THE COMPLETsmaE BUSINESS...Appendix 1, "Marketing," contains a sample marketing plan and Marketing Tips, Tricks, and Traps, a condensed guide on how to market your product or service

T H E

COMPLETE

smaBUSINESSSOURCEBOOK

Information, Services, andExperts Every Small and

Home-Based Business Needs

C A R L HAUSMAN a n d W I L B U R C R O S SDeveloped by The Stonesong Press, creators of The New York Public Library Desk Reference

Crafting the Funding Blueprint

Small Business Development Centers (SBDCs)

39

Small Business Development Centers, which are sponsored by the U.S.Small Business Administration in partnership with state and local govern-ments, the educational community, and the private sector, can assist withbusiness planning and the preparation of a business plan.

lip Sheet

Complete Guide to Developing a Business Plan

The following outline is excerpted from the SBA's "Road Map to Success" Work-shop on preparing a business plan. You can use this model as a guide when de-veloping a business plan for your own business.

ELEMENTS OF A BUSINESS PLAN

I. Cover sheet

II. Statement of purpose

III. Table of contents

1. The Business

A. Description of business

B. Marketing

C. Competition

D. Operating procedures

E. Personnel

F. Business insurance

G. Financing

2. Financial Data

A. Loan applications

B. Capital equipment and supply list

C. Balance sheet

D. Break-even analysis

E. Pro forma income projections (profit and loss statements)

• Three-year summary

• Detail each month (first year)

• Detail each quarter (second and third years)

• Assumptions on which projections are based

40 PART TWO RESOURCES BY CATEGORY

F. Pro forma cash flow

• Follow guidelines for section E (above)

3. Supporting Documents

A. Tax returns of principals for past three years

B. Personal financial statement (all banks have these forms)

C. For a franchised business, a copy of the franchise contract and allsupporting documents provided by the franchisor

D. Copy of proposed lease or purchase agreement for building space

E. Copies of licenses and other legal documents

F. Copies of resumes of all principals

G. Copies of letters of intent from suppliers, etc.

BUSINESS PLANS: THE BASIC CONTENT

What information must be given in business plans? This is an excellent question,but too many new and potential small-business owners don't ask it. The body ofa business plan should, at a minimum, cover: (1) description of the business;(2) marketing plan; (3) management plan; and (4) financial management plan.Addenda to the business plan should include the executive summary, support-ing documents, and financial projections.

D Description of the Business

You should provide a detailed description of your business. Ask yourself: "Whatbusiness am I in?" To answer this question, consider your products, market, andservices, as well as the characteristics that make your business unique. Re-member, however, that as you develop your business plan, you may have tomodify or revise your initial questions.

This section includes a business description that has three primary divi-sions: (1) business description, (2) product or service offered, and (3) location—and why this location is desirable (if you have a franchise, some franchisorsassist with site selection).

/. Business Description

When describing your business, generally you should explain:

• Origin: Is it a new independent business, a takeover, an expansion, afranchise?

• Legalities: Business form; such as proprietorship, partnership, corpora-tion, and the licenses or permits you will need.

• Business type: Merchandizing, manufacturing, or service.

Crafting the Funding Blueprint 41

• Product: What your product or service is.

• Value: Why the business will be profitable. What are the growth opportu-nities, and will franchising impact growth?

• Operation: When your business will be open (days, hours)?

• Management: What you have learned about your kind of business fromoutside sources (e.g., trade suppliers, bankers, other franchise owners,franchisors, publications).

A cover sheet should fall before the description. On it, include the name, ad-dress, and telephone number of the business and the names of those who areprincipal participants involved in the business. In the description of your busi-ness, describe its unique aspects and how or why they will appeal to consumers.Emphasize —explaining how and why—any special features you believe will en-courage that appeal. The description of your business should clearly identifyyour business goals and objectives, and it should clarify why you are, or why youwant to be, in business.

2. Product or Service

Describe the benefits of your goods and services from your customers' perspec-tive. Successful business owners know, or at least have an idea of, what theircustomers want and expect from them. This type of anticipation can be helpfulin building customer satisfaction and loyalty, and it certainly is a good strategyfor beating the competition or retaining your competitiveness. Describe yourproduct or service by answering the following questions:

• What am I selling?

• How will the product or service benefit the customer?

• Which products or services are in demand? Will there be a steady cashflow?

• What is different about the product or service my business is offering?

3. Location

The location of your business can play a decisive role in its success or failure.Build around your customers; the location should be accessible and provide asense of security. Consider these questions when addressing this section of yourbusiness plan;

• What are my location needs?

• What kind of space will I need?

• Why is the area and/or the building desirable?

• Is the location easily accessible? Is public transportation available? Isstreet lighting adequate?

• Are market shifts or demographic shifts occurring in the area?


It is a good idea to create your own checklist of questions you identify when de-veloping your business plan. Categorize the questions, and as you answer eachquestion, remove it from your list.

