BUSINESS PLAN How To Write A Business Plan, 7th Edition

7th edition

How toWrite
a Business Plan

by Mike McKeever



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NOLO

7th edition

How toWrite
a Business Plan

by Mike McKeever

SEVENTH EDITION JANUARY 2005
Editor RICHARD STIM
Illustrations MARI STEIN
Cover Design SUSAN PUTNEY
Book Design TERRI HEARSH
Manuscript Preparation STEPHANIE HAROLDE
Proofreading ROBERT WELLS
Index ELLEN DAVENPORT
Printing DELTA PRINTING SOLUTIONS, INC.

McKeever, Mike P.
How to write a business plan / by Mike McKeever.-- 7th ed.
p. cm.
Includes index.
ISBN 1-4133-0092-8 (alk. paper)
1. Business planning. 2. New business enterprises--Planning. 3. New business
enterprises--Finance. 4. Small business--Planning. 5. Small business--Finance. I. Title.

HD30.28.M3839 2004 2004055209
658.15'224—dc22

Copyright © 1984, 1986, 1988, 1992, 1999, 2002, and 2004 by Mike P. McKeever. ALL RIGHTS RESERVED.
Printed in the U.S.A.

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Dedication

This book is dedicated to the memory of my late grandmother, Elizabeth Eudora
Woodall Darby, whose influence I acknowledged only recently.

Acknowledgments

After more than a decade of working with various revisions and editions of this book, I
am amazed at the uniform spirit of goodwill and cooperation given me by many
people. Without that spirit, this book would not have seen the light of day or continued
helping people. My first editor, Ralph “Jake” Warner, showed infinite patience in
working with a first-time author. My second editor, Lisa Goldoftas, challenged every
punctuation mark and sentence structure while gracefully deferring to my knowledge
about the subject.

Also at Nolo: Steve Elias designed many of the helpful charts and made a number of
editorial suggestions; Adam Stanhope educated me about computers; Mark Stuhr lent
his expertise by fine-tuning and updating computer-related material; Stephanie Harolde
worked her word processing wonders on the manuscript; Terri Hearsh designed the
book and lent her vast experience to enhance the quality of the book and financial
forms; Eddie Warner gave helpful suggestions on online information; and many more
helpful and professional folks at Nolo improved the book greatly.

A special thanks to a number of generous individuals, each of whom knows a great
deal about starting and operating a small business. Peg Moran, author of Invest in
Yourself: A Woman’s Guide to Starting Her Own Business and Surviving the First Two
Years: A Woman’s Guide to Running Her Business Successfully, made several
suggestions that helped the book greatly and has been a good and supportive friend
from the first. Terri Hearsh, a former Vice President for Bank of America, made a
number of suggestions from the bank officer’s point of view. Roger Pritchard, a
Berkeley, California, small business consultant who has counseled hundreds of small
business owners, reminded me that small is often beautiful. Also, thanks to two people
who took the time to read the book carefully and offer suggestions. Their input was
extremely useful—but I am responsible for any information that is incorrect: Jason
Wallach is a friend and a CPA in Santa Rosa, California; his input was very helpful.
Harry Keller of the Santa Rosa SBA office was kind enough to explain several intricacies
of that system to me.

Dan Peters took time from starting his new manufacturing business to read the manu-
script and offer valuable suggestions. Sharyn Simmons kindly allowed me to use her
business concept as an example of a service business. Larry Healy let me modify his
business plan as an example of a manufacturing business. Hugh Codding and Leroy
Knibb of Codding Investments shared details of retail operations.

Finally, I want to thank all my readers, clients, and students who have shared their hopes,
dreams, and problems with me over the years. Many of their stories and suggestions
appear here in disguised form. I hope you will profit from their experiences as I have.

Mike P. McKeever
San Francisco, California

About the Author

Mike P. McKeever’s education, work experience, business ownership,
writing, and teaching careers give him a broad and unique perspec-
tive on business planning. He has a BA in Economics from Whittier
College and a Master’s in Economics from the London (England)
School of Economics, and has done post-graduate work in financial
analysis at the USC Business School. Mike has taught classes at
numerous community colleges in entrepreneurship and small busi-
ness management. He has published articles on entrepreneurship for
Dow Jones publications, the Sloan Publications Business Journal, and
numerous newspapers and periodicals.

Mike has successfully purchased, expanded, and sold a number of
businesses, including a manufacturing company, tune-up shop, gas
station, retail store, and commercial building. He has worked for a
variety of companies ranging from small groceries to multimillion
dollar manufacturers. As an independent business broker, he assessed
the strengths and weaknesses of hundreds of companies. As senior
financial analyst for a Fortune 500 company, he wrote and analyzed
nearly 500 business plans.

Currently, Mike runs a company, Business Plan Workshop, in which
this book features prominently. He conducts workshops for groups of
small business owners and takes each person through the actual steps
of completing a business plan for his or her individual business.

Table of Contents

I How to Use This Book
1 Benefits of Writing a Business Plan

A. What Is a Business Plan? ...................................................................... 1/2
B. Why Write a Business Plan? ................................................................ 1/2
C. Issues Beyond the Plan ........................................................................ 1/3

2 Do You Really Want to Own a Business?
A. Introduction ......................................................................................... 2/2
B. Self-Evaluation Exercises ...................................................................... 2/3
C. How to Use the Self-Evaluation Lists ................................................... 2/6
D. Reality Check: Banker’s Analysis ......................................................... 2/6

3 Choosing the Right Business
A. Introduction ......................................................................................... 3/2
B. Know Your Business ............................................................................ 3/2
C. Be Sure You Like Your Business ........................................................... 3/3
D. Describe Your Business ....................................................................... 3/4
E. Taste, Trends, and Technology: How Will the Future
Affect Your Business? ........................................................................... 3/8
F. Break-Even Analysis: Will Your Business Make Money? .................... 3/11
G. What You Have Accomplished .......................................................... 3/21

4 Potential Sources of Money to Start or Expand Your
Small Business
A. Introduction ......................................................................................... 4/3
B. Ways to Raise Money .......................................................................... 4/3
C. Common Money Sources to Start or Expand a Business ....................... 4/9
D. Additional Money Sources for an Existing Business ........................... 4/16
E. If No One Will Finance Your Business, Try Again ............................. 4/18
F. Secondary Sources of Financing for Start-Ups or Expansions ............. 4/18
G. Conclusion ........................................................................................ 4/21

5 Your Resume and Financial Statement
A. Introduction ......................................................................................... 5/2
B. Draft Your Business Accomplishment Resume ..................................... 5/2
C. Draft Your Personal Financial Statement .............................................. 5/8

6 Your Profit and Loss Forecast
A. Introduction ......................................................................................... 6/2
B. What Is a Profit and Loss Forecast? ...................................................... 6/2
C. Determine Your Average Cost of Sales ................................................ 6/3
D. Complete Your Profit and Loss Forecast ............................................... 6/5
E. Review Your Profit and Loss Forecast ................................................ 6/15

7 Your Cash Flow Forecast and Capital Spending Plan
A. Introduction ......................................................................................... 7/2
B. Prepare Your Capital Spending Plan .................................................... 7/3
C. Prepare Your Cash Flow Forecast ........................................................ 7/5
D. Required Investment for Your Business .............................................. 7/11
E. Check for Trouble .............................................................................. 7/12

8 Write Your Marketing and Personnel Plans
A. Introduction ......................................................................................... 8/2
B. Marketing Plan .................................................................................... 8/2
C. Personnel Plan ................................................................................... 8/10

9 Editing and Finalizing Your Business Plan
A. Introduction ......................................................................................... 9/2
B. Decide How to Organize Your Plan .................................................... 9/2
C. Write Final Portions of Your Plan......................................................... 9/3
D. Create the Appendix ............................................................................ 9/7
E. Create Title Page and Table of Contents .............................................. 9/8
F. Complete Your Final Edit ..................................................................... 9/9
G. Consider Using a Business Consultant ............................................... 9/10

10 Selling Your Business Plan
A. How to Ask for the Money You Need ................................................ 10/2
B. How to Approach Different Backers .................................................. 10/4
C. What to Do When Someone Says “Yes” ............................................ 10/7
D. Plan in Advance for Legal Details ...................................................... 10/8

11 After You Open—Keeping on the Path to Success
A. Introduction ....................................................................................... 11/2
B. Watch Out for Problem Areas ............................................................ 11/2
C. Getting Out of Business ..................................................................... 11/6

12 Good Resources for Small Businesses
A. Introduction ....................................................................................... 12/3
B. Business Consultants .......................................................................... 12/3
C. Books ................................................................................................. 12/4
D. Pamphlets .......................................................................................... 12/9
E. Magazines—Continuing Small Business Help .................................... 12/9
F. Computers and Business .................................................................. 12/10
G. Online Business Resources .............................................................. 12/12
H. Formal Education ............................................................................. 12/14

Appendixes
1 Business Plan for a Small Service Business
2 Business Plan for a Manufacturing Business
3 Business Plan for a Project Development
4 How to Use the CD-ROM
5 Tear-Out Forms

Index

INTRODUCTION

I

How to Use This Book

I/2 HOW TO WRITE A BUSINESS PLAN

“Nine to five ain’t takin me where I’m bound.” What Kind of Plan Do You Need?
—Neil Diamond,
You can use How to Write a Business Plan to
from “Thank the Lord for the Nighttime” write whatever type of plan best suits your needs:

“You’ve got to be careful if you don’t know where • Complete business plan. By writing this type
you’re going because you might not get there.” of plan, you’ll gain a thorough understand-
ing of all aspects of your business. A
—Yogi Berra complete business plan is especially helpful
for people who are starting a new business.
Here is a book designed to help you write a first- This form of plan is also excellent for
rate business plan and loan application. How to convincing prospective backers to support
Write a Business Plan contains detailed forms and your business. You’ll be more successful in
step-by-step instructions designed to help you raising the money you need if you answer
prepare a well-thought-out, well-organized plan. all of your potential backers’ questions. A
It shows you how to apply proven financial and complete plan should include the following
business planning techniques used by traditional elements:
lenders and investors to your benefit. Coupled Title Page: Chapter 9, Section E
with your positive energy and will to succeed, Plan Summary: Chapter 9, Section C1
this book shows you how to design a business Table of Contents: Chapter 9, Section E
plan and loan package you will be proud to show Problem Statement: Chapter 3, Section D2
to the loan officer at your bank, the Small Busi- Business Description: Chapter 3, Section D3
ness Administration, or your Uncle Harry. Business Accomplishments: Chapter 5,
Section B
But this book does more than just take you Marketing Plan: Chapter 8, Section B7
through the steps of writing a business plan. More Sales Revenue Forecast: Chapter 3,
importantly, the tools and techniques in this book Section F1
help you decide if your business idea will work. Profit and Loss Forecast: Chapter 6,
The same financial and analytical tools necessary Section D
to convince potential lenders and investors that Capital Spending Plan: Chapter 7, Section B
your business idea is sound can help you decide Cash Flow Forecast: Chapter 7, Section C
whether your idea is the right business for you. Future Trends: Chapter 3, Section E
Risks Facing Your Business: Chapter 8,
After working with hundreds of business owners, Section B8
I have observed an almost universal truth about Personnel Plan: Chapter 8, Section C4
business planning: Writing a plan is an internal • Business Personality: Chapter 8,
journey through the mind of one person. Even in Section C1
partnerships and corporations, usually one person • Staffing Schedule: Chapter 8, Section C2
has the vision and energy to take an idea and • Job Descriptions: Chapter 8, Section C3
turn it into a business by writing a business plan. Specific Business Goals: Chapter 2,
For that reason, I have addressed this book to the Section B4
business owner as a single individual rather than Personal Financial Statement: Chapter 5,
a husband and wife team, group, committee, Section C
partnership, or corporation. Personal Background (Your Strong and
Weak Points, General and Specific

