Writing a Business Plan
By U.S. Small Business Administration
See also: PDF-version
Copyright 1993, Linda Pinson and Jerry Jinnett. All rights
reserved. No part may be reproduced, transmitted
or transcribed without the permission of the authors. SBA retains
an irrevocable, worldwide, nonexclusive, royalty-free,
unlimited license to use this copyrighted material. While we
consider the contents of this publication to be of general merit,
its sponsorship by the U.S. Small Business Administration
does not necessarily constitute an endorsement of the views
and opinions of the authors or the products and
services of the companies with which they are affiliated.
All of SBA's programs and services are extended to
the public on a nondiscriminatory basis.
TABLE OF CONTENTS
STATEMENT OF PURPOSE (MISSION STATEMENT)
Description of the Business
Methods of Record Keeping
Summary of Financial Needs
Sources and Uses of Funds Statement
Cash Flow Statement (Budget)
Three-year Income Projection
Break-even Analysis Graph
Actual Performance Statements
Personal Financial Statement
PUTTING YOUR BUSINESS PLAN TOGETHER
KEEPING YOUR BUSINESS PLAN CURRENT
APPENDIX: INFORMATION RESOURCES
There are two main purposes for writing a business plan.
The first, and most important, is to serve as a
guide during the life of your business. It is the blueprint
of your business and will serve to keep you on
the right track. To be of value, your plan must be kept current.
If you spend the time to plan ahead, many pitfalls
will be avoided and needless frustrations will be eliminated.
Second, the business plan is a requirement if you are
planning to seek loan funds. It will provide potential
lenders with detailed information on all aspects of the company's
past and current operations and provide future
The text of a business plan must be concise and yet must
contain as much information as possible. This sounds
like a contradiction, but you can solve this dilemma by using
the Key Word approach. Write the following key
words on a card and keep it in front of you while writing:
Who What Where
Answer all of the questions asked by the key words in
one paragraph at the beginning of each section
of the business plan. Then expand on that statement by telling
more about each item in the text that follows.
There is no set length to a business plan. The average
length seems to be 30 to 40 pages, including the
supporting documents section. Break the plan down into sections.
Set up blocks of time for work with target dates
for completion. You may find it effective to spend two evenings
per week at the library where the reference materials
needed will be close at hand. It takes discipline,
time and privacy to write an effective business plan.
You will save time by compiling your list of supporting
documents while writing the text. For example,
while writing about the legal structure of your business, you
will realize the need to include a copy of your
partnership agreement. Write partnership agreement on your list
of supporting documents. When compiling that section
of your plan, you will already have a list of necessary
documents. As you go along, request any information that you
do not have, such as credit reports.
With the previous considerations in mind, you are ready
to begin formulating your plan. Read through this
entire publication to get an overall view of the business planning
The first page of your business plan will be the cover
sheet. It serves as the title page of your plan.
It should contain the following information:
Company phone number (include area
Names, titles, addresses, phone numbers
(include area code) of owners
Month and year in which the plan is
The following example will serve as a guide.
372 East Main Street
Burke, BY 10071
John Smith, President (207)
724 South Street
Jamestown, NY 10081
Mary Blake, Vice President
86 West Avenue
Burke, NY 10071
James Lysander, Secretary
423 Potrero Avenue
Jessup, NY 10602
Tandi Higgins, Treasurer
321 Nason Street
Adams, NY 10604
Plan prepared September
by Corporate Officers
STATEMENT OF PURPOSE (MISSION STATEMENT)
The statement of purpose is also called
the mission statement or executive summary. If your lender
were to read only this information, he or she would know the name
and nature of your business, its legal structure,
the amount and purpose of your loan request and your plan for
repayment. Use the key word approach mentioned earlier.
Be concise and clear. The statement of purpose is
contained on one page. Although it is positioned after the cover
sheet, it is most effectively written after the plan
has been completed. At that time, all the information and financial
data needed are available.
If you are writing your plan for a lender, be specific
about the use of funds. Support the amount requested
with information such as purchase orders, estimates from suppliers,
rate sheets and marketing results. Include this information
in the supporting documents section. Address the question
of loan repayment. You want to show the lender your company's
ability to meet payments of interest as well as principal.
Some investors like to see two ways out, i.e., two different
sources of repayment. When you have answered the key word questions,
you are ready to present that information in one
or two concise paragraphs. A sample statement of purpos follows.
STATEMENT OF PURPOSE
ABC CORPORATION, an S-Corporation established in 1985,
is a tool and die company that manufactures specialized
parts for the aerospace industry and is located at
372 East Main Street, Burke, N.Y. The company is
seeking growth capital in the amount of $50,000 for
the purpose of purchasing new and more modern equipment
and for training existing personnel in the use of that new
Funding is needed in time for the equipment to be delivered
and in place by 11 January 1993. There is a two-month
period between order placement and delivery date.
The modernized equipment will result in a 35 percent
increase in production and a 25 percent decrease
in the unit cost. Repayment of the loan and interest
can begin promptly within 30 days of receipt and
can be further secured by real estate, which is owned by
the company and which has a 1990 assessed valuation of $185,000.
The first major section of your plan covers the details
of your business. Begin this section with a one-page
summary addressing the key elements of your business. The following
text will expand on each area presented in the summary.
Use the key word system to help you write concisely.
Address all of the topics as they relate to your business
in an order that seems logical to you.
Include information about your industry in general, and
your business in particular. Be prepared to back
up statements and justify projections with data in the supporting
State the reasons for your choice of legal structure. If
you are a sole proprietor, you may include a copy
of your business license. If you have formed a partnership, include
a copy of your partnership agreement in the supporting
documents section. Your agreement should include provisions
for partners to exit and for the dissolution of the company. It
must spell out the distribution of the profits and
the financial responsibility for any losses. Explain the reasoning
behind the terms of the agreement. If you have formed
a corporation, explain why this legal form was chosen
and how the company will operate within the corporate structure,
and include a copy of the charter and articles in
the supporting document section.
If you plan to change your legal structure in the future,
make projections regarding why you would change,
when the change would take place, who would be involved and how
the change would benefit the company.