THE MARKETING PLAN

Because marketing plays a vital role in making business ventures successful,how well you market your business can ultimately determine the business'sdegree of success or failure. The key element of a successful marketing plan in-volves knowing your customers—their likes, dislikes, expectations. By identify-ing these factors, you can develop a marketing strategy that will allow you toarouse and fulfill their needs.

Identify your customers by their age, sex, income and education level, andresidence. At first, target only those customers who are likely to purchase yourproduct or service. As your customer base expands, modify the marketing planto include other customers.

To initiate development of your business's marketing plan, answer the ques-tions that follow (potential franchise owners will have to use the marketing strat-egy developed by their respective franchisor):

• Who are my customers? Define your target market(s).

• Are the markets steady? Are they growing or declining?

• Is the market share steady, growing, or declining?

• How will you attract, hold, increase your market share? If a franchise, willthe franchisor provide assistance in this area? Based on the franchisor'sstrategy, how will you promote your sales?

• If a franchise, how is the market segmented?

• Are the markets large enough to expand?

• What pricing strategy have you devised?

Appendix 1, "Marketing," contains a sample marketing plan and Marketing Tips,Tricks, and Traps, a condensed guide on how to market your product or service.Study these documents carefully when developing the marketing portion of yourbusiness plan.

D Competition

Competition is part of life. We compete for jobs, promotions, scholarships, sport-ing awards, and so on; there is competition in almost every aspect of our lives.Nations compete for consumers in the global marketplace as do individual busi-ness owners. Advances in technology can send profit margins of a successful


business into a tailspin, causing them to plummet within just a few hours. Whenconsidering these factors, we can conclude that business is a highly competitive,volatile arena, an arena where it is important to know about your opponents. An-swers to the following questions can help:

• Who are my five nearest direct competitors?

• Who are my indirect competitors?

• How are the competitors' businesses: steady? increasing? decreasing?

• What can be learned from their operations and advertising?

• What are their strengths and weaknesses?

• How does their product or service differ from mine?

To better understand your competitors and how they operate their businesses,maintain a file on each of your competitors. Fill manila envelopes with their ad-vertising and promotional materials and pricing-strategy techniques. Reviewthese files periodically, determining when and how often your competitors adver-tise, sponsor promotions, and offer sales. Study the copy used; for example, is itshort, descriptive, or catchy? How much are prices reduced for sales?

D Pricing and Sales

Pricing strategy is another marketing technique used to improve a business'soverall competitiveness. Investigate the pricing strategies of your competitors todetermine if your prices are in line with your market area and with industry aver-ages. Some of the pricing strategies are as follows:

Retail cost and pricing.

Competitive position.

Pricing below competition.

Pricing above competition.

Price lining.

Multiple pricing.

Service costs and pricing (for service businesses only):

—Service components.

—Material costs.

—Labor costs.

—Overhead costs.

The key to success is to develop a well-planned strategy, establish your policies,and constantly monitor prices and operating costs to ensure profits. Even in afranchise where the franchisor provides operational procedures and materials,


keep abreast of the changes in the marketplace because these changes can af-fect your competitiveness and profit margins.

Appendix 1, "Marketing," contains a sample price/quality matrix. Review itfor ideas on pricing strategies of your competitors, determining which of thestrategies they use and if and why it is effective.

D Advertising and Public Relations

How you advertise and promote your goods and services also can make or breakyour business. Having a good product or service and not advertising and pro-moting it is like not having a business at all. Many business owners operateunder the mistaken concept that the business will promote itself; thus, theychannel money that should be used for advertisements and promotions to otherareas of the business. Yet, public relations is the lifeline of a business and shouldbe treated as such.

Devise a plan that uses advertising and networking as a means to promoteyour business. With short, descriptive copy (text material), clearly identify yourgoods or services, their prices, and your business's location. Construct catchyphrases to arouse the interests of your readers, listeners, and/or viewers. In thecase of a franchise, the franchisor will provide advertising and promotional ma-terials as part of the franchise package; you may need approval to use anymaterials that you and/or your staff develop. Whether this is the case, as a cour-tesy, allow the franchisor opportunity to review, provide feedback, approve thesematerials before using them. Make sure the advertisements you create are con-sistent with the image the franchisor is trying to project. Remember that themore care and attention you devote to your marketing program, the more suc-cessful your business will be.

THE MANAGEMENT PLAN

Managing a business requires more than the desire to be your own boss. Itdemands dedication, persistence, and the ability to make decisions and to man-age employees and finances. Your management plan, along with your marketingand financial plans, sets the foundation for and facilitates the success of yourbusiness.

