Elements of a Business Plan There are seven major sections of a business plan, and each one is a complex document. Read today's selection from our business plan tutorial to fully understand the components of your business plan.

Now that you understand why you need a business plan and you've spent some time doing your homework gathering the information you need to create one, it's time to roll up your sleeves and get everything down on paper. The following pages will describe in detail the seven essential sections of a business plan: what you should include, what you shouldn't include, how to work the numbers and additional resources you can turn to for help. With that in mind, jump right in.

Executive Summary

Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. This is very important. All too often, what the business owner desires is buried on page eight. Clearly state what you're asking for in the summary.

The statement should be kept short and businesslike, probably no more than half a page. It could be longer, depending on how complicated the use of funds may be, but the summary of a business plan, like the summary of a loan application, is generally no longer than one page. Within that space, you'll need to provide a synopsis of your entire business plan. Key elements that should be included are:

1. Business concept. Describes the business, its product and the market it will serve. It should point out just exactly what will be sold, to whom and why the business will hold a competitive advantage.

2. Financial features. Highlights the important financial points of the business including sales, profits, cash flows and return on investment.

3. Financial requirements. Clearly states the capital needed to start the business and to expand. It should detail how the capital will be used, and the equity, if any, that will be provided for funding. If the loan for initial capital will be based on security instead of equity, you should also specify the source of collateral.

4. Current business position. Furnishes relevant information about the company, its legal form of operation, when it was formed, the principal owners and key personnel.

5. Major achievements. Details any developments within the company that are essential to the success of the business. Major achievements include items like patents, prototypes, location of a facility, any crucial contracts that need to be in place for product development, or results from any test marketing that has been conducted.

When writing your statement of purpose, don't waste words. If the statement of purpose is eight pages, nobody's going to read it because it'll be very clear that the business, no matter what its merits, won't be a good investment because the principals are indecisive and don't really know what they want. Make it easy for the reader to realize at first glance both your needs and capabilities.

Business Description

The business description usually begins with a short descriptionof the industry. When describing the industry, discuss the presentoutlook as well as future possibilities. You should also provideinformation on all the various markets within the industry,including any new products or developments that will benefit oradversely affect your business. Base all of your observations onreliable data and be sure to footnote sources of information asappropriate. This is important if you're seeking funding; theinvestor will want to know just how dependable your information is,and won't risk money on assumptions or conjecture.

When describing your business, the first thing you need toconcentrate on is its structure. By structure we mean the type ofoperation, i.e. wholesale, retail, food service, manufacturing orservice-oriented. Also state whether the business is new or alreadyestablished.

In addition to structure, legal form should be reiterated onceagain. Detail whether the business is a sole proprietorship,partnership or corporation, who its principals are, and what theywill bring to the business.

You should also mention who you will sell to, how the productwill be distributed, and the business's support systems.Support may come in the form of advertising, promotions andcustomer service.

Once you've described the business, you need to describe theproducts or services you intend to market. The product descriptionstatement should be complete enough to give the reader a clear ideaof your intentions. You may want to emphasize any unique featuresor variations from concepts that can typically be found in theindustry.

Be specific in showing how you will give your business acompetitive edge. For example, your business will be better becauseyou will supply a full line of products; competitor A doesn'thave a full line. You're going to provide service after thesale; competitor B doesn't support anything he sells. Yourmerchandise will be of higher quality. You'll give a money-backguarantee. Competitor C has the reputation for selling the bestFrench fries in town; you're going to sell the best ThousandIsland dressing.

How Will You Profit?

Now you must be a classic capitalist and ask yourself, "Howcan I turn a buck? And why do I think I can make a profit thatway?" Answer that question for yourself, and then convey thatanswer to others in the business concept section. You don'thave to write 25 pages on why your business will be profitable.Just explain the factors you think will make it successful, likethe following: it's a well-organized business, it will havestate-of-the-art equipment, its location is exceptional, the marketis ready for it, and it's a dynamite product at a fairprice.

If you're using your business plan as a document forfinancial purposes, explain why the added equity or debt money isgoing to make your business more profitable.

Show how you will expand your business or be able to createsomething by using that money.

Show why your business is going to be profitable. A potentiallender is going to want to know how successful you're going tobe in this particular business. Factors that support your claimsfor success can be mentioned briefly; they will be detailed later.Give the reader an idea of the experience of the other key peoplein the business. They'll want to know what suppliers or expertsyou've spoken to about your business and their response to youridea. They may even ask you to clarify your choice of location orreasons for selling this particular product.

The business description can be a few paragraphs in length to afew pages, depending on the complexity of your plan. If your planisn't too complicated, keep your business description short,describing the industry in one paragraph, the product in another,and the business and its success factors in three or fourparagraphs that will end the statement.

While you may need to have a lengthy business description insome cases, it's our opinion that a short statement conveys therequired information in a much more effective manner. Itdoesn't attempt to hold the reader's attention for anextended period of time, and this is important if you'representing to a potential investor who will have other plans he orshe will need to read as well. If the business description is longand drawn-out, you'll lose the reader's attention, andpossibly any chance of receiving the necessary funding for theproject.

