Small Business Victoria

Plan to Succeeda business planning guide

INTRODUCTION 4

THE BUSINESS PLAN

1.Primaryobjectives 5

2.Businessplansummary 5

3.Businessdescription 6

4.SWOTanalysis:Strengths,Weaknesses,OpportunitiesandThreats 6-7

5.Marketanalysis 7

6.Marketingstrategies 8

7.Salesandproductiontargetslinkedtoworkingcapital 8

8.Businessgrowthanddevelopment 9

9.Productionfacilities 9

10.Businessstructure 10

11.Financialrequirements 10-13

12.Costingsofproducts,hourlyratesandoverheads 13-14

13.Break-evenanalysis 14

14.Returnoninvestment 14

15.Managementandownership 15-16

16.Qualitycertification 16

17.Administration 17

18.Supportingdocumentation 17

ATTACHmENTS

1.CanterburyRenovationsprojectedprofitorloss–firstyear 18

2.CanterburyRenovationsprojectedcashflow–firstyear 19

3.CanterburyRenovationsprojectedprofitorloss–secondyear 20

4.CanterburyRenovationsprojectedcashflow–secondyear 21

5.Statementoffinancialposition 22

3SmallBusinessVictoria

Thebusinessplan

Introduction

Acomprehensiveguidetotheprocessofpreparingabusinessplan.

Abusinessplanisessentialwhenapplyingforbankloansoraleaseonbusinesspremises.

Thefollowinginformationwillassistyouthroughtheprocessofresearchingandpreparingabusinessplan.

Alwaysseeksoundprofessionaladvice(legal,accountingandcommercial)beforemakingimportantbusinessdecisions.

Businesspeoplewhodotheirownplanningnotonlysavealotofmoney,theylearnalotabouthowtobuildasuccessfulbusiness.Theyalsohaveagreatersenseofownershipoftheirbusinessplanandaremorelikelytoutiliseitasanongoingpartofgoodbusinessmanagement.However,preparingabusinessplanforthefirsttimeisnotaseasyasitseems.

Althoughtherearemanyinformationproductsavailableandconsultantsofferingassistancewithbusinessplanning,thisbookletisdesignedspecificallytoassistnewandexistingsmallbusinessoperatorsplantheirbusinesseswithminimalexternalassistance.

Thisbookletsetsoutthekeyfeaturesofabusinessplanandprovidespromptsandexamplesofhowabusinessplaniswritten.

Thesamplecasestudyusedinthisbookletisanewbusinessinkitchen,bathroomandlaundryrenovationstoberunbyahusbandandwifeteam.Thebusinesswillrequire:

• existingknowledgeofbuildingtechnologyandthebuildingindustry

• determinationtobuildasmallbusinessandlearnaboutbusinessmanagement,and

• adequatecapital.

Thebasicoperationswillbeobtainingcontractsbycompetitivetendering,thepurchaseofrawmaterialsandequipment,themanufacturingoffittings,theirinstallationandfinishing.

Whatisabusinessplan?Abusinessplanissimplythestrategytoachievetheobjectivesoftheproprietorsofthebusiness.Abusinessplanpreparedforabankorinvestorswillneedtoincludeevidenceofthemarketpotentialsupportingtheprojectedsalesofthebusiness.Preferablyabusinessplantakestheformofawrittendocument.Itplainlysetsoutalltheimportantfactsaboutthebusiness,itshistory(ifrelevant),thecurrentposition,theobjectivesandthebusinessactivitiestobeundertaken.

Whydoabusinessplan?Itisbecomingincreasinglytoughtosurviveinbusiness.Itisnotgoodenoughtohaveagoodproductorservice.Businesspeople,whethertheybepanelbeaters,manufacturersordoctorsmustalsobegoodmanagers.Successfulbusinessmanagershaveclearobjectives,producegoodproductsorservices,understandthemarket,managetheirmoneyproperlyandaregoodemployers.

Accordingly,theprimaryreasontoformulateabusinessplanistoaddressalltheissuesthatmakeasuccessfulbusiness.Inthecaseofanewbusiness,abusinessplanwillassistindeterminingthefeasibilityoftheproposal.Foranexistingbusiness,comparingactualoutcomesagainstprojectionswillassistinrefiningthebusinessplanandimprovingperformance.

Butthereareotherimportantreasonstoformulateabusinessplan.Forastart,nobankwilllendmoneytoabusinessunlessithasabusinessplanthatdemonstrateshowthebusinessproposestoservicetheinterestandrepaytheloan.Theinvolvementofstakeholderssuchasstaff,familyandpartnersintheformulationofabusinessplanisalsoagoodwayofsecuringtheircommitmenttothebusiness.

Important note Thesamplebusinessplaninthisbookletabouthowtowriteabusinessplanisprovidedasaguideonly.Thestatisticalandfinancialinformationinthisbookletareassumptionsforthecasestudyandshouldnotbeusedforanactualbusinessplan.Intendingandexistingbusinesspeoplemustundertaketheirownresearchandusereliabledataforthepreparationoftheirbusinessplans.

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Thebusinessplan

Followingaretheusualsectionheadingsforabusinessplan

ThetextofasamplebusinessplanforCanterburyRenovationsisborderedlikethis.

Noteverysectionhastobeaddressedinthesamedegreeofdetail.Forexample,apersonbuyingawellestablishedbusinessmighthavetopaymuchmoreattentiontothevaluationofthebusinessthantothemarketanalysis.

Conversely,anewstarterwantingtobreakintoacompetitivebusinesssuchasroadtransport,buildingconstructionorthelegalprofessionshouldpayparticularattentiontomarketresearchandmarketingstrategies.

1.Primaryobjectives

Theproprietorshaveagreedtoestablishabuildingbusiness,initiallyspecialisingindomestickitchen,bathroomandlaundryrenovationsandprogressingintwotothreeyearstoresidentialconstruction.Theemphasiswillbeonhighqualityproductsandservice,thereinvestmentofprofitsinbusinessgrowthandthedevelopmentofabusinessidentityseparatefromtheproprietors.Theiraimwillbetocompleteeveryjobontimeandwithinbudget.

