Pp Feasibility Study and Business Writing

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A : thc narne inrplies, a fbasibilitl stud1, is an/ l. ..-..1, ..;- .-r- +r-^ ,,:,,L:r:+-.

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&_t .LrrJrlJrJ Ur Ltls vtduulLy ul dll lutra. I llc lca-I Lsihiliti srlrd-\ fbcLrses on hel;,ing ansu,er ihe

essential qr-restior.r ol"should rve proceecl u itlt the

proposed project idea?" All activities olthe stLrc1l, are

clirected toward helping ans\\el ihis riuesfion.

Feasibility stLrdies can be used in rnan) wavs bLrt pri-rlarily fbcus on proposed business r,en.trrr-es. Fatrl-ers and others witlr a business idea shoLilcl conducta t-easibilitl,studl'' to cleterrnine tlre i..iabilitl oltlreir"iclea betbre proceeding n ith the der,elopireni ot-rbnsiness. Deterrrrininq earl1., lhat a lrusiness iiiea Ir, ili

not rryork saves tirne. mone)' and hearlache latcr..

A feasible business \,entllre is one rvhere the busi-

ness \,\ i 1 I gerrer;ite adecl_rrai* cas it -il o* :lt tl i--nr li t:;.

rr'ithsiand tire risl<s il i.liii citettLrnrcr. r'ciitiriit i iaLrir

in tlre long-term and rneet tire goals oithc fbr-rncl-

ers. The venture can be either a start-up business.

the pr,rrchase of an existing business. an expansior-r

olctrrrent bLrsins5t operations or I ite\\ entcrprisc

lor an existing busiress. [nfctrmution File C5-66,

Feasibility Study Outline is provided to give yoLr

guidance on horv to proceed with the str_rdy and ruhat

to include. Also, In/brmation File C'5-6.1" Horv toUse and When to Do a Feasibility Study rvill helpyor,r through the process and help )ou get the most

out olyor,rr study.

A feasibility studl, is only one step in rhe business

idea assessment and business deveiopment process

(In/ormation File C5-02). Revier,ving this process

and reading the information below will help put the

role of the feasibilit.v str-rdy in perspective.

Evaluate AlternativesA feasibility, study is usually conductecl afrer pro-

ducers have discr-rssed a series of br,rsiness ideas orscenarios. The feasibility stLrdy helps to "frame" ancl

"flesh-out" specific business scenarios so thel, can be

studied in-depth. DLu"ing this process rhe nurnber ol

File C5-65

October 2009

wlt'r4'. ext€ n s i on. ias tate. e d u/a gd m

bLrsincss alternatives under corisideration is usLralll

rltrir'klr lcdrrceti.

Dr-rring the Ibasibility' proe ess _\ r)Lr ilrav irrr cstigate

a variety' olways of organizing the business and

positioning your produci in iire rnarketpiace. it is

like an exploratory journev and you may take severalpaths before .r'ou reach your destination. Jr-rst because

the iuitial anall,sis is negative does not mean that theproposal does not have meril. Sornetirnes limitationsor ilau's in the proposal can be corrected,

Fne-FeasibilityStudyA pre-fbasibilitl' stLrdl, rnav be condr-rcted first to

help sort out relevant scenarios. Befbr-e proceedingrr irh r il'll-hlnrlr it:cihilit,, .t,,.1..

uLl llld ladlll

il r,jo sotle pr-e-i'easibilitr alal-r'sis ill',oirr orr,ri. if't oLi finei out earlr'-on that tite pr"oposed br_rsiness

iclea is not f-easible, it will save yoir time and rr-rone1.

lf the findings lead you to proceed with the feasi-

bility stLrdi,, your work nay have resolved some

bas i c i ss ues. A consul tant (http ://lvww.. agmrc. or.g/

di rectories_state_reso rrrcesTagmrc_directori es/con-sultants_and_busi nesses.cfir/val ueadded_agricultLrr-

al_consultants_and_servicejrovi ders_2) may hel pyoLr with the pre-feasibility study, but yor_r should be

involved. This is an opporlunit,v- for you to i-rnder-

stand the issues of business development.

Market AssessmentAlso, a market assessment (lnformation File C'5-301

may be conducted that will help detennine the r, i-

ability ola proposed prodr-rct in the marketplace. The

narket assessment will help to identify opporlunitiesin a market or market segment. lf no opportunitiesare tbLrnd. tirere may be no reason to proceed with

a fbasibility study. If opportunities are floLrnd, tl-re

market assessment can give fbcus and direction to

the ccnstruction of br-rsiness scenarios to investigate

in the feasibility study. A market assessment willprovide rnr-rch olthe inlomation for the marketinef-easibility section of tLre fbasibility study.

lowa Srnrn Uxn'rnsrry Don Hofstrand , co-director Ag Marketing Resource Center641 - 423-0844, [email protected]

lllary Holz-Clause, co-director Ag Marketing Resource Center

[email protected]

University Extension



Results and Concluqionsl he conclusions of the f-easibility stLrdy should out-

line in depth the various sce narios examined and the

irnplications. strengths and u,eaknesses oleacli Tlieproject leaclers rreed to str-rdy tl-re tbasibiliry srudy

artci chaiienge irs uncieriving assumptions. Tjiis is rhetiure to be skeptical.

Don't expect one alternative to'jLrrnp oilthe page"

r: bc ng the besl seenario. Fersibil t_r stlrclie> d,l

not suddenlv becorne positive or negative. As yoLr

accum ul ate i nlonnati on and i nvesti gate alterna-

tives, neither a positive nor negative olltcolxe ma)'

erxerge. The decision of r.vhether to proceed is r--1ten

not clear cul. Ma.jor str-rmbling blocks lrav elnergc-

tltat negaLe the project. Sonrctirtres tlrese lr,eak-nesses

can be overcolrle. Rare 11 doe s lite anahsis come orlt

oveni,heirningly positive. The sti,idr wili help 1'oriassess the tradeofF betr,veen tlre risks aird rervards olrxoving fonvard rvrth the business pro.iect.

ll"enrentber-. it is not the pulpose rlt'the i'easibilir.

studl or the role olthe consuitant to decicle rvhether

or not to proceed r,vith a business idea. It is the role

of the project leaders to make this decision, using

information fi"orn the feasibility stLrdy and inpLrt fiornconsultants" -

Go/No-Go DecisionThe go/no-go decision is one of the most crrtical in

business development. It is the point of no retum.

Once you have definitely decided to plrrsue a busi-ness scenario, there is usually no turning back. The

feasibility studv will be a major infonnation solrrce

in rnaking this decision. This indicates the impor-tance of a properly developed feasibility str-rdy.

Feasibility Study vs. Business PIanA f-easibility study is not a br-isiness plan. The sepa-

rate roles of the feasibilitl, str-rdy and the br-rsiness

plan are freqr-rently misunderstood.l'he feasibilitystudy provides an investigating function. It addresses

the ouestion of"ls this a viable business venture?"The business plan provides a planning function. The

business plan outlines the actions needed to talie theproposal lrom "idea" to "reality."

l'he 1'easibiiitl,riLrti-r lilliiires and anaiyzes ser-eral altern;liives ol nrethods of achieving br-isiness

sLrccess. The ii:asibiIit;,'stud,r,'helps to narrow the

scope olthe Lrojeci Lo iclentil,v the irest business

scenalio(s).'l'he

br-rsine.\s plan deals rvith oniy onc

;iliei-rrati v e iil scei rai'ir,r. T irc feirs i iri i itl,' sir-rci v iiei ps ionArrow the scope of the project to identifr trricl clefjne

tw'o or three scenarios or alternatives. The person or

business conducting the t'easibility study n-ray worklvith the group to iclentitl, the "best" alternative iortheir situation. This becornes the basis for the br-rsi-

ness plan.

l'he f'easibilitv study is conducted before the br-rsi-

ness plan. ,l\ business plan is prepared onlv afier the

br,rsiness vcnture has beeu deenreri to be f-easible.

