When you're applying for a loan or seeking capital from investors, you’ll need a business plan that shows you're going to put the money to good use. Lenders want to see that you’ll be able to repay their loans, and investors want assurance that they'll get a good return on their money.
To establish this credibility, your business plan must be realistic and believable. It must be based on solid research backed up with practical numbers based on data from authoritative websites and information gained from other business people and customer surveys.
Here’s how to get the figures you’ll need for the various parts of your business plan.
Sales and Marketing
Your business plan will start with a projection of sales for the next few years, typically three years. You'll need to do the market research of your target market and the percentage of penetration that you expect to achieve.
Your market research should produce the following information:
Size: How many people or businesses are in your target market? Is the number of potential customers increasing or decreasing?
Demographic: What is their age, marital status, educational level, number of children and employment? If your target customers are other businesses, you’ll want information about their number of employees, annual revenues, age of the business and whether they’re private or public.
Location: Are your potential customers located close by, or will you need other means of marketing to reach them?
Income: What are the average incomes of your customers or the average revenues of businesses?
Purchasing habits: How much do your customers typically spend? Where do they buy? And how often?
You’ll be able to find much of this information at these sites:
Read More: What Resources Are Available From the SBA?
State of the Economy
Your business plan must make sense in relation to the state of the economy. It wouldn't be logical to show a business plan with rapidly increasing sales and profits during an economic downturn.
Economic data available from the Bureau of Economic Analysis, which has figures for the Gross Domestic Product and Personal Income, will establish the validity of your projections.
You can find data on interest rates and the money market from the Federal Reserve Bank.
What is the status of your competition? How many competitors do you have? Where are they located? What are their sizes and revenues? How do they price their products and services?
Finding the answers to these questions will determine your ability to compete and be successful. You can find information about your industry through trade organizations and from the data collected at the North American Industry Classification System (NAICS) website.
You will also use these figures to prepare your projected income statements and balance sheets and as a guide to the financial ratios that will be used to evaluate the financial health and performance of your business.
Read More: Resources for Entrepreneurs
Your income statement shows how much you plan to sell and how you intend to make a profit. Starting with sales, you can use surveys of competitors’ prices to show how your pricing strategy will be effective by establishing the value for your products or services.
Support the cost of goods sold of your products with price quotes for materials and the labor cost needed to produce the product.
You can follow the same approach when calculating your overhead costs. For example, information from real estate agencies would show the cost per square foot to rent commercial space for offices and manufacturing. Similarly, quotes from insurance agents would disclose the premium cost for commercial and property insurance. Go through this type of analysis for each line item in your overhead cost.
A balance sheet lists all the company's assets and liabilities. It shows how the company finances its assets and how each piece works together. Financial ratios based on figures from a balance sheet show these relationships.
Take inventory, for example. If you're a manufacturer, your inventory turnover would be around six times per year. The pro forma balance sheets in your business plan should indicate that inventory in your business will approach that turnover rate.
Accounts receivable is another example. Your balance sheet projections should show that your receivables turnover will be in the range of six to eight times per year.
Other financial ratios, such as financial leverage and accounts payable turnover, should be in line with the averages for your industry.
Read More: Comparative Balance Sheet Analysis
Cash Flow Statement
A cash flow statement shows how you plan to manage the cash that comes into your business and where it goes out.
Your business plan should show that the business will generate enough sales and produce a gross profit sufficient to cover overhead, pay off debts and leave a profit.
If you're applying for a loan, your cash flow statement should show that the business will generate enough cash to meet the principal and interest payments of a loan and leave enough cash to finance the company's growth. Typically, lenders like to see a debt-coverage ratio of $2 in cash for each $1 in loan payments.
Investors want to see enough cash flow staying in the business to finance growth and to increase the company's equity because it is this growth in equity that will eventually create a return on the investors’ money.
A break-even analysis shows that you know how to manage your business to produce a profit as it grows. A break-even analysis changes over time as the business grows, and you continue to add personnel and other fixed overhead costs to handle the increased sales volume.
Increases in fixed overhead costs create new milestones that the business must reach to cover the higher expenses and leave a profit. When your business plan shows that you have thought about this problem and you have solutions on how you intend to manage it, lenders and investors have more confidence in your managerial ability.
The break-even point is the number of sales that it takes to generate enough gross profit to cover fixed overhead expenses. The formula is:
Break-even sales volume = fixed costs divided by gross profit margin
Suppose your projected business plan shows the fixed overhead as $400,000 and a gross profit of 40 percent. You would need $1 million in revenues to break even ($400,000 divided by 0.40). With revenues above this amount, you would make a profit. If revenues fall below this amount, the business would lose money.
Now suppose sales increase, and you need to hire another person for the office at a salary of $40,000 per year, increasing the fixed overhead to $440,000. Your break-even sales volume would go up to $1,100,000 ($440,000 divided by 0.40).
- Federal Deposit Insurance Corporation: Developing a Marketing Plan
- SCORE: Financial Projections Template
- Small Business Administration: Market Research and Competitive Analysis
- USA.gov: Data and Statistics About the U.S.
- United States Census Bureau: Statistics of U.S. Businesses (SUSB)
- United States Census Bureau: North American Industry Classification System - NAICS
- Federal Reserve System: Consumer Credit
- Bureau of Labor Statistics: Demographic Data
- Bureau of Labor Statistics: Labor Force Statistics from the Current Population Survey PRINT:Print CPS CPS Program Links
- Bureau of Economic Analysis: Consumer Spending
- Bureau of Economic Analysis: Gross Domestic Product
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.