2.Businessplansummary

The conceptTheproprietorsFrankandJulieWalterhaveabuildingbackgroundcombinedwithconsiderableflairininteriordesign.Theirproposalistoestablishanewbusinessprovidingkitchen,bathroomandlaundryrenovationsforhomeowners.

The product / serviceThebusinesswillsupplyandinstalldomestickitchen,bathroomandlaundryequipmentandfittingsandcarryoutallassociatedbuildingservices.Afreedesignandquotationservicewillalsobeprovided.Theproductsandserviceswillbeofhighqualityandincludeawiderangeofbuilt-inequipmentsuchasovens,microwaves,cooktopsanddishwashers.

market analysisMarketresearchcarriedoutbytheproprietorsrevealincreasingactivityinhomerenovationbyhomeownerswhosubcontractthemorecomplexworktobuilders,especiallyintheinnersuburbs.

Manyexistingkitchen,bathroomandlaundryrenovatorsdonothaveagoodreputation,sotheproprietorsbelievetheircompetitiveadvantagewillbetheprovisionoftopqualityproductsandservices,accesstospecialityitemsandinnovativedesigns.

marketing strategyTheproprietorsbelievethebestmarketingstrategyisacombinationofagoodnetworkofcontacts,areputationforqualityandreliabilityandpersonalreferrals.Thiswillbecomplementedbybrochures,directcontactwithhomebuyersinselectedareasandasmalldisplayinalocalrentedshop.

Financial data Theinitialfundingwillbe$85,000.Theproprietorswillprovidetheinitial$40,000,andwillarrangeanoverdraftof$45,000securedbyamortgageovertheirhome.Theyexpecttoachieveaturnoverof$300,000inthefirstyearyieldingagrossprofitof$50,000afterFrank’ssalaryhasbeenpaid.Thiswillbesufficienttopayoverheadexpensessuchasrent,interestandadvertising.

See Attachment 1.

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3.BusinessdescriptionProvideabriefdescriptionofthecoreactivitiesofthebusiness.Inthecaseofanexistingbusiness,stateitshistory,currentpositionandfuturebusinessactivities.Foranewbusiness,outlinetheproposal,wheretheproprietorswantthebusinesstobeintwotofiveyearsandhowtheywillachievetheirobjectives.

Thebusinesswillbecalled‘CanterburyRenovations’.Thenamehasalreadybeenregisteredasabusinessnameandanapplicationhasbeenlodgedforatrademark.Thecoreactivitywillbetherenovationofkitchens,bathroomsandlaundries.Thebusinesswillprovideacompleteservicerangingfromdesign,quotationandinstallationtoaftersalesmaintenanceandasevenyearguaranteeovertheworkmanship.Althoughtheproprietorsintendtoconcentrateontheircorebusiness,theywillalsoacceptshopfittingandgeneralrenovationsifopportunitiesarise.

Theproprietorswillestablishasmallshowroomintheinnereasternsuburbs.Thereareanumberofpremisesavailableatamodestrental.Thesepremiseswillalsobeusedforthestorageofmaterialsandequipment.Onesuchshopisavailableforrentandoutgoingsof$14,000perannum.Somemanufacturingworkwilltakeplaceattheproprietors’residence.Thishasbeenapprovedbythecouncilasahomeoccupation.

Theproprietors’objectiveistoachieveanoperatingturnoverof$300,000bytheendofthefirstyear.Inthesecondyear,theproprietorsexpecttheannualturnovertobe$450,000,withtheemploymentoftwomorestaff.Thisgrowthwillresultfromthemarketingstrategyandreputationfortheprovisionofexcellentproductsandservices.Themanufacturingworksmayhavetoberelocatedtoanindustrialsiteandadditionalfinancewillberequiredinduecourse.

4.SWOTanalysis:Strengths,Weaknesses,OpportunitiesandThreatsASWOTanalysishighlightsstrengthsandweaknesseswithinthebusinessandidentifiesopportunitiesandthreatsintheexternalbusinessenvironment.Thiswillenabletheproprietorstomakethemostoftheircompetitiveadvantages,takestepstoovercometheirshortcomings,exploitopportunitiesinthemarketplaceandminimisetheirexposuretoexternalthreats.

Providealistofthestrengths,weaknesses,opportunitiesandthreats.

Strengths

• Technicalcompetenceoftheproprietors

• Dedicatedstaff

• Completeagreementbytheproprietorsontheirobjectives

• Financialresources

• Agoodnetworkofcontactsforpotentialclients,suppliersandtradespersons

• Abilitytorespondtotheneedsofthemarket

• Businesslocatedwithinthetargetmarket

Weaknesses

• Lackofmanagementskills

• Sizeofpremises

• Notrackrecordinbusiness

• Noplanformanagementsuccession

• Inefficientequipment

• Lackofresearchanddevelopmentfacilities

• Limitedsecuritywithwhichtoraisefinanceforfuturegrowthanddevelopment

• Thebusinessisprincipallydependentononepersonduringtheformativestages

Opportunities • Rapidlygrowingmarketbecauseofapreferencebyhome

ownerstorenovateratherthanshift

• Poorreputationofmanyexistingrenovationbusinessesandbuildingtradespersons

• Largenumberofolderbutvaluablehomeswithinthetargetmarketarea

• Availabilityofcasualstaffandtradespersons

• Availabilityofdisplayandmanufacturingpremiseswithinthearea

• Highdisposableincomewithinthetargetmarket

• Expansionofthebusinessintootherareasand/orfranchising

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Threats

• Poorreputationoftheindustryregardingqualityandreliability

• Economicdownturns

• Existingandfuturecompetitorswithintheindustry

• Increasingcostofmaterials,equipmentandsubcontracttradespersons

• Difficultiesofgettinggoodstaffandreliablesubcontractors

• Possiblegovernmentregulation

• Geographicallydiversemarket

5.MarketanalysisItisessentialtoshowthatthereisasoundcustomerbaseforthebusiness.Provideadescriptionofthemarketintermsofthefollowing:

• Whoarethecustomers?