Iia proposed bLrsiness vcntLlre is citnsidered to be

t'easible, a business plan is Lrsuaiiy, constructed nextthat provides a "roadmap" olhorv the busir-ress willbe created and developed. The bilsiness plan pro-., ides the "'blLreprini" lirl pio.jcci irnpicrtierrtation. Ilihe rieritLrre is rJei:il':ri irt-rt to be ibasible" eilbi'ts ilavbe made to correct its cleficiencies. other alternatir c-s

may be exploled. or the idea is dropped.

Reasons Given Not to Do a FeasibilityStudyProject leaders rlay find themselves under pressure

to skip the "feasibilitv analysis" step- and go directlyto building a business. Individuals from within and

outside of the prcject may push to skip this srep.

Reasons given lor not doing a feasibilitv analysis

include:. We know it's f-easibie. An existing business is

already doing it.

. Why do another feasibility study when one was

done jr-rst a feu, years ago?

. Feasibility siudies are just a way for consultants to

make rnonel .

. The market analysis has already been done by thebusiness that is going to sell us the equipment.

. Why not just hire a general manager who can do

the stLrdv?



" {reasibility' str-rcjies arL' a rvastc oitjrne. Wc rreeil

to buy the bLrilding, tie up the site ancl birirtn tlie

equiprnent.

The reasoris given above: shoiilcl not clissLladL. yoLi

frnrr rnnr rr-iint t'--anirerrflrl

an,-l annrrroto fLaci-IiultI u\/tluLreLltrb a rrrecrriii'i;rLii aiiiu aiLULiiiiLL ivlfJr

bilitl, stLrdy. Once decisions l.]ave been rracle aboLrt

proceeding lvith a proposed br-isiness" thel' ale ofteir

veri difficLrlt to charrge. You rnal' need to livc witlr

these deci:ions lor a lonp tirne..''

Reasons to Do a Feasibilify StudyConducting a feasibility stLrdy is a good business

practice. lf yor-r eramine sr-rccessfirl businesses. yoii

will find that they' did not go into a new business

venture ''r'ithoLrt {rrst thoroLighlr. examining ail ofthe issLres iind assessin-q tire probability' o1'bLrsiiress

S LICCCSS.

Beloll' are otirer reasons to condr-tct a leasibiliti'.

'r,.j] .

" {livc: tbcrrs ic thc prri-]cei anLi t)uiline aite rnatir c.,

' Narror s bLrsiness alterrralir rs

" i,-ie;riiiir:s iru."r opporiLiniiies tliroLrgh the investiga-

iii'e plocess.

' ldentifies reasons not to proceed.

" F.nhances tire probabilitv olsl:ccess bi ailclles:ing

lnd trtrlir';rtinr,fictnrs earlv or-r 1l'raf i:r'rrild atTecf theo_--_-p;irit.r.t.

' Provides qLral it1'' intbrrnation fbr decision making.

" Provides documentation that the business ventLlre

rvas thoror,rghly investigated.

. Helps in securing funding lrorn lending institLr-

tions and other monetary sources.

. Hclp> irl f,l1t'ae I cqrrit. inr c:ltncilt.

i'he f-easibilit\' srud-r' is a criticai step in the bLrsincss

assesslrent process. lf prr-rpellv conducted, it may betlie best inl'estrnent yor-r ever made.

. . . and justite for all

Ihe LJ.S. l)epartment of Agncullure (USDA) prohibits discriminatrt,n rn

ali rts programs and activrties on the basis olrace. color. national origin.gender. religion. age. disability. political beliel . sexual orientation. and

rrarital or family status. (Not all prohibited bases apply to all programs )

Many matcrials can be made available in alternative lbrmats fbr ADAclients To file a cornplaint oldiscrim jnation. urite USDA. Otfice olCivil Rrghts. Roorn 326-W. \ ''hitten BLrilding. 14th and Independence

Avenue. SW. \i/ashirrgton DC 20250-9410 or call 102-720-596.1.

Issued in iurtherance oi'Cooperatlve Extension work, Acts ollV{ay E and

.lune 30. 1914, in cooperation witlr the U.S. Depadment ofAgriculture.

.lack M. Pavne. tlirectol Cooperative Extension Service. Iowa State

UniversiS,- of Science and Technology. Ames, Iowa.





" [)cscribc tlte pricc contpet tivenfss oi' ,i]:i-:1' ;'r', ,:Li,-i

5cl \ icc.

lVlarket potential. Identilf ivheiher rhe product be soici iitto a ct'rrnrnod

:i', r rial'i'ei or lt iiiijclenliateri produci/ser-'v i,s r r i;ir.l,ili.

" lclentif, the clernancl altd usage trends of the rlar"kctor rrarket seglrent in rvhich the prodr-rct or sclr icc

u,il,i p36,.1not..

" i.xamine the potential for ernerging. niche or seg-."^ ,,, .-.1 ,-^-t. ., ^^^.,d..,.:,:^,rr\ ril (l rll([ N t upput Ltltttt lg).

' Explore the opportr,rnity and potential fbr a brancled

prod irct.

. Assess rnarket Lisage and your 1lotential share o1'lhe

t'narket ol inarket segrnent.

Aeeess to rya+tiet outlets

' ir-lcniifi thc pote ntial bulers of tlte pi'odLrctl-qei'r,ice

i',nd tlie associated marketing costs.

. lni cstigaie iiie pi"ocluct/sei'i ice cjisii-il-.,Liiiitii si stetrluirii tltc clrsts iri', olr,ecl.

Sales projection. Estimate sales or Llsage.

" Carelirlly' identify and assess the accurac,l of the

underil,ing asstunptions in the sales projecrion.'

. Pro.ject sales under various assumptions (i.e. seiiingprices,

sen,ices provided. etc.).

Technical FeasibilityFacility needs. Estimate the size and type olprodr-rciion facilities.

. Investigate the need for related bLrildings. eqrrip-

ment, rolling-stock, etc.

Suitabilig of production technology. Investigate and cornpare technology proviCers.

. Determine reliability and competitiveness of tech-

nology" (proven or unproven, state-of-tlre-ai't. etc.).

. ldentill lirnitations or constraints olthe technology.

Availabilify- and suitability of sitelnvestigate access t0:

. rarv materials

, transpofiation

. Iahor

" procluctioit irrprrts leiectricitl,. narr_rral gas, water"

etc. )

. Investigate potential emissions problems.

, ,tnal1'ze otlier ent iroirrne rrtal itlpacts.

" idcrttil\ r'clrrllt,,i\ Ir'Liuitelncnl>.

. Hrplore econiirric clevelopirrenl incentir,es.

Raw materials. E,stimate the amor-rnt olraw materials needed.

. Investigate the current and lirture availability and

access to raw rnaterials"

. Assess the qualit"- and cost of rarv materiais.

