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Business Plan for Home Based Businesses
Home Based Business
THE BUSINESS PLAN FOR HOME-BASED BUSINESS
Introduction
Homework has taken on new meaning for more than 10 million Americans. The drive for economic self-sufficiency has motivated large numbers of persons to market their skills and talents for profit from home. More than 400,000 persons launched home enterprises in 1985. Our increasingly service oriented economy offers a widening spectrum of opportunities for customized and personalized small business growth.
Though untrained entrepreneurs have traditionally had a high rate of failure, small businesses can be profitable. Success in small home-based business is not an accident. It requires both skills in a service or product area and acquisition of management and additional competencies.
Information Gathering
While the reasons for the rapid growth of home-based business operations may vary from the need to supplement family income with a few hundred dollars all the way to a sophisticated technical consulting service billing hundreds of thousands of dollars, there are many common characteristics and challenges to be considered in launching most home-based businesses, regardless of size. Some tasks are universal to all small business startups, while others are unique to a home base.
Special planning is required to research legal and tax issues, proper space utilization, and to establish time management discipline. Inadequate or careless attention to development of a detailed business plan can be costly for you and your family in terms of lost time, wasted talent, and disappearing dollars.
The Entrepreneurial Personality
A variety of experts have documented research that indicates that successful small business entrepreneurs, whether male or female, have some common characteristics. How do you measure up?
On this checklist, write "Y" if you believe the statement describes you; an "N" if it doesn't; and a "U" if you can't decide:
___ I have a strong desire to be my own boss.
___ Win, lose, or draw, I want to be master of my own financial destiny.
___ I have significant specialized business ability based on both my education and my experience.
___ I have an ability to conceptualize the whole of a business; not just its individual parts, but how they relate to each other.
___ I have an inherent sense of what is "right" for a business and have the courage to pursue it.
___ One or both of my parents were entrepreneurs; calculated risk-taking runs in the family.
___ My life is characterized by a willingness and capacity to persevere.
___ I possess a high level of energy, sustainable over long hours to make the business successful.
While not every successful home-based business owner starts with a "Y" answer to all of these questions, three or four "N's" and "U's" should be sufficient reason for you to stop and give second thought to doing it alone. Many proprietors who sense entrepreneurial deficiencies seek extra training and support their limitations with help from a skilled team of business advisors such as accountants, bankers, and attorneys.
Selecting a Business
Perhaps you have already decided what your home-based business will be. You know how you will serve your market and with what. If not, but you are determined to establish a home-based source of income, then you need to decide exactly what business you will enter. A logical first step for the undecided is to list potential areas of personal background, special training, educational and job experience, and special interests that could be developed into a business.
Review the following list of activities that have proven marketable for others. On a scale of "0" (no interest or strength) to 10 (maximum interest or strength) indicate the potential for you and a total score for each activity:
| My Level Of Interest |
Personal Strength |
Market Strength |
Total Points |
|
| Personal services | ||||
| - house cleaning | __ | __ | __ | __ |
| - babysitting | __ | __ | __ | __ |
| - tutoring | __ | __ | __ | __ |
| - secretarial | __ | __ | __ | __ |
| - catering | __ | __ | __ | __ |
| - direct mail | __ | __ | __ | __ |
| Handicrafts | ||||
| - needle work | __ | __ | __ | __ |
| - ceramics | __ | __ | __ | __ |
| - jewelry design | __ | __ | __ | __ |
| - upholstering | __ | __ | __ | __ |
| Handicrafts | ||||
| - painting | __ | __ | __ | __ |
| - photography | __ | __ | __ | __ |
| - prints | __ | __ | __ | __ |
| - wire sculpture | __ | __ | __ | __ |
| - engraving | __ | __ | __ | __ |
| Repair services | ||||
| - small appliances | __ | __ | __ | __ |
| - furniture | __ | __ | __ | __ |
| - clothing | __ | __ | __ | __ |
| - TV and radio | __ | __ | __ | __ |
| - automotive | __ | __ | __ | __ |
| Instruction skills | ||||
| - languages | __ | __ | __ | __ |
| - math | __ | __ | __ | __ |
| - gourmet cooking | __ | __ | __ | __ |
| - music | __ | __ | __ | __ |
| - home repairs | __ | __ | __ | __ |
| Mail order ideas | ||||
| - product sales | __ | __ | __ | __ |
| - repairs | __ | __ | __ | __ |
| - business service | __ | __ | __ | __ |
| Seasonal products | ||||
| - foodstuffs | __ | __ | __ | __ |
| - clothing | __ | __ | __ | __ |
| - gift items | __ | __ | __ | __ |
| Party sales | ||||
| - cookware | __ | __ | __ | __ |
| - plants | __ | __ | __ | __ |
| - plastic goods | __ | __ | __ | __ |
| - cosmetics | __ | __ | __ | __ |
| Your own ideas | ||||
| _____________ | __ | __ | __ | __ |
| _____________ | __ | __ | __ | __ |
| _____________ | __ | __ | __ | __ |
0 to 10 Almost a sure loser
11 to 15 Reconsider, but proceed with caution
16 to 20 Some potential here, worth further study
21 to 25 Probably a winner, if you answered correctly
26 to 30 How can you lose?