HOW TO USE THIS BOOK I/3

Skills Your Business Needs, Your Likes Cash Flow Forecast: Chapter 7, Section C
and Dislikes): Chapter 2, Section B Supporting Documents: Chapter 9,
Appendix: Table of Contents: Chapter 9,
Section D Section D.
Appendix: Supporting Documents: Chapter
9, Section D. Quick Plan. The “quick plan” icon appears
• Quick plan (one-day plan). This method at the beginning of each chapter containing
allows you to produce a basic business quick plan components and guides you to the
plan in a short time—as little as one day in sections you’ll need.
some cases. If you know your business, are
familiar with and able to make financial • Customized plan. Of course, you can start
projections, and have done the necessary with a quick plan and add components
research, you may be able to create a plan from the complete business plan to suit
in one day. But understand that a quick your needs. When deciding what to include
plan is a stripped-down version of a busi- and what to exclude, ask yourself:
ness plan. It won’t convince either you or Which of my statements are the strongest?
your prospective backers that your business Which statements do my backers want to
idea is sound. It is appropriate only if your see?
business idea is very simple or someone
has already committed to backing your Note that the appendixes contain blank
venture. forms as well as business plans for a small
Most lenders and investors receive many service business, a manufacturing business, and a
requests for money every week and they develop project development. All the forms (except for the
a set of criteria that helps them screen proposals. Loan Interest Calculation Chart) and business
The basic information in a quick plan is usually plans are included on the CD-ROM located at the
not enough for them to make a decision. Sad to back of the book. The forms—for calculating
say, most busy backers will turn down a proposal sales forecasts, personal financial information,
before they will ask for more information. Poten- profit and loss forecasts, and cash flow fore-
tial backers, just like most people, prefer a deluxe casts—are provided in Microsoft Excel spread-
version with all the extras to a stripped-down sheet format and include helpful formulas for
model. making calculations. The “CD” icon appears
A stripped-down quick plan has these few whenever forms or business plans are reproduced
components: on the CD. (Note, if a series of #### symbols ap-
Title Page: Chapter 9, Section E pear in a box in a spreadsheet that means that
Plan Summary: Chapter 9, Section C1 you will need to widen the column in order to
Table of Contents: Chapter 9, Section E display the numbers.)
Problem Statement: Chapter 3, Section D2
Business Description: Chapter 3, Section D3 Meet Antoinette
Business Accomplishments: Chapter 5,
Section B In an effort to make sense out of the thousands of
Sales Revenue Forecast: Chapter 3, types of small businesses, I have roughly divided
Section F1 them into five main ones: retail, wholesale,
Profit and Loss Forecast: Chapter 6, service, manufacturing, and project development.
Section D All the financial tools I present can be used by all
Capital Spending Plan: Chapter 7, Section B

I/4 HOW TO WRITE A BUSINESS PLAN

five. However, for the sake of simplicity, I follow you start revising individual parts of the plan be-
one particular retail business—a dress shop. In so fore you have the complete picture, you’ll waste a
doing, I illustrate most of the planning concepts lot of energy. If you’re like me, you’ll rewrite and
and techniques necessary to understand and raise edit your plan several times once you’ve finished
money for any business. the first run-through.

As you read through the text you’ll meet And a Few More Words
Antoinette Gorzak, a friend of mine. Antoinette
wants to open a dress shop, and she has allowed As I write this, the book has been in print for
me to use her plans and thought processes as an over ten years and has sold more than 100,000
example of a complete and well-prepared busi- copies. I have heard that it has been pirated in
ness plan for a retail store. You’ll find parts of her some parts of the former Soviet Union. Since it
plan presented in different chapters as we discuss first came out I have taught, lectured, and
the various components of a complete business consulted on business plans in a wide variety of
plan. forums. I have taken that experience and
reformulated the exercises in the book to make
Getting Started them more effective as well as easier and quicker
to use. I remain friends with many of the people I
Before you sit down to write your plan, you’ll met through the book and occasionally help them
want to gather together these essentials: over rough spots in their planning, which is the
most gratifying part of the experience for me. My
• a word processor or typewriter business is helping people write business plans
• a calculator or computer spreadsheet that find money for their businesses. Call me at
415-681-7900 and I’ll listen or help if I can. You
program can also email me at [email protected].
• a good supply of 8½" by 11" typing paper Please mention “Nolo Business Plan Book” in the
• several pencils and a good eraser subject line of your email, otherwise I might de-
• access to a photocopy machine. lete it as a spam message.
Now, here’s a word about revisions and
changing your plan. I firmly believe in writing Finally, to avoid always using the pronoun
your first thoughts on paper and letting them rest “he” when referring to individuals in general, and
for a day or two. Then you can edit, expand, and to further avoid clumsy neologisms like “s/he”
revise later to get a more perfect statement. In this and awkward phraseologies like “he/she” and “he
book, I show examples of Antoinette’s writing or she,” I have compromised by the random use
process. (I’m grateful she’s such a good sport.) of “he” in some instances and “she” in others. I
Most people discover about halfway through hope I have arrived at a fair balance.
writing their plan that they want to change either
their assumptions or some of the plan they’ve Also, keep in mind that wherever possible, this
already written. My best advice is this: Complete book uses plain language, not jargon. As result
the plan all the way through on your original set you may find that I have often substituted simple
of assumptions. That way you can see the financial terminology for traditional business plan lingo. ■
impact of your ideas, and it will be much easier
to make the right changes in the second draft. If

CHAPTER

1

Benefits of Writing a Business Plan

A. What Is a Business Plan? ................................................................................... 1/2
B. Why Write a Business Plan? ............................................................................. 1/2

1. Helps You Get Money ................................................................................. 1/2
2. Helps You Decide to Proceed or Stop .......................................................... 1/2
3. Lets You Improve Your Business Concept .................................................... 1/3
4. Improves Your Odds of Success ................................................................... 1/3
5. Helps You Keep on Track ............................................................................ 1/3
C. Issues Beyond the Plan ..................................................................................... 1/3
1. Bookkeeping and Accounting ...................................................................... 1/4
2. Taxes ........................................................................................................... 1/4
3. Securities Laws ............................................................................................ 1/4
4. Your Management Skill ................................................................................ 1/4
5. Issues Specific to Your Business ................................................................... 1/4

1/2 HOW TO WRITE A BUSINESS PLAN

“Marry in haste, repent at leisure.” (proverb) In my experience, about 35% to 40% of the
“A stitch in time saves nine.” (proverb) people currently in business do not know how
money flows through their business. Writing a
A. What Is a Business Plan? business plan with this book teaches you where
money comes from and where it goes. Is it any
A business plan is a written statement that wonder that your backers want to see your plan
describes and analyzes your business and gives before they consider your financial request?
detailed projections about its future. A business
plan also covers the financial aspects of starting There are as many potential lenders and
or expanding your business—how much money investors as there are prospective business owners.
you need and how you’ll pay it back. If you have a thoroughly thought-out business
and financial plan that demonstrates a good
Writing a business plan is a lot of work. So likelihood of success and you are persistent, you
why take the time to write one? The best answer will find the money you need. Of course, it may
is the wisdom gained by literally millions of take longer than you expect and require more
business owners just like you. Almost without work than you expect, but you will ultimately be
exception, each business owner with a plan is successful if you believe in your business.
pleased she has one, and each owner without a
plan wishes he had written one. 2. Helps You Decide to Proceed or Stop

B. Why Write a Business Plan? One major theme of the book may surprise you.
It’s as simple as it is important. You, as the pro-
Here are some of the specific and immediate spective business owner, are the most important
benefits you will derive from writing your business person you must convince of the soundness of
plan. your proposal. Therefore, much of the work you
are asked to do here serves a dual purpose. It is
1. Helps You Get Money designed to provide answers to all the questions
that prospective lenders and investors will ask.
Most lenders or investors require a written business But it will also teach you how money flows
plan before they will consider your proposal through your business, what the strengths and
seriously. Even some landlords require a sound weaknesses in your business concept are, and
business plan before they will lease you space. what your realistic chances of success are.
Before making a commitment to you, they want
to see that you have thought through critical The detailed planning process described in this
issues facing you as a business owner and that book is not infallible—nothing is in a small busi-
you really understand your business. They also ness—but it should help you uncover and correct
want to make sure your business has a good flaws in your business concept. If this analysis
chance of succeeding. demonstrates that your idea won’t work, you’ll be
able to avoid starting or expanding your business.
This is extremely important. It should go without
saying that a great many businesspeople owe
their ultimate success to an earlier decision not to
start a business with built-in problems.

BENEFITS OF WRITING A BUSINESS PLAN 1/3

3. Lets You Improve Your connection between these two seemingly uncon-
Business Concept nected facts? My suggestion is this: Let someone
else prove the connection wrong. Why not be
Writing a plan allows you to see how changing prudent and improve your odds by writing a
parts of the plan increases profits or accomplishes plan?
other goals. You can tinker with individual parts
of your business with no cash outlay. If you’re 5. Helps You Keep on Track
using a computer spreadsheet to make financial
projections, you can try out different alternatives Many business owners spend countless hours
even more quickly. This ability to fine-tune your handling emergencies, simply because they
plans and business design increases your chances haven’t learned how to plan ahead. This book
of success. helps you anticipate problems and solve them
before they become disasters.
For example, let’s say that your idea is to start
a business importing Korean leather jackets. Every- A written business plan gives you a clear
thing looks great on the first pass through your course toward the future and makes your decision
plan. Then you read an article about the declining making easier. Some problems and opportunities
exchange ratio of U.S. dollars to Korean currency. may represent a change of direction worth follow-
After doing some homework about exchange rate ing, while others may be distractions that referring
fluctuations, you decide to increase your profit to your business plan will enable you to avoid.
margin on the jackets to cover anticipated declines The black and white of your written business plan
in dollar purchasing power. This change shows will help you face facts if things don’t work out as
you that your prices are still competitive with expected. For example, if you planned to be mak-
other jackets and that your average profits will ing a living three months after start-up, and six
increase. And you are now covered for any likely months later you’re going into the hole at the rate
decline in exchange rates. of $100 per day, your business plan should help
you see that changes are necessary. It’s all too
4. Improves Your Odds of Success easy to delude yourself into keeping a business
going that will never meet its goals if you
One way of looking at business is that it’s a approach things with a “just another month or
gamble. You open or expand a business and two and I’ll be there” attitude, rather than
gamble your and the bank’s or investor’s money. comparing your results to your goals.
If you’re right, you make a profit and pay back
the loans and everyone’s happy. But if your esti- C. Issues Beyond the Plan
mate is wrong, you and the bank or investors can
lose money and experience the discomfort that I have written this book to provide you with an
comes from failure. (Of course, a bank probably overview of the issues that determine success or
is protected because it has title to the collateral failure in a small business. Experienced lenders,
you put up to get the loan. See Chapter 4 for a investors, and entrepreneurs want a plan that
complete discussion.) takes these issues into account. Of course, this
book can’t cover everything. Here are some of the
Writing a business plan helps beat the odds. key business components that are left out of this
Most new, small businesses don’t last very long. initial planning process.
And, most small businesses don’t have a business
plan. Is that only a coincidence, or is there a

