Business Plans Part 4 Taken from

Assignments to Date Preliminary Mini Plan –Mission/Objectives –Keys to success –Target Market –Competitive Advantage –Basic Strategies –Initial break-even chart Company Summary & Product Description –Start-up Funding Table Market Analysis Summary & Management Summary –Sales Forecast and Assumptions –Personnel Plan

Simplified Business Plan Outline Executive Summary Company Summary Product Description Market Analysis Summary Strategy and Implementation Summary Management Summary Financial Plan

Strategy and Implementation “Strategy is focus” What are your main marketing and sales priorities? Keep this list short Use “Strategy Pyramid” to make it real

Strategy Pyramid Example Strategy Tactics Program(s)

Strategy and Implementation Making it Real - Milestones Table

Financial Plan Components Important assumptions Key financial indicators Breakeven Profit and loss Projected cash flow (most critical projection) Projected balance sheet Business ratios

How Tables and Charts are Linked

Points About Cash “Cash is King” Profitable companies go broke because their money is tied up in assets Need to understand the difference between profit and cash (can spend cash) The time to solve cash flow problems is up front An understanding of this is important to your business plan

Cash vs. Profits Starting Numbers IncomeBalance Sales$0Assets Cost of Sales$0Bank Balance$100 Profit$0Total$100 Liabilities Capital Paid-In$100 Earnings$0 Total$100 “Paid-In” – initial cash that I invested in company. Assets = Capital + Liabilities Need to match

Cash vs. Profits Sell a Widget IncomeBalance Sales$150Assets Cost of Sales$100Bank Balance$150 Profit$50Total$150 Liabilities Capital Paid-In$100 Earnings$50 Total$150 “Cost of Sales” is how much the widget costs me. Initial sales cost covered by my initial capital investment of $100.

Cash vs. Profits Sell Another IncomeBalance Sales$300Assets Cost of Sales$200Bank Balance$200 Profit$100Total$200 Liabilities Capital Paid-In$100 Earnings$100 Total$200

Cash vs. Profits And Still Another IncomeBalance Sales$450Assets Cost of Sales$300Bank Balance$250 Profit$150Total$250 Liabilities Capital Paid-In$100 Earnings$150 Total$250 What’s wrong with this picture? A bit too simple......these are IDEAL customers.

Cash vs. Profits Adding Realism - Selling on Terms IncomeBalance Sales$150Assets Cost of Sales$100Bank Balance$0 Profit$50 Total$150 Liabilities Capital Paid-In$100 Earnings$50 Total$150 Accounts Receivable$150 Bank balance is $0 because the customer has not paid their bill yet. Accounts Receivable – you are extending credit to a customer Need to match

Cash vs. Profits Buying on Terms IncomeBalance Sales$150Assets Cost of Sales$100Bank Balance$0 Profit$50 Total$250 Liabilities Capital Paid-In$100 Earnings$50 Total$250 Accounts Receivable$150 Inventory$100 Accounts Payable$100 Total Liabilities$100 Accounts Payable – money that you owe others. Business looks good, so I bought a widget “on terms” ( $100 ) from my supplier, and placed this widget in inventory.

Cash vs. Profits Buying on Terms & Short Term Debt IncomeBalance Sales$450Assets Cost of Sales$300Bank Balance$0 Profit$150 Total$550 Liabilities Capital Paid-In$100 Earnings$150 Total$550 Accounts Receivable$450 Inventory$100 Accounts Payable$100 Total liabilities$300 Short-term debt$200 Received an order for two widgets. My supplier now wants cash up-front for these widgets. Have to borrow $200 to finance these two widgets, and still keep one widget in inventory. I expect to pay it back quickly. Short term debt is debt to be paid off in less than one year.

Cash vs. Profits Lesson: Business looks a lot better with $400 in starting capital IncomeBalance Sales$450Assets Cost of Sales$300Bank Balance$300 Profit$150 Total$850 Liabilities Capital Paid-In$400 Earnings$150 Total$850 Accounts Receivable$450 Inventory$100 Accounts Payable$100 Total liabilities$300 Short-term debt$200 $550 in working capital Have money in the bank

Case Examples Baseline: Computer store $6 million annual sales 8% net profit on sales Cash Flow Cash Balance Looks good, money in bank “Cash Balance” – cash in bank “Cash Flow” – how much cash flows in/out of bank each month. A positive cash flow in a month increases cash balance for next month; a negative cash flow decreases cash balance for next month.

Case Examples Only change is adding 15 days, on average, to receive money on invoices Reduced cash balance

Case Examples Only change from baseline is going from two to three month inventory I owe money!!

Profit and Loss Statement What owners are most interested in Uses sales forecast and personnel plan numbers Good idea to link the profit and loss to other sheets so revisions in numbers are automatically updated You will do a pro forma profit and loss – one that projects the future –You have to estimate future revenues and cost

Profit and Loss Example (Income Statement) You will have to produce one of these over a three year period. Also will have to produce a cash flow statement and balance sheet.

Returning to Cash and Balance Sheet Focus Different point of view than profit and loss We are following the money in and money out Sources of money –Cash sales –Payments from receivables –New loan money –New investment Expenditures –Buying widgets in cash –Paying interest –Paying bills –Paying loans

Sample Case See “Cash is King” section of Hurdles for information on entries Cash BalanceBalance Sheet Numbers in thousands

Definitions for Previous Slide “Retained Earnings” – earnings re-invested in company, earnings not paid out as dividends. “paid-in capital” – capital received from investors in return for stock. Paid-in capital does not occur only at start-up. Can always seek out more capital. Need more capital if you want to grow as you have to build buildings, buy widgets, etc, and you might not have the cash to do this.

Key Cash Flow Points Profits are very important to cash (though this does not tell the whole story) An increase in assets decreases cash An increase in liabilities increases cash Extra dollars in receivables or inventory as assets are dollars that you don’t have in cash Dollars that you have in payables are dollars you have in cash

Balance Sheet Start-up cost

Business Ratios Different barometers on how healthy a business is. For a person, a barometer is: Net Worth = Assets (what you own) – Liabilities (what you owe). Positive is good.

Business Ratios Gross Margin = sales – cost of sales Net Profit Margin = net profit/sales Return on Assets = net profit/total assets Return on Equity (ROI) = net profit/net worth Current Ratio = short-term assets/short-term liabilities Quick Ratio = (short-term assets – inventories)/short-term liabilities Net Working Capital = short-term assets – short-term liabilities Interest Coverage = profit before interest and taxes/total interest payments Acid test = (short-term assets – accounts receivable – inventory)/short term liabilities

Executive Summary Most important of your chapter summaries – the doorway to the rest of the plan One-page, written last Example format: –Opening paragraph –One highlight graphic –A list of two to four measurable objectives Ex. Net income more than 10% of sales by the third year –A mission statement defining your business concept –A list of two to three keys to success

Summary Implementation of Plan Must Be Communicated