This checklist should give you a good idea of the kind of business that would suit you best and why.
Time Management
For both the novice and the experienced business person planning a small home-based enterprise, an early concern requiring self-evaluation is time management.
It is very difficult for some people to make and keep work schedules even in the disciplined setting of an employer's office. At home, as your own boss, the problem can be much greater. To determine how much time you can devote to your business. Begin by drafting a weekly task timetable listing all current and potential responsibilities be added without undue physical or mental stress on you and your family? Potential conflicts must be faced and resolved at the outset and as they occur. Otherwise, your business can become a nightmare. During the first year of operation, continue to chart, post, and checkoff tasks on a daily, weekly, and monthly basis.
Distractions and excuses for procrastination abound. It is important to keep both a planning and operating log. These tools will help avoid oversights and provide vital information when memory fails. To improve the quality of home work time, consider installation of a separate telephone line for the business and attach an answering machine to take messages when you do not wish to be distracted, or when you are away from home. A business line has the added advantage of allowing you to have a business listing in the phone book and, if you wish to buy it, an ad in the classified directory.
Is a Home-Based Business Site Workable?
- Where in the home will the business be located?
- What adjustments to living arrangements are required?
- What will be the cost of changes?
- How will your family react?
- What will the neighbors think?
It will be important to set aside a specific work area. For example, more than one fledgling business ledger has gone up in smoke, been chewed by the family dog, or thrown out with the trash when business records were not kept separate from family papers. Ready access to business records during work hours is essential, but they must be protected.
Check the reasons below for and against working at home that apply to you. List any additional drawbacks or obstacles to operating this business at home.
Pros Cons
Lower startup costs Isolation______ ____
Lower fixed costs Space limitations___ __
Tax benefits Zoning____________
Lifestyle flexibility Security concerns____
commuting Household interference
____________________ __________________
____________________ __________________
_____________________ ___________________
Note that changes in personal habits will be required. Examples:
- Self-discipline to keep TV off while working.
- Limiting personal telephone calls in length and number.
- Diligence in meeting work deadlines when no one is checking.
Ask family members to comment on pros and cons. Their concerns may require reconsideration of some specifics.
Is a Home-Based Business Site Allowable?
Now you will want to investigate potential legal and community problems associated with operating the business from home. You should gather, read, and digest specialized information concerning federal, state, county, and municipal laws and regulations concerning home-based business operations.
Check first! Get the facts in writing. Keep a topical file for future reference. Some facts and forms will be needed for your business plan. There may be limitations enforced that can make your planned business impossible or require expensive modifications to your property.
Items to be investigated, recorded, and studied are:
TO DO DONE
______ ______ county or city zoning code restrictions
______ ______ necessary permits and licenses for operation
______ ______ state and local laws and codes regarding zoning
______ ______ deed or lease restrictions such as covenants and restrictive conditions
of purchase
______ ______ parking and customer access; deliveries
______ ______ sanitation, traffic, and noise codes
______ ______ signs and advertising
______ ______ state and federal code requirements for space, ventilation, heat, and light
______ ______ limitations on the number and types of workers. If not, check with the local
Chamber of Commerce office
______ ______ reservations that neighbors may have about a business next to or near them
Here are some ways to collect your information. Call or visit the zoning office at county headquarters or city hall. In some localities the city or county Office of Economic Development has print materials available to pinpoint key "code" items affecting home-based business.
