Massachusetts Small Business Development Center Network
Northeast Regional Office


Business Plan Guide

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Introduction

Unlike many business planning publications, this guide will not attempt to evaluate your entrepreneurial fitness, nor will it provide instruction in the various management skills needed to start and operate a business. Its sole purpose is to provide brief and easily understood guidance for preparing a useable business plan, especially for those for whom this is a new experience.

A business plan is a detailed written description of why, how and when an enterprise will achieve a stated level of sales and profitability. It should be first and foremost an internal operating document to validate planning assumptions for both new and existing businesses and to provide the management team with a blueprint for actions to which it will commit itself. It may also be used as a selling document to describe to prospective lenders or investors what and how management intends to utilize the funding and human resources at its disposal.

There is no single correct approach to writing a business plan. However, certain key elements are always needed to describe what the business does as well as why, where, how and when economic success will be achieved. Although the length, content and format of a business plan will vary with the nature and complexity of the venture, presentation is important. The document should project professionalism, look appealing, be easy to read, be well organized and follow a logical progression.

There are generally three sections to a business plan:

  • A description of the business and its environment
  • Historical and projected financial information
  • Appropriate supporting documents

The following pages present an approach to preparing your business plan. Some material covered and questions posed may not be relevant. Some important relevant issues may not be covered. Please use this guidance to help stimulate and organize your thinking and as a check list to be sure you have covered all the bases. Although you may wish to seek assistance as the plan takes shape, the end result will be uniquely yours and should clearly, concisely and completely describe your business.

Keep in mind that writing an effective business plan is a difficult, time consuming and repetitive process. Your first draft will not be your last. With the assistance of your SBDC business advisor, you will know when the plan is ready for implementation. Good luck!
 



Statement of Purpose

This section will immediately identify for the reader who he or she is dealing with and why the business plan has been generated. Information provided should include:

  • Formal name of the business, including any DBA identities
  • Business address, telephone and fax numbers, e-mail address
  • Form of business organization, i.e. sole proprietorship, corporation, partnership or limited liability company (LLC)
  • Names and titles of the principals
  • Why the plan has been generated, i.e. as an operating plan or in support of a funding proposal (debt or equity)
  • If in support of a loan application or guarantee, the amount and pay back period requested
  • If in support of an equity offering, the amount and buyback strategy
     


Table of Contents

Every business-planning document should contain a Table of Contents. This page will allow the lender or investor to quickly review your document and determine if all the criteria for making a decision are contained in the package. All of the components suggested in the following sample plan are necessary for a complete comprehensive plan. Additional data or information may be added as necessary.

The Table of Contents cannot be completed until you have decided on the format and components. It will be the last task in completing the plan. The Table of Contents shown in this example may not match your Table of Contents exactly.

  • Have you titled each part of the plan?
  • Have you included all of the parts in the Table of Contents?
     


Summary

This is an extremely important part of any plan and should be considered absolutely necessary. It should be no longer than two pages designed to capture the reader’s attention. It should be written last and should highlight the key features of the venture and why it will be successful.

An effectively written summary will:

  • Explain the customer need to be satisfied
  • Describe the product or service intended to meet that need
  • Distinguish the business from its competition
  • Establish credibility of the management team
  • Present the company’s marketing and financial goals
  • Identify any funding being sought and how it will be used
  • Make the reader want to read the entire plan


Section I: The Business

Business Description

This section should describe the company’s industry, its perceived mission and its products or services. Here is where you address the who, what, where, when, and how questions of your business in as much detail as necessary to present a complete and accurate picture. Try to avoid technical jargon and assume the reader knows little or nothing about your business. Detailed brochures, specifications, drawings, flowcharts, etc. can always be included as supporting documents where appropriate.

Some questions that should be addressed:

  • What is the industry’s recent history and trends? Is it new or mature? Is it growing or contracting?
  • Is this a start-up situation or are you continuing an existing business? If the latter, why is the present owner selling, and why do you feel you can maintain the business or make it grow?
  • What goals have you established for the business (e.g. market share, sales, profit margins)?
  • How is the product or service created, sold and distributed? Describe each process briefly but completely.
  • Is there anything unique or proprietary about the product or service? Are there any patents or trademarks involved?
  • Is there any seasonal variation in demand? If so, how will you handle the low points?
  • What, if any special permits or licenses are required? Are there any unusual regulatory compliance issues?
     

Location and Facilities

An important consideration in starting or running any business is its location and facilities. Selection criteria are typically dictated by the type of business (manufacturing, wholesale, retail) and industry. There are many influencing factors, each to be considered according to its importance and cost.