• Whatistheirgeographicallocation?

• Howmanycustomersarethereinthislocation?

• Whatistheirpurchasingpower?

• Howaretheyaccessed?

• Whatisthestabilityofthemarketandexpectedgrowth(ordecline)?

• Whataretheseasonaltrends?

• Whatinfluencesthecustomers?

• Whatisthepricesensitivity?

• Whatisthecompetitiveedge?

market analysis

Theproprietorshavecompletedconsiderableresearchofthemarketoverrecentyears.StatisticalinformationhasbeenobtainedfromtheAustralianBureauofStatisticsandlocalcouncilrecords.Inaddition,extensivepersonalnetworkingbytheproprietorshasprovidedtheinformationtobuildaprofileofthemarketforthebusiness.

AccordingtotheAustralianBureauofStatistics,buildingrenovationisthemoststablesectorofthedomesticconstructionindustry.Manyhomeownerswhowanttoimprovetheirlivingenvironmentchoosetorenovateratherthanmove.Relocationcosts–suchaslegalandestateagents’fees,mortgagecosts,lodgingfees,andstampdutyaresignificantdeterrentstomoving.Savingthesecostsmakesasizeablecontributiontothecostofrenovatinganexistinghome.

AsurveyofcouncilsintheinnereasternmunicipalitiesofStonnington,BoroondaraandWhitehorserevealedthatinthe1995/96financialyearapproximately2,500permitswereissuedforhomerenovations.Approximatelyhalfwereissuedtohomeowners.Aboutathirdofowners/renovatorswerepeoplewhohadrecentlypurchasedahomewithapreferenceforlocalityratherthancondition.

Mostowners/renovatorsintheareassurveyedwereinthemiddletohighincomebracketwithatleasttwosourcesofincomeforeachhousehold.Therewasusuallyhigherthanaveragedisposableincome,whichwasspentimprovingtheirqualityoflife.Therewasadefinitepreferenceforhomerenovationbecauseofimmediateandenduringfinancialbenefits.

Theproprietorshavesurveyedtheexistingcompetitorsandidentifiedtheirweaknessesasfollows:

• Largeoverheadswhichmeanhigherprices

• Mostarenotlocatedclosetothetargetmarket

• Usuallysubcontracttheirmanufacturingtoexternalcontractors

• Fewhavestrongpersonalcontactswithinthetargetmarket

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Thebusinessplan

Thebusinessplan

6.MarketingstrategiesAgoodmarketingstrategyisvitaltothesuccessofabusiness.Customersmustknowabouttheproduct/sandservice/softhebusinessandbeencouragedtobuythem.

Describethestrategiesthatwillbeusedtoachievesales.Thefollowingpointsshouldbeconsidered:

First-class customer serviceCanterburyRenovationswillprovideafirst-classcustomerserviceintermsof:

• Respondingtoenquiries

• Hoursofservicetomeetcustomerneeds,withinthelimitedgeographicallocation

• Providingclearandcomprehensivejobspecificationsandfixedprices

• Startingandfinishingthejobsontimeandtobudget

• Minimaldisruptiontothehouseholdduringinstallation

• Guaranteeofqualityproduct

• Siteclean-uponjobcompletion

• After-salesservice

Promotional literature Promotionalliteraturewillbeproducedanddistributedasfollows:

• Theliteraturewillillustratestyles,idealdimensions,andprovideclassicnames

• Itwillincludeinformationabouttheproprietorstocreatea‘personalfeel’aboutthebusiness

• Itwillbedistributedintheareatoallhomebuyers,applicantsforpermitsforrenovationsandrespondentstolocaladvertising

Theadvertisingandpromotionalbudgetinthefirstyearwillbe$12,000.

means of advertising • Selectiveandspecialisedmarketpromotionandlocalprint

mediaanddirectmarketingtohomebuyers/renovators

• ‘Wordofmouth’,whichhasprovedtobeoneofthebestformsofpromotionand,asaresultofthe‘closeknit’communitytheproprietorsworkin,theybelievethiswillbethemosteffectiveformofadvertising

Pricing policy Theproprietorsbelievethatbecauseofthehighdisposableincomeinthelocationtheyintendtotarget,clientswillnotbeparticularlypricesensitive,ratingqualityofproductandservicemoreimportant.Accordingly,thebusinesswillbaseitscompetitiveadvantageonqualityratherthancheapprices.

Location and visibility of the business Thebusinesswillbelocatedinthegeographicalcentreofthemarket,withitsdisplayunitandmanufacturingfacilitiesnofurtherthan10kilometresfromthefarthestboundaryofthemarket.Onlyonesimilarbusinessislocatedclosetothemarket.Otherwiseallcompetitorsarelocatedinoutersuburbanareaswhichisinconvenienttoclients.

The competitive edge Thecompetitiveedgewillbesuperiorservice,customersdealingwiththeproprietors(notemployedsalesstaff),freedesignandquotation,qualityoftheproduct,after-salesservice,sevenyears’guarantee,thelocationofthebusiness,andtherangeofmaterials,finishesandequipmentavailable.Theproprietorswillensurethesebenefitsareemphasisedthroughpromotionalliteratureandword-of-mouthreferrals.

7.SalesandproductiontargetslinkedtoworkingcapitalMostbusinessesareunderpinnedbycash.Usually,materials,stock,labour,andsubcontractworkwillhavetobepaidforbeforethecustomerspayforthework,equipmentandservicestheyreceive.Thereforethemoresalesthatareachievedthemoremoneywillberequiredtofinancetheproduction.Themoneyrequiredtopaythebillsastheyfalldueiscalledworkingcapital.

