Guide in the preparation of Business Plan

I. EXECUTIVE SUMMARY

What is an example of a good executive summary for business plan? The executive
summary for a business plan is a brief, positive synopsis of the business that goes at the
beginning of your business plan. It is normally about two pages long and contains two-
sentence overviews of each section within the plan. Ideally, the reader will be able to
quickly grasp the key elements of your business plan from the executive summary.
It is important that the executive summary not be a dry statement. If it is to entice readers
to take an interest in your business, It should be clear, succinct, and engaging.

What Goes into an Executive Summary?

The content of the executive summary will vary between startups and established
businesses. However, there are certain elements common to both:

 The name and location of the business.

 Your company's value proposition: What sets your company apart from your
competitors?
 The marketplace need your company meets, with evidence of that need.
 The way your company's products and/or services meet that need.
 A description of your competition and the advantages your company has over them.
 A description of your target customer.
 An overview of your company's management team and how each member
contributes to its success.
 A description of the company's current developmental stage.
 A financial summary, showing projected sales and profits for the next three years in
a way that is both honest and convincing.
 If you are requesting money from a financial institution, state the specific amount
you want. For investors, state the percentage stake in the company you're offering
for their financial backing.
 A summary of major milestones so far and your goals for the future.

Startups should also include:

 A brief overview of your sales and marketing strategy.

 Your implementation plan, describing how you intend to get the business from
planning to opening.

For established businesses, be sure to add:

 Your mission statement, which is a brief description of the purpose and values of the
company.
  A short history of the company, including the products and/or services it provides
and general statistics (number of employees, locations, etc.).
 An overview of how the business has grown, both in terms of revenue and market
share.
 A financial summary for potential investors.
 A business road-map describing your plans for the company. This is also important
for investors. They will want to see how you plan to use their money to grow the
business.

When a business starts generating profits, its value can increase quickly. Be sure your
executive summary spells out explicitly how the company's ownership is divided. For the
summary, this need only be a simple statement to say, for example, that the five founding
partners will receive 20 percent ownership each. Details can be negotiated later.

Tips for Writing the Executive Summary

 Write the executive summary after you have completed the entire business plan.
 Start the executive summary with a compelling case for why you have a great
business idea. No matter how good the rest of the plan looks, no one is going to be
interested in a bad idea.
 Keep the tone upbeat, but don't oversell. While you don't need to mention ordinary
risks, it's OK to note unusual challenges. However, always be sure to highlight the
positives.
 Write in concise language using layman's terms. Anyone without knowledge of your
business should be able to understand your executive summary and recognize the
opportunity it presents.
 Do not be ambiguous. Present a clear plan for your business. Multiple options
convey indecision and uncertainty which are turn-offs for potential investors.
 Conclude your executive summary with a couple of sentences that tell the reader
why your business will be successful. Again, keep the language positive and
confident. Avoid “maybe” and “possibly.”
 When you've finished, read it back to yourself aloud. Make changes where sentences
sound awkward or don't flow well. Then give it to someone who is unfamiliar with
your business to read. Note their feedback.

The executive summary is the most important part of your business plan, but it need not be
the hardest to write. If you've written the plan, you've already done most of the work.

II. BUSINESS CONCEPT

What is a Business Concept?

Definition: A business concept is a statement that describes the reach and reason of
existence of a given business idea. In other words, it sums up the crucial elements that
define the business.
What Does Business Concept Mean?
A concise definition of what a business concept is varies from author to author. The reason
for this is that describing a business is never a formula. There are different ways to
communicate what a business do and why it exists. Nevertheless, there are some key
elements that must be explained by a business concept for it to be considered useful and
informative. First of all, the product or service being offered must be easily understood.

This means that whatever the company is offering must be clearly communicated through
the business concept. On the other hand, the target market should also be mentioned in this
concept. This market will be the segment that the business is looking to serve.

Finally, the company’s overall competitive advantage should conclude the statement, to
describe how this proposal differs from what already exists. Business concepts are
employed regularly in the business world, most commonly to present new business ideas
to potential investors and also as institutional information displayed to the public to
transmit the essential qualities and elements behind a given business.