Some questions:

  • Where will your business be located (i.e. specific address)? This is a critical factor for retail businesses.
  • Who are your neighbors and what are the neighborhood characteristics?
  • What type of building will house the business? How much space is needed?
  • Will you own or lease the space? If lease, what are the key terms and conditions?
  • Will any significant expansion or renovation be needed? If so, what, and how much will it cost?
  • Are the necessary utilities in place?
  • What, if any, special equipment will be required?
  • Is there adequate parking for customers and employees?
  • Are there any licenses or permits required?
  • What is the area’s economic, demographic and political climate?
     

Marketing

Satisfying customer needs is the sole reason for the existence of your business. This key section of the business plan demonstrates that you understand what customer needs you intend to satisfy, who your customers are, where they are located and how you plan to find, secure and retain them. It also provides the basis for your sales projections. Accordingly, it will probably be the most detailed and intensively examined section of the plan.

Some questions:

  • What business are you in - i.e. what customer needs will you satisfy?
  • What reputation in the market place are you seeking?
  • What are the demographic and motivational characteristics of your customers?
  • What is the geographic size of the market, and what is your potential share?
  • What specific market research have you done to address the two previous questions?
  • What is the long-term trend of your market - i.e. is it growing, stable, or declining? How will you use this to your advantage?
  • What, if anything, is unique about your product or service?
  • What channels of distribution will you use?
  • What is your pricing structure and strategy?
  • What promotion and advertising techniques will you use?
  • What methods will you use to generate leads and close sales?
  • How did you develop a sales forecast? Is it supported by market research data?
  • Who will be responsible for marketing decisions?
     

Competition

Every business is faced with competition in some form. This section of the plan should demonstrate a thorough knowledge of the strengths and weaknesses of your competitors and the position of your business in comparison. Your venture will be successful only if you can be competitive and still make a profit.

In order to determine the feasibility of any venture, the competition must be analyzed in depth. By studying your competition you should be able to determine the viability of your product or service. You should have a thorough knowledge of the strengths and weaknesses of your competitors and the advantages and disadvantages you have in comparison to them. Your venture will be successful only if you can be competitive and still make a profit.

Your competition can put you out of business. On the other hand, your competition can allow you to penetrate the marketplace if they are not serving the needs of their customers. And, believe it or not, your competition can actually become a source of business for you. Do not attempt to enter a marketplace that is already saturated with your type of business or service. Your share of that market may not be enough for economic survival. Avoid making the mistakes of your competitors but also incorporate their positive practices.

You must be aware of the competition's position in the market and their strategic moves that will affect your business. Counter the competition's moves with your own strategies. If possible, attempt to get yourself into a position in which the competition has to counter your strategic marketing moves.

The easiest way to keep abreast of the competitions' strategies is to develop a personal relationship with the salespeople who call on both you and the competition. They generally know when your competition is planning an advertising campaign, sale or promotion. They can be a wealth of information to you.

When studying your competition, it may be useful to evaluate their affect on your business at three levels:

Primary – Businesses that look and operate very similarly;
Secondary – Businesses that may look and operate differently but provide comparable products or services;
Indirect – Businesses that offer different products or services that may provide customers with an acceptable alternative.

Some questions:

  • Who are your five strongest competitors? List them by name.
  • How will the competition react to your entry into the market?
  • What are the competitions' strengths and how can you use them?
  • What are the competitions' weaknesses and how can you capitalize on them? Be careful not to use emotional language or make unsubstantiated derogatory comments.
  • What is the competitions' pricing structure and strategy?
  • How will you differentiate your business? In quality? In price? In service?
  • How will you keep informed about the competitors’ positions and strategies?
     

Management Profile

Investors or lenders consider strong management one of the most important factors contributing to business success, and it will be one of the first things they look for when reading your business plan. Here is where to present the qualifications and relevant experience of your management team. Direct experience in the industry is important for your understanding of the business. This should include your attorney, accountant or other professionals with a close and expected long-term relationship with the business.

You should describe how responsibilities will be assigned to cover three key areas where strong management skills are essential:

Operations – Designing, developing and creating the product or service. Who understands and can deal with all the technical and operational needs of the business? Have they managed a similar business in the past?

Marketing – Establishing and maintaining a customer orientation. Who will provide marketing and selling expertise? Has their background prepared them to compete effectively in your industry?

Finance – Keeping the business liquid (cash flow) and profitable. What kind of accounting and administrative systems will be used to measure the use of cash and other assets, especially accounts receivable and inventory? Who will have financial management responsibilities?

This section of the plan should also discuss plans for filling gaps should key team members become ill or injured.
 

Personnel Profile

If your business is going to have employees or use independent contractors, this section of the plan presents your staffing, scheduling and training requirements. Depending on the size of the business and skills needed, the seeking, finding, hiring and retaining of human resources can be very important.

