the plan:
A Step-by-Step
BUSINESS PLAN
WORKBOOK
Illinois Small Business Development Centers
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that are interested in selling their
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(TIES) ten SBDC location
s
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be reproduced in any form including information storage and retrieval systems, without prior permission in writing from the publisher. 0213
INTRODUCTION
Planning is your map to success
in the business world. You need to
write a business plan if you are:
• startingorbuying
abusiness
• nancingorrenancing
yourbusiness
• raisingdebtor
equitycapital
Much money is made then lost
because one area of a business
fails, dragging the positive parts
down with it.
The Plan helps you find hidden
business flaws and makes you
think carefully about each phase
of your business.
It is important that you write
your business plan. Why? You
will gain in-depth knowledge
about your business which will
make it easier to answer lenders’
questions. The process of writing
your business plan will clarify
what is involved in making your
business work successfully.
The Plan
A Step-By-Step
Guidebook
Business Plan
aSK YOURSelF TheSe QUeSTIOnS:
_______________________________________
(bank, state or federal agency, venture
capitalist firm, or other investor) ______________________________________
________________
______________________
______________________
________________________________
BeFORe MeeTInG WITh a lenDeR:
the lender that your business has merit.
BaSIC QUeSTIOnS a lenDeR WIll aSK YOU:
____________________________________
_________________________
_________________________________
____________________________
________________________________________
_________________________________
LENDERSUSETHEEIGHT“C’s”RULE:
1. Credit (must be good)
2. Capacity (ability to repay)
3. Capital (money going into the business)
4. Collateral (your assets that secure the loan)
5. Character (you)
6. Conditions (economy, finances, anything that affects your business)
7. Commitment (your ability and willingness to succeed)
8. Cash Flow (can it support the business’ debt and expenses?)
Divide your business plan into
sections that match the “contents”
outline shown on the next page.
There is no set length for your
answers — they will range from a
paragraph to a few pages long.
Once it’s written, your business plan
will need editing. Ask other people to
read and critique your plan. Include
a statement on the inside cover that
says its contents are confidential, and
making copies is prohibited.
Your business plan should be neat
and organized to make a professional
impression. After your text is written,
use a spelling and grammar check
feature to be sure your work is error
free. For financial data, use a spread-
sheet program.
Once you’re done, make copies for
your lender and for others who are
interested in your business. Make
sure all the copies you submit are
readable and include original
signatures. Lenders keep your pre-
sentation even if you are rejected,
so make copies for yourself of
everything you submit. Number the
business plan copies and make a list
of each person you’ve given one to.
It’s a good idea to put your loan
presentation in a 3-ring binder with
tabs and indexes
.
BusinessLoanBasics
How To
Use This
Workbook
The aPPenDIx comes at the end of your business plan and includes
all details and documents that support the plan.
Items that need to be included in the aPPenDIx are indicated
throughout this workbook. On page 31, you’ll find a comprehensive
list, which you can use as a guide.
The first page of the aPPenDIx should be a listing of its contents.
Be sure to separate and organize the documents logically, perhaps in
the order they are referred to in the plan.
The aPPenDIx will grow, so it is a good idea to use a 3-ring binder
with tabbed dividers. Some people prefer using an expandable file.
When MeeTInG WITh a lenDeR:
application, and any other materials you need.
Give an overview or outline at the beginning.
Answer all negative questions with positive answers.
the decision on the phone.
loan request was rejected.
...................... 6
..................... 8
Managers & .............. 10
Operations & Location ............... 11
Marketing .................................. 12
....................... 16
..................... 17
Loan Request .............................. 18
FInanCIal STaTeMenTS
General Information ............ 19
1. Personal Finances ............ 20
2. .................. 22
3. ........... 24
4. Cash Flow ....................... 26
Ratios ......................................... 28
Formulas .................................... 30
................................... 31
BusinessLoanBasics
BREAK DOWN YOUR BUSINESS
PLAN INTO SECTIONS SIMILAR
TO THOSE IN THIS BOOK.
The Appendix
COnTenTS
Generally, lenders like to simplify the process
used to screen loan requests. Take your
matter; the basic formula is as simple as 1-2-3.
FORMULAS
6
The ExecutiveSummary (your Cover Letter)
briefly
in about one or two pages.
Page two is the TableofContents. It shows
the lender on which page each section can be
found (see page 5 for the breakdown of sections).
exeCUTIVe SUMMaRY
The Green Rose
456 Oak Street
This Town, USA 67890
Mr. John Nelson
ABC Bank
123 Main Street
Anytown, USA 12345
Re: Loan Request for $300,000
Dear Mr. Nelson,
With 20 years of management experience in the residential landscaping
business, we are requesting a loan to start our own landscaping business,
called The Green Rose.
The climate for a successful landscaping business is perfect. Last year, the
number of new homes built in Pembroke Pines increased by 15%. Just this
quarter, new building permits are up 10% over last year. Of the 45,000
homes in the area, 3,000 were built last year.
Our target market is owners of new and older homes. We plan to reach them
with focused marketing, which you will read about in our plan. In addition,
we have good working relationships with many building contractors, who
have indicated they will refer us to their clients.
Two of our six local competitors have filed Chapter 11. Two are family-
owned businesses who concentrate on commercial contracts. The last two
are healthy competition, though they lack our marketing and management
expertise.
We are investing $75K from our savings, and are requesting a $300K loan
from your bank. We would like five years to repay the loan, using the cash
flow of the business. Our secondary source of repayment will be from col-
lateralized equipment. Our homes and business assets, valued at $300K, are
offered as collateral for the loan.
Our business plan is attached. In it you will find the information you need.
If you have any questions or need more information, please contact
Mr. Green at (321) 234-5678.
Respectfully submitted,
Ed Rose Tim Green
YOUR COVeR leTTeR ShOUlD ReaD SOMeThInG lIKe ThIS One:
To build
the lender’s
enthusiasm,
make references
to what’s
included in your
business plan
Leave off your
return address if
the letter is on
your company’s
stationery.
List the purpose
of the loan
(starting, buying,
or expanding
a business).
Include owners’
-
rience. Mention
your products
and services.
your markets
and customers.
Include key
facts about your
competition.
Include
all
signature(s) and
typed name(s).
Tell the lender
who should be
contacted and
provide a phone
number and
email adderss.
Mention how much
money you would
like to finance and
the terms (how
many years). List
the source of
re-payment (loans
should be repaid by
the business’ cash
flow).
Also include
how much you are
investing and
where your money
will come from.
List the secondary
source of
repayment.
This is usually
collateral which
includes business
and personal
assets (see page
18). Also, fill in
the equity value
of these assets.
7
Date____________________________________________________________________________________________________
Your address_____________________________________________________________________________________________
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
Lender’s name, bank name, and address
____________________________________________________________________________________________________________
_________________________________________________________________________________________________________
_________________________________________________________________________________________________________
__________________________________________________________________________________________________________
Re: Loan Request for $______________ (fill in amount)
Dear (fill in lender’s name)___________________________:
I (or we) am requesting a loan of____________________________________. The owner(s)
(fill in names) _____________________ have experience in this industry including... (mention
experience in industry or training that would qualify you to run this business).