Even in rural areas, the era of unlimited free enterprise is over. Although the decision-makers may be in the state capital or ina distant regional office of a federal agency, check before investing in inventory, equipment, or marketing programs. If in doubt, call the state office of Industrial Development or the nearest SBA district office. In some states the county agent will have helpful information.
To cover the income tax rules regarding a home-based business, be sure to secure the IRS publication #587, BUSINESS USE OF YOUR HOME.
Is the Home-Based Business Site Insurable?
In addition to community investigations, contact your insurance company or agent. It is almost certain that significant changes will be required in your coverage and limits when you start a home-based business. When you have written a good description of your business, call your agent for help in insuring you properly against new hazards resulting from your business operations such as:
- Fire, theft, and casualty damage to inventories and equipment
- Business interruption coverage
- Fidelity bonds for employees
- Liability for customers, vendors, and others visiting the business
- Workmen's compensation
- Group health and life insurance
- Product liability coverage if you make or sell a product; workmanship liability for services
- Business use of vehicle coverage
Overall Home Site Evaluation
After you have gathered as much information as seems practical, you may wish to evaluate a home-based site vs. one or more other nearby locations. Here's a handy checklist. Using the "0" to "10" scale, grade these vital factors:
Factors to Consider Grades for Each Factor
Home Other
1. Customer convenience _______ _______
2. Availability of merchandise or raw materials _______ _______
3. Nearby competition _______ _______
4. Transportation availability and rates _______ _______
5. Quality and quantity of employees available _______ _______
6. Availability of parking facilities _______ _______
7. Adequacy of utilities (sewer, water, power, gas) _______ _______
8. Traffic flow _______ _______
9. Tax burden _______ _______
10. Quality of police and fire services _______ _______
11. Environmental factors _______ _______
12. Physical suitability of building _______ _______
13. Provision for future expansion _______ _______
14. Vendor delivery access _______ _______
15. Personal convenience _______ _______
16. Cost of operation _______ _______
17. Other factors including how big can you get without moving _______ _______
Totals _______ _______
The greater the difference between the totals of the two columns, the clearer your decision should be. In the space below, write out what your decision is and the reasons that support it.
Decision: _____________________________________________________________________________
Writing the Business Plan
Now that your research and plan development are nearing completion, it is time to move into action. If you are still in favor of going ahead, it is time to take several specific steps. The key one is to organize your dream scheme into a business plan.
What Is It?
- Is written by the home-based business owner with outside help as needed.
- Is accurate and concise as a result of careful study.
- Explains how the business will function in the marketplace.
- Clearly depicts its operational characteristics.
- Details how it will be financed.
- Outlines how it will be managed.
- Is the management and financial "blueprint" for startup and profitable operation?
- Serves as a prospectus for potential investors and lenders.
Why Create It?
- The process of putting the business plan together, including the thought that you put in before writing it, forces you to take an objective, critical, unemotional look at your entire business proposal.
- The finished written plan is an operational tool which, when properly used, will help you manage your business and work toward its success.
- The completed business plan is a means for communicating your ideas to others and provides the basis for financing your business.
Who Should Write It?
- The home-based owner to the extent possible
- Seek assistance in weak areas such as:
- accounting
- insurance
- capital requirements
- operational forecasting
- tax and legal requirements
When Should a Business Plan Be Used?
- To make crucial startup decisions
- To reassure lenders or backers
- To measure operational progress
- To test planning assumptions
- As a basis for adjusting forecasts
- To anticipate ongoing capital and cash requirements
- As the benchmark for good operational management
Proposed Outline for Home-Based Business Plan
This outline is suggested for a small proprietorship or family business. Shape it to fit your unique needs. For more complex manufacturing or franchise operations see the Resource Section for other options.