Market Strategies

Market strategies are the result of a meticulous marketanalysis. A market analysis forces the entrepreneur to becomefamiliar with all aspects of the market so that the target marketcan be defined and the company can be positioned in order to garnerits share of sales. A market analysis also enables the entrepreneurto establish pricing, distribution and promotional strategies thatwill allow the company to become profitable within a competitiveenvironment. In addition, it provides an indication of the growthpotential within the industry, and this will allow you to developyour own estimates for the future of your business.

Begin your market analysis by defining the market in terms ofsize, structure, growth prospects, trends and sales potential.

The total aggregate sales of your competitors will provide youwith a fairly accurate estimate of the total potential market. Forinstance, within the beer brewing industry, the total marketpotential would be the total sales of malt beverages in the UnitedStates, which is $15.2 billion.

Once the size of the market has been determined, the next stepis to define the target market. The target market narrows down thetotal market by concentrating on segmentation factors that willdetermine the total addressable market-the total number of userswithin the sphere of the business's influence. The segmentationfactors can be geographic, customer attributes orproduct-oriented.

For instance, if the distribution of your product is confined toa specific geographic area, then you want to further define thetarget market to reflect the number of users or sales of thatproduct within that geographic segment.

Once the target market has been detailed, it needs to be furtherdefined to determine the total feasible market. This can be done inseveral ways, but most professional planners will delineate thefeasible market by concentrating on product segmentation factorsthat may produce gaps within the market. In the case of amicrobrewery that plans to brew a premium lager beer, the totalfeasible market could be defined by determining how many drinkersof premium pilsner beers there are in the target market.

It's important to understand that the total feasible marketis the portion of the market that can be captured provided everycondition within the environment is perfect and there is verylittle competition. In most industries this is simply not the case.There are other factors that will affect the share of the feasiblemarket a business can reasonably obtain. These factors are usuallytied to the structure of the industry, the impact of competition,strategies for market penetration and continued growth, and theamount of capital the business is willing to spend in order toincrease its market share.

Projecting Market Share

Arriving at a projection of the market share for a business planis very much a subjective estimate. It's based on not only ananalysis of the market but on highly targeted and competitivedistribution, pricing and promotional strategies. For instance,even though there may be a sizable number of premium pilsnerdrinkers to form the total feasible market, you need to be able toreach them through your distribution network at a price pointthat's competitive, and then you have to let them know it'savailable and where they can buy it. How effectively you canachieve your distribution, pricing and promotional goals determinesthe extent to which you will be able to garner market share.

For a business plan, you must be able to estimate market sharefor the time period the plan will cover. In order to project marketshare over the time frame of the business plan, you'll need toconsider two factors:

1. Industry growth which will increase the total number ofusers. Most projections utilize a minimum of two growth modelsby defining different industry sales scenarios. The industry salesscenarios should be based on leading indicators of industry sales,which will most likely include industry sales, industry segmentsales, demographic data and historical precedence.

2. Conversion of users from the total feasible market.This is based on a sales cycle similar to a product life cyclewhere you have five distinct stages: early pioneer users, earlyusers, early majority users, late majority users and late users.Using conversion rates, market growth will continue to increaseyour market share during the period from early pioneers to earlymajority users, level off through late majority users, and declinewith late users.

Defining the market is but one step in your analysis. With theinformation you've gained through market research, you need todevelop strategies that will allow you to fulfill yourobjectives.

Positioning Your Business When discussing market strategy,it's inevitable that positioning will be brought up. Acompany's positioning strategy is affected by a number ofvariables that are closely tied to the motivations and requirementsof target customers within as well as the actions of primarycompetitors.

Before a product can be positioned, you need to answer severalstrategic questions such as:

1. How are your competitors positioning themselves?
2. What specific attributes does your product have that yourcompetitors' don't?
3. What customer needs does your product fulfill?

Once you've answered your strategic questions based onresearch of the market, you can then begin to develop yourpositioning strategy and illustrate that in your business plan. Apositioning statement for a business plan doesn't have to belong or elaborate. It should merely point out exactly how you wantyour product perceived by both customers and the competition.

Pricing

How you price your product is important because it will have adirect effect on the success of your business. Though pricingstrategy and computations can be complex, the basic rules ofpricing are straightforward:

1. All prices must cover costs.
2. The best and most effective way of lowering your sales pricesis to lower costs.
3. Your prices must reflect the dynamics of cost, demand, changesin the market and response to your competition.
4. Prices must be established to assure sales. Don't priceagainst a competitive operation alone. Rather, price to sell.
5. Product utility, longevity, maintenance and end use must bejudged continually, and target prices adjusted accordingly.
6. Prices must be set to preserve order in the marketplace.

There are many methods of establishing prices available toyou:

• Cost-plus pricing. Used mainly by manufacturers,cost-plus pricing assures that all costs, both fixed and variable,are covered and the desired profit percentage is attained.
• Demand pricing. Used by companies that sell theirproduct through a variety of sources at differing prices based ondemand.
• Competitive pricing. Used by companies that are enteringa market where there is already an established price and it isdifficult to differentiate one product from another.
• Markup pricing. Used mainly by retailers, markup pricingis calculated by adding your desired profit to the cost of theproduct. Each method listed above has its strengths andweaknesses.

