. Builds credibility. Get an analysis on an industry leader and apply to your business concept. You could apply this to convenience store venture. Read up on the industry leader! See where you have similar strengths, etc or where you can differentiate yourself.
- #17 State where your company fits in the marketplace for this good or service. Strategic Positioning: what distinguishes your product from competitors. Why will your customer come to you instead of your competitor? Is it a customer perception factor – price, quality, features, customer service, societal benefit (“green,” no animal testing), or convenience. Are you positioning your business to serve a particular market segment – geographic location, age, income, family size, or a specialized customer need. Distribution Channels: storefront, website, existing channel (Wal-Mart, etc) Pricing strategy: how do you compare with your competition?
- #18 Small-Business Myths Busted Entrepreneur Magazine Patricia Simone, August 14, 2006 “ I don’t need a marketing plan or marketing materials. This product/service sells itself.” The Real Story: Even if you think your product is the best thing since sliced bread, if you don’t have a marketing plan or budget, you will fail. Okay – this is a MAJOR section. The market analysis section of your business plan should discuss each of these bullets.
- #20 Best way to describe is read some excerpts from a couple of the 65 segments.
- #21 There is always competition, either direct competitors in business now, close substitutes for the product or service you are offering, or the threat of market entrants. Describe major competitors. What are their strengths? Weaknesses? Biggest challenge to your business? Market share - OK – that’s tough. Try and rank them from most share to least. Barriers to entry. Patents? Installed base? Licensing requirements? Specialized expertise? Niche – most successful small businesses.
- #22 Here is a hypothetical example concerning opening a new toy store. The red star depicts the proposed location, and the triangles are complementary businesses and competitors per the legend. Understanding the population of existing businesses near a proposed location can be helpful. Will existing businesses help draw in customers; compete with customers directly; or deter the target customer from coming into the proposed store? The drive time polygons show how long it will take to drive to the new store and are one way to define the trade area. A fixed radius ring (in this case, 1 mile), is another.
- #23 For many start-ups, location is the most important business decision they will make. People can’t patronize your business if they don’t know you exist. Money spent on a good location is frequently a wise investment. Your location can be a marketing tool! Find a real estate broker with retail experience. You may want to identify successful businesses serving the same target customer and locate near them. Leverage their success, capture their customers.
- #24 Here is a map of Texarkana, Arkansas and Texas, depicting median household income AND existing specialty food stores. By looking at the map legend, you can identify the relative affluence of different parts of the township. For some businesses, this is a critical driver of demand and it may be important to locate proximate to clusters of high income households.
- #26 Okay, once you figure out what you want to tell your customers (Five F’s), figure out HOW you’re going to tell them. Fit – your marketing vehicles must reach your actual target customer Mix – use more than one method to gain exposure to customers Repetition – it takes many exposures before a customer becomes aware of a message Affordability – it’s got to fit within your available resources
- #27 Here are some examples of marketing vehicles. This is not a marketing class, so I’ll stop here. The ASBTDC has a lot more training and resources in this regard.
- #28 Market research is HOW you answer the questions in the preceding section.
- #29 Small-Business Myths Busted Entrepreneur Magazine Patricia Simone, August 14, 2006 “ I can pay myself whatever I want.” The Real Story: …business owners should be prepared not to take any money out of their business for one to two years. You should emphasize why you are qualified to run this business (experience, certification, etc.) You don’t have to be good at everything. But you have to put together a team that is. You don’t have to go out and hire these people right away, but you should have people lined up in these roles who are reputable professionals who you trust and feel comfortable working with, should the need arise. Meet with multiple people, ask for referrals from people you respect.
- #30 Objectively state the qualifications of key personnel or the qualifications desired if they are not yet filled. Lenders are vitally interested in the competency of the management team. They must have confidence that they can execute the plan. What are the lines of authority and reporting relationships? Clearly spell out who is in charge of what. Frequently, in a small business start-up, it is the founder who is responsible for most everything.