Part I. – Business Organization
Cover Page:
Business Name:_____________________
Street Address: _____________________
Mailing Address:____________________
Telephone Number:__________________
Owner(s) Name(s):___________________
Inside Pages:
Business Form:______________________
(proprietorship, partnership, corporation)
If incorporated:______________________
(state of corporation)
Include copies of key subsidiary documents in an appendix. Remember even partnerships require written agreements of terms and conditions to avoid later conflicts and to establish legal entities and equities. Corporations require charters, articles of incorporation, and by-laws.
Part II. – Business Purpose and Function
In this section, write an accurate yet concise description of the business. Describe the business you plan to start in narrative form.
What is the principal activity? Be specific. Give
Product or service description(s):
- Retail sales?
- Manufacturing?
- Service?
- Other?
How will it be started?
- A new startup
- The expansion of an existing business
- Purchase of an going business
- A franchise opportunity
- Actual or projected startup date
Why will it succeed? Promote your idea!
- How and why this business will be successful
- What is unique about your business
- What is its market "niche"
What is your experience in this business? If you have a current resume of your career, include it in an appendix and reference it here. Otherwise write a narrative here and include a resume in the finished product. If you lack specific experience, detail how you plan to gain it, such as training, apprenticeship or working with partners who have experience.
The Marketing Plan
The marketing plan is the core of your business rationale. To develop a consistent sales growth, a home-based businessperson must become knowledgeable about the market. To demonstrate your understanding, this section of the home-based business plan should seek to concisely answer several basic questions.
Who Is Your Market?
- Describe the profile of your typical customer.
Male, female, both_______________________ _
How many in family_____________________ ___
Annual family income_______________________
Location________________________________
Buying patterns___________________________
Reason to buy from you____________________
Other__________________________________
- Geographically describe your trading area
________________________________________
- Economically describe your trading area
________________________________________
How Large is the Market?
- Total units or dollars__________________________
- Growing______ Steady______ Decreasing_____
- If growing, annual growth rate___________________
Who Is Your Competition?
No small business operates in a vacuum. Get to know and respect the competition. Target your marketing plans. Identify direct competitors (both in terms of geography and product lines) and those who are similar or marginally comparative. Begin by listing names, addresses, and products or services. Detail briefly but concisely the following information concerning each of your competitors:
- Who are the nearest ones?
- How are their businesses similar or competitive to yours?
- Do you have a unique "niche"? Describe it.
- How will your service or product be better or more saleable than your competitors?
- Are their businesses growing? Stable? Declining? Why?
- What can be learned from observing their operations or talking to their present or former clients?
- Will you have competitive advantages or disadvantages by operating from home? Be honest!
Remember, your business can become more profitable by adopting the good competitive practices and by avoiding their errors.
To help you evaluate how successful your product or service will be, go down the following list of standard characteristics (you may want to add more from your knowledge of your field) and make a candid evaluation of your competitive "edge." On a scale of "0" (theirs puts mine to shame) to 10 (mine puts theirs to shame) indicate the potential for you and a total score:
FEATURE
Price ______
Performance ______
Durability ______
Versatility ______
Speed/accuracy ______
Ease of operation or use ______
Ease of maintenance or repair ______
Ease of cost or installation ______
Size or weight or color ______
Appearance or styling or packaging ______
Total Points ______
A Total Points score of less than 60 indicates that you might reconsider the viability of your product or service or think about how you can improve it. Over 80 points indicates a clear competitive edge.
What Percent of the Market Will You Penetrate?
- Estimate the market in total units or dollars. ______
- Estimate your planned volume. ______
- Amount your volume will add to total market. ______
- Subtract 3 from 2. ______
Line 4 represents the amount of your planned volume that must be taken away from the competition.
What Pricing and Sales Terms Are You Planning?
The primary consideration in pricing a product or service is the value that it represents to the customer. If, on the previous checklist of features, your product is truly ahead of the field, you can command a premium price. On the other hand, if it is a "me too" product, you may have to "buy" a share of the market to get your foothold and then try to move price up later. This is always risky and difficult. One rule will always hold: ultimately, the market will set the price. If your selling price does not exceed your costs and expenses by the margin necessary to keep your business healthy, you will fail. Know your competitors pricing policies. Send a friend to comparison shop. Is there discounting? Special sales? Price leaders? Make some "blind" phone calls. Detail your pricing policy:
__________________________________________________________________________
What Is Your Sales Plan?