The industry we are entering... (include one brief paragraph about the industry and its growth)
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
Our target market is... (include one brief paragraph about your target market/customers)
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
The competition includes.... (include one brief paragraph about your competition and how
your business will attract their customers)
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
We are investing $___________ of our own money. Our collateral consists of business assets
having a fair market value of $__________________ and personal assets (if applicable)
with a value of $__________________
Attached is our business plan which backs up our request. If you have any questions, please contact
(name) __________________ at __________________ (include phone number and email address).
Sincerely,
_______________________ ____________________________
Your signature(s) and printed name(s) here
exeCUTIVe SUMMaRY (YOUR COVER LETTER)
8
BUSIneSS DeSCRIPTIOn
General:
List the business name,
location, mailing address,
and web site address.
Purpose: Describe the
intent of your business.
Industry:
Talk about what’s going
on in your industry,
including economic
trends, outlook, growth
patterns and forecasts.
your Marketing section.
LegalBusiness
Description:
-
nership, limited liability,
List the state where the
business is incorporated.
Owners:
List each owner’s name,
business title, home
address, telephone number,
email address and social
security number. Include a
brief description of owners
and managers (experience
and credentials in running
the business) and their
ownership percentage
of the business.
Goals:
Include both current and
long-term projections.
GENERAL
Name: MRJ Design
Address: 21 Longwood Drive, Orlando, Florida 32751
Phone: (407) 123-4567 Fax: (407) 123-4789
E-mail: [email protected], Web Site: www.MRJ.com
OWNERS:
Bob Smith: 10 Brookfield Rd., Orlando, FL 32751
Phone: 407-456-7891 Social Security: 367-89-7088
Over 20 years of experience in creative management. Worked
for several design firms. Mr. Smith owns 60% of the business.
Linda Jones: 96 Elm St., Orlando, FL 32751
Phone: 407-567-1234 Social Security: 234-56-7891
Ten years of experience as manager of large
marketing communications department within
Fortune 1000 corporation. Ms. Jones owns 40% of the business.
LEGAL STATUS: Florida S Corporation
PURPOSE: Produce superior marketing communications material for
other businesses.
STATUS: Start-Up.
BUSINESS TYPE: Service
PRODUCTS AND SERVICES: Graphic design, illustration, and artwork
production. Other services, supplied by vendors/suppliers, include
writing, photography, printing, and mailing.
REASONS: Both partners have over 30 years of industry
experience that will be put to profitable use in our own firm.
The demand for graphic communications is ...etc.
GOALS:
CURRENT: Bring to profitable status that will equal or exceed
current income levels. Create relationships with clients.
Build ...etc.
LONG-TERM: In four years, we will have 50-100 clients.
Hire administrative person ... etc.
INDUSTRY:
100 design firms and designers exist in our territory. Advertising
agencies (about 235) are also competitors but their specialty is
not design. Many companies have relocated to Orlando so the
demand for our services is growing. The number of start-up
companies numbered 6,000 last year...etc.
PROFESSIONAL RELATIONSHIPS:
ACCOUNTANT:
Larry Stuart, CPA, 123 Main St., Winter Springs,
FL 32751. Ph: 407-678-9012, Fax: 407-678-7890
ATTORNEY:
Linda Johnson of Johnson and Smith, 456 Elm St.,
Winter Park, FL 32789.
Ph: 407-234-5678, Fax: 407-345-6789
BANKER:
John Nelson, Heritage Bank, 678 Oak St., Orlando,
FL 32908. Ph: 407-123-4567. Fax: 407-0987-6543.
INSURANCE AGENT:
Linda Doe, Doe Insurance, 321 Grove Ave., Winter Park, FL
32789. Ph: 407-432-7654. Fax: 407-876-5432
PROFESSIONAL ADVISORS:
Claire Velleca, Velleca Consultants, 1 Park St.,
Orlando, FL 32701 Ph: 407-222-1456, Fax: 407-419-1989
Typeofbusiness:
Retail, wholesale,
service, manufacturing,
contracting, professional,
BusinessStatus:
New/start up, ongoing,
a business. Include the
date your business started
or will start. If buying
a business, include a
detailed business history
in this section.
Reasonsfor starting,
business.
Professional
Relationships:
Include name, address,
numbers and email
address for your
accountant, attorney,
banker, insurance agent,
and professional
advisor(s).
9
BUSIneSS DeSCRIPTIOn
GeneRal
________________________________________________
Location _____________________________________________________
Mailing address _______________________________________________
_________________________
______________________________________
________________________________________________
_____________________________________________
PROFeSSIOnal RelaTIOnShIPS
Accountant __________________________________________________
______________________________________________________________
______________________________________________________________
Attorney _____________________________________________________
______________________________________________________________
______________________________________________________________
_______________________________________________________
______________________________________________________________
______________________________________________________________
Insurance agent ______________________________________________
______________________________________________________________
______________________________________________________________
Professional advisor(s) _________________________________________
______________________________________________________________
______________________________________________________________
OWneRS
Provide the following information for each principal in the company.
Name _______________________________________________________
__________________________________________________
________________________________________________
Telephone number ____________________________________________
___________________________________________
Include a brief description of owners and managers (experience and
credentials in running the business) and their percentage of ownership
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
KeeP TRaCK
Use this check box as a
reminder system. Some
answers will be short
and some will be long.
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Reasons
for starting, buying, or
ProductsandServices
Provide a summary.
Purpose
Describe the intent of your business.
Goals
Industry
Provide a brief summary of what’s going
on in your industry. Include economic trends,
outlook, growth patterns and forecasts. Include
details in the aPPenDIx.
LegalBusinessDescription (sole proprietorship, partnership, corporation, etc.) ________________________________________________
State _________________________________________________
Typeofbusiness (retail, wholesale, service, manufacturing, contracting, etc.) __________________________________________________
BusinessStatus
Date your business started or will start _______________________________________________________________________________________
✓
10
Employees
are needed to run the company? It’s a good
idea to develop an organizational chart
(example below).
and
keep them?
Costs
benefits and résumés in the aPPenDIx.
to pay each employee?
benefits and their costs?
needed and how much will
General
available from outside the
business. For example, you
may use an accountant for
financial reporting.
some services should be
included in the aPPenDIx.
For example, you can outsource
a direct mail program to a
marketing firm.
Managers
do you need? What are their functions?
-
ers also like to see a back-up plan.
If you die or can no longer work, who will
run the business and repay the company’s
debts? One solution is to buy enough life
insurance to cover the business debt.
ManaGeRS & eMPlOYeeS
Sales/Marketing Manager
Operations Manager
The Good Earth Organizational Chart
Finance
MIKE JONES (accountant and owner)
20 years of accounting experience in various industries...
A bookkeeper will be outsourced.
Sales & Marketing
LEE MYERS
10 years of marketing experience. Myers will be responsible for the
sales staff (estimators), customer service, promotional plans...
Two office staff: One full-time customer service representative and one
full-time administrative assistant. Each will be paid $40,000 annually.
They will receive health insurance, ten paid sick days, paid holidays,
and two weeks of vacation. These benefits will cost ...