Example
For example, Calories Watch is a mobile app designed to track the amount of calories being
burned during an exercise routine. The app calculates an estimate by inputting the nature
of the training and the time spent on it. The company’s founder Mr. Puller is preparing a
business document to potential investors where he will explain his idea and how it can
make money for them. In order to do this, he needs to come up with a business concept that
is both appealing and informative for these individuals.

As we previously discussed, a business concept explains the reason of existence and reach
of a given product or company. In this case, a business concept for Calories Watch might be
the following: “Calories Watch is a mobile app designed for fitness enthusiasts to help them
track their progress while they are training. This app measures the amount of calories
being burned by using innovating calculation methods that no other app is currently able to
provide”.

III. MARKET ANALYSIS

How to Write the Market Analysis Section of a Business Plan

The market analysis section of your business plan comes after the products or services
section and should provide a detailed overview of the industry you intend to sell your
product or service in, including statistics to support your claims.
In general, the market analysis section should include information about the industry, your
target market, your competition, and how you intend to make a place for your own product
and service. Extensive data for this section should be added to the end of the business plan
as appendices, with only the most important statistics included in the market analysis
section itself.

What Should a Market Analysis Include?

The market analysis section of your small business plan should include the following:

 Industry Description and Outlook: Detailed statistics that define the industry
including size, growth rate, trends, and outlook.
 Target Market: Who is your ideal client/customer? This data should include
demographics on the group you are targeting including age, gender, income level,
and lifestyle preferences. This section should also include data on the size of the
target market, the purchase potential and motivations of the audience, and how you
intend to reach the market.
 Market Test Results: This is where you include the results of the market research
you conducted as part of your initial investigation into the market. Details about
your testing process and supporting statistics should be included in the appendix.
 Lead Time: Lead time is the amount of time it takes for an order to be fulfilled once
a customer makes a purchase. This is where you provide information on the
research you've completed on how long it will take to handle individual orders and
large volume purchases, if applicable.
 Competitive Analysis: Who is your competition? What are the strengths and
weaknesses of the competition? What are the potential roadblocks preventing you
from entering the market?

7 Tips for Writing a Market Analysis

Here is a collection of tips to help you write an effective and well-rounded market analysis
for your small business plan.
 Use the Internet: Since much of the market analysis section relies on raw data, the
Internet is a great place to start. Demographic data can be gathered from the U.S.
Census Bureau. A series of searches can uncover information on your competition,
and you can conduct a portion of your market research online.
 Be the Customer: One of the most effective ways to gauge opportunity among your
target market is to look at your products and services through the eyes of a
purchaser. What is the problem that needs to be solved? How does the competition
solve that problem? How will you solve the problem better or differently?
 Cut to the Chase: It can be helpful to your business plan audience if you include a
summary of the market analysis section before diving into the details. This gives the
reader an idea about what's to come and helps them zero in on the most important
details quickly.
 Conduct Thorough Market Research: Put in the necessary time during the initial
exploration phase to research the market and gather as much information as you
can. Send out surveys, conduct focus groups, and ask for feedback when you have an
opportunity. Then use the data gathered as supporting materials for your market
analysis.
 Use Visual Aids: Information that is highly number-driven, such as statistics and
metrics included in the market analysis, is typically easier to grasp when it's
presented visually. Use charts and graphs to illustrate the most important numbers.
 Be Concise: In most cases, those reading your business plan already have some
understanding of the market. Include the most important data and results in the
market analysis section and move the support documentation and statistics to the
appendix.
 Relate Back to Your Business: All of the statistics and data you incorporate in
your market analysis should be related back to your company and your products
and services. When you outline the target market's needs, put the focus on how you
are uniquely positioned to fulfill those needs.

IV. MANAGEMENT TEAM

 The Management Team Section of Your Business Plan

The Goal of the Management Team Section of Your Business Plan

Your management team plan has 3 goals:

 To prove to you that you have the right team to execute on the opportunity you have

defined, and if not, to identify who you must hire to round out your current team

 To convince lenders and investors (e.g., angel investors, venture capitalists) to fund

your company (if needed)

 To document how your Board (if applicable) can best help your team succeed

What to Include in Your Management Team Section

There are three areas to include in your management team business plan as follows:

Management Team Members

For each key member of your team, document their name, title and background. 
Their backgrounds are most important in telling you and investors they are qualified to

execute. Detail what positions each member has held in the past and what they

accomplished in those positions. For example, if your VP of Sales was formerly the VP of

Sales for another company in which they grew sales from zero to $10 million, that would be

an important and compelling accomplishment to document.