Workingcapitalrequirementsarederivedfromtheprojectedcashflow.Thecashflowisbasedonamonthlyscheduleof‘moneyin’less‘moneyout’.

However,anotherwayofcalculatingworkingcapitalrequirementsisillustratedasfollows:

CanterburyRenovationswill,duringthefirstyear,achievethefollowinglevelsofsalesandproductioninaveragefigures:

25renovationjobsfor$12,000each.

Totalsales–$300,000.Eachjobwilllastfourweeks(oneweekproductionandthreeweeksinstallation)

i.e.25x4=100weeksproductionandinstallationtime

÷48effectiveworkingweeksperyear=approximatelytwojobsconcurrent.

Duetothefluctuatingnatureoftheindustryitispossiblethattherecouldbebetweenzeroandfourjobsconcurrent.Iffourjobsareconcurrentthefinancialrequirementswouldbethetotalcontractpriceslessdepositsreceived.

fourjobsx$12,000=$48,000–depositsof15%

($7,200)=$40,800.Thereforethemaximumworkingcapitalrequiredwillbeabout$41,000whichispredictedtooccurinAprilaccordingtothecashflow.

See Attachment 2.

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8.Businessgrowthanddevelopment

Businessgrowthanddevelopmentmeansincreasingsales,optimisingtheuseofthebusinessinfrastructure,increasingbuyingpower,improvingefficienciesthroughinternalspecialisationandcontinuallyimprovingtheproductandservice.Businessesthatdonothaveastrategyforgrowthanddevelopmentwillsoonbeovertakenbycompetitors.Describehowthebusinesswillbedeveloped.

Theproprietorswillkeepabreastofnewproducts,technologyandproductionmethods.Theywillcontinuetoliaisewithlocalandoverseassuppliers.Marketingtechniqueswillbemonitored.Thosethataresuccessfulwillbeexpandedandtheotherswillbeabandoned.

Theproprietorsareespeciallyconsciousoftheneedtocontinuallymonitorthefinancialpositionofthebusiness.Sales,profitabilityandespeciallycashflowwillbecomparedagainstprojectionsonamonthlybasis.Thecostsofeachjobwillalsobecomparedwiththeestimatestoensureprofitabilityisbeingachievedandtheestimatesareaccurate.

Thebusinesswillnotbeprofitableinthefirstyear.Butexpectedprofitsinsubsequentyearswillbeappliedtobusinessdevelopmentbytheexpansionofproductionfacilities,expenditureonpromotionalactivitiesandreservingcashtopayformorematerials,labourandsubcontractworkassociatedwithahigherlevelofbusinessactivity.

Theproprietorswillanalyseallunsuccessfulquotations.Prospectivecustomerswillbeaskedtoprovidecommentonwhytheyrejectedthequotations,andinformationgainedthiswaywillbeusedinmonitoringtheeffectivenessofthepricingandmarketingstrategy.

9.ProductionfacilitiesProvideanoutlineofhowtheproductsandserviceswillbeproduced:

• Theskills,qualificationsandexperienceoftheproprietors

• Theequipmentrequired

• Sourcesofrawmaterials

• Subcontracting

• Technicalrequirements

• Personnel

Theproprietorswillproducetheunitspartlywiththeirownresourcesandpartlywithsub-contractors.Initially,theinstallationwillbecarriedoutbyFrank,withelectricalandtilingworksubcontractedtoexperiencedtradespersons.Astheworkloadincreasesmoreinstallationworkwillbesubcontracted.

Frankhasthecarpentryandplumbingskillstoproducethebasicunits,butworksuchaslaminatingveneerswillbeoutsourcedtospecialistsuppliers.Theproprietorshavealargegarageattheirpremisesandwoodworkingequipment–suchasarouter,adockingsaw,planer,benches,jigs–andalargerangeofhandtools.Theyalsoownafourwheeldrivevehicleandatrailer.

Theproprietorshavesatisfiedthecouncilthattheproductionactivitieswillbeahome-basedoccupationandnoplanningpermitwillberequired,providedthatnoisymachinerywillonlybeusedbetween9:00amand5:00pmMondaystoFridays.

Theproprietorshaveobtaineddesigndetailsandtechnicalspecificationsforfittingssuchasstoves,hotplates,ovens,sinks,dishwashers,hoods,baths,basinsandtoilets.Theyhavealsoestablishedcontactwithsuppliersofinnovativekitchenandlaundryproducts.

Theproprietorsenvisagethatafterthefirstyearofbusiness,theproductionfacilitieswillberelocatedtoasmallfactoryclosetothemarket.Theshowroomwillalsobemovedtothesepremises.Thefactorywillbeanextraexpensetothebusiness,butcanbeaffordedwiththehigherlevelofbusinessandprofitabilityinthesecondyearofbusiness.

9SmallBusinessVictoria

Thebusinessplan

10.BusinessstructureBusinessproprietorsmaychoosetooperatetheirbusinessesunderoneofanumberofstructureswithdifferentoptionsforidentifyingthebusinessanditsproductsandservices.Theseinclude:

• Businessstructures–Soletrader–Partnership–Limitedpartnership–Proprietarycompany

• Identifyingfeatures–Businessnames–Companynames–Trademarks–Designs–Patents

Provideacleardescriptionoftheproposedownershipstructureandwhyitwaschosen.

Thebusinesswillbeestablishedasaproprietarycompany.Thecompanywillbeacquiredasashelfcompanyforacostof$1,000plus$200tochangethecompanynameto‘F&JWalterNomineesPtyLtd’.Thename‘CanterburyRenovations’hasbeenregisteredasabusinessnameinthenamesoftheproprietorsbutwillbetransferredtothecompanyafterincorporation.Theproprietorshavealsoappliedforatrademarktosecurethenameoftheirproductandservice.