1/4 HOW TO WRITE A BUSINESS PLAN

1. Bookkeeping and Accounting partner without being affected by securities laws.
A complete discussion of these issues is beyond
This book discusses the numbers and concepts the scope of this book. For now, take note that
you as the business owner need to open and you must comply with securities regulations after
manage your small business. You have the you complete your plan and before you take any
responsibility to create bookkeeping and account- money into your business from selling shares or
ing systems and make sure they function partnership interests.
adequately. (Some suggestions for setting up a
system are contained in Chapter 6, Section D.) 4. Your Management Skill

One of the items generated by your accounting This book shows you how to write a very good
system will be a balance sheet. A balance sheet is business plan and loan application. However,
a snapshot at a particular moment in time that your ultimate success rests on your ability to
lists the money value of everything you own and implement your plans—on your management
everything you owe to someone else. skills. If you have any doubts about your manage-
ment ability, check out the resources in Chapter
2. Taxes 12. Also see Chapter 11 for a thought-stimulating
discussion of management.
While there are a few mentions of tax issues
throughout the book, most of the planning 5. Issues Specific to Your Business
information doesn’t discuss how taxes will be
calculated or paid. The book focuses its efforts on How successfully your business relates to the
making a profit and a positive cash flow. If you market, the business environment, and the compe-
make a profit, you’ll pay taxes and if you don’t tition may be affected by patents, franchises,
make a profit, you’ll pay fewer taxes. A CPA or foreign competition, location, and the like. Of
tax advisor can help you with tax strategies. necessity, this book focuses on principles common
to all businesses and does not discuss the specific
3. Securities Laws items that distinguish your business from other
businesses. For example, this book doesn’t discuss
If you plan to raise money by selling shares in a how to price your products to meet your competi-
corporation or limited partnership, you’ll fall tion; I assume that you have enough knowledge
under state or federal securities regulations. You about your chosen business to answer that
can, however, borrow money or take in a general question. ■

CHAPTER

2

Do You Really Want to Own
a Business?

A. Introduction ...................................................................................................... 2/2
B. Self-Evaluation Exercises ................................................................................... 2/3

1. Your Strong and Weak Points ...................................................................... 2/3
2. General and Specific Skills Your Business Needs ......................................... 2/4
3. Your Likes and Dislikes ................................................................................ 2/5
4. Specific Business Goals ............................................................................... 2/5
C. How to Use the Self-Evaluation Lists ................................................................ 2/6
D. Reality Check: Banker’s Analysis ...................................................................... 2/6
1. Banker’s Ideal .............................................................................................. 2/6
2. Measuring Up to the Banker’s Ideal ............................................................. 2/7
3. Use the Banker’s Ideal ................................................................................. 2/7

2/2 HOW TO WRITE A BUSINESS PLAN

A. Introduction potential for great success exists, so do many
risks. Running a small business may require that
“Hope springs eternal in the human breast,” said you sacrifice some short-term comforts for long-
English poet and essayist Alexander Pope several term benefits. It is hard, demanding work that
centuries ago. He wasn’t describing people requires a wide variety of skills few people are
expanding or starting a business, but he may as born with. But even if you possess (or more likely
well have been. Everyone who goes into business acquire) the skills and determination you need to
for themselves hopes to meet or surpass a set of successfully run a business, your business will
personal goals. While your particular configuration need one more critical ingredient: Money.
is sure to be unique, perhaps you will agree with
some of the ones I have compiled over the years You need money to start your business,
from talking to hundreds of budding entrepreneurs. money to keep it running, and money to make it
grow. This is not the same thing as saying you
Independence. A search for freedom and can guarantee success in your small business if
independence is the driving force behind many you begin with a fat wallet. Now, let me confess
businesspeople. Wasn’t it Johnny Paycheck who to one major bias here. I believe that most small
wrote the song “Take This Job and Shove It?” business owners and founders are better off
starting small and borrowing, or otherwise raising,
Personal Fulfillment. For many people, owning as little money as possible. Put another way, there
a business is a genuinely fulfilling experience, is no such thing as “raising plenty of capital to
one that lifetime employees never know. ensure success.” Unless you, as the prospective
business founder, learn to get the most mileage
Lifestyle Change. Many people find that while out of every dollar, you may go broke and will
they can make a good income working for other surely spend more than you need to. But that
people, they are missing some of life’s precious doesn’t mean that you should try to save money
moments. With the flexibility of small business by selling cheap merchandise or providing
ownership, you can take time to stop and smell marginal services. In today’s competitive economy,
the roses. your customers want the best you can give them
at the best price. They will remember the quality
Respect. Successful small business owners are of what they get from you long after they have
respected, both by themselves and their peers. forgotten how much they paid.

Money. You can get rich in a small business, In practical terms, that means you must buy
or at least do very well financially. Most entrepre- only the best goods for your customers. Anything
neurs don’t get wealthy, but some do. If money is that affects the image your business has in your
your motivator, admit it. customer’s mind should be first-rate. It also means
that you shouldn’t spend money on things that
Power. When it is your business, you can have don’t affect the customer. For example, unless
your employees do it your way. There is a little you’re a real estate broker your customers
Ghengis Khan in us all, so don’t be surprised if probably won’t care if you drive an old, beat-up
power is one of your goals. If it is, think about car to an office in a converted broom closet, as
how to use this goal in a constructive way. long as you provide them an honest product or
service for an honest price. Save the nice car,
Right Livelihood. From natural foods to solar fancy office, and mobile telephone until after
power to many types of service businesses, a your business is a success.
great many cause-driven small businesses have
done very well by doing good.

If owning a small business can help a person
accomplish these goals, it’s small wonder that so
many are started. Unfortunately, while the

DO YOU REALLY WANT TO OWN A BUSINESS? 2/3

B. Self-Evaluation Exercises you go out for the Sunday paper and are met by
a newsie who is groggy from a hangover and
Here’s a question to ponder: Are you the right badmouths his girlfriend in front of you. Chances
person for your business? Because running a are that next Sunday will find you at a different
business is a very demanding endeavor that can newsstand.
take most of your time and energy, your business
probably will suffer if you’re unhappy. Your busi- I’m not saying you need to be psychologically
ness can become an albatross around your neck if perfect to run a small business. But to succeed,
you don’t have the skills and temperament to run you must ask people for their money every day
it. Simply put, I’ve learned that no business, and convince a substantial number of them to
whether or not it has sound financial backing, is give it to you. By providing your goods or services,
likely to succeed unless you, as the prospective you will create intimate personal relationships
owner, make two decisions correctly: with a number of people. It makes no difference
whether you refer to people who give you money
• You must honestly evaluate yourself to as clients, customers, patients, members, students,
decide whether you possess the skills and or disciples. It makes a great deal of difference to
personality needed to succeed in a small your chances of ultimate success if you under-
business. stand that these people are exchanging their
money for the conviction that you are giving
• You must choose the right business. (How them their money’s worth.
to select the right business is covered
extensively in Chapter 3.) The following self-evaluation exercises will
help you assess whether you have what it takes
A small business is a very personal endeavor. to successfully run a small business. Take out a
It will honestly reflect your opinions and attitudes, blank sheet of paper or open a computer file.
whether or not you design it that way. Think of it
this way: The shadow your business casts will be 1. Your Strong and Weak Points
your shadow. If you are sloppy, rude, crafty, or
naively trusting, your business will mirror these Take a few minutes to list your personal and
attributes. If your personal characteristics are business strengths and weaknesses. Include
more positive than those, your business will be
more positive, too. To put this concretely, suppose

2/4 HOW TO WRITE A BUSINESS PLAN

everything you can think of, even if it doesn’t Your list of strong and weak points will help
appear to be related to your business. For you see any obvious conflicts between your
instance, your strong points may include the personality and the business you’re in or want to
mastery of a hobby, your positive personality start. For example, if you don’t like being around
traits, and your sexual charisma, as well as your people but plan to start a life insurance agency
specific business skills. Take your time and be with you as the primary salesperson, you may
generous. have a personality clash with your business. The
solution might be to find another part of the
To provide you with a little help, I include a insurance business that doesn’t require as much
sample list for Antoinette Gorzak, a personal people contact.
friend who has what she hopes is a good
business idea: a slightly different approach to Unfortunately, many people don’t realize that
selling women’s clothing. You’ll get to know her their personalities will have a direct bearing on
better as we go along. Her strengths, weaknesses, their business success. An example close to the
fantasies, and fears are surely different from experience of folks at Nolo involves bookstores.
yours. So, too, almost certainly, is the business In the years since Nolo began publishing, they
she wants to start. So be sure to make your own have seen all sorts of people, from retired librarians
lists—don’t copy Antoinette’s. to unemployed Ph.D.s, open bookstores. A large
percentage of these stores have failed because the
Antoinette Gorzak: skills needed to run a successful bookstore
My Strong and Weak Points involve more than a love of books.

Strong Points (in no particular order) 2. General and Specific Skills Your
1. Knowledge of all aspects of women’s fashion Business Needs

business Businesses need two kinds of skills to survive and
2. Ability to translate abstract objectives into prosper: Skills for business in general and skills
specific to the particular business. For example,
concrete steps every business needs someone to keep good
3. Good cook financial records. On the other hand, the tender
4. Faithful friend and kind to animals touch and manual dexterity needed by glass-
5. When I set a goal, I can be relentless in blowers are not skills needed by the average
paving contractor.
achieving it
6. Ability to make and keep good business Next, take a few minutes and list the skills
your business needs. Don’t worry about making
friends—I have had many repeat customers an exhaustively complete list, just jot down the
at other jobs first things that come to mind. Make sure you
have some general business skills as well as some
Weak Points of the more important skills specific to your
1. Impatience particular business.
2. Dislike of repetitive detail
3. Romantic (is this a weak point in business?) If you don’t have all the skills your business
4. Tendency to postpone working on problems needs, your backers will want to know how you
5. Tendency to lose patience with fools (some- will make up for the deficiency. For example, let’s
say you want to start a trucking business. You
times I carry this too far—especially when
I’m tired)

DO YOU REALLY WANT TO OWN A BUSINESS? 2/5

have a good background in maintenance, truck very good at it. If this list creates doubts about
repair, and long distance driving, and you know whether you’re pursuing the right business, I sug-
how to sell and get work. Sounds good so far— gest you let your unconscious mind work on the
but, let’s say you don’t know the first thing about problem. Most likely, you’ll know the answer af-
bookkeeping or cash flow management and the ter one or two good nights’ sleep.
thought of using a computer makes you nervous.
Because some trucking businesses work on large If your list contains several things you
dollar volumes, small profit margins, and slow- really don’t like doing and nothing at all that
paying customers, your backers will expect you you like doing, it may be a sign that you have a
to learn cash flow management or hire someone negative attitude at this time in your life. If so,
qualified to handle that part of the business. you may wish to think carefully about your deci-
sion to enter or expand a business at this time.
Antoinette Gorzak: General and Chances are your negative attitude will reduce
Specific Skills My Business Needs your chances of business success.

