8th edition How to Write a Business Plan by Mike McKeever EIGHTH EDITION FEBRUARY 2007 Editor RICHARD STIM Book Design TE RRI HEARSH Proofreading ROBERT WELLS Index ELLEN SHERRON Printing DELTA PRINTING SOLUTIONS, INC. McKeever, Mike P. How to write a business plan / by Mike McKeever 8th ed. p. cm. Includes index. I SBN-13: 978-1-4133-0562-3 (alk. paper) ISBN-10: 1-4133-0562-8 (alk. paper) 1. Business planning. 2. New business enterprises Planning. 3. New business enterprises Finance. 4. Small business Planning. 5. Small business Finance. I. Title. HD3 0.28.M3839 2007 658.15'224—dc22 2006046797 Copyright © 1984, 1986, 1988, 1992, 1999, 2002, 2004, and 2007 by Mike P. McKeever. ALL RIGHTS RESERVED. Printed in the U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher and the author. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact the Special S ales Department. For academic sales or textbook adoptions, ask for Academic Sales. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, CA 94710. About the Author Mike P. McKeever’s education, work experience, business ownership, writing, and teaching careers give him a broad and unique perspective on business planning. He has a BA in Economics from Whittier College and a Master’s in Economics from the London (England) School of Economics, and has done postgraduate work in financial analysis at the USC Business School. Mike has taught classes at numerous community colleges in entrepreneurship and small business management. He has published articles on entrepreneurship for Dow Jones publications, the Sloan Publications Business Journal, and numerous newspapers and periodicals. Mike has successfully purchased, expanded, and sold a number of businesses, including a manufacturing company, tune-up shop, gas station, retail store, and commercial building. He has worked for a variety of companies ranging from small groceries to multimillion-dollar manufacturers. As an independent business broker, he assessed the strengths and weaknesses of hundreds of companies. As senior financial analyst for a Fortune 500 company, he wrote and analyzed nearly 500 business plans. Currently, Mike runs a company, Business Plan Workshop, in which this book features prominently. He conducts workshops for groups of small business owners and takes each person through the actual steps of completing a business plan for his or her individual business. I How to Use This Book What Kind of Plan Do You Need? 2 Getting Started 4 And a Few More Words 5 1 Benefits of Writing a Business Plan What Is a Business Plan? 8 Why Write a Business Plan? 8 Issues Beyond the Plan 10 2 Do You Really Want to Own a Business? Introduction 14 Self-Evaluation Exercises 15 How to Use the Self-Evaluation Lists 19 Reality Check: Banker’s Analysis 19 3 Choosing the Right Business Introduction 24 Know Your Business 24 Be Sure You Like Your Business 26 Describe Your Business 26 Taste, Trends, and Technology: How Will the Future Affect Your Business? 32 B reak-Even Analysis: Will Your Business Make Money? 36 What You Have Accomplished 48 Table of Contents 4 Potential Sources of Money to Start or Expand Your Small Business Introduction 53 Ways to Raise Money 53 Common Money Sources to Start or Expand a Business 61 Additional Money Sources for an Existing Business 70 If No One Will Finance Your Business, Try Again 72 Secondary Sources of Financing for Start-Ups or Expansions 73 Conclusion 76 5 Your Resume and Financial Statement Introduction 78 Draft Your Business Accomplishment Resume 78 D raft Your Personal Financial Statement 85 6 Your Profit and Loss Forecast Introduction 102 What Is a Profit and Loss Forecast? 102 D etermine Your Average Cost of Sales 103 C omplete Your Profit and Loss Forecast 106 R eview Your Profit and Loss Forecast 118 7 Your Cash Flow Forecast and Capital Spending Plan Introduction 122 Prepare Your Capital Spending Plan 123 P repare Your Cash Flow Forecast 125 R equired Investment for Your Business 135 Check for Trouble 136 8 Write Your Marketing and Personnel Plans Introduction 140 Marketing Plan 140 Personnel Plan 153 9 Editing and Finalizing Your Business Plan Introduction 158 Decide How to Organize Your Plan 158 W rite Final Portions of Your Plan 159 Create the Appendix 164 C reate Title Page and Table of Contents 165 Complete Your Final Edit 166 C onsider Using a Business Consultant 167 10 Selling Your Business Plan How to Ask for the Money You Need 170 How to Approach Different Backers 172 What to Do When Someone Says “Yes” 176 P lan in Advance for Legal Details 177 11 After You Open—Keeping on the Path to Success Introduction 182 Watch Out for Problem Areas 182 Getting Out of Business 186 12 Good Resources for Small Businesses Introduction 190 Business Consultants 190 Books 192 Pamphlets 198 M agazines—Continuing Small Business Help 198 Computers and Business 199 Online Business Resources 202 Formal Education 204 Appendixes A Business Plan for a Small Service Business 207 B Business Plan for a Manufacturing Business 223 C Business