Acompanystructurewaschosenoverapartnershiporsoletraderbecauseacompanywouldprovidethebestpossibleprotectionoftheproprietors’personalassetsintheeventofafailureofthebusiness.Anallowancehasbeenmadeforthehighercompliancecostsintheprojectedoperationalcosts.Ithasalsobeenrecognisedthattheproprietors/operatorswillbedeemedemployees,whichwillinvolvestatutoryresponsibilities,suchasWorkCover,superannuationpaymentsandlongserviceleave.

11.FinancialrequirementsBusiness establishment costs

Itisvitaltoassesstotalfundsrequiredtosetupabusinessandcoveritsoperatingcostsuntilitbecomesprofitable.Atfirstglance,itmayappearthatallthatisrequiredisstock,basicfixturesandperhapsthefirstmonth’srent.However,therearemanyothercostsandexpensesinstartingabusinessandtheitemsonthefollowinglistsshouldbeconsidered.

Note: all items in the following tables should include GST as applicable.

PRE-BUSINESS COSTS

• Accommodation

• Accountingfees

• Businessplanning

• Consultants

• Entertainment

• Legalfees

• Marketresearch

• Publications

• Samples

• Telephone,fax,letters,photocopying

• Translations

• Travel

• Valuationfees

ADD UP PRE-BUSINESS COSTS HERE: $2,600

Thebusinessplan

$2,600

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INITIAL COSTS

• Lease $2,500 –Legalcosts –Stampduty –Rentinadvance –Bond

• Electricity,gasandphone $500 –Connections –Securitydeposits

• Openingstock $4,000

• Insurancepremiums $800 –Propertydamage –Publicliability –Vehicle –Theft –Personaldisability –Professionalindemnity

• Printingandartwork

• Wages

• Creditcardestablishmentfee

• Initialpromotion

• Promotionalcost

• Loanestablishmentcost

• Stationeryandofficesupplies

• Computersoftware –Installation –Training

• Statutorycharges –Licences –Permits –Registrations

• Subscriptionsforpublications

• Associationmembershipfees

ADD UP INITIAL COSTS HERE: $9,400

CAPITAL COSTS

• Businessstructure $1,200 –Registration –Professionalfees

• Officeequipment $2,800 –Desks –Chairs –Safe –Computers –Fax,telephonesystem

• Vehicles $4,000

• Plantandmachinery $2,000 –Purchaseprice/deposit –Delivery –Repairs –Installation/commissioning

• Buildingcosts $600 –Shopfront –Partitions –Electricalwiringandfittings –Floorcoverings –Toilets,plumbinganddrainage –Painting –Signs

• Displaymaterials $1,500

• PurchasepriceofbusinessFranchisefee

• Trainingshopfittings –Counters –Racks,shelving –Storage –Decorations

• Securitysystem

• Trademark/design/patents–Registrations

–Patentattorneyfees –Referencematerials

• Land

ADD UP CAPITAL COSTS HERE: $12,700

$1,600

$600

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Thebusinessplan

Note: all items in the following tables should include GST as applicable.

POSSIBLE DIRECT/RENOvATION COSTS

• Subcontractors $103,300

• Materials $84,300

• Wages $50,400

• WorkCover

• Grouptax/payrolltax

• Maintenanceandrepairs

• Wastedisposal

• Commissions

• Royalties

• Freight

ADD UP RENOvATION/DIRECTCOSTS FOR THE FIRST yEAR HERE: $250,000

POSSIBLE OvERHEAD ExPENSES FOR THE FIRST yEAR

• Rent $14,400

• Outgoings $1,600

• Interests $2,250

• Motorvehicleexpenses $9,600

• Advertisingandpromotion $12,000

• Bankcharges

• Hirepurchasepayments

• Leasepayments

• Insurancepremiums

• Accountingfees

• PAYGTAX

• Legalfees

• Staffamenities

• Electricityandgas

• Postage

• Entertainment

• Travelandaccommodation

• Subscriptions

ADD UP OvERHEAD ExPENSES FOR THE FIRST yEAR HERE: $50,650

ADD PRE-BUSINESS AND INITIAL COSTS $12,000

TOTAL OvERHEADS FOR THE FIRST yEAR $62,650

Projected profit/loss

Calculatetheexpectedprofit/lossforthenexttwelvemonthperiodonaquarterlybasisforanexistingbusinessoronamonthlybasisforanewbusinessasfollows:

Revenuefromallsourceswithinthebusiness(renovations,saleoftradingstock,interestearned,etc.)

Lessrenovatingcosts(subcontractors,materials,wagesdirectlyrelatedtorenovations,etc.)

Equals gross profit/loss

Lessoverheadexpenses(exploratorycosts,initialcosts,rent,financecharges,marketingcosts,vehiclecosts,wagesformanagementandadministration,etc.)

Equals net profit/loss

Notes:

1. Thebusinessstructurewillbeaproprietarycompanysotheprofit/lossprojectionswillincludewagesforworkingowners/proprietors.

2. Useactualreceiptsandexpenditureofmoneytocalculateprofit/loss.Thisissimplerthanusingearningsandcommitments,butsomeexpensessuchasannualinsurancepremiumsshouldbeamortised(orspreadequally)overthewholeyear.

See Attachment 1.

Projected cashflow

Irrespectiveoftheprofitabilityofabusinessitisnecessarytoensurethatthebusinessdoesnotrunoutofcash.Thiscanhappenbecause,forexample:whentoomuchstockormaterialsarepurchased;clientsdonotpaywhentheyshould;theowners/proprietorsdrawtoomuch;fundshavenotbeensetasidetopaytaxortoomuchhasbeenborrowedtosetupthebusiness;andthereisinsufficientprofitonhandtomakethecapitalrepayments.

Theprojectedcashflowhighlightssurplusesandshortfallsofcashandisavitalpartofgoodfinancialmanagementofabusiness.Itiscalculatedasfollows:

Cashreceiptsfromallbusinesssources(revenue,loans,saleofequipment,etc.)

