initial capital requirements business plan

How to Estimate Start Up Capital for Starting a Business

• Small Business
• Types of Businesses to Start
• Start Up Businesses
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How to Start a Portable Concrete Pump Company

How to write a restaurant proposal, why is it important for entrepreneurs to develop financial plans for their companies.

• How to Do a Successful Product Launch
• Examples of Project Cost Assumptions

Startup capital includes funds for any expenses to be incurred before launching a company, and capital required after launch to run the company until it reaches positive cash flow -- when revenues are higher than expenses.

Accurately estimating the capital required to start a company is critical because running out of capital can cause the company to fail in its very early stages. With careful estimates based on sound assumptions, the chances of a cash shortfall are reduced.

Create a Detailed Business Plan

Creating a business plan with forecasts is essential to figuring out how much you'll need to launch and run your business, advises the U.S. Small Business Administration. Describe the products and services you will be offering, and the strategies you intend to deploy to introduce them to the market.

Determine when each strategy will be implemented, such as the schedule for advertising and what media you intend to use. Include a budget that includes your costs to launch the business and run it for the first year. Including revenue projections will help you estimate how much money you will need to get your business off the ground and operate it during year one.

Calculate Product Development Costs

Consult with your vendors or suppliers, and obtain estimates of what these costs will be. Work out precise estimates rather than wide ranges.

Prepare a marketing budget. The strategic marketing plan provides you with information about what your marketing tactics will be. Now attach numbers to these tasks based on consultation with vendors you have selected and researching what other companies in your industry typically spend.

Put together a personnel budget. Forecast the number of employees and management team members you will need for the first three years. Break this out by department so you make sure you don't overlook any functional areas.

Forecast facilities and equipment cost. Determine how much space your venture needs to conduct operations. This can be office space, retail space, and production and warehouse space depending on the type of company. Ask real estate professionals for information about the rate per square foot for the type of space you will need. Remember to include office equipment leases in your equipment forecast, for items such as computer workstations and telephone systems.

Forecast general and administrative expenses. These costs include items such as office supplies, travel, insurance, legal and accounting fees.

Separate Launch and Operating Expenses

Separate out the costs that will be incurred before launching the company from those that will be incurred on an ongoing basis after the company is launched, recommends small-business website BPlans .

Complete a revenue forecast. Build financial models with assumptions about unit sales volume and price, and then generate a spreadsheet with forecast revenues, month by month for the first three years. Total up the expenses you forecast for each of these months, and calculate how long it will take for the company to reach breakeven cash flow. Total the cash deficit for these months.

Compute your total startup capital. Add up capital needed prior to launch and the capital required to fund the cash deficit. This is your total startup capital. It is extremely difficult to accurately forecast how quickly revenues will grow in a start up venture. Take this into account by adding 10 percent to 20 percent to the capital you think you need. Low-ball your projected income estimates to give you a cushion, as well.

• BPlans: Estimating Realistic Startup Costs
• Schedule each new person you hire to come on board when they are absolutely needed, not before, so you can save on personnel costs.
• Plan on securing a short-term lease for the minimum square footage you need to get started, with an option to acquire more space if the company grows as fast as you forecast.
• It is extremely difficult to accurately forecast how quickly revenues will grow in a start up venture. Take this into account by adding 10 percent to 20 percent to the capital you think you need.

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Developing a financial plan for a small business, what is a revenue budget, how to calculate a budgeted profit, how to write a 3-year business forecast, what is an annualized budget, objectives of a feasibility study, how to open a pumpkin farm, main steps in business planning, how to prepare and manage a budget, most popular.

• 1 Developing a Financial Plan For a Small Business
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• 4 How to Write a 3-Year Business Forecast

Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., business plan financials: starting costs.

It’s really important to have an idea of what you need before you start. Continuing with my series on standard business plan financials , startups need to project starting costs. Starting costs set up a starting balance, which is necessary to plan cash flow. And the starting costs are critical to determining whether a startup can bootstrap or needs outside funding. For existing companies that already have financial results, projections start with the expected ending balance of the previous period. But for startups, it’s about starting costs.

Starting costs are essentially the sum of two kinds of spending. You can estimate them both in two simple lists:

• Startup expenses : These are expenses that happen before the beginning of the plan, before the first month of operations. For example, many new companies incur expenses for legal work, logo design, brochures, site selection and improvements, and signage. If there is a business location, then normally the startup pays rent for a month or more before opening. And if employees start receiving compensation before the opening, then those disbursements are also startup expenses.
• Startup assets : Typical startup assets are cash (the money in the bank when the company starts), business or plant equipment, office furniture, vehicles, and starting inventory for stores or manufacturers.

A Simple Starting Costs Example

I’ve used a bicycle store as an example in several posts that are part of this series of standard business plan financials. Here’s a visual in spreadsheet form, of sample starting costs for a hypothetical bicycle store.

Notice that the lists for estimating starting costs, on the left in the illustration above, are matched to another list of starting funding, on the right side of the illustration. Books have to balance, so the initial estimates need to include not just the money you spend, but also where it comes from. In the case above, Garrett had to find $124,500, and you can see that he financed it with Accounts Payable, debt, and investment in various categories.

Another Simple Starting Costs Example

Here is another simple example: the starting costs worksheet that Magda developed for the restaurant I used for a sample sales forecast . Magda’s list includes rent and payroll, the same as in her monthly spending, but here they are included in starting costs because these expenses happen before the launch.

I included rent and payroll because they point out the importance in timing. The difference between these as startup expenses and running expenses is timing, and nothing else. Magda could have chosen to plan startup expenses as a running worksheet on expenses, starting a few months before launch, as in the illustration below. The launch in this case is early January, so the expenses for October through December are startup expenses. I prefer the separate lists, because I like the way the two lists create an estimate of starting costs. But that’s an option.

The LivePlan Alternative

If you’re a LivePlan user, the LivePlan interface assumes this method and has a more intuitive interface than the spreadsheet version I’m showing in this post. For LivePlan, you start your plan when you start spending, regardless of launch date. So the spending you do for rent and salaries and such, before launch, is part of the flow, as above. Also, LivePlan has its own guided way of helping you figure out what assets you need, how much they cost, and how you are going to finance starting costs, to set up your balance. And the LivePlan cash flow estimator will help you decide how much cash you need, so you don’t have to follow the spreadsheet method here (below).

How to Estimate Your Starting Costs

Obviously the goal with starting costs isn’t just to track them, but to estimate them ahead of time so you have a better idea, before you start a new business, of what the financial costs might be. Breaking the items down into a practical list makes the educated guess a lot easier. Ideally, you know the business you want to start, you are already familiar with the industry, so you can do a useful estimate for most of the startup costs from your own experience. If you don’t have enough firsthand knowledge, then you should be talking to people who do. For others, such as insurance, legal costs, or graphic design for logos, call some providers or brokers, and talk to partners; educate those guesses.

Starting Cash is the Hardest and Most Important

How much cash do you need in the bank, as you launch? That’s usually the toughest starting cost question. It’s also prone to misinformation, such as those alleged rules of thumb you can find everywhere, saying you need to have a year’s worth of expenses, or six months’ worth, before you start. It’s not that simple. For most businesses, the startup cash isn’t a matter of what’s ideal, or what some expert says is the rule of thumb – it’s how much money you have, can get, and are willing to risk.

The best way is to do a Projected Cash Flow while leaving the supposed starting cash balance at zero, which shows how much (at least in theory, according to assumptions) the startup really needs in cash to support the business as it grows, before it reaches a monthly cash flow break-even point. Magda did that to determine the $12,000 needed as starting cash for her restaurant. Note how, in the illustration here, the lowest point in cash is slightly less than $12,000:

That low point comes, theoretically, in the third month of the business, March. The low point is $11,609. Obviously that’s just an educated guess, but it’s based on assumptions for sales forecast, expense budget, and important cash flow factors including sales on account and purchasing inventory. So it’s better than a stab in the dark, or some rule of thumb. Just as an example, the total spending with the estimates shown here, the theoretical “year’s worth of spending,” is $182,000 (which you don’t see on the illustration, by the way, but take my word for it). The total for the first six months is $93,000. If Magda sticks to those old formulas, she can’t start the business. She is able to raise enough money, between loans and her savings, to put $12,000 into the starting cash balance. So that’s what she does. Then she launches and continues to have her monthly reviews, and watch the performance of all key indicators very carefully.

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1.4: Chapter 4 – Initial Business Plan Draft

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• Page ID 21278

• Lee A. Swanson
• University of Saskatchewan

Learning Objectives

After completing this chapter, you will be able to

• Develop a comprehensive business plan draft

This chapter describes an approach to writing your draft business plan. It also outlines the elements of a comprehensive business plan that can be used as a template for starting your business plan.

Figure 7 – Initial Business Plan Draft (Illustration by Lee A. Swanson)

Effective Business Plans

Effective business plans

• Provide statements that are backed by evidence or data
• Include context and references with every table, figure, or illustration
• Include relevant, clear, concise tables and financial information, and exclude unnecessary material
• Present timelines for distinct purposes
• Use clear sections customized to the particular business or its environment rather than generic sections

Writing the Draft Business Plan

Although there are various ways to approach the task of writing a draft business plan, one effective approach is to do the following:

• This will provide you with a template for the information needed for your plan.
• You can copy and paste the results of your essential initial research into the sections of your business plan template where you believe that they can be used to support or justify the strategies and other decisions you will later describe in those sections. Of course, you can later move those parts of your environmental scan as needed as you develop your plan. In general, this strategy results in a stronger business plan .
• Completing this step will give you the satisfaction of seeing some of your work so far taking shape in the form of a business plan.
• Also, inserting the results from your environmental scan into the relevant sections of your plan should later provide you with the stimulus and support you will need to develop solid, realistic, evidence-based strategies and decisions for those sections.
• Incorporate your business model into your new business plan template. As there is no section in a business plan in which you specifically describe your business model, you will need to incorporate your business model elements into appropriate sections of your plan.
• You will normally include both information that you got from particular sources and information based on an assumption you made (and that you might intend to replace later with more accurate information from valid sources).