1. How to motivate employees Antoinette Gorzak:
2. How to keep decent records My Likes and Dislikes
3. How to make customers and employees
Things I Like to Do
think the business is special 1. Be independent and make my own decisions
4. How to know what the customers want— 2. Keep things orderly. I am almost compulsive

today and, more important in the clothing about this
business, to keep half-a-step ahead 3. Take skiing trips
5. How to sell 4. Work with good, intelligent people
6. How to manage inventory 5. Cook with Jack
7. How to judge people 6. Care about my work

3. Your Likes and Dislikes Things I Don’t Like to Do
1. Work for a dimwit boss
Take a few minutes and make a list of the things 2. Feel like I have a dead-end job
you really like doing and those you don’t enjoy. 3. Make people unhappy
Write this list without thinking about the
business—simply concentrate on what makes you 4. Specific Business Goals
happy or unhappy.
Finally, list your specific business goals. Exactly
If you enjoy talking to new people, keeping what do you want your business to accomplish
books, or working with computers, be sure to for you? Freedom from 9 to 5? Money—and if so,
include those. Put down all the activities you can how much? More time with the children? Making
think of that give you pleasure. Antoinette’s list is the world or your little part of it a better place? It’s
shown as an example. your wish list, so be specific and enjoy writing it.

As a business owner, you will spend most of
your waking hours in the business, and if it
doesn’t make you happy, you probably won’t be

2/6 HOW TO WRITE A BUSINESS PLAN

Antoinette Gorzak: You have accomplished several things if you
My Specific Business Goals have followed these steps. You have looked
inside and asked yourself some basic questions
1. Have my own business that gives me a about who you are and what you are realistically
decent living and financial independence qualified to do. As a result, you should now have
a better idea of whether you are willing to pay
2. Work with and sell to my friends and the price required to be successful as a small
acquaintances as well as new customers businessperson. If you are still eager to have a
business, you have said, “Yes, I am willing to
3. Introduce clothing presently unavailable in make short-term sacrifices to achieve long-term
my city and provide a real service for benefits and to do whatever is necessary—no
working women matter the inconvenience—to reach my goals.”

4. Be part of the growing network of successful D. Reality Check: Banker’s Analysis
businesswomen

5. Be respected for my success

C. How to Use the Self- Banks and institutions that lend money have a lot
Evaluation Lists of knowledge about the success rate of small
businesses. Bankers are often overly cautious in
After you’ve completed the four self-evaluation making loans to small businesses. For that very
lists, spend some time reading them over. Take a reason it makes sense to study their approach,
moment to compare the skills needed in your even though it may seem discouraging at first
business to the list of skills you have. Do you glance.
have what it takes?
1. Banker’s Ideal
Show them to your family and, if you’re brave,
to your friends or anyone who knows you well Bankers look for an ideal loan applicant, who
and can be objective. Of course, before showing typically meets these requirements:
the lists to anyone, you may choose to delete any
private information that isn’t critical to your busi- • For an existing business, a cash flow
ness. If you show your lists to someone who sufficient to make the loan payments.
knows the tough realities of running a successful
small business, so much the better. You may want • For a new business, an owner who has a
to find a former teacher, a fellow employee, or track record of profitably owning and
someone else whose judgment you respect. operating the same sort of business.

What do they think? Do they point out any • An owner with a sound, well-thought-out
obvious inconsistencies between your personality business plan.
or skills and what you want to accomplish? If so,
pay attention. Treat this exercise seriously and • An owner with financial reserves and
you will know yourself better. Oh, and don’t personal collateral sufficient to solve the
destroy your lists. Assuming you go ahead with unexpected problems and fluctuations that
your business and write your business plan, the affect all businesses.
lists can serve as background material or even be-
come part of the final plan. Why does such a person need a loan, you ask?
He or she probably doesn’t, which, of course, is
the point. People who lend money are most
comfortable with people so close to their ideal
loan candidate that they don’t need to borrow.

DO YOU REALLY WANT TO OWN A BUSINESS? 2/7

However, to stay in business themselves, banks if they have many years of successful experience
and other lenders must lend out the money in the software marketing business, preferably in
deposited with them. To do this, they must lend California.
to at least some people whose creditworthiness is
less than perfect. 3. Use the Banker’s Ideal

2. Measuring Up to the Banker’s Ideal It’s helpful to use the bankers’ model in your
decision-making process. Use a skeptical attitude
Who are these ordinary mortals who slip through as a counterweight to your optimism to get a
bankers’ fine screens of approval? And more to balanced view of your prospects. What is it that
the point, how can you qualify as one of them? makes you think you will be one of the minority
Your job is to show how your situation is similar of small business owners who will succeed? If
to the banker’s ideal. you don’t have some specific answers, you are in
trouble. Most new businesses fail, and the large
A good bet is the person who has worked for, majority of survivors do not genuinely prosper.
or preferably managed, a successful business in
the same field as the proposed new business. For Many people start their own business because
example, if you have profitably run a clothing they can’t stand working for others. They don’t
store for an absentee owner for a year or two, a have a choice. They must be either boss or bum.
lender may believe you are ready to do it on your They are more than willing to trade security for
own. All you need is a good location, a sound the chance to call the shots. They meet a good
business plan, and a little capital. Then, watch out chunk of their goals when they leave their
Neiman-Marcus! paycheck behind. This is fine as far as it goes, but
in my experience, the more successful small
Further away from a lender’s ideal is the business owners have other goals as well.
person who has sound experience managing one
type of business, but proposes to start one in a A small distributor we know has a well-
different field. Let’s say you ran the most profitable thought-out business and a sound business plan
hot dog stand in the Squaw Valley ski resort, and for the future. Still, he believes that his own
now you want to market computer software in personal commitment is the most important thing
the Silicon Valley of California. In your favor is he has going for him. He puts it this way: “I break
your experience running a successful business. my tail to live up to the commitments I make to
On the negative side is the fact that computer my customers. If a supplier doesn’t perform for
software marketing has no relationship to hot dog me, I’ll still do everything I can to keep my
selling. In this situation, you might be able to get promise to my customer, even if it costs me
a loan if you hire people who make up for your money.” This sort of personal commitment
lack of experience. At the very least, you would enables this successful business owner to make
need someone with a strong software marketing short-term adjustments to meet his long-range
background, as well as a person with experience goals. And while it would be an exaggeration to
managing retail sales and service businesses. say he pays this price gladly, he does pay it. ■
Naturally, both of those people are most desirable



CHAPTER

3

Choosing the Right Business

A. Introduction ...................................................................................................... 3/2
B. Know Your Business ......................................................................................... 3/2
C. Be Sure You Like Your Business ........................................................................ 3/3
D. Describe Your Business .................................................................................... 3/4

1. Identify Your Type of Business ..................................................................... 3/4
2. Problem Statement ....................................................................................... 3/5
3. Business Description .................................................................................... 3/6
E. Taste, Trends, and Technology: How Will the Future Affect Your Business? ..... 3/8
1. Taste ............................................................................................................ 3/8
2. Trends .......................................................................................................... 3/9
3. Technology .................................................................................................. 3/9
4. Write a Future Trends Statement ................................................................ 3/11
F. Break-Even Analysis: Will Your Business Make Money? ................................. 3/11
1. Forecast Sales Revenue .............................................................................. 3/12
2. Forecast Fixed Costs .................................................................................. 3/15
3. Forecast Gross Profit for Each Sales Dollar ................................................ 3/16
4. Forecast Your Break-Even Sales Revenue ................................................... 3/18
G. What You Have Accomplished ....................................................................... 3/21

3/2 HOW TO WRITE A BUSINESS PLAN

Quick plan. If you’ve chosen the quick plan Are You Choosing a Risky Business?
method to prepare a business plan (see
Introduction), you need to read and complete When considering the businesses you know, it
only these sections of Chapter 3: is helpful to know how well they typically fare.
• Section D2 (“Problem Statement”) For instance, these businesses have higher than
• Section D3 (“Business Description”) average failure rates:
• Section F1 (“Forecast Sales Revenue”).
• computer stores
A. Introduction • laundries and dry cleaners
• florists
This chapter helps you determine whether you have • used car dealerships
chosen the “right” business for you—one that you • gas stations
know, like, and will work hard for and that makes • local trucking firms
economic sense. Most experienced businesspeople • restaurants
complete several steps as a rough and ready tem- • infant clothing stores
plate to decide whether to complete a plan. If your • bakeries
business passes all these steps with flying colors, • machine shops
it means it’s a good idea to write a full business • car washes
plan; it doesn’t guarantee success. On the other • e-commerce
hand, if your proposal doesn’t pass, you’ll probably • grocery and meat stores.
want to modify or change your plans altogether.
If your business idea is on this list, it doesn’t
If you’re like most people, chances are your mean you should abandon it automatically.
business will pass some tests easily and fail some However, it should remind you to be extra
of the others. Antoinette faces just that problem in critical and careful when preparing your plan.
this chapter. Pay careful attention to how she I’ve known successful businesspeople in every
approaches that dilemma; her method of proceed- category listed, just as I have known people
ing may help you in your decision. who have failed in each of them.

B. Know Your Business Many people enter businesses they know little
or nothing about. I did it once myself. I opened
One of the most common questions people ask an automobile tune-up shop at a time when,
me is this: What business should I start? My seemingly, they couldn’t miss. I knew a good deal
answer is always the same—start a venture that about running a small business, had a personality
you know intimately already. I don’t believe any well suited for it, and could borrow enough
business exists that is so foolproof that anyone money to begin. The end of what turned out to
can enter and make a sure profit. On the other be a very sad story is that it took me two years
hand, a skilled, dedicated owner often can make and $30,000 to get rid of the business. Why?
a venture successful when others have failed. Because in my hurry to make a profit, I overlooked
Remember, your potential customers will exchange several crucial facts. The most important of these
their money only for the conviction that you are was that I knew virtually nothing about cars and I
giving them their money’s worth. And that means didn’t really want to learn. Not only was I unable
you’ll need to know what you’re doing. While this to roll up my sleeves and pitch in when it was
point should appear obvious, sadly—it isn’t. needed, I didn’t even know enough to properly

CHOOSING THE RIGHT BUSINESS 3/3

hire and supervise mechanics. In short, I made a C. Be Sure You Like Your Business
classic mistake—I started a business in a “hot”
field because someone was foolish enough to Does the business you want to own require skills
lend me the money. and talents you already possess? If you have the
necessary skills, do you enjoy exercising them?
How can you apply my lesson to your situation? Think about this for a good long time. The
Let’s say you’ve heard pasta shops make lots of average small business owner spends more time
money and you want to start one. First, if at all with his venture than with his family. This being
possible, get a job working in one, even if you so, it makes sense to be at least as careful about
work for free. Learn everything you can about choosing your endeavor as you are about picking
every aspect of the business. After a few months, your mate. A few of us are sufficiently blessed
you should be an expert in every aspect of pasta that we can meet someone on a blind date, settle
making, from mixing eggs and flour, flattening the down a week later, and have it work out wonder-
dough, and slicing it into strips. Ask yourself fully. However, in relationships, as in business,
whether you enjoy the work and whether you are most of us make better decisions if we approach
good at it. If you answer “Yes,” go on to the sec- them with a little more care.
ond important question: Is the business a poten-
tial money maker? You should have a pretty good Be sure you aren’t so blinded by one part of a
answer to this question after working in the field small business that you overlook all others. For
for a few months. example, suppose you love music and making
musical instruments. Running your own guitar
If you’re unable to find employment in the shop sounds like it would be great fun. Maybe it
pasta business, make a tour of delicatessens and would be, but if you see yourself contentedly
shops that make their own pasta. Interview the making guitars all day in a cozy little workroom,
owners. To get reliable answers, it’s best to do you’d better think again. Who is going to meet
this in a different locale from the one in which customers, keep the books, answer the phone, and
you plan to locate. Small business owners are let potential customers know you are in business?
often quite willing to share their knowledge once If you hate all these activities, you either have to
they are sure you will not compete with them. work with someone who can handle them, or do
something else.
I remember reading a management philosophy
that said that a good manager doesn’t have to Here’s one last thing to think about when
know every job, only how to get other people to considering how much you like your business
do them. That approach may work well in a large idea. In fact, it’s a danger that threatens almost
corporation, but for a small business, it’s danger- every potential entrepreneur. Precisely because
ously naive. In short, don’t start your small your business idea is yours, you have an emotional
venture until you know it from the ground up. I attachment to it. You should. Your belief in your
mean this literally. If you’re opening a print shop, idea will help you wade through all the unavoid-
you should be able to run the presses and do able muck and mire that lies between a good idea
paste-up and layout, as well as keep a coherent and a profitable business. However, your ego
set of books. If it’s your elegant little restaurant involvement can also entail a loss of perspective.
and the food isn’t perfect, you’re the one who I’ve seen people start hopeless endeavors and
either improves it in a hurry or goes broke. If you lose small fortunes because they were so enamored
don’t like getting your hands dirty, choose a clean with their “brilliant ideas” that they never examined
business. honestly the negative factors that doomed their
ventures from the start.