Description of the Business
This is the section of the plan in which you go into greater
detail about your business. Answer the key word questions
regarding the business's history and present status, and your
future projections for research and development.
Outline your current business assets and report your inventory
in terms of size, value, rate of turnover and marketability. Include
Stress the uniqueness of your product or service and state
how you can benefit the customer.
Project a sense of what you expect to accomplish three
to five years into the future.
Products or Services
Give a detailed description of your product from raw materials
to finished item. What raw materials are used, how
much do they cost, who are your suppliers, where are they located
and why did you choose them? Include cost breakdowns
and rate sheets to back up your statements.
Although you may order from one main supplier, include
information on alternate suppliers.
Address how you could handle a sudden increase of orders
or a loss of a major supplier.
You may hear a lender refer to the worst case scenario.
This means that the lender wants you to be able to
anticipate and solve potential problems. It is also to your advantage
to think in terms of alternatives and to prepare
for the unexpected so that your business can continue to run smoothly.
Some businesses fail because they become too successful too soon.
Therefore, it is also good to plan for the best case
scenario. If you are inundated with orders, your business plan
should contain information needed to hire staff and
contact additional suppliers.
If you are providing a service, tell what your service
is, why you are able to provide it, how it is provided,
who will be doing the work and where the service will be performed.
Tell why your business is unique and what you have
that is special to offer to your customers. If you have both a
product and a service that work together to benefit your customer
(such as warranty service for the products you sell)
be sure to mention this in your plan. Again the key words come
List future services you plan to add to your business.
Also, anticipate any potential problem areas and
work out a plan for action.
You should state any proprietary rights, such as copyrights,
patents or trademarks, in this section.
If location is important to your marketing plan, you may
focus on it in the marketing section. For example,
if you are opening a retail shop, your choice of location will
be determined by your target market. If you are a
manufacturer and ship by common carrier, your location is not
directly tied to your target market so you can discuss
location in the business section. You may begin this
topic with a sentence such as "ABC Corporation is housed
in 25,000 square feet of warehouse space located
at 372 East Main Street, Burke, NY. This site was chosen because
of accessibility to shipping facilities, good security
provisions, low square footage costs and proximity
to sources of supplies."
Now expand on each reason for choosing that location and
back up your statements with a physical description
of the site and a copy of the lease agreement. Give background
information on your site choice and list other possible
locations. You may want to include copies of pictures, layouts
or drawings of the location in the supporting document section.
Use the worksheet on page 4 as a guideline for writing
a location (site) analysis. Cover only those topics
that are relevant to your business. If you need assistance, contact
the SBA resource center nearest you (see Information
LOCATION ANALYSIS WORKSHEET
2. Name of realtor/contact person:
3. Square footage/cost:
4. History of location:
5. Location in relation to target market:
6. Traffic patterns for customers:
7. Traffic patterns for suppliers:
8. Availability of parking: (include
9. Crime rate for area:
10. Quality of public services (e.g.
police, fire protection)
11. Notes on walking tour of area:
12. Neighboring shops and local business
13. Zoning regulations:
14. Adequacy of utilities (get information
from utility company representatives):
15. Availability of raw materials/supplies:
16. Availability of labor force;
17. Labor rate of pay for the area:
18. Housing availability for employees:
19. Tax rates (state, county, income,
payroll, special assessments):
20. Evaluation of site in relation to
This section describes who is behind the business. If you
are a sole proprietor, tell about your abilities
and include your resume. Be honest about areas in which you will
need help and state how you will get that help. Will
you take a marketing seminar, work with an accountant or seek
the advice of someone in advertising?
If you have formed a partnership, explain why the partners
were chosen, what they bring to the company and how
their abilities complement each others. Experience, background
and qualifications will be covered in their resumes
in the supporting documents section.
If your business is incorporated, give detailed information
on the corporate structure and officers. Include
a resume for each officer and describe each one by answering the
following questions: Who are they? What are their
skills? Why were they chosen? What will they bring to the
Who will be doing the work? Why are they qualified? How
will they be hired? What is their wage? What will
they be doing? Outline the duties and job descriptions for all
Explain any employee benefits. If you are inundated with
orders for your product or items to be serviced,
do you have a plan for increasing personnel?
Methods of Record Keeping
Tell what accounting system will be used and why the system
was chosen. What portion of your record keeping will
be done internally? Who will be responsible for keeping those
records? Will you be using an outside accountant
to maximize your profits? If so, who within your company will
be skilled at reading and analyzing financial statements provided
by the accountant? It is important not only to show
that your accounting will be taken care of, but that you will
have some means of using your financial statements
to implement changes to make your company more profitable.
After reading this section, the lender should have confidence
in your company's ability to keep and interpret a
complete set of financial records.
Insurance is an important consideration for every business.
Product liability is a major consideration, especially
in certain industries. Service businesses are concerned with personal
liability, insuring customers' goods while on the
premises or during the transporting of those goods.
If a vehicle is used for business purposes, your insurance must
reflect that use. If you own your business location,
you will need property insurance. Some types of businesses require
bonding. Partners may want life insurance naming
each other as the beneficiary. Consider the types
of coverage appropriate to your business. Tell what coverage you
have, why you chose it, what time period it covers
and who the carrier is. Keep your insurance information current.
According to the U.S. Chamber of Commerce, more than 30
percent of business failures result from employee
dishonesty. This concerns not only theft of merchandise, but also
theft of information.
Address the issue of security as it relates to your business.
For example, if you are disposing of computer printout
data, a small paper shredder may be cost-effective. Anticipate
problem areas in your business, identify security
measures you will put into practice, tell why you chose them and
what you project they will accomplish. Discuss this area with
your insurance agent. By installing security devices
you may be able to lower certain insurance costs along with protecting
You have now covered all the areas which should be addressed
in the business section. Use the key words, be thorough,
anticipate any problem areas and be prepared with solutions, and
analyze industry trends and be ready to project your
business into the future. When you have completed
the business section, you are ready to begin developing the marketing
The second major section of your business plan covers the
details of your marketing plan. A good marketing
plan is essential to your business development and success. Include
information about the total market with emphasis
on your target market. You must take the time to identify your
customers and find the means to make your product or service available
to them. The key here is time. It takes time to research
and develop a marketing plan, but it is time well spent.
