The company section of the business plan is where you outline the details of your company. In this section we will cover and describe the following:
- Business Ownership
- Formation and Legal Structure
- Management Team
- Company Advisors
- Fiscal Forecast
- Key Assumptions
- Fiscal Forecast
We will start with the easy part and then work ourselves up to the mathematical part of the business plan.
In the company overview, specify who owns your company. For each owner, provide some information about their background and how much ownership they have. Be sure to include formation information. If your business a sole proprietorship, partnership, LLC, or corporation.
An example of an overview introduction would be the following:
The Founders Program was founded in 2016 as a LLC, with its primary location of business being 123 Pine Drive, Entrepreneur, PA. The Founders Program is legally structured as a single member LLC, with Nathan Neil being the sole member.
Yours will likely be more detailed since this is a fake company, but you get the general idea for this.
If you have any patents or trademarks, they would be worth mentioning here as well as a short pitch for what the company offers its customers.
Here is where you get to show off the great team you have formed. If it is just you, be sure to illustrate all of the relevant experience that shows how you are able and capable of managing this company.
For each individual on your team, describe their skills, experience, and their role within the company. You need to use this space to bring in the reader and emphasize the strengths of your team to show the reader that your team is the right one to capitalize on the opportunity proposed earlier.
As you write this section, keep the following questions in mind:
- How will this individual make the team stronger?
- What specific expertise do they have?
- Do they have managerial experience?
- Do they have experience with building a new business?
- What makes their person right to help the company capitalize on the opportunity?
Having advisors, mentors, and business professionals that you can use for guidance is vital to your business’s success. Successful businesses have people that they can ask questions to about new challenges or general advice. Describe the different people that you will use to help advise your business’s direction. This can include investors, professors, small business counselors, accountants, attorneys, and other people who can help point you in the best direction.
As you describe these different advisors, talk about their background and what makes them a great resource to your company.
In this section, describe how you are going to have the capital to operate your business until it is generating enough sales volume to cover expenses. You may fund it yourself, you may get bank financing, or seek out investors. No matter what method you plan on utilizing, describe it here. If you are seeking investment capital, how much of the company’s ownership do you intend to give up. If you are using bank financing, outline the terms and interest.
Every good entrepreneur has an exit strategy and there are several that we will discuss in the following chapter. Do you intend to sell this business, go for an IPO, or turn it into a cash cow? What is your plan if the business goes south? Will you merge with another company or liquidate the assets. All of these are questions that you need to consider and investors will be looking to see what you have in mind. They will want to know that you are not married to the business and if you get an opportunity to sell out that you’ll consider the opportunity. They also want to see that you’ll know when it is time to walk away.
As we start to dive into the fiscal section of our business plan, realize that this is not the same as accounting. While we may be drafting documents that are associated with accounting, we are forecasting. Accounting looks at historical data and actual data looking at the past. We are planning for the future with a forward focused plan, which looks at our expectation for the future. Keep in mind that in this forecast, we are not “tax reporting”, but rather taking an “educated guess” at the future of the business.
Think of fiscal forecasting like weather forecasting. The meteorologist does not know for sure what the weather will be for the day or week; they are making an educated guess what the weather will be. This is exactly what we are going to be doing here.
To develop our forecast, we are obviously going to have to make some assumptions about our expenses and revenue. Before we begin to outline our forecast, we should define the assumptions that we have in place. A few good examples of assumptions could be the following:
- Anticipated Expenses Do Not Increase Above Estimates
- Permits for Business Are Approved on Schedule
- Cost of Goods Sold Does Not Increase Within Estimate Margin
- Sales Personnel Are Able to Achieve Estimated Average for Monthly Sales
- Customer Retention Remains at Estimated 80%
- Additional Employees are not Required Sooner Than Estimated
- Ability to Secure Financing to Cover Initial Expenses
- Any Government Approval Does Not Delay Business Anticipated Start Date
- Office Rental Cost Does Not Increase More Than 6% Per Year
This list can go on for a while depending on the type of business we are starting. It is very important to outline these assumptions so that if we do not hit our forecasted numbers, we can determine if it is due to one of these assumptions not hitting the expectation.