Describe how you will sell, distribute or service what you sell. Be specific. Below are outline some common practices:
Direct Sales
Mail Order
Franchising
a. You may decide to either buy into someone else's franchise as a franchise or
b. Create your own franchise operation that sells rights to specific territories or
product lines to others. Each will require further legal, financial, and marketing
research.
An excellent starting point if you are considering franchise involvement is the SBA Publication #MA7.007, Evaluating Franchising Opportunities. The International Franchise Association also publishes a number of valuable aids in this field.
Distributors
You may decide to work as a local or regional distributor for several different product lines.
Outline your sales plan below:
What Is Your Advertising Plan?
Each product or service will need its own advertising strategy as part of the total business marketing plan. Before developing an advertising campaign for your business plan, take time to review a few basic assumptions. By definition, advertising is any form of paid, non-personal promotion that communicates with a large number of potential customers at the same time. The purpose of advertising is to inform, persuade, and remind customers about your company's products or services. Every advertising activity should have specific goals. Common examples are:
- To bring in sales orders or contracts
- To promote special events such as sales, business openings, new products
- To bring in requests for estimates or for a sales representative to call
- A special goal at the outset may be to use special media to establish yourself even before startup and to get potential customer "feedback"
These might include one or more of the following:
- Purchase and distribution of business cards to potential clients
- Posting notices on free bulletin boards in area supermarkets or office complexes
- A telephone survey of potential clients to alert them to startup plans
To assist in determining what types of advertising are appropriate and within company budget projections, it will be necessary to carefully review your customer profile. From this review, establish a clear statement of advertising goals. Write down what you want your advertising to accomplish:
The next step will be to develop answers to the following crucial questions:
Q. What should be said about the business and how should it be sated?
A. ____________________________________________________________________
What media should be used?
A.__________________________________________________________________
Q. How much can be afforded?
A. _____________________________________________________________________
Q. How can the advertising program be implemented?
A. ______________________________________________________________________
Q. How can its effectiveness be measured?
A.____________________________________________________________________
The basic criteria for selecting specific types of media will include concise answers to the following:
- Trading Area – Do you plan to serve or sell to an industrial market, a national market, a neighborhood or specialized market? Describe yours:__________________________________________________________ ________________________________________________________________
- Customer Type – What does your potential customer read or listen to? Where? How often? What image does the media you are considering suggest? Does it fit your customer? Describe your customer: _________________________________________________________
- Budget Restrictions – how will the amount of money you have to spend limit the media you can use? How can you spread your budget out over a year to give a repetitive, continuous message? While you may have to spend more at the start, a good ongoing guideline is that advertising should not exceed 1 or 2 percent of sales. Set forth how much you are willing to invest in advertising in the first year: $_____ Break into months or quarters:
$_____ $_____ $_____ $_____
$_____ $_____ $_____ $_____
- Continuity of Message – how will the type of product or service, customer profile, and seasonal buying patterns affect your choice of media and the frequency with which you advertise? Explain your message here:_____________________________________________________
- Past Performance – What is the track record for use of the medium you are considering for your type of business? What do your competitors use? What does your trade association suggest? Enter appropriate comments here:______________________________________
For more on media selection and creating your advertising plan, see Plan Your Advertising Budget (also found in this handbook).
Management Plan
Who Will Do What?
Be sure to include four basic sets of information:
1. State a personal history of principals and Related work, hobby, or volunteer experience (include formal resumes in Appendix).
2. List and describe specific duties and responsibilities of each
3. List benefits and other forms of compensation for each.
4.Identify other professional resources available to the business. Example: accountant, lawyer, insurance broker, banker. Describe relationship of each to business. Example: "accountant available on part-time hourly basis, as needed, initial agreement calls for services not to exceed x hours per month at $xx.xx per hour."