Importantly, try to relate your team members’ past job experience with what you need

them to accomplish at your company. For example, if a former high school principal was on

your team, you could state that their vast experience working with both teenagers and

their parents will help them succeed in their current position (particularly if the current

position required them to work with both customer segments).

Management Team Gaps

In this section, detail if your management team currently has any gaps or missing

individuals. Not having a complete team at the time you develop your business plan. But,

you must show your plan to complete your team.

As such detail what positions are missing and who will fill the positions. For example, if you

know you need to hire a VP of Marketing, state this. Further, state the job description of this

person. For example, you might say that this hire will have 10 years’ experience managing a

marketing team, establishing new accounts, working with social media marketing, have

startup experience, etc.

To give you a “checklist” of the team members you might want to include in your

Management Team Members and/or Gaps sections, below are the most common

management titles at a growing startup (note that many are specific to tech startups):
  Founder, CEO and/or President

 Chief Operating Officer

 VP of Sales

 VP of Marketing

 VP of Web Development and/or Engineering

 UX Designer/Manager

 Product Manager

 Digital Marketing Manager

 HR Manager

 Business Development Manager

 Account Management/Customer Service Manager

 Sales Manager/Sales Staff

Board Members

If you have a Board of Directors or Board of Advisors, you would include the bios of your

Board members in this section.

A Board of Directors is a paid group of individuals who help guide your company. Typically

startups do not have such a board until they raise VC funding.

If your company is not at this stage, consider forming a Board of Advisors. Such a board is

ideal particularly if your management team is missing expertise and/or experience in

certain areas..An advisory board includes 2 to 8 individuals who act as mentors to your

business. Usually you meet with them monthly or quarterly and they help answer

questions and provide strategic guidance. You typically do not pay advisory board
members with cash, but offering them options in your company is a best practice as it

allows you to attract better board members and better motivate them.

V. MARKETING PLAN

The Marketing Plan Section of the Business Plan

The marketing plan section of the business plan explains how you're going to get your
customers to buy your products or services. The marketing plan, then, will include sections
detailing your:

 Products and services and your unique selling proposition (USP)

 Pricing strategy
 Sales and distribution plan
 Advertising and promotions plan

The easiest way to develop your marketing plan is to work through each of these sections,
referring to the market research you completed when you were writing the previous
sections of the business plan. (Note that if you are developing a marketing plan on its own,
rather than as part of a business plan, you will also need to include a target market and
a competitors' analysis section.)

Let's look at each of these four sections in detail.

Products, Services, and Your Unique Selling Proposition

Focus on the uniqueness of your product or service and how the customer will benefit from
what you're offering. Use these questions to write a paragraph summarizing these aspects
for your marketing plan:

 What are the features of your product or service?

 Describe the physical attributes of your product or service and any other relevant
features such as what it does or how it differs from competitors' offerings.
 How will your product or service benefit the customer?
  Remember that benefits can be intangible as well as tangible; for instance, if you're
selling a cleaning product, your customers will benefit by having a cleaner house,
but they may also benefit by enjoying better health. Brainstorm as many benefits as
possible to begin with, then choose to emphasize the benefits that your targeted
customers will most appreciate in your marketing plan.
 What is it that sets your product or service apart from all the rest? In other words,
what is your USP, the message you want your customers to receive about your
product or service? This will be at the heart of your marketing plan.

Examples of Unique Selling Propositions

Unique selling propositions should be short (no more than a sentence) and concise. Here
are a few great examples:

 Domino's Pizza: "We deliver hot, fresh pizza in 30 minutes or less, or it's free."
 FedEx Corporation: "When it absolutely, positively has to be there overnight."
 M&Ms: "The milk chocolate melts in your mouth, not in your hand."
 Dollar Shave Club: “Everything you need in the bathroom—from razor blades to
grooming products—automatically delivered to your door. It doesn’t get any
simpler than that.”