- #31 Facilities – lease or own, terms of lease, improvements, maintenance, utilities. Production plan – equipment schedule, quality control, productivity, capacity. Inventory – JIT, LIFO, FIFO, need for management information system. Supply and distribution – selecting supplier that meet business needs, reliable suppliers (distributors, sell direct) Order Fulfillment and customer service – how are orders created, tracked, shipped? Returns, exchange, refund policy. How many employees are required to provide good good customer service to your clients. Financial controls - record keeping, handling cash, audit trails, credit policy, and so on. Legal issues – zoning, licensing, patents, trademarks, insurance, etc. Contingency planning – what if bad things happen? Back up records, computer files, disaster plan.
- #32 Frequent problem your operational plan addresses. For example, fast food might be employee turn over problem. Anticipate a lender’s objection and address it explicitly in the plan. Vitally important – most business problems we see are failure to execute fundamentals properly, not an inherently flawed business concept.
- #33 The next four slides are pictures of statements from the sample janitorial business plan in your packets. They aren’t very visible as slides, but you can see them on your handout in your packet. I’ll just run through them real quick to call attention to them in your packet. MOST PEOPLE NEED HELP PUTTING THESE TOGETHER. Don’t get discouraged - ASBTDC can help with these.
- #34 Start-up Costs Frequently entrepreneurs are long on innovative ideas, dedication, and willingness to expend the necessary effort to start or expand a business. Often times, though, they are short on the tangible resources to make it happen. Most entrepreneurs need some sort of financing to bring the idea to fruition. One of the first steps to obtaining financing, whether it be from personal savings, family and friends, or a bank or lending institution, is to determine exactly how much money you need; you need to determine your start-up costs. Look at pages 18 and 19 in the sample plan provided. You’ll find a listing of several start-up cost categories. This list is not exhaustive and contains some items that are unique to the individual business; however, several of the cost categories would be common in most businesses. Once you’ve determined the types of costs you’re likely to incur, the next step is to figure out the amount of each cost. There are several sources of information to use in determining the amount of start-up costs. The list includes: local utilities, insurance agents, and equipment and supply dealers. When uncertain about the amount of a cost, it is always best to be conservative, overestimate. Be sure to follow your start-up cost schedule with a listing of sources and assumptions you’ve made. This will help the reader of your plan understand your rationale and basis for listing the type and amount of each cost.
- #35 Balance Sheet The balance sheet is a snapshot of the financial position of your business. It shows what your business owns (assets), how much you owe (liabilities), and the amount of investment you’ve made in the business (equity) at a discrete point in time, often the end of a month or the end of a year. The balance sheet is set up using what’s often referred to as the accounting equation. Assets = Liabilities + Equity. Assets are things in your business that you own. A good example is a piece of equipment. Liabilities represent debts or obligations your business has. An example of a liability is a loan on that piece of equipment with a maturity of greater than one year. Equity represents the amount of investment you’ve made into the business as well as the undistributed business profits. Many of the items listed on the start-up cost sheet will be used to develop the balance sheet. Examples include: utility deposits, equipment, furniture, fixtures, and working capital.
- #36 Handout: Sample Balance Sheet From workshop packet, part of Doc #1535 Managing Cash Flow Current Assets : assets that either are cash now or will become cash within the next 12 months (savings accounts, inventory, accounts receivable). Fixed Assets : things you own for the purpose of producing income (buildings, vehicles, equipment). Other Assets : (patents, copyrights, utility deposits).
- #37 Handout: Sample Balance Sheet From workshop packet, part of Doc #1535 Managing Cash Flow Current Liabilities : amounts you owe that must be paid within the next twelve months (accounts payable, sales and payroll taxes, income taxes, 12 months on notes and mortgages). Long-term Liabilities : amounts owed that will be paid after the next 12 months (remainder of notes and mortgages). Capital (Owner’s Equity): investment made by the owner, less any capital withdrawals, plus all accumulated earnings of the company since inception.