$ther inputs

. investigate the availabilit.i. of labor includiirg rvageriiic:. :kill lcr el" rti.

" Assess the potential to access and attract qualified

ilallagcnrerit itersonLiel.

fl inancial/Economic FeasibilifyEstimate the total capital requirements. Assess the "seed capital" r-reeds of the business proj-

ect dr-rring the investigation process and start-up, and

how these needs will tie rnet.

. E,stimate capital reqnirements for f-acilities, equip-

rnent and inventories.

. Estimate r,vorking capital needs.

. E,stimate stari-Lrp capital needs until revenues are

realized at lull capacitr.

. Estimate contingency capital needs due to construc-

tion delays, technology malfunction, market access

delays. etc.

. Estirnate other capital needs.

Estimate equify and credit needs

. Estimaie equity needs.

. Identify alternative equity sources and capital avail-

ability - family, producers, local investors, angle

investors. ventllre capitalists, etc.

' Estimate credit needs.

. Identify and assess alternative credit sources -



l-rrittlis" go\,ern rent ii.,t, .iii-:'l i,,,;;1i sr1- ir.iilr)

gLlarantee-qj. grarrts aiid oc;-,i ;ir,,j :rii.iie scolr()lni

tiei'eloplnent i ncenti l'r's.

Budget expected costs and i'sturns of various

altei'natives, i:.stinrate the expected revenLle. ro:rt . profl L rttz,igin

anri erpectc'i'i nct profit.

" i:stiinate rhe sales or usage nee,,jcd t,-r i,.r'caii-e,, cir.

- Flstiirale the returns under \iariolrs prodLlction,,--;^., ^,- l-^l^- l^. ^1. fl.:. ,..^, :,., ^1, , i l--riC,yrr drru JJILJ lL\f l\. i jr'J iirJi lji\vrt ruLrrLrl_r

ing "'best case". "typicai"', ancl "u,orst case" sce-

narios or more sophisticated analy'sis like a Morrte

Carlo simLrlation.

, Assess the reliabilitr, of the Lrnde rlf ing ilssLluril-

tioirs oi-the anal\sis iplices. protlLrctioii. elficien-:-i-:,. rr-ri'liet aCCeSS. l.narket peitetratiCn. i'tc. i

' l]enchniark againsr irrdustli' a\'e ra-s:es alrd/or' ari]nr-

llclilor'5 tLr)\t. lnargin" piirfil:. R( )1. ctr. t.

- Li --rlli. li,--i+-+i^-- ,-- ^^--r--l-.r., ,-1'+1..-. ,-,-.-,,.-,-.;^" {lilltll\ lli llLdlltirt) rl L-L'tt.-\tlatltttJ ul Llli L rrlltrliliL'

r.iltiti\ 5i .

, l-nicLrlate expected cash flo'ovs riui-ing tl.1r' -stitrt-Lltl

period and u'hen the business reaches capaeitr.

. Prepare pro fenqa incone statelnent. balance

sheet. and othel staternent,s of wiren the business is

iuiiy operating.

O r ganizatio n aVM an age ri al Feas ib ilit"vBusiness structure. Identify ihe proposeci iegai sirucrirre oirhe busi-

t-less.

. OLrtline the siaffing and go\./ernance strllcture ofthe business along r,vith iines of aLrthority and deci-

sion rnaking structure.

' Identifl' anv potential joint venture parrners, alli-ances or other important stal<ehclder:s.

. ldentitl,'the availabiliry- of skiiied and experienced

business managers.

. Identiiv tlre availability of consr"rltants and service

providers r.vith the skills needed to realize the proj-

ect" irrclLLdin-e legal. accounti rg. indr:stry experts.

etc "

Business founders. Character lratters - are the people irrvolvecl ot'

0 utstan d i n-g cliai'acter'l

. Do the fbunclers har,'e the "fire in the belh" rc-

rlLrirccl to lai(r lhe pro.ject to cornpletion'?

" Do the ibtrnders hiive ihe sliills and abitity' to c{.)n-

plete the project?

' What kei' individLrals will lead the pro.ject?

. Is there a reward systern for the fbunders? Is it

based on bLrsiness perfbrmance?

. I{ar.'e tlie ibrrncler,s organized {lther successfirl bLrsi-

ne sses'l

Study Conclusions' ldentify ancj cleseribe alternalir,'e business'se cnali- -

os and models.

. ['oinparc ancl coriirasl sccnarios t-.aEer,i ,.rir gt.r;ris olt ire plrrir-ir:ei' gi1)Liir.

. Outiine criteria fbr decision makins alrons alter-

natives.

Next StepAfter the feasibility str"rdy has been complbted and

presented to the leaders ofthe project, they should

carefully study and analysis the conclusions and un-derlying assumptions. Next, the leaders will be faced

with deciciing rvhich course ol action to pursue.

Potential courses of action include:

" Choosing the most viable business scenario or

model, developing a business plan and proceeding

with creating and operating a business.

. Identifying additional scenarios lor furtlrer study.

" Deciding that a viable business opportunit,v- is not

available and moving to end the br-rsiness investi-

gation process.

" Irollowing another course ol action.

... errd jastire for alliheirS I)eDannrertoi{g rcultrile(LrSI)A)l)rohibLliarscil$rneironrnrllrrstrogrrnrsanrll.lr\r1:aj on tlrc basrs ol race. color, nalronal orgrn. gcrder. felr.'qton. age. Jisabrlrt-r. pc'lrtrcal

bcir3i.s.5.lual ofiertitror. rnd madlal or tenrly status (Not all prohibrled bascs appl to all

progranlsJ\itrymate.ralscanbemadeavailablernalternalvefbrnatslor.lDAclients lbfrler complarnl of drscrimrnalron. \ rre USDA. Olhce ofCivil Rights, Roorr ll(r \\'. Wh1ften tsurld.

rnr. l.lrh3rdlnd.pendinccA\rnue SW \\ieshLngton.l){ l[r2j0-91lilor call] l'7lD r96J

lssued in funherance of( ooperatrve [rtensror \io.k. Act5 ofN]a] 8 and lure la. l9Ll. in roop

erit)on wrlh Ihe U S Depa.tment ofAgrcuiture Jack NI lravnc, djrector fooperalrrc Erlerston

Serlrce. lorra Stare Lj.rversi\- ofScience turd Icchnology, Aures. Iowa



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{i-r oLr Lre uorrsitiering conclr:cting a t'easibiiity|

^-..r..;,-r,- :-.

^-+:.-.-+.-+t-^.,;^L;t;+.. .-+'^ ,-.-r^,-+;^l

| ur4i"),)') rU rtr\L)r 541L Liilt viailriiit) (r1 4 p(rLgllttdlL hit.irterr \ tltturc" ;rn:\\crillg th.. lirilori irrr:'r.,

'tr-testionswill heip gLricle 1,'oLr throLrgh tlre process.

131 using these as a guide. it vlill help )olt inove

througlr the process efficiently, r,vhiie helping )roLr get

the rlost crut oltlre analysis.

lnfbrmation -ile C5-65, What is a FeasibilityStud-v helps you uncJerstanding thc concept olat'easibility str-rd1' and how it is used in tlre business

dei'eiopment process. Infitrnttttion Frlc C5-66, Fea-

sibilitv Stud3' ()utline provicies :) cLi wiih a tiainc--

\\,,-rrk lbr creiiting voLu'leasibiiity anailsis. You alsoneed io undersiand hotv a f-easibility slud;, fiis into

the overall business development process.