Lesscashpayments(renovatingcostsandoverheadexpenses,setupcosts,capitalrepayments,taxation,etc.)

Equals surplus/shortfall of cash

See Attachment 2.

Thebusinessplan

$12,000

$10,800

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Initial funding of the business

Theprojectedcashflowwillshowhowmuchmoneyisrequiredtosupportthebusinessduringtheestablishmentphase.Whatisthesourceofthismoney?

Theownershave$20,000oftheirowntoinvestinthebusinessandhavebeenofferedaninterestfreeloanof$20,000fromFrank’sparentswithnospecificcommitmentforrepayment.Buttheclosingbalancesintheprojectedcashflowshowsthatsome$41,000ofadditionalfundswillberequiredoverthefirstyearofthebusiness.Theownershavehadpreliminarydiscussionswiththeirbankmanagerandsubjecttotheprovisionofaproperlydocumentedbusinessplanandtheprovisionofamortgageovertheirhome,theywillbeprovidedwithanoverdraftof$45,000.

Anoverdraftwasagreedasthemostsuitablearrangementforthefirstyearasthefinancialrequirementswillvarysubstantiallyfrommonthtomonthandtherewillbenoprofitswithwhichtorepaycapital.

Afterthefirstyeartradinglevelswillbemorepredictableandthefinancearrangementswillbereviewed.

12.Costingofproducts,hourlyratesandoverheads

Showhowthepricesoftheproductsandserviceswillbeestablished

Thebusinesswillbeinvolvedinthefollowing:

• Purchaseandsupplyofequipment

• Purchaseandconversionofraworpartiallyfinishedmaterials

• Provisionofmanufacturingandon-sitelabour

• Provisionofsubcontractwork

Thefollowingassumptionsaremadeinpreparingquotations:

Direct costs $368,500

Overhead expenses $73,150

Business profit $8,350

Total $81,500 +$81,500

Annual business turnover in the second year

$450,000

Thereforetocoverprofitoverheads,theaveragemark-uponalldirectcosts,equipment,materials,labourandsubcontractors’costswillbe25%.

Accordingly,quotationswillbepreparedonthefollowingbasis(seebelow)foratypicaljobofe.g.$10,000:

Note:all items should include GST as applicable.

Item Direct cost $ mark-up % mark-up $Equipment 2,500 15 375Material 1,500 35 525Labour 2,300 30 690Subcontractors 1,700 25 425Total $8,000 (ave) 25% (approx.) $2,000

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Thebusinessplan

Note:all items should include GST as applicable.

Labour rates will be calculated as follows:

Costs $

Hourlyrate(accordingtoawardorworkplaceagreement) 18.00

Addoncosts,e.g.WorkCover5% 0.90

Medicalcosts,e.g. 1,700

Superannuation $8,000

Payrolltax (N/A)

Sickpayallowance,e.g. 2.00

Annualleaveallowance($18x52÷48)-$18 1.50

Toolsallowance 1.00

Total 25.48

Allowancefornon-productivetime,e.g.industrialaction,maintenance,travelling,toolmaintenance,traininginjuries,etc.,e.g.10%

+2.55

Total 28.03

Therefore, the hourly rate for estimating work will be$28.00 plus 25 per cent mark up = $36.50 per hour.

Thebusinessplan

13.Break-evenanalysis

Abreak-evenanalysisisacalculationtoshowthelevelofsalesorbusinessrequiredtopayforalltheoverheadsofthebusinessandatleastcomeouteven.Thebreak-evenpointforCanterburyRenovationsiscalculatedasfollows:

Theaveragemark-upondirect/renovationcostsis25%.

e.g.a$10,000jobwillhaveadirectcostof$8,000.Thereforethegrossprofitwillbe$2,000,i.e.20%ofthevalueofthejob.

Theprojectedoverheadsforthebusinessinthefirstyearwillbe$62,650.Tobreakeventhebusinesswouldhavetoachievesalesofwhich80%paysforthedirect/renovationcostsand20%paysfortheoverheadsof$62,650.

Ifsalesx20%=$62,650,thenthesalestoreachbreak-evenwouldbe$62,650÷20%ormultipliedby5,i.e.$313,250.

Therefore,thebreak-evenpointofsalesinthefirstyearwillbe$313,250.Thiswillnotbeachievedinthefirstyear.However,inthesecondyeartheprofitmarginof18%oftheprojectedsalesof$450,000(i.e.$81,500grossprofit)willcovertheoverheadsofabout$73,150andproduceanetprofitof$8,350.

14.ReturnoninvestmentTheproprietors’moneytiedupinabusinessisaninvestment.Ifitwasnottiedupinthebusinessitwould,presumably,beearninginterestinsomeotherformofinvestment.Willthebusinessprovideareturnontheinvestmentatleastequaltofixeddepositsinbanksorbluechipshares?

TheprojectednetlossinthefirstyearmeanstheproprietorswillnotreceiveanyreturnonthemoneytheyinvestedinCanterburyRenovations.However,theexpectedprofitinthesecondyearwillbe$8,350(afterproprietors’salarieswhicharepartofcostsandexpenses).

Thereforethereturnof$8,350ontheproprietors’originalinvestmentof$40,000isabout21%.Whilstbetterthanthecurrentrateofreturnonmoresecureinvestmentstheproprietorsareconsciousoftherisksandinsecurityofsmallbusiness,particularlyinthebuildingindustryandaimtoincreasethereturnoninvestmentto25%infutureyears.Thisisparticularlyimportantastheproprietorsplantoretainprofitstopartlyfinancefuturegrowthofthebusinessandsoincreasetheirinvestmentinthebusiness.

14 PlantoSucceed

15.ManagementandownershipDescribethebackgroundofthekeypersonsinthebusinessandwhatotherstafforcontractorswillberequired.Alsobrieflystatetherolesofthekeypersons,themethodsofremuneration,methodsofrecruitment(whereapplicable)andtrainingprograms.