3/4 HOW TO WRITE A BUSINESS PLAN

D. Describe Your Business Each of the business categories requires
different skills to run efficiently. Many small
What is your good idea? What business do you businesses involve one or two types of business
want to be in? It’s time to look at the specifics. Let’s in the same endeavor. But if your idea will in-
say you want to open a restaurant. What will you volve you in several types of business, it may be
serve? What will your sample menu look like? What too complicated for you to run efficiently. As a
equipment will you need? Note that including general rule, small businesses work best when
french fries means you’ll have to install french- their owners know exactly what they are about
fryers, grease traps in the sewer line, hoods and and strive for simplicity.
fire extinguishing systems. On the other hand, by
not serving fried foods you will save a lot of • Retail. Retail businesses buy merchandise
money in the kitchen, but maybe you’ll go broke from a variety of wholesalers and sell it
when all the grease addicts go next door. directly to consumers. Some retailers pro-
vide service and repair facilities, while most
Or suppose you want to sell DVDs, games, or do not. Most retailers just take in the goods
digital cameras. Do you plan to have a service and mark up the price, sometimes doubling
department? If so, will you make house calls, or their purchase price to arrive at a sales
only accept repairs at your store? What sort of se- price.
curity system will you install to protect your in- Supermarkets, mail order catalogue
ventory? What about selling component sound merchants, computer stores, dress shops,
systems or home entertainment centers? What department stores, and convenience marts
about competition from nearby retailers? are retailers.

Answers to these types of questions will be • Wholesale. Wholesalers buy merchandise
crucial to the success of your venture and to from manufacturers or brokers and resell
writing your business plan. Let me tell you from the goods to retailers. Normally, a whole-
hard, personal experience that you need a written saler maintains an inventory of a number of
document—even if you’re sure you know exactly lines. A wholesaler normally does not sell
what your business will do. to consumers in order to avoid competing
with his retailer customers. Wholesalers
With this foundation document to refer to, you usually offer delivery service and credit to
are less likely to forget your good plans and customers. This type of business is charac-
resolutions in the heat of getting your business terized by low gross profit margins (some-
under way. Any changes you later make can be times varying between 15% and 33% of the
made both consciously and with consideration. wholesaler’s selling price) and high inven-
tory investment.
To write a complete description of your Wholesalers typically buy in large lots
proposed business, simply follow the suggestions and sell in smaller lots. Like retailers, they
on the next few pages. seldom make any changes to the products.
Most wholesalers aren’t well known to the
1. Identify Your Type of Business general public.

Find the business category listed below that most • Service. People with a particular skill sell it
closely matches your business. You’ll use the to consumers or to other businesses,
description that follows as a reference when you depending on the skill. The end product of
describe your own business. a service business is normally some sort of

CHOOSING THE RIGHT BUSINESS 3/5

advice or the completion of a task. Occa- Software development note: Software
sionally, a service business sells products as development differs from software produc-
an ancillary function. For example, a baby tion and sales in that software developers create a
diaper cleaning service may also sell diapers product that another entity produces and markets.
and baby accessories. Service business For example, Fred Jones creates a bookkeeping
customers normally come from repeats and program for employment agencies on his own
referrals. It’s common to have to meet state time. Then he sells or licenses production and
licensing requirements. marketing rights to the Acme Programs Co. for
$1,000 cash and 5% of future sales. Fred is the
Hairdressers, carpet cleaners, consultants, project developer and Acme is the manufacturer.
housecleaners, accountants, building If Fred also produces copies and markets them
contractors, and architects are examples of himself, he acts as both developer and manufac-
service businesses. turer.
• Manufacturing. Manufacturers assemble
components or process raw materials into 2. Problem Statement
products usable by consumers or other
businesses. This type of business ranges Successful businesses share a common attribute:
from an artisan who makes craft items to They do something useful for their customers.
General Motors. The most difficult part of One way to determine what is useful for your
the manufacturing business is to find a customers is to identify and describe the problem
product, or even better, a series of products, that your business will solve. For example, a
that have acceptance in the marketplace window washing service solves the customer’s
and generate a steady sales volume. Or, as twin problems of wanting clean windows but
one businessperson put it: “Production lacking either the time or physical ability to clean
without sales is scrap.” windows himself. If you accurately understand
• Project development. Developers create and your customers’ problems and needs, your
finish a saleable commodity by assembling business will have a better chance of success.
resources for a one-time project. Normally,
the developer knows the market value of For example, here’s a problem faced by a
the finished product before she begins customer of a pizza-by-the-slice stand: “I’m
work. When the project is complete, the hungry and I don’t have much time or money, but
developer sells her interest in the project, I’m tired of hamburgers and want a change of
normally directly to the user or consumer. pace. Also, I’d like to be able to specify the exact
To understand project developers, consider ingredients I want in my meal. And, it would be
a woman building a single-family house on really swell to have a glass of wine or beer with
speculation. She buys the lot, secures per- the meal.”
mits, hires a contractor, gets a loan, builds a
house, and sells it. She is then ready to go Now, think about your customers for a minute.
on to another project. Other examples of What is the problem that you solve for them?
project developers include someone who Take a sheet of blank paper or open a computer
buys, restores, and sells antique cars and file and write out your description of the problem
someone who purchases dilapidated build- your business solves for its customers. This
ings at a bargain price, fixes them up, and statement will become part of your completed
sells them. business plan.

3/6 HOW TO WRITE A BUSINESS PLAN

Problem Antoinette’s Dress the first draft of Antoinette’s Dress Shop’s business
Shop Will Solve description. You will find three additional business
descriptions in Appendixes 1–3 at the back of the
Professional working women like to buy book.
fashionable, slightly conservative clothing at
moderate prices. They prefer shopping at a. General Business Questions
convenient times and patronizing stores that
offer a wide selection of merchandise. These These questions apply to most small businesses.
women like to talk to sales clerks who under- Feel free to skip any questions that don’t pertain
stand fashion and know their store’s merchan- to you.
dise; few clerks in the local department stores
have this knowledge. At the present time, many 1. What problem do I solve for my customers?
of these women travel 45 miles to shop because (You answered this question in detail in
no local store meets their needs. Section D2, above.)

3. Business Description 2. Who is my typical (target) customer?
3. How will I communicate with my target
Next, describe how your business will solve your
customers’ problem. Take your time and do a customer?
thorough job. It’s very likely that the first time 4. What products and/or services will I pro-
you attempt this task, questions will occur to you
that you didn’t consider previously. If so, figure vide? Are there any products or services my
out a good answer and rewrite your description. customers may expect me to provide that I
The important thing is not how long it takes to do don’t plan to provide?
this, but that you end up with a realistic, well- 5. Where will my business be located?
thought-out business description. After all, it’s 6. Where will I buy the products I need?
cheaper to answer questions and solve problems 7. What hours will I operate?
on paper than it is with real money. 8. Who will work for me and how will they
be paid?
Your business description should explain 9. Who will handle critical tasks like selling,
exactly what you will provide for the customer as ordering, bookkeeping, marketing, and
well as what you’ll exclude. Each of the choices shipping?
you make in your business description will affect 10. How will I advertise and promote my
the amount of money you’ll need to start or business?
expand and how much sales revenue you can 11. What are the competition’s strengths and
expect. weaknesses?
12. How am I different from the competition,
Consider the following series of questions as seen through the eyes of my customers?
when writing your business description. If you (Make sure that you answer this question
answer both the general business questions and from a customer’s perspective and not from
each question that applies to your business, you’ll an owner’s point of view.)
present your business accurately and fairly.
b. Specific Business Questions
For an example of a well-thought-out business,
refer to the accompanying sample, which contains Some issues your business faces can be categorized
by business type. Make sure your business
description addresses both the general business

CHOOSING THE RIGHT BUSINESS 3/7

questions that apply to your business and the 5. Am I better off associating with others or being
questions specific to your type of business. independent?

If you plan to conduct operations in more
than one category, be sure to use the spe-
cific questions for each type of business that ap-
plies.

Retail Manufacturing
1. How will I keep abreast of fashion and taste in 1. Does my manufacturing process create toxic or

my field? polluting materials? If so, how will I deal with
2. Does my location have enough drive-by or them and what regulatory agencies handle
them?
walk-by traffic to support my business, or must 2. Is there a pool of readily available, affordable
I rely on heavy advertising for sales? skilled labor where I want to locate?
3. Is it better to be in a shopping center with high 3. Will I make products for inventory or per order?
rents and operating restrictions, or in a separate 4. Will I make one product only or a line of
location with lower costs and less drive-by or products?
walk-by traffic? 5. If I succeed on a small scale, do I plan to sell
4. How much inventory will I buy in comparison out to a larger company or try to compete
to my expected sales revenues? (This is a criti- nationally or internationally?
cal question in the retail field and deserves 6. Is my competition from small or large firms?
your close attention.)
Project Development
Wholesale 1. Am I sure of the selling price of my project?
1. Which product lines will I carry in inventory 2. Am I sure of my projected costs? What will

and which will I order as required? happen if my costs are higher than estimated?
2. Will I carry accounts for my customers or work 3. Am I sure of the time factors? What will happen

on cash only? if it takes longer than expected to complete
3. Are there any exclusive distributorships avail- and sell the project?
4. What portions of the work will I contract with
able to me? others to perform?
4. Will I have to market all the products myself or 5. Is there a definite buyer for my project? If not,
what costs will I incur before it’s sold?
will the manufacturers have marketing pro-
grams?

Service
1. Are my credentials and skills equal to or better

than others in my field?
2. Can I sell my service as well as I can perform

it?
3. Will I take work on speculation or will I insist

on cash for each job?
4. Do I have a client list to begin with or will I

start cold?

