A8/A9: Business Plan Financials

Business Plan Financials

Mike S. Reyes, MBASr. Certified Business AdvisorUTSA Institute for Economic Development Small Business Development Center

Copyright - UTSA SBDC 2008

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Brief review of business planning process

Analyze Market to arrive at Sales Projections

Financial Analysis The Credit Process Financing Needs-Purpose &

Types of Loans Q&A and Evaluations

Agenda


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SBDC Mission Promote

• Growth• Expansion• Innovation• Increased Productivity• Improved Management


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Training Feasibility Business Plan Internet IRS Tax Education QuickBooks Pro Accounting How to Market Your Business Money Management for Small Businesses

UTSA SBDC Services


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Counseling Confidential, by appointment only Business Startups and Existing Businesses Analysis of Business Operation Financial Analysis-Format Human Resources Recordkeeping Marketing Research Information

UTSA SBDC Counseling Services


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Business Plan Development Feasibility Analysis

Funding Needs

Loan Proposal Structuring

Lender Evaluation

SBA Eligibility/Credit


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Business Plan Tips Purpose Your “reader” Content vs. length Organized information

gathering system

Financial proposal


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Business Plan

Cover letter

Executive Summary

Table of Contents

Definition of Product or Service

Operations Overview

Market Analysis


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Business Plan

Marketing Plan

Management Profile

Financial Analysis

Supporting documents

As you are writing your business plan, keep a running log of all expenditures to make sure the narrative corresponds with the financials.


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Market Research

Market Research

Industry trends

Description of total market

Competitive analysis

Demographic information

Documentation of demand for product or service


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Research StrategiesFree Small Business Resources Online

SBDC National Information Clearinghousehttp://sbdcnet.utsa.edu

Links of interest for entrepreneurs. Of particular interest isthe Industry Research section.

SIC/NAICSU.S. Census Bureauhttp://www.census.gov/epcd/www/naics.html

Identify the SIC and/or NAICS code for your line of business

http://sbdcnet.utsa.edu/


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Research StrategiesIndustry TrendsBizJournalshttp://www.bizjournals.com/Search Business Journals to find relevant business articles. Free site, requires registration. Searchable by industry and market (i.e. city). FindArticleshttp://www.findarticles.com/

Search for articles from numerous leading academic, industry and general interest publications. Industry Linkshttp://www.irs.gov/businesses/small/industries/index.html

Competitors/SuppliersSuperPageshttp://www.superpages.com/Searchable by keyword by city, state or zip code. Also searchable by distance up to 100 miles from an address. Results can be viewed on a map.


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Research StrategiesWage Setting InformationU.S. Department of Labor - Bureau of Labor Statisticshttp://www.bls.gov/bls/blswage.htmIdentify wages for specific occupations on a national, regional, state, or

Metropolitan Statistical Data (MSA) level. America’s Career InfoNethttp://www.acinet.org//acinet/select_occupation.asp?stifips=&next=occ_repWages and trends by occupation and state.

DemographicsAmerican FactFinder from the U.S. Census Bureauhttp://factfinder.census.gov View demographic information by a state, county, city, or zip code level.


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Startup Costs


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H O W M U C H W IL L IT C O S T Y O U T O A C C O M P L IS H Y O U R P R O J E C T ?

T he se f ig ure s s ho u ld b e re f le c te d in the p re -s ta rtup c o lum n o f yo ur c a s h f lo w s ta te m e nt. A llo w e no ug h w o rk ing c a p ita l fo r e xp e n se s d u r ing the e a r ly p e r io d .

N O T E S :

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DES C RIP T IO N AM O U NT

B u i ld ing 75,000$ L a n d 20,000$ R e m o d e l in g /Im p ro ve m e n ts 30,000$ F ixtu re s & E q u ip m e n t 8,500$ F u rn i tu r e 1,000$ O u td o o r S ig n 1,500$ In ve n to ry 25,000$ D e p o s i ts 5,000$ As s o cia tio n F e e 200$ Ad ve rti s in g 1,800$ L ice n s e , P e rm i ts , In s u ra n c e 500$ O ffic e /O p e ra tin g S u pp l ie s 200$ L o a n Fe e s (4 .5 % ) 6,300$ W o rk ing C a p i ta l 25,000$