TheproprietorswillbeFrankandJulieWalter.Frankhasatradecertificateinplumbingandisaregisteredbuilder.Hehasbeenemployedasaprojectmanagerbyaleadinghomebuilderfortenyearsandisthoroughlyfamiliarwithbuildingtechnology.Inthelasttwoyears,Frankalsoworkedparttimeforthesamefirmasasalesconsultantdevelopinggoodcustomerrelationsskills.JuliestudiedhomeeconomicsatRMITandisnowateacherataprivateschoolintheinnereasternsuburbs.BothFrankandJulieareenthusiastichomerenovators,withparticularexperienceinclassicalandperiodstylehomes.Juliewillmaintainherjobforthenextsixmonthsbutwillworkparttimeforthebusinessmainlyinadministrationandmarketing.Juliehasanextensivenetworkofacquaintancesthroughheremploymentandmembershipofanumberofassociations.FrankandJuliehaveoneinfantchild,butregularchildcareisprovidedbytheirextendedfamilies.

Itisnotanticipatedthatthebusinesswillemployanystaffotherthantheproprietorswithinthefirstyear.Duringthatyear,mostoftheworkwillbesubcontractedtoreliabletradespeoplewhomFrankknowsthroughhisemploymentintheindustry.

Frankwillhowever,personallyundertaketheplumbingandcloselysupervisetheotherwork.Itisexpectedthatafterthefirstyear,theworkflowwillhaveincreasedandtheemploymentofacarpenter/joinerandasalesassistant/administratorfortheshowroomwillberequired.EmployeeswillreceiveremunerationinaccordancewiththerelevantawardortheminimumemploymentconditionsprescribedbytheWorkplace Relations Act 1996.Inaddition,theywillbeentitledtoparticipateinanincentiveschemebasedonpersonalperformanceandbusinessprofitability.

management succession

Describethearrangementthatwillbemadeforthebusinesstocontinueintheeventofdisabilityoftheproprietors.

Theproprietorsagreethatwithinthefirstsixmonths,itwouldbeimpracticalforJulietocontinuethebusinessintheeventofFrank’sdisability.Frank’sinsurancewouldcoverthenon-recoverableinvestmentsinthebusiness(stock,advertising,tools,etc.),repaymentoftheloanandsubcontractingofcurrentcontracts(approximately$50,000).

JuliealsohasastrongpersonalcommitmenttoensurethatthebusinesswillbecomesuccessfulandhasdecidedthatwhensheresignsfromherpresentpositionafterthefirstyearshewouldcontinuewiththebusinessintheeventofFrank’sdisability.

Hisinsurancewouldcoverthere-financingofthebusinesstosubcontractthemanufacturing,andhiresuitabletradespeoplefortheinstallation.Havingbeencloselyinvolvedwiththedesignandtechnicalaspectsofrenovatingtheirownhomesoveraperiodofeightyears,Juliefeelsconfidentthatshecantakeoveramanagementrole.

Key person insurance

Ascertainthefinancialimpactonthebusiness,ifoneofthekeypeoplecouldnotcontinuetoprovidetheirservicesbecauseofdisability.

BothFrankandJuliewillbeinsuredtocoverthelossoftheircontributiontothebusinessintheeventofdisability.Inthefirstyear,thebusinessandthefamilywillbesubstantiallydependentonFrankandaccordingly,hiscontinuinggoodhealthwillbeinsuredfor$250,000.Julie’srole,albeitasupportiveone,isequallyimportantandhercontinuingcontributionwillbeinsuredforthesameamountasFrank’s.

15SmallBusinessVictoria

Thebusinessplan

Thebusinessplan

Personnel management

Theproprietorsandstaffarethemostimportantresourceofasmallbusinessandgoodarrangementsbetweenthebusinessanditspersonnelisnecessarytoensurethesuccessofabusiness,especiallyinthelongterm.Thefollowingmattersneedtobeconsidered:

• Arrangements between the proprietors TheproprietorshavereachedagreementontheirprincipalobjectivesandtheirrespectiveroleswhicharesetoutelsewhereinthisBusinessPlan.Theyagreetobeboundbythisagreementforthefirstyearofthebusiness.Anyvariationtothismustbebymutualconsentandbeinwriting.

• Involvement of family members.Theproprietors’extendedfamilyhaveagreedtoassistbyprovidingchildcareasandwhenrequired.Ifthebusinessisretainedlongenough,theproprietors’childrenwillbeencouragedtotakeanactiveroleinthebusiness.

• Assessment of staff and subcontractors’ performance. Theperformanceofthestaff,includingtheproprietorsandsubcontractors,inrelationtokeyresultssuchasqualityofworkmanshipandcustomerservice,effectiveuseoftimeandaccuracywillbereviewedeverythreemonthsinthefirstyearofthebusiness.

• Contribution of staff to the development and implementation of business plans.Thestaffwillbeconsultedregularlyinrelationtothebusinessplanningprocess,particularlyintheareasofproduction,customerserviceandmarketing.Thiswillbebothongoingandinformalmeetingseverythreemonthsinthefirstyearofthebusiness.

• Training programme.Skillsmaintenanceanddevelopmentareessentialinbuildingabiggerandbetterbusiness.Thepriorityareasforstafftrainingwillbe:-Buildingandproductiontechniques-Newproducts:fittings,materials,equipment,etc.-Newmachinery:outputs,operation,efficiency,etc.-Marketingskills-Marketanalysis-Selling-Customerservice-Financialskills-Analysingfinancialstatements-Estimatingandpricing

-Preparingcashflowprojections-Comparingactualexpenditure-Bookkeeping

Theproprietorsplantodeveloptheirbasicbusinessskillsinitiallybybothattendingtheeight-weekcourse‘PlanningandStartingaSmallBusiness’attheBoxHillCollegeofTAFE.TheproprietorswilljointheMasterBuildersAssociationandattendrelevantindustrycourses.Theproprietorswillalsoattendtradeshowsandsubscribetobusinessandtrademagazines.