3/8 HOW TO WRITE A BUSINESS PLAN

Business Description for E. Taste, Trends, and Technology:
Antoinette’s Dress Shop How Will the Future
Affect Your Business?
Antoinette’s Dress Shop will be a women’s retail
clothing store designed to serve the growing Let’s assume you have a good description of your
market of professional working women. The proposed business, and the business is an exten-
store will buy clothing and accessories from a sion of something you like and know how to do
variety of manufacturers that provide good well. Perhaps you have been a chef for ten years
quality and dependable service. Antoinette’s and have always dreamed of opening your own
Dress Shop will resell them “as is” to our target restaurant. So far, so good—but you aren’t home
market. Antoinette’s will specialize in fashion- free yet. There is another fundamental question
able, reasonably priced clothing suitable to this that needs answering: Does the world need, and
city’s working environment. The store will sell is it willing to pay for, the product or service you
only a limited line of sportswear or leisure wear. want to sell? For example, do the people in the
We will carry business suits, pantsuits, and small town where you live really want an Indone-
dresses for daytime wear, together with normal sian restaurant? If your answer is “Yes” because
accessories like purses and belts. We will make times are good and people have extra money, ask
prompt minor alterations at no charge. yourself what is likely to happen if the economy
goes into a slump ten minutes after you open
Antoinette’s will regularly publish a news- your doors.
letter containing clothing tips for working
women, which we will send to customers on our To make this point more broadly, let’s use a
mailing list. We will maintain a card file on our railroad train as a metaphor for our economic
customers that contains their size and style and society. And let’s have you, as a potential new
color preferences. Antoinette’s will schedule businessperson, stand by the tracks. How do you
fashion shows for our customer base as a deal with the train when it arrives? You can get
marketing device. on and ride. You can continue to stand by the
tracks and watch the train disappear in the
Antoinette’s will offer a relaxed atmosphere distance. Or you can stand in the middle of the
with personalized attention and unlimited fitting- tracks and get run over.
room time. Our store will be decorated in a
simple, classic style. All our employees will be To continue this metaphor, let’s now assume
knowledgeable about fashion in general and the economic train has three engines: taste,
about the clothing we sell. Antoinette’s will be trends, and technology. Together they pull the
located in approximately 2,000 square feet in heavy steel cars which can give you a comfort-
the downtown mall and will maintain regular able ride or flatten you. Let’s take a moment to
mall hours of Monday through Friday from think more about each of these engines.
11:00 a.m. until 9:00 p.m. and Saturdays from
10:00 a.m. until 6:00 p.m. These hours will be a 1. Taste
convenience to our customer base. The store
will not offer delivery on a regular basis, People’s tastes drive many of the changes our
although we will offer Federal Express shipments society speeds through. For example, in the 1970s,
when requested and we will have a fax many of us changed our taste in automobiles
machine. from large gas guzzlers to small, well-built cars.

CHOOSING THE RIGHT BUSINESS 3/9

American manufacturers didn’t recognize this sharply in recent years and that certain types of
change in taste until they almost went broke. The reduced-smoke lounges with wine and imported
Japanese were in the right place with small, beer are doing very well. Putting this information
reliable cars and realized great prosperity. together with other factors, such as your antici-
pated location and target customers, should give
Consider popular music as another example. you a pretty good idea of what drinks you should
Music styles change every few years, and some offer. You might decide to serve a number of
bright businesspeople succeed by selling clothing varieties of fine wine and imported beer and
and other accessories associated with each new forget about a hard liquor license altogether.
music style.
3. Technology
What does this mean to you? Look at your
business idea again. How does it fit with today’s This is a fancy name for the new items just
tastes? Is your business idea part of a six-month coming out on the market. Technology is your
fad? Are you going into something that was more innovative kitchen appliance, your home
popular five years ago than it is now and is computer, NASA’s new spacecraft, and even the
declining rapidly? If so, you are likely to go broke proverbial better mousetrap. For example, lots
no matter how good a manager you are and how and lots of people are working feverishly to come
much you love your business. up with better video games, laser toothbrushes,
wristwatches, TVs, and the like. Sometimes it
2. Trends takes years to perfect an item. That can be good
news for small business owners, as there is plenty
It’s one thing to understand that people’s tastes of time to prepare to profit. Perhaps you have
have changed and will undoubtedly change again heard of holographic imaging. This is the new
and again, but it’s a lot harder to accurately pre- video technology that enables three-dimensional
dict what will be popular in a few years. I wish images to be shown. This technology requires
there were a central source of information about large amounts of capital and can produce great
predicting future trends in any field, but there profits. Some people will surely profit hand-
isn’t. You have the task of looking into the future somely from the opportunities that arise.
and deciding where it is going and how that
affects what you do today. Fortunately, a little Of course, there is a downside to new technol-
research can do wonders. Here are some tips on ogy, too. It often involves high risk. There’s no
how to proceed. guarantee of success just because the product is
new. In fact, something like 80% of the new
Read everything you can about your field of products introduced into the marketplace die a
interest. Attend trade shows and talk to people in quick death. Remember 3-D movies, the Edsel,
small businesses at the cutting edge of the field. and eight-track tape players?
Talk to people in similar businesses. Read back
issues of magazines aimed at your proposed field. What should you do to take advantage of new
Your goal is to know enough about your proposed technologies? First, recognize that large-scale new
business to spot the trends that will continue into technology ventures require vast amounts of
the next decade. For example, if you’re interested money and will be beyond your reach unless you
in opening a night club from the 1950s featuring a plan to have your small business grow in a hurry.
piano bar, mixed drinks, and lots of room for Many companies expect to lose money for years
smokers, you should know that the consumption during product development and approval before
of hard liquor and cigarettes has gone down

3/10 HOW TO WRITE A BUSINESS PLAN

developing a big hit. However, there are often sold, many people will make a good living repair-
ways creative small business owners can find to ing them. Maybe that’s a good business for you.
participate in new technological trends. For Or, if you plan to open a television repair shop,
example, many computer software companies you should know that in the next few years many,
started with little more than a good idea and a if not most, new televisions will have HDTV tech-
computer. Or to think even smaller—but not nology. If you are the first TV shop to specialize
necessarily less profitably—lots of carpenters have in that technology in your area, you may do very
done well making ergonomically correct furniture well.
for computer work stations.
In short, new technology is a mighty engine
Pay attention to new developments in your that can pull the economy in new directions at
chosen field and think about how you can take terrific speed. Be sure you are riding on the train
advantage of them. With all the camcorders being and not picking daisies on the tracks in front of it.

Starting an e-Business After the Dot-Bomb

The dot-com shakeout of 2001 (the “dot-bomb”) on their website will bring in significant
dramatically changed many investors’ views on revenue. But website revenues appear to be
what a Web-based business needs to do to suc- drying up. Your business plan will need to
ceed. Positive cash flow, once scorned as old- focus on sales of your products or services as
fashioned, has reappeared on investors’ priority the primary revenue source.
lists. They now look very skeptically at plans for • Don’t ignore traditional marketing channels.
e-businesses. I think e-businesses can succeed, A website is one way to market products and
but only by following some new and different rules. services, but it is not the only way. Many suc-
cessful entrepreneurs use a website as a mar-
• Keep those email-savvy customers happy. keting tool, but also use the traditional mar-
One of the best things about the Internet is keting channels appropriate to their business.
that it makes communication quick and easy. • Stay focused. Some of the dot-coms failed
However, this is also a disadvantage for a because they tried to do too many things at
fledgling e-business. When the business makes once instead of finding one or two specialty
a mistake, the customer can, and often does, areas and doing those extremely well. Every
spread the news to hundreds of friends and new product or service added to a website
acquaintances. This means that e-businesses requires a large investment in inventory, ex-
must follow higher performance standards pertise, and order fulfillment. Perhaps lean
than more traditional “brick and mortar” and mean is the way to go.
businesses to avoid deathly negative “word- • Put yourself in the user’s chair. Many potential
of-email” publicity. Smart entrepreneurs consumers will go elsewhere if they’re frus-
focus on shipping, return, and inventory trated by slow-loading or misleading websites,
management, making sure that orders are or aren’t convinced that their privacy is guar-
filled quickly and accurately and that returns anteed. Successful e-businesses are up front
are convenient for the customer. about their privacy policies and provide a
pleasant experience for customers—instead
• Don’t count on revenue from advertising. of trapping them in “Web hell.”
Some e-businesses build their business model
around the assumption that sales of advertising

CHOOSING THE RIGHT BUSINESS 3/11

4. Write a Future Trends Statement F. Break-Even Analysis: Will
Your Business Make Money?
With this discussion of taste, trends, and technol-
ogy, I have attempted to focus your attention on Some people have a bigger problem than others
the broad movements in the economy that can when opening a new business. These are folks
affect your business idea. Also, remember that who are positively enamored with their business
there are similar trends in your local community. concept and are desperately eager to begin. They
It’s at least as important that you pay attention to are so smitten and eager to start, they have no
these. For example, perhaps you live in a farming patience with the economic realities involved in
community with no manufacturing industries and their business. If you recognize this tendency in
many migrant workers. It is unlikely that a high yourself, it’s extra important that you prepare a
fashion clothing store would do well there, but financial forecast carefully and pay attention to
you might do very well selling a new lighter, what it tells you. This step tells you whether your
stronger, cheaper work boot, or chain saw, or idea is a sure winner or a sure loser or, like most
stump puller. ideas, whether it needs work and polishing to
make it presentable.
Write down your first thoughts about what
trends affect your business and where they will How can you tell if your business idea will be
be in five years. Nobody expects a perfect fore- profitable before you implement it? The honest
cast, but most financial backers want to know that answer is, you can’t. This essential fact makes
you have thought through how your business will business scary. It also makes it adventurous. After
fit into the world in the next few years. all, if it were a sure thing, everyone would go
into business.
Future Trends Affecting
Antoinette’s Dress Shop Just because you can’t be sure you will make
money doesn’t mean you should throw up your
There are two conflicting trends affecting my hands and ignore the whole problem. You can
business. First, more women are entering the and should make some educated guesses. I like
workforce. However, women increasingly must to call them SWAGs (“Scientific,” Wild Ass
work to pay for family necessities rather than to Guesses). The challenging part is to make your
make money for extras. For my business, this profit estimate SWAGs as realistic as possible and
means that professional working women will then make them come true.
appreciate even more in the years ahead the
extra service and convenience that we offer. The best way to make a SWAG about your
business profitability is to do a break-even forecast.
Second, as the baby boom matures, the Although a break-even analysis or forecast can
number of women in the age group that enters never take the place of a complete business plan,
the workforce is declining. This means that I it can help you decide if your idea is worth pur-
cannot count on an ever-expanding population suing.
base for my business.
Most financial backers expect you to know
To accommodate these trends, I plan to pay how to apply break-even analyses to your business.
attention to my customers’ changing tastes as Your backer may ask what your profits will be if
they grow older. I also intend to find new ways sales are slightly higher or lower than your forecast.
to market to the smaller number of younger
women entering the workforce. Many experienced entrepreneurs use a break-
even forecast as a primary screening tool for new
business ventures. They won’t write a complete
business plan unless their break-even forecast
shows that the sales revenue they expect to

3/12 HOW TO WRITE A BUSINESS PLAN

obtain far exceeds what they need just to pay all week or month to pay for both direct
the bills. Otherwise, they know their business will product costs and fixed costs. It will not
not last very long. include any profit.

You can use this technique as a “quick and Math alert: The following section requires
dirty” profit analysis, but don’t use it as a that you make some simple mathematical
substitute for the full profit and loss forecast calculations, which you’ll use to analyze your
presented in Chapter 6. A break-even forecast is a business before writing a complete plan. If the
great screening tool, but you need a more very thought of math makes your head spin,
complete analysis before spending any money. you’ll probably want to find someone to help you.