Follow these practices as you develop your plan:

• When you do this, you help establish your credibility as a business plan writer, and your business plan’s credibility. It also might save you time later when you discover that you need to add a similar item along with its cost to your list.
• Note: Do not reinvent the wheel by “inventing” your own method to reference your sources and do not use multiple methods. Use one (and only one) proper and well-established referencing method, like APA. This will improve the degree of professionalism of your plan.
• Note: if you are an expert source on something—maybe you are a construction expert that business plan readers will trust to do estimates on building costs—you should establish your credentials and clearly indicate when some of the information in your plan is based on your own expert knowledge.
• When you flag your assumptions in this way, you can quickly and easily see what information needs to be replaced with sourced information before you finalize your business plan.
• Projecting realistic sales can be difficult, but setting up a method for doing so early gives business plan writers a significant start toward completing their business plan. A well-developed sales model that takes advantage of the powers of electronic spreadsheets gives business plan writers the opportunity to relatively quickly and easily make necessary changes to their assumptions and overall estimates when needed.
• When you use the schedules provided on the spreadsheet templates, and any others that you add, you will be well on your way to developing the financial component of your business plan.

General Business Plan Format

Letter of transmittal.

A letter of transmittal is similar to the cover letter of a resume. The letter of transmittal should be tailored to the reader, clearly identifying the customized ask of the potential investor or lender. It should be short and succinct, delineating the ask (i.e. funding, specialized recruiting, purchasing a product or service, obtaining advice, etc.) within a few paragraphs. It should not summarize the business plan, as that is the job of the executive summary.

• Includes nice, catchy, professional, appropriate graphics to make it appealing for targeted readers

Executive Summary

• Can be longer than normal executive summaries—up to three pages
• Written after remainder of plan is complete
• Includes information relevant to targeted readers as this is the place where they are most likely to form their first impressions of the business idea and decide whether they wish to read the rest of the plan

Table of Contents

List of tables.

• References every table, figure, and appendix within the text of the plan so the relevance of each of these elements is clear.

List of Figures

Introduction.

• Indicates the purpose for the plan
• Appeals to targeted readers

Business Idea

• May include description of history behind the idea and the evolution of the business concept if relevant

Value Proposition

• Explains how your business idea solves a problem for your expected customers or otherwise should make them want to purchase your product or service instead of a competitor’s
• Outlines what you intend for the venture to be
• Inspires all members of the organization
• Helps stakeholders aspire to achieve greater things through the venture because of the general direction provided through the vision statement

After articulating a good vision, the business plan writer should consider what achieving the vision looks like. Many business plan writers write their vision and leave it at that. The problem with this approach is that they often then do not take the necessary steps to illustrate how the strategies they outline in their plan will move them toward achieving their vision. If they make this mistake, their strategies might indicate that they are fulfilling their current mission, but are not taking steps to move beyond that.

Vision statements should be clear with context throughout the business plan. For example, if the goal is to be the premier business operating in that industry in Saskatchewan, does that mean you have one location and are considered the best at what you do it even though you only have a small corner of the market, or does it mean that you have many locations across the province and enjoy a large market share?

• Should be very brief—a few sentences or a short paragraph
• Indicates what your organization does and why it exists—may describe the business strategy and philosophy
• Consists of five to ten short statements indicating the important values that will guide everything the business will do
• Outlines the personal commitments members of the organization must make, and what they should consider to be important
• Defines how people behave and interact with each other
• Should be reflected in all of the decisions outlined in the business plan, from hiring to promotions to location choices
• Helps the reader understand the type of culture and operating environment this business intends to develop

Major Goals

• Describes the major organizational goals
• Specific, Measurable, Action oriented, Realistic, and Timely [SMART]
• Realistic, Understandable, Measureable, Believable, and Achievable [RUMBA]
• Aligns with everything in plan
• Written, or re-written as the second last thing you do before finalizing your business plan by proofreading, polishing, and printing it (writing the Executive Summary is the final thing you should write)

Operating Environment

Trend analysis.

• However, consider whether this is the right place for this analysis: it may be better positioned, for example, in the Financial Plan section to provide context to the analysis of the critical success factors, or in the Marketing Plan to help the reader understand the basis for the sales projections.

Industry Analysis

• Includes an analysis of the industry in which this business will operate
• As above, consider whether this is the right place for this analysis: it may be better placed, for example, in the Marketing Plan to enhance the competitor analysis, or in the Financial plan to provide context to the industry standard ratios in the Investment Analysis section.

Of course, your trend analysis will also include a market-level analysis (using a set of questions, like those listed in Chapter 2) and a firm-level analysis (using tools like a SWOT Analysis / TOWS Matrix, various forms of financial analyses, a founder fit analysis, and so on), but those analyses are usually best placed in other sections of your plan to support the strategies and decisions you present there. The market-level analysis will inevitably fit in the Marketing Plan section, but the firm-level analysis might be spread across some or all of the Operating Plan, Human Resources Plan, Marketing Plan, and Financial Plan sections.

Operations Plan

• Given these constraints, what is your operating capacity (in terms of production, sales, etc.)?
• What is the work flow plan for your operation?
• What work will your company do and what work will you outsource?

Operations Timeline

• When will you make the preparations, such as registering the business name and purchasing equipment, to start the venture?
• When will you begin operations and make your first sales?
• When will other milestone events occur such as moving operations to a larger facility, offering a new product line, hiring new key employees, and beginning to sell products internationally?
• Sometimes it is useful to include a graphical timeline showing when these milestone events have occurred and are expected to occur.

Business Structure and other Set-up Elements

• Sole Proprietorship
• Partnership
• Limited Partnership
• Corporation
• Cooperative

Note: Your financial statements, risk management strategy, and other elements of your plan are affected by the type of legal structure you choose for your business. For example, all partnerships should have a clear agreement outlining the duties, expectations, and compensation of all partners as well as the process of dissolution. Spreadsheet templates are formatted for corporations and will need to be formatted for other forms of businesses.

• Zoning, equipment prices, suppliers, etc.
• Leasing terms, leasehold improvements, signage, pay deposits, etc.
• Getting business license, permits, etc.
• Setting up banking arrangements
• Setting up legal and accounting systems (or professionals)
• Ordering equipment, locks and keys, furniture, etc.
• Recruiting employees, setting up the payroll system and benefit programs, etc.
• Training employees
• Testing the products/services that will be offered
• Testing the systems for supply, sales, delivery, and other functions
• Creating graphics, logos, promotional methods, etc.
• Ordering business cards, letter head, etc.
• Setting up supplier agreements and outlining why those sellers are preferred
• Buying inventory, insurance, etc.
• Revising business plan
• And many more things, including, when possible, attracting purchased orders in advance of start-up through personal selling (by the owner, a paid sales force, independent representatives, or by selling through brokers wholesalers, catalogue houses, retailers), a promotional campaign, or other means

Note: As part of your business set-up, you need to determine what kinds of control systems you should have in place, establish necessary relationships with suppliers prior to your start-up, and generally deal with a list of issues like those mentioned above.

• What is required to start-up your business including the purchases and activities that must occur before you make your first sale?
• When identifying capital requirements for start-up, a distinction should be made between fixed capital requirements and working capital requirements.

Fixed Capital Requirements

• What fixed assets, including equipment and machinery, must be purchased so your venture can conduct its business?
• May also show the financing required, often in the form of longer-term loans

Working Capital Requirements

• What money is needed to operate the business (separately from the money needed to purchase fixed assets) including the money needed to purchase inventory and pay initial expenses?
• May also show the financing required. Working capital is usually financed with operating loans, trade credit, credit card debt, or other forms of shorter-term loans

Risk Management Strategies

• Enterprise – liability exposure for things like when someone accuses your employees or products you sell of injuring them
• Financial – securing loans when needed and otherwise having the right amount of money when you need it
• Operational – securing needed inventories, recruiting needed employees in tight labour markets, operating when customers you counted on not purchasing product as you had anticipated, managing theft, arson, and natural disasters like fires and floods, etc.
• Avoid – choose to avoid doing something, outsource, etc.
• Reduce – through training, assuming specific operational strategies, etc.
• Transfer – insure against, outsource, etc.
• Assume – self-insure, accept, etc.

Figure 8 – Risk Management Strategies (Illustration by Lee A. Swanson)

Operating Processes

• What operating processes will you apply?
• How will you ensure your cash is managed effectively?
• How will you schedule your employees?
• How will you manage your inventories?
• If you will have a workforce, how will you manage them?
• How will you bill out your employee time?
• How will you schedule work on your contracts?
• How you will manufacture your product (process flow, job shop, etc.?)
• How will you maintain quality?
• How will you institute and manage effective financial monitoring and control systems that provide needed information in a timely manner?
• How will you manage expansion?
• May include planned layouts for facilities
• What are your facility plans?
• Expressed as a set physical location
• Expressed as a set of requirements and characteristics
• How large will your facility be and why must it be this size?
• How much will it cost to buy or lease your facility?
• What utility, parking, and other costs must you pay for this facility?
• What expansion plans must be factored into the facility requirements?
• What transportation and storage issues must be addressed by facility decisions?
• What zoning and other legal issues must you deal with?
• What will be the layout for your facility and how will this best accommodate customer and employee requirements?

Organizational Structure

• May include information on Advisory Boards or Board of Directors from which the company will seek advice or guidance or direction
• May include an organizational chart
• Can be a nice lead-in to the Human Resources Plan

Human Resources Plan

• How do you describe your desired corporate culture?
• What are the key positions within your organization?
• How many employees will you have?
• What characteristics define your desired employees?
• What is your recruitment strategy? What processes will you apply to hire the employees you require?
• What is your leadership strategy and why have you chosen this approach?
• What performance appraisal and employee development methods will you use?
• What is your organizational structure and why is this the best way for your company to be organized?
• How will you pay each employee (wage, salary, commission, etc.)? How much will you pay each employee?
• What are your payroll costs, including benefits?
• What work will be outsourced and what work will be completed in-house?
• Have you shown and described an organizational chart?