Operations
JOHN SMITH
20 years of operational experience in landscaping industry. Smith
will supervise the grounds staff and handle ...
Four full-time grounds employees starting at minimum wage for work-
ing Monday- Friday, 7:00 a.m. to 3:30 p.m. A two-day training program
is required before joining the company. Employees will receive paid
health insurance, five paid sick days, paid holidays, and one week of va-
cation. These benefits will cost ...
Finance Manager
Bookkeeper
(outsourced)
Customer Service Rep.
Administrative Asst.
Ground Employee
Ground Employee
Ground Employee
Ground Employee
Done
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Done
To Do
Done
To Do
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To Do
Done
To Do
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To Do
11
a copy of the deed in the aPPenDIx.
If leased, the
term of the lease must be renewable to match the
loan period you are requesting. Include a copy of
the lease (or proposed lease) with
terms, conditions,
length, and cost in your aPPenDIx.
› Are improvements, renovations, furniture,
aPPenDIx.
› Retailers:
> Research and show traffic patterns in the
aPPenDIx.
> What other businesses are in your
immediate area?
› Wholesalers, manufacturers and other businesses:
> Are you located near your customers and suppliers?
> Do you have easy access to major highways,
railways, and airports?
including a floor plan, blueprint or plot plan
(if building) in the aPPenDIx.
hOW WIll YOUR BUSIneSS OPeRaTe?
business be open? Is the business seasonal?
If so, show how you will adjust your time,
schedule, inventory, and personnel.
machinery is needed? Will it be bought, leased,
or rented? Include proposed purchases in your
aPPenDIx.
SUPPlIeRS
If you need suppliers and other companies
to complete your product or service:
› What and how much will you need?
› Where will you get these products
and services?
›
› What system will you use for materials
processing and inventory control?
In the
aPPenDIx include details about
your suppliers, including names, addresses,
products or services supplied, costs/quotes,
delivery/shipping fees and turnaround, terms
of sales, contracts, and a purchasing plan.
If you’ve requested financial, managerial,
or technical assistance from your suppliers,
include details in the
aPPenDIx.
lOCaTIOn
› Why is the area and location desirable?
› Does this location affect your costs?
›
› Is it easily accessible?
Is public transportation available?
Is there adequate parking?
› Does your business comply with
› Do you own or lease the building? In the
aPPenDIx
local government and approval letters from
local and state inspectors. If owned, provide
OPeRaTIOnS & lOCaTIOn
CLOTHES WITH CLASS
We are a school uniform shop. Business hours will be from 10 to 5,
Monday through Saturday. Our plan is to purchase fixtures to
display uniforms and furniture to create a relaxed retail
atmosphere. A computer system to track customer purchases
and inventory will be leased. These costs are included in the
Appendix.
Our stock will come from three suppliers — two national and one
local. Local supplies will be delivered by truck, with the remainder
of goods coming via UPS. Information on our proposed suppliers
and purchases may be found in the Appendix.
The five-year lease we have signed on a 1,500 sq. ft. building
is included in the Appendix. The building is located within
15 miles of 22 private and parochial schools who
require uniforms that we will stock. Our building is on a major
thoroughfare, conveniently located right off Highway 93.
A floor plan of the building is included in the Appendix. We have
divided the area into retail space and warehousing/office space.
700 sq. ft. will include retail displays, three dressing rooms,
restroom facilities and two purchasing counters. The remaining
800 sq. ft. will warehouse stock. It includes a delivery receiving
area, two offices, and a small employee lounge with restroom.
The 20-space parking lot is adjacent to the building.
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Done
To Do
12
Place
customers? There are many methods for reaching customers
besides retail stores and internet sites. You could sell:
resells it. or through a manufacturer’s representatives
who charge you commissions.
by “consignment” when another company sells
your product and the price is divided between the two
of you.
company sends new customers coupons every month
for free coffee at a local shop. Websites are perfect for
partnerships, since clicking on a link connects people
from one site to another.
Promotion
-
vices? Make it your business to know what your audience
pages 13 -15 for ideas.
Plan
Without a marketing plan, your efforts could become
scattered and your results not measurable. You should in-
clude money for marketing in your annual budget. Think
trends, consumer sentiment and the economy are always
changing, so your marketing plan should grow, adjust and
evolve. Include detailed plans and costs in the Appendix.
Product
Is there a demand?
about their age, income, gender, education, marital
status, and lifestyle. If you’re selling to businesses, learn
about the companies you’re targeting.
competitors? Research their weaknesses, strengths,
pricing, service, creativity and marketing.
copyrights, and trademarks?
during the rest of the year?
Price
Your products and services need to be offered at prices
your market will pay, while providing your desired profit.
Thinking about about your products and services from
the customer’s point of view is called the perceived value.
light bulb for $2 and then raised the price to $3 and sales
of your products and services, factoring in your company’s
image and reputation.
MaRKeTInG
Thinking like a marketer is necessary to attract and keep customers.
The right product and service at the right price is only the beginning.
You also need to create a mix of marketing on and off the internet.
PRODUCT, PRICe, PlaCe AND PROMOTIOn
–
Plan.
13
MaRKeTInG
NameGetting customers to remember your name is a
mighty hurdle! Think about standing out. If you repair
Computer Repair.
Logo The symbol or type treatment that represents your
business should be memorable. Choose colors and use
them consistently. Your logo belongs everywhere, from
business cards to signage to emails, and it can be used,
unchanged, for years.
Tagline Your company tagline should be short, catchy
and, in some cases, functional. If your company is called
purpose. Your logo and tagline should be inseparable.
Packaging A beautiful gold watch in a rumpled brown
bag will never be given the same value as that same watch
-
aging is branding, so everything customers see – from
bags to menus – represents you.
PrintedMaterialIf it’s on paper, it matters. Ads, direct
mail and brochures represent your image, so never com-
promise when it comes to being sure they look polished
customers should be given attention.
In addition to your website, traditional marketing tools are
time to find the combination that works best for you.
Advertising can take the form of print ads in local or
trade publications, or media ads on radio and TV. If you’re
unsure where to advertise, consult with professional
online banner ads are more effective on websites that
attract your target audience.
DirectMarketing uses traditional mail, email or phone
your method. Measuring response is crucial, because it
will help you determine which lists are best – and the cost
of gaining an order or client. You can buy databases or
book for customers to sign, ask them for business cards or
send emails that request feedback.
PublicRelations is a great way to build a brand
identity, and to influence the attitudes of your audience.
If you make all-natural sunblock, you could sponsor a
press releases to area newspapers, online publications,
radio and TV stations.
TradeShows offer a chance to meet customers, intro-
duce products, get leads and write orders. Networking
with others in your industry and sharing information
You need professionals to make you look and sound your best. A graphic
designer will create your logo, packaging, signage and website, working
closely with your website programmer/developer/host. A copywriter
can create copy to help your website, ads and other promotional material
get noticed.”
YOUR IMaGe TRaDITIOnal TOOlS
14
MaRKeTInG
InternetMarketingYou’ll find that maintaining a vital
Internet presence does require some time and effort, so
put limits and practical guidelines in place. You don’t
want customers browsing in your retail business while you
some other basics:
your industry on a regular basis. What do you like about
boring or interesting? Is the site easy to negotiate?