Distribution

Distribution includes the entire process of moving the productfrom the factory to the end user. The type of distribution networkyou choose will depend upon the industry and the size of themarket. A good way to make your decision is to analyze yourcompetitors to determine the channels they are using, then decidewhether to use the same type of channel or an alternative that mayprovide you with a strategic advantage.

Some of the more common distribution channels include:

• Direct sales. The most effective distribution channel isto sell directly to the end-user.
• OEM (original equipment manufacturer) sales. When yourproduct is sold to the OEM, it is incorporated into their finishedproduct and it is distributed to the end user.
• Manufacturer's representatives. One of the best waysto distribute a product, manufacturer's reps, as they areknown, are salespeople who operate out of agencies that handle anassortment of complementary products and divide their selling timeamong them.
• Wholesale distributors. Using this channel, amanufacturer sells to a wholesaler, who in turn sells it to aretailer or other agent for further distribution through thechannel until it reaches the end user.
• Brokers. Third-party distributors who often buy directlyfrom the distributor or wholesaler and sell to retailers or endusers.
• Retail distributors. Distributing a product through thischannel is important if the end user of your product is the generalconsuming public.
• Direct Mail. Selling to the end user using a direct mailcampaign.

As we've mentioned already, the distribution strategy youchoose for your product will be based on several factors thatinclude the channels being used by your competition, your pricingstrategy and your own internal resources.

Promotion Plan

With a distribution strategy formed, you must develop apromotion plan. The promotion strategy in its most basic form isthe controlled distribution of communication designed to sell yourproduct or service. In order to accomplish this, the promotionstrategy encompasses every marketing tool utilized in thecommunication effort. This includes:

• Advertising. Includes the advertising budget, creativemessage(s), and at least the first quarter's mediaschedule.
• Packaging. Provides a description of the packagingstrategy. If available, mockups of any labels, trademarks orservice marks should be included.
• Public relations. A complete account of the publicitystrategy including a list of media that will be approached as wellas a schedule of planned events.
• Sales promotions. Establishes the strategies used tosupport the sales message. This includes a description ofcollateral marketing material as well as a schedule of plannedpromotional activities such as special sales, coupons, contests andpremium awards.
• Personal sales. An outline of the sales strategyincluding pricing procedures, returns and adjustment rules, salespresentation methods, lead generation, customer service policies,salesperson compensation, and salesperson marketresponsibilities.

Sales Potential

Once the market has been researched and analyzed, conclusionsneed to be developed that will supply a quantitative outlookconcerning the potential of the business. The first financialprojection within the business plan must be formed utilizing theinformation drawn from defining the market, positioning theproduct, pricing, distribution, and strategies for sales. The salesor revenue model charts the potential for the product, as well asthe business, over a set period of time. Most business plans willproject revenue for up to three years, although five-yearprojections are becoming increasingly popular among lenders.

When developing the revenue model for the business plan, theequation used to project sales is fairly simple. It consists of thetotal number of customers and the average revenue from eachcustomer. In the equation, "T" represents the totalnumber of people, "A" represents the average revenue percustomer, and "S" represents the sales projection. Theequation for projecting sales is: (T)(A) = S

Using this equation, the annual sales for each year projectedwithin the business plan can be developed. Of course, there areother factors that you'll need to evaluate from the revenuemodel. Since the revenue model is a table illustrating the sourcefor all income, every segment of the target market that is treateddifferently must be accounted for. In order to determine anydifferences, the various strategies utilized in order to sell theproduct have to be considered. As we've already mentioned,those strategies include distribution, pricing and promotion.

Competitive Analysis

The competitive analysis is a statement of the business strategyand how it relates to the competition. The purpose of thecompetitive analysis is to determine the strengths and weaknessesof the competitors within your market, strategies that will provideyou with a distinct advantage, the barriers that can be developedin order to prevent competition from entering your market, and anyweaknesses that can be exploited within the product developmentcycle.

The first step in a competitor analysis is to identify thecurrent and potential competition. There are essentially two waysyou can identify competitors. The first is to look at the marketfrom the customer's viewpoint and group all your competitors bythe degree to which they contend for the buyer's dollar. Thesecond method is to group competitors according to their variouscompetitive strategies so you understand what motivates them.

Once you've grouped your competitors, you can start toanalyze their strategies and identify the areas where they'remost vulnerable. This can be done through an examination of yourcompetitors' weaknesses and strengths. A competitor'sstrengths and weaknesses are usually based on the presence andabsence of key assets and skills needed to compete in themarket.

To determine just what constitutes a key asset or skill withinan industry, David A. Aaker in his book, Developing BusinessStrategies suggests concentrating your efforts in fourareas:

1. The reasons behind successful as well as unsuccessfulfirms
   
2. Prime customer motivators
   
3. Major component costs
   
4. Industry mobility barriers

According to theory, the performance of a company within amarket is directly related to the possession of key assets andskills. Therefore, an analysis of strong performers should revealthe causes behind such a successful track record. This analysis, inconjunction with an examination of unsuccessful companies and thereasons behind their failure, should provide a good idea of justwhat key assets and skills are needed to be successful within agiven industry and market segment.