Some questions:

  • What are your staffing requirements, now and in the future?
  • Will you fill these requirements with employees or outside help?
  • What education and experience is necessary?
  • What training, if any, will be needed and how will it be provided?
  • Will personnel be retained on a full-time of part-time basis?
  • How will they be compensated? Will fringe benefits be included?

Two words of caution: Hiring employees requires compliance with both federal and state laws governing wage rates, tax withholdings and workers’ compensation insurance. Be sure you understand what is required before hiring anyone! Also, retaining independent contractors who will function like employees raises federal tax law compliance issues that should be discussed with a tax advisor.




Section II: Financial Information

Loan/Investment Summary

The potential investor or lender in your venture wants to know how much money you need, for how long, and how you intend to use the funds. This section should clearly outline all of this information in a clear and orderly manner.

The summary should indicate:

  • Purpose of the funding request
  • Eligibility of the applicant per specific program requirements
  • Amount being requested
  • If a loan, its assumed length, interest rate and other terms
  • If equity, any proposed exit strategies (a separate section may be appropriate to cover this issue properly)
  • How the funds will be used, identify each major category of expenditures
  • Collateral offered

In order to establish the amount of funding needed and how it will be used, you need to estimate three major categories of expenditures that warrant comment: start-up expenses, capital equipment and working capital.

 

Start-up Expenses

In preparation for opening your business (either new or existing) many tasks must be completed, many of which require significant, one-time expenditures. These include, but are not limited to:

  • Architectural plans and specifications for facilities construction or renovation
  • Accounting and legal assistance to assure regulatory compliance, negotiate agreements and establish proper record keeping systems
  • Pre-opening promotion and advertising
  • Necessary licenses and permits
  • Lease, utility and other deposits
  • Initial inventory and supplies
 

Capital Equipment

Most businesses make major investments in so-called “fixed assets” needed to produce and support its products or services. Although accounting rules for such expenditures will spread out the affect on profits, the cash flow impact is immediate and needs to be estimated accurately. This includes:

  • Real estate
  • Machinery
  • Equipment
  • Computer hardware and software
  • Furniture and fixtures
  • Vehicles (owned, not leased)

Your SBDC business advisor or accountant can help define your unique list and develop the appropriate accounting treatment.

  

Working Capital

In its simplest sense, working capital is the amount of free cash you need to operate the business on a month-to-month basis plus a reserve for emergencies. Your initial working capital will be the difference between start-up funding and start-up expenditures. Thereafter, it will be a function of how well you manage sales, collections, inventory levels and all other functions affecting the use of cash. The optimum level of working capital will vary depending on the type and size of the business, but it should enable you to withstand unexpected business problems during a typical year or operating cycle.

  

Cash Flow

The most important asset for most businesses is cash. For small businesses the management of cash is critical to survival. Accordingly, significant time and effort must be spent estimating the amount and timing of future cash inflows and outflows. Your SBDC business advisor can help explain the construction of a cash flow worksheet and provide guidance regarding forecasting techniques.

When developing data for this worksheet remember that you are measuring the flow of cash, not net income. For example, if you make a credit sale in January the accounting system will show this transaction as a sale on your Income Statement in that month, but it will not affect cash until a subsequent month when the customer pays the bill. Similarly, if you purchase a computer for $2,000 the resulting capital expenditure does not show on the Income Statement, but cash is affected immediately.

The first column of your cash flow worksheet will record one-time receipts and expenditures prior to actual start-up of business operations. All following columns will record the cash impact of normal operations. Projections should be made for the first year by month and for two subsequent years by quarter.

It is important that the cash flow worksheet reflect your analysis and estimates. This will demonstrate your understanding of what is required to establish and run your business and the impact on cash flow.

Upon completion of this exercise you may want to enlist help from your SBDC business advisor or accountant to generate projected income statements and balance sheets discussed in the following sections. After making mutually agreeable assumptions regarding non-cash considerations (e.g. accounts receivable collection period, inventory levels, depreciation) he or she can make the necessary conversions and prepare appropriately formatted statements.

 

Income Statements

The income statement matches sales/revenues against expenses made to generate them and calculates the resulting “profit” for any given time period. It measures whether your business is (or will be) profitable after considering all costs of doing business - both those affected by, as well as those independent of cash flow.

Some things that should be kept in mind when preparing or reading an income statement:

  • Sales/revenues are shown when the sale is made, not when the customer pays the invoice.
  • Merchandise purchases are shown as a cost of sales expense when the resulting product is sold, not when they are made and the merchandise is placed in inventory.
  • Operating expenses are shown when incurred, not when you pay the bill.
  • Operating expenses include depreciation of fixed assets.
  • Only the interest portion of debt service payments shows as an expense. The remainder is a reduction of loan principle.
  • Unless the owner is a corporate employee, his or her cash withdrawals are not considered operating expenses.
  • If the business is a sole proprietorship, partnership or S Corporation, no income taxes appear as an expense. These taxes, if the business is profitable, are paid by the owners as part of their personal tax returns.
  • If the business itself is subject to income taxes (C Corporation), they are estimated and shown as a non-operating expense that reduces operating profit.