What’s the balance between words and pictures? This
will help you develop a more tangible idea of what you
want your website to be – or not be.
-
writer pays off, making you look polished and profes-
sional. Once your site is “live,” you’ll need a “host.”
A good one will be able to help you create traffic,
measure activity, collect data and insure security.
“go in” yourself and update your website information.
There’s nothing that gives website visitors a worse
impression than to see you promoting an event that
happened last month.
SEOMatters
away wants 28 replacement windows for her Victorian
another company that appeared third on the list of results.
be desired. Codes written by the developer, the regularity
of blogging posts or the use of highly relevant words and
OnlineFeedbackYears ago, people shared their opinions
about companies with 2 or 3 people over the back fence.
Today, websites that feature consumer feedback reach
thousands, even millions of people.
CrossMarketing
make organic pet treats. Why not approach a local dog
grooming business and ask to be featured on their website
– and you, of course, return the favor. Get creative in part-
nering with your community!
A website in today’s world is as basic as a business card. “If you build
it, they will come” doesn’t always apply to websites, which are dynamic
(changing constantly) and not static (do it and you’re done). Directing
traffic to your site – and giving visitors a reason to come back – is the goal.
WeBSITeS
15
MaRKeTInG
Blasting is sending one email out to a large audience
made up of active, interested recipients. After signing
on at your physical site or your website, your “A-listers”
to them, as a thank you for allowing you into their
the local nursery to big retailers and see how they do it.
your emails look great – and compile valuable data
on effectiveness.
Blogging is keeping an online journal (“web” + “log” =
short, and feature “no scroll” posts. Determine the content
positive and chatty – and always end by asking for the
will help move you higher up in search results ranking.
Ask your website developer to incorporate a blog into your
website, or check out sites that let you set up a blog.
Facebook is the social media “go to” site – the place
where the world “meets.” This open forum can be a
marketer’s dream, an easy way to get a message out, talk
about promotions, get feedback and generally engage
customers. Check out how other companies are handling
their postings.
LinkedIn is the site that means business, where profes-
sionals post résumés, network and read industry news.
You should establish profiles for yourself and your staff,
and don’t be afraid to brag a little. It is a good site to find
vendors and resources, too.
Twitter is a “microblogging” network, where messages
called “tweets” are sent out to only those readers who
“follow” you. This isn’t the place for long messages,
as tweets are limited to just 140 characters. The word
“immediacy” captures the essence of Twitter; it’s a
YouTube is the world’s TV channel. It’s easy to start your
own “network” where you can post videos that will edu-
cate, inform, market to and entertain your audience. And
YouTube has made cross promoting as simple as possible.
Vlogging
you’re celebrating your 10th year in business, or you want
to show off what your new printing press can do for your
customers. A short video – no more than 2 or 3 minutes –
can be posted on your website, or other sites like Facebook
or YouTube, and reach a bigger audience than you ever
thought possible!
Social media sites are two-way expressways, where people contribute to,
interact with and participate in your online presence. These sites help you
gain new customers and engage existing ones. Another advantage of
social media is your ability to measure results. Your posts and updates can
also be “shared” across many social media sites.
SOCIal MeDIa
16
QUeSTIOnS ThaT neeD anSWeRS:
of the business? Where is it located and where
are its customers located?
(see page 15.)
you increase sales?
suppliers.
returns from the last 3 years.
which shows:
› the purchase price components - down
payment, allocation of the price, and
how it will be financed
› how the business will be conducted until purchased
› the liabilities you are assuming including accounts payable, loans, leases,
› the value of the assets you are buying including Accounts Receivable (quality and the age
condition, and value), patents/trademarks, and real estate.
› that the purchase and sale agreement is subject to financing and inspections
(especially the goodwill - the difference between the value of hard assets and the business’
purchase price)? What are the terms, rates, and conditions? Develop a Loan Request (see page 18).
environmental inspections.
In your
aPPenDIx, include pictures of the business location, a detailed description and appraised
value of the building, inventory and equipment, assets and liabilities, inspection reports, and any pat-
ents/trademarks. Also include the purchase-and-sale agreement and any legal documents.
ORANGE DOT MACHINE
PRODUCT: machining services for the seller’s railroad product line
OWNERS: Jack Reich and Tom Wallis, both of whom want to retire
LOCATION: Western Connecticut. The building’s landlord is Reich
Holdings, LLC (see Appendix Section 9, “Business Location”)
LEGAL STATUS: S Corporation registered in Connecticut
HISTORY: Started in 1982 as a division of a larger corporation.
CLIENTS: 200 companies in Connecticut and southern New England.
(Commercial companies: 60%; military-related: 25%; railroad: 15%)
SALES: $1.4 million in sales last year — a 30% increase over the
previous fiscal year, due to an expanded product line and aggressive
marketing. The quality of the equipment and caliber of the staff
present an excellent growth opportunity.
MARKETING: The redesign of the company website, along with a formal
marketing program, is expected to increase the customer base and
expand the service area.
PURCHASE PRICE: $500,000 includes $475,000 in assets (see
appraisals in the Appendix) and $25,000 in good will. An additional
$50,000 is needed for working capital. Refer to our Loan Request
and Cash Flow Analysis.
TRANSFER TERMS: As of the closing, all Accounts Receivable and Pay-
able will be the current owners’ responsibility. Work-in-progress
inventory will be consigned to the buyer, then completed on a
labor-only basis. When the product is completed, future revenue will
be kept by the new owners.
LIABILITIES: The assumption of capital lease obligations (see Appendix)
✓
CheCKlIST
forbuyingabusiness
Done
To Do
Done
To Do
Done
To Do
Done
To Do
Done
To Do
BUYInG a BUSIneSS
17
BUYeR, Be aWaRe
A franchise is a legal business relationship between a
-
see (you). The franchiser owns the right to the business
name, and sells that right to you. In return, you sell
products and services supplied by the franchiser.
The advantages of buying a franchise can be appeal-
ing. You get an established business presence. And since
many of the decisions and products come from the
franchiser, your risks are reduced. You are also provided
with a range of support services, such as site selection,
training, supplies and advertising/marketing plans.
The DISClOSURe DOCUMenT:
ReaD IT CaReFUllY
The Federal Trade Commission (FTC) requires sellers
of franchises and other business-opportunity ventures
to provide a Disclosure Document to prospective buyers.
how business between you and the franchiser will be
conducted.
It is crucial that you read this document very carefully,
as many times as you need to, because it contains
important information — audited financial statements,
your start-up and ongoing costs, and locations of other
through it as well.
The Disclosure Document must be given to you in
advance so you can gather and consider any and all
information you need to be sure your decision is an
informed one.
Top Ten Questions To Ask
Before Buying a Franchise
your area? Don’t be afraid to ask for a list, then to
visit as many as you can. If possible, speak with
the owner(s) about some of the real-world realities
of running the business.
Ask how long they have been selling franchises.
You have a right to see their financial statements,
which should be included in the Disclosure
Document. Make sure you are comfortable with
all the numbers.
4 What does your initial cost cover? Discuss things
like the licensing fee, training, equipment, starting
inventory and promotional fees. Find out if the
land will be purchased or leased, and whether the
building will be constructed or renovated.