Pricing and Positioning Strategy

The pricing strategy portion of the marketing plan involves determining how you will price
your product or service. The price you charge has to be competitive but still allow you to
make a reasonable profit.

Being reasonable is key—you can charge any price you want to, but for every product or
service there's a limit to how much the consumer is willing to pay. Your pricing strategy
needs to take this consumer threshold into account.

The most common question small business people have about the pricing strategy section
of the marketing plan is, "How do you know what price to charge?" Basically, you set your
pricing through a process of calculating your costs, estimating the benefits to consumers,
and comparing your products, services, and prices to others that are similar.

Set your pricing by examining how much it cost you to produce the product or service and
adding a fair price for the benefits that the customer will enjoy. You may find it useful to
conduct a breakeven analysis to determine your minimum threshold. Competitor pricing
will also help guide you toward the fair market value and help you determine how high you
can reasonably go.1

The pricing strategy you outline in your marketing plan will answer the following
questions:

 What is the cost of your product or service? Make sure you include all your fixed and
variable costs when you're calculating this. The costs of labor and materials are
obvious, but you may also need to include freight costs, administrative costs, and
selling costs, for example.
 How does the pricing of your product or service compare to the market price of
similar products or services?
 Explain how the pricing of your product or service is competitive. For instance, if the
price you plan to charge is lower, why are you able to do this? If it's higher, why
would your customers be willing to pay more? This is where the strategy aspect
comes into play; will your business be more competitive if you charge more, less, or
the same as your competitors, and why?
 What kind of return on investment (ROI) are you expecting with this pricing
strategy, and within what time frame?

Sales and Distribution Plan

Remember, the primary goal of the marketing plan is to get people to buy your products or
services. Here's where you detail how this is going to happen.

There are usually three parts to the sales and distribution section, although all three parts
may not apply to your business.
Distribution Methods

 How is your product or service going to get to the customer? Will you distribute
your product or service through a website, through the mail, through sales
representatives, home delivery, or through retail?
 What distribution channel is going to be used? In a direct distribution channel, the
product or service goes directly from the manufacturer to the consumer. In a one-
stage distribution channel, it goes from manufacturer to retailer to consumer. The
traditional distribution channel is from manufacturer to wholesaler to retailer to
consumer. Outline all the different companies, people and technologies that will be
involved in the process of getting your product or service to your customer.
 What are the costs associated with distribution?
 What are the delivery terms?
 How will the distribution methods affect production time frames or delivery? How
long will it take to get your product or service to your customer?

If your business involves selling a product, you should also include information about
inventory levels and packaging in this part of your marketing plan. For instance:

 How are your products to be packaged for shipping and for display?
 Does the packaging meet all regulatory requirements (such as labeling)?
 Is the packaging appropriately coded, priced, and complementary to the product?
 What minimum inventory levels must be maintained to ensure that there is no loss
of sales due to problems such as late shipments and backorders?

Transaction Process

 What system will be used for processing orders, shipping, and billing?
 What methods of payment will customers be able to use?
 What credit terms will customers be offered? If you will offer discounts for early
payment or impose penalties for late payment, they should be mentioned in this
part of your marketing plan.
 What is your return policy?
  What warranties will the customer be offered? Describe these or any other service
guarantees.
 What after-sale support will you offer customers and what will you charge (if
anything) for this support?
 Is there a system for customer feedback so customer satisfaction (or the lack of it)
can be tracked and addressed?

Sales Strategy

 What types of salespeople will be involved (commissioned salespeople, product

demonstrators, telephone solicitors, etc.)?
 Describe your expectations of these salespeople and how sales effectiveness will be
measured.
 Will a sales training program be offered? If so, describe it in this section of the
marketing plan.
 Describe the incentives salespeople will be offered to encourage their achievements
(such as getting new accounts, the most orders, etc.).

Advertising and Promotion Plan

Essentially the advertising and promotion section of the marketing plan describes how
you're going to deliver your USP to your prospective customers. While there are literally
thousands of different promotion avenues available to you, what distinguishes a successful
plan from an unsuccessful one is the focus—and that's what your USP provides.