T O T A L S T A RT UP C O S T S 200,000$

A . S T A R T U P C O S T S

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N O T E S :

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O f t h e t o t a l p r o j e c t c o s t y o u ' v e i d e n t i f i e d f o r s t a r t i n g t h e b u s i n e s s , h o w m u c h a r e y o u c o n t r i b u t i n g , a n d h o w m u c h c o m e s f r o m t h e f i n a n c i a l i n s t i t u t i o n o r i n v e s t o r ? W h a t i s t h e m o n e y b e i n g s p e n t o n ?

D e s c r i p t i o n L o a n O w n e r T o t a lI n j e c t i o n

I n v e n t o r y 4 , 0 0 0$ 2 1 , 0 0 0$ 2 5 , 0 0 0$ F u r n i t u r e a n d E q u i p m e n t 1 1 , 0 0 0$ 1 1 , 0 0 0$ L a n d 2 0 , 0 0 0$ 2 0 , 0 0 0$ B u i l d i n g 7 5 , 0 0 0$ 7 5 , 0 0 0$ I m p r o v e m e n t s 3 0 , 0 0 0$ 3 0 , 0 0 0$ D e p o s i t s 5 , 0 0 0$ 5 , 0 0 0$ W o r k i n g C a p i t a l 2 5 , 0 0 0$ 2 5 , 0 0 0$ O r g a n i z a t i o n a l C o s t s 9 , 0 0 0$ 9 , 0 0 0$

T O T A L 1 4 0 , 0 0 0$ 6 0 , 0 0 0$ 2 0 0 , 0 0 0$

B . S O U R C E A N D U S E O F F U N D S

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Purpose - to show how money for transactions is accounted for in a given time period.

Indicates revenue, expenses, and resulting profits for that period of time.

Profit & Loss Statement (Income Statement)


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Key Elements of the Income Statement

Gross Sales Cost of Goods Sold Gross Income Operating Costs

General & Admin Rent, Wages Utilities Ad & Promotions Etc.

Depreciation & Amortization Expense

Operating Income Interest Income Interest Expense Income Before

Taxes Income Taxes Net Income


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Income/P&L StatementYear 1

Gross Sales $300,000

Less COGS $218,000

Gross Profit $82,000

Less Operating Exp.

Rent, wages, utilities, etc.

$58,000

Profit before Tax $24,000


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Use assumptions from market research and industry averages

Realistic seasonal sales by the month Method of payment for services

Cash / Checks Credit / Debit cards Credit terms (30 days)

Inventory purchasing Use several different ways to project sales Can the business sustain slow periods

Cash Flow Projections


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Key Elements of the Cash Flow Statement

1) Cash inflow and outflow from operations

2) Cash inflow and outflow from investing

3) Cash inflow and outflow from financing

OutfloOutfloww

InfloInfloww

CASHCASH


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Cash Flow

Reasonable

assumptionsSeasonality

Aging of

accounts receivable

Month 1 Month 2 Month 3

Cash on Hand 25,000 23,000 24,000

Plus Revenues

12,000 19,000 22,000

Available Cash

37,000 42,000 46,000

Less Expenses

14,000 18,000 20,000

End of Month 23,000 24,000 26,0000


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Purpose- to provide a ‘snapshot’ of a business’s financial position at a given point in time.

Illustrates what the business owns, what it owes and what the business’s net worth is at a given point in time.

Total assets should equal the sum of the total liabilities and the net worth.

Balance Sheet


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Key Elements of the Balance Sheet

Current Assets Cash & Cash

Equivalents Accounts Receivable Inventories

Fixed Assets Property, Plant &

Equipment Intangible Assets

Liabilities & Capital /Net Worth

Current Liabilities Current portion of

long term debt Accounts Payable Accrued Payroll

Long term Liabilities Long-term Debt

Net Worth (Equity)