Recruitment and Retention Strategies

• Includes how many employees are required at what times
• Estimates time required to recruit needed employees
• Employment advertisements
• Contracts with employment agency or search firms
• Travel and accommodations for potential employees to come for interviews
• Travel and accommodations for interviewers
• Facility, food, lost time, and other interviewing costs
• Relocation allowances for those hired including flights, moving companies, housing allowances, spousal employment assistance, etc.
• May include a schedule showing the costs of initial recruitment that then flows into your start-up expense schedules

Leadership and Management Strategies

• Outlines your leadership philosophy
• Explains why it is the most appropriate leadership approach for this venture
• What training is required because of existing rules and regulations?
• How will you ensure your employees are as capable as required?
• Health and safety (legislation, WHMIS, first aid, defibulators, etc.)
• Initial workplace orientation
• Financial systems
• Product features

Performance Appraisals

• Identifies how you will manage your performance appraisal systems

Health and Safety

• Notes any legal requirements (and also legal requirements for other issues that may be included in other parts of the plan)
• Identifies accreditation you might pursue, such as ISO 9000, and if so, evaluates the costs, benefits, and time frame
• Outlines training for employees, such as WHMIS training or machinery handling training

Compensation

• Always justifies your planned employee compensation methods and amounts
• Always includes all components of the compensation (CPP, EI, holiday pay, etc.)
• Identifies how you will ensure both internal and external equity in your pay systems
• Describes any incentive-based pay or profit sharing systems planned
• May include a schedule that shows the financial implications of your compensation strategy and supports the cash flow and income statements shown later

Key Personnel

• May include brief biographies of the key organizational people

Marketing Plan

• You must show evidence of having done proper research, both primary and secondary. If you make a statement of fact, you must back it up with properly referenced supporting evidence. If you indicate a claim is based on your own assumptions, you must back this up with a description as to how you came to the conclusion.
• It is a given that you must provide some assessment of the economic situation as it relates to your business. For example, you might conclude that the current economic crisis will reduce the potential to export your product and it may make it more difficult to acquire credit with which to operate your business. Of course, conclusions such as these should be matched with your assessment as to how your business will make the necessary adjustments to ensure it will thrive despite these challenges, or how it will take advantage of any opportunities your assessment uncovers.
• If you apply the Five Forces Model, do so in the way in which it was meant to be used to avoid significantly reducing its usefulness while also harming the viability of your industry analysis. This model is meant to be used to consider the entire industry, not a subcomponent of it (and it usually cannot be used to analyze a single organization).
• Your competitor analysis might fit within your assessment of the industry, or it might be best as a section within your marketing plan. Usually a fairly detailed description of your competitors is required, including an analysis of their strengths and weaknesses. In some cases, your business may have direct and indirect competitors to consider. Maintain credibility by demonstrating that you fully understand the competitive environment.
• Assessments of the economic conditions and the state of the industry appear incomplete without accompanying appraisals outlining the strategies the organization can/should employ to take advantage of these economic and industry situations. So, depending upon how you have organized your work, it is usually important to couple your appraisal of the economic and industry conditions with accompanying strategies for your venture. This shows the reader that you not only understand the operating environment, but that you have figured out how best to operate your business within that situation.
• Outlines an effective analysis of your venture (see the Organizational Analysis section below)

Market Analysis

• Usually contains customer profiles, constructed through primary and secondary research, for each market targeted
• Contains detailed information on the major product benefits you will deliver to the markets targeted
• Describes the methodology used and the relevant results from the primary market research completed
• If there was little primary research completed, justifies why it is acceptable to have done little of this kind of research and/or indicate what will be done and by when
• Includes a complete description of the secondary research conducted and the conclusions reached
• Define your target market in terms of identifiable entities sharing common characteristics. For example, it is not meaningful to indicate you are targeting Canadian universities. It is, however, useful to define your target market as Canadian university students between the ages of 18 and 25, or as information technology managers at Canadian universities, or as student leaders at Canadian universities. Your targeted customer should generally be able to make or significantly influence the buying decision.
• You must usually define your target market prior to describing your marketing mix, including your proposed product line. Sometimes the product descriptions in business plans seem to be at odds with the described target market characteristics. Ensure your defined target market aligns completely with your marketing mix (including product/service description, distribution channels, promotional methods, and pricing). For example, if the target market is defined as Canadian university students between the ages of 18 and 25, the product component of the marketing mix should clearly be something that appeals to this target market.
• Carefully choose how you will target potential customers. Should you target them based on their demographic characteristics, psychographic characteristics, or geographic location?
• You will need to access research to answer this question. Based on what you discover, you will need to figure out the optimum mix of pricing, distribution, promotions, and product decisions to best appeal to how your targeted customers make their buying decisions.

Competition

• However, this information might fit instead under the market analysis section.
• Describes all your direct competitors
• Describes all your indirect competitors
• If you include a competitor positioning map, insure that the x-axis and y-axis are meaningful. Often, competitor maps include quality and price as axes. Unless you can clearly articulate the distinction between high quality and low quality, it may be more valuable to have more meaningful axes or describe your value proposition relative to your competitors in the absence of a positioning map.

Figure 9 – Competitor Positioning Map (Illustration by Lee A. Swanson)

• You must clearly communicate the answers to these questions in your business plan in order to attract the needed support for your business. One caution is that it may sound appealing to claim you will provide a superior service to the existing competitors, but the only meaningful judge of your success in this regard will be customers. Although it is possible some of your competitors might be complacent in their current way of doing things, it is very unlikely that all your competitors provide an inferior service to that which you will be able to provide.

Marketing Strategy

• Covers all aspects of the marketing mix: your promotional decisions, product decisions, distribution decisions, and pricing decisions
• Outlines how you plan to influence your targeted customers to buy from you (your optimum marketing mix, and why is this one better than the alternatives)

Organizational Analysis

• Leads in to your marketing strategy or is positioned elsewhere depending upon how your business plan is best structured
• If doing so, ALWAYS ensure this analysis results in more than a simple list of internal strengths and weaknesses and external opportunities and threats. A SWOT analysis should always prove to the reader that there are organizational strategies in place to address each of the weaknesses and threats identified and to leverage each of the strengths and opportunities identified.
• An effective way to ensure an effective outcome to your SWOT Analysis is to apply a TOWS Matrix approach to develop strategies to take advantage of the identified strengths and opportunities while mitigating the weaknesses and threats. A TOWS Matrix evaluates each of the identified threats along with each of the weaknesses and then each of the strengths. It does the same with each of the identified opportunities. In this way strategies are developed by considering pairs of factors.
• The TOWS Matrix is a framework with which to help you organize your thoughts into strategies. Most often you would not label a section of your business plan as a TOWS Matrix because this would not add value for the reader. Instead, you should describe the resultant strategies—perhaps while indicating how they were derived from your assessment of the strengths, weaknesses, opportunities, and threats. For example, you could indicate that certain strategies were developed by considering how internal strengths could be employed toward mitigating external threats faced by the business.

Product Strategy

• If your product or service is standardized, you will need to compete on the basis of something else—like a more appealing price, having a superior location, better branding, or improved service. If you can differentiate your product or service, you might be able to compete on the basis of better quality, more features, appealing style, or something else. When describing your product, you should demonstrate that you understand this.

Pricing Strategy

• If you intend to accept payment by credit card (which is probably a necessity for most companies), you should be aware of the fee you are charged as a percentage of the value of each transaction. If you don’t account for this you risk overstating your actual revenues by perhaps one percent or more.
• Sales forecasts must be done on at least a monthly basis if you are using a projected cash flow statement. These must be accompanied by explanations designed to establish their credibility for readers of your business plan. Remember that many readers will initially assume your planned time frames are too long, your revenues are overstated, and you have underestimated your expenses. Well crafted explanations for all of these numbers will help establish credibility.

Distribution Strategy

• If you plan to use e-commerce, you should include all the costs associated with maintaining a website and accepting payments over the Internet.

Promotions Strategy

• As a new entrant into the market, must you attract your customers away from your competitors they currently buy from or will you be creating new customers for your product or service (i.e. not attracting customers away from your competitors)?
• If you are attracting customers away from competitors, how will these rivals respond to the threat you pose to them?
• If you intend to create new customers, how will you convince them to reallocate their dollars toward your product or service (and away from other things they want to purchase)?
• In what ways will you communicate with your targeted customers? When will you communicate with them? What specific messages do you plan to convey to them? How much will this promotions plan cost?
• If your entry into the market will not be a threat to direct competitors, it is likely you must convince potential customers to spend their money with you rather than on what they had previously earmarked those dollars toward. In your business plan you must demonstrate an awareness of these issues.
• Consider listing the promotional methods in rows on a spreadsheet with the columns representing weeks or months over probably about 18 months from the time of your first promotional expenditure. This can end up being a schedule that feeds the costs into your projected cash flow statement and from there into your projected income statements.
• If you phone or visit newspapers, radio stations, or television stations seeking advertising costs, you must go only after you have figured out details like on which days you would like to advertise, at what times on those days, whether you want your print advertisements in color, and what size of print advertisements you want.
• Carefully consider which promotional methods you will use. While using a medium like television may initially sound appealing, it is very expensive unless your ad runs during the non-prime times. If you think this type of medium might work for you, do a serious cost-benefit analysis to be sure.
• Some promotional plans are developed around newspaper ads, promotional pamphlets, printing business cards, and other more obvious mediums of promotion. Be certain to, include the costs of advertising in telephone directories, sponsoring a little league soccer team, producing personalized pens and other promotional client give-always, donating items to charity auctions, printing and mailing client Christmas cards, and doing the many things businesses find they do on-the-fly. Many businesses find it to be useful to join the local chamber of commerce and relevant trade organizations with which to network. Some find that setting a booth up at a trade fair helps launch their business.
• If you are concerned you might have missed some of these promotional expenses, or if you want to have a buffer in place in case you feel some of these opportunities are worthwhile when they arise, you should add some discretionary money to your promotional budget. A problem some companies get into is planning out their promotions in advance only to reallocate some of their newspaper advertisement money, for example, toward some of these other surprise purposes resulting in less newspaper advertising than had been intended.

Financial Plan

• Contains financial statements
• Various funding options and exit strategies for potential investors
• Business valuation (be cautious not to over value your business)
• Break-even analysis

Business Valuation

There are a multitude of sophisticated business valuation methodologies. A rule of thumb for business valuations is a multiple of its earnings. For example, if the chosen multiple is five and the business’ earnings before taxes are $55M, the business’ valuation would be approximately $275M.

Break-Even Analysis

Break-Even Point = FC/(P-VC)

• FC = Fixed Costs
• P = Unit Price
• VC = Variable Cost

Example: If the business’ total fixed costs are $1,000,000.00, it costs $5.00 to produce the widget, and the business sells the widget for $7.00, the break-even point is 500,000 widgets.

• You will most certainly need to make monthly cash flow projections from business inception to possibly three years out. Your projections will show the months in which the activities shown on your fixed capital and working capital schedules will occur. This is nearly the only way to clearly estimate your working capital needs and, specifically, important things like the times when you will need to draw on or can pay down your operating loans and the months when you will need to take out longer-term loans with which to purchase your fixed assets. Without a tool like this you will be severely handicapped when talking with bankers about your expected needs. They will want to know how large of a line of credit you will need and when you anticipate needing to borrow longer-term money. It is only through doing cash flow projections that you will be able to answer these questions. This information is also needed to determine things like the changes to your required loan payments and when you can take owner draws or pay dividends.
• Your projected cash flows are also used to develop your projected income statements and balance sheets.