Project development note: The break-even 1. Forecast Sales Revenue
analysis described below does not apply to
a project development, since only one sale Your first task is to estimate your most likely sales
occurs. This exercise is designed for a continuing revenue by month for your first two years of
business with ongoing sales revenue. Before they operation. This is both the hardest thing to do
begin, developers must know how much profit and the most important part of your business
they will make after the project is completed. A plan. Much of your hope for success rides on
developer prepares a break-even forecast every how accurately you estimate sales revenue.
time she calculates the likely sale proceeds and
subtracts estimated costs. Developers can skip this Keep in mind that you’re honestly trying to
section, unless they need a refresher course on decide if your business will be profitable. This
break-even analyses. means that you must base your forecast on the
volume of business you really expect—not on
To complete a break-even forecast of your how much you need to make a good profit. If
business, you’ll make four separate estimates: you estimate sales too high, your business won’t
have enough money to operate. But if you
• Sales revenue. This consists of the total estimate sales too low, you won’t be prepared or
dollars from sales activity that you bring able to handle all the business you get.
into your business each month, week, or
year. Appendix 5 contains a Sales Revenue Forecast
form, where you can fill in your estimated two-
• Fixed costs. These are sometimes called year monthly sales revenue. Depending on the
“overhead,” and you must pay them regard- type of business, you may also choose to fill in
less of how well you do. Fixed costs don’t the number of units you expect to sell. Here are
vary much from month to month. They some methods different types of businesses use to
include rent, insurance, and other set forecast sales revenues.
expenses.
A copy of the Sales Revenue Forecast is
• Gross profit for each sale. This is defined as also included on the CD-ROM in Excel
how much is left from each sales dollar spreadsheet format (known as .xls). You can find
after paying for the direct costs of that sale. it under the filename salesrev.xls. Note that for-
For example, if Antoinette pays $100 for a mulas have been embedded in the spreadsheet
dress that she sells for $300, her gross profit document so that it will automatically calculate
for that sale is $200. revenue totals.

• Break-even sales revenue. This will be the
dollar amount your business needs each

CHOOSING THE RIGHT BUSINESS 3/13

You may decide to round off your forecasts Then they compare the average sales per
to the nearest $1,000 instead of writing out person with state averages. If it’s higher, it might
each single dollar amount. For instance, a monthly mean that people living in the area have a higher-
sale of $33,333 would become $33,000. After all, than-average income. They can verify that by
these are guesses, and it’s hard to guess at single referring to the United States Census, which lists
dollar amounts when you’re in the five-figure average income per family and per person for
area. every census tract. If the income per person is
average or below average, and sales per person
a. Retail Sales Revenue Forecast are higher than average, it probably means that
people come from surrounding areas to do their
The simplest way to forecast retail sales revenue shopping. If the sales per person are lower than
is to find the annual sales revenue per square foot average in the area, it might mean that income is
of a comparable store. Then multiply that dollar below average or that people leave the area to do
figure by your estimated floor space to derive an their shopping. On the basis of this sort of data,
estimate of your annual sales revenue. together with an analysis of competition and de-
mographics, supermarket executives can develop
EXAMPLE: A similar business shows $200 of relatively accurate estimates of sales volume for a
sales per square foot per year. If you have new store.
1,000 square feet of floor space, your estimated
annual sales revenue will be $200,000 (1,000 b. Service Business Sales Revenue Forecast
x $200). Naturally, your estimate should take
into account everything that makes you To estimate sales revenue for a service business,
different from the other store. you’ll need a good understanding of what steps
you go through to generate a billable sale. Then
Some chainstores, such as supermarkets and make a forecast of how many times you expect to
drugstores, have refined the art of estimating sales go through all those steps every week or month
to a science. Of course, they have the advantage and how much revenue you’ll derive from those
of learning from their experience with their other steps.
stores. Even so, they occasionally make bad esti-
mates. Don’t forget to allow time for internal matters
and marketing. If you’re a sole proprietor, you’ll
Supermarket executives first gather statistics on need to allow somewhere between 20% and 40%
how much the average person living in town of your time for nonbillable activities. If you have
spends every week in grocery stores. These num- employees or partners, you’ll want to make similar
bers are available by obtaining total sales volume allowances for them.
of grocery stores from the state sales tax agency;
normally that data is broken down by county. The sales revenue forecasting process for
They estimate how many people live in the area Central Personnel Agency shows the kind of
for which sales volume statistics are gathered. logical process you’ll need to go through. (Central’s
Dividing the sales volume data by the number of complete business plan is provided in Appendix 1.)
people in the area gives them the average sales
per person from grocery stores.

3/14 HOW TO WRITE A BUSINESS PLAN

Sales Revenue Forecast for Antoinette’s Dress Shop

Antoinette wants to open a 2,000-square-foot Because Antoinette must forecast monthly
dress store in a downtown shopping mall. The sales for the first two years, she now has to decide
shopping mall manager says that rents for how the sales revenue will occur each month.
women’s clothing stores in the mall average be- She could simply divide this $400,000 by 12
tween $200 per foot and $250 per foot per year. months and get $33,333 per month. But in the
dress business, Antoinette knows, this would be
After checking with other clothing retailers, inaccurate. In women’s clothing, there are four
reading trade magazines, visiting similar stores in sales seasons: spring, early summer, fall, and
other cities, and integrating her own experience Christmas. The kind of shop Antoinette plans to
in the business, Antoinette decides that she can open is slow in midsummer and in January and
achieve the $250-per-foot-per-year figure. This February. Antoinette also figures that sales will be
means her annual sales should be $500,000 a little lower than the average for the first few
(2,000 x $250). To be conservative, she plans for months until her advertising campaign catches on.
the first year’s sales to be about 20% below that
level to allow for her business to build. This means Antoinette’s monthly sales add up to $401,000
that first-year sales will be about $400,000, or for the first year, so she reduces the December
$200 per foot. figure by $1,000 to make a nice, round $400,000.

Sales Revenue Forecast

Year 1: March 1, 2003 to February 28, 2004

Month Revenue
Month 1: March
Month 2: April 20% below average due to just opening $ 27,000
Month 3: May
10% below average due to just opening 30,000
Month 4: June
Month 5: July 20% above average because of cumulative effects of 40,000
Month 6: August grand opening & seasonal peak 33,000
Month 7: September
Month 8: October An average month
Month 9: November
Month 10: December 10% below average due to seasonal slowdown 30,000
Month 11: January
Month 12: February 10% below average due to summer slowdown 30,000
10% above average due to back to school 37,000

10% above average due to fall season 37,000

20% above average due to fall season 40,000
40% above average due to Christmas 47,000
30% below average since everybody’s broke after Christmas 23,000

20% below average 27,000

Year One Total: $ 401,000

CHOOSING THE RIGHT BUSINESS 3/15

Sales Revenue Forecast for and combine some of the concepts to estimate
Central Personnel Agency your sales volume. If you know as much about
your business as you should, it shouldn’t be diffi-
I like to allow room for mistakes in my forecast, cult to develop a reasonable estimate. If you’re
so this sales forecast seems like overkill; my having great difficulty, the chances are that you
experience shows the overage is needed. need to learn more about your business.

Since it’s harder to find qualified people than EXAMPLE: Patty plans to import and wholesale
it is to find job openings, I’ll concentrate on modems for Acme computers. Acme has told
finding people after I build a backlog of openings. her that they have sold 100,000 computers to
I estimate I can find about ten job openings per date and projections show about 1,000 per
week. I will allow myself two weeks to find 20 month for the next three years. Patty realizes
job openings. After the first 20, I’ll get plenty of she doesn’t know what percentage of Acme
openings by referrals and repeats. My income owners will want modems and decides to
goal is to gross $3,000 to $4,000 per month, and conduct a mail survey of Acme owners before
I know that the average job order filled is worth completing her sales forecast.
$500 to $600 in gross fees, so filling only ten
openings per month should give me about d. Project Development Sales
$5,000 to $6,000 in gross fees. Revenue Forecast

Finding good people is the hard part. It takes Project developers are not required to complete a
me up to 20 interviews to find one excellent monthly sales revenue forecast. They need to
person. Some of these interviews are done in a know the likely amount they can sell the project
few minutes over the phone, but just the same, I for before they begin work; all revenue comes
allow one hour per interview. It takes an average when the project is sold.
of three good people sent out on interviews to fill
one job. Of course, once I have a good person, I 2. Forecast Fixed Costs
send that person out on every interview I can.
For most small businesses, the difference between
This means that to fill six to eight job orders success and failure lies with keeping costs down.
per month and meet my gross income goal, I Many smart people start successful businesses in a
need 25 to 30 good people on file. Since it takes spare room in their house, the corner of a ware-
an average of one hour per person and 20 house, or a storefront in a low-rent neighbor-
interviews to get one good person, I have a lot of hood. Unfortunately, others sink their original
interviewing to do. I can average five to eight capital into essentially cosmetic aspects of their
per day, and it will take me about 60 days of business, such as fancy offices, and then go
interviewing to build a base of qualified people. broke.
I anticipate three months of fairly low income
before I begin to reach my income goals. On a blank sheet of paper or in a computer
file, make a list of the fixed or regular monthly
c. Manufacturing or Wholesale Business expenses of your business. Your objective is to
Sales Revenue Forecast develop a dollar amount of expense that you are
committed to pay every month. This is your “nut,”
If you plan to be in a manufacturing or wholesale or the dollar figure you must be able to pay to
business, read Sections F1a and F1b, just above,

3/16 HOW TO WRITE A BUSINESS PLAN

keep the business viable. Include rent, utilities, Certain expenses are not “fixed costs.” Do
salaries of employees, payroll taxes, insurance not include as fixed costs:
payments, postage, telephone, utilities, bookkeep- • the costs to actually open your business
ing, and so forth. Some costs will be paid each (covered in Chapter 7, Section B)
month and others will be paid once or twice a • loan repayments (covered in Chapter 7,
year. If a cost is less than about 10% of your total Section C)
fixed costs, you can divide the cost by 12 and • the costs you pay for any goods you’ll re-
show an amount each month. If the cost is larger sell or use in the manufacturing or develop-
than 10% of the total, record the cost in the ment process (covered in Chapter 6, Section
month you expect to pay it. You can choose C).
whether to include a draw for yourself as part of
the fixed costs. If you plan to take your compen- By completing this simple exercise, Antoinette
sation only if the business shows a profit, do not has gained important information. She now knows
include your draw. that she must sell enough every month so that
she has at least $16,050 left after accounting for the
Your fixed-cost list should also include some merchandise she sells. On an annual basis, that’s
“discretionary costs”—expenses that change from $192,600 ($16,050 multiplied by 12). Antoinette
time to time due to your conscious decision. For must also bear in mind that she has not shown
example, your promotion expenses may change any salary or draw for herself. To prosper, she
occasionally as you increase or decrease advertis- obviously must not only cover fixed costs, but
ing to take advantage of slow or busy times. also must take in enough to make a decent living.
Include them in the fixed-cost category even
though the amount may fluctuate from time to 3. Forecast Gross Profit for Each
time. Sales Dollar

Fixed Costs Forecast for How much of each sales dollar will be left after
Antoinette’s Dress Shop subtracting the costs of the goods sold? That num-
ber will pay fixed costs and determine your profit
Antoinette estimates her fixed costs on a for your business. At this stage, you are trying for
a broad brush, quick and dirty forecast, so it’s
monthly basis: okay to make a rough estimate of your average
gross profit.
Rent, including taxes, maintenance $ 3,850
Let’s look at how Antoinette calculates her gross
Wages, employees only (average profit for her first year of business. Antoinette
plans to sell about half her products at double the
including payroll taxes, etc.) 3,600 cost she pays. A dress she buys for $125 she sells
for $250. That means that her gross profit per
Utilities 800 dress sale is 50%. She plans to derive her selling
price for sale dresses, mark-downs, and accessories
Advertising 1,000 by adding one-half of her cost to her selling price;
for example, if a belt cost her $10, she’ll sell it for
Telephone 600 $15.