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F. BALANCE SHEET PROJECTION

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Start-up Year-End

Current Assets

Cash 25,000 52,218 23.0%

Accounts Receivable 0 1,350 0.6%

Inventory 25,000 31,706 13.9%

Deposits 5,000 5,000 2.2%

Other Current Assets 0 0 0.0%

Total Current Assets 55,000 90,274 39.7%

Property & Equipment

Furniture & Equipment 11,000 11,000 4.8%

Land 20,000 20,000 8.8%

Building 75,000 75,000 33.0%

Improvements 30,000 30,000 13.2%

Acc. Depreciation 0 -6,018 -2.6%

Total Property & Equipment 136,000 129,982 57.1%

Other Assets

Organizational Costs (Net Amort.) 9,000 7,200 3.2%

Total Assets 200,000 227,456 100.0%

Current Liabilities

Accounts Payable 0 6,033 2.7%

Income Taxes Payable 0 1,088 0.5%

Payroll Tax Payable 0 231 0.1%

Sales Tax Payable 0 0 0.0%

Current LT. Debt (Bank) 4,063 4,510 2.0%

Total Current Liabilities 4,063 11,861 5.2%

Long-Term Liabilities

Long-Term Debt 135,937 131,427 57.8%

Total Long-Term Liabilities 135,937 131,427 57.8%

Total Liabilities 140,000 143,288 63.0%

Capital

Owner's Equity 60,000 60,000 26.4%

Dividend Distributions

Retained Earnings

Current Profit or (Loss) 0 24,168 10.6%

Total Capital 60,000 84,168 37.0%

Total Capital & Liabilities 200,000 227,456 100.0%


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Personal Financial Data Personal Balance Sheet

•Resources

•Obligations

•Dependence on business

o Credit Report

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Financing Needs

Purpose & Types of Loans


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Determining Sources & Uses of Funds

Sources should match Uses

Long lasting (fixed) assets funded by long term or equity funds Ex. Buildings with mortgage loans

Short term (current) assets funded by short or “current” liabilities


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Purpose of Loans (Short term) Short term (< 1 year):

Working capital A/R financing Inventory increases Raw material increases Payroll gaps

Business cycle (Seasonal) loans Peak selling seasons Ag loans

Interim construction loans


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Types of (Short Term) Loans

Term loans (90-180 days) Revolving lines of credit Letters of credit Business Credit cards Interim construction loans(< 1 year) Shareholder (subordinated) loans


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Purpose (long term) Loans

Long term loans (> 1 year) Equipment loans Leasehold improvements Permanent working capital Product development ( R&D) Real Estate

Expand existing facilities Build new facility


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Types of (long term) Loans

Installment Principal & interest

Self amortizing Balloon payment Real estate

Interim Permanent


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Existing Businesses Historic Information

Past three year trend analysis

Start-up Businesses Market Share Analyze Competition Production Capacity

Forecasting Techniques


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Projected Target Market Sales

Total hair salon sales, Your City = $2 mm

Total number of hair salons = 12 Average Sales per salon

($2mm/12) = $167k Projected sales

Conservative $167 x .80= $133k Expected $ 167 x 1.0 = $167k Best case $167 x 1.2 = $200k


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Industry related factors Competitor related factors Customer related factors Other factors

Economy Regulations Etc.

Factors to Consider when Targeting the Right Price


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Pricing Characteristics

Elasticity of demand Competitors price range Perceived image Intangibles

Quality Service Added value Convenience


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Lender Evaluation


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The Expectations of the Banker


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A Banker ...

When developing your business plan and loan proposal, remember to address the needs of your reader.

…is not a venture capitalist.

…is not a private investor.

…is not a microloan lender.

…wants reasonable assurance of repayment ability from the cash flow of the business.


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Six C’s of Credit

Character Honesty Reliability Trustworthiness

Credit History Past payment record Public records

Capacity Financial strength Ability to manage business


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Six C’s of Credit

Capital Cushion for recessionary times Commitment to business Value as investment

Collateral Secondary repayment source Reduces loss to bank (liquidation) Willingness to pledge personal assets


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Six C’s of Credit

Conditions External forces that can affect business (From

Market Research) Economic Social psychographics Regulatory

Poor business cycle timing Competitive environment (Market Research)


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Borrowing Reality

•Owner Injection: 25-30% for startup

•Existing: 20-25% equity

•Good Credit

•Collateral

•Repayment ability


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Choosing a Bank

Talk to your present banker: Knows your business Track record Credit history Help from SBA/SBDC for banker