5 Will the franchiser help finance the business?
If so, you still need to develop a business plan with
financial projections.
6 What ongoing costs will you pay the franchiser?
Discuss royalties, training, insurance and
advertising.
7 Will you be required to buy supplies from the
franchiser or their designated suppliers?
Will prices be competitive?
8 Do any restrictions apply when competing with
the competition?
about the terms covering renewal rights.
10 Do you have the right to resell the franchise?
BUYInG a FRanChISe
18
hOW MUCh WIll YOU neeD?
You must invest 25% - 50% of your own money.
your money will come from.
Also provide information
about money coming from
money you are requesting
from the lender.
hOW WIll The
MOneY Be USeD?
Uses include inventory,
machines, repairs and
improvements, and working
capital (money for the
business’ day-to-day
activities). Your business’
income (and other money)
You need more money if
your income. Use of funds
must be fully documented
with quotes in the aPPen-
DIx (include a breakdown of
machinery, equipment,
hOW lOnG aRe YOU aSKInG FOR RePaYMenT?
• ShortTerm (less than a year):
called Lines of Credit (LOC) or Revolvers and work like
a credit card, with a pre-determined amount. Lines of
credit are primarily used for working capital and must
be paid in full within that year.
• IntermediateTerm (1-10 years): Like a car loan,
payments are monthly. Use for buying the business,
equipment, or for long-term working capital.
• LongTerm (10 years or more): Like a mortgage, used
to buy commercial real estate, commercial vehicles,
and heavy equipment.
hOW WIll The lOan Be RePaID?
The lender wants to see the loan repaid from the busi-
ness’ income. If necessary, the
lender needs to know that the
loan could also be repaid by
selling an asset or by a cash
infusion from an investor.
IF YOUR lOan ReQUeST
IS RejeCTeD, aSK:
problems and re-submit
the request.
lender or seek alternative
financing.
WhaT COllaTeRal
aRe YOU OFFeRInG?
Collateral is assets the bank
has a lien on and will take if
you can’t repay the loan.
Collateral can be personal
(savings, stocks and/or equity
in personally owned real estate)
or business (receivables,
inventory, equipment).
Lenders require appraisals of your collateral and they
discount the value of your assets. The total discounted
collateral amount must equal the total loan amount
requested.
Typical
discounts
include:
saleable
inventory
at 50% or
assets at 50% or lower, collectable
accounts receivable at 25% or lower,
equipment at fair market value
of book value. In the aPPenDex include the, model,
year, serial number and fair market value.
AMOUNT NEEDED
•AmountRequested $
•Owner’sInvestment $
•OtherInvestors $
Total $
USE OF FUNDS
• Inventory $
• WorkingCapital $
• Equipment,Machinery,Computers $
• Furniture&Fixtures $
•Other $
•RealEstate $
Total $
Repayment
• Period:_________years
• Source:BusinessCashFlow
• Collateral:
- Accounts Receivable $
- Inventory $
- Equipment & Machinery $
- Furniture & Fixtures $
- Equity in Real Estate $
- Other $
Total $
exaMPle:
Market Discount Discounted
Value Percentage Value
Receivable
Total
$230,000 $135,000
request of $135,000 is
based on the collateral
value of their assets.
LoanDecisions
The “1-2-3 Method” on page 30 helps you
calculate your maximum loan amount.
lOan ReQUeST
19
BalanceSheet
This is a snapshot
of your business.
A moment frozen in
time. See page 22.
hInTS FOR DeVelOPInG FInanCIalS:
Make a record of your assumptions so you can prove to the lender that your
projections are realistic.
future projections.
WaTCh FOR TheSe COMMOn FInanCIal PROBleMS:
Limitedcapital
Capital is just another word for money, and if there’s not enough of it, it can
lead to insufficient working capital (money for day-to-day activities). Don’t try
to make money stretch too far. Ask for more loan money, or cut down on
Littleornorecordkeeping
Failuretoseekoutsidehelp
Consult an accountant, gain business advisors, contact the
Administration/
Development (a quick google search will locate them). Your advisors‘
You should have a basic understanding of your company’s finances.
Poormanagement
A business needs a good financial manager (within the company or an outside
advisor). It’s your money, so be very self-disciplined.
Reluctancetoinvestinthebusiness
Why should the lender stand behind you if you won’t invest any of your own
money? You must put a percentage of your own money into the company (usually
25% to 50%).
Failuretopersonallyguaranteetheloanrepayment
If the business fails for any reason, the owners must repay the loan. Lenders
need to be assured of your total commitment.
There are Two ways To
handle your accounTing
accrual OR cash.
1. The cash method means
you don’t record a sale until
you collect money, and you
don’t record an expense
until you pay for it.
2. The accrual method,
means:
› Sales are made but payments
are not immediately collected.
Your customers pay later,
which creates “accounts
receivable.”
› Business purchases are
made, but paid for later,
creating “accounts payable.”
› Assets (like equipment) are
depreciated over their life-
time. This is tax deductible.
› Net Income does not always
mean cash, since money is
tied up in accounts receiv-
able and inventory.
F OUR FInanCIal STaTeMenTS aRe I nClUDeD In ThIS SeCTIOn :
IncomeStatement
Think of this as your
business’ “report card”
over a period of time.
See page 24.
PersonalFinancial
Statement
Your own personal
financial health will be
carefully examined by
the lender. See page 20.
CashFlow
Statement
This will show how
much money comes in
and how much goes
out. See page 26.
Accrual
Cash
vs.
aCCOUnTInG
MeThODS
1 2 3 4
FInanCIalS
20
PERSONAL FINANCIAL STATEMENT
Date ____________________________________________________________________________
Your Name and Address ________________________________________________________
Business Name and Address ____________________________________________________
Social Security ________________________ Date of Birth: __________________________
Phone: __________________ Fax: __________________________ E-mail: ______________
ASSETS & LIABILITIES
ASSETS (what you own)
Cash
$ _________________________________
Savings Accounts
$ _________________________________
Retirement Accounts
$ _________________________________
Accounts & Notes Receivable
$ _________________________________
Life Insurance, cash surrender value
$ _________________________________
Stocks & Bonds (market value)
$ _________________________________
Real Estate (market value)
$ _________________________________
Automobiles (market value)
$ _________________________________
Other Property
$ _________________________________
Other Assets
$ _________________________________
TOTAL ASSETS
$ _________________________________
LIABILITIES (what you owe)
Accounts Payable
$ _________________________________
Notes Payable
$ _________________________________
Residential Mortgage, balance
$ _________________________________
Investment Mortgage, balance
$ _________________________________
Installment Loan Balance, auto
$ _________________________________
Installment Loan Balance, other
$ _________________________________
Unpaid taxes
$ _________________________________
Other liabilities
$ _________________________________
TOTAL LIABILITIES
$ _________________________________
NET WORTH (assets less liabilities)
$ _________________________________
TOTAL LIABILITIES + NET WORTH
$__________________________________
officers, stockholders). It’s a good idea to order your credit report from the three credit bureaus and
they usually request is shown in this sample.