Most of the information you need will be found in your
public library and in the publications of the U.S.
Department of Commerce, the U.S. Small Business Administration
(SBA) and the U.S. Census Bureau. Remember that you
need a clear understanding of who will purchase your product,
who will make use of your service, why they will choose your company
and how they will find out about it.
Begin this section with a one-page summary covering the
key elements of your marketing plan.
The following text will expand on each area presented in
the summary. Back up statements and justify projections
with data in the supporting documents section. Again, the key
word approach will help you to thoroughly cover each
area. The topics may be covered in any order that seems logical
The target market has been defined as that group of customers
with a set of common characteristics that distinguish
them from other customers. You want to identify that set of common
characteristics that will make those customers yours. Tell how
you did your market research. What were your resources
and your results? What are the demographics of your target market?
Where do your customers live, work and shop? Do they shop where
they live or where they work? If you are in the business
of video cassette recorder (VCR) repair, how many VCRs are
owned within a certain radius of your shop? Would in-home service
be cost-effective and a benefit to your customers?
Back up your findings with U.S. Census Bureau reports, questionnaires
and test marketing results. State how you feel you can serve this
market in terms of your resources, strengths and
weaknesses. Focus on reasonable, believable and obtainable projections
regarding the size of your potential market. (See Information
Direct competition is a business offering the same product
or service to the same market. Indirect competition
is a company with the same product or service but with a different
Evaluate both types of competitors. You want to determine
the competitors' images. To what part of the market
are they trying to appeal? Can you appeal to the same market in
a better way? Or can you find an untapped market?
Use the worksheet to compile, organize and evaluate information
on your competition. Your analysis of this information
will help you plan your market entry. What is the competition's
current market share (what percent of the total customer
base is theirs)? Can you tap into this share or will
you need to carve out your own market niche?
COMPETITOR PROFILE WORKSHEET
|1. Name of Competitor(s):
|3. Products or services offered:
4. Methods of distribution
(wholesale, retail, marketing
reps, personal selling,
Methods of advertising:
perception of quality of
product or service):
|6. Pricing structure:
|7. Performance (past and present):
|8. Market share (by number, type and location of customers):
|9. Strengths (The strengths of the competition become your
|10. Weaknesses (Looking at the weaknesses of
the competition can help you find ways of
being unique and of benefiting the customer.):
After completing this section you or your lender will
know who your competitors are, where they are located,
what products or services they offer, how you plan to compete,
how your customers can access your business and
why you can provide a unique and beneficial service or product.
Methods of Distribution
Distribution is the manner in which products are physically
transported to the consumer or the way services
are made available to the customer. Distribution is closely
related to your target market.
Establish the purchasing patterns of your customers.
If you are selling a product, do your customers
purchase by direct mail, buy through catalogues or make in-store
purchases? Will you sell directly or through a
manufacturer's representative? If you are shipping the product,
who will absorb the shipping costs and what carrier
will be used? Use the key words to answer questions regarding
your distribution plan. Back up your decisions with statistical
reports, rate sheets from shippers, contracts with
manufacturer's representatives or any other supporting documents.
If you are involved in a service business, will
you provide in-shop service? Will you make service calls,
and, if so, how will mileage costs be handled? What is your
planned response time to fill your customers' needs?
List the pros and cons of the various methods of distribution
and give reasons for your choices. Keep in mind
the worst case scenarios mentioned above. Present alternatives.
For example, if United Parcel Service, your major
shipper, were to go on strike, how would you distribute your
products? If your mobile service van were to break
down, do you have a vehicle which could be used
as backup? Provide for a smooth business flow.
Advertising presents the message to your customer that
your product or service is good and desirable.
Tailor your advertising to your target market. Your marketing
research will have spelled out which television
and radio stations and which publications are of interest to
your target market. Those are the ones you will
use. Analyze your competitors' advertising in these publications.
Be ready to back up your decisions. Include copies of your promotional
materials, such as brochures, direct mail advertisements
and flyers. Tell the lender where you will put your advertising
dollars, why you chose those methods, how your message will
reach your target market, when your advertising
campaign will begin, how much your plan will cost and what format
your advertising will take.
Your pricing structure is critical to the success of
your business and is determined through market
research and analysis of financial considerations. Basic marketing
strategy is to price within the range between the
price ceiling and the price floor. The price ceiling is determined
by the market; it is the highest cost a consumer
will pay for a product or service and is based on perceived
value. What is the competition charging? What is the quality
of the product or service you are offering? What
is the nature of the demand and what is the image you are projecting?
The price floor is the lowest amount at which you can
offer a product or service, meet all your costs
and still make your desired profit. Consider all costs -- raw
materials, office overhead, shipping, vehicle expense,
taxes, loan and interest payments and owner draws are a few.
The profitable business operates between the price
ceiling and the price floor. The difference allows for
discounts, bad debt and returns. Be specific about how you arrived
at your pricing structure and leave room for some
Positioning -- predetermining the perceived value in
the eyes of the consumer -- can be accomplished
through promotional activities. To be successful, you must decide
what your product or service offers that your competitor's
does not and promote it as the unique benefit.
Very few items on the market have universal appeal your
product or service cannot be all things to all
people. However, if you position your product or service properly,
prospective purchasers or users will immediately
recognize its benefits to them.
Packaging and product design can play a major role in
the success of your business. It's what first catches
the customer's eye. Consider the tastes of your target market
in the ultimate design of your product and your
package design. Decide what will be most appealing in terms
of size, shape, color, material and wording. Packaging
attracts a great deal of public attention. Be advised
of the Fair Packaging and Labeling Act, which established mandatory
labeling requirements. The U.S. Food and Drug Administration
(FDA) has strict procedures for the labeling of
items falling within its jurisdiction. The packaging guidelines
can be obtained from the FDA or found in the library.
Use key words to answer questions regarding
your product design and packaging. Include sketches
or photographs. Also include information on any proprietary rights,
such as copyrights, trademarks or patents.
Timing of Market Entry
The timing of your entry into the marketplace is critical
and takes careful planning and research.