\\ Sren lc el* 'r stuiJr"'

l'he decision to concluct a i'easibilitv sttidl shoLrld

not be taken lightl1". lt is an expensive ancl time

consuming process. How-ever, not doing a f'easibility

analysis can be even mo 'e gr-pensive in terms of the

poor clecisions voil t.r'ru1, *ik" fiom not conciucting

the proper analysis. To help yolr understand when to

conduct a feasibilit," siud,u" yoLl tray rvant to review

Inforrnation Fiie C5-02,Idea Assessment and Busi-ness Development Process.

You need to be ibr enough along in the deiiberation

process of yotii business idea to make the best use

of a feasibility str-idy. So -vou need to have a clearly

defined or-rtline of one or rlore alternative business

mocieis or scenarios that 5'ou want to explore. And

-\ou \\anl lo hare eoirdrrcted srrificient initiai inr er-

tigation of ihese alternatives to detennine if they

lrave the potential of being viable. You don't want to

spend your feasibility mone)' investigating ideas that

)'oLl can detennine are not f-easible by just rnaking a

lew phone calls.

This means that yor"r rvill need to have already done

much of the early investigation and exploration ol

File C5-64

November 2009

www.extension.iastate.edu/agdm

1'oi,rr bLrsiness idea befbre 1,ou scheclr:le a lirll blovln

stLrd;'. Tlris earll.' in..,estigation or pre-leasibiliti'anall'sis can be tione by rlerrbers of 1,o.'r'aon.trniitceor with the help ola consuitant. Yori nral' start by

eloing a rnarketing str-rdy to determine ilthe bLrsincss

idea has marl<et viabilitl'. lf it does not, you have

saved time and money by not cornmissioning a com-

prehensive feasibility study. lf the idea has rrarket

viability. yoLr can move fonvard lvith the feasibility

analysis and use the rnarket anall'sis in the f-easrbility'

stud,v''.

Who will conduct the analysis?

IlvoLr plan to do a f,easibilit-v stud;i. 1,ou rvill r.r'ant tr.r

strongly consider hiring a consultant to concjuci the

study. Names of business consuitants are contained

in Dii-ectot') olConstrltants arri Serr,'ice Proo" iiie rs

iltttp:/i ri ri u .:ignr rc.olqi d ilectcx"ies r1't:.i

agmrc:di rectori eslconsu ltants:anci:busi nesses.

cfin/val ueadded:agri c ulturai:cons ultants:and:ser-viceJrroviders 2). This directory only provides yor-r

with the names of consultants. You are responsible

for choosing the proper consultant to fit your needs.

Time and money spent in choosing and using a good

consultant is an imporlant investment that will pay

dividends later. For help in choosing which consr,rl-tant to hire, refer to Information File C5-60, Select-

ing a Consultant.

The cost of a feasibility study can vary greatly

depending on the depth and breadth ofthe stLrdy.

A high qLrality, in-depth study can cost as much as

$100,000. although the cost is usually significantly

less. Wlren selecting a consultant for a feasibility

stLrdy. it is often recornrnended that ,v,ou send a Re-

quest for Proposals (RFP) to prospective consultants,

or-rtlining what vou want done. For a minirnal cost,

the AgMRC will post yor-rr RFP on the Web site.

A consultant can respond to the RFP by describing

how the study lvill be conducted, wlrat qLrestions willbe answered by the study, a time-lir-re fbr completing

the analysis and holi, much it will cost. When select-

Iowa Srerr UilryERsnvUniversity Extension

Don Hofstrandextension value added specialist

co-director Ag Marketing Resource Center

641- 423 -4844, dhof@iastate. ed u



ri11,. ii riiiiiiLii ;liri ii'r.,iii ajt-rriitg lliosc |csp0ittiing lti llrc

RFi)" fir'sr ide;iti1'. rrhlcl-i ones provicle tlre tvpe and

qtialitr oi'aii:iwefs neeclecl to adequateiy assess your

b'.isine,cs idca. Ti;cn se iecl the consultant u ho rarl

pror ide thc i'r:rluiicci ana r,sis tbi: tlie lcasi cc:ti.

f'onsr-iitants oitc'n tbel pressurerd to tell r,'oil rr,hat

-\'oti \\ ant to hear. irarrn grrtups LrsLiallr erc {i-\citfci

aborit a busir-ress prospect aiid. lr,ithout realizing it,

indirectll inllr-rence the consr-rltant to teil therr what

ther" rvant to irear "the proposal is a good idea."

So, comrrunicate to the consultant that you want au

accurate assessrrent of tlre feasibilitv of the ventlre.

FIow' will ysu rnonitor the progress sf the

studv?ilir"rng ll corigirli;ir':t r-iocs not nrg31r: r oitr i'r:spitrisibii-

itr ior insLiring thiit thc l'easibilitl,stuclr is conclucteci

plopelll,. You neecl to be engageci in tite project and

the eraluation p -ocess. Ltnderstand the issLies in-., oir,:ci" rli-rcsiiori tiic l;esic a:,suiriptir,ri.ts iisc-cl irr iiir:.i t i i ai"' " il n ri e h it i i it i r gr iii r; i,.r it i l ii s i i-- it ) rr i t lt d i l Li ii'\ .

;\ mernbel ol the projeci committee ul a stnall group

of members can to'be selected to work r.lith the

consultant. They firnction as the iiaison betrveen the

cousuItani an,i the-r'est b-lithe cornmittee ltlembers

to insure ihat the study progresses according to the

ivishes of the project committee. To adequately per-

fbrm these cli-rties thev mr-rst have a thorough under-

standins of ihe pro-iect. Thev must also understand

the purpo--re of the study and be knowledgeable oftlre provisions olthe consulting contract. They will:

' Represent the pro.iect comrnittee's needs and inter-

ests to the consultant

" Revierl anci clarili'rvhat is needecl fiom the con-

s u ltant

" Monitor the work of the consr-rltant

. Provicle pcriodic reports to tlre project coLnrnittce

Holv to accept or reject the study?At the end of the stLrdv. the consultant will provide

ihc corrrnittee r.r'itlt a clrafi ola final repcrt. ilefbre

) oLr starl discLrssiirg the conclusiorrs ol'tlrc stLiiir.

and i'r'hat irrpact thel har,e on tire via'oility oivotrr'pro.ject. )oLi mLlst first revierv the stucir to deterntinc

il it is accLrr;rte. rcier,anl artd conrpletc. It is itor

ilircrllnnlolr fbi: lhc pritjce I a(rinililtrt' trr i'r,'-jr-ct lhc,-lrrft,rf tl.o ronnri .r.,1 ."1. +;'- +'',.1t'-.,'l..iJl^-ti,--

1rv rvy\/r lrctr irlL.lll\Jll

Ittlrl ltt,rlr si'.

The stLrdy is oni-v as strong as its r.veakest part. ittakes a rnistake in orrlv one part of the str:dl'to sink

the business ventltre. So, befbre y.ou aecept the

study yor-r shor-rld detennine that it:

. Is understandable and easv to read

. Addresses ail of the relelant issr-res and qLrestions

. l-ists anc'l r'iiscr,rsses ali olthe unclerl', ilrq assLrrrip-

iions oi'ihe prc.lect anail'sis

. Meets the expectaiioirs oithe project conrrniitee

' Is logicalll' consistent within sections anci anons:cr litirr>

" ls ihoroLrghll researciicci iising qooti rese;ii'cit

techniques

. Contains all of the relevant infonnation

. Meets the conditions of th.e consulting contract

It is imporlant that you meet this "due diligence"

requirementbecause

investors and others mayquestion your procedures and decisions during this

period ifthe business venture eventually fails. You

rnay want to discuss this with your attomey to make

sure the proper safeguards are in place.