For instance, in the personal-computer operating-system softwaremarket, Microsoft reigns supreme with DOS and Windows. It'sbeen able to establish its dominance in this industry because ofsuperior marketing and research as well strategic partnerships witha large majority of the hardware vendors that produce personalcomputers. This has allowed DOS and Windows to become the operatingenvironment, maybe not of choice, but of necessity for the majorityof personal computers on the market.

Microsoft's primary competitors, Apple and IBM, both havecompeting operating systems with a great deal of marketing toaccompany them; however, both suffer from weaknesses that Microsofthas been able to exploit. Apple's operating system for itsMacintosh line of computers, while superior in many ways to DOS andWindows, is limited to the Macintosh personal computers; therefore,it doesn't run many of the popular business applications thatare readily available to DOS and Windows. To an extent, IBM'sOS/2 operating system suffers from the same problem. While it willrun on all of the personal computers DOS and Windows can run on andeven handle Windows applications, the number of programs producedfor OS/2 in its native environment is very small. This is the typeof detailed analysis you need in analyzing an industry.

Through your competitor analysis, you will also have to create amarketing strategy that will generate an asset or skill competitorsdon't have, which will provide you with a distinct and enduringcompetitive advantage. Since competitive advantages are developedfrom key assets and skills, you should sit down and put together acompetitive strength grid. This is a scale that lists all yourmajor competitors or strategic groups based upon their applicableassets and skills and how your own company fits on this scale.

Create a Competitive Strength Grid

To put together a competitive strength grid, list all the keyassets and skills down the left margin of a piece of paper. Alongthe top, write down two column headers: "weakness" and"strength." In each asset or skill category, place allthe competitors that have weaknesses in that particular categoryunder the weakness column, and all those that have strengths inthat specific category in the strength column. After you'vefinished, you'll be able to determine just where you stand inrelation to the other firms competing in your industry.

Once you've established the key assets and skills necessaryto succeed in this business and have defined your distinctcompetitive advantage, you need to communicate them in a strategicform that will attract market share as well as defend it.Competitive strategies usually fall into these five areas:

• Product
  
• Distribution
  
• Pricing
  
• Promotion
  
• Advertising

Many of the factors leading to the formation of a strategyshould already have been highlighted in previous sections,specifically in marketing strategies. Strategies primarily revolvearound establishing the point of entry in the product life cycleand an endurable competitive advantage. As we've alreadydiscussed, this involves defining the elements that will set yourproduct or service apart from your competitors or strategic groups.You need to establish this competitive advantage clearly so thereader understands not only how you will accomplish your goals, butalso why your strategy will work.

Design and Development Plan

The purpose of the design and development plan section is toprovide investors with a description of the product's design,chart its development within the context of production, marketingand the company itself, and create a development budget that willenable the company to reach its goals.

There are generally three areas you'll cover in thedevelopment plan section:

• Product development
• Market development
• Organizational development

Each of these elements needs to be examined from the funding ofthe plan to the point where the business begins to experience acontinuous income. Although these elements will differ in natureconcerning their content, each will be based on structure andgoals.

The first step in the development process is setting goals forthe overall development plan. From your analysis of the market andcompetition, most of the product, market and organizationaldevelopment goals will be readily apparent. Each goal you defineshould have certain characteristics. Your goals should bequantifiable in order to set up time lines, directed so they relateto the success of the business, consequential so they have impactupon the company, and feasible so that they aren't beyond thebounds of actual completion.

Goals For Product Development

Goals for product development should center on thetechnical as well as the marketing aspects of theproduct so that you have a focused outline from which thedevelopment team can work. For example, a goal for productdevelopment of a microbrewed beer might be "Produce recipe forpremium lager beer" or "Create packaging for premiumlager beer." In terms of market development, a goal might be,"Develop collateral marketing material." Organizationalgoals would center on the acquisition of expertise in order toattain your product and market-development goals. This expertiseusually needs to be present in areas of key assets that provide acompetitive advantage. Without the necessary expertise, the chancesof bringing a product successfully to market diminish.

Procedures

With your goals set and expertise in place, you need to form aset of procedural tasks or work assignments for each area of thedevelopment plan. Procedures will have to be developed for productdevelopment, market development, and organization development. Insome cases, product and organization can be combined if the list ofprocedures is short enough.

Procedures should include how resources will be allocated, whois in charge of accomplishing each goal, and how everything willinteract. For example, to produce a recipe for a premium lagerbeer, you would need to do the following:

• Gather ingredients.
• Determine optimum malting process.
• Gauge mashing temperature.
• Boil wort and evaluate which hops provide the best flavor.
• Determine yeast amounts and fermentation period.
• Determine aging period.
• Carbonate the beer.
• Decide whether or not to pasteurize the beer.