Pro forma Cash Flow Statements

Pro forma income statements, pro forma balance sheets, investment analysis, projected financial ratios and industry standard ratios, critical success factors (sensitivity analysis), list of items a business may need to purchase.

• Business license
• Registration for name, etc.
• Domain name registration
• Initial product inventory
• All the little things like curtains/blinds, decorations, microwave for staff room, etc.
• All the things needed to run the business from day #1 (like cutlery, plates, cooking pots, table settings etc. for restaurants; like towels, soap, etc. for gyms; like equipment and so on for manufacturing and service places)
• Set-up and testing of new facilities—new factories and offices do not operate at peak efficiency for some time after start-up because it takes time for the new systems to kick into high gear
• Professional services needed
• Lawyer’s fees to make sure agreements are solid
• Graphic designer or design company needed to develop visuals
• Accounting firm needed to set up initial systems
• Insurance—maybe not a direct cost to this one to account for
• Accounting system software
• Computer, printer, other things needed like scanner
• Office furniture
• Initial office supplies—paper, pens, etc.
• Internet/wifi
• Microwave and coffee maker and similar supplies for staff room or coffee room
• Bank fees—business banking is normally not free—might also need to have business cheques

Customer Interaction

• Cash register
• Loyalty cards/system

Production/Operations

• Safety equipment (fire extinguishers, AED)
• Security systems
• Equipment maintenance
• Janitorial services and cleaning supplies
• Bathroom supplies—toilet paper, soap, towels
• Membership costs for various associations, including the local chamber of commerce, any professional associations for the relevant industry, etc.
• Subscriptions for things like important trade publications, etc.
• Shelving and storage systems
• Even when not full restaurant, operations like coffee shops still require equipment like dishwasher
• Safety—prior to start-up and ongoing and for new employees
• Ads, travel expenses—flights, hotels, taxi rides, meal allowances, etc.—to recruit people through interviews, meeting meals, set up with real estate agents, etc.
• Website development
• Costs for setting up and managing social media (can take a lot of an employee’s time)
• Grand opening costs
• If buying, include property taxes and all utilities in cash flows and income statement and include building maintenance and maybe build up a reserve fund to pay for things like future roof repairs and needed renovations and upgrades
• If renting/leasing, include rental/least cost and whatever utilities are not included in rental/lease payment

Renovations

• Construction
• Utility hookups
• Inspections
• Interior signage
• Fencing, parking lot, exterior lighting, other exterior things

Risk Management

• Insurance (need to choose the types needed)
• Training costs
• Things like snow removal, de-icing sidewalks, etc.

Chapter Summary

This chapter described the basic elements of a comprehensive business plan.

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Elements of a Business Plan There are seven major sections of a business plan, and each one is a complex document. Read this selection from our business plan tutorial to fully understand these components.

Now that you understand why you need a business plan and you've spent some time doing your homework gathering the information you need to create one, it's time to roll up your sleeves and get everything down on paper. The following pages will describe in detail the seven essential sections of a business plan: what you should include, what you shouldn't include, how to work the numbers and additional resources you can turn to for help. With that in mind, jump right in.

Executive Summary

Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. This is very important. All too often, what the business owner desires is buried on page eight. Clearly state what you're asking for in the summary.

The statement should be kept short and businesslike, probably no more than half a page. It could be longer, depending on how complicated the use of funds may be, but the summary of a business plan, like the summary of a loan application, is generally no longer than one page. Within that space, you'll need to provide a synopsis of your entire business plan. Key elements that should be included are:

• Business concept. Describes the business, its product and the market it will serve. It should point out just exactly what will be sold, to whom and why the business will hold a competitive advantage.
• Financial features. Highlights the important financial points of the business including sales, profits, cash flows and return on investment.
• Financial requirements. Clearly states the capital needed to start the business and to expand. It should detail how the capital will be used, and the equity, if any, that will be provided for funding. If the loan for initial capital will be based on security instead of equity, you should also specify the source of collateral.
• Current business position. Furnishes relevant information about the company, its legal form of operation, when it was formed, the principal owners and key personnel.
• Major achievements. Details any developments within the company that are essential to the success of the business. Major achievements include items like patents, prototypes, location of a facility, any crucial contracts that need to be in place for product development, or results from any test marketing that has been conducted.

When writing your statement of purpose, don't waste words. If the statement of purpose is eight pages, nobody's going to read it because it'll be very clear that the business, no matter what its merits, won't be a good investment because the principals are indecisive and don't really know what they want. Make it easy for the reader to realize at first glance both your needs and capabilities.

Business Description

Tell them all about it.

The business description usually begins with a short description of the industry. When describing the industry, discuss the present outlook as well as future possibilities. You should also provide information on all the various markets within the industry, including any new products or developments that will benefit or adversely affect your business. Base all of your observations on reliable data and be sure to footnote sources of information as appropriate. This is important if you're seeking funding; the investor will want to know just how dependable your information is, and won't risk money on assumptions or conjecture.

When describing your business, the first thing you need to concentrate on is its structure. By structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or service-oriented. Also state whether the business is new or already established.

In addition to structure, legal form should be reiterated once again. Detail whether the business is a sole proprietorship, partnership or corporation, who its principals are, and what they will bring to the business.

You should also mention who you will sell to, how the product will be distributed, and the business's support systems. Support may come in the form of advertising, promotions and customer service.

Once you've described the business, you need to describe the products or services you intend to market. The product description statement should be complete enough to give the reader a clear idea of your intentions. You may want to emphasize any unique features or variations from concepts that can typically be found in the industry.

Be specific in showing how you will give your business a competitive edge. For example, your business will be better because you will supply a full line of products; competitor A doesn't have a full line. You're going to provide service after the sale; competitor B doesn't support anything he sells. Your merchandise will be of higher quality. You'll give a money-back guarantee. Competitor C has the reputation for selling the best French fries in town; you're going to sell the best Thousand Island dressing.

How Will I Profit?

Now you must be a classic capitalist and ask yourself, "How can I turn a buck? And why do I think I can make a profit that way?" Answer that question for yourself, and then convey that answer to others in the business concept section. You don't have to write 25 pages on why your business will be profitable. Just explain the factors you think will make it successful, like the following: it's a well-organized business, it will have state-of-the-art equipment, its location is exceptional, the market is ready for it, and it's a dynamite product at a fair price.

If you're using your business plan as a document for financial purposes, explain why the added equity or debt money is going to make your business more profitable.

Show how you will expand your business or be able to create something by using that money.

Show why your business is going to be profitable. A potential lender is going to want to know how successful you're going to be in this particular business. Factors that support your claims for success can be mentioned briefly; they will be detailed later. Give the reader an idea of the experience of the other key people in the business. They'll want to know what suppliers or experts you've spoken to about your business and their response to your idea. They may even ask you to clarify your choice of location or reasons for selling this particular product.

The business description can be a few paragraphs in length to a few pages, depending on the complexity of your plan. If your plan isn't too complicated, keep your business description short, describing the industry in one paragraph, the product in another, and the business and its success factors in three or four paragraphs that will end the statement.

While you may need to have a lengthy business description in some cases, it's our opinion that a short statement conveys the required information in a much more effective manner. It doesn't attempt to hold the reader's attention for an extended period of time, and this is important if you're presenting to a potential investor who will have other plans he or she will need to read as well. If the business description is long and drawn-out, you'll lose the reader's attention, and possibly any chance of receiving the necessary funding for the project.

Market Strategies

Define your market.

Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and promotional strategies that will allow the company to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this will allow you to develop your own estimates for the future of your business.

Begin your market analysis by defining the market in terms of size, structure, growth prospects, trends and sales potential.

The total aggregate sales of your competitors will provide you with a fairly accurate estimate of the total potential market. Once the size of the market has been determined, the next step is to define the target market. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market--the total number of users within the sphere of the business's influence. The segmentation factors can be geographic, customer attributes or product-oriented.

For instance, if the distribution of your product is confined to a specific geographic area, then you want to further define the target market to reflect the number of users or sales of that product within that geographic segment.

Once the target market has been detailed, it needs to be further defined to determine the total feasible market. This can be done in several ways, but most professional planners will delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market. In the case of a microbrewery that plans to brew a premium lager beer, the total feasible market could be defined by determining how many drinkers of premium pilsner beers there are in the target market.

It's important to understand that the total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.

Projecting Market Share

Arriving at a projection of the market share for a business plan is very much a subjective estimate. It's based on not only an analysis of the market but on highly targeted and competitive distribution, pricing and promotional strategies. For instance, even though there may be a sizable number of premium pilsner drinkers to form the total feasible market, you need to be able to reach them through your distribution network at a price point that's competitive, and then you have to let them know it's available and where they can buy it. How effectively you can achieve your distribution, pricing and promotional goals determines the extent to which you will be able to garner market share.

For a business plan, you must be able to estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, you'll need to consider two factors:

• Industry growth which will increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
• Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where you have five distinct stages: early pioneer users, early users, early majority users, late majority users and late users. Using conversion rates, market growth will continue to increase your market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.

Defining the market is but one step in your analysis. With the information you've gained through market research, you need to develop strategies that will allow you to fulfill your objectives.

Positioning Your Business

When discussing market strategy, it's inevitable that positioning will be brought up. A company's positioning strategy is affected by a number of variables that are closely tied to the motivations and requirements of target customers within as well as the actions of primary competitors.

Before a product can be positioned, you need to answer several strategic questions such as:

• How are your competitors positioning themselves?
• What specific attributes does your product have that your competitors' don't?
• What customer needs does your product fulfill?

Once you've answered your strategic questions based on research of the market, you can then begin to develop your positioning strategy and illustrate that in your business plan. A positioning statement for a business plan doesn't have to be long or elaborate. It should merely point out exactly how you want your product perceived by both customers and the competition.

How you price your product is important because it will have a direct effect on the success of your business. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward:

• All prices must cover costs.
• The best and most effective way of lowering your sales prices is to lower costs.
• Your prices must reflect the dynamics of cost, demand, changes in the market and response to your competition.
• Prices must be established to assure sales. Don't price against a competitive operation alone. Rather, price to sell.
• Product utility, longevity, maintenance and end use must be judged continually, and target prices adjusted accordingly.
• Prices must be set to preserve order in the marketplace.