How to use the study results?The pr-rrpose of the f-easibility stLrdy is to provide

vou with the inforrnation needed to determine iltheproposed business venture is viable. However" it

will probably not provide yor"r with a magic ansvver.

So you rvill need to carefr-rlly assess the conclr-rsions

of the study and decide iltlie proposed businessventure has sufficient merit to move forward.

Ilever there is a time for ilnemotional, rational and

logical thinking. it is nor,v. Mistakes at this tirne



liiri,-. iir: i', iil: y'0tt ibi'a long iitle . Colntrl()rl tnisiakes

*:<-q-{.t[sl,:trrtr,A.='u((\-<:<<tt<-<(<--

i . 'lhe con-i rittee lnembers have already lttade Llp

iitcii miniis iind rationzrlize the slrld results to fit

their decisir-rn.

l. Because prciiect colnlxittee inembers tetld ttl be

, iictiol1 orieutecl rather than cJeliberators. they becon're

l"estiess io rnove forward with the proiect and gloss

over irnportant aspects of tlre study.

3. Because o1'the irnporlance of the decision and the

lack olclear direction fiorn the f'easibility analysis,

committee rnelnbers find they cannot bring thern-

seives to make a decision. Ratirer" they continuall;u

seek morc infbrnration.

-i. Thc cori-imittee ri.reilbers become conf used by' rhe

alral oi inibnnation pr-esented to them anci pressr-iretlieii' colrsLiitants and others to

-eivedel.tnitive-an-

sr,vers ol ri'hether to move fbrward with tlre project.1,',\,'

i tr-: i r,;or i r i i r i iir:c i iietit Lrel'5 ;'c*rpoitd io QLieSii tii-r

i-1ciiai1ting ic i1'n\ titcr ittor erl iot-ri lrcl rr itir ll |i\-,ict'iri icpl; ing. "our consultants said it ri'ouicl rl'i--rk."

are abrji cati ng their decision rnal<ing responsi bi Iity'.

. . . and justice for all

The iJ.S Depanrnent olAgriculture (t-ISDA) prohrbits discrimination in

all its prograrrs and actir ities on ihe basis ol race- color. ttattonal origirr.

gender. religion. age. disability, political belicfi. sexual orjentation. and

mantal or f'amrly status (Nol al1 prohibited bases apply to all programs.)

Manf iraterials can be made avajlable in altemattve tbrmats lor ADA

clients. To lile a complaini oldiscrinriiration, write tJSDA. Of'llce olCivil Rights, iioom 326-W Whitten Building. 14th and Independence

.{renr-re. SW. Washrngton. DC 20250-S410 or call 202-720 -s964

lssucd rn lirrlherancc of Cooperative lr\tet.]slon sork. Acts ol'Ma1' 8 ar.rd

Ji,ure 30. 1914, rn cooperation rvith the U S. Department ol Agrrc''llttlre

.lack M. Payne, director" Cooperative Ertension Serlice, lowa State

Unrversrty oiScience and Technology'" Ames. Iowa



i i l

Proforma Financial Statements

Frc'm AAUPwiki

.,,.JHN ROLI,INS. YALII TNIVERSITY PRESS

The AATJP Business Handbook >> Part Trvo: Accounting. Budgeting. and Financial Management >>L}-rdgeting and Financial Accounting

Iri Ralph Estes's Dictionary oJ'Accounting (MIT,Cambridge, 1981, p. 105), a pro forma financialstatement is defined as "a financial statement prepared on the basis of some assumed events and

transactions that have not yet occurred." Historical financial statements are used to measure an

organization's past financial performance and condition. Without historical financial statements.

financial analysis and eialuation would not be possible and management, board members. inlestors. and

customers would be largely in the dark about how well an organization has done. Pro lorma financialstatements are simiiar to historical financial statements in appearance and use. except tl-rat thel' focus r,.i'i

tlre firture instead of the past and ale based Lrpon assumptions ratherthan hard lact. Historical

statemcnts

should be real, solid. and scientific, while pro fbrma statements allow managerxcnt to exere isc a ccnain

amount of creativity and flexibility. Pro forma statements reflect a dynamic environment in whiche'hangc is sliii possibie anci avariety of ciifferent aiternatives can be foiio..veci. Thcy take the sarlc iorms

as historic:t1 statcnrents. thc most conn-ron being thc inconre statement. thc baiunce shr'er. ,iuci th.-

statement of'changes in f-inancial position.

Pro fbrma statements ale used for a full range of financial analysis and should be created at the

beginning of every financial planning cycle or whenever an organization is considering a siep that couid

have a significant financial impact. They are often examined when a company is coniempifring a

merger, new financing (debt, stock, institutional subsidy, or external grant), capital investment in plant

or other fixed assets, expanding production, launching a new product line, or any other situation withimporiant financial implications. A university press most often uses proforma statements in connectionri ith its annual operating budget and long-term financial planning process. Budgets and multi-yearfrnancial pians usually contain pro forma income statements and balance sheets to summarize financialperibrmance for given time periods and hnancial conditions for given dates.

The constrr.rction of pro forma statements is based upon detailed financial projections and the historicaire lationships betlveen different income statements and balance sheet accounts. A set cf current financialsS,-.r\ i i'tS the fbLrndation on which the pro forma will be built. Alongside pro forma statements, actual

si-llcntcltts iiom previous periods will often be shown for easier comparison anci analysis. The current

lrt:i:tcials are used as a starting point to which adjustments are made to reflect the financial transactions

iiir:i lor the time covered by the pro fbrma. Before putting together a pro forma irrcorne statement, it,: in-r:,-',nant to have complete sales and other income forecasts as well as complete projections of.t-..ti...1actllring costs, royalties, freight-in, title subsidies, salaries and benefits, operating expenses,

r:"li:-'il -\pense. etc. After completing the pro forma income statement and its supporling forecasts

;r;..:jtn.: a cash flow projection), it becomes possible to construct the balance sheet. To do this,

I r--J.:Si actn iw for the period is added or subtracted to the current account balances. For instance, to

.-,ii ui:te pro fbrma end-of-the-year balances for accounts receivable. inventory. and fixed assets, the

- : -,. '.i inu adjustments are made:

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In this way, all of the accounts of the proforma balance sheet can be estimated ""vith the exception of

cash, which becomes the final and forced or balancing entry'

A quicker but often less accurate method of projecting a pro forma balance sheet involves using the

hisiorical relationships between different f,rnancial statement items to calculate the pro forma account

balances. For e"ample, if accounts receivable at year-end are typically 20 percent of annual sales

billings and the new fiscal year's forecast of invoiced sales is $2,500,000, then the projected hscal year-

end accounts receivable baiance is $500,000. The problem with this approach is that it ignores timing

differences. If you are going to have a very late list or plan to publish a blockbuster just befbre year-end.

then the ,ror-ul year-end historical relationship between annual sales volume and accounts receivable

will not hold. Accounts receivable will be higher than normal as a percent of sales billings. A complete

balance sheet can be put together using this method, but you should be aware of its shortfalls.

toVCII

Actual InventorY 11,000,00c 6301t996

plus Pr":..t.4 Ur"rir.tt N1,200,00c

mtnus Projected Inventory Writedown ,$ 150,000)

mlnuslProiected

Manufacturing Cost of Sales

It$Tso,ooolllProiected Manufacturing Cost of Frees l($so.ooq)]

equa:I Pfq..r"a mt"t,"tY -- lTlrtooolVr-wt::l

Accounts Receivable

Actual Accounts Receivable

$2,500,000rojected Billings

$2,350,000jected Payments Againsl

61301199Projected Accounts Receivable

Fixed Assets

Actual Fumiture and Equipment ll$350,000 301r99

ected Furniture & Equi

$360,000roi ected Furniture and

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Once the pro forma balance sheet is completed, it becomes possible to make a pro forma statement ofchanges in financial position by calculating the changes in specific balance shset accounts, consideringthe effects of pro forma income statement items that will not use cash (for example, depreciation), andtaking into account uses of cash that are not reflected in the income statement (fbr example. repaymentof debt).