PERSONAL FINANCIAL STATEMENT
NotesPayable:
In the aPPenDIx,
include the name
and address of
the noteholder,
original loan
balance, current
balance, payment
amount, and what
collateral is used
for security.
OtherProperty:
Describe in the
aPPenDIx. If
any is pledged as
security/collateral,
include name
and address of
lien holder, lien
amount, and
payment terms.
LifeInsurance:
In the aPPen-
DIx, provide face
amount and cash
surrender value
of policies, name
of insurance
companies and
beneficiaries.
RealEstate:
The total is
included here. In
the aPPenDIx,
include type of
property, date
purchased,
original cost,
and the present
market value.
Also include
the mortgage
account number,
balance, and
monthly
payment.
Unpaidtaxes:
The total is
included here.
In the aPPenDIx,
specify the type of
to, when it’s due
and whether there
is a lien on any
property
Stocks&Bonds:
The total is
included here. In
the aPPenDIx,
include the
number of shares,
name
of securities,
cost, market value
with date.
1
21
In the aPPenDIx, include copies of:
bonds, real estate, and personal property.
and a copy of the last statement.
INCOME & EXPENSES
ANNUAL INCOME:
Salary, Bonuses, and Commissions $ _________________________________
Dividends, Interest, Investment income $ _________________________________
Real Estate Income $ _________________________________
Other Income $ _________________________________
TOTAL ANNUAL INCOME $ _________________________________
ANNUAL EXPENSES:
Mortgage/Rental payments $ _________________________________
Loans and notes payable $ _________________________________
Taxes: Federal, State, Local, Property $ _________________________________
Insurance premiums $ _________________________________
Alimony and child support $ _________________________________
Tuition $ _________________________________
Medical Exp./Insurance $ _________________________________
Contingent liabilities $ _________________________________
Other Debt or Liabilities $ _________________________________
TOTAL ANNUAL EXPENSES $ _________________________________
This statement is true and accurate.
I authorize any inquiries necessary to verify its accuracy.
(your signature and date) _________________________________________
AnnualExpenses:
Multiply your monthly
Contingentliabilities:
Are you an endorser,
co-maker or guarantor
of other loans? If so, are
there any legal actions
YOUR PERSONAL FINANCIAL STATEMENT
22
YOUR BalanCe SheeT InClUDeS The FOllOWInG:
Think of the balance sheet
as a seesaw. The assets
and liabilities alone are out
of balance. Capital, the last
weight you put
on the scale, makes a
perfect balance.
Assets Liabilities
▲
Assets
Liabilities+ Capital
▲
The BalanceSheet is
like a picture of your
second. The numbers
change every day.
BALANCE SHEET
Depreciation:
wear out. The value
goes down and can be
deducted. Values for
assets are presented
via a reserve for depre-
ciation. Market value
the price you could
sell it for will differ
from this figure.
OwnersInvestment:
Also called capital
or common stock in
a corporation
TotalCapital:
Also called net worth
aSSeTS
What the company owns
Current Assets
Can be converted into cash in one year
Accounts Receivable
Sales made but not collected
Inventory
Inventory on hand, waiting to be sold
Total Current Assets
Add up all of the Current Assets
Non-Current Assets
Takes one year or more to turn
into cash
This includes property, plant,
and equipment
Less Depreciation
Subtract Accumulated Depreciation
Fixed Assets minus Accumulated
Depreciation
Advances to Owners
Money that owners take out of the busi-
ness in the form of a loan to be repaid
Total Non-Current Assets
Add up all the Non-Current Assets
Total Assets
Add Current Assets and Non-Current Assets
lIaBIlITIeS
How much the company owes
Current Liabilities
Liabilities due within one year
Current Portion of
Long-Term Debt
One year’s worth of loan payments
Note Payable
Due within one year
Accounts Payable (A/P)
Purchases not paid for
Total Current Liabilities
Total all the Short-Term Liabilities
Long-Term Liabilities
Due for more than one year
Loan Payable
Due after one year’s worth of payments
Total Long-Term Liabilities
Total all the Long-Term Liabilities
Total Liabilities
Add the Current and Long-Term
Liabilities
CaPITal OR neT WORTh
The business’ equity
Owners Investment
Amount of money owners have invested
Income earned and kept in the business
Total Capital
Add Owners Investment and
Retained Earnings
Total Liabilities & Capital
Add Liabilities and Capital.
Equal to Total Assets
Max Computer Company
Balance Sheet
aSSetS
Current Assets:
Cash ................................................................ 10,000
Accounts Receivable ........................................ 75,000
Inventory (ending) ......................................... 85,000
Total Current Assets ..................................................... 170,000
Non-Current Assets
Fixed Assets ................................................. 140,000
Less Accumulated Depreciation ..................... (25,000
Fixed Assets (net) ........................................ 115,000
Advances to Owners ...................................... 6,000
Total Non-Current Assets ............................................. 121,000
Total Assets (170 + 121) ................................................ 291,000
liaBilitieS
Current Liabilities
Current Portion of Long-Term Debt ................. 6,000
Note Payable.................................................. 100,000
Accrued Taxes ................................................ 3,000
Accounts Payable(A/P) ................................... 41,000
Total Current Liabilities ............................................... 150,000
Long-Term Liabilities
Loan Payable ................................................. 54,000
Total Long-Term Liabilities ........................................... 54,000
Total Liabilities (150 + 54) .............................................. 204,000
capital or net worth
Owners Investment ...................................... 20,000
Retained Earnings ........................................ 67,000
Total Capital ................................................................. 87,000
Total Liabilities & Capital (204 + 87) .............................. 291,000
These
numbersshould
bethesame.
)
In the aPPenDIx,
include fiscal year-
end statements for
the last three years,
and an interim state-
ment not more than
three months old.
Include an opening
the balance sheet will
look like the day after
the loan closes).
2
23
These
numbersshould
bethesame.
Your Company Name
Balance Sheet
Date of Statement ______________________
aSSetS
Current Assets
Cash ....................................................................... $
Accounts Receivable ............................................... $
Inventory (ending) ................................................ $
Other Current Assets .............................................. $
Total Current Assets ......................................................................... $
Non-Current Assets
Fixed Assets ........................................................... $
Less Depreciation ................................................... $
Fixed Assets (net) .................................................. $
Advances to Owners ............................................... $
Other Non-Current Assets ...................................... $
Total Non-Current Assets ....................................... $
Total Assets............................................................................................. $
liaBilitieS
Current Liabilities
Current Portion of Long-Term Debt ......................... $
Note Payable........................................................... $
Accrued Taxes ........................................................ $
Accounts Payable(A/P) ........................................... $
Total Current Liabilities ................................................................... $
Long-Term Liabilities
Loan & Notes Payable ............................................. $
Total Long-Term Liabilities ..................................... $
Total Liabilities ................................................................................. $
capital or net worth
Owners Investment ............................................... $
Retained Earnings ................................................. $
Total Capital $
Total Liabilities & Capital $
YOUR BALANCE SHEET
24
Max Computer Company
income Statement
SaleS
Net Sales ................................................................ 900,000
Less Cost of Goods Sold:
Beginning Inventory .......................... 75,000
Purchases ......................................... 350,000
Labor ................................................. 200,000
Total ................................................. 625,000
Less: Ending Inventory .................... (85,000)
Cost of Goods Sold (625 less 85) ........................... 540,000
GROSS PROFIT (900 less 540) .............................. 360,000
expenSeS
Operating Expenses:
Selling Expenses ............................ 90,000
General & Administrative ........... 170,000
Total Expenses ....................................................... 260,000
Operating Income (360 less 260) .......................... 100,000
Interest Expense .................................................... 20,000
profit
Net Profit before taxes (100 less 20) ....................... 80,000
Less: All Income Taxes ............................................ 27,000
Net Profit (80 less 27) ............................................ 53,000
The IncomeStatement
is your company’s report
subtracted from income,
which gives you the
business’ financial
performance or net profit
(or loss). Other names for
SaleS
Revenue or income. Gross sales
is before returns and allowances. Net
sales is after returns and allowances.