To make this section graphically clear, start with a simple organizational chart that lists specific tasks and shows who (type of person is more important than individual name other than for principals) will do what indicated by arrows, work flow, and lines of responsibility and/or communications. Consider the following examples:
Or like this?
Concisely answer the following question:
A. What are your personal needs now?
1. ____________________________________________________________
2. ____________________________________________________________
3. _____________________________________________________________
4. _____________________________________________________________
A. What skills must each key person have
1. _____________________________________________________________
2. _____________________________________________________________
3. _____________________________________________________________
4. _____________________________________________________________
A. Are the people needed available? Name Them, indicate full or part-time salary rates:
1. ______________________________________________________________
2. ______________________________________________________________
3. ______________________________________________________________
4. _______________________________________________________________
Detail a proposed work schedule by week and month for at least the first year.
Calculate total salaries, wages, fringe benefits, and payroll taxes for each month of the first year.
Compensation Fringe Payroll
Benefits Taxes
1st month $______ $______ $______
2nd month $______ $______ $______
3rd month $______ $______ $______
4th month $______ $______ $______
5th month $______ $______ $______
6th month $______ $______ $______
7th month $______ $______ $______
8th month $______ $______ $______
9th month $______ $______ $______
10th month $______ $______ $______
11th month $______ $______ $______
12th month $______ $______ $______
Full Year $______ $______ $______
If you have identified any gaps in personnel skills, state how these will be overcome by training, purchase of outside services, or subcontracting. Check with the nearest state employment service office for assistance. Write your plan:
____________________________________________________________
____________________________________________________________
What Is Your Banking Plan?
What will be the location and type of bank accounts opened for the business? A word of caution, keep business accounts separate from personal or family accounts. These vital records will be necessary for future tax and accounting purposes. Describe your banking plan:
____________________________________________________________
____________________________________________________________
How Is Your Credit Rating?
There may be several partial answers to this question. All will be of importance to the future of the business. First, what is your personal history of paying debts? Just to be safe, purchase a copy of your personal credit record from the local credit bureau for a small fee and make sure that it is accurate. Look in the classified telephone directory under "Credit Reporting Agencies."
To establish a credit rating, it is necessary to secure credit with a number of businesses and to use it. Your rating will be based upon your record for paying for goods and services based upon the agreed terms. If your prior credit rating is poor, discuss with your lawyer, accountant, and banker options for improvement before seeking and being refused business credit.
Operational Plans Summary
The purpose of this section is to summarize from previous sections, the various operations of your business and link them to the finance section of your business plan. In addition you will want to summarize the advantages and disadvantages of a home-based business operation. Refer to your earlier checklist. Write your summary here:
_________________________________________________________
_________________________________________________________
The Financial Plan
Clearly the most critical section of your business plan document is the financial plan. In formulating this part of the planning document, you will establish vital schedules that will guide the financial health of your business through the troubled waters of the first year and beyond.
Before going into details of building the financial plan, it is important to realize that some basic knowledge of accounting is essential to the productive management of your business. If you are like most home business owners, you probably have a deep and abiding interest in the product or services that you sell or intend to sell. You like to do what you do, and it is even more fulfilling that you are making money doing it. There is nothing wrong with that. Your conviction that what you are doing or making is worthwhile is vitally important to the success. Nonetheless, the income of a coach who takes the greatest pride in producing a winning team will largely depend on someone keeping score of the wins and losses.
The business owner is no different. Your product or service may improve the condition of mankind for generations to come, but, unless you have access to an unlimited bankroll, you will fail if you don't make a profit. If you don't know what's going on in your business, you are not in a very good position to assure its profitability.
Most home-based businesses will use the "cash" method of accounting with a system of recordkeeping that may be little more than carefully annotated checkbook in which is recorded all receipts and all expenditures, backed up by a few forms or original entry (invoices, receipts, cash tickets). For a sole proprietorship, the business form assumed by this handout, the very minimum of recorded information is that required to accurately complete the federal Internal revenue Service Form 1040, Schedule C. Other business types (partnerships, joint ventures, corporations) have similar requirements but use different tax forms.