Remember. pro forma income statements are active planning tools. If analysis o1'your pro fbrmasindicates that problems lie ahead, there should still be time to make adjustments and to improve yourpress's financial performance.

The AAUP Business Handbook >> Parl'fwo: Accounting, Budgeting, and Financial Management >>Budgeting and Financial Accounting

Retrieved fiom "http ://aaupwiki.princeton.edr/index.php?title-Proforma Financial Statements&oldid :197 38,'

" This page was last modifie d on 24 August 2012, at 14:33.. This page has-been accessed 157,240 rimes.

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Writing a Business Plan SBDC



Why Write a Business Plan?

A Business Plan helps you evaluate the feasibility of a new

1-..oi-oo. ilo^ i* ^- ^Ll^^+i-,^ ^-l+l^^l ^- I ---^ ^-^^ ^tl ^--^lrllrrrtrr) rutr4 rtr ail uuJnulrvtr, ufrlluAi, ano ungnloTionai -way.

o Marketing - Is there a market? How much can you sell?. Management - Does the management team have the skill?. Financial - Can the business make a profit?

It provides an operating plan to assist you in running thebusiness

and improves your probability of success"

+ Identi$ oppcrtunities and avoid mistakes

e Develop production, administrativc, anel marketing plans. Create budgets and projections to show financial outcomes

It communicates your idea ta others, serves as a l'selling toof"and provides the basis fcr :vour financing proposal.

. Determine the amouru anci rype of financing needeci

. Forecast profitability and investor refurn on investmento F orecast cash flo',^/, show liquidity and ability to repay debt

Who will use the plan? If you won't use the plan to raise money,your plan will be internal and may be less formal. If you are

presenting it to outsiders as a financing proposal, presentationquality and thorough financial analysis are very important.




Basic Business Plan Guidelines

Writing a Business Plan will probably take a lot of time. up tc 10G hours ormore is not uncommon for a new business that requires a lot of researcii.

A typical plan will have three sections. Section one is a written section

describing Management and Marketing aspects of the business. Section Tw.o

ineludes finaneial projeetions. Seetion Three i-s -sr-rpplemental information.A short (3-5 pages) Executive Summary is often added at the beginning ofmore complex business plans.

o Section One should be thorough, but concise and to-the-point. lJse

headlines, graphs and "bullets" to improve readability. Length cf this

section is usually 10 -.20 pages.

* Section Two describes in-numirers the outeome of your business

strategies and plans. Ycur financial projections should be based on fbcts

and research, not "wild guesses." Be prepared to justifu your numbers.

. Section Three contal+s supporting infonnation to reinforce the first'twosections. This section's ccntents will vary with your type of business.

Owners should be veq", involved in the planning process. Hring -qomeone todo it or delegating it tc scmeone who is not a key member of the companywill result in an inferior plan.

No plan (or a poor plan) is a leading cause of business failure. You can

improve your chances of success with a good Business Plan.




Ten Wavs to Ruin Your Business PE=e:

These errors in business plan preparation and presentation will uadermine thecredibility of the pian and hurt your chances to receive funding:

r Submitting a "rough copyr" (with coffee stains and typos) tells the reader thatmanagement doesn't take the planning process seriously

r Outdated historical financial information or unrealistic industry comparisonswiii ieave doubis about the entrepreneur's pianning abilities.

r Unsubstantiated assumptions can hurt a business plan; the business ownermust be prepared to explain the "why" of every point in the plan.

* Too much "tllue slry" - a failure to consider prospective pitfalls - will lead the

reader to conclude that the idea is not realistic.

c A lo^L nf rtnrlor<fanrlinn n"ff ff^--^iol i*f^-*n+:^- E.,^- :S^^*^^-^ ^l^^ tr raLn vr qfiuur Jf4rrurtrS ur trrr4trLt4r tttlttt tllattttrll" LvE;ll rr SLrrlrELJttE E;lig:

prepar€s the pro.jeetions, the cwner i:rust be able tc explain them.

o Lack of specific, detailed strategies. A plan that includes only general

statements of strategy ("We will provide world class service and the lowestpossible price.") without important details will be dismissed as fiuff..

Especiully imporiant tf the basiness plan is preparedfor a lender:

r No indication iirat the owner has anything at stake. The lender expects theentrepreneur to have some equity capital invested in the business.

o Unwillingnes*e to personally guarantee any loans. If the business owner isn'twilling to stand behind his or her company. then why shoul<i the bank?

r Starting the plan with unrealistic loan amounts or terms. Do yourhomework and propose a realistic strucfure.

r Too much focus on collateral. Even for a cash-secured loan, the banker islooking toward projected profits for repayment of the loan. Cash flow shouldbe emphasized as the source of repayment.




Business Plan OueEgEE*

Cover Sheet: Business Name, Address, Phone i{umber, Prineipals

Executive Summary or Statement of Purpose

Table of Contents

Section One: The Business

A. Description of Business

B. ProductsiServices

C. Market Analysis

D" Marketing Plan

E" LocationF. CompetitionG JLt{qnqoernpnf qtrrl f)t.o"qfinnc

{>vrrrvrr wriu vyvi 4Lldrllr)

F{" F*rsonnci

I. application and Eflbct af Loan or Investment

Secfion T'wo: Financial DataA. FrOjected Financial Staterirents

Income Statements

Cash Flow Statements

Balance Sheeis

Assumptions to Projected Financial Statements

B. Break Even Analysis

C. Sources and Uses of Funds

Section Three: Supporting Documents Historical financial statements,

tax returns, resumes, reference letters, personal financial statements,

facilities diagrams, letters of intent, purchase orders, contracts, etc.




Section One: Tlee E-=esiness

The following pages describe in detail each part ia th,rough I) of the previous

Business Plan Outline. Disregard atry questions that do not apply to your business.

A. Description of the Business

Part A nrovides qn nrrerrrieur nf kerr infnrrngrtinn rrrhinh ic rlarrplnnpd in cnoafor rlafairrr br vs.vr vlrsrt

in the following pages. Aim for clarity and simpticity in this part. Too much detail

here gets in the way of the main ideas. The Elevator Test - Can you explain yourbasic business idea in the time it takes to get from the lobby to the 5th floor?

Basic Questions:

1) What general type of business is this?

2) What is the status of the business? Start-up, expansion or take-over?

3) 'rl./hat is the business foim? Sole Frcprietorship, Partn*rship. Corporationor Limited Liability Company'

4) What are your products?