There are many methods of establishing prices available to you:

• Cost-plus pricing. Used mainly by manufacturers, cost-plus pricing assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained.
• Demand pricing. Used by companies that sell their product through a variety of sources at differing prices based on demand.
• Competitive pricing. Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another.
• Markup pricing. Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product. Each method listed above has its strengths and weaknesses.
• Distribution

Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose will depend upon the industry and the size of the market. A good way to make your decision is to analyze your competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide you with a strategic advantage.

Some of the more common distribution channels include:

• Direct sales. The most effective distribution channel is to sell directly to the end-user.
• OEM (original equipment manufacturer) sales. When your product is sold to the OEM, it is incorporated into their finished product and it is distributed to the end user.
• Manufacturer's representatives. One of the best ways to distribute a product, manufacturer's reps, as they are known, are salespeople who operate out of agencies that handle an assortment of complementary products and divide their selling time among them.
• Wholesale distributors. Using this channel, a manufacturer sells to a wholesaler, who in turn sells it to a retailer or other agent for further distribution through the channel until it reaches the end user.
• Brokers. Third-party distributors who often buy directly from the distributor or wholesaler and sell to retailers or end users.
• Retail distributors. Distributing a product through this channel is important if the end user of your product is the general consuming public.
• Direct Mail. Selling to the end user using a direct mail campaign.

As we've mentioned already, the distribution strategy you choose for your product will be based on several factors that include the channels being used by your competition, your pricing strategy and your own internal resources.

Promotion Plan

With a distribution strategy formed, you must develop a promotion plan. The promotion strategy in its most basic form is the controlled distribution of communication designed to sell your product or service. In order to accomplish this, the promotion strategy encompasses every marketing tool utilized in the communication effort. This includes:

• Advertising. Includes the advertising budget, creative message(s), and at least the first quarter's media schedule.
• Packaging. Provides a description of the packaging strategy. If available, mockups of any labels, trademarks or service marks should be included.
• Public relations. A complete account of the publicity strategy including a list of media that will be approached as well as a schedule of planned events.
• Sales promotions. Establishes the strategies used to support the sales message. This includes a description of collateral marketing material as well as a schedule of planned promotional activities such as special sales, coupons, contests and premium awards.
• Personal sales. An outline of the sales strategy including pricing procedures, returns and adjustment rules, sales presentation methods, lead generation, customer service policies, salesperson compensation, and salesperson market responsibilities.

Sales Potential

Once the market has been researched and analyzed, conclusions need to be developed that will supply a quantitative outlook concerning the potential of the business. The first financial projection within the business plan must be formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time. Most business plans will project revenue for up to three years, although five-year projections are becoming increasingly popular among lenders.

When developing the revenue model for the business plan, the equation used to project sales is fairly simple. It consists of the total number of customers and the average revenue from each customer. In the equation, "T" represents the total number of people, "A" represents the average revenue per customer, and "S" represents the sales projection. The equation for projecting sales is: (T)(A) = S

Using this equation, the annual sales for each year projected within the business plan can be developed. Of course, there are other factors that you'll need to evaluate from the revenue model. Since the revenue model is a table illustrating the source for all income, every segment of the target market that is treated differently must be accounted for. In order to determine any differences, the various strategies utilized in order to sell the product have to be considered. As we've already mentioned, those strategies include distribution, pricing and promotion.

Competitive Analysis

Identify and analyze your competition.

The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.

The first step in a competitor analysis is to identify the current and potential competition. There are essentially two ways you can identify competitors. The first is to look at the market from the customer's viewpoint and group all your competitors by the degree to which they contend for the buyer's dollar. The second method is to group competitors according to their various competitive strategies so you understand what motivates them.

Once you've grouped your competitors, you can start to analyze their strategies and identify the areas where they're most vulnerable. This can be done through an examination of your competitors' weaknesses and strengths. A competitor's strengths and weaknesses are usually based on the presence and absence of key assets and skills needed to compete in the market.

To determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book, Developing Business Strategies , suggests concentrating your efforts in four areas:

• The reasons behind successful as well as unsuccessful firms
• Prime customer motivators
• Major component costs
• Industry mobility barriers

According to theory, the performance of a company within a market is directly related to the possession of key assets and skills. Therefore, an analysis of strong performers should reveal the causes behind such a successful track record. This analysis, in conjunction with an examination of unsuccessful companies and the reasons behind their failure, should provide a good idea of just what key assets and skills are needed to be successful within a given industry and market segment.

Through your competitor analysis, you will also have to create a marketing strategy that will generate an asset or skill competitors don't have, which will provide you with a distinct and enduring competitive advantage. Since competitive advantages are developed from key assets and skills, you should sit down and put together a competitive strength grid. This is a scale that lists all your major competitors or strategic groups based upon their applicable assets and skills and how your own company fits on this scale.

Create a Competitive Strength Grid

To put together a competitive strength grid, list all the key assets and skills down the left margin of a piece of paper. Along the top, write down two column headers: "weakness" and "strength." In each asset or skill category, place all the competitors that have weaknesses in that particular category under the weakness column, and all those that have strengths in that specific category in the strength column. After you've finished, you'll be able to determine just where you stand in relation to the other firms competing in your industry.

Once you've established the key assets and skills necessary to succeed in this business and have defined your distinct competitive advantage, you need to communicate them in a strategic form that will attract market share as well as defend it. Competitive strategies usually fall into these five areas:

• Advertising

Many of the factors leading to the formation of a strategy should already have been highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve around establishing the point of entry in the product life cycle and an endurable competitive advantage. As we've already discussed, this involves defining the elements that will set your product or service apart from your competitors or strategic groups. You need to establish this competitive advantage clearly so the reader understands not only how you will accomplish your goals, but also why your strategy will work.

Design and Development Plan

What you'll cover in this section.

The purpose of the design and development plan section is to provide investors with a description of the product's design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.

There are generally three areas you'll cover in the development plan section:

• Product development
• Market development
• Organizational development

Each of these elements needs to be examined from the funding of the plan to the point where the business begins to experience a continuous income. Although these elements will differ in nature concerning their content, each will be based on structure and goals.

The first step in the development process is setting goals for the overall development plan. From your analysis of the market and competition, most of the product, market and organizational development goals will be readily apparent. Each goal you define should have certain characteristics. Your goals should be quantifiable in order to set up time lines, directed so they relate to the success of the business, consequential so they have impact upon the company, and feasible so that they aren't beyond the bounds of actual completion.

Goals For Product Development

Goals for product development should center on the technical as well as the marketing aspects of the product so that you have a focused outline from which the development team can work. For example, a goal for product development of a microbrewed beer might be "Produce recipe for premium lager beer" or "Create packaging for premium lager beer." In terms of market development, a goal might be, "Develop collateral marketing material." Organizational goals would center on the acquisition of expertise in order to attain your product and market-development goals. This expertise usually needs to be present in areas of key assets that provide a competitive advantage. Without the necessary expertise, the chances of bringing a product successfully to market diminish.

With your goals set and expertise in place, you need to form a set of procedural tasks or work assignments for each area of the development plan. Procedures will have to be developed for product development, market development, and organization development. In some cases, product and organization can be combined if the list of procedures is short enough.

Procedures should include how resources will be allocated, who is in charge of accomplishing each goal, and how everything will interact. For example, to produce a recipe for a premium lager beer, you would need to do the following:

• Gather ingredients.
• Determine optimum malting process.
• Gauge mashing temperature.
• Boil wort and evaluate which hops provide the best flavor.
• Determine yeast amounts and fermentation period.
• Determine aging period.
• Carbonate the beer.
• Decide whether or not to pasteurize the beer.

The development of procedures provides a list of work assignments that need to be accomplished, but one thing it doesn't provide are the stages of development that coordinate the work assignments within the overall development plan. To do this, you first need to amend the work assignments created in the procedures section so that all the individual work elements are accounted for in the development plan. The next stage involves setting deliverable dates for components as well as the finished product for testing purposes. There are primarily three steps you need to go through before the product is ready for final delivery:

• Preliminary product review . All the product's features and specifications are checked.
• Critical product review . All the key elements of the product are checked and gauged against the development schedule to make sure everything is going according to plan.
• Final product review . All elements of the product are checked against goals to assure the integrity of the prototype.

Scheduling and Costs

This is one of the most important elements in the development plan. Scheduling includes all of the key work elements as well as the stages the product must pass through before customer delivery. It should also be tied to the development budget so that expenses can be tracked. But its main purpose is to establish time frames for completion of all work assignments and juxtapose them within the stages through which the product must pass. When producing the schedule, provide a column for each procedural task, how long it takes, start date and stop date. If you want to provide a number for each task, include a column in the schedule for the task number.

Development Budget

That leads us into a discussion of the development budget. When forming your development budget, you need to take into account all the expenses required to design the product and to take it from prototype to production.

Costs that should be included in the development budget include:

• Material . All raw materials used in the development of the product.
• Direct labor . All labor costs associated with the development of the product.
• Overhead . All overhead expenses required to operate the business during the development phase such as taxes, rent, phone, utilities, office supplies, etc.
• G&A costs . The salaries of executive and administrative personnel along with any other office support functions.
• Marketing & sales . The salaries of marketing personnel required to develop pre-promotional materials and plan the marketing campaign that should begin prior to delivery of the product.
• Professional services . Those costs associated with the consultation of outside experts such as accountants, lawyers, and business consultants.
• Miscellaneous Costs . Costs that are related to product development.
• Capital equipment . To determine the capital requirements for the development budget, you first have to establish what type of equipment you will need, whether you will acquire the equipment or use outside contractors, and finally, if you decide to acquire the equipment, whether you will lease or purchase it.

As we mentioned already, the company has to have the proper expertise in key areas to succeed; however, not every company will start a business with the expertise required in every key area. Therefore, the proper personnel have to be recruited, integrated into the development process, and managed so that everyone forms a team focused on the achievement of the development goals.

Before you begin recruiting, however, you should determine which areas within the development process will require the addition of personnel. This can be done by reviewing the goals of your development plan to establish key areas that need attention. After you have an idea of the positions that need to be filled, you should produce a job description and job specification.

Once you've hired the proper personnel, you need to integrate them into the development process by assigning tasks from the work assignments you've developed. Finally, the whole team needs to know what their role is within the company and how each interrelates with every position within the development team. In order to do this, you should develop an organizational chart for your development team.

Assessing Risks

Finally, the risks involved in developing the product should be assessed and a plan developed to address each one. The risks during the development stage will usually center on technical development of the product, marketing, personnel requirements, and financial problems. By identifying and addressing each of the perceived risks during the development period, you will allay some of your major fears concerning the project and those of investors as well.