The format of income statements should be tailored to reflect information content and level of detail to make them most useful for management of the business.

Income statements should be projected by month for the first year and by quarter for two additional years. Once completed, the first year can be used as a budget to be compared against actual results and the variances analyzed to determine any necessary corrective action.

If your business has been operating for some time, or if you are acquiring an existing business, you will also need to provide up to three years of actual income statements and tax returns.

Where appropriate, this section of the business plan should also explain the method(s) used to generate estimates. This is especially appropriate for sales/revenue data, which should tie in with the Marketing section of the plan. This is particularly important if the plan is being used as a financing proposal, since it will provide credibility for your projections and give potential investors or lenders the means to evaluate the plan’s strengths and weaknesses.

 

Balance Sheets

The balance sheet is a presentation of your business assets, liabilities and equity at any point in time. It shows what the business owns (assets) and who owns them—creditors (liabilities) or investors (equity).

Although all balance sheets contain the same type of information, the format and level of details may vary. The following categories are generally presented:

  • Current Assets – Cash and anything that is expected to be converted to cash within one year - primarily accounts receivable and inventory.
  • Fixed Assets – Tangible items with expected long-term use. This includes real estate, machinery, equipment and vehicles.
  • Current Liabilities – Short-term financial obligations which must be paid within one year. This includes accounts payable, short term borrowing, earned but unpaid wages and estimated taxes payable.
  • Long-term Liabilities – Longer-term financial obligations like mortgages, equipment loans and long-term notes payable over more than one year.
  • Net Worth – Owner’s equity in the business. It reflects original and any subsequent investments plus profit or loss from inception to date. It is the difference between assets and liabilities.

The format of balance sheets can also be tailored to each business.

Balance sheets should be generated for the end of each period covered by projected income statements. These two statements go together to measure the progress and health of your business.

If your business has been operating for some time, or if you are acquiring an existing business, you will also need to provide actual balance sheets for prior years.

 

Ratios

Financial ratios are tools used by all parties—management, lenders and investors— to evaluate comparative performance of a business. They can be calculated from data in your business plan. The most commonly used ratios fall into one of four categories:

  • Profitability: Measures the ability to earn an adequate return on sales/revenues, assets and invested capital

Profit Margin = Profit (Gross or Net) ÷ Sales/Revenues

Return on Assets = Net Income ÷ Total Assets

Return on Equity = Net Income ÷ Total Equity

  • Efficiency: Measures how effectively assets are being used to generate sales/revenues and collect cash

Collection Period = Accounts Receivables ÷ (Sales/Revenues ÷ 360)
Inventory Turnover = Cost of Sales ÷ Inventory
Asset Turnover = Sales/Revenues ÷ Total Assets

  • Liquidity: Measures the ability to meet short-term obligations

Current Ratio = Current Assets ÷ Current Liabilities
Quick ratio = (Cash + Accounts Receivable) ÷ Current Liabilities

  • Safety: Measures debt position in light of the firm’s asset base and earning power

Debt to Equity = Total Debt ÷ Total Equity
Debt to Asset = Total Debt ÷ Total Assets
Times Interest Earned = (Income Before Interest + Taxes) ÷ Interest Expense
Debt Coverage = Cash Flow ÷ Debt Service

You may also wish to calculate variations of these or other ratios that have particular importance to your industry or business. It is important to keep in mind, however, that all ratios are valuable analytic tools only in context of comparison with similar firms in your industry, as well as to your own past performance.



Section III: Supporting Documents

Sections I and II of the business plan contain information to provide the reader with an understanding of what your business is, where you intend to take it, and how you are going to get there, with a minimum of unnecessary detail. Section III is where you can include additional material for the serious reader. It should present all relevant material that will clarify or supplement any part of your business plan.

Although there is no limit to the type and length of documents, don’t go overboard—size and weight are not the criteria! Material should be added only if it is required or will add to the credibility of you and your business. Typical supporting documents are:
  • Personal financial statement
  • Personal credit report
  • Resumes or personal data sheets
  • Letters of reference and testimonials
  • Brochures
  • Organization charts
  • Specifications and drawings
  • Market research studies
  • Capital equipment list
  • Tax returns
  • Contracts
  • Leases
     


Appendix: Financial Statement Formats

  

Click here for a PDF containing information from this page, a business plan example and more!