Having your products and services available at the right
time and the right place depends more on understanding
consumer readiness than on your organizational schedule. The
manner in which a new product is received by the
consumer can be affected by the season, the weather and holidays.
Early January and September are the best times to mail flyers
and catalogs, as consumers seem to be more receptive
to mail order purchasing in those months. The major gift shows
are held in the summer months (June, July, August) and again
in January and February.
Most wholesale buying takes place at these shows. November
and December are not good months for introducing
new service businesses unless they relate in some way to the
holiday season. Spring is a better time to introduce
a service. Trade journals and trade associations in your
field can provide the information you need on the timing patterns
of your industry. Tell the lender when you plan
to enter the market and how you arrived at your decision.
If your choice of location is related to your target
market, cover it in this section of your business plan.
List the reasons for your choice. What is the character of the
neighborhood? Does the site project your business
image? Where is the competition in the area? What is the traffic
What are the terms of the lease? What services, if any,
does the landlord provide? What is the occupancy
history of your location? Did any companies in the area go out
of business within the past few months? If so,
try to find out if it was related to location. Is the area in
which you plan to locate supported by a strong
economic base? What alternate sites were considered? These
are some of the questions to be considered. Refer to Location
in the business section for additional information.
Be alert for changes in your industry. New technology
may bring new products into the marketplace that
will generate new service businesses. Read trade journals and
industry reports in your field. Project how your
market may change and what you plan to do to keep up.
You are now ready to develop the third area of your plan.
Financial records are used to show past, current
and projected finances. In this section we will cover the major
documents you will want to include in your business
plan. They will consist of both pro forma (projected) and actual
financial statements. Your work will be easier
if these are done in the order presented.
Summary of Financial Needs
Application of Loan Funds
Cash Flow Statement (Budget)
Actual Performance Statements:
Income (Profit and Loss) Statement
Loan Application/Financial History
Summary of Financial Needs
If you are applying for a loan, your lenders and investors
will analyze the needs of your business.
They will distinguish among the three types of capital
to be used as follows:
Working capital -- Used to meet fluctuating
needs that are to be repaid through cash during the business's
next full operating cycle, generally one year.
Growth capital -- Used to meet needs
that are to be repaid with profits over a period of a few years.
If you seek growth capital, you will be expected to show how
the capital will be used to increase your profits
enough to be able to repay the loan within several years (usually
not more than seven).
Equity capital -- Used to meet permanent
needs. If you seek equity capital, it must be raised from investors
who will take the risk in return for some combination of dividend
returns, capital gains or a specific share of the
Keeping the above in mind, you must now prepare a summary
of financial needs. This document is an outline
telling why you are applying for a loan and how much you need.
SUMMARY OF FINANCIAL NEEDS
||I. ABC Corporation is seeking a loan to increase its growth
capital in the following areas of production:
||A. Equipment (new and more modern)
B. Training of personnel in operation of above
||Funds needed to accomplish above goal will be
||A. See "Use of Funds" for distribution of
funds and backup statement.
Uses of Funds Statement
The potential lender will require a statement of how
the money you intend to borrow will be used. It
will be necessary for you to tell how you intend to disperse
the loan funds. Back up your statement with supporting
You must be sure that your supporting data can be easily
found by the loan officer who is examining your
application. If you do not have your information well organized
and retrievable, your application may be refused
for the simple reason that the material cannot be found. It
will be necessary to have a well written table
USES OF FUNDS
||DISPERSAL OF LOAN FUNDS
||ABC Corporation will use anticipated loan funds in the
amount of $50,000 to modernize its production equipment.
This will necessitate the purchase of two new pieces of
equipment and the training of present personnel in the operation
of this equipment.
||a. The equipment needed is as follows:
(1) High-speed F-34 Atlas Press
(purchase price -- $32,900)
(2) S71 Jaworski Ebber (purchase
price -- $2,800)
||b. The training is available from the
as a three-week intensive program (cost: 10
employees @ $1,200 = $12,000).
||c. The remaining $2,300 will be used
for the first
monthly installment on loan repayment -- a
period of low production due to employee
||d. The equipment will result in a 35
increase in production, a 25 percent decrease in
unit cost, and a net profit increase sufficient
to repay the loan and interest within three years
with a profit margin of 15 percent.
|Note: Refer to page 17* of the production
plan of ABC Corporation. See pages 27 and 28* of the marketing
section for market research and projected trends in the
When writing your business plan be sure
that your production plan includes a description of the
equipment, how the work will be done, by whom and at what
The market research will show projected needs for your
product, and thus show how increased production will results
in increased sales and ultimately in the capability to
enable you to repay the loan.
(*The page numbers are hypothetical and do not refer
to page numbers in this book.)
Cash Flow Statement (Budget)
Cash flow statements are the documents that project what
your business plan means in terms of dollars. They
show cash inflow and outflow over a period of time and are used
for internal planning. If you have been in business
for some time, worksheets can be put together from the actual
figures of income and expenses of previous years combined with
projected changes for the next period. If you are
starting a new business, you will have to project your financial
needs and disbursements. Your profit at the end
of the year will depend on the proper balance between cash inflow
and outflow. The cash flow statement identifies
! When cash is expected to be received.
! How much cash will be received.
! When cash must be spent to pay bills and
! How much cash will be needed to pay expenses.
It also allows the manager to identify the source of
necessary cash, i.e., will it come from sales and
services rendered or must it be borrowed? Be sure that your
projections take into account receivables and how
long it will take your customer to pay. The cash flow statement
deals only with actual cash transactions and not
with depreciation and amortization of goodwill or other noncash
A cash flow statement can be prepared for any period
of time. It is recommended that you match the fiscal
year of your business. It should be prepared on a monthly basis
for the next year and revised not less than quarterly
to reflect actual performance in the preceding three months
In preparing your cash flow statement, it might be useful
to compile several individual budgets.
They could be as follows:
2. Fixed expenses budget.
3. Variable expenses budget.
Two worksheets can be used in developing a cash flow
Sources of cash worksheet -- Contains
all the financing sources for the business.
