ESTIMATING SALES AND PROFITS
Whether the primary purpose of a projected operating statement is to obtain a bank loan estimate cash requirements or provide information for management planning you should create such a statement BEFORE you start your business. Later as operating data become available update and refine your projections regularly.
The steps for estimating monthly sales and profits are as follows:
1. Start with the store size in square feet.
2. Estimate the annual sales per square foot for the business based on sales per square foot for other businesses in the same trade area and similar businesses in other areas.
3. Calculate the total annual sales volume: dollars per square foot x square feet = total sales.
4. Estimate the seasonal sales patterns for the business attributing varying percentages of the total volume to each month of the year.
5. Allocate the total annual sales calculated in step 3 to months: annual sales x monthly percentage = monthly sales.
6. Adjust these normal monthly sales totals to reflect the start-up period, this is strictly a value judgment.
7. Deduct from the monthly sales totals the cost of goods sold. The remainder is your gross profit margin. Then deduct your fixed and variable expenses. What’s left is your net profit before taxes.
MONTHLY OPERATING STATEMENT
(The following pro forma operating statement is based on a 3 000- to 4 000-square-foot tire/battery facility with three bays at the low end four at the high end and annually doing $432 000-$720 000. The shop is open from 7 a.m. to 7 p.m. Monday through Friday 9 a.m. to 6 p.m. Saturdays 10 a.m. to 5 p.m. Sundays. Low-end payroll consists of two full-time general service personnel two part-time along with one full-time salesperson and one part-time, the high-end three full-time general service personnel two part-time plus an assistant manager/salesperson and two part-time assistants. In both cases the owner is manager.)
| INCOME | RANGE |
| Gross Sales | $36 000 to $60 000 |
| (Cost of Sales) | (15 900) to (25 000) |
| Gross Profit | $20 100 to $35 000 |
| OPERATING EXPENSES | |
| $3 000 to $4 000 | |
| Utilities/Phone | 470 to 600 |
| Owner/Manager’s Salary … | 2 500 to 3 000 |
| Payroll/Benefits/Taxes | 3 000 to 5 500 |
| Advertising/Promotion | 1 800 to 2 800 |
| Professional Services | 320 to 510 |
| 280 to 450 | |
| Repairs/Maintenance | 360 to 570 |
| Depreciation | 580 to 780 |
| Licenses/Taxes | 250 to 390 |
| Interest | 160 to 260 |
| Insurance | 830 to 1 200 |
| Miscellaneous | 200 to 300 |
| TOTAL EXPENSES | 13.75 to 20.36 |
| NET PROFIT BEFORE | |
| TAXES | $6 350 to $14 640 |
| NET PROFIT AS A PERCENTAGE OF GROSS | |
| SALES/REVENUE | 0.176 to 0.244 |
FAILURE FACTORS
Most small-business surveys show that the primary reasons for business failure lie in the following areas:
1. Inefficient control over costs and quality of product.
2. Bad stock control.
3. Under pricing of goods sold.
4. Bad customer relations.
5. Failure to promote and maintain a favorable public image.
6. Bad relations with suppliers.
7. Inability of management to reach decisions and act on them.
8. Failure to keep pace with management system.
9. Illness of key personnel.
10. Reluctance to seek professional assistance.
11. Failure to minimize taxation through tax planning.
12. Inadequate insurance.
13. Loss of impetus in sales.
14. Bad personnel relations.
15. Loss of key personnel.
16. Lack of staff training.
17. Lack of knowledge of merchandise.
18. Inability to cope adequately with competition.
19. Competition disregarded due to complacency.
20. Failure to anticipate market trends.
21. Loose control of liquid assets.
22. Insufficient working capital or incorrect gearing of capital borrowings.
23. Growth without adequate capitalization.
24. Bad budgeting.
25. Ignoring data on the company’s financial position.
26. Inadequate financial records.
27. Extending too much credit.
28. Bad credit control.
29. Over borrowing or using too much credit.
30. Bad control over receivables.
31. Loss of control through creditors’ demands.
EDITOR’S NOTE:
Although we have covered all the details necessary for you to set up and operate this business business-management experience and/or education will certainly reduce your chances of failure. If you don’t have management education or experience we highly recommend that you enroll in a small-business-management course at one of your local community colleges. You may also wish to acquire the Entrepreneurs Institute. For more information call toll-free: 1(800)421-2300, California resident’s call 1(800)352-7449.0. TIRE DEALER START-UP
START-UP
EXPENSES (Based on a new 3 000- to 4 000-square-foot tire/battery store with projected annual gross sales of $480 000-$720 000. Equipment and inventory ranges apply only to a tire-battery operation. Figures will rise if brake shock muffler and alignment services are offered, see text.)
