What is a business plan?

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1 What is a business plan? A business plan is the presentation of an idea for a new business. When a person (or group) is planning to open a business, there is a great deal of research that must be done to help insure that the idea for a business is likely to turn into a successful business. The business plan explains the idea of the business and why it will be successful to someone who has not previously heard the idea. The business plan will describe the basic idea of the business, what the product is and who the customers will be. It will describe not only what the prospects for success are, but also what pitfalls may lie ahead. It will describe how the business will go from the plan stage to being an actual business. A business plan also describes the financial situation that the company will be facing over the next few years. In this competition, you will take on the role of a group of people who want to start a business. You will come up with an idea for a business and then investigate to determine what is necessary to make that business a success. I. Introductory Elements a. Title Page b. Table of Contents c. Executive Summary 1. Business idea 2. Goals and objectives 3. Market opportunities 4. Economics and profitability. II. III. IV. Description of Business and Product a. Vision and Mission Statement b. Business Description 1. Legal Structure c. Description of Product or Service Evaluation of Market Opportunity a. Market Size and Trends b. Customers c. Competition d. Market Share e. Differentiation/Uniqueness f. Risks Description of Development and Production a. Development of Product 1. Who will Develop Product

2 2. Milestones 3. Patents and Intellectual Property b. Production Process 1. Internal Production or Outsourcing 2. Milestones 3. Suppliers c. Labor Requirements 1. Skills needed d. Future Product Development V. Sales and Marketing Strategy a. Marketing Strategy 1. Product - Why is this product needed? 2. Price - How much will be charged & why? 3. Promotion - How will this product be presented to consumers? 4. Place - Where will product be sold; distribution; middlemen? b. Customer Service and Warranties c. Strategic Partnerships VI. VII. Management and Operations Plan a. Management Description 1. Team Member Bios / Skills 2. Mentors for Team 3. Additional Skills Needed b. Support Services c. Ownership / Board of Directors / Advisors Financials a. Initial Computations 1. Economics of one Unit 2. Fixed and Variable Costs 3. Break Even Analysis 4. Start Up Costs b. Financial Statements 1. Balance Sheet (3 Year) 2. Income Statement (3 Year) 3. Cash Flow Statement (3 Year) c. Financial Ratios 1. Return on Investment 2. Payback Period 3. Profit Margin d. Assumptions for Financial Statements & Support 1. Start-up costs 2. Cost of One Unit 3. Monthly Expenses 4. Estimated Sales 5. Balance Sheet

3 VIII. Optional Appendices a. Timeline for Business b. Sample ads; product drawings; prototypes Economics of One Unit 1. Determine the selling price of one unit of your product. (This can be one unit of a physical product like a computer, or one unit of service like building a web page.) 2. Determine the cost of materials. (If the unit is a service, there probably won't be any materials.) 3. Determine the total number of hours it will take to complete the service or build the product. (If it takes two people 4 hours each to complete one unit, the number of hours is 8.) 4. Determine the wage that you will pay for one hour of labor. That's it for the economics of one unit. The worksheet will do the rest of the calculations. Fixed Costs Calculator 1. Determine the costs for monthly expenses: rent, utilities and telephone, insurance, advertising and salaries. Determine if there are any other expenses that may also apply. Temporary help and website hosting are examples of other types of fixed expenses. 2. Establish the cost over the next three years. A quarterly cost will be calculated for you. Use this as the starting point, and then decide if these costs will remain the same, or if you expect them to go up or down over time. 3. Determine your break even point. The total fixed cost line is added for you; just divide that number by the net profit per unit from the economics of one unit calculator. 4. Determine how many units you expect to sell for each quarter. Will this number rise or fall seasonally? How long will it take for your company to achieve break even? 5. Figure the Projected gross sales revenue and the cost of goods sold for each quarter. A projected gross profit will be calculated. Start-Up Costs 1. Will you need any tools, equipment or machinery to start your business? How much will they cost.

4 2. How much money will your company need to cover operations until there is a steady flow of income coming to the business? This amount should be enough to cover any unexpected shortfalls in sales. You may need to assign a temporary value to your starting cash and then change it based on your cash flow worksheet. 3. Will you borrow any money to start the company or buy equipment? Will the loan be long or short term? Accounts Payable -- This is an entry on the balance sheet for money that is owed to vendors of the company. Generally these amounts will be paid within the next 60 days, so they are not considered to be short term loans. Vocabulary Terms Accounts Receivable -- This entry is for the amount of money that is owed to your company by customers that you extended credit to. Advertising -- Advertising allows a company to tell the benefits of a product to a potential customer. Advertising can be in a newspaper or magazine, on radio or TV, a billboard, internet or a variety of other means. Advertising is generally paid for, as opposed to publicity, which is usually free. Assets -- Assets are things of value owned by a company. Assets can be current, meaning that they are cash or will be turned into cash within 12 months, or fixed, meaning that they will be held for more than a year. Assumptions -- Assumptions are the justifications for the financial figures that are used in the business plan calculations. Balance Sheet -- This financial statement is used to look at the company at a moment in time. The balance sheet measures the assets, liabilities and owner's equity of a company. Break Even -- This is the point of sales where the company sells enough product to cover all of the variable and fixed costs associated with producing a product. The next unit sold will start to generate profit for the company. Cash -- Cash is just what it sounds like: money that the company has available. It is sometimes referred to as Cash and Cash Equivalents, because it includes not only cash on hand, but checking and savings accounts, stocks and bonds, and other items that can be turned into cash on short notice. Cash Flow -- Cash flow is the direction of money to (or from ) the company. If a firm has positive cash flow, it is making money faster than it spends it. If it has negative cash flow, it is spending money faster than it collects it. Cash Flow Statement -- The cash flow statement is the financial tool that measures the cash flow of a company. Cost of Goods Sold (COGS) -- The cost of goods sold is the total of the variable costs that go into making a product.