Cost to make products including
materials and labor.
Comes from the Ending Inventory
of the previous year.
Purchases
Used to make product.
Labor
Used to make product only. Other
labor-related expenses are included
in the Operating Expenses section.
This number becomes the beginning
inventory for the next year’s Income
Statement.
Compute the Cost of Goods Sold.
Gross Profit
Sales less cost of goods sold.
This is your profit margin.
exPenSeS
Salaries and expenses related
to sales only.
General and Administrative
All other expenses used to run
the company.
Operating Income
(or Loss)
Shows how the business performed.
Subtract interest expense.
PROFIT
Tax rates depend on your
business’ legal status.
Net Profit
Profit left after all expenses
(including taxes) have been paid.
YOUR InCOMe STaTeMenT InClUDeS The FOllOWInG:
OperatingIncome:
In the aPPenDIx,
include three years’ fiscal
year end statements plus
an interim statement
(not more than three
months old).
Project month by
month for the first year,
quarterly for the second
year and one whole year
for the third year.
Netvs.GrossSales
Gross sales is the amount
before adjustments like
returns and allowances.
After these adjustments you
3
Important Note: Compare
numbers in the current year’s
previous year. You should
know whether income/profits
or down.
This number is pulled
on page 22.
$75,000 was the ending
inventory for the previous year
and became the beginning
25
Your Company Name
income Statement
Date of Statement ______________________
SaleS
Net Sales ............................................................................................
$
Less Cost of Goods Sold:
Beginning Inventory .................................................
$
Purchases .................................................................
$
Labor ........................................................................
$
Total ........................................................................
$
Less: Ending Inventory .............................................
-
$
Cost of Goods Sold ..............................................................................
$
GROSS PROFIT (sales less cost of goods sold) .........................................
$
expenSeS
Operating Expenses:
Selling Expenses ...................................................
$
General and Administrative ..................................
$
Total Expenses ..................................................................................
$
Operating Income ...............................................................................
$
Interest Expense .................................................................................
$
profit
Net Profit before taxes ........................................................................
$
Less: All Income Taxes ........................................................................
$
Net Profit ............................................................................................
$
YOUR INCOME STATEMENT
26
a. CaSh On hanD
B. CaSh ReCeIPTS
2. Collections from Credit Accounts
C. TOTal CaSh ReCeIPTS
D. TOTal CaSh aVaIlaBle
(A + C, before cash paid out)
e. CaSh PaID OUT:
1. Purchases (Merchandise)
2. Gross Wages
6. Repairs and maintenance
7. Advertising
8. Car, Delivery and Travel
10. Rent (real estate only)
11. Telephone
12. Utilities (Water, heat, electricity, etc.)
13. Insurance (on business property & products)
15. Interest (on loans)
18. Subtotal
F. OTheR OPeRaTInG COSTS:
1. Loan Principal Payment (include equipment)
G. TOTal CaSh PaID OUT
18 + F1 through F5)
h. CaSh POSITIOn
eSSenTIal OPeRaTInG DaTa
5. Monthly Depreciation
WhaT’S The
BIG IDea?
T
cash
“
register.” It shows money that
comes into the business and what
goes out. Profits do not guarantee
positive cash flow. You need to know
or
based on the direct and variable
costs of your products or services.
Cash must be available to pay bills on
time and for day-to-day activities.
This statement will also show an
important figure, the breakeven
point, when cash income equals the
cash outflow (see page 30).
Tipsforpreparing
CashFlowStatements:
Numbers in the Cash Flow ate-
ment will also appear in the Income
it records when cash is received,
when cash is paid, and how much
cash you have reserved.
of the loan.
increase 80% every year, this may
seem unrealistic. Prove assumptions
and include them in the aPPenDIx.
because
start-up costs are large in
the first year.
Negative balances are common in
the first year. They must be covered
by providing more cash (loans or
owners’ investments), or by reducing
Increased sales can cause a cash drain
(due to increased costs or labor).
quarterly figures in the second year,
and a lump sum in the third year.
Month 1
Month 2 Month 3 Month 4
Costs
4
27
eSSenTIal
OPeRaTInG
DaTa
The five items shown at
the bottom of the Cash Flow
Statement can be kept
separately and included at
the bottom of your monthly
cash flow projections. They
are important planning
and cash flow projection
tools.
1.
Accounts Receivable
Previous unpaid credit
sales, plus current month’s
unpaid credit sales.
2.
Bad Debt
Should be deducted from
the month. This figure is
based on past history or
industry standards.
3.
Inventory on Hand
Any products available
for sale at the end of
the month.
4.
Accounts Payable
Any accounts due at the
end of the month.
5.
Depreciation
Assets wear out and lose
value. The monthly depre-
ciation value is established
by your accountant
(as allowed by the IRS).
Month 11 Month 12Month 10Month 9Month 5 Month 6 Month 7 Month 8 Total
- PLUS -
28
WorkingCapital
QuickorAcidTest
nOTe:
money owed to you. Lower answers are better.
InventoryTurnover
nOTe:
-
rent liabilities. The answer must be positive. More money is
need
nOTe:
(or sell) your inventory. Lower answers are better.
Total Current Assets
of $170,000
(pg. 22) less
Inventory of
$85,000
(pg. 22)
Total
Current Liabilities (pg. 22)
The answer
should be 1
or more. In
the answer,
$0.56, is less
than 1. The
company
could not pay
all its current
liabilities
without
selling some
inventory.
$27,375,000
$900,000
=
30.4
Accounts
Receivable
($75,000
on pg. 22)
x 365 days
It takes
30 days
to collect
bills
$31,025,000
$540,000
=
57.4
Inventory
Figure
($85,000 on
pg. 22)
x 365 days
57 days to
turnover
or sell the
inventory
$170,000
-$150,000
=
$20,000
Current
Assets
(pg. 22)
Current
Liabilities
(pg. 22)
Working
Capital
AccountsReceivableTurnover
lIQUIDITY RaTIOS
aSSeT ManaGeMenT RaTIOS
2
1
nOTe:
inventory is eliminated. (Inventory can become
obsolete.) It’s called “quick” because it includes
items that can be turned into cash.
R
are not included in your business plan, they will be
calculated by lenders to make decisions.