SBA PLP/CLP bank list (www.sba.gov)


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SBA Programs & Eligibility


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Benefits Reduces Risk to

Lender

Longer Terms

Lower Interest

Supports Start-up Position


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SBA Eligibility/Credit Eligibility

Business size

Type of business

Legal

Non-investment property

Use of proceeds

Credit Analysis

Role as a guarantor

Benefits to obtaining an SBA guarantee


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Most Common Ineligible Businesses or Situations Non-profit Financial Institutions Real Estate Investment (non-owner

occupied) Limited membership clubs Over 1/3 revenue from legal

gambling Default on federal loans Probation/Parole Religious teaching Prurient sexual nature


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Loan Purposes

Working Capital Machinery &Equipment Inventory Furniture & Fixtures Leasehold Improvements Expansion Renovations


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Loan Purposes

Construction of new building Land Debt-refinancing Buy existing business Franchise Home-Based


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SBA Loan Programs Regular 7(a) Loan Guaranty Program

Guaranty up to $1,500,000Specialized MicroLoan <$50,000

Accion & South Tx. Bus. Fund SBA Express up to $350,000 SBA Patriot Express up to $500K

504 Loan Program <$1.MM Debenture CAPLines; Standard Line <$2,000,000

Small Asset Based <$200,000 International Trade & Export Working

Capital >$1.25MM Disaster FEMA LOANS


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SBA Patriot Express-Highlights

Purpose to help vets with Small Business ventures

Service related Veteran Service – disabled vets Reservists & National Guard Current spouses of above Widowed spouse of veteran

See counselor for more details


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SBA Loan Guarantees:Step By Step

Develop a business plan Present to lender, who

screens/recommends Loan Committee decision may stipulate

SBA SBA Loan Officer review SBA approve, withdraw or decline Closing with lender Payments to lender


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Additional Funding Sources Leasing Account Payable A/R Management

Collection policies Borrowing base for RLOC

Factoring Business Angels Venture Capitalists


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Additional Sources - Leasing

Pros Way to stretch funds Use for rapidly

changing equipment Increase level of

equipment

Cons No equity in

equipment Capital lease shows as

liability Negative exit terms

(upside down) Can’t use depreciation


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Non-Traditional Sources (Factoring)

Selling your A/Rs (invoices) As compared to A/R financing Normally younger or weaker

companies Factoring charges & discount fees

Approx. 4-5% Factor looks at debtor credit

worthiness Tries to be transparent to you client


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Factoring Pros

Increased cash flow Immediate funding Approval not based on your credit rating Doesn’t increase your debt to equity

ratio Factor does own collection Non-recourse


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Factoring Cons

Short term cash source Relatively more expensive Factor does not own collection Recourse A/R have some liability to you


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Non-traditional ( Angels & VCs)

Business Angels (apparently) invisible Fleeting Got to be good to find one

Angels are small investor groups More informed in their industry Doctors, lawyer, successful business

people


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Business Angels

Usually prefer technology or bio-techs

Early (intro) stage capital

Equity position Substantial but not controlling Presence on board of directors Size - $100k to 1,000k Usually look for exit plan


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Venture Capitalists (VCs)

Big brother version of Angels Larger investment

$500k to $10mm and beyond Middle and later stage investors Try to get controlling interest Daily management oversight 10 X returns in 5-9 years Popular funding sources for Dot.coms


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The Next Step

o Rough Draft of business plan/financial proposal

o Last three years financial statements (if available)

o Current copy of credit report?o Appointment with SBDC counselor


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Getting Through the Process

Resource: UTSA SBDC

Confidential counseling

Technical assistance

Workshops

Location: 501 W. Durango

Call for appointment: 458-2460

Feasibility Analysis

Business Plan Development

Loan Proposal Structuring

Lender Evaluation

SBA Eligibility/Credit


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Questions & AnswersEvaluation

??????????????EvaluationSpeaker –

Mike Reyes-458-2469

A8/A9: Business Plan Financials

Documents

census bureau

assets funded

purpose amp

long term

business plan

short term

market research

cash inflow