Operations & Management

The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. In fact, within the operations plan you'll develop the next set of financial tables that will supply the foundation for the "Financial Components" section.

The financial tables that you'll develop within the operations plan include:

• The operating expense table
• The capital requirements table
• The cost of goods table

There are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.

Organizational Structure

The organizational structure of the company is an essential element within a business plan because it provides a basis from which to project operating expenses. This is critical to the formation of financial statements, which are heavily scrutinized by investors; therefore, the organizational structure has to be well-defined and based within a realistic framework given the parameters of the business.

Although every company will differ in its organizational structure, most can be divided into several broad areas that include:

• Marketing and sales (includes customer relations and service)
• Production (including quality assurance)
• Research and development
• Administration

These are very broad classifications and it's important to keep in mind that not every business can be divided in this manner. In fact, every business is different, and each one must be structured according to its own requirements and goals.

The four stages for organizing a business are:

Calculate Your Personnel Numbers

Once you've structured your business, however, you need to consider your overall goals and the number of personnel required to reach those goals. In order to determine the number of employees you'll need to meet the goals you've set for your business, you'll need to apply the following equation to each department listed in your organizational structure: C / S = P

In this equation, C represents the total number of customers, S represents the total number of customers that can be served by each employee, and P represents the personnel requirements. For instance, if the number of customers for first year sales is projected at 10,110 and one marketing employee is required for every 200 customers, you would need 51 employees within the marketing department: 10,110 / 200 = 51

Once you calculate the number of employees that you'll need for your organization, you'll need to determine the labor expense. The factors that need to be considered when calculating labor expense (LE) are the personnel requirements (P) for each department multiplied by the employee salary level (SL). Therefore, the equation would be: P * SL = LE

Using the marketing example from above, the labor expense for that department would be: 51 * $40,000 = $2,040,000

Calculate Overhead Expenses

Once the organization's operations have been planned, the expenses associated with the operation of the business can be developed. These are usually referred to as overhead expenses. Overhead expenses refer to all non-labor expenses required to operate the business. Expenses can be divided into fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and variable or semivariable (those which change according to the amount of business).

Overhead expenses usually include the following:

• Maintenance and repair
• Equipment leases
• Advertising & promotion
• Packaging & shipping
• Payroll taxes and benefits
• Uncollectible receivables
• Professional services
• Loan payments
• Depreciation

In order to develop the overhead expenses for the expense table used in this portion of the business plan, you need to multiply the number of employees by the expenses associated with each employee. Therefore, if NE represents the number of employees and EE is the expense per employee, the following equation can be used to calculate the sum of each overhead (OH) expense: OH = NE * EE

Develop a Capital Requirements Table

In addition to the expense table, you'll also need to develop a capital requirements table that depicts the amount of money necessary to purchase the equipment you'll use to establish and continue operations. It also illustrates the amount of depreciation your company will incur based on all equipment elements purchased with a lifetime of more than one year.

In order to generate the capital requirements table, you first have to establish the various elements within the business that will require capital investment. For service businesses, capital is usually tied to the various pieces of equipment used to service customers.

Capital for manufacturing companies, on the other hand, is based on the equipment required in order to produce the product. Manufacturing equipment usually falls into three categories: testing equipment, assembly equipment and packaging equipment.

With these capital elements in mind, you need to determine the number of units or customers, in terms of sales, that each equipment item can adequately handle. This is important because capital requirements are a product of income, which is produced through unit sales. In order to meet sales projections, a business usually has to invest money to increase production or supply better service. In the business plan, capital requirements are tied to projected sales as illustrated in the revenue model shown earlier in this chapter.

For instance, if the capital equipment required is capable of handling the needs of 10,000 customers at an average sale of $10 each, that would be $100,000 in sales, at which point additional capital will be required in order to purchase more equipment should the company grow beyond this point. This leads us to another factor within the capital requirements equation, and that is equipment cost.

If you multiply the cost of equipment by the number of customers it can support in terms of sales, it would result in the capital requirements for that particular equipment element. Therefore, you can use an equation in which capital requirements (CR) equals sales (S) divided by number of customers (NC) supported by each equipment element, multiplied by the average sale (AS), which is then multiplied by the capital cost (CC) of the equipment element. Given these parameters, your equation would look like the following: CR = [(S / NC) * AS] * CC

The capital requirements table is formed by adding all your equipment elements to generate the total new capital for that year. During the first year, total new capital is also the total capital required. For each successive year thereafter, total capital (TC) required is the sum of total new capital (NC) plus total capital (PC) from the previous year, less depreciation (D), once again, from the previous year. Therefore, your equation to arrive at total capital for each year portrayed in the capital requirements model would be: TC = NC + PC - D

Keep in mind that depreciation is an expense that shows the decrease in value of the equipment throughout its effective lifetime. For many businesses, depreciation is based upon schedules that are tied to the lifetime of the equipment. Be careful when choosing the schedule that best fits your business. Depreciation is also the basis for a tax deduction as well as the flow of money for new capital. You may need to seek consultation from an expert in this area.

Create a Cost of Goods Table

The last table that needs to be generated in the operations and management section of your business plan is the cost of goods table. This table is used only for businesses where the product is placed into inventory. For a retail or wholesale business, cost of goods sold --or cost of sales --refers to the purchase of products for resale, i.e. the inventory. The products that are sold are logged into cost of goods as an expense of the sale, while those that aren't sold remain in inventory.

For a manufacturing firm, cost of goods is the cost incurred by the company to manufacture its product. This usually consists of three elements:

As in retail, the merchandise that is sold is expensed as a cost of goods , while merchandise that isn't sold is placed in inventory. Cost of goods has to be accounted for in the operations of a business. It is an important yardstick for measuring the firm's profitability for the cash-flow statement and income statement.

In the income statement, the last stage of the manufacturing process is the item expensed as cost of goods, but it is important to document the inventory still in various stages of the manufacturing process because it represents assets to the company. This is important to determining cash flow and to generating the balance sheet.

That is what the cost of goods table does. It's one of the most complicated tables you'll have to develop for your business plan, but it's an integral part of portraying the flow of inventory through your operations, the placement of assets within the company, and the rate at which your inventory turns.

In order to generate the cost of goods table, you need a little more information in addition to what your labor and material cost is per unit. You also need to know the total number of units sold for the year, the percentage of units which will be fully assembled, the percentage which will be partially assembled, and the percentage which will be in unassembled inventory. Much of these figures will depend on the capacity of your equipment as well as on the inventory control system you develop. Along with these factors, you also need to know at what stage the majority of the labor is performed.

Financial Components

Financial statements to include.

Financial data is always at the back of the business plan, but that doesn't mean it's any less important than up-front material such as the business concept and the management team. Astute investors look carefully at the charts, tables, formulas and spreadsheets in the financial section, because they know that this information is like the pulse, respiration rate and blood pressure in a human--it shows whether the patient is alive and what the odds are for continued survival.

Financial statements, like bad news, come in threes. The news in financial statements isn't always bad, of course, but taken together it provides an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward.

The three common statements are a cash flow statement, an income statement and a balance sheet. Most entrepreneurs should provide them and leave it at that. But not all do. But this is a case of the more, the less merry. As a rule, stick with the big three: income, balance sheet and cash flow statements.

These three statements are interlinked, with changes in one necessarily altering the others, but they measure quite different aspects of a company's financial health. It's hard to say that one of these is more important than another. But of the three, the income statement may be the best place to start.

Income Statement

The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It's a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result--which is either a profit or a loss.

For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It's formed by listing your financial projections in the following manner:

• Income . Includes all the income generated by the business and its sources.
• Cost of goods . Includes all the costs related to the sale of products in inventory.
• Gross profit margin . The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
• Operating expenses . Includes all overhead and labor expenses associated with the operations of the business.
• Total expenses . The sum of all overhead and labor expenses required to operate the business.
• Net profit . The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities.
• Depreciation . Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
• Net profit before interest . The difference between net profit and depreciation.
• Interest . Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.
• Net profit before taxes . The difference between net profit before interest and interest.
• Taxes . Includes all taxes on the business.
• Profit after taxes . The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.

Following the income statement is a short note analyzing the statement. The analysis statement should be very short, emphasizing key points within the income statement.

Cash Flow Statement

The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.

Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.

The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items that you'll need to include in the cash-flow statement and the order in which they should appear are as follows:

• Cash sales . Income derived from sales paid for by cash.
• Receivables . Income derived from the collection of receivables.
• Other income . Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
• Total income . The sum of total cash, cash sales, receivables, and other income.
• Material/merchandise . The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.
• Production labor . The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
• Overhead . All fixed and variable expenses required for the production of the product and the operations of the business.
• Marketing/sales . All salaries, commissions, and other direct costs associated with the marketing and sales departments.
• R&D . All the labor expenses required to support the research and development operations of the business.
• G&A . All the labor expenses required to support the administrative functions of the business.
• Taxes . All taxes, except payroll, paid to the appropriate government institutions.
• Capital . The capital required to obtain any equipment elements that are needed for the generation of income.
• Loan payment . The total of all payments made to reduce any long-term debts.
• Total expenses . The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments.
• Cash flow . The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
• Cumulative cash flow . The difference between current cash flow and cash flow from the previous period.

As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan. Once again, the analysis statement doesn't have to be long and should cover only key points derived from the cash-flow statement.

The Balance Sheet

The last financial statement you'll need to develop is the balance sheet. Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan; however, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas:

To obtain financing for a new business, you may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, you'll need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.

As mentioned, the balance sheet is divided into three sections. The top portion of the balance sheet lists your company's assets. Assets are classified as current assets and long-term or fixed assets. Current assets are assets that will be converted to cash or will be used by the business in a year or less. Current assets include:

• Cash . The cash on hand at the time books are closed at the end of the fiscal year.
• Accounts receivable . The income derived from credit accounts. For the balance sheet, it's the total amount of income to be received that is logged into the books at the close of the fiscal year.
• Inventory . This is derived from the cost of goods table. It's the inventory of material used to manufacture a product not yet sold.
• Total current assets . The sum of cash, accounts receivable, inventory, and supplies.

Other assets that appear in the balance sheet are called long-term or fixed assets. They are called long-term because they are durable and will last more than one year. Examples of this type of asset include:

• Capital and plant . The book value of all capital equipment and property (if you own the land and building), less depreciation.
• Investment . All investments by the company that cannot be converted to cash in less than one year. For the most part, companies just starting out have not accumulated long-term investments.
• Miscellaneous assets . All other long-term assets that are not "capital and plant" or "investments."
• Total long-term assets . The sum of capital and plant, investments, and miscellaneous assets.
• Total assets . The sum of total current assets and total long-term assets.