Like plants and equipment, people, too, are resources; they are the mostvaluable asset of a business. Employees and staff play important roles in thetotal operation of your business; consequently, it is imperative to know whichskills you possess and which you lack since you will be hiring personnel tocomplement your abilities. Additionally, you should know how to manage andcommunicate with your employees. Make them a part of the team: keep theminformed of, and get their feedback regarding, changes. Employees oftentimes

have excel leproducts or =ness's comf:questions:

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have excellent ideas that can lead to new market areas, innovations to existingproducts or services or new product lines, or services that can improve the busi-ness's competitiveness. Your management plan should answer the followingquestions:

• How do past experiences help me with this business?

• What are my weaknesses, and how can I compensate for them?

• Who will be on the management team? What are their strengths andweaknesses?

• What are their duties? Are these duties clearly defined?

• If a franchise, what type of assistance can I expect from the franchisor?Will this assistance be ongoing?

• What are my current personnel needs?

• What are my plans for hiring and training personnel?

• What salaries, benefits, vacations, and holidays will I offer? If a franchise,are these issues covered in the management package the franchisor willprovide?

• What benefits, if any, can I afford to provide at this point?

If a franchise, the operating procedures, manuals, and other materials providedby the franchisor should be included in this section of the business plan. Studythese documents carefully when writing your business plan, and be sure to in-corporate this material. The franchisor should assist you with managing yourfranchise. Take advantage of his or her expertise and develop a managementplan that will ensure success for your franchise and satisfy the needs and ex-pectations of your employees, as well as of your franchisor.

THE FINANCIAL MANAGEMENT PLAN

Sound financial management is necessary for your business to remain profitableand solvent. How well you manage the finances of your business is the corner-stone of every successful business venture; each year thousands of potentiallysuccessful businesses fail because of poor financial management. As a businessowner, you will need to identify and implement policies that will lead to and en-sure your meeting all financial obligations.

To effectively manage your finances, create a sound, realistic budget by de-termining the actual amount of money needed to open your business (start-upcosts) and that needed to keep it open (operating costs). The first step to build-ing a sound financial plan is to devise a start-up budget. Your start-up budgetwill usually include such one-time-only costs as major equipment, utility de-posits, down payments, and so forth. The start-up budget should allow for thefollowing expenses:


• Personnel (costs prior to opening).• Legal, professional, and/or fees.• Occupancy.• Licenses and/or permits.• Equipment and supplies.• Insurance.• Advertisements and/or promotions.• Income.• Utilities.• Payroll expenses.

An operating budget is to be prepared when you are actually ready to open forbusiness. This budget should reflect your priorities in terms of how you willspend the business's money, the expenses that will be incurred and how you willmeet those expenses (income). The operating budget also should includemoney to finance the business's first three to six months of operation. It shouldallow for the following expenses.-

• Personnel.• Insurance.• Rent.• Depreciation.• Loan payments.• Advertisements and/or promotions.• Legal and/or accounting fees.

Miscellaneous expenses.

Supplies.Payroll expenses.Utilities.

Dues and/or subscriptions.Taxes.Equipment/maintenance.

This section of your financial management plan should include any loan appli-cations you have filed, a capital equipment and supply list, balance sheet,break-even analysis, pro forma income projections (profit and loss statement),and pro forma cash flow. The income statement and cash flow projectionsshould include a three-year summary, detailed by month for the first year, thenby quarter for the second and third years.

The accounting and inventory control systems you will be using are also gen-erally addressed in this section of the business plan. If a franchise, the franchisor

may stipsystems -you will tand inverthem, orunderstaisist you iring quesineeded tc

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may stipulate, in the franchise contract, the type of accounting and inventorysystems to be used. If this is the case, he or she will have a system intact andyou will be required to adopt this system. Whether you develop the accountingand inventory systems yourself, contract an outside financial adviser to developthem, or find them provided by the franchisor, you need to acquire a thoroughunderstanding of each segment and how it operates. (A financial adviser can as-sist you in developing this section of your business plan.) Answers to the follow-ing questions should help you to determine the amount of start-up capitalneeded to purchase and open a franchise:

• How much money do I have?

• How much money will I need to purchase the franchise?

• How much money will I need for startup?

• How much money will I need to stay in business?

Other questions to consider are:

• What type of accounting system will I use? Is it a single-entry or dual-entry system?

• What will be my sales and profit goals for the coming year? If a franchise,will the franchisor set these goals, or will he or she expect me to reachand retain a certain sales level and profit margin?

• What financial projections will I need to include in the business plan?

• What kind of inventory control system will I use?

Your plan should include an explanation of all projections. Unless you are thor-oughly familiar with financial statements, get help in preparing your balancesheet and cash flow and income statements. Your aim is not to become a fi-nancial wizard, but to understand available financial tools well enough to gaintheir benefits. Your accountant or financial adviser can help you accomplishthis goal.

Sample balance sheets, income projections (profit and loss statements),and cash flow statements are included in Appendix 2, "Financial Management."For a detailed explanation of these and more complex financial concepts, con-tact your local SBA office. You can find its telephone number listed under theU.S. Government section of your local telephone directory.