If your business is, or will be, larger than just a small supplement to family income, you will need something more sophisticated. Stationery stores can provide you with several packaged small business accounting systems complete with simple journals and ledgers and detailed instructions in understandable language.
Should you feel that your accounting knowledge is so rudimentary that you will need professional assistance to establish your accounting system, the classified section of your telephone directory can lead you to a number of small business services that offer a complete range of accounting services. Your can buy as much as you need, from a simple "peg-board" system all the way to computerized accounting, tax return service, and monthly profitably consultation. Rates are reasonable for the services rendered and investigative consultation will usually be free. Look under the heading, "Business Consultants," and make some calls. Be sure to let them know the size of your business so you get to the ones who specialize in home-based operations. Many of them are home-based entrepreneurs themselves, and know what you will be going through.
Let's start by looking at the makeup of the financial plan for the business.
The financial plan includes the following:
- Financial Planning Assumptions-these are short
- Market health__________________________
- Date of startup_________________________
- Sales buildup ($)_______________________
- Gross profit margin_____________________
- Equipment, furniture, and fixtures require___________________________
- Payroll and other key expenses that will impact the financial plan_________________
2. Operational Plan – Profit and Loss Projection
1. Souuce of Funds Schedule – this shows the source(s) of your funds to capitalize the business and how they will be distributed among your fixed assets and working capital.
2. Pro Forma Balance Sheet –"Pro Forma" refers to the fact that the balance sheet is before the fact, not actual. This form displays Assets, Liabilities, and Equity of the business. This will indicate how much investment will be required by the business and how much of it will be used as Working Capital in its operation.
3. Cash Flow Projection – this will forecast the flow of cash into and out of your business through the year. It helps you plan for staged purchasing, high volume months, and slow periods.
Creating the Profit and Loss Projection
Refer to Exhibits A and A-1. Create a wide sheet of analysis paper with a three-inch wide column at the extreme left and 13 narrow columns across the page. Write at the top of the first page the planned name of your business. On the second line of the heading, write "Profit and Loss Projection." On the third line, write "First Year."
Then, note the headings on Exhibit A and copy them onto your 13-cloumn sheet. If startup is indefinite, just write "Month #1," "Month #2," etc. Column 13 should be headed "Total Year."
In the wide, unnumbered column on the left of your 13-column sheet, copy the headings from the similar area on Exhibit A. Then, follow the example set by Exhibit A and list all of the other components of your income, cost, and expense structure. You may add or delete specific lines of expense to suit your business plan. Guard against consolidating too many types of expense under one account lest you lose control of the components. At the same time, don't try to break down expenses so discretely that accounting becomes a nuisance instead of a management tool. Once again, Exhibit A provides ample detail for most home-based businesses.
Now, in the small column just to the left of the first monthly column, you will want to note which of the items in the left-hand column are to be estimated on a monthly (M) or a yearly (Y) basis. Items such as sales, cost of sales, and variable expenses will be estimated monthly based on planned volume and seasonal or other estimated fluctuations. Fixed expenses can usually be estimated on a yearly basis and divided by twelve to arrive at even monthly values. The "M" and "Y" designations will be used later to distinguish between variable and fixed expense.
Depreciation allowances for fixed assets such as production equipment, office furniture and machines, vehicles, etc., will be calculated from the source of funds schedule.
Exhibit A-1 describes line by line how the values on the profit and loss projection are developed. Use this as your guide.
Source of Funds Schedule
To create this schedule, you will need to create a list of all of the Assets that you intend to use in your business, how much investment each will require, and the source of funds to capitalize them. A sample of such a list is shown below:
Asset Cost Source of Funds
Cash $2,500 Personal savings
Accounts Receivable 3,000 From profits
Inventory 2,000 Vendor credit
Pickup truck 5,000 Currently owned
Packaging machine 10,000 Installment purchase
Office desk and chair 300 Currently owned
Calculator 75 Personal cash
Electric Typewriter* 500 Personal savings
*A note about office equipment: although this handout has been written for a broad audience of home-based business operators, those who plan enterprises which produce printed products or large volume of correspondence should consider an electronic word processor as a great time saver. Test use or rent two or more brands that appear to meet your needs and select the one with which you feel most comfortable. Don't be afraid to ask others who have had to make this decision for advice. Compatibility of your system with those of potential typesetting services or printers should be of high consideration. If you are not quite sure, consider renting or leasing the equipment until you are. Service contracts on such complex electronic gear are usually a good insurance policy.