The development of procedures provides a list of workassignments that need to be accomplished, but one thing itdoesn't provide are the stages of development that coordinatethe work assignments within the overall development plan. To dothis, you first need to amend the work assignments created in theprocedures section so that all the individual work elements areaccounted for in the development plan. The next stage involvessetting deliverable dates for components as well as the finishedproduct for testing purposes. In Terence P. McGarty's book,Business Plans That Win Venture Capital there are primarilythree steps you need to go through before the product is ready forfinal delivery:

1. Preliminary product review. All the product'sfeatures and specifications are checked.
   
2. Critical product review. All the key elements of theproduct are checked and gauged against the development schedule tomake sure everything is going according to plan.
   
3. Final product review. All elements of the product arechecked against goals to assure the integrity of theprototype.

Scheduling and Costs

This is one of the most important elements in the developmentplan. Scheduling includes all of the key work elements as well asthe stages the product must pass through before customer delivery.It should also be tied to the development budget so that expensescan be tracked. But its main purpose is to establish time framesfor completion of all work assignments and juxtapose them withinthe stages through which the product must pass. When producing theschedule, provide a column for each procedural task, how long ittakes, start date and stop date. If you want to provide a numberfor each task, include a column in the schedule for the tasknumber.

Development Budget

That leads us into a discussion of the development budget. Whenforming your development budget, you need to take into account allthe expenses required to design the product and to take it fromprototype to production.

Costs that should be included in the development budgetinclude:

• Material. All raw materials used in the development ofthe product.
• Direct labor. All labor costs associated with thedevelopment of the product.
• Overhead. All overhead expenses required to operate thebusiness during the development phase such as taxes, rent, phone,utilities, office supplies, etc.
• G&A costs. The salaries of executive andadministrative personnel along with any other office supportfunctions.
• Marketing & sales. The salaries of marketingpersonnel required to develop pre-promotional materials and planthe marketing campaign that should begin prior to delivery of theproduct.
• Professional services. Those costs associated with theconsultation of outside experts such as accountants, lawyers, andbusiness consultants.
• Miscellaneous Costs. Costs that are related to productdevelopment.
• Capital equipment. To determine the capital requirementsfor the development budget, you first have to establish what typeof equipment you will need, whether you will acquire the equipmentor use outside contractors, and finally, if you decide to acquirethe equipment, whether you will lease or purchase it.

Personnel

As we mentioned already, the company has to have the properexpertise in key areas to succeed; however, not every company willstart a business with the expertise required in every key area.Therefore, the proper personnel have to be recruited, integratedinto the development process, and managed so that everyone forms ateam focused on the achievement of the development goals.

Before you begin recruiting, however, you should determine whichareas within the development process will require the addition ofpersonnel. This can be done by reviewing the goals of yourdevelopment plan to establish key areas that need attention. Afteryou have an idea of the positions that need to be filled, youshould produce a job description and job specification.

Once you've hired the proper personnel, you need tointegrate them into the development process by assigning tasks fromthe work assignments you've developed. Finally, the whole teamneeds to know what their role is within the company and how eachinterrelates with every position within the development team. Inorder to do this, you should develop an organizational chart foryour development team.

Assessing Risks

Finally, the risks involved in developing the product should beassessed and a plan developed to address each one. The risks duringthe development stage will usually center on technical developmentof the product, marketing, personnel requirements, and financialproblems. By identifying and addressing each of the perceived risksduring the development period, you will allay some of your majorfears concerning the project and those of investors as well.

Operations and Management Plan

The operations and management plan is designed to describe justhow the business functions on a continuing basis. The operationsplan will highlight the logistics of the organization such as thevarious responsibilities of the management team, the tasks assignedto each division within the company, and capital and expenserequirements related to the operations of the business. In fact,within the operations plan you'll develop the next set offinancial tables that will supply the foundation for the"Financial Components" section.

The financial tables that you'll develop within theoperations plan include:

• The operating expense table
• The capital requirements table
• The cost of goods table

There are two areas that need to be accounted for when planningthe operations of your company. The first area is theorganizational structure of the company, and the second is theexpense and capital requirements associated with its operation.

Organizational Structure

The organizational structure of the company is an essentialelement within a business plan because it provides a basis fromwhich to project operating expenses. This is critical to theformation of financial statements, which are heavily scrutinized byinvestors; therefore, the organizational structure has to bewell-defined and based within a realistic framework given theparameters of the business.

Although every company will differ in its organizationalstructure, most can be divided into several broad areas thatinclude:

• Marketing and sales (includes customer relations andservice)
• Production (including quality assurance)
• Research and development
• Administration

These are very broad classifications and it's important tokeep in mind that not every business can be divided in this manner.In fact, every business is different, and each one must bestructured according to its own requirements and goals.