D Self-Paced Activity

Review the development of a business plan by performing the following activities:

1. Briefly describe what is included in a business plan.

2. Identify advantages of developing marketing, management, and finan-cial management plans.


3. List financial projections included in the financial management plan.

4. Jot down an outline for your own business plan.

APPENDIX 1: MARKETING

D The Marketing Plan

I. Market Analysis

A. Target Market: Who Are the Customers?

1. We will be selling primarily to (check all that apply):

3.

Total Percentof Business

a.

b.

c.

d.

e.

Private sector

Wholesalers

Retailers

Government

Other

2. We will be targeting customers by:

a. Specific product linesand/or services. Wewill target lines

b. Geographic area(s)

Sales

Industry __Other

c.

d.e.

N;

Ac

Ye

M.

Pr

Pr

2. He

Hi.

Me

Lo

3. Lis

CO

sei

How much will our selected market spend on our type of product or servicethis com ing year? $

B. Competition

1. Who are our competitors?

Name:Address:

Years in business

Market share

Price/strategy

Product/service features

C. Enviror

1. The

our

ecc

2. The

mai

3. The

4, The

but


2nt plan.

la I Percent: Business

Name: _Address:

2.

Years in business

Market share

Price/strategy

Product/service features

How competitive is the market?

High

Medium

Low

3. List your strengths and weaknesses compared with those of yourcompetition (consider such areas as location, resources, reputation,service, personnel, etc.):

Strengths Weaknesses

;t or service

C. Environment

1. The following are some important economic factors that will affectour product or service (such as trade area growth, industry health,economic trends, taxes, rising energy prices, etc.):

2. The following are some important legal factors that will affect themarket:

3. The following are some important government factors:

4. The following are environmental factors that will affect the market,but over which we have no control:


Product or Service Analysis

A. Description

1. Describe the product or service is and what it does:

B. Comparison

1. What advantages does your product or service have over that of thecompetition (consider such things as unique features, patents, ex-pertise, special training, etc.)?

2. What are the disadvantages?

C. Additional Considerations

1. Where will you get your materials and supplies?

2. List Other:

Marketing Strategies: Market Mix

A. Image

1. What kind of image do I want the business to project (such as cheapbut good, or exclusiveness, or customer-oriented or highest quality,or convenience, or speed, or. . . )?

B. Features

1. List the features to be emphasized:a.b.c.


C. Pricing

1. We will be using the following pricing strategy:

a. Markup on cost

b. Suggested price

c. Competitive

d. Below com petition

e. Premium price

f. Other

What percent markup?

2. Are our prices in line with our image?

Yes___ No

3. Do our prices cover costs and leave a margin of profit?

Yes No-

D. Customer Services

1. List the customer services we provide:a.b.c.

2. These are our sales/credit terms:a.b.c.

3. The competition offers the following services:a. _b.c. —

E, Advertisement/Promotion

1. These are the things we wish to say about the business:

2. We will use the following advertising/promotion sources:

1. Television

2. Radio

3. Direct mailings

4. Personal contacts

5. Trade associations

6. Newspapers . __

7. Magazines


8. Yellow Pages

9. Billboards

10. Other:

3. The following are reasons why we consider the media we have cho-sen to be the most effective:

D Marketing Tips, Tricks and Traps

Marketing Steps

• Classifying your customers' needs

• Targeting your customer(s)

• Examining your niche

• Identifying your competitors

• Assessing and managing your available resources

—Financial

—Human

—Material

—Production

Notes and Strategies for Your Business-.

Marketing Positioning

• Follower versus leader

• Quality versus price

• Innovator versus adaptor

• Customer versus product

• International versus domestic

• Private sector versus government

Notes and Strategies for Your Business: .


nave cho-

Sales Strategy

• Use customer-oriented selling approach by constructing agreement

—Phase One: Establish rapport with customer by agreeing to discusswhat the customer wants to achieve.

—Phase Two: Determine customer objective and situational factors byagreeing on what the customer wants to achieve and those factors inthe environment that will influence these results.

—Phase Three: Recommend a customer action plan by agreeing thatusing your product or service will indeed achieve what customer wants.

—Phase Four: Obtaining customer commitment by agreeing that thecustomer will acquire your product or service.

• Emphasize Customer Advantage

—Must be read: When a competitive advantage cannot be demon-strated, it will not translate into a benefit.

—Must be important to the customer: When the perception of competi-tive advantage differs between supplier and customer, the customerwins.

—Must be specific: When a competitive advantage lacks specificity, ittranslates into mere puffery and is ignored.

—Must be promotable: When a competitive advantage is proven, it isessential that your customer know it, lest it not exist at all.

Notes and Strategies for Your Business:

Benefits versus Features

• The six O's of organizing customer buying behavior:

Origins: Who buys it?