| ITEM RANGE | |
| Rent (sec. dep. + 1st mo.) | $6 000 to $8 000 |
| Initial Tire/Battery Inventory | 9 000 to 13 500 |
| Equipment/Fixtures | 22 510 to 55 860 |
| Lease hold Improvements ($5- $10/Sq. ft.) | 15 000 to 40 000 |
| Licenses/Tax Deposits | 125 to 250 |
| Grand Opening/Advertising | 4 000 to 6 000 |
| Utilities/Phone Deposits | 150 to 400 |
| Professional Services | 960 to 1 530 |
| Owner/Operator Salary | 1 500 to 1 800 |
| Payroll | 2 000 to 3 500 |
| Supplies | 620 to 900 |
| Insurance (1st quarter) | 2 490 to 3 600 |
| Miscellaneous | 400 to 600 |
| TOTALS | 64.755 to $135.940 |
| Suggested Operating Capital | $30 000 to $50 000 |
THE BUSINESS PLAN
The process of creating a business plan forces you to take a realistic objective unemotional more or less detached look at your proposed business in its entirety. Why is it so important to see your venture as a whole? Most people who have business ideas deal with them haphazardly. Putting a business plan together and writing down specifics not only gives you a chance to see your business as creator but allows you to step outside it and take a realistic approach to implementing your creation.
A finished business plan becomes an operating tool that will help you manage your business and work toward its success. The final completed plan is the chief instrument for communicating your ideas to others business people bankers partners etc. If you seek financing for your business the plan will become the basis for your loan proposal.
A strong business plan holds few surprises for its target. It conforms to generally accepted guidelines of form and content. Aside from introductory material a business plan typically has as many as 13 sections. Each section should include specific elements that will clarify your business goals. The overall structure is as follows:
Cover sheet.
1. Statement of purpose and summary.
2. Description of business.
3. Market analysis.
4. Market strategy.
5. Design and development plans.
Operations plan.
7. Management structure.
8. Timetables and schedules.
9. Potential pitfalls.
10. Community benefits.
11. Financial data.
12. Supporting information.
13. SB A materials.
The last section is included only if the purpose of developing your business plan is to obtain SB A financing. Documents required by the SB A may be useful to you in setting up your business.
This is the order of the plan as it should appear in the bound copy: title page, statement of purpose, table of con-tents (prepared last), description of business, market analysis, market strategy, design and development plans, operations plan, management structure, timetables and schedules, potential pitfalls, community benefits, financial data, and supporting documents.
An important fact to keep in mind when preparing your plan is that you will not be creating it in the same order that it is presented.
A business plan should have a cover. There is no reason to have your work bound in leather, what is required is that it be neat and of adequate size to hold your material. Buy a blue black or brown cover at a stationery store. Further a lender is more likely to think well of you if you remain conservative in this regard than if you spend money on unnecessary show. Subtle factors like this reflect on your business judgment. In some respects the way a person reads your business plan will affect his judgment of your management ability.
Include a “title page” in your business plan. On this page put the name of the business the name(s) of the principals who own it as well as the business address and phone number. If you have a professional businesslike logo it can be used to dress up your title page.
Next comes a statement of purpose and summary and this can be labeled as such. The summary should tell the reader what you want. This is very important. All too often what the business owner desires is buried in the middle of the report. Make clear what you are asking for in the statement summary. The statement of purpose cannot be completed with numbers until you’ve calculated your capital needs. But you can write a draft sentence and leave the numbers blank to be filled in later. The summary can cite the nature of the business the legal form of operation (sole proprietorship partnership corporation limited partnership) the amount and purpose of the loan being requested repayment schedule the equity share of the borrower and the equity-debt ratio after the loan security or collateral is offered. Also listed are the market value estimates or quotes on the cost of any equipment to be purchased with the loan proceeds.