Asthebusinessandstaffdevelopdeficienciesincertainareas,thesewillbeidentifiedandaddressedthroughaformaltrainingstrategy.

16.Qualitycertification

Willqualityassurancecertificationbeundertaken?Ifso,forwhatpurpose,howwillitbeundertakenandatwhatcostintimeandmoney?

CanterburyRenovations,asanewbusiness,willbedevelopedinaccordancewithacomprehensivebusinessplan.Asthereisnoanticipatedrequirementbyclientsintheimmediatefuture,qualityassurancecertificationwillnotbeundertakenatthisstage.However,thisaspectwillbekeptunderreviewasthebusinessdevelops.

16 PlantoSucceed

17.Administrationmanagement information systems

Thebusinesswillmaintainproperandsufficientbusinessrecordstoshowthefinancialpositionofthebusinessonamonthlybasis.Financialrecordswillshowoverallprofitabilityandcashflowandcomparedwithprojectedprofit/lossandcashflowstatementsofthisBusinessPlan.Recordswillalsobekeptforeachjobtoshowitsprogressandcostinlabour,materials,andsubcontractorsandcomparedwiththeestimateforthatjob.

Thefollowingspecificrecordswillbekept:

• Cashbook

• Receiptbook

• Invoices,receivedandsent

• Bankdepositsandstatements

• Pettycashexpenditure

• Wage,WorkCover,superannuation,longserviceleaverecords,andemployeedetails

• Capitalassetsregister

• Materialspurchasedandallocatedtoeachjobortemporarilyasfloatingstock

• Contactdetailsofallenquirers,existingclients,suppliersandsubcontractors

• Individualjobrecordsshowingprogress

• Jobestimates

18.SupportingDocumentationYoushouldprovidecopiesofapplicabledocumentswhichsupportthebusinessplan:

• References,qualifications

• Licencesandpermits

• Businessorcompanyincorporationcertificate

• Partnershipagreement

• Researchdata,promotionalliterature

• Productdrawings,designsorphotos,localitymap

• Projectedprofit/loss-firstyear(see example - Attachment 1)

• Projectedcashflow-firstyear(see example - Attachment 2)

• Projectedprofit/loss-secondyear(see example - Attachment 3)

• Projectedcashflow-secondyear(see example - Attachment 4)

• Statementoffinancialposition(see example - Attachment 5)

17SmallBusinessVictoria

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19SmallBusinessVictoria

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21SmallBusinessVictoria

Thebusinessplan

Statement of financial position

Thestatementoffinancialpositionorbalancesheetbringstogethertheresultsfromtheprofitorlossstatementandthecashflowstatementtoidentifytheproprietors’networthandhowthatnetworthismadeup.

ThefirstcolumnshowsthatwhenthebusinessstartedFrankandJuliepaidcashfor$20,000ofsharesinthebusiness,andthenborrowed$20,000fromFrank’sparentswhichgavethebusinessaninitial$40,000cashinthebankattheendofJune1996.Forsimplicity,wehaveassumedtheseactivitieswereundertakenbeforeestablishmentandcommercialcostswereincurred.

Columntwoshowsthatinthefirstyearofoperationallthisinitialcashisusedplusanoverdraftisrequiredtorunthebusiness.Thelossof$12,650meansthatproprietors’equityof$20,000hasbeenreducedto$7,350.

Developingabusinessplaninthismannerhighlightstheinitialrisksassociatedwithstartinganewbusinessandtheimportanceofproprietorshavingsufficientequityinthebusiness.IfthebusinessweretocloseattheendofthefirstyearFrankandJuliewouldonlyhave$7,350leftfromtheir$20,000andtheywouldstilloweFrank’sparentstheir$20,000.

Columnthreeshowsthe$8,350profitinthesecondyearimprovesFrankandJulie’spositionwiththeirequitybuildingbackupto$15,700,whilethebankoverdrafthasbeenreducedfrom$20,450to$2,100.Inthethirdyearofoperationstheproprietors’equityshouldbemorethantheiroriginal$20,000,andthereshouldbecashinthebank.

Who can help?

Forfurtherassistanceandinformationcontact

• VictorianBusinessLine13 22 15

• business.vic.gov.au

• YourlocalVictorianBusinessCentre

Attachment5

30/06/96 30/06/97 30/06/98

Assets $ $ $

Cash 40,000

Debtors 40,000 30,000

Capitalcosts 7,800 7,800

Total assets 40,000 47,800 37,800

Less liabilities

Loan 20,000 20,000 20,000

BankO/D 20,450 2,100

Total liabilities 20,000 40,450 22,100

Net assets 20,000 7,350 15,700

Proprietors’ equity

Shares 20,000 20,000 20,000

Retainedearnings (12,650) (4,300)

Total proprietors’ equity 20,000 7,350 15,700

22 PlantoSucceed

Ballarat( 5320 5900 48 Sturt Street Ballarat VIC 3350

Bendigo( 5442 410046 Edward StreetBendigo VIC 3550

Dandenong( 9791 8572314 Thomas StreetDandenong VIC 3175

Geelong( 5229 064169-71 Moorabool StreetGeelong VIC 3220

Glenroy( 9304 4344Suite A, 3 Belair AvenueGlenroy VIC 3046

Melbourne CBD( 13 22 15113 Exhibition StreetMelbourne VIC 3000

Mildura( 5051 2000131 Langtree AvenueMildura VIC 3500

Shepparton( 5821 18113/164 Welsford StreetShepparton VIC 3630

Traralgon( 5174 923333 Breed StreetTraralgon VIC 3844

Vermont( 9874 5733520 Canterbury RoadVermont VIC 3133

Wangaratta( 5721 698827-29 Faithfull StreetWangaratta VIC 3677

Wodonga( 6056 21666/22 Stanley StreetWodonga VIC 3690

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