Objectives: What do they buy?

Occasions: When do they buy it?

Outlets: Where do they buy it?

Objectives: Why do they buy it?

Operations: How do they buy it?

• Convert features to benefits using the "which means" transition:

Features "Which Means" Benefits

PerformanceReputation

Time savedReduced cost


Features

ComponentsColorsSizesExclusiveUsesApplicationsRuggednessDeliveryServicePriceDesignAvailabilityInstallationPromotionLab TestsTermsWorkmanship

Rational

Accurate performanceAvailabilityComplete servicingCuriosityDesire to be uniqueDurabilityEase of installationEase of repairEconomy of purchaseEconomy of useEfficient profitsGood workmanshipIncreased productionIncreased profitsLabor-savingLow maintenanceSimple constructionSimple operationSpace-savingThorough researchTime-saving

"Which Means"

Buying Motives

Benefits

PrestigeBigger savingsGreater profitsGreater convenienceUniform productionUniform accuracyContinuous outputLeadershipIncreased salesEconomy of useEase of useReduced inventoryLow operating costSimplicityReduced upkeepReduced wasteLong life

Emotional

ConvenienceCuriosityDesire to be uniqueDesire to createDesire to imitateDesire for prestigeDesire for recognitionDesire for securityDesire for varietyFearPride of appearancePride of ownershipSafety

D Price/Qua!


• Sales maxim: Unless the proposition appeals to their interest, unless itsatisfies their desires, and unless it shows them a gain—then they will notbuy!

• Quality customer leads:

Ability to pay.

Accessibility.

Authority to pay.

Business history.

Level of need.

One-source buyer.

Reputation (price or quality buyer).

Sympathetic attitude.

Notes and Strategies for Your Business:

D Price/Quality Matrix Sales Appeals

PRICE


APPENDIX 2: FINANCIAL MANAGEMENT

D The Income Projections Statement

To control business operations the income projections (projections include prof-its and losses) statement is valuable as a planning tool and a key managementtool. It enables the owner and/or manager to develop a preview of the amount ofincome generated monthly and/or yearly, based on reasonable predictions levelsof sales, costs, and expenses.

As monthly projections are developed and entered into the income projec-tions statement, they serve as definite goals to be considered when controllingbusiness operations. As actual operating results become known each month,they should be recorded for comparison with the monthly projections. A com-pleted income statement allows the owner and/or manager to compare actualfigures with monthly projections and to take the necessary steps to correct anyproblems. See the sample income projection statement on page 57.

Industry Percentage

In the industry percentage column, enter the percentages of total sales (rev-enues) that are standard for your industry, which are derived by dividing:

Costs / Expenses x 100%

Total net sales

These percentages can be obtained from various sources, such as trade associ-ations, independent accountants, and banks. The reference librarian in yournearest public library also can refer you to documents that contain the requiredpercentage figures.

Industry figures serve as a useful benchmark with which to compare costand expense estimates that you develop for your firm. Compare the figures in theindustry percentage column with those in the annual percentage column.

Total Net Sales (Revenues)

Determine the total number of units of products or services you realistically ex-pect to sell each month in each department at the prices you expect to get. Usethis step to create the projections to review your pricing practices: What returns,allowances and markdowns can be expected? Exclude any revenue not strictlyrelated to the business.

Cost of Sales

The key to calculating your cost of sales is that you do not overlook any costsyou have incurred. Calculate cost of sales of all products and services used to


INCOME PROJECTION STATEMENT

Industry PercentageUse a Column for Each Month Annual Annual

Jan. Feb. . . . Dec. Total Percentage

Total net sales(revenues)

Cost of salesGross profitGross profit margin

Controllable expensesSalaries/wagesPayroll expensesLegal/accountingAdvertisingAutomobile and travelOffice suppliesDues/subscriptionsUtilitiesMiscellaneous

Total controllable expenses

Fixed expensesRentRepair/maintenanceDepreciationUtilitiesInsuranceLicenses/permitsLoan paymentsMiscellaneous

Total fixed expenses

Total expensesNet profit (loss) before taxesTaxesNet profit (loss) after taxes


determine total net sales. Where inventory is involved, do not overlook trans-portation costs. Also include any direct labor.

Gross Profit

Subtract the total cost of sales from the total net sales to obtain gross profit.

Gross Profit Margin

The gross profit is expressed as a percentage of total sales (revenues). It is cal-culated by dividing:

Gross profits

Total net sales

Controllable (Variable) Expenses

The following is a list of common business expenses necessary for the businessto maintain routine operations. These expenses are variable in that they can bemodified to more readily reflect the interests of the business:

• Salaries/wages — Base pay plus overtime.

• Payroll expenses — Include paid vacations, sick leave, health and unem-ployment insurance, and social security taxes.

• Legal/accounting — Outside professional services.