5 Credit -- Credit allows a customer to buy now and pay later, or a seller to sell now and collect later. Purchases and sales are recorded as Accounts Payable or Accounts Receivable. These accounts usually are due 30 to 60 days from the date of the sale. Current Assets -- These are assets that are either cash or will be able to be converted to cash within a year. Debt -- This is money that the company owes to all others. Debt includes both short term amounts like accounts payable and longer term loans that are not due in full for several years. Depreciation -- This amount is used to determine the amount that something is worth based on it's remaining useful value. Depreciation only applies to fixed asses. Dividend -- Once a company starts making more money than it is spending and has reached profitability, there are two things that can be done with the money that is generated: retain the earnings for future investment, or declare a dividend to pay back the owners of the company for their investment. Earnings -- Earnings is another name for revenues or income. Earnings Before Interest & Taxes (EBIT) -- This is one of the most commonly used measures of earnings. Estimated Sales -- The amount of sales that a company expects to have for a certain period of time. Expenses -- Expenses are what the company spends its money on. Fixed Assets -- Fixed assets are assets that are permanent for the purposes of the operation of the company. (They will not be sold within a year.) Types of fixed assets include computers, machines for manufacture, office furniture and vehicles. Fixed Costs -- Fixed costs are costs that do not vary based on the quantity of products produced, but instead stay constant. Gross Profit -- This is the amount of profit generated from total sales minus the fixed and variable costs. Gross Sales -- The total amount of sales dollars generated by a company. Income -- Money that is earned by a company. Income Statement -- The financial statement that shows how a company's income and profit change over time. Insurance -- Insurance protects a company against losses from fire or catastrophe, and also provides benefits for employees who suffer an injury on the job.

6 Inventory -- Amounts of materials awaiting production, or products awaiting sale. Labor -- 1) A term used to describe the amount of money spent for human energy producing a product. 2) The amount of human energy that is expended to produce a product. Liabilities -- Money that a company owes for things. Like assets, they can be short or long term, based on when they will be paid off. Liabilities can either be accounts payable or loans. Loans -- Loans are money that the company owes. Like assets, they can be short or long term, based on when they will be paid off. Long Term -- Something with a duration of over 12 months. Materials -- The components of a product that a company makes. Milestones -- Milestones are how you measure your progress at something. In business, milestones are ways to determine where you are on a particular task, like building a product. Net Profit -- The amount of profit that remains after all the expenses, including interest and taxes have been deducted. Net Sales -- The amount of money generated by gross sales minus the cost of goods sold. One Unit -- A single unit of production. Owners Equity -- The amount of money that the company owners have in the company. Payback Period -- The amount of time that it takes the company to generate enough profit to gain back the initial investment in the company. Profit -- The amount of money that is left after all expenses have been paid. Product -- The thing that a company makes. It is possible that a company's product is a service, or something that is made by someone else and re-sold by the company. Production -- The act of building or creating the product. Projected Gross Sales Revenue -- The amount of money that a company expects to make based on it's estimated sales. Projected Sales -- The amount of sales that a company expects to have for a certain period of time. Quarter -- A three month period of time. Ratios -- A financial tool used to get a quick look certain aspects of a company.

7 Rent -- The price that a company pays a building's owner for using the building. Re-Selling -- The process that a wholesaler or a retailer for a product uses. Retained Earnings -- Retained earnings acts as a holding account for money that the company makes. Once a company starts making more money than it is spending and has reached profitability, there are two things that can be done with the money that is generated: The company can return money to the owners, or it can invest the money in new projects that will benefit the company and the owners. Return on Investment (ROI) -- This is a ratio that measures how well the company makes use of it's money. The ROI looks at what the company is worth related to the amount of the original investment. Revenue -- Revenue is money that the company earns from selling its product or service. Salaries -- The amount of money that is paid out to employees of the company. For the business plan competition, this is regarded as different from labor, which is the money paid to produce the product or service. Sales -- A way to express how much of a product or service that a company provides for its customers. Sales can be expressed either in terms of dollars or units. Service -- A performance of labor for the benefit of another, like building a website or installing a computer. Shareholder -- A person who owns a part (a share) of a company. Shareholders Equity -- The amount of ownership that a person has in the whole of the company. If the shareholder has shares equal to one half of the company, and the company is worth $1,000, then the shareholder's equity is $500. Short Term -- A period of time less than twelve months. Short Term Loan -- A loan for an amount of money that is to be repaid within twelve months. Start-up Costs -- The amount of money needed to begin a company. It includes not only the money to buy needed goods, but also money to cover the initial expenses of the company. Stock -- 1) A way of issuing ownership of the company to investors, usually called shares of stock. 2) Inventory can also be referred to as stock. Temporary Help -- Companies often hire workers for specific duties or limited periods of time. Seasonal workers at Christmastime are an example of temporary help. Total Assets -- This is the amount of everything that the company owns, prior to subtracting debt.

8 Total Liabilities -- This is the amount of debt that a company owns on its assets. Utilities -- Power, water, gas, phone and the other services that must be installed in order for a company to operate. Variable Costs -- The costs for a product that are associated with the number of units that are produced. Vendors -- Companies that supply materials, products and services to your company. Wages -- The amount of money that a company pays its employees. Website Hosting -- For a company to have a website, it must either buy or rent equipment to hest the website, such as servers, routers, etc.

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