Suppose you own a business and want to expand. This is how your statement of purpose might read.
Venetian Blinds Inc. a closely-held company incorporated under the laws of the State of Ohio is seeking a loan of $75 000to purchase equipment and inventory as well as property and buildings at520Olive Street Springfield Ohio. The money will be used to perform necessary renovations and improvements to maintain sufficient cash reserves and provide adequate working capital to successfully expand an existing wholesale/retail window decorating company. The sum together with the $20 000equity investment of the principals will be sufficient to finance the transition through the expansion phase so that this recently started business can operate as an ongoing profitable enterprise.
Make it easy for the loan analysts to know your wants and capabilities, that way they can say yes or no immediately and waste neither your time nor theirs.
Whether the plan is to be used for financial or operations purpose its statement of purpose should be kept short and businesslike probably no more than half a page. It could be longer depending on how complicated the use of funds may be but the summary of a business plan like the summary of a loan application is generally no more than one page.
In financially-oriented business plans the page following might have a table that shows how the loan proceeds will be distributed the source and the use of funds. You can amplify this with a small list showing what is going to be used as collateral and the conditions of the loan you propose.
Following the statement of purpose come a table of contents, you will naturally prepare this last but be aware that you do need to include one. When you or others look over your plan you should be able to quickly find certain information financial data market information and the like.
The section describing the business provides the reader with a general idea of the venture. Include any variables that provide insight into the business the industry and its markets.
In the market analysis section your main objectives are to provide research that defines the potential customers the size of the market the competition and how much of the market share you can reasonably hope to attain. This is perhaps the most important section you’ll be deal- A ling with. You’ll be developing expected v sales figures that define factors to be discussed in later sections. Because of this it may be to your advantage to complete this section before any other in the business plan.
Once you have defined your potential market and expected sales figures you have to detail how you will reach those projections. Based on your marketing analysis you want to describe exactly what your marketing strategy will be.
The section on design and development plans is geared toward detailing the status of the proposed product or service before it is ready to hit the market, if your product or service is already completely developed you can forego this section.
If you have developed the idea but not the product have plans to improve an existing product or are an existing company with plans to introduce a new product this section is extremely important to the business plan. The investor will want to know the development progress of any product or service concept costs associated with making it a marketable item as well as the estimated period of time.
In the operations section you’ll want to describe your facility requirements plus any production or inventory-purchasing plans. It is essential to present any costs the business will acquire in the production and inventory cycle.
Of course any investors will also be interested in the management structure of the organization. They are going to want to know who will run the business what type of support personnel there will be etc. They will also want to know what kind of compensation any management personnel will receive as well as any equity positions that may be given in order to attract key individuals.
After the management section you’ll coordinate all the preceding information into a timetable that will chart the development of the company from start-up to a projected break-even and beyond. This is an integral step to raising money. Your main task in this section is to Interrelate all the major events involved in your company’s growth to projected deadlines for the completion of those items.
The pitfall section is included to show that you have thought of all the potential difficulties you might encounter when starting this venture. This type of information lends credibility to your ability to manage and conceptualize the various risks involved in business.
Aside from the pitfalls you also want to show potential investors the community benefits that will be derived from your business. This would include the economic impact of your business upon the community in the form of jobs increased money circulated through the local area living standards etc. In addition describe how your business will affect the human element as well as the community in general. If you’re providing a product or service that is unavailable in that community this is a definite plus, if your business will increase community pride that is another benefit.
Supporting documents follow the financial data. Some people prefer to put a half-page summary of personal information right after the summary of the business and before the table of contents. This is a matter of discretion; many advisors believe that it makes sense because lenders are investing in the individual as much or more than they are in a business. Frequently individual tenacity dedication and character are the deciding factors of success in small business. In any case it’s important for lenders to know that they have a person able to make a go at a business, a personal summary following the first summary of the business can give them this information.
Personal data might show you’re educational and work history in a functional way and things you’ve done that support your ability to run a business. Credit references and a summarized financial statement can be included as well; any financial statement should be no more than 60 days old. Keep this in mind if you’re presenting a plan to different prospects for a period longer than this and update your financial statement as required.
This is just a brief overview of what is needed in a business plan. For more information that will guide you through the preparation of a business plan see Entrepreneur’s detailed report No. X3402 How to Develop a Successful Business Plan?