• Advertising — Include desired sales volume and classified directory adver-tising expenses.

• Automobile and travel — Include charges if personal car is used for busi-ness, including parking, tools, travel expenses, and so on.

• Office supplies — Services and items purchased for use in the business.

• Repair/maintenance — Regular maintenance and repair, including peri-odic large expenditures such as painting.

• Miscellaneous — Include costs of subcontracts, overflow work, and spe-cial or one-time services.

Fixed Expenses

The following includes those regular payments for which nearly every small busi-ness must account:

• Rent — List only real estate used in business.

• Repair/maintenance.

• Depreciation — Amortization of capital assets.

• Utilities— Water, heat, light, and so on.

D TheBalai


• Insurance—Fire or liability on property or products. Include workers'compensation,

• Licenses/permits.

• Loan payments—Interest on outstanding loans.

• Miscellaneous—Unspecified, small expenditures without separate accounts.

Net Profit (Loss)

To find your business's net profit (before taxes), subtract the total expenses fromgross profit.

Taxes

Where taxes are to be noted on the statement, include all taxes incurred by thebusiness: inventory, sales, excise, real estate tax, and so on.

Net Profit (Loss)

To calculate your business's net profit (after taxes), subtract total taxes from thenet profit (before taxes).

Annual Total

For each of the sales and expense items in your income projections statement,add all the monthly figures across the table and put the result in the annual totalcolumn.

Annual Percentage

Calculate the annual percentage by dividing:

Annual totalx 100%

Total net sales

Now compare this figure with the industry percentage in the table's first column.

D The Balance Sheet

Figures used to compile the balance sheet are taken from the business's previ-ous and current balance sheets as well as the current income statement. (Theincome statement is usually attached to the balance sheet.) At the top of the bal-ance sheet, fill in the legal name of the business.- the type of statement, balancesheet, and the day, month, and year the statement was completed. Essentialelements of the balance sheet are discussed in the following text. (A sample bal-ance sheet can be found on pages 60-61.)


BALANCE SHEET

Company Name

As of. .,20.

Assets

Current AssetsCashPetty cashAccounts receivableInventoryShort-term investmentsPrepaid expenses

Long-Term Investments

Fixed AssetsLandBuildingsImprovementsEquipmentFurnitureAutomobile/vehicles

Other Assets1.

2.

3.

4.

Total Assets

Liabilities

Current LiabilitiesAccounts payableNotes payableInterest payable

Taxes PayableFederal income taxState income taxSelf-employment taxSales tax (SBE)Property taxPayroll accrual

Long-Term LiabilitiesNotes payable

Total Liabilities

Total Net Woi

Total Liabiliti

Current Asset

You r total of a


Net Worth (owner equity)

Proprietorship or PartnershipEquity [name]Equity [name]

CorporationCapital stockSurplus paid inRetained earnings

Total Net Worth

Total Liabilities and Total Net Worth

Assets

List anything of value that is owned or legally due the business as an asset.Total assets include all net values. These are the amounts derived when yousubtract depreciation and amortization from the original costs of acquiring the

assets.

Current Assets

Your total of all cash and other items of value includes the following:

• Cash—Cash and resources that can be converted into cash within 12months of the date of the balance sheet (or during one established cycleof operations). Include any money on hand and demand deposits in thebank: for example, checking accounts and regular savings accounts.

• Petty cash—A fund for small miscellaneous expenditures. If your busi-ness has such a fund, include its total here.

• Accounts receivable—Amounts due from customers in payment for aproduct or service.

• Inventory—Includes raw materials on hand, work in progress, and all fin-ished goods; either manufactured or purchased for resale.

• Short-term investments—Also called temporary investments or mar-ketable securities, these include interest- or dividend-yielding holdingsexpected to be converted into cash within one year. List stocks andbonds, certificates of deposit, and time-deposit savings accounts ateither cost or market value, whichever is less.

• Prepaid expenses—Goods, benefits, or services a business buys or rentsin advance. Examples include office supplies, insurance protection, and

floor space.


Long-Term Investments

Also called long-term assets, these are holdings the business intends to keep forat least one year and that typically yield interest or dividends. Included arestocks, bonds, and savings accounts earmarked for special purposes.

Fixed Assets

Also called plant and equipment, fixed assets include all resources a businessowns or acquires for use in operations and does not intend to resell. Fixed assetsmay be leased, and depending on the leasing arrangements, the value and lia-bility of the leased property may need to be listed on the balance sheet. The fol-lowing is a list of commonly held fixed assets:

• Land—List original purchase price without allowances for market value.

• Buildings.

• Improvements.

• Equipment.

• Furniture.

• Automobile/vehicles.

Liabilities

Your tally of what you owe includes the following:

Current Liabilities

List all debts, monetary obligations and claims payable within 12 months or onecycle of operations. Typically, such liabilities include the following:

• Accounts payable—Amounts owed to suppliers for goods and servicespurchased in connection with business operations.