Time to break out Microsoft Excel or your preferred spreadsheet program! For our sales forecast, keep in mind to keep our sales numbers realistic. Entrepreneurs have a habit for being over optimistic with their sales goals and forecast. Set reasonable sales projections, which will act as your target numbers as you begin to operate. If you exceed your forecast that is fantastic, but keep it reasonable as you estimate your sales.
In your spreadsheet, build out different rows for the things you sell and columns for each month. For our forecast, your numbers should be monthly for the first year at a minimum. For years two and three, quarterly forecasts for sales is often acceptable. The standard business plan can vary between three to five-year forecasting. Build out your spreadsheet to what you are the most comfortable estimating. See below for an abbreviated example:
It could be useful to create a separate spreadsheet with a row for number of units and one for the sales price. Then you can see how many units it will take to sell in order to meet your sales forecast.
|January Breakdown||# of Units||Price||Sales Total|
Now that we have our sales forecast outlined, we need to account for the expenses we will incur. Running a business is expensive. There are many expenses that you will encounter and it can be easy to miss some. This is why planning and researching is so critical. From your marketing plan, you should have an idea of your marketing expenses, but there are many more we need to plan for. Talk to your advisors, business professionals, and friends knowledgeable about business to get an idea if you are missing any items from your expense forecast.
Again this is forecasting and not accounting so do your best to provide a realistic estimate. Like the sales forecast, do monthly estimates for year one, and quarterly for the next two to four years. In an Excel spreadsheet, make a list of monthly expense estimates. Do not list just a number for the total expenses, rather break it out into different categories.
Some of these will be fixed costs, like rent and payroll. Other things will be more variable based such as professional fees, electricity, equipment, and marketing.
Below is an abbreviated table to show how to line item expenses.
Proper forecasting will allow you to know how much money you need to operate your business, what you need to get started, and how much money you need to cover the business until you start to build sales.
A cash flow statement shows the dollars moving in and out of your business. Again, since this is a new business, you do not have historical data to base your cash flows on, a good practice will be to forecast this over the next 12 months. You can use the data from your sales forecast, expense forecast, and other assumptions to determine this projection.
As you formulate the cash flow forecast, be realistic on how many of your invoices will be paid in cash. Depending on your type of business, you may get paid up front. If you need to have 100% collected invoices in the first 30 days to pay your projected expenses, do not be surprised if it takes a bit longer to collect. Not all clients/customers will pay within the first 30 days.
You can find many great resources online to help build your cash flow forecast. It is recommended to use Excel or a preferred spreadsheet program.
The objective here is to outline the amount of cash received from customers and then subtract cash paid for inventory, wages, marketing, and other expenses incurred that month. From this you will know if you have a positive cash balance or more money in the bank or if you have a negative cash balance. Many businesses take a while to obtain positive cash flows. If you find it will take a while to have positive cash flows coming in then you may want to explore issuing stock for proceeds, bank loans, and other financing methods to provide capital to sustain the business.
Your income projections are essentially your pro forma (standard) profit and loss statement. For your business plan, you should detail the forecasts for your business for the next three years.
With the details from your previous forecasts, the income projections are made easier. Use the numbers from the sales, expense, and cash flow statement to formulate your yearly incomes.
First, let’s determine what your gross margin is for your sales with the following formula:
Gross Margin = Sales – Cost of Sales
Now we can calculate our net profit:
Net Profit = Gross Margin – Expenses – Interest – Taxes
When your expenses match the sales volume, you have reached your breakeven point. This is something important to determine. Determining the breakeven, will allow you to know how much capital you need to operate your business until you have enough sales to cover your expenses. You can formulate this in Excel using a combination of your sales and expense forecasts.