Quick Business Plan Writing – Part II
7. Sales Revenue Forecast
Your first task is to estimate your most likely sales revenue by month for your first two years of operation. This is both the most difficult thing to do and the most important part of your business plan. Keep in mind that you are trying to decide if your business will be profitable or not in practical “real world” terms. This means that you must base your financial forecast on the volume of business you realistically expect – not on how much you need to make a good profit. If your sales estimates are too high, your business won’t have enough money to operate. If you estimate sales too low, you won’t be prepared or able to handle all the business that comes in fast.
8. Profit and Loss Forecast
A. Sales Revenue
You have completed this estimate already. Simply enter the total sales revenue dollars for each month for two years from the Sales Revenue Forecast. You have to be sure you really believe that you can generate all the revenues you forecast. Make sure you don’t do it backwards by writing down enough sales revenue to show the profits you want. Otherwise, you’ll have to explain to your backers each month why things aren’t as good as you said they would be.
B. Cost of Sales
Enter your monthly dollar cost of sales. To get these figures, multiply your monthly sales revenue forecast by the average cost of sales percentage. If you made separate forecasts of sales revenue, cost of sales and gross profit for each product line, then add together all the gross profit numbers and enter them on a summary form. You will have prepared separate forms for each product line for the first three lines and a summary sheet showing total gross profit, operating expenses and profit.
C. Gross Profit
Subtract cost of sales (line 2) from sales revenue (line 1) to get gross profit. It’s the amount of money that remains after you’ve paid your direct costs of the products sold. This money is available to pay the business’ fixed expenses and your profits. Larger gross profit –> you have a profit, smaller gross profit –> you have a loss.
D. Fixed Expenses
The categories listed on the form are the most common fixed expenses, but feel free to add or modify items to suit your business. All fixed expense items reduce your profit so that you pay less business income tax.
Most small businesses keep some employees on a fixed weekly or monthly work schedule regardless of how business fluctuates. You’ll need to know how many people you’ll hire, how many hours per month each will work and how much you’ll pay each person.
As an employer, you’ll pay the federal government taxes of around 14% of your employees’ wages and salaries.
Normally you will want to sign a lease for a business space rather than to accept a month-to-month tenancy. Business leases generally protect the tenant more than the landlord, but there is not so beautiful as it seems to be. You’ll be sure that you can stay at the location long enough to build your business around it, and you’ll know what your rental costs will be. But there is risk if your business fails you’ll be responsible for paying the rent until the space is rented to someone else.
H. Marketing and Advertising
If you put your ads your business can go better. As long as it go better and better (even if someone think that ads is not appropriate) you should continue with method that produces results.
Your lease may require you to keep fire, flood or earthquake insurance on the building. If the public comes into your business, public liability and property damage insurance is a necessity. This will protect you from the person who slips and falls on your floor mat. If you employ anyone, you also need workers’ compensation insurance, since you are absolutely liable if one of your employees injures herself while at work. You will probably also want to carry insurance on your valuable inventory and fixtures. And if you manufacture any product that could possibly harm anyone, such as food or machinery, you will want to consider product liability insurance.
This line of your Profit and Loss Forecast concerns the interest portion of the payments you make on any money you borrow. Unless you have an interest-only loan with a balloon payment at the end, your interest payment will vary from month to month even though you pay the same monthly amount.
Depreciation is an amount you can subtract from your profits when you pay taxes. Your depreciation allowance simply lets you show a percentage of this wear as an expense on your tax return each year.
Subtract the Total Fixed Expenses and fill in the result. Make sure that you place brackets around each negative number—that will identify it as a loss.
M. Year Total
Enter the yearly totals under the Year Total column. Check your arithmetic by seeing if the monthly profit figures add up to the same figure you get for your yearly total.
If they don’t match, double-check your addition to find the error.
9. Capital Spending Plan
Capital spending plan includes all the things you have to buy before your business begins bringing in sales revenue, including opening inventory, fixtures and equipment, business licenses, deposits for the building lease and whatever else you need. There is two categories of capital spending plan:
A. Capital items
They have a useful life of more than one year and can be depreciated for tax purposes. They consist of:
- permanent signs, heaters, air conditioners, cooking and refrigeration equipment
- equipment, including machinery, large tools and other expensive items
- racks and display fixtures for retail selling areas
- office furniture
- leasehold improvements or any alterations you make to the building, including walls, bathrooms and carpeting
- computers, typewriters, fax machines, adding machines, cash registers, phone systems and other small equipment you purchase
B. Expense items
They show fixed expenses or costs of sale at the time they are purchased because they last less than one year. They consist of:
- opening inventory
- lease deposits
- tax deposits
- business licenses and permits
- opening marketing and promotion
- telephone installation
- utility deposits
- office supplies and stationery
- legal fees, costs to incorporate and CPA fees to establish your business
- contingency reserve
10. Cash Flow Forecast
The basic process we’ll use to make a Cash Flow Forecast is to start with the monthly profit (or loss) figures you developed in your Profit and Loss Forecast. You’ll then make adjustments each month to the monthly profits to account for the time differences in collecting and spending money.
11. Supporting Documents
Specific items are critically important to the success or failure of your business. Your job is to decide which items to include in your business plan. The key to deciding what to include is whether the information helps the reader understand your proposal. Include proof of statements a lender or investor would be likely to question for
instance, horse shoeing is a growth industry. Do not include support for obvious statements for example, people like ice cream. Things that you should include in your
- prior years’ financial statements if you are expanding an existing business (profit and loss statements and balance sheets from at least two prior years)
- copies of proposed lease agreements
- copies of bids for any needed construction work
- plans for construction work
- drawings of business signs or logos
- a list of what will be purchased for your opening inventory
- key employees’ resumes, if available
- copies of any newspaper stories or other publicity you have
received which relates to your business. This is important for people
who are entering service businesses, where they are their own main