5) $,'ho are (will be) your customers?

Addiiional Questions for Start-Ups:

1) Why witrl you be successful in this business?T What is your experience with this tvpe of business?

3) What will be special or unique about this business?

4) Why will your business be successful?

Additional Questions for Purchase of Existing Business:

l) When and by whom was the business tbunded?

2) Why is the owner selling?

3) How was the purchase price determined?

4) What are the current financial conditions and trends?

5) How will your management make the business more profitable?




B. Products/Services

In this section, describe your product ofkring. This will include details of product

features and an overview of unique technology or processes. But don't stop there and

don't focus too much on technology. You must aiso describe the product benefits and

.why customers will want to buy.

For most businesses, the products/sei'vices ai''e iiot iotaEiy unique. if yours are, take

advantage of this while you can and plan for the competitive battles that will come.

If your products/services are not unique, you must find a way to position yourproducts/services in the mind of your customer and to differentiate them from the

eompetition. Positioning is the process of establishing your irnage with prospects or

custorners. (Examples include: highest quality. lowest price, wider selection, Bestcrrstomer service, faster delivery, etc.)

Basic Questions:

1) What products/services are you (wi1l you be) selling?

2) What are the features and benefits of what you sell?

3) What position do you have (or want to itave) in the market?

4) How do your products/services ditfbr from the competition?

5) What makes your products unique and desirable?5) Why do (rvil ) customers bu1,frcm i'cu?




C" Market Analysis

For start-ups or existing businesses, :riarket analysis is imporlant as the basis for themarketing plan and to help justi$,'tiie saies forecast. Existing businesses will relyheavily on past performance as an indicator of the future. Start-ups have a greater

challenge - they will rely more on market research using libraries, trade associations,govemment statistics, surveys, competitor observation, etc. In ail oases, make sure

your market analysis is relevant to establishing the viability of the business and thereasonableness of the sales forecast.

Questions for Existing Businesses:

1) \Vho are your cuffent customers? (List largest customers or categories.)

2) What do they buy from you?

3) Why do they buy from you? qQuality, Pice, Reputation, ete.?)

Basic Questions:

1) Who are the purchasers of-your produets or type of,products? (Geographic,

Demographic and Psychographic characteristics)

2) What is the size of the market? Is it growing?

3) What is (will be) your share? How will your share change over time?

4) 'Whatis the industry outlook?

5) Are there segments of users who are under-served by competition?

6) Do any of these under-senr-ed segments present opportunities?




D. Marketing Fie*

In this section, you include the higirlights or your detailed marketing plan. The basiccomponents of a Marketing Flan are:

' What are you selling? (What benefits do you provide and what position orimage do you have?)

Who wants the things you sell? (Identifr Target Markets)' How will you reach your Target Markets and motivate them to buy?

(Develop Product, Pdce, and Promoiionai Sirategies)

Product Strategies

1) How will products be packaged?

2) How broad will your produet line be?

3) What new products will you introduce?4) What Position or lmage will you try to develop or reinforce?

Friei*lg S{rategies

1) what will be your pricing strategies? (For example: Premium, Every DayLow Price, Frequent Sale Prices, Meet Competitor Price, etc.)

. ?) How will you compar-e with competition and how will theyrespond?3) Why will custcmers pay your price?

4) What will be yurur credit policies?

5) Is there anything about your business which insulates you from pricecompetition?

6) Can you add value and compete on issues other than price?

Promotional Strategies

1) Who are your Tar-get Markets?

2) How will you rsach your Target Markets? (What Media will you use?)

3) How will you motivate them to buy? (What Message will you stress?)

4) What is the cost and timetable for implementation of the marketing plan?




E. Locati*n

Locatians r,vith greater custcmer traffic usualiy cost more to buy or rent, but theyrequiie less spending for adveilising to attract customers. This is especially true ofretail businesses where traffic count and accessibility are critical.

Basic Questions:

1) What is the business address?

2) Is it owned oi'lease,j? if ieased, whai are iire terms?

3) Are renovations or modifications needed, and what are the costs?

4) Describe the properfy and the surroundingarea.

5) Why is this a good location for your business?

For Mail Order, Telemarketing, Manufacturing, Consulting, or other eompanies

where the customer does not purchase while physically at the business address, lesslocation detail is needed. Modiff the location section to fit your situation. ln somecases, a good location may be one close to suppliers, transoortation huhs or a

eornplementary busin*ss that will alsc attract lr*ur Target l\{arket.

F. Competition

'"Who is your competitioR?" is one of the frst questions a banker or investor will ask.

Business by nature is competitive, and few businesses are completely new. If thereare no competitors,

be careful; there may be no market for your products.

Expand your concept of competition. If you plan to open the first roller skating rinkin town, your competition includes movie theaters, malls, bowling alleys, etc.

Basic Questions:

l) Who are (will be) your largest cornpetitors? List them.

2) How will your.operation be better (and worse) than your competitors?

3) How are competitors doing? What are their sales and profits?

4) (If Start-Up) How will competition respond to your market entry?

Writing a Business Plan SBDC 10



G" iL5aEE==sment and 0perations

Because inanegement problems are the leading cause of business failures, it is

important to discuss management qualifications and structure. Resumes of Principals

should be included in supporting data. If your business will have few employees and

rely heavily on outside professionals, list these key peopie and their qualifications. Ifyou are seeking financing, include personal frrancial statements for all principals in

' supporting data section.

Basic Questions:

1) What is the business management experience of the management team?

2) What are the functional areas of the business?

3) Who will be responsible for each functional area?

4)Who reports to whora?

5) What will salaries be?

6) What management resources outside the company are avaiiable?

7) Haw r,vill ycur prociuetsz'seryices be produced? {Describe manufaeturing

processes, prcprietary technciogy and key supplier relaticnships.)

H. Personnel

The success of many companies depends on their ability to recruit, train and retain

quality emoloyees. The amount of emphasis in your plan will depend on the number

anci iype of empioyees required.

Basic Qr:es€ions:

1) \\hat are the personnel needs now? In the future?

2) Vihat skills must they have? What training will you provide?

-:; Are the people you need available?

4) What is their compensation? What fringe benefits will be provided?




E.^Fplication

and Effect of Loan or Investment

This seciion is imporlant whether you are seeking a loan, outside investment (equify)

or investing your own money. It may be necessary to complete Section Two,

Financial Data, before completing this part.

Basic Questions:

1) What is the total investment required?

2) How will the loan or invesfinent be used?

3) How will the loan or investment make the business more profitable?

4) When will the loan be repaid?

5) If you are seeking equity (selling part of the business to an investor):

What percent of the company are you willing to give up?

" - What rate of retum is possible for the investor? (Note: If your business

pian will be presented to private investors, seek legal counsel tc be sure

you are in compliance with securities laws.)

Writing a Business Plan SBDC T2



Section Two: Financial Data

A. Projected Financial Statements

The basic purposes of financial projections are:

. Establish the profit potential of the business, given reasonabie assumptionso Determine how much capital the cornpany needs and how it will be used

; D.-onstrate the business can generate the cash to operate and re-pay loans

it is usually helpful, but not necessary, to complete at least a rough draft of Section

One (the written section) before attempting the financial section. In the written

section, you will develop and describe your strategies for the business. In the

financial section, you will estimate the financial impact of those strategies by

developing projected lncome Statements, Balance Sheets, and Cash Flow Statements.