So think first of the message that you want to send to your target audience. Then look at
these promotion possibilities and decide which to emphasize in your marketing plan:

Advertising

The best approach to advertising is to think of it in terms of media—specifically, which

media will be most effective in reaching your target market. Then you can make decisions
about how much of your annual advertising budget you're going to spend on each medium.
What percentage of your annual advertising budget will you invest in applicable methods
of advertising, such as:

 The internet (including business website, email, social media campaigns, etc.)
 Direct mail
 Door-to-door flyer delivery
 Cooperative advertising with wholesalers, retailers, or other businesses
 Radio
 Newspapers
 Magazines
 Directories
 Billboards
 Bench/bus/subway ads
 Television

Include not only the cost of the advertising but your projections about how much business
the advertising will bring in. 

Sales Promotion

If it's appropriate to your business, you may want to incorporate sales promotional

activities into your advertising and promotion plan, such as:

 Offering free samples

 Coupons
 Point of purchase displays
 Product demonstrations

Marketing Materials

Every business will include some of these in its promotion plans. The most common
marketing material is the business card, but brochures, pamphlets, and service sheets are
also popular.

Publicity
This is another avenue of promotion that every business should use. Describe how you plan
to generate publicity. While press releases spring to mind, that's only one way to get people
spreading the word about your business. Consider:

 Product launches
 Social media
 Special events, including community involvement
 Writing articles
 Getting and using testimonials

Your Business's Website

If your business has or will have a website and a business Facebook page, describe how
these fit into your advertising and promotion plan.

Trade Shows

Trade shows can be incredibly effective promotion and sales opportunities if you pick the
right ones and go equipped to put your promotion plan into action.

Other Promotion Activities

Your promotion activities are limited only by your imagination. But whether you plan to
teach a course, sponsor a community event, or conduct an email campaign, you'll want to
include it in your advertising and promotion plan. Sporadic, disconnected attempts to
promote your product or service are bound to fail. Your goal is to plan and carry out a
sequence of focused promotion activities that will communicate the message you want to
send about your products or services.

No business is too small to have a marketing plan. After all, no business is too small for
customers or clients. And if you have these, you need to communicate with them about
what you have to offer.

VI. FINANCIAL PLAN

A comprehensive financial plan is essential to help make sure your business idea will pay
the bills, make a profit and help you achieve your financial goals.

You can get started on creating yours by following the steps below.

1. Calculate set-up costs

Research and list all the items you need to start your business to get a good idea of upfront
costs and whether you’ll need to borrow funds. Here are some examples of costs that
typically come up at the start:

 Registrations and licences, such as registering for an ABN and business name

 Rent and utilities
 Equipment and fit-out
 Starting working capital – money needed for day-to-day operations

2. Forecast profit and loss

Estimate your sales and expenses on a monthly, quarterly or yearly basis to gauge whether
you can expect to make a profit or loss for each of these periods. This will help you develop
sales targets, pricing and likely profit margins. You can base your numbers on the
performance of similar businesses in your industry by using industry benchmarks, market
research and industry analysis.

3. Work out your cash-flow projections

A business that makes a profit can still run out of cash. You may, for example, make a lot of
sales the first month, but only receive payment for these sales a month later. Completing
cash-flow projections can help you recognise whether you’ll have enough cash to run your
business or if you’ll need additional funds.

Some useful tips to keep in mind include:

 Project your cash flow at least 12 months ahead to capture any seasonality
 Be realistic – some customers may be slower to pay
 Take actions to manage your cash flow if you find a cash shortfall

4. Forecast balance sheet

List all your expected assets and liabilities after your first 12 months to create a financial
snapshot of your business. This is a good way to evaluate the financial health of your
business idea – you can use your balance sheet numbers to work out if you’ll have enough
resources after a year to run your day-to-day operations.

Your balance sheet should include these three sections:

Assets: 
This is what your business owns – examples include cash, inventory and buildings

Liabilities: 
What your business owes – examples include accounts payable and loans

Owner’s equity: 
This is the portion of the assets that belongs to the business owner. To calculate this, total
all your assets and then subtract your total liabilities.