Cash to be paid out worksheet
-- Identifies how much cash is expected to be spent to pay expenses
Note: Projections in the two worksheets
must be made for the same time period (monthly, quarterly
Once you have completed the two worksheets, you are ready
to transfer the information into your cash flow
statement. You will need to think your way through each month,
projecting what amount from each category of the
worksheets will be appropriate to what month. For example, if
your total sales amount to $100,000, you will have
to project the individual amounts that will probably
occur in each month.
SOURCES OF CASH WORKSHEET
(Cash Flowing Into Your Business)
CASH TO BE PAID OUT WORKSHEET
(Cash Flowing Out of Your Business)
Completing Your Cash Flow Statement
The vertical columns of a cash flow statement represent
the twelve months, preceded by a total column.
Horizontal rows on the statement contain figures for the sources
of cash and cash to be paid out copied from the
two previous worksheets and from individual budgets.
The figures are projected for each month, reflecting
the flow of cash in and out of your business for
a one-year period. Begin with the first month of the business
cycle and proceed as follows:
1. Project the
beginning cash balance. Enter under the first month of the business
2. Project the
cash receipts for the first month.
3. Add beginning
cash balance and cash receipts to determine total cash available.
4. Project the
direct, indirect and interest expenses for the first month.
5. Project monies
due on taxes, long-term assets and loan repayments. Also project
any amounts to be drawn by owners.
6. Total all
expenses and draws. This is total cash paid out.
total cash paid out from total cash available. Enter the result
under cash balance/deficiency. If the result is
negative, be sure to bracket this figure.
8. Project loans
to be received and equity deposits to be made. Add to cash balance/
deficiency to get ending cash balance.
9. Carry forward
the ending cash balance for January as February's beginning
10. Repeat the process through
the last month of the business cycle.
To complete the total column, proceed as follows:
1. Enter the
beginning cash balance for the first month in the first space
of the total column.
2. Add the monthly
figures for each category horizontally and enter the result
in the corresponding total category.
3. Compute the
total column in the same manner as each of the individual months.
If you have been accurate in your computations,
the December ending cash balance will be exactly
the same as the total ending cash balance.
Note: If your business is new, you
will have to base your projections solely on market research
and industry trends. If you have an established
business, you will also use your financial statements
from the previous tax years.
A quarterly budget analysis should be used as
a record to compare your cash flow statement (or budget)
with your business's actual performance. Its purpose is to let
you know whether or not you are operating within
your projections and to help you maintain control of all phases
of your business operations. If your analysis shows
that you have gone over budget in some areas you will
have to compensate by adjusting your cash flow statement with
future cuts in those or other areas. If properly
used, a cash flow statement can prove to be an invaluable tool
to help you reach your financial goals.
Your cash flow statement can be compiled on a month-by-month
basis and then compared with actual monthly performance.
The SBA's Form 1100 (4-82) is very useful in this regard; for
a free copy, contact your local SBA office. Prepared
in this manner, your statement can provide an annual
projection for your next fiscal year.
Three-year Income Projection
The three-year income projection is a pro forma
income statement (profit and loss statement for more
information, see Income Statement, page 18). The difference
is that the three-year projection only includes
income and deductible expenses while the cash flow statement
includes all sources of cash and cash to be paid
There are various opinions as to what period of time
should be covered in estimating income and expenses,
i.e., whether it should be on an annual or monthly basis. If
this income projection is for the purpose of obtaining
a loan, talk to the lender about his or her specific requirements.
If the projections are for your own use, a three-year
projection is suggested with annual rather than monthly
Sources of Information
Information for a three-year income projection can be
found in your cash flow statement, sales forecast
and individual budgets, and your business and marketing analyses
if you are new in business. Again, if you are an
established business, you will also be able to use past financial
statements to help determine future projections
for your business. Be sure to take into account fluctuations
anticipated in costs, efficiency of operation, changes in the
market and any other factors. Increases and decreases
in income and expenses are only realistic. These changes should
be reflected in any projections. Remember, too,
that industry trends can cause decreases in both income
and expenses. An example of this might be the computer industry,
where competition has increased greatly and standardization
of components has caused a decrease in both the cost and
the sales price of certain items.
The break-even point is the point at which a company's
expenses exactly match its sales or service volume.
It is the point at which the business will neither make a profit
nor incur a loss.
The break-even point can be calculated in either mathematical
or graph form. It can be expressed in total dollars
or revenue exactly offset by total expenses or in total units
of production (cost of which equals exactly the
income derived by sales).
To apply a break-even analysis to a business operation,
two types of expenses must first be projected:
fixed costs and variable costs. Fixed costs do not vary with
sales or output. Variable costs vary in direct
proportion to the output. The greater the volume of sales, the
higher the cost.
For purposes of the break-even analysis, make sure to
include cost of sales in your variable costs figure.
Sources of Information for a Break-even Analysis
All of your figures can be derived from your three-year
projection. In fact, by now you should be able
to see that each financial document in your business plan builds
on the ones done previously. It should be a simple
matter to retrieve the figures to plug into the following formula.
An example of calculating the break-even point using
a mathematical formula is shown below.
B-E point sales (at break-even
point) = fixed costs
+ [1 - variable costs expressed
as % of total sales]
B-E point sales = volume of sales
at break-even point
Fixed costs = fixed expenses,
Variable costs = cost of sales
and variable expenses
Sales revenues = income from
sales of goods/services
A firm's sales at break-even point can be plotted as
in the following break-even analysis graph.
Using the same figures as in the above formula, draw
three lines in the graph: horizontal line at point
representing fixed costs (25); total expenses (TC = FC + VC)
line from left end of fixed cost line sloping upward
to point where total (fixed plus variable) costs on vertical
scale (7) meet total sales revenues on the horizontal
scale (9); total revenues (sales) line from zero through a point
describing total revenues (sales) on both scales (9).
The point on the graph where the total expenses line
intersects the total sales revenues line is the break-even
point. This business estimates that it will break even when
sales volume reaches $50,000. The triangular area
below that point represents company losses. The triangular area
above and to the right of the point represents
Actual Performance Statements
Actual performance statements are those financial statements
reflecting the activity of your business in the
past. If you are a new business owner, you have no business
history. Your financial section will end with the
projected statements and a personal financial history. If you
are an established business, you will include the
following actual performance statements:
Profit and loss (income) statement
Business financial history or loan
The balance sheet is a financial statement, usually
prepared at the close of an accounting period, that
shows the financial position of the business as of a fixed date.