Plan for Project Develpment 241 D How to Use the CD-ROM Installing the Form Files Onto Your Computer 252 Using the Financial Planning Spreadsheets 253 Using the Business Plan Files 255 Index What Kind of Plan Do You Need? 2 Meet Antoinette 4 Getting Started 4 And a Few More Words 5 How to Use This Book I INTRODUCTION 2 | HOW TO WRITE A BUSINESS PLAN “Nine to five ain’t takin me where I’m bound.” —Neil Diamond, from “Thank the Lord for the Nighttime” “You’ve got to be careful if you don’t know where you’re going because you might not get there.” —Yogi Berra Here is a book designed to help you write a first-rate business plan and loan application. How to Write a Business Plan contains detailed forms and step-by-step instructions designed to help you prepare a well-thought- out, well-organized plan. It shows you how to apply proven financial and business planning techniques used by traditional lenders and investors to your benefit. Coupled with your positive energy and will to succeed, this book shows you how to design a business plan and loan package you will be proud to show to the loan officer at your bank, the Small Business Administration, or your Uncle Harry. But this book does more than just take you through the steps of writing a business plan. More importantly, the tools and techniques in this book help you decide if your business idea will work. The same financial and analytical tools necessary to convince potential lenders and investors that your business idea is sound can help you decide whether your idea is the right business for you. After working with hundreds of business owners, I have observed an almost universal truth about business planning: Writing a plan is an internal journey through the mind of one person. Even in partnerships and corporations, usually one person has the vision and energy to take an idea and turn it into a business by writing a business plan. For that reason, I have addressed this book to the business owner as a single individual rather than a husband and wife team, group, committee, partnership, or corporation. What Kind of Plan Do You Need? You can use How to Write a Business Plan to write whatever type of plan best suits your needs: • Complete business plan. By writing this type of plan, you’ll gain a thorough understanding of all aspects of your business. A complete business plan is especially helpful for people who are starting a new business. This form of plan is also excellent for convincing prospective backers to support your business. You’ll be more successful in raising the money you need if you answer all of your potential backers’ questions. A complete plan should include the following elements: Title Page: Chapter 9 Plan Summary: Chapter 9 Table of Contents: Chapter 9 Problem Statement: Chapter 3 Business Description: Chapter 3 Business Accomplishments: Chapter 5 Marketing Plan: Chapter 8 Sales Revenue Forecast: Chapter 3 Profit and Loss Forecast: Chapter 6 INTRODUCTION | HOW TO USE THIS BOOK | 3 Capital Spending Plan: Chapter 7 Cash Flow Forecast: Chapter 7 Future Trends: Chapter 3 Risks Facing Your Business: Chapter 8 Personnel Plan: Chapter 8 n Business Personality: Chapter 8 n Staffing Schedule: Chapter 8 n Job Descriptions: Chapter 8 Specific Business Goals: Chapter 2 Personal Financial Statement: Chapter 5 Personal Background (Your Strong and Weak Points, General and Specific Skills Your Business Needs, Your Likes and Dislikes): Chapter 2 Appendix: Table of Contents: Chapter 9 Appendix: Supporting Documents: Chapter 9. • Quick plan (one-day plan). This method allows you to produce a basic business plan in a short time—as little as one day in some cases. If you know your business, are familiar with and able to make financial projections, and have done the necessary research, you may be able to create a plan in one day. But understand that a quick plan is a stripped-down version of a business plan. It won’t convince either you or your prospective backers that your business idea is sound. It is appropriate only if your business idea is very simple or someone has already committed to backing your venture. Most lenders and investors receive many requests for money every week and they develop a set of criteria that helps them screen proposals. The basic information in a quick plan is usually not enough for them to make a decision. Sad to say, most busy backers will turn down a proposal before they will ask for more information. Potential backers, just like most people, prefer a deluxe version with all the extras to a stripped-down model. A stripped-down quick plan has these few components: Title Page: Chapter 9 Plan Summary: Chapter 9 Table of Contents: Chapter 9 Problem Statement: Chapter 3 Business Description: Chapter 3 Business Accomplishments: Chapter 5 Sales Revenue Forecast: Chapter 3 Profit and Loss Forecast: Chapter 6 Capital Spending Plan: Chapter 7 Cash Flow Forecast: Chapter 7 Supporting Documents: Chapter 9. Quick Plan. The “quick plan” icon appears at the beginning of each chapter containing quick plan components and guides you to the sections you’ll need. • Customized plan. Of course, you can start with a quick plan and add components from the complete business plan to suit your needs. When deciding what to include and what to exclude, ask yourself: n Which of my statements are the strongest? n Which statements do my backers want to see? [...]