- #38 Income Statement The income statement, sometimes referred to as a Profit and Loss or Result of Operations, has two basic components: income and expenses. The Income Statement is a summary of sales and expenses for span of time, often one month or one year. Typically business planners find it easier to project items in the expense category using the same strategies we used in the start up cost exercise. A more difficult task is often times developing a projection of sales. There are several resources available that you might find helpful when developing sales projections: RMA, JJ Hill (sales per square foot), and personal experience in the industry. It can sometimes be confusing to determine if an item is an expense or an asset. A simple way to determine the difference is to use the one year test. Ask yourself, will my business use this item up within the span of one year? If so, it is probably an expense. If not, it is probably an asset. What’s the difference? An expense is fully realized in the period in which it is incurred. An asset, even though you may pay for it all at once, is generally deducted over several years.
- #39 Handout: Sample Income Statement
- #40 Recommend getting assistance once they develop draft (ASBDC, accountant, etc)
- #41 Cash Flow Projections Cash is the life blood of most businesses. A cash flow projection serves as an important planning tool for the small business owner by allowing him/her to determine and plan for cash shortages. Profitability is of little relevance if you don’t have the cash on hand to meet your obligations as they become due. The cash flow projection works a lot like a checkbook. It reconciles the Balance Sheet and Income Statement with the inflows and outflows of cash from the business. When projecting cash flow, we put away all concerns about expenses v. assets and focus on when the cash is paid out. Likewise many businesses sell to their customers using accounts receivable; the cash flow projection helps the business owner plan by showing the collection of cash regardless of when the sale is made. Lenders often give the cash flow projection extra scrutiny. It is here that you will demonstrate to the lender that your business will generate enough cash to meet its obligations as they become due and have enough left over to repay the debt.
- #42 Break-even – figuring out how many units you must sell to have a net profit of zero. Sensitivity analysis – Break-even is a form of sensitivity analysis. Measure the impact of changing one variable on another, typically net profit. Contribution margin – Fixed cost – variable cost = CM. Isolate true variable costs, determine contribution towards fixed. Ratio analysis – ways to assess the health and stability of a firm. Diagnostic tools. Also, tools for evaluating credibility of projections. Quick ratio or acid test – current assets less inventory divided by current liabilities. Measure of liquidity. Compares assets that will convert to cash within a year to the liabilities that must be paid in a year. A low quick ratio means a firm can’t meet maturing obligations by with current assets. It must rely on income or financing. Inventory turnover – COGS divided by ending inventory. Measure of inventory management. Return on assets – net profit divided by total assets. Basic measure of how a business allocates and manages its resources. How efficiently does it utilize capital? Collection period – accounts receivable divided by credit sales per day. Compare to terms of sale.
- #43 Break-even – figuring out how many units you must sell to have a net profit of zero. Sensitivity analysis – Break-even is a form of sensitivity analysis. Measure the impact of changing one variable on another, typically net profit. Contribution margin – Fixed cost – variable cost = CM. Isolate true variable costs, determine contribution towards fixed. Ratio analysis – ways to assess the health and stability of a firm. Diagnostic tools. Also, tools for evaluating credibility of projections. Quick ratio or acid test – current assets less inventory divided by current liabilities. Measure of liquidity. Compares assets that will convert to cash within a year to the liabilities that must be paid in a year. A low quick ratio means a firm can’t meet maturing obligations by with current assets. It must rely on income or financing. Inventory turnover – COGS divided by ending inventory. Measure of inventory management. Return on assets – net profit divided by total assets. Basic measure of how a business allocates and manages its resources. How efficiently does it utilize capital? Collection period – accounts receivable divided by credit sales per day. Compare to terms of sale.
- #44 All of these basically do the same thing: compare your financial statements to a cross-section of the industry. RMA is used by the lending industry. It segments businesses by sales and assets for better comparisons. Financial Statement Studies of the Small Business is just small businesses. ProfitCents is a tool the ASBTDC has licensed which compares a client’s financial statement information to industry benchmarks. It creates a user-friendly report which calls attention to problem areas and makes suggestions.
- #45 These support the main body of the business plan which supports the Executive Summary. Don’t clutter the business plan with too much detail. Have detail available for reference. Put data in appendices and reference in plan and in table of contents.
- #46 The appendix should reinforce the content in the body of the plan. Do not include unnecessary items. It will only take away from what the audience where the audience will place their focus.