It is a picture of your firm's financial condition
at a particular moment. By regularly preparing this statement,
you will be able to identify and analyze trends
in the financial strength of your business and thus implement
All balance sheets must contain three categories -- assets,
liabilities and net worth -- that have been established
by a system known as generally accepted accounting principles.
The three are related in that at any given time
a business's assets equal the total contributions by its creditors
Assets = Anything your business
owns that has monetary value.
Liabilities = Debts owed by the
business to any of its creditors.
Net worth (capital) = An amount
equal to the owner's equity.
The relationship between these terms is simply illustrated
in the following accounting formula:
Assets = Liabilities + Net Worth
Examined as such, it becomes apparent that if a business
possesses more assets than it owes to creditors,
its net worth will be a positive value. Conversely, if a business
owes more money to creditors than it possesses
in assets, the net worth will be a negative value.
The balance sheet also must follow an accepted format.
By so doing, anyone reading the balance sheet can
readily interpret it.
All assets are divided under three headings:
Current assets -- Assets that can
be converted into cash within one year of the date on the
Long-term investments -- Stocks,
bonds and special savings accounts to be kept for at least
Fixed assets -- The resources a
business owns and does not intend for resale (land, buildings,
equipment, automobiles, etc.).
Liabilities are divided into current and long-term liabilities:
Current liabilities -- Those obligations
payable within one operating cycle.
Long-term liabilities -- Outstanding
balance less current portion due (e.g., mortgage, vehicle).
Net worth is documented according to the legal structure
of the business:
Proprietorship or partnership --
Each owner's original investment plus earnings after withdrawals.
Corporation -- The sum of contributions
by owners or stockholders plus earnings retained
after paying dividends.
As of _________________________, 19_____
(Total assets will always equal total
liabilities and total net worth)
The income (profit and loss) statement shows
your business financial activity over a period of time,
usually your tax year. In contrast to the balance sheet, which
shows a picture of your business at a given moment,
this statement can be likened to a moving picture, which shows
what has happened in your business over a period
of time. The income statement is an excellent tool
for assessing your business. You will be able to pick out weaknesses
in your operation and plan ways to run your business
more effectively and thereby increase your profits. For example,
you may find that some heavy advertising you did
in March did not effectively increase your sales.
In following years, you may decide to use your advertising funds
more effectively by using them at a time of increased
customer spending. Along the same vein, you might examine your
income statement to see what months have the heaviest
sales volume and plan your inventory accordingly.
Comparison of the income statements from several years will
give you an even better picture of the trends in
your business. Do not underestimate the value of this particular
tool when planning your tactics.
The income statement shows where your money
has come from and where it was spent over a specific
period of time. It should be prepared not only at the end of
the fiscal year, but at the close of each business
month. It is one of the two principal financial statements prepared
from the ledgers and records of a business. All
profit and loss statements contain income and expense account
balances. The remaining asset, liability and capital information
provides the figures for the balance sheet.
At the end of each month, the accounts in the general
ledger are balanced and closed. Balances from the
revenue accounts and the expense accounts must be transferred
to your profit and loss statement.
A profit and loss statement must also follow
an accepted format and contain the following categories:
Net sales (gross sales
returns and allowances).
Cost of goods sold (see
IRS Form 1040, Schedule C for computation).
Gross profit (net sales
cost of goods sold).
Selling expenses (direct,
(indirect, fixed, office overhead).
Income from operations (gross profit total
Other income (interest income)
Other expenses (interest expense)
Net profit (loss) before income taxes
Income taxes (federal, state, self-employment)
Net profit (loss) after income taxes
Two sample income statements are shown for your use.
The first is divided into 12 months. Fill it in
monthly after balancing your ledgers. At the end of the year,
this form will provide an accurate picture of your
financial activity. The second form can be used for your monthly
and annual profit and loss statements.
(Also known as Profit and Loss Statement)
Business Financial History
The financial history is the last of the financial statements
required in your business plan. It is a summary
of financial information about your company from its start to
If you are a new business, you will have only projections
for your business. If you are applying for a loan,
the lender will require a personal balance sheet. This will
be of benefit in that it will show the lender the
manner in which you have conducted your personal business and
be an indication as to the probability of succeeding
in your new business.
If you are using your business plan to apply for a loan,
your business financial history and the loan application
are the same. This document should be completed last, but placed
first in the financial section of your plan. When
you indicate that you are interested in obtaining a business
loan, the institution considering the loan will
supply you with an application. The format may vary
slightly. When you receive your loan application, be sure to
review it and think about how you are going to
answer each item. Answer all questions and, by all means, be
certain that your information is accurate and that
it can be verified if the need should arise.
Information Needed and Sources
As you complete your business financial history or loan
application, it should become immediately evident
why this is the last financial document to be completed. All
of the information needed will have been compiled
in earlier parts of your plan and in the completed financials.
To help you with your financial history, the following is a
list of information usually included and the source
you will refer to for that information:
Assets, liabilities and net worth
-- You should be able to recognize these three as balance sheet
terms. Go back to your balance sheet and bring
these figures forward.
Contingent liabilities -- These are
debts you may come to owe in the future (e.g., default on cosigned
note or settlement of a pending lawsuit).
Inventory details -- Information
about inventory is derived from your inventory record. Also,
the business section should have a summary of your
current policies and methods of evaluation.
Income statement -- This is revenue
and expense information. Depending on the period of time to
be covered, you will transfer the information from your most
recent annual profit and loss statement or from
a compilation of several if required by the lender.
Real estate holdings, stocks and bonds
-- Refer back to the business portion of your plan. You may
also have to go through your investment records for more comprehensive
Sole proprietorship, partnership or corporation
information -- There are generally three
separate schedules on the financial history
one for each form of legal structure. You will be required
to fill out the one that is appropriate to
yours. In the business section, you will have covered two
areas that will serve as the source of this
information -- legal structure and management. Your supporting
documents may also contain some of the information that
you will need.
Audit information -- Refer back to
your business section under record keeping. You may also be
asked questions about other prospective lenders,
whether you are seeking credit, who audits your books
and when they were last audited.