Terence P. McGarty in his book, Business Plans That WinVenture Capital, lists four stages for organizing abusiness:

Calculate Your Personnel Numbers

Once you've structured your business, however, you need toconsider your overall goals and the number of personnel required toreach those goals. In order to determine the number of employeesyou'll need to meet the goals you've set for your business,you'll need to apply the following equation to each departmentlisted in your organizational structure: C / S = P

In this equation, C represents the total number of customers, Srepresents the total number of customers that can be served by eachemployee, and P represents the personnel requirements. Forinstance, if the number of customers for first year sales isprojected at 10,110 and one marketing employee is required forevery 200 customers, you would need 51 employees within themarketing department: 10,110 / 200 = 51

Once you calculate the number of employees that you'll needfor your organization, you'll need to determine the laborexpense. The factors that need to be considered when calculatinglabor expense (LE) are the personnel requirements (P) for eachdepartment multiplied by the employee salary level (SL). Therefore,the equation would be: P * SL = LE

Using the marketing example from above, the labor expense forthat department would be: 51 * $40,000 = $2,040,000

Calculate Overhead Expenses

Once the organization's operations have been planned, theexpenses associated with the operation of the business can bedeveloped. These are usually referred to as overhead expenses.Overhead expenses refer to all non-labor expenses required tooperate the business. Expenses can be divided into fixed(those that must be paid, usually at the same rate, regardless ofthe volume of business) and variable or semivariable(those which change according to the amount of business).

Overhead expenses usually include the following:

• Travel
• Maintenance and repair
• Equipment leases
• Rent
• Advertising & promotion
• Supplies
• Utilities
• Packaging & shipping
• Payroll taxes and benefits
• Uncollectible receivables
• Professional services
• Insurance
• Loan payments
• Depreciation

In order to develop the overhead expenses for the expense tableused in this portion of the business plan, you need to multiply thenumber of employees by the expenses associated with each employee.Therefore, if NE represents the number of employees and EE is theexpense per employee, the following equation can be used tocalculate the sum of each overhead (OH) expense: OH = NE *EE

Develop a Capital Requirements Table

In addition to the expense table, you'll also need todevelop a capital requirements table that depicts the amount ofmoney necessary to purchase the equipment you'll use toestablish and continue operations. It also illustrates the amountof depreciation your company will incur based on all equipmentelements purchased with a lifetime of more than one year.

In order to generate the capital requirements table, you firsthave to establish the various elements within the business thatwill require capital investment. For service businesses, capital isusually tied to the various pieces of equipment used to servicecustomers.

Capital for manufacturing companies, on the other hand, is basedon the equipment required in order to produce the product.Manufacturing equipment usually falls into three categories:testing equipment, assembly equipment and packaging equipment.

With these capital elements in mind, you need to determine thenumber of units or customers, in terms of sales, that eachequipment item can adequately handle. This is important becausecapital requirements are a product of income, which is producedthrough unit sales. In order to meet sales projections, a businessusually has to invest money to increase production or supply betterservice. In the business plan, capital requirements are tied toprojected sales as illustrated in the revenue model shown earlierin this chapter.

For instance, if the capital equipment required is capable ofhandling the needs of 10,000 customers at an average sale of $10each, that would be $100,000 in sales, at which point additionalcapital will be required in order to purchase more equipment shouldthe company grow beyond this point. This leads us to another factorwithin the capital requirements equation, and that is equipmentcost.

If you multiply the cost of equipment by the number of customersit can support in terms of sales, it would result in the capitalrequirements for that particular equipment element. Therefore, youcan use an equation in which capital requirements (CR) equals sales(S) divided by number of customers (NC) supported by each equipmentelement, multiplied by the average sale (AS), which is thenmultiplied by the capital cost (CC) of the equipment element. Giventhese parameters, your equation would look like the following:CR = [(S / NC) * AS] * CC

The capital requirements table is formed by adding all yourequipment elements to generate the total new capital for that year.During the first year, total new capital is also the total capitalrequired. For each successive year thereafter, total capital (TC)required is the sum of total new capital (NC) plus total capital(PC) from the previous year, less depreciation (D), once again,from the previous year. Therefore, your equation to arrive at totalcapital for each year portrayed in the capital requirements modelwould be: TC = NC + PC - D

Keep in mind that depreciation is an expense that shows thedecrease in value of the equipment throughout its effectivelifetime. For many businesses, depreciation is based upon schedulesthat are tied to the lifetime of the equipment. Be careful whenchoosing the schedule that best fits your business. Depreciation isalso the basis for a tax deduction as well as the flow of money fornew capital. You may need to seek consultation from an expert inthis area.

Create a Cost of Goods Table

The last table that needs to be generated in the operations andmanagement section of your business plan is the cost of goodstable. This table is used only for businesses where the product isplaced into inventory. For a retail or wholesale business, costof goods sold-or cost of sales-refers to the purchase ofproducts for resale, i.e. the inventory. The products that are soldare logged into cost of goods as an expense of the sale, whilethose that aren't sold remain in inventory.

For a manufacturing firm, cost of goods is the cost incurred bythe company to manufacture its product. This usually consists ofthree elements:

As in retail, the merchandise that is sold is expensed as acost of goods, while merchandise that isn't sold isplaced in inventory. Cost of goods has to be accounted for in theoperations of a business. It is an important yardstick formeasuring the firm's profitability for the cash-flow statementand income statement.

In the income statement, the last stage of the manufacturingprocess is the item expensed as cost of goods, but it is importantto document the inventory still in various stages of themanufacturing process because it represents assets to the company.This is important to determining cash flow and to generating thebalance sheet.

That is what the cost of goods table does. It's one of themost complicated tables you'll have to develop for yourbusiness plan, but it's an integral part of portraying the flowof inventory through your operations, the placement of assetswithin the company, and the rate at which your inventory turns.