• Notes payable—The balance of principal due to clear short-term debt forborrowed funds. Also includes the current amount due of total balanceon notes whose terms exceed 12 months.

• Interest payable—Any accrued fees due for use of short- and long-termborrowed capital as well as credit extended to the business.

• Taxes payable—Amounts estimated by an accountant to have been in-curred during the accounting period.

• Payroll accrual—Salaries and wages currently owed.

Long-term Liabilities

List notes and any contract or mortgage payments due over a period exceeding12 months or one cycle of operations. They are listed by the outstanding balanceless the current position due.


Net Worth

Also called owner's equity, net worth is the claim of the owner(s) on the assets of

the business. In a proprietorship or partnership, equity is each owner's original

investment plus any earnings that remain after withdrawals.

Total Liabilities and Net Worth

The sum of these two amounts always must match that for total assets.

MONTHLY CASH FLOW PROJECTION

Name of Business:

Year:

Date:

Use a Column for Each MonthJan. Feb. . . . Dec.

1. Cash on hand (beginning month)2. Cash receipts

(a) Cash sales(b) Collections from credit accounts(c) Loan or other cash injections (specify)

3. Total cash receipts (2a + 2b + 2c = 3)4. Total cash available (before cash out) (1 + 3)5. Cash paid out:

(a) Purchases (merchandise)(b) Gross wages (excludes withdrawals)(c) Payroll expenses (taxes, etc.)(d) Outside services(e) Supplies (office and operating)(f) Repairs and maintenance(g) Advertising(h) Car, delivery, and travel(i) Accounting and legal(j) Rent(k) Telephone(I) Utilities(m) Insurance(n) Taxes (real estate, etc.)(o) Interest(p) Other expenses (specify each)(q) Miscellaneous (unspecified)(r) Subtotal(s) Loan principal payment(t) Capital purchases (specify)(u) Other start-up costs(v) Reserve and/or escrow (specify)(w) Owner's withdrawal

(Continued)



Name of Business:

Year:

Date:

Use a Column for Each MonthJan. Feb. . . . Dec.

6. Total cash paid out (5a-5w)7. Cash position (end of month) (4 - 6)

Essential operating data (non-cash flowinformation)

(a) Sales volume (dollars)(b) Accounts receivable (end of month)(c) Bad debt (end of month)(d) Inventory on hand (end of month)(e) Accounts payable (end of month)

Instructions1. Cash on hand (beginning of month) — Cash on hand same as (7), cash position, previ-

ous month.2. Cash receipts:

(a) Cash sales — All cash sales. Omit credit sales unless cash is actually received.(b) Gross wages (including withdrawals) — Amount to be expected from all accounts.(c) Loan or other cash injection — Indicate here all cash injections not shown in 2(a)

or 2(b) above.3. Total cash receipts (2a + 2b + 2c = 3)4. Total cash available (before cash out) (1 + 3).5. Cash paid out:

(a) Purchases (merchandise) — Merchandise for resale or for use in product (paidfor in current month).

(b) Gross wages (including withdrawals) — Base pay plus overtime (if any).(c) Payroll expenses (taxes, etc.) — Include paid vacations, paid sick leave, health in-

surance, unemployment insurance (this might be 10 percent to 45 percent of

(d)

(e)

(f)

(g)(h)

(i)(j)(k)(I)(m)

(n)(o)

Outside services — This could include outside labor and/or material for special-ized or overflow work, including subcontracting.Supplies (office and operating) — Items purchased for use in the business (not forresale).Repairs and maintenance — Include periodic large expenditures, such as paint-ing or decorating.Advertising — This amount should be adequate to maintain sales volume,Car, delivery, and travel — If personal care is used, charge in this column; includeparking.Accounting and legal — Outside services, including, for example, bookkeeping.Rent — Real estate only (see 5[p] for other rentals).Telephone.Utilities — Water, heat, light, and/or power.Insurance — Coverage on business property and products (fire, liability); alsoworker's compensation, fidelity, and so on. Exclude executive life (include in 5[w]).Taxes (real estate, etc.) — Plus inventory tax, sales tax, excise tax, if applicable.Interest — Remember to add interest on loan as it is injected (see 2[c] above).



Name of Business: Date:

Year:Use a Column for Each Month

Jan. Feb. . . . Dec.

(p) Other expenses (specify each).

Unexpected expenditures may be included here as a safety factor

Equipment expenses during the month should be included here (non-capitalequipment)

When equipment is rented or leased, record payments here.

(q) Miscellaneous (unspecified)—Small expenditures for which separate accountswould be practical.