5. Find your break-even point

Completing a break-even analysis shows you the number of sales needed to cover costs –
anything above this number can be counted as a profit. The break-even point can be useful
for analysing the sales, costs and pricing numbers used in your earlier forecasts and
judging whether your business idea is feasible. For example, if your break-even point is
years away, you may want to revisit your numbers to see if there are any opportunities to
make your business more profitable.

Things to consider are:

 Estimating realistic sales. For example, if you’re a service business you may want to
base figures on 60-70% utilisation rather than assuming all your time can be
charged
 Testing different scenarios – you can easily do this by changing your prices, costs
and sales
 Documenting the reasons behind your numbers provides credibility to your
forecasts – lenders may also request this when you need to borrow

6. Look for professional help

For extra guidance, an accountant can help you assess your prospective financial position
and ensure you’ve thought through all potential income and expenses.

VII. OPERATIONS AND MANAGEMENT PLAN

The operations and management plan is designed to describe just how the business
functions on a continuing basis. The operations plan will highlight the logistics of the
organization such as the various responsibilities of the management team, the tasks
assigned to each division within the company, and capital and expense requirements
related to the operations of the business. In fact, within the operations plan you'll develop
the next set of financial tables that will supply the foundation for the "Financial
Components" section. The financial tables that you'll develop within the operations plan
include:
*The operating expense table

*The capital requirements table

*The cost of goods table

There are two areas that need to be accounted for when planning the operations of your
company. The first area is the organizational structure of the company, and the second is
the expense and capital requirements associated with its operation.

Organizational Structure

The organizational structure of the company is an essential element within a business plan
because it provides a basis from which to project operating expenses. This is critical to the
formation of financial statements, which are heavily scrutinized by investors; therefore, the
organizational structure has to be well-defined and based within a realistic framework
given the parameters of the business.

Although every company will differ in its organizational structure, most can be divided into
several broad areas that include:

*Marketing and sales (includes customer relations and service)

*Production (including quality assurance)

*Research and development

*Administration

These are very broad classifications and it is important to keep in mind that not every
business can be divided in this manner. In fact, every business is different, and each one
must be structured according to its own requirements and goals.

Terence P. McGarty in his book, Business Plans That Win Venture Capital, lists four stages
for organizing a business:

1. Establish a list of the tasks using the broadest of classifications possible.

2. Organize these tasks into departments that produce an efficient line of communications
between staff and management.

3. Determine the type of personnel required to perform each task.

4. Establish the function of each task and how it will relate to the generation of revenue
within the company.
Once you have structured your business, however, you need to consider your overall goals
and the number of personnel required to reach those goals.

In order to determine the number of employees you'll need to meet the goals you've set for
your business, you'll need to apply the following equation to each department listed in your
organizational structure:

C÷S=P

In this equation, C represents the total number of customers, S represents the total number
of customers that can be served by each employee, and P represents the personnel
requirements. For instance, if the number of customers for first year sales is projected at
10,110 and one marketing employee is required for every 200 customers, you would need
51 employees within the marketing department.

10,110 ÷ 200 = 51

Once you calculate the number of employees that you'll need for your organization, you'll
need to determine the labor expense. The factors that need to be considered when
calculating labor expense (LE) are the personnel requirements (P) for each department
multiplied by the employee salary level (SL). Therefore, the equation would be:

P × SL = LE

Using the marketing example from above, the labor expense for that department would be:

51 × $40,000 = $2,040,000

Once the organization's operations have been planned, the expenses associated with the
operation of the business can be developed. These are usually referred to as overhead
expenses. Overhead expenses refer to all non-labor expenses required to operate the
business. Expenses can be divided into fixed -- those that must be paid, usually at the same
rate, regardless of the volume of business -- and variable (or semivariable) -- those which
change according to the amount of business.

Overhead expenses usually include the following:

*Travel

*Maintenance and repair

*Equipment leases

*Rent

*Advertising & promotion

*Supplies

*Utilities

*Packaging & shipping

*Payroll taxes and benefits

*Uncollectible receivables

*Professional services

*Insurance

*Loan payments

*Depreciation

Overhead

In order to develop the overhead expenses for the expense table used in this portion of the
business plan, you need to multiply the number of employees by the expenses associated
with each employee. Therefore, if NE represents the number of employees and EE is the
expense per employee, the following equation can be used to calculate the sum of each
overhead (OH) expense:

OH = NE × EE

In addition to the expense table, you'll also need to develop a capital requirements table
that depicts the amount of money necessary to purchase equipment you will use to
establish and continue operations. It also illustrates the amount of depreciation your
company will incur based on all equipment elements purchased with a lifetime of more
than one year.