Insurance coverage -- You will be
asked to provide detailed information on the amounts of different
types of coverage (i.e., merchandise, equipment, public liability,
earthquake, automobile, etc.). Your business section
contains coverage information that can be brought forth to
the financial history.
The financial documents covered in this section will
probably be sufficient for both your own use and
that of potential lenders. Some lenders may not require all
documents and other lenders may require additional
documents. The important thing to note in compiling any financial
statements is that the information must be correct
and that you must have records to support your figures.
Remember, you can use the information in your business
plan not only to aid you in dealing with a lender,
but also to assist you on an on-going basis. If you have done
your homework, the financial documents you have
prepared will be invaluable to you in the assessment of your
operation and may very well be the determining
factor in whether or not you succeed in your business!
Now that you have completed the main body of your business
plan, you will need to include a separate section
for any additional records that should be included to support
Supporting documents are the records that back up the
statements and decisions made in the three main
parts of your plan. As you are compiling the first three sections,
it is a good idea to keep a separate list of the
supporting documents that you mention or that come to mind.
For instance, discussion of your business location
might indicate a need for demographic studies, location
maps, area studies, leases, etc. If you are considering applying
for a loan to purchase equipment, your supporting
documents might be existing equipment purchase agreements or
lease contracts. By listing these items as you
think of them, you will have a fairly complete list of
all of your supporting documents by the time you reach this
part of your task. You will be ready to sort them
into a logical sequence and add any new ones that come to mind.
The following are several documents that you will want
If you are a sole proprietor, include your own resume.
If your business is a partnership, there should
be a resume for each partner. If you are a corporation, include
resumes for all officers of the corporation. A
resume need not and should not be a lengthy document. Preferably,
it should be contained on one page for easy reading.
Include the following categories and information:
Work history -- Name of employers
or businesses with dates of employment. Begin with most recent.
Include duties and responsibilities.
Educational background -- Names of
schools and dates you attended them, degrees earned, fields
Professional affiliations and honors
Special skills -- e.g., relate well
to others, able to organize, willing to take risks, etc.
Personal Financial Statement
The owner(s) should include a statement of personal assets
and liabilities. This information can be compiled
in the same manner as a balance sheet. Use the same format and
list all assets and liabilities to determine net
worth. If you are a new business owner, your personal financial
statement will be a part of the financial document
and may be a standard form supplied by the potential
Credit ratings are of two types, business and personal.
You can ask your suppliers or wholesalers to supply
you with letters of credit. Personal credit ratings can be obtained
through credit bureaus, banks and companies with
whom you have dealt on a basis other than cash.
Copies of Leases
Include all lease agreements currently in force between
your company and a leasing agency.
Some examples are the lease agreement for your
business premises, equipment, automobiles, etc.
Letters of Reference
These are letters recommending you as a reputable and
reliable business person worthy of being considered
a good risk. There are two types of letters of reference: business
references, or those written by business associates,
suppliers and customers; and personal references, or those written
by nonbusiness associates who can assess your business
skills (not friends or relatives).
Include all business contracts, both completed and currently
in force. Some examples are current loan contracts,
papers on prior business loans, purchase agreements on large
equipment, vehicle purchase contracts, service
contracts and maintenance agreements.
Include all legal documents pertaining to your business.
Some of these are articles of incorporation, partnership
agreements, copyrights, trademark registrations, patents, insurance
policies, property and vehicle titles, etc.
These are all the documents (other than the above) that
are referred to, but not included, in the business
and marketing sections of your business plan. A good example
would be those records related to selecting your
location that may have been finalized as the result of developing
a location plan. A potential lender who may be
particularly interested in your location information will
be able to find the location plan in your supporting documents
and examine your demographic studies, maps, area
studies on crime rate, income, etc.
Please note: All supporting documents
need not be included in every copy of your business plan. You
need to include only that information you think will be needed
by the potential lender. The rest of the information
should be kept with your copy of the plan and be easily accessible
should it be requested by the lender.
PUTTING YOUR BUSINESS PLAN TOGETHER
Your plan should be put together in a professional manner.
To create a favorable impression, it should be
Appearance -- Use a plastic spiral
binding or covers purchased from your local stationery store.
Use blue, brown or black covers. Bankers are usually
Length -- Be concise! Usually, you
should have no more than 30 to 40 pages, including your supporting
documents. When you are writing each section, think of it as
being a summary.
Include as much information as you can in a brief statement.
A potential lender does not want to have to wade
through volumes of words to get the information needed.
Presentation -- Do your best to make
your plan look presentable. However, do not go to the unnecessary
expense of paying for typesetting and high-powered computer
graphics. These might be considered frivolous by
some lenders a first impression that might indicate you would
not use their loan wisely.
Table of contents -- Be sure to include
a table of contents in your business plan. It will follow the
statement of purpose. Make it detailed enough so
the lender can locate any of the areas addressed in
the plan. It must also list the supporting documents.
Number of copies -- Make copies for
yourself and each lender you wish to approach. Keep track of
each copy. Do not try to work with too many potential lenders
at one time. If your loan is refused, be sure to
retrieve your business plan.
When you are finished, your business plan should look
professional, but the lender should know that it
was done by you. It will be the best indication a lender will
have to judge your potential for success. Be sure
that your business plan represents your best efforts.
KEEPING YOUR BUSINESS PLAN CURRENT
If your business plan is going to be effective either
to the business or to a potential lender, it will be
necessary for you to update it on a regular basis. Changes necessitating
revisions can be attributed to three sources: changes
within the company, changes originating with the customer and
technological changes. Neglecting to allow for these changes
will doom your operation to decreased profits and
As the owner, you must be aware of changes in your industry,
market and community. First you must determine
what revisions are needed. You will have to compare your plan
with the changes discussed above. You can use your
employees to help keep track of business trends applicable to
their expertise. However, the final judgment as
to revisions will rest with you, the owner. You may
make errors, but with experience, your percentage of correct
decisions will increase and your reward will be
Try to see ahead and determine what possible problems
may plague you. For example, you may have to deal
with costs that exceed your projections. At the same time, you
may experience a sharp decline in sales. These
two factors occurring simultaneously can portend disaster if
you are not ready for them. Also, be cautious when
things are too good. The increased profits may only be
temporary. A product or service that is in demand this year
may not be popular next year. You might think about
developing an alternate budget based on possible problems. Awareness
of changes in your industry and revision according
to those changes will benefit you greatly.