Supplies 900

Insurance 1,500

Freight 700

Accounting/Legal 600

Bad debts 500

Miscellaneous 2,000

Total per month $16,050

CHOOSING THE RIGHT BUSINESS 3/17

Gross Profit Calculation for Antoinette’s Dress Shop

Average Costs each Regular Sale Dresses Total
Dresses & Accessories N/A

$125 $10

Bags, wrap 1 1 N/A
Average Total Cost 126 11 N/A
Average Selling Price 250 15 N/A
Gross Profit (Selling Price less Total Cost) 124 N/A
Gross Profit % (Gross Profit divided by Selling Price) 49.6% 4 N/A
(or 0.496) 26.7% N/A
Total Annual Sales $200,000 (or 0.267) $400,000
Total Annual Gross Profit $99,200 $200,000 $152,600
$53,400

Average gross profit percentage = 38.2% ($152,600 divided by $400,000 equals 38.2%)

The prices in the Sales Dresses & a. Forecast Gross Profit for a
Accessories column illustrate gross profit Start-Up Business
calculations; they do not represent the selling
price of sale items. For a new business, calculate the average gross
profit for your business by following these steps:
The calculations are similar for different type
businesses. Service businesses will have higher 1. For each product or service that you sell,
gross profit margins than retailers; most revenue list every individual item that goes into that
is gross profit because little merchandise is sold. product, including piece-rate labor and
Wholesale businesses will be similar to the retail commissions. For example, Antoinette buys
example. Manufacturing businesses will be similar dresses from outside suppliers and resells
in appearance even though the cost of goods will them. The cost of the dress is the major
include materials from a variety of sources and component of the total product cost. She
any labor that is paid per piece. may add the cost of the preprinted bag to
derive the total cost of the sale.
Project developers have only variable costs in
each project. There are usually no fixed costs 2. Once you have a complete list of all the
since the developer’s business ends with the sale cost components for your products or ser-
of the project. However, if a project developer vices, add up the cost of each item.
works on several projects at the same time, he
may have some fixed costs that continue after any 3. Write the selling price of the item below
particular project is sold. For a project developer, the total cost of the item.
the gross profit is the difference between the
project’s selling price and all the project costs. 4. Subtract the total cost from the selling price
to derive the gross profit from each sale of
that item.

3/18 HOW TO WRITE A BUSINESS PLAN

5. Divide the selling price into the gross profit 4. Forecast Your Break-Even
to derive the gross profit percentage for Sales Revenue
each product.
Now that you have the fixed costs per month for
6. Repeat for each product you’ll sell; if you your business and the average gross profit per
have more than four or five individual sale, you can estimate how much revenue you will
products, then it’s better to group them by need to just break even. You can use any period
gross profit percentage rather than to make you wish, although most people use a month or a
an estimate for each individual product. year. As this chart shows, it’s simple to calculate.
Obtain the fixed costs figure from Section F2,
7. Write down how much total dollar sales above, and the average gross profit percentage
you expect for each product or product from F3, above. Then just divide the fixed costs by
group. the average gross profits expressed as a decimal.

8. Multiply the gross profit percentage by the Break-Even Sales Revenue Forecast
total dollar sales to derive the dollar gross
profit from each product. A BC

9. Add together the total dollar gross profit Fixed costs per Average gross Break-even
figures to derive the total dollar gross profit
from the year’s sales. profit percentage sales revenue

10. Divide the dollar gross profit by the annual expressed as a
sales revenue to derive the average gross month or year decimal
profit percentage for the year’s sales. (A divided by B)

Completing this gives you an average gross
profit percentage for your business.

b. Forecast Gross Profit for an EXAMPLE: Ronnie Ryann runs the Religious
Existing Business Sounds Round Table in Rye, New York. It’s a
small business, but she loves it dearly. The
If you’re already operating and have a profit and gross profit on the CDs, tapes, and videos she
loss statement for your business from prior sells is 50%. This is the same as saying that
months, your job is even easier. Simply subtract after adding up the cost of the products,
the total cost of sales from the total revenue to packaging, and postage (all variable costs),
get the gross profit for the period. Then, convert Ronnie is able to sell at double this amount.
the dollar gross profit figures to a percentage of Ronnie rents 1,000 square feet for $800 per
sales revenue by dividing total dollar gross profit month, pays her part-time clerk $950 per
by total sales for the period. The percentage gross month, and budgets $650 per month for
profit figure you get will be the percentage gross utilities, taxes, and so forth. This means her
profit figure you use for your break-even forecast. operating expenses (all fixed costs) are $2,400
per month. (Her costs seem low because
If you’re already operating and your expansion some parts of New York State are behind the
will change the percentage of total sales revenue inflation curve.) Therefore, Ronnie has to sell
that each product group brings, then you will $4,800 of records per month to break even.
need to forecast your new average gross profit by
following the procedure for a new business listed
just above.

CHOOSING THE RIGHT BUSINESS 3/19

Her salary comes out of the money she takes Break-Even Sales Revenue Forecast
in over the $4,800. Fortunately, it will cost
Ronnie very little in extra overhead to sell up A BC
to $10,000 of records per month, so if she can Fixed costs per
achieve this volume, she will get to keep Average gross Break-even sales
close to half of it. year
month or year profit percentage revenue
a. How to Calculate Your Profit
expressed as a

decimal (A divided by B)

$192,600 0.382 $504,188

Perhaps you’re lucky enough that your break- Antoinette needs $504,188 in sales revenue just
even sales forecast shows you’ll make more than to break even. That is $104,188 more than she ex-
you need to break even. If so, you can easily cal- pects the first year and $4,188 more than she ex-
culate your profit. Simply multiply your projected pects for the second year. Despite her enthusiasm
sales revenue that is over the break-even point and determination, Antoinette’s first reaction to
(Section F1, above) by your average gross profit this news is to panic and consider giving up. After
percentage (Section F3, above). some reflection, she reexamines the calculations
to make sure she hasn’t made a mistake in her
EXAMPLE: Deborah needs $140,000 to break arithmetic. Then she starts considering her op-
even in her bookkeeping business. Her pro- tions. Should she abandon her idea and work for
jected sales revenue shows that she will be someone else? Should she proceed with her loan
bringing in $185,000 the first year—or $45,000 application and fudge figures to show a profit? Or
more than she needs to break even. To deter- is there some other alternative?
mine the profit, she multiplies her average
gross profit percentage (0.692) by $45,000. In any business, only these things can improve
Her profit will be $31,140. profits:

b. If Your Forecast Shows a Loss • you can increase the sales revenue by sell-
ing more of your product or service
What will you do if your break-even sales forecast
shows that you’ll lose money? First of all, don’t • you can reduce fixed costs
panic. You’ll need to do some sober, serious, and • you can increase the gross profit percentage
meticulous thinking. Carefully check all your
numbers and double-check your arithmetic. Inci- by raising selling prices or by lowering your
dentally, many people doing this exercise for the product cost.
first time make some simple mistake in arithmetic Let’s see how Antoinette applies that knowl-
that throws off the whole forecast. You might edge to her break-even analysis.
have someone with good math skills review your First, Antoinette thinks about increasing sales.
work. Maybe she was too conservative in her original
sales forecast. What would happen if she in-
Let’s look at Antoinette’s situation and see how creased her annual sales forecast by $150,000 (to
her figures have turned out. $550,000) and kept the same fixed costs and gross
profit margin? That is more than the break-even
sales and should be enough to give her a profit
for her efforts. How much profit? Let’s see.

3/20 HOW TO WRITE A BUSINESS PLAN

Break-Even Sales Revenue Forecast Break-Even Sales Revenue Forecast
for Antoinette’s Dress Shop for Antoinette’s Dress Shop

Revision 1: Increase Sales Volume to $550,000 Revision 2: Reduce Fixed Costs by $50,000

Annual sales $550,000 Annual sales $400,000

Annual fixed costs 192,600 Annual fixed costs
($192,600 minus 50,000)
Gross profit 0.382 142,600
Gross profit 0.382

Break-even sales 504,188 Break-even sales 373,300
($192,600 divided by 0.382) 45,812 ($142,600 divided by 0.382) 26,700

Sales over break-even $ 17,500 Sales over break-even $ 10,200
($550,000 minus $504,188) ($400,000 minus 373,300)

Profit Profit
($45,812 x 0.382) ($26,700 x 0.382)

Antoinette concludes that a very aggressive That fixed cost reduction shows a profit of
sales increase alone brings her a small profit, but $10,200, but it requires a reduction of one-quarter
believes that the sales increase of $150,000 is very of the fixed costs. Antoinette believes it will be
high. The profit resulting from that sales increase very difficult to reduce fixed costs that much.
is probably not enough to justify the risk of that Perhaps a combination of fixed-cost reduction
high an increase in the sales forecast. and sales increase will improve the profits
enough and still be possible. Before she thinks
If a sales increase of $40,000 or $50,000 would about that option, though, she completes the
show that profit, she would be more comfortable break-even forecast analysis by seeing what will
increasing sales. She just isn’t sure she can do as happen if she can increase the average gross
well as the most established women’s clothing profit to 50% while leaving the sales revenue and
store in the mall in her first year. After all, the the fixed costs the same. She doesn’t know if she
range of women’s clothing sales per square foot can really do it, but wants to see what will
per year is $200 to $250, and she used the $250 happen to the numbers.
figure to project sales of $500,000 in the second
year.

As a second thought, and even though she has
no idea how to accomplish it, she wonders what
would happen to profits if she reduced fixed
costs by $50,000 per year (about one-quarter of
the current total) and left the sales forecast at
$400,000 and her gross profit at 38.2%.

Let’s see what would happen.

CHOOSING THE RIGHT BUSINESS 3/21

Break-Even Sales Revenue Forecast Make sure that you have the same level of
for Antoinette’s Dress Shop confidence in the revised forecast that you
had in the first forecast. Obviously, you can fiddle
Revision 3: Increase Gross Margin to 50% with the numbers and show good profits, but the
danger lies in making the goals impossible to
Annual sales $400,000 reach. We all have a desire to make things work,
and making the numbers work is very easy to do.
Annual fixed costs 192,600 Just remember that you’ll have to live with the
numbers you write down for a very long time.
Gross profit 0.5 Make sure they’re right.

Break-even sales 385,200 G. What You Have Accomplished
($192,600 divided by 0.5) $14,800
$ 7,400 We’ll follow Antoinette throughout her journey
Sales over break-even later in the book and see what combination of
($400,000 minus 385,200) figures she settles on. For now, let’s review what
you’ve learned so far. You’ve decided whether to
Profit write a complete plan for your business by com-
($14,800 x 0.5) pleting these steps:

It seems that Antoinette needs to find some • choosing a business you know well
combination of higher sales estimates, lower fixed • identifying a need you can fill (the customer’s
costs, and higher gross profit margin that will
improve profits so that she can make a living problem)
wage. But the really critical part is this: She must • describing your business and how it will fill
be absolutely sure that she can meet all the fore-
cast changes she makes. that need
• deciding that your business is the right idea
Antoinette was sure of her first forecasts;
unfortunately, those forecasts produced a loss for at the right time
the first year of business. Now, while she can • deciding that you like your business and
manipulate the numbers to show a profit, the • forecasting enough profits to make writing
danger is that the numbers may not be achievable.
She may be able to create a good-looking business a complete business plan worthwhile.
plan but may be unable to meet those revised In this chapter, you’ve been answering questions
projections. Or, just as dangerous, she may for yourself. Now that you’ve answered the ques-
become uneasy about the project’s success. A lack tions positively, you can proceed to sell your idea
of confidence may just be enough to take the and your answers to potential financial partners.
edge off her drive and dedication and enough to The next few chapters show you how to write a
make the project fail. document that sells your idea. ■