After the assets are listed, you need to account for the liabilities of your business. Like assets, liabilities are classified as current or long-term. If the debts are due in one year or less, they are classified as a current liabilities. If they are due in more than one year, they are long-term liabilities. Examples of current liabilities are as follows:

• Accounts payable . All expenses derived from purchasing items from regular creditors on an open account, which are due and payable.
• Accrued liabilities . All expenses incurred by the business which are required for operation but have not been paid at the time the books are closed. These expenses are usually the company's overhead and salaries.
• Taxes . These are taxes that are still due and payable at the time the books are closed.
• Total current liabilities . The sum of accounts payable, accrued liabilities, and taxes.

Long-term liabilities include:

• Bonds payable . The total of all bonds at the end of the year that are due and payable over a period exceeding one year.
• Mortgage payable . Loans taken out for the purchase of real property that are repaid over a long-term period. The mortgage payable is that amount still due at the close of books for the year.
• Notes payable . The amount still owed on any long-term debts that will not be repaid during the current fiscal year.
• Total long-term liabilities . The sum of bonds payable, mortgage payable, and notes payable.
• Total liabilities . The sum of total current and long-term liabilities.

Once the liabilities have been listed, the final portion of the balance sheet-owner's equity-needs to be calculated. The amount attributed to owner's equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors when evaluating the company. Many times it determines the amount of capital they feel they can safely invest in the business.

In the business plan, you'll need to create an analysis statement for the balance sheet just as you need to do for the income and cash flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.

Source: The Small Business Encyclopedia , Business Plans Made Easy, Start Your Own Business and Entrepreneur magazine.

Business Plan Guide

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Calculate Your Startup's Capital Requirements

Raising Investment and its Use of Funds

Hours of convincing yourself to “ just do it ” brings you to a pivotal moment in your startup journey. You've visualized your business idea, crafted a compelling plan, and now stand on the edge of action. At this point, one fundamental question demands an answer: How much money does your startup need?

Determining how much investment to raise and outlining the use of funds depends on your business's specific needs and goals. Here's a general process to help you determine the right amount of investment and how to allocate those funds:

Assess Your Financial Needs 

Your initial step is to get a good understanding of what current financial position your business is in before you make any assumptions about how much money to ask during fundraising. This process entails carefully evaluating your business's financial well-being from multiple angles:

• Determine the Current Financial Position: This includes a thorough analysis of your available capital, existing revenue streams, incurred expenses, and a detailed outline of your projected cash flow. Understanding where your startup currently stands financially is like pinpointing your starting coordinates on a map; it's the foundation upon which you'll plot your course.
• Defining the Capital Requirements: With a clear understanding of your current financial position, the next crucial task is determining the amount of capital required to fulfill your short-term and long-term business goals. Here, it's essential to consider a multitude of factors that directly impact your funding needs. 

Areas to Consider When Defining a Capital Requirement

There are key areas to consider when defending your startup’s capital requirements: 

Product Development: If your business creates innovative products or services, you'll need to allocate funds for research, design, prototyping, and eventual production. Understanding the financial demands of your product development pipeline is necessary for sustainable growth.

Marketing: Effective marketing leads to brand awareness, attracting customers, and ultimately driving revenue. Allocating an appropriate budget for marketing campaigns and initiatives ensures your business can reach its target audience and generate the desired traction.

Operations: Day-to-day operational expenses, such as rent, utilities, and administrative costs, are the backbone of your business. Even if you don’t know exactly what these costs will be in the early stage, it is still important to give an estimate to cover the bases when forming your financial projections. 

Scaling: When outlining your funding needs, consider including a thorough breakdown of how these funds will be allocated, such as hiring key personnel and designating a specific percentage for sales and marketing initiatives. Once you’ve chosen the right investor to pursue, transparency will boost their confidence and demonstrate that you've conducted careful planning to ensure their capital will be effectively deployed to fuel your company's expansion.

Estimate Your Burn Rate

The next step is calculating your monthly or annual operating expenses, often referred to as your " burn rate ," which is the pace at which a startup uses its cash reserves to sustain operations and is the north star of financial intelligence .

Burn rate is a metric that can determine a startup's success or downfall. With statistics revealing that 29% of startups fail due to financial exhaustion , understanding the burn rate is paramount. 

It's not just about financial health; it's about survival. 

By connecting it to financial forecasts, startups can navigate their financial journey more effectively, ensuring they know when to raise capital before it's too late. Balancing burn rate with cash flow is crucial, as 82% of small businesses are estimated to fail due to cash flow issues. This includes salaries, rent, utilities, marketing, and other overhead expenses. Startups must find the equilibrium between growth and fiscal prudence while aiming for 18-30 months of runway when raising capital. In the unpredictable startup journey, the burn rate, cash balance, and runway are vital metrics for reaching the financial checkered flag.

Determine Your Funding Gap

Determining your funding gap is a critical step for startups, and it begins by carefully assessing the balance between your estimated expenses (commonly referred to as the burn rate) and your projected revenue. If your expenses consistently outstrip your income, it's a clear indicator of a funding gap that necessitates external investment. 

While it's true that your initial financial model may not be entirely accurate, the key is to focus on the precise amount of funding required to reach your startup's next significant milestone. 

Whether it's the timeline to launch your first product, attain a specific user base, or achieve a targeted revenue figure, these milestones serve as guideposts for your funding strategy. The length of time you need to secure funding depends on your industry, with software startups often needing around a year and others potentially requiring several years. 

Importantly, when approaching investors, be strategic in your funding request. It's more effective to seek a precise amount, whether it's $5 million or $7 million, rather than casting a wide net. Clarity in your funding goals ensures you can attract the right investors and secure the capital needed to steer your startup toward success.

Consider Growth Plans

Determining your funding gap as a startup hinges on your strategic growth plans. The trick is knowing where you will expand and how much money it takes to reach the goals. 

Investors keenly assess your scalability strategy to gauge your startup's potential for success. They want to know if you've done your due diligence by presenting the scalability of the company.

Some key points to include in this when explaining this aspect are:

• Current market position & customer acquisition potential 
• Market share analysis
• Go-to-market strategy
• Projected revenue generated from customer potential

Having A Powerful Financial Forecast

For startups, predicting your trajectory five years down the line can be a challenge. Nonetheless, a robust financial forecast proves instrumental in gauging the capital needed for a stable 18 to 24-month runway. 

Your financial forecast should include the following key elements:

Projected Revenue : Anticipate your revenue streams based on market analysis, customer acquisition strategies, and pricing models.

Estimated Expenses : Intricacies of your operating costs, factoring in variables such as salaries, marketing expenditures, rent, and more.

Expected Growth : Paint a picture of how your startup will evolve over time, charting your growth trajectory and potential market expansion.

For potential investors, a robust financial forecast serves as a powerful tool to:

• Demonstrate Financial Viability: It showcases your startup as a sound business investment, underscoring its potential to generate profits and returns.
• Risk Assessment: Investors gain insight into potential financial pitfalls and how your startup plans to navigate them, instilling confidence in your ability to manage cash flow effectively.
• Future Financial Needs: Clear financial projections reveal when and how much additional investment may be required for continued growth and expansion.
• Performance Evaluation: Over time, your forecast allows investors to gauge your startup's performance against initial expectations, enabling adjustments to align with growth goals.
• Financial Responsibility: Demonstrates your commitment to fiscal responsibility and prudent financial management, reinforcing trust with potential investors.

In conclusion, determining the right amount of investment for your startup and crafting a powerful financial forecast are fundamental steps in your entrepreneurial journey. These strategies attract investors and guide your startup toward sustainable growth and long-term success. Embrace these financial principles, and you'll be well-prepared to navigate the exciting yet challenging world of startups with confidence and poise.

Daniel Hoyles

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Determining Your Capital Needs

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Capital is money you use to finance the purchase of equipment, supplies and products. Working capital is money you use to cover the day-to-day operating costs of your business. You must consider both when determining your business’s fiscal needs.

For any small business, potential capital outlays can include:

• buildings and facilities
• major equipment
• office equipment and furnishings
• materials, supplies and parts
• initial inventory

When planning capital needs for a start-up, simply calculate the costs of setting up the business. To determine capital needs for an existing business, calculate the costs of growth and expansion, but don’t include items like salaries, utility costs, insurance, and other fixed business expenses.

To determine working capital needs, create projections for accounts receivable, inventory and accounts payable. Compare current, actual costs to your projections. Then subtract the increase in current liabilities from the increase in current assets. The difference is your working capital needs — the amount you will need to keep the doors open.

If you’re seeking capital for a start-up, calculations are easy. You don’t have current actual costs, so the difference in liabilities and assets equals your working capital needs.

Say you plan to open a restaurant and you estimate the following capital costs:

The sum of your capital and working capital requirements, $1,235,000, is what you will need to cover the first year of business expenses.

On the other hand, your successful restaurant will generate cash, so develop best and worst-case scenarios.

Let’s say best case you expected to generate $800,000 in sales in that first year. The math is simple: $1,235,000 minus $800,000 equals $435,000. You need $435,000 in capital to open the restaurant under the best circumstances.

Something else to consider: Your projected $800,000 in sales won’t be spread evenly across 12 months. The first few months are likely to be lean until customers discover your restaurant.

To prepare for the unexpected, you might estimate that you need an additional $200,000. Under-capitalization is the number one cause of business failure, so this cash buffer is a “must-have.”

Add that buffer amount to your initial capital requirements and you’ll need $1,435,000 during the first year of operation.

To present the best, most transparent picture to investors and lenders, prepare a statement of capital needs on a month-by-month basis, showing working capital requirements and projected business income. Show them what you need, justify those needs based on solid projections, and clearly demonstrate how you’ll pay back borrowed funds.

Have you determined your capital needs? Are you looking for a solution? You may want to learn more about  Working Capital Loans .

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How to calculate start-up capital requirements for business

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After determining Start-up costs and investments and Ongoing costs you can now calculate start-up capital requirements. Since many start-ups are too optimistic when assessing business development, we advise you to include a buffer in addition to the calculated capital requirements. 

After you calculate start-up capital requirements, you can create the profitability invoice. The profitability calculation indicates whether your project is also economically worthwhile . 

