Business Planning

According to the U.S. Small Business Administration (SBA), the core elements of a business plan include:

Description of business. 

Explains your product or service in clear terms. It includes the name of your business, address, and a list of owners. Include the legal form of ownership of the business and the state where it is registered. (The three major forms of business ownership are corporations, partnerships, and sole proprietorships.)

Marketing plan. 

Who are your target customers are and how you wish to sell to them. Include an analysis of customer characteristics, product pricing, and a strategy to increase the number of new customers and retain existing ones. A marketing plan also discusses advertising and an analysis of your anticipated competitors.

Management and staffing plan. 

Identify who you intend to hire, what responsibilities you intend to give them, and and what forms of compensation you plan to provide.

Operational plan. 

An operational plan explains the day-to-day operations of your business—hours of operation, manufacturing schedule, emergency and back-up procedures, etc.

Financial data. 

The SBA recommends that you include the following financial data in a business plan:

• Loan applications. When you seek to raise capital for your business, a prospective lender or investor will ask to see your business plan. 
• Start-up and operating budgets. Estimate an operating budget for your business. 
• Balance sheet. A balance sheet is a graphical representation of your company's assets, liabilities, and equity at a given point in time.
• Break-even analysis. A break-even analysis looks at various combinations of sales and fixed costs necessary for your company to begin earning a profit. 
• Forecasted income. The income statement is one of the two financial statements that connect the period of time between two balance sheets. An income statement measures sales, expenses, and profit or loss over the reporting period. 
• Forecasted cash flows. The cash flow statement is the other financial statement that connects the balance sheet between two points in time. It measures cash inflows and cash outflows from three business areas: operations, investing, and financing.

^{The above information is educational and should not be interpreted as business advice. Your actual business plan may differ in structure and level of detail. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

Capital requirements depend on the sales goals you set for your business. As you increase sales, it is necessary to invest in additional fixed assets and staff to attain the higher goals. 

For example, you may estimate that you need to hire an additional account manager and one piece of additional manufacturing equipment, at a total cost of $75,000, for each $250,000 in higher forecast sales. Unless you have accumulated enough in profits, you will more than likely turn to outside sources—a bank or potential investor— to raise capital. (If you're seeking a new source of funds, including a copy of your latest business plan increases your chances of success.)

In addition to investment capital, you may find that your business requires additional net working capital until it generates enough in cash each year. Working capital is equal to your current assets minus current liabilities. Both of these totals are shown on your company balance sheet.

^{The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

Operating leverage magnifies the financial performance of a business. Instead of depending on the capital structure of the firm, however, operating leverage depends on its cost structure.

Cost structure of your business is based on the composition of fixed costs and variable costs. Fixed costs are those costs that don't change for different levels of output and sales. Rent and expenses for previously bought equipment are two types of fixed costs. In general, the fixed assets of your firm represent its fixed costs.

Variable costs are those costs that change for different levels of output and sales. Most obvious categories of variable costs are materials and labor related to the manufacture of goods. Together, these costs represent your cost of goods sold. Some discretionary expenses such as advertising, travel, and employee perks are treated as variable costs.

If your business has a cost structure that leans towards higher fixed costs— say 70 to 80 percent of total costs—your break-even point comes at a higher level of production and sales. If your business has a cost structure that leans towards lower fixed costs as a percentage of total costs, your break-even point comes at a lower level of production and sales.

Since your decisions on how to finance a business are based, in part, on how much in fixed assets you invest in, you will want to evaluate the role of operating leverage. You should avoid over-borrowing to pay for equipment and fixed assets that may result in a cost structure that penalizes you in a business or economic downturn.