...  |  How to Write a business Plan Note that the appendixes contain blank forms as well as business plans for a small service business, a manufacturing business, and a project development All the forms (except for the Loan Interest Calculation Chart) and business plans are included on and thought processes as an example of a complete and well-prepared business plan for a retail store You’ll find parts... of a task Occasionally, 28  |  How to Write a business Plan a service business sells products as an ancillary function For example, a baby diaper cleaning service may also sell diapers and baby accessories Service business ­customers normally come from repeats and referrals It’s common to have to meet state licensing requirements Hairdressers, carpet cleaners, con­ sultants, housecleaners, accountants,... Needs 1 How to motivate employees 2 How to keep decent records 3 How to make customers and employees think the business is special 4 How to know what the customers want—today and, more important in the clothing business, to keep half-astep ahead 5 How to sell 6 How to manage inventory 7 How to judge people Your Likes and Dislikes Take a few minutes and make a list of the things you really like doing and... Plan “Marry in haste, repent at leisure.” (proverb) A stitch in time saves nine.” (proverb) What Is a Business Plan? A business plan is a written statement that d ­ escribes and analyzes your business and gives detailed projections about its future A business plan also covers the financial aspects of starting or expanding your business how much money you need and how you’ll pay it back Writing a business. .. so, how will I deal with them and what regulatory agencies handle them? 2 Is there a pool of readily available, afford­ able skilled labor where I want to locate? 3 Will I make products for inventory or per order? 4 Will I make one product only or a line of p ­ roducts? 32  |  How to Write a business Plan 5 If I succeed on a small scale, do I plan to sell out to a larger company or try to compete ­nationally... disasters 10  |  How to Write a business Plan A written business plan gives you a clear course toward the future and makes your decision making easier Some problems and opportunities may represent a change of direction worth following, while others may be distractions that referring to your business plan will enable you to avoid The black and white of your written business plan will help you face facts... and she has allowed me to use her plans Getting Started Before you sit down to write your plan, you’ll want to gather together these essentials: • a word processor or typewriter • a calculator or computer spreadsheet p ­ rogram • a good supply of 8½" by 11" typing paper • several pencils and a good eraser • access to a photocopy machine Now, here’s a word about revisions and changing your plan I firmly... I am willing to make short-term sacrifices to achieve long-term benefits and to do whatever is necessary—no matter the inconvenience— to reach my goals.” Reality Check: Banker’s Analysis Banks and institutions that lend money have a lot of knowledge about the success rate of small businesses Bankers are often overly cautious in making loans to small businesses For that very reason it makes sense to. .. “he” in some instances and “she” in others I hope I have arrived at a fair balance Also, keep in mind that wherever possible, this book uses plain language, not jargon As result you may find that I have often substituted simple terminology for traditional business plan lingo n chapter 1 Benefits of Writing a Business Plan What Is a Business Plan? .8 Why Write a Business Plan? .8... plan You have accomplished several things if you have followed these steps You have looked ­inside and asked yourself some basic questions about who you are and what you are realistically qualified to do As a result, you should now have a better idea of whether you are willing to pay the price required to be successful as a small businessperson If you are still eager to have a business, you have said, . make financial projections, and have done the necessary research, you may be able to create a plan in one day. But understand that a quick plan is a stripped-down version of a business plan. . individual rather than a husband and wife team, group, committee, partnership, or corporation. What Kind of Plan Do You Need? You can use How to Write a Business Plan to write whatever type of plan. 2 Getting Started 4 And a Few More Words 5 1 Benefits of Writing a Business Plan What Is a Business Plan? 8 Why Write a Business Plan? 8 Issues Beyond the Plan 10 2 Do You Really Want to Own a Business? Introduction