In order to generate the cost of goods table, you need a littlemore information in addition to what your labor and material costis per unit. You also need to know the total number of units soldfor the year, the percentage of units which will be fullyassembled, the percentage which will be partially assembled, andthe percentage which will be in unassembled inventory. Much ofthese figures will depend on the capacity of your equipment as wellas on the inventory control system you develop. Along with thesefactors, you also need to know at what stage the majority of thelabor is performed.

Financial Components

Financial data is always at the back of the business plan, butthat doesn't mean it's any less important than up-frontmaterial such as the business concept and the management team.Astute investors look carefully at the charts, tables, formulas andspreadsheets in the financial section, because they know that thisinformation is like the pulse, respiration rate and blood pressurein a human-it shows whether the patient is alive and what the oddsare for continued survival.

Financial statements, like bad news, come in threes. The news infinancial statements isn't always bad, of course, but takentogether it provides an accurate picture of a company's currentvalue, plus its ability to pay its bills today and earn a profitgoing forward.

The three common statements are a cash flow statement, an incomestatement and a balance sheet. Most entrepreneurs should providethem and leave it at that. But not all do. Robert Crowley, vicepresident of Massachusetts Technology Development Corp., astate-owned venture firm, once described it as "this horribledisease . . . called spreadsheet-itis. It's the most commonailment in business plans today." Crowley says electronicspreadsheet software allows business plan writers to easily crankout many pages and many varieties of financial documents. But thisis a case of the more, the less merry. As a rule, stick with thebig three: income, balance sheet and cash flow statements.

These three statements are interlinked, with changes in onenecessarily altering the others, but they measure quite differentaspects of a company's financial health. It's hard to saythat one of these is more important than another. But of the three,the income statement may be the best place to start.

Income Statement

The income statement is a simple and straightforward report onthe proposed business's cash-generating ability. It's ascore card on the financial performance of your business thatreflects when sales are made and when expenses are incurred. Itdraws information from the various financial models developedearlier such as revenue, expenses, capital (in the form ofdepreciation), and cost of goods. By combining these elements, theincome statement illustrates just how much your company makes orloses during the year by subtracting cost of goods and expensesfrom revenue to arrive at a net result-which is either a profit ora loss.

For a business plan, the income statement should be generated ona monthly basis during the first year, quarterly for the second,and annually for each year thereafter. It's formed by listingyour financial projections in the following manner:

1. Income. Includes all the income generated by thebusiness and its sources.
2. Cost of goods. Includes all the costs related to thesale of products in inventory.
3. Gross profit margin. The difference between revenue andcost of goods. Gross profit margin can be expressed in dollars, asa percentage, or both. As a percentage, the GP margin is alwaysstated as a percentage of revenue.
4. Operating expenses. Includes all overhead and laborexpenses associated with the operations of the business.
5. Total expenses. The sum of all overhead and laborexpenses required to operate the business.
6. Net profit. The difference between gross profit marginand total expenses, the net income depicts the business's debtand capital capabilities.
7. Depreciation. Reflects the decrease in value of capitalassets used to generate income. Also used as the basis for a taxdeduction and an indicator of the flow of money into newcapital.
8. Net profit before interest. The difference between netprofit and depreciation.
9. Interest. Includes all interest derived from debts, bothshort-term and long-term. Interest is determined by the amount ofinvestment within the company.
10. Net profit before taxes. The difference between netprofit before interest and interest.
11. Taxes. Includes all taxes on the business.
12. Profit after taxes. The difference between net profitbefore taxes and the taxes accrued. Profit after taxes is thebottom line for any company.

Following the income statement is a short note analyzing thestatement. The analysis statement should be very short, emphasizingkey points within the income statement.

Cash Flow Statement

The cash-flow statement is one of the most critical informationtools for your business, showing how much cash will be needed tomeet obligations, when it is going to be required, and from whereit will come. It shows a schedule of the money coming into thebusiness and expenses that need to be paid. The result is theprofit or loss at the end of the month or year. In a cash-flowstatement, both profits and losses are carried over to the nextcolumn to show the cumulative amount. Keep in mind that if you runa loss on your cash-flow statement, it is a strong indicator thatyou will need additional cash in order to meet expenses.

Like the income statement, the cash-flow statement takesadvantage of previous financial tables developed during the courseof the business plan. The cash-flow statement begins with cash onhand and the revenue sources. The next item it lists is expenses,including those accumulated during the manufacture of a product.The capital requirements are then logged as a negative afterexpenses. The cash-flow statement ends with the net cash flow.

The cash-flow statement should be prepared on a monthly basisduring the first year, on a quarterly basis during the second year,and on an annual basis thereafter. Items that you'll need toinclude in the cash-flow statement and the order in which theyshould appear are as follows:

1. Cash sales. Income derived from sales paid for bycash.
   
2. Receivables. Income derived from the collection ofreceivables.
   
3. Other income. Income derived from investments, intereston loans that have been extended, and the liquidation of anyassets.
   