Before you leave your source of funds schedule, indicate the number of months (years x 12) of useful life for depreciable fixed assets. (In the example, the pickup truck, the packaging machine, and the furniture and office equipment would be depreciable.) Generally, any individual item of equipment, furniture, fixtures, vehicles, etc., costing over $100 should be depreciated. For more information on allowances for depreciation, you can get free publications and assistance from your local Internal revenue Service office. Divide the cost of each fixed asset item by the number of months over which it will be depreciated. You will need this data to enter as monthly depreciation on your profit and loss projection. All of the data on the source of funds schedule will be needed to create the balance sheet.
Creating the Pro Forma Balance Sheet
Refer to Exhibit B. This is a balance sheet form. There are a number of variations of this form and you may find it prudent to ask your banker for the form that the bank uses for small businesses. It will make it easier for them to evaluate the health of your business. Use Exhibit B in Exhibit B-1 that describes line by line how to develop balance sheet.
Even though you may plan to stage the purchase of some assets through the year, for the purposes of this pro forma balance sheet, assume that all assets will be provided at startup.
Cash Flow Projection
An important subsidiary schedule to your financial plan is a monthly cash flow projection. Prudent business management practice is to keep no more cash in the business than is needed to operate it and to protect it from catastrophe. In most small businesses, the problem is rarely one of having too much cash. A cash flow projection is made to advise management of the amount of cash that is going to be absorbed by the operation of the business and compares it against the amount that will be advisable.
Refer to Exhibit C for an excellent form for this purpose. Your projection should be prepared on 13-column analysis paper to allow for a twelve-month projection. Exhibit C-1 represents a line by line description and explanation of the components of the cash flow projection that provides a step-by-step method of preparation.
Outside Sources of Assistance
The U.S. Small Business Administration's Office of Business Development programs are extensive and diversified. They include free individual counseling, courses, conferences, workshops, problem clinics, and a wide range of publications. Counseling is provided through community based organizations such as:
SCORE and ACE, which help small business owners, solve their operating problems through a one-on-one relationship. Counseling is not limited to small businesses that have a problem. It is available as well to managers of successful firms who wish to review their objectives and long-range plans for expansion and diversification.
SMALL BUSINESS INSTITUTES (SBIs) which have been organized through SBA on over 500 university and college campuses as another way to help small business. At each SBI, senior and graduate students at schools of business administration, and their faculty advisors, provide on-site management counseling. Students are guided by the faculty advisors and SBA management assistance experts and receive academic credit for their work.
SMALL BUSINESS DEVELOPMENT CENTERS (SBDCs) which draw from resources of local, state, and federal government programs, the private sector, and the university facilities to provide managerial and technical help, research studies, and other types of specialized assistance of value to small business. These university-based centers provide individual counseling and practical training for small business owners.
BUSINESS MANAGEMENT TRAINING programs are co-sponsored by SBA in cooperation with educational institutions, Chambers of Commerce, and trade associations. Courses generally take place in the evening and last from six to eight weeks. In addition, conferences covering such subjects as working capital, business forecasting, and marketing are held for established businesses on a regular basis. SBA conducts Pre-Business Workshops dealing with financing, marketing assistance, types of business organizations, and business site selection for prospective business owners. Clinics that focus on particular problems of small firms in specific industrial categories are held on an as-needed basis.
COOPERATIVE EXTENSION SERVICE offers advice in a wide variety of home economics and agricultural subject matter. Consult your county Extension agent for more information.
A Final Word
In completing this handout, you have put in a great deal of time and effort. You should now have all of the elements needed to present as simple or sophisticated a prospectus for your enterprise as you desire. More important, you have created the management tools to guide you in your venture. Once the business opens its doors, the details, problems, challenges, and joys of going it alone will inundate you. It will be difficult to hold your course through the rough seas ahead, but don't forget this "chartbook," it will see you through to "port profit."
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