(r) Subtotal—This subtotal indicates cash out for operating costs,(s) Loan principal payment—Include payment on all loans, including vehicle and

equipment purchases on time payment,(t) Capital purchases (specify)—Nonexpensed (depreciable) expenditures such as

equipment, building purchases on time payment,(u) Other start-up costs—Expenses incurred prior to first-month projection and paid

for after startup,(v) Reserve and/or escrow (specify)—Example: insurance, tax or equipment escrow

to reduce impact of large periodic payments.(w) Owner's withdrawals—Should include payment for such things as owner's in-

come tax, social security, health insurance, executive life insurance premiums,and soon.

6. Total cash paid out (5a-5w).7. Cash position (end of month) (4-6)—Enter this amount in (1) Cash on hand

following month—

Essential operating data (non-cash flow information)—This is basic information nec-essary for proper planning and for proper cash flow projection. Also with this data, thecash flow can be evolved and shown in the above form.

A. Sales volume (dollars)—This is an important figure and should be estimatedcarefully, taking into account size of the facility and employee output as well asrealistic anticipated sales (actual sales, not orders received).

B. Accounts receivable (end of month)—Previous unpaid credit sales plus currentmonth's credit sales, less amounts received current month (deduct "C").

C. Bad debt (end of month)—Bad debts should be subtracted from "B" in themonth anticipated.

D. Inventory on hand (end of month)—Last month's inventory plus merchandisereceived and/or manufactured current month minus amount sold current month.

E. Accounts payable (end of month)—Previous month's payable plus currentmonth's payable minus amount paid during month.

F. Depreciation—Established by your accountant, or value of all your equipmentdivided by useful life (in months) as allowed by IRS.


Diversification, Growth, and Financial Viability

You diversity your business when you extend your operations to fields outside ofyour expertise, whether related or unrelated, to augment product lines, exploitmore promising opportunities, or otherwise increase profitability and long-termpotential. Diversification into new businesses, however, has been rated as one ofthe highest types of business risks, according to the National Business Informa-tion Center, which notes that fewer than 20 percent of the businesses in Amer-ica have been successful when they tried to diversity. The chief reasons for faileddiversification include the following:

• Poor selection of enterprises into which to diversify.

• Lack of experience in, or knowledge about, the "new" field of business.

• Overallocation of investment capital to an untried field of operations.

• Increased management responsibilities by way of additional commit-ments and time-consuming problems.

• Neglect of existing business to attend to the demands of the newbusiness.

Proper business planning, well in advance of any attempt at diversification,can measurably improve your chances of success.

J.K. Lasser ]1993). Revisness—insura:how to incorr.

Lasher, WillL1994). Comp.examples ofworking with

McDeever, Ming a businesmodel plans f

The PortableWiley, 1997).

Sherman, An-ness (New Yaelude "BusineFinancing for

"Small Businoverview on dplan.

RECOMMENDED READING

Dethomas, Art, Financing Your Small Business: Techniques for Planning, Acquir-ing and Managing Debt. Edited by Vickie Reierson (Grants Pass, Oregon: Oasis,1992). Variety of methods for all financial circumstances.

Graybill, John O., Entrepreneur's Road to Business Success and Personal Free-dom: 101 Proven Tips for Your Small Business (New York: Amacom, 1995). Tipsfor small business owners interested in accurate planning, expanding their busi-ness, and locating a solid client base.

Hughes, Charles L., Goal Setting (New York: Amacom, 1979). Practical guidanceon setting short- and long-term goals, with emphasis on breaking large goals intosmall steps.

Inc. Business Resources, a division of Inc. magazine, publishes several good re-sources about business plans, including the "Guide to Creating a Successful Busi-ness Plan," Inc. PLAN Software, and the video "How to Really Create aSuccessful Business Plan." Call 617-248-8000, or you can find a variety of Inc.publications at: www.inc.com/incmagazine/


J.K. Lasser Institute, How to Run a Small Business (New York: McGraw-Hill,1993). Revision of popular handbook covering issues pertinent to small busi-ness—insurance, taxes, personnel, location, and so forth—along with advice onhow to incorporate those issues into your business plan.

Lasher, William, The Perfect Business Plan Made Simple (New York: Doubleday,1994). Comprehensive yet compact guide, long on practical information. Manyexamples of successful business plans, along with important information onworking with lawyers and accountants.

McDeever, Mike, How to Write a Business Plan (Seattle: Nolo Press, 1992). Writ-ing a business plan that will impress banks and potential investors. Includesmodel plans for different types of businesses.

The Portable MBA in Entrepreneur ship. Edited by William Bygrave (New York:Wiley, 1997). Informative chapter on creating a successful business plan.

Sherman, Andrew J., The Complete Guide to Running and Growing Your Busi-ness (New York: Times Books, Random House, 1997). Insightful chapters in-clude "Business Planning and Strategies for Raising Equity Capital" and "DebtFinancing for Growing Companies."

"Small Business Advisor." Entrepreneur magazine. Has both an excellentoverview on developing a business plan as well as an extensive sample businessplan.