In order to generate the capital requirements table, you first have to establish the various
elements within the business that will require capital investment. For service businesses,
capital is usually tied to the various pieces of equipment used to service customers.

Capital for manufacturing companies, on the other hand, is based on the equipment
required in order to produce the product. Manufacturing equipment usually falls into three
categories: testing equipment, assembly equipment, and packaging equipment.

With these capital elements in mind, you need to determine the number of units or
customers, in terms of sales, that each equipment item can adequately handle. This is
important because capital requirements are a product of income, which is produced
through unit sales. In order to meet sales projections, a business usually has to invest
money to increase production or supply better service. In the business plan, capital
requirements are tied to projected sales as illustrated in the revenue model shown earlier
in this chapter.

For instance, if the capital equipment required is capable of handling the needs of 10,000
customers at an average sale of $10 each, that would be $100,000 in sales, at which point
additional capital will be required in order to purchase more equipment should the
company grow beyond this point. This leads us to another factor within the capital
requirements equation, and that is equipment cost. If you multiply the cost of equipment by
the number of customers it can support in terms of sales, it would result in the capital
requirements for that particular equipment element. Therefore, you can use an equation in
which capital requirements (CR) equals sales (S) divided by number of customers (NC)
supported by each equipment element, multiplied by the average sale (AS), which is then
multiplied by the capital cost (CC) of the equipment element. Given these parameters, your
equation would look like the following:

CR = [(S &3247; NC) × AS] × CC

The capital requirements table is formed by adding all your equipment elements to
generate the total new capital for that year. During the first year, total new capital is also
the total capital required. For each successive year thereafter, total capital (TC) required is
the sum of total new capital (NC) plus total capital (PC) from the previous year, less
depreciation (D), once again, from the previous year. Therefore, your equation to arrive at
total capital for each year portrayed in the capital requirements model would be:

TC = NC + PC - D

Keep in mind that depreciation is an expense that shows the decrease in value of the
equipment throughout its effective lifetime. For many businesses, depreciation is based
upon schedules that are tied to the lifetime of the equipment. Be careful when choosing the
schedule that best fits your business. Depreciation is also the basis for a tax deduction as
well as the flow of money for new capital. You may need to seek consultation from an
expert in this area.

The last table that needs to be generated in the operations and management section of your
business plan is the cost of goods table. This table is used only for businesses where the
product is placed into inventory. For a retail or wholesale business, cost of goods sold,
or cost of sales, refers to the purchase of products for resale -- the inventory. The products
that are sold are logged into cost of goods as an expense of the sale, while those that aren't
sold remain in inventory.

For a manufacturing firm, cost of goods is the cost incurred by the company to manufacture
its product. This usually consists of three elements:

1. Material
2. Labor

3. Overhead

As in retail, the merchandise that is sold is expensed as a cost of goods, while merchandise
that isn't sold is placed in inventory. Cost of goods has to be accounted for in the operations
of a business. It is an important yardstick for measuring the firm's profitability for the cash-
flow statement and income statement.

In the income statement, the last stage of the manufacturing process is the item expensed
as cost of goods, but it is important to document the inventory still in various stages of the
manufacturing process because it represents assets to the company. This is important to
determining cash flow and to generating the balance sheet.

That is what the cost of goods table does. It is one of the most complicated tables you'll
have to develop for your business plan, but it is an integral part of portraying the flow of
inventory through your operations, the placement of assets within the company, and the
rate at which your inventory turns.

In order to generate the cost of goods table, you need a little more information in addition
to what your labor and material cost is per unit. You also need to know the total number of
units sold for the year, the percentage of units which will be fully assembled, the
percentage which will be partially assembled, and the percentage which will be in
unassembled inventory. Much of these figures will depend on the capacity of your
equipment as well as on the inventory control system you develop. Along with these
factors, you also need to know at what stage the majority of labor is performed.