4. Total income. The sum of total cash, cash sales,receivables, and other income.
   
5. Material/merchandise. The raw material used in themanufacture of a product (for manufacturing operations only), thecash outlay for merchandise inventory (for merchandisers such aswholesalers and retailers), or the supplies used in the performanceof a service.
   
6. Production labor. The labor required to manufacture aproduct (for manufacturing operations only) or to perform aservice.
   
7. Overhead. All fixed and variable expenses required forthe production of the product and the operations of thebusiness.
   
8. Marketing/sales. All salaries, commissions, and otherdirect costs associated with the marketing and salesdepartments.
   
9. R&D. All the labor expenses required to support theresearch and development operations of the business.
   
10. G&A. All the labor expenses required to support theadministrative functions of the business.
    
11. Taxes. All taxes, except payroll, paid to theappropriate government institutions.
    
12. Capital. The capital required to obtain any equipmentelements that are needed for the generation of income.
    
13. Loan payment. The total of all payments made to reduceany long-term debts.
    
14. Total expenses. The sum of material, direct labor,overhead expenses, marketing, sales, G&A, taxes, capital andloan payments.
    
15. Cash flow. The difference between total income and totalexpenses. This amount is carried over to the next period asbeginning cash.
    
16. Cumulative cash flow. The difference between currentcash flow and cash flow from the previous period.

As with the income statement, you will need to analyze thecash-flow statement in a short summary in the business plan. Onceagain, the analysis statement doesn't have to be long andshould cover only key points derived from the cash-flowstatement.

The Balance Sheet

The last financial statement you'll need to develop is thebalance sheet. Like the income and cash-flow statements, thebalance sheet uses information from all of the financial modelsdeveloped in earlier sections of the business plan; however, unlikethe previous statements, the balance sheet is generated solely onan annual basis for the business plan and is, more or less, asummary of all the preceding financial information broken down intothree areas:

To obtain financing for a new business, you may need to providea projection of the balance sheet over the period of time thebusiness plan covers. More importantly, you'll need to includea personal financial statement or balance sheet instead of one thatdescribes the business. A personal balance sheet is generated inthe same manner as one for a business.

As mentioned, the balance sheet is divided into three sections.The top portion of the balance sheet lists your company'sassets. Assets are classified as current assets and long-term orfixed assets. Current assets are assets that will be converted tocash or will be used by the business in a year or less. Currentassets include:

• Cash. The cash on hand at the time books are closed atthe end of the fiscal year.
• Accounts receivable. The income derived from creditaccounts. For the balance sheet, it's the total amount ofincome to be received that is logged into the books at the close ofthe fiscal year.
• Inventory. This is derived from the cost of goods table.It's the inventory of material used to manufacture a productnot yet sold.
• Total current assets. The sum of cash, accountsreceivable, inventory, and supplies.

Other assets that appear in the balance sheet are calledlong-term or fixed assets. They are called long-term because theyare durable and will last more than one year. Examples of this typeof asset include:

• Capital and plant. The book value of all capitalequipment and property (if you own the land and building), lessdepreciation.
• Investment. All investments by the company that cannotbe converted to cash in less than one year. For the most part,companies just starting out have not accumulated long-terminvestments.
• Miscellaneous assets. All other long-term assets thatare not "capital and plant" or"investments."
• Total long-term assets. The sum of capital and plant,investments, and miscellaneous assets.
• Total assets. The sum of total current assets and totallong-term assets.

After the assets are listed, you need to account for theliabilities of your business. Like assets, liabilities areclassified as current or long-term. If the debts are due in oneyear or less, they are classified as a current liabilities. If theyare due in more than one year, they are long-term liabilities.Examples of current liabilities are as follows:

• Accounts payable. All expenses derived from purchasingitems from regular creditors on an open account, which are due andpayable.
• Accrued liabilities. All expenses incurred by thebusiness which are required for operation but have not been paid atthe time the books are closed. These expenses are usually thecompany's overhead and salaries.
• Taxes. These are taxes that are still due and payable atthe time the books are closed.
• Total current liabilities. The sum of accounts payable,accrued liabilities, and taxes.

Long-term liabilities include:

• Bonds payable. The total of all bonds at the end of theyear that are due and payable over a period exceeding oneyear.
• Mortgage payable. Loans taken out for the purchase ofreal property that are repaid over a long-term period. The mortgagepayable is that amount still due at the close of books for theyear.
• Notes payable. The amount still owed on any long-termdebts that will not be repaid during the current fiscal year.
• Total long-term liabilities. The sum of bonds payable,mortgage payable, and notes payable.
• Total liabilities. The sum of total current andlong-term liabilities.

Once the liabilities have been listed, the final portion of thebalance sheet-owner's equity-needs to be calculated. The amountattributed to owner's equity is the difference between totalassets and total liabilities. The amount of equity the owner has inthe business is an important yardstick used by investors whenevaluating the company. Many times it determines the amount ofcapital they feel they can safely invest in the business.

In the business plan, you'll need to create an analysisstatement for the balance sheet just as you need to do for theincome and cash flow statements. The analysis of the balance sheetshould be kept short and cover key points about the company.

Source:The Small Business Encyclopedia,Business Plans Made Easy, Start Your Own Business andEntrepreneur magazine.