Bobrow, Edwin E. Pioneering New Products: A Market
Survival Guide. Homewood, IL: Dow Jones-Irwin,
Breen, George, and A. B. Blankenship. Do-It-Yourself
Marketing Research. New York: McGraw-Hill,
Clifford, Denis, and Ralph Warner. The Partnership
Book. Berkeley: Nolo Press, 1989.
Goldstein, Harvey. Up Your Cash Flow. Los Angeles:
Granville Publications, 1986.
Husch, Tony, and Linda Foust. That's a Great Idea.
Oakland, CA: Gravity Press, 1986.
Lavin, Michael R. Business Information: How to Find
it, How to Use it. Phoenix, AZ: Oryx Press,
Levinson, Jay Conrad. Guerilla Marketing: Secrets
for Making Big Profits from Your Small Business.
Boston: Houghton-Mifflin, 1984.
Ogilvy, David. Ogilvy on Advertising. New York:
Vintage Books, 1985.
Pinson, Linda, and Jerry Jinnett. Anatomy of a Business
Plan. Tustin, CA: Out of Your Mind...and Into
the Marketplace, 1989. Also available with a software package,
Automate Your Business Plan, that applies principles
of the text.
Pinson, Linda, and Jerry Jinnett. Marketing: Researching
& Reaching your Target Market.
Tustin, CA: Out of Your Mind...and Into the Marketplace,
Pinson, Linda, and Jerry Jinnett. Out of Your Mind...and
Into the Marketplace. Tustin, CA: Out of Your
Mind...and Into the Marketplace, 1988.
Pinson, Linda, and Jerry Jinnett. Recordkeeping: the
Secret to Growth & Profit. Tustin, CA: Out of
Your Mind...and Into the Marketplace, 1989.
Schmenner, Roger W. Making Business Location Decisions.
Englewood Cliffs, NJ: Prentice-Hall, 1982.
Worthington, Anita, and Robert E. Worthington. Staffing
a Small Business: Hiring, Compensating,
and Evaluating. Denver, CO: Oasis Books, 1987.
APPENDIX: INFORMATION RESOURCES
U.S. Small Business Administration (SBA)
The SBA offers an extensive selection of information
on most business management topics, from how to
start a business to exporting your products. SBA
has offices throughout the country. Consult the U.S. Government
section in your telephone directory for the office
nearest you. SBA offers a number of programs and services, including
training and educational programs, counseling services,
financial programs and contract assistance. Ask
• SCORE: Counselors to America’s Small Business,
a national organization sponsored by SBA of over
11,000 volunteer business executives who provide free counseling,
workshops and seminars to prospective and existing
small business people. Free online counseling and
training at www.score.org.
• Small Business Development Centers (SBDCs),
sponsored by the SBA in partnership with state
governments, the educational community and the private sector.
They provide assistance, counseling and training
to prospective and existing business people.
• Women’s Business Centers (WBCs), sponsored by
the SBA in partnership with local non-government
organizations across the nation. Centers are geared specifically
to provide training for women in finance, management,
marketing, procurement and the Internet.
For more information about SBA business development programs
and services call the SBA Small Business Answer
Desk at 1-800-U-ASK-SBA (827-5722) or visit our
Other U.S. Government Resources
Many publications on business management and other related
topics are available from the Government Printing
Office (GPO). GPO bookstores are located in 24 major cities
and are listed in the Yellow Pages under the bookstore
heading. Find a “Catalog of Government Publications at
Many federal agencies offer Websites and publications
of interest to small businesses. There is a nominal
fee for some, but most are free. Below is a selected list of
government agencies that provide publications and
other services targeted to small businesses. To get their publications,
contact the regional offices listed in the telephone
directory or write to the addresses below:
Federal Citizen Information Center (FCIC)
The CIO offers a consumer information catalog of
Consumer Product Safety Commission (CPSC)
Washington, DC 20207
The CPSC offers guidelines for product safety
U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
The USDA offers publications on selling to
the USDA. Publications and programs on entrepreneurship
are also available through county extension offices nationwide.
U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Washington, DC 20230
DOC's Business Liaison Center provides listings
of business opportunities available in the federal
government. This service also will refer businesses to different
programs and services in the DOC and other federal
U.S. Department of Health and Human Services (HHS)
Substance Abuse and Mental Health Services
1 Choke Cherry Road
Rockville, MD 20857
Helpline: 1-800-workplace. Provides information
on Employee Assistance Programs Drug,
Alcohol and other Substance Abuse.
U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with
U.S. Department of Treasury
Internal Revenue Service (IRS)
1500 Pennsylvania Avenue NW
Washington DC 20230
The IRS offers information on tax requirements
for small businesses.
U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
1200 Pennsylvania Avenue NW
Washington, DC 20480
The EPA offers more than 100 publications designed
to help small businesses understand how they can
comply with EPA regulations.
U.S. Food and Drug Administration (FDA)
5600 Fishers Lane
Rockville MD 20857-0001
The FDA offers information on packaging and labeling
requirements for food and food-related products.
For More Information
A librarian can help you locate the specific information
you need in reference books. Most libraries have
a variety of directories, indexes and encyclopedias that cover
many business topics. They also have other resources,
• Trade association information
Ask the librarian to show you a directory of trade associations.
Associations provide a valuable network of resources
to their members through publications and services such as newsletters,
conferences and seminars.
Many guidebooks, textbooks and manuals on small business
are published annually. To find the names of books
not in your local library check Books In Print, a directory
of books currently available from publishers.
• Magazine and newspaper articles
Business and professional magazines provide information
that is more current than that found in books and
textbooks. There are a number of indexes to help you find specific
articles in periodicals.
• Internet Search Engines
In addition to books and magazines, many libraries offer
free workshops, free access to computers and the
Internet, lend skill-building tapes and have catalogues and
brochures describing continuing education opportunities.