SCORE ® Counselors to America’s Small Business Service Corps of Retired Executives Create a Winning Business Plan Session 5 Supporting Documents Other Financial Statements / Analysis Doing It Checklist Wrap-up

203/06/08 1. The Title Form 2. Table of Contents 3. Executive Summary (complete last) 4. Business Section 5. Marketing Section 6. Financial Section 7. Supporting Documents Business Plan Outline

303/06/08 Supporting Documents Personal resumes and other documents Personal resumes and other documents Owner’s financial statements & credit report Owner’s financial statements & credit report Copy of leases, mortgages, purchase agreements Copy of leases, mortgages, purchase agreements Contracts and Letters of reference Contracts and Letters of reference Key Employee job Descriptions Key Employee job Descriptions Licenses and permits required Licenses and permits required Attorney/accountants/insurance advisors Attorney/accountants/insurance advisors

403/06/08 Financial Statements Accounting Methods Cash Basis Cash Basis –Very simple - (like household accounting) –Recognize income when received –Recognize expenses when paid Accrual Basis Accrual Basis –More complex - need an accountant –More financial reports generated –Software is more difficult to use –Recognize income when earned –Recognize expenses when incurred

503/06/08 Financial Statements Profit & Loss Statement (also called income statement) Profit & Loss Statement (also called income statement) –reflects on-going business performance over a period of time Balance Sheet Balance Sheet – Displays net worth of business at a given point in time Cash Flow Statement Cash Flow Statement –Reflects all projected cash inflows and outflows –This is the most important financial statement Important to produce and analyze these statements regularly (monthly)

603/06/08 Profit & Loss Statement Reflects performance over a period of time Gross Sales (Revenue) - Cost of Goods Sold Gross Profit - Operating expenses Operating Income - Interest expense Net Income before taxes - Income taxes Net Income (Profit) Variable expenses ( costs which vary with sales ) Fixed (or period) expenses incl. depreciation Selling expenses General & Administrative expenses Cost to buy, make or provide the product or service sold

703/06/08 Balance Sheet Displays net worth of business at a given point in time +Cash +Accounts Receivable +Inventory Current Assets (convertible to cash within one year) +Equipment +Furniture & Fixtures +Property - Depreciation Fixed Assets (longer than one year to convert to cash) TOTAL ASSETS +Accounts Payable +Accrued Taxes +Short-term Notes Payable +Current due on Long-term Debt Current Liabilities (Collectible within one year) +Long-term Notes Payable (Payable in longer than one year) Total Liabilities +Owners Investment +Retained Earnings (income reinvested in the company) Net Worth (Equity of the company) TOTAL LIABILITIES+NET WORTH Assets (what you own)Liabilities (what you owe) =

803/06/08 An Example Start up costs Start up costs –Fixtures 65 –Pick up truck 15 –Inventory 5 –Cash on hand 15 Total100 Total100 Start up financing –Equity 35 –Debt 65 Total100 Fixed Asset Life = 5 years Annual Depreciation = 16 Debt Term = 5 years Interest = 11% Annual Interest = 7 Principal payment = 13

903/06/08 Example (continued) 1 st year operations: 1 st year operations: –Revenue100 … but collect 97 –Cost of sale 67 … and built 5 of inv. but paid 60 Materials; Direct Labor; Delivery, etc. –Fixed costs 12 Craft Supplies & Artists; Shop & Truck Rental; Advertising, Utilities, Insurance, Legal, Accounting –Owner’s draw 10 Minimum amount needed to live on

1003/06/08 Cash Flows - Year 0

1103/06/08 Cash Flows - Year 0

1203/06/08 Cash Flows - Year 1

1303/06/08 Beginning Balance Sheet Beginning Balance Sheet

1403/06/08

1503/06/08 Cash Flow Statement

1603/06/08 Financial Statements Analyze Your Business Regularly Financial Statements Analyze Your Business Regularly Measure your performance Measure your performance –against industry (ratio analysis compares relationship between two line items to provide benchmarking information) –today vs. yesterday vs. same day last year (trend analysis) –How did I do vs. how did I say I would do (actual vs forecast) Helps recognize red flags; becomes a diagnostic tool Helps recognize red flags; becomes a diagnostic tool

1703/06/08 Types of Benchmark Ratios Profitability Ratios Profitability Ratios –Measure the efficiency of the business and the owner’s return on investment Liquidity Ratios Liquidity Ratios –Measure the ability of the business to meet its financial obligations Leverage Ratios Leverage Ratios –Measure the business risk arising from the debt structure of the business Activity Ratios Activity Ratios –Measure the rate the business is creating cash

1803/06/08 Benchmark Ratios - Examples Profitability Ratios Profitability Ratios –Gross Profit as % of sales –Before Tax Income as % of sales Liquidity Ratios Liquidity Ratios –Quick asset ratio: cash + receivables / current liabilities Leverage Ratios Leverage Ratios –Debt / equity; Debt / Total Liabilities + Net Worth Activity Ratios Activity Ratios –Inventory Turnover

1903/06/08 Other Benchmark Ratio Examples Accounts Receivable as % of sales Accounts Receivable as % of sales Cost of Goods Sold as % of sales Cost of Goods Sold as % of sales Operating Expenses as % of sales Operating Expenses as % of sales Wages as a % of sales Wages as a % of sales Return on Investment Return on Investment = Before Tax income as % of Investment

2003/06/08 Doing It Check List Create legal business Create legal business Get Federal Employer Identification Number Get Federal Employer Identification Number Get state employer I.D. or sales tax permit Get state employer I.D. or sales tax permit Obtain a business license or permit Obtain a business license or permit Obtain financing (equity & debt) Obtain financing (equity & debt) Identify Personnel and begin recruiting Identify Personnel and begin recruiting Set up a business checking account Set up a business checking account Establish a line of credit (if necessary) Establish a line of credit (if necessary)

2103/06/08 Doing It Check List (continued) Establish Credit Card/Check Protection Services Establish Credit Card/Check Protection Services Buy insurance Buy insurance Line up suppliers Line up suppliers Set a starting date Set a starting date Set up physical business Set up physical business Order business cards and stationary Order business cards and stationary Order signage (Outside and Point of Sale) Order signage (Outside and Point of Sale) Develop a website Develop a website Begin pre-opening advertising Begin pre-opening advertising

2203/06/08 Summary Value of a plan lies in thinking about your business in a systematic way Value of a plan lies in thinking about your business in a systematic way You can’t be all things to all people You can’t be all things to all people Segment, differentiate products / services Segment, differentiate products / services Emphasize benefits over features Emphasize benefits over features Market research reduces your risk Market research reduces your risk When you’re out of cash you’re out of business! When you’re out of cash you’re out of business! Cash flow forecast is a tool for testing the condition of a startup or existing business. Cash flow forecast is a tool for testing the condition of a startup or existing business. Budget, Budget, and Budget! Budget, Budget, and Budget! Analyze your performance Analyze your performance

2303/06/08 Workshop Critique What did you like about the workshop? What did you like about the workshop? What could be improved? What could be improved?

SCORE ® Counselors to America’s Small Business Service Corps of Retired Executives Congratulations & Thank You! Keep in touch.

2503/06/08 Katy Area Chamber of Commerce