Lenders and investors compare your ratios to:
Industry averages are found in the RMA Annual
nOTe: a company’s short-term debt paying
ability. This means there is $1.13 in cash and current assets
available to pay every $1 of current liabilities.
$170,000
$150,000
=
1.13
Total
Current
Assets
(pg. 22)
Total Current
Liabilities (pg. 22)
Current
Number
of times
you can
pay current
liabilities
FORMULA
$85,000
$150,000
=
.56
FORMULA
FORMULA
FORMULA
FORMULA
RaTIOS
29
CashFlowtoCurrentMaturities
(DebtService)
ProtMarginonSales
AccountsPayableTurnover
Leverage(orDebt-to-Worth)
nOTe:
Lower numbers are better.
nOTe:
of sales. If the profit margin is too low, the prices are too low,
-
pare the profit margin to previous years (if the business is over
three years old). New businesses may compare the profit mar-
gin to those published in RMA studies or by trade associations.
nOTe:
owners’ withdrawals. Lenders prefer 2 or better.
nOTe:
equity. Lower answers are better. Lenders prefer this ratio
to be 3 or lower.
$204,000
$87,000
=
2.34
Total
Liabilities
(pg. 22)
Total Capital
(pg. 22)
The
company
is leveraged
2.34 times
$53,000
$900,000
=
.0588
Net Profit
(pg. 24)
(pg. 24)
The profit
margin is
5.9%
$63,000
$6,000
=
10.5
Net Profit of
$53,000
(pg. 24) +
Depreciation
of $10,000
(amount
created
for this
Current Portion of Long-Term Debt (pg. 22). For new
businesses, use one year’s worth of loan payments.
For every
dollar of
debt, $10.50
is available
to pay it
$14,965,000
$350,000
=
42.75
Accounts
Payable at
$41,000
(pg. 22)
x 365 days
Purchases
(pg. 24)
Accounts
Payable
are paid
every
43 days
DeBT ManaGeMenT RaTIOS PROFITaBIlITY RaTIOS
3 4
VIR
Very
Important
Ratio
VIR
Very
Important
Ratio
AccountsReceivableTurnover
InventoryTurnover
WorkingCapital
QuickorAcidTest
Current
Leverage(orDebt-to-Worth)
AccountsPayableTurnover
ProtMarginonSales
CashFlowtoCurrentMaturities
(DebtService)
YOUR BUSIneSS:
RaTIO analYSIS
FORMULA
FORMULA
FORMULA
FORMULA
1
2
3
4
Liquidity
Assets
Debt
Profit
=
=
=
=
=
=
=
=
=
RaTIOS
30
The 1-2-3 MeThOD FOR lOan DeCISIOnS
DISCOUNTED
COLLATERAL
Also called
COLLATERAL
COVERAGE
THE ABILITY
TO REPAY
Also called
DEBT SERVICE
COVERAGE
EQUITY
Also called
DEBT-TO-WORTH
or LEVERAGE
Use the 1-2-3 method to pre-qualify and calculate your maximum loan amount.
EXAMPLE: ABCCompany
EXPLANATION ANSWER
covered by $1 in collateral.
Lenders discount the value
of assets (collateral) so the
discounted value must equal
the loan amount. This
covers the lender in case of
18.
For every $2 a business
has in annual cash flow,
the bank will allow $1 in
loan payments.
A business can borrow
$3 for every $1 invested.
borrow and afford to re-pay for a seven-year loan:
annual payments is half of the annual cash flow
interest rate of 11% is $17.13
When a company has neither a profit nor a loss, it is the breakeven point. It is important to
determine your breakeven point so you know the sales needed for your business to be profitable.
The
This company needs sales of $566,667 to break
even. One dollar more and the business is profitable.
One dollar less and the business shows a loss.
BREAKEVEN POINT
Determine your NetSales
$900,000
Total your VariableExpenses and divide them by the
$540,000
+$90,000
$630,000
100%
60%
+ 10%
70%
Margin.
$900,000
-$630,000
$270,000 MARGIN
100%
- 70%
30% or .30
and the answer is your BreakevenPoint
$170,000
FI(this number comes from page 24 General & Administrative)
÷ .30 MARGIN
$566,667
loan
based on
discounted
collateral is
$55K
loan
based on
the ability
to repay is
$36.5K
$75K
The lOan
DeCISIOn
The lowest of
the three answers
calculated here
The
for
ABCCompany
exaMPle:
Market Discount Discounted
Value Percentage Value
Receivable
Total
$100,000 $55,000
This is a common discount formula used with collateral:
1
2
3
4
1
2
3
FORMUlaS
31
Page8>BUSIneSS DeSCRIPTIOn
Legal documents filed with your state or municipality
Page9>BUSIneSS DeSCRIPTIOn, exPlaIneD
growth patterns and forecasts.
Page10>ManaGeRS & eMPlOYeeS
.
.
ésumés
Page11>OPeRaTIOnS & lOCaTIOn
Include proposed rentals, leases or purchases of furniture,
uppliers names, addresses, products or services supplied, costs/
quotes, delivery/shipping fees, turnaround, terms of sales,
contracts, and a purchasing plan.
Details about assistance from your suppliers.
Provide a copy of the deed if you own the business location.
If buying the location, include a purchase-and-sale agreement
and related legal documents. An appraisal of the building, the
assets and liabilities along with an environmental inspection, will
be done by the lender.
If your location is leased, include a copy of the lease
(or proposed lease) with
terms, conditions, and cost.
health, environmental, and occupational safety).
Include a floor plan,
blueprint or plot plan (if constructing location).
Pages12-15>MaRKeTInG
staff, reps, agents, brokers or wholesalers.
Page16>BUYInG a BUSIneSS
legal documents that apply to the purchase
Page18>lOan ReQUeST
-
down of
Pages20&21>PeRSOnal FInanCIal STaTeMenT
market value with the date.
Provide the face amount and cash surren-
der value, name of insurance companies and beneficiaries.
original cost, and the present market value. Also include the mort-
gage account number, loan balance, and the monthly payment.
Other property: Any pledged as security/collateral. Include the
name and address of lien holder, lien amount, and payment terms.
original loan balance, current loan balance, payment amount,
and what collateral is used for security.
owed to, the amount, when paymentt is due, and whether
there is a lien on any property.
Page21>PeRSOnal FInanCIal STaTeMenT
and real estate deeds.
Page22>BalanCe SheeT
and an interim statement (not more than two months old).
sheet the day after the loan closes).
Page24>
InCOMe & exPenSe STaTeMenT (orP&L)
Three years’ fiscal year end statements, plus
an interim statement (not more than two months old).
Provide projections month by month for the first year, quarterly for
the second year and lump sum for the third year.
The aPPenDIx comes at
the end of your business plan.
It includes all the details and
documents that support your
business plan.
The first page of your should be a listing
order they are referred to in your business plan.
The grows so it’s a good idea to use a
In general, your should include:
a) estimates for anything being purchased
b) estimates on any work to be done
c) copies of documents related to loans, mortgages,
and accounts payable to be refinanced
Done
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aPPenDIx Items Checklist
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www.ilsbdc.biz
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cooperative agreement with the U.S. Small Business
Administration and the Illinois Department of
Commerce and Economic Opportunity.
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