It is usually recommended that these projected statements be on a monthly basis forat least the first twelve months of until the business is profitable and stable. Activity

displayed beyond the monthly detail may be in summary form (such as quarterly or

annually.) The forecast period for most business pian.s is two to fbur years.

Befbre you starl developing projected financial statements, gather the suggested

information on the following pages. The personal computer is an excellent tool for

financial projections; and those with a good background in accounting and personai

computer spreadsheets may want to create their own financial forecast model. (There

are also some specialized software programs which have basic templates to help wirh

your linanclal forecast.)

The quality of your projection depends on the accuracy of the assumptions. (Garbage

in - Garbage out.) Existing businesses will rely heavily on past financial results as the

basis for their forecasts. Start-ups have greater challenges. They must do e;<tensive

research to prove the reasonableness of their numbers. Examples of sources include:

Industry data from public sources and trade associations, personal interviews v"'ith

potential customers and people in the business, competitive observation and analysis,

etc.

If you would like assistance, gather the suggested information on the following pages

and contact the Small Business Development Center. The SBDC will review the

information from your research and help you develop your projection.




Steps in Financial Projections

For items I and 2, use the following " Fixed Asset/Start-up Expense List. "

1) Estimate fixed asset requirements for the first year. Include Land, Buildings,

Leasehold Improvements, Equipment, and Vehicles.

2) Estimate any start-up or one-time expenses. Include any expenses needed to begin

. operation such as legal fees, licenses, and initial marketing costs.

For item 3, use the /bllowing "(Jnit Selling Price and Cost Anafusis" sheet.

3) Define each "unit" of your product or service and estimate the selling price and

direct cost per unit. In the appropriate places on the form, estimate Cost of Sales and

calculate Gross Profit as a percentage of the selling price.

For items 4 throrLgh 6, use the following "Proiected Income Statement".

4) Estimate sales by month for at least one year. (Unit sales price times the number cfunits.) Consider howstart-up, marketing, and seasOnal fbctors affect sales.

5) Estimate monthly Cost of Sales and Gross Profit based cn the percentages af sales

calculated in #3 above. Use a weighted average if multipie product lines.

6) Estimate and itemize fixed expenses by month for at least one year. Include things

like rent, insurance, utilities, salaries, marketing, legaVaccounting, etc. Determine all

categories which apply to your business, but don't include expenses here that are in

"cost of goods (services) sold."

Research items 7 through 10, and provide a short narrative.

7) Describe the amount of inventory (if any) required to support the sales forecast.

Express in number of days sales or tumover if possible.

8) Describe your credit, sales, and collections policies. If you w-ill rr-rake sales on credit,

estimate the number of days after the sale before the average customer parvs.

9) Describe how fast you must pay your vendors for any items you will purchase.

10) Also: - Estimate obligations for Income Taxes.

- Businesses already in operation will need the latest Balance Sheet.




Fixed Asset/Start-up Expense List

Fixed Asset Description:

r ^_, 1/n__:tl:,-_

Lanui DuiluillB

*pquipment and/or Vehicles

Leasehold Improvements

(Other)

Cost:

Start-up Expense Description:

LcgalrOrgan i zation Costs

lnitial Marketing & Promotion

Licenses and Permits

Beginning Inventory

(Other)

Total Fixed Asset and Start-up Expenses:

Note: List major items individually. You may group other, smaller items (like office equipment)

into a single line item.

Writing a Business Plan SBDC L5



tlnit Selling Price and Cost Analysis(Make additional copies of this sheet if necessary.)

Product or Service #1:

A. Selling Price:

less

Direct Costs:

Vlaterials-iLabor

Sub-contractors

(Other)

B. Total Cost per Unit

C. Unit Gross Profit (A minus B)

D. Gross ProfitYo (C divided bv A)

Product or Service: #2:

A. Selling Price:

less

Direct Costs:

Materials

LaborSub-contractors

(Other)

B. Total Cost per Unit

C. Unit Gross Profit (A minus B)

D. Gross Profit % (C divided by A)




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A. (Cont.) Optional Method to Calculate Needed Capital

Many businesses can get a reasonable picture of their financial future by using the fbllowingfonnula. If the business will start making sales very soon after opening, you may decide to multipiimonthly fixed expenses by a number smaller tlran six.

Total Required Capital :. Six Months of Fixed Expenses + Asset Purchases + Start-up Expenses

Column I Column 2

Monthly Fixed Expenses

Salaries (include owner)

Payroll Taxes at l2o/o

Rent

Marketing and Adverlising

Supplies

Telephone & Utilities

- Irrsulancc

MaintenanceI ^,'.1 ^-i A^^^',^ri^,,LLSqr qr ru nl\r.,ur rrrt rE

V iscellaneous

(Other)

Monthly Fixed Expense Sub-total

Asset Purchases

Purchase of Land and BuildingDecorating and Remodeling

Fixtures and Equipment (plus installation)Deposits on Rental Properfy and Utilities

Beginning Inventory

Asset Purchase Sub-Total

Start-up Expense You Pay Once

Legal and Accounting Organization Costs

Licenses and Permits

Initial Advertising and Promotion

(Other)

Start-up Expense Sub-total

Total Estimated Cash Needed to Start (Add Column 2)

x6:

Writing a Business Plan SBDC t8



B. Break Even Analysis

Break even (BlE) analysis is a simple, but very effective Ilnancial fbasibility test. B/E is used to firrct

the amount of sales necessary to pay all fixed costs (and have zero income.) in your business plan. it

represents a minimum acceptable perfbrmance. I--ollow these steps to calculate:

l) Determine Contribution Margin Percent. Contribution Margin (ClN4) eclLrats Sales rninirs

, Variable Expenses. CM% equals CM dollars divided by Sales. Note: The biggest variable

expense is usually Cost of Goocls Sold (CGS), which is the direct material and labor necessary ^ .--^1,^ ^ .^..^1..^. .:^^ -^^-J-, l-^- ^^l^u rll.lKtr d PruuuLr. ui Jgiviur igduJi lLr )drs.

2) List and total all Fixed Expenses for a specific time period (usually one month.) Fixed

expenses do not rise or fall rvith sales volume. Examples: rent. insurance, utilities. etc.

3) Break Even Sales is Fixed Expenses divided by Contribution Margin 7o. (See Exarnple)

Exarnple:

LJnit sales price"

iess Cost of Goods Sold:

Material & Labor/ess Other Variable Exp:

Commissions

Unit Contribution Margin

($10-$3-S1)

CN4"h ($6 + $10; -

Monthl_v Fixed Erpenses.

Rent 2,000

utilities 1,000

Salary 3,000

Other 4.000

Total Fixed E*p. S10,000

$l{)

iI

={A{r\.,

600

BIE : Fixed Expense + CM o/o

BIE: $10,000 +.6

Monthly B/E Sales =

Writing a Business Plan SBDC t9



C. Sources and [Jses of Funds

The Sources and Uses of Funds is a statement of how much money 1,ou need (anci where it wilicome from) and how that money will be used. This statement should be included if your businessplan is being presented to a lender or investor. By definition, sources must equal uses. The

following is an example of a t5,,pical fbrmat.

Sources:

Term Loan

Line of Credit

Personal Equity

Outside Equity

Other

Total Sources

Uses:

Purchase Building

Purchase Equipment

Renovations

Inventory

Working Capital

Cash Resene

Other

Total Uses:

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