Capital requirements for your start-up

In the first chapter of the financial plan, you calculate start-up capital requirements for the start of the company. Following this, you could use the running costs identify a possible liquidity gap and thus further capital requirements.

These two calculations combine the essential elements for calculating the total capital requirement.

Since many start-ups are too optimistic about the development of the company, we advise you to add a buffer to the capital requirements.

If you have taken the normal case as the basis for calculating capital requirements, you should add a buffer of 25% to the capital requirement. If you take the pessimistic calculation as the basis, you do not need to include an additional buffer in the capital requirements, because you have already calculated very conservatively in this scenario.

Once you calculate start-up capital requirements, the crucial question is, of course, how you can finance the capital requirements of your foundation. But before you jump into the final chapter of the financial plan, read the remarks on profitability. 

Basis of profitability calculation: Planned result

In addition to the capital requirements, the question of the economic attractiveness of your start-up project is particularly relevant – the profitability calculation provides information on this.

The profitability calculation is important to you, because you can use the profitability calculation to find out whether your project is worthwhile. On the other hand, the profitability calculation also provides further information on the economic viability of your project, which is especially important for your donors. 

When you create the profitability calculation, it is best to do two steps. Since you have the result plan in the profitability calculation (depending on the other figures of the Plan Income statement) in relation to the capital employed, you must first draw up a plan for profit and flows and a plan balance sheet. 

The profitability calculation: is your project worth it?

Although the profit and loss account is an absolute figure, it only says a limited amount about actual profitability. Because: It is a significant difference whether you use 10,000 euros in equity and thus make 100 euros per year profit (return on equity 1%) or whether you earn 100 euros and use “only” 1,000 euros of equity (return on equity 10%). 

In addition to the return on equity, which investors pay particular attention to, the overall return on capital is also relevant. The total return on capital represents the profit earned plus interest (for debt capital) in relation to the company’s total capital (equity + debt capital).

Also in the profitability statement: the margin

Although this point does not belong directly to the profitability calculation, it is also a crucial relative measure. 

For example, the profit margin indicates how much of a euro earned can be recorded as a profit. In our opinion, this point of profitability is very important because the margin allows you to determine relatively easily how much room for manoeuvre you have, for example, for price reductions, or how increased costs affect your business model.

The goal is …

… that you first quantify the total capital requirements (foundation costs, investments, liquidity bottlenecks + buffers) in your business plan when it comes to capital requirements & profitability calculation. In your business plan, show how capital requirements differ in the pessimistic case from the calculated capital requirements of the normal scenario. The goal should be that you calculate a realistic capital requirement and that you are sufficiently capitalized for the first 12-18 months. 

Once you have identified the total capital requirement, you should include a meaningful profitability calculation in your business plan. Your profitability calculation, which is based on the plan and the plan balance sheet, provides information on the profitability and margins of your start-up. 

If you have worked through both topics, capital requirements and profitability calculation, you must answer the question of how you want to cover the calculated capital requirement. You will do this in the next part of the business plan – the Financing.

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Home > Business Plan > Funding Requirements in a Business Plan

Funding Requirements in a Business Plan

… our funding requirements are …

The summary given in the funding requirement section should be consistent with the rest of the business plan. The amount needed, and when it is needed should follow from the detailed financial projections, and the purpose of the funding, sales and marketing, hire of employees, to achieve a milestone etc. should again link in with the rest of the plan,

Funding Requirements Presentation

This is part of the financial projections and Contents of a Business Plan Guide , a series of posts on what each section of a simple business plan should include. The next post in this series is the final section, and deals with the planned exit for investors.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Determining Your Capital Needs

"Capital," in investment terms, is money to finance the purchase of equipment, supplies and products. When you buy new equipment, the money spent is called capital.

On the other hand, "working capital" is money spent to cover day-to-day operating costs of your business. Working capital is cash or accounts that can be converted into cash, like accounts receivable or inventory. It is the cash a business needs to cover regular, financial obligations.

Think of capital as money to buy things and working capital as money to pay weekly, monthly, quarterly and annual bills, from payroll to local, state and federal taxes.

So, to determine your businesses' fiscal needs, consider both capital and working capital. The total of those two figures is the amount required to operate the business.

Potential capital outlays might include:

• buildings, facilities, etc.
• major equipment
• office equipment and furnishings
• materials, supplies, parts, etc.
• initial inventory

When planning capital needs for a start-up, simply calculate the costs of setting up the business. To determine capital needs for an existing business, calculate the costs of growth and expansion, but don't include items like salaries, utility costs, insurance, and other fixed business expenses.

Next, determine working capital needs. Create projections for accounts receivable, inventory and accounts payable. Compare current, actual costs to your projections. Then, subtract the increase in current liabilities from the increase in current assets. The difference is your working capital needs - how much you need to keep the doors open.

If you're seeking capital for a start-up, calculations are easy. You don't have current actual costs, so the difference in liabilities and assets equals your working capital needs.

Say you plan to open a new restaurant and you estimate the following capital costs:

You determine you need $745,000 to open your bistro. But that's not all the capital you need. You also need working capital to keep the operation going while the restaurant gains popularity. So, next estimate working capital needs for the first 12 months of business:

Adding up capital and working capital indicates you need $1,235,000 to cover the first year's business expenses. Minimum!

On the other hand, your successful restaurant generates cash, so develop best and worst case scenarios. Best case? You generate $800,000 in sales in that first year.

The math is simple: $1,235,000 minus $800,000 equals $435,000. You need $435,000 in capital to open the restaurant under the best circumstances.

Something else to consider. Your projected $800,000 in sales won't be spread evenly across 12 months. The first few months are likely to be lean until customers discover your restaurant.

In addition, to prepare for the unexpected, you estimate you need an additional $200,000. Under-capitalization is the number one cause of business failure, so this cash buffer is a "must-have."

Adding up initial capital needs, and a buffer, you'll need $1,435,000 during the first year of operation. Worst case scenario? You cut that total by a conservative $300,000 because you use income to offset some working capital needs.

To present the best, most transparent picture to investors and lenders, prepare a statement of capital needs on a month-by-month basis, showing working capital requirements and projected business income. Show lenders and investors what you need, justify those needs based on solid projections and clearly demonstrate how you'll pay back borrowed funds.

The key is to factor in capital needs and working capital needs to avoid business failure because you worked too hard to even consider failure.

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As a business owner, there are many things that need to be prepared to run a company. One of the most important considerations is a full understanding of capital. Capital is essential to keep a business running and growing.

Understanding Capital

In short, capital is cash or liquid assets that each company secures to pay for their expenditures. It is both a measurement of wealth and a resource that one could utilize to increase company wealth through different investments. The financial assets that a company has in deposit accounts and funds that it received from other financing sources are considered to be its capital.

Capital can be held through financial assets, or be can procured from debt or selling company stock to investors, otherwise known as equity financing .

A firm’s capital is the core of the business. The company needs this to run and finance all the assets that require significant amounts of money. There are three types of business capital that every business needs to prepare: working capital, debt capital, and equity capital.

Capital Assets

Another term that needs to be discussed is capital assets. These are assets of the business that may be part of the current or long-term portion of the balance sheet. These can either be in cash, cash equivalents, and marketable securities. It may also include the company’s production and storage facilities and their manufacturing equipment.

Capital is vital for the business to grow. All companies must be careful about how they finance their working capital, which is for daily expenses, and how they invest the money that they obtained. If done well, the company’s return on investment would be guaranteed. The business’s net worth would depend on the total capital and capital assets that the company holds.

The company will use the capital to pay for everything that it needs to manufacture the products that they will sell to the market, which will create profit. Most companies also use this to invest in all sorts of things that could be beneficial to the business. They mostly allocate their capital for expansions both in labor and buildings or facilities. Doing so directs money towards investments that would bring in more money than the cost of the capital.

As time passes by, the firm must carefully assess the capital thresholds, capital needs for investments, and all its other capital assets. This can be done by reviewing and analyzing the balance sheet.

What are Capital Requirements?

Capital requirement is the total amount of funds that the firm will need for the business to achieve its goal of raising profit. The way to calculate this is by adding the founding and start-up expenses and investments. Afterwhich, one can subtract their equity capital from their capital requirements to know how much external capital they will need.

When making the business plan, the management and executives must also specify the capital requirements because there are follow-up costs that need to be considered. Remember to calculate the capital requirements as accurate as possible. However, it is also important not to plan too conservatively in case the company will face unforeseen financial problems in the future.

On the other hand, if one calculates too generously, the funds are much more flexible, but that would be much more expensive. Take note that one must prioritize liquidity over profitability. Meaning it is much better to have too much credit and return it, then subsequently finance funds.

Start-Up Capital Requirements

One of the most challenging tasks for anyone that wants to start their own business is preparing the right amount of start-up capital they will need. Start-Up capital is the money that one will need to keep the business running until it will break-even (positive cash flow). If business owners cannot calculate enough capital to sustain the company until the break-even point, the business will go bankrupt and fail.

To create a budget, one must include all the expenses from recurring costs (lease, electricity, taxes, payroll, etc.) and income. Also, take note of one-time expenditures, such as business licenses, building signs, and incorporation costs. To calculate an accurate budget, list everything down on a spreadsheet, including:

Initial Costs

Fixed costs, capital intensive start-ups.

Managing capital-intensive startups is tricky. Most investors and debt lenders have an aversion to capital-intensive business models and industries like biotech, medical devices, cleantech and semiconductors.

Carrying considerable staff, receivables, inventory, research and development costs, and even buildings, as a more capital-intensive startup takes a special kind of focus, patience and partnership with investors, management and employees.

Unlike software, bootstrapping a capital intensive company is not a long-term option. These industries are far too risky for debt financing, too.

You will need equity financing to run operations like R&D, labs, highly compensated research professionals, and, as you get closer to commercial viability, clinical trials and regulatory approvals.

Business Capital Structure

A balance sheet analysis must be done to review and assess the business capital, which will eventually lead to profitable returns. There are several types of capital that make-up the business capital structure, and those are:

Debt Capital

A company can acquire funds by getting a loan either from private or government sources or from the owner’s friends or family. However, to obtain this, one must have an active credit history and excellent credit rating. Companies must also remember that this option requires regular payment of the amount borrowed plus interest, which will depend on the capital that was obtained and the borrower’s credit history.

Equity Capital

This can come in three distinctions, namely private equity, public equity, and real estate equity. The first two are usually in the form of shares. Public equity capital will be received if the owner lists their company on a market exchange that is open for all people to invest in and become a shareholder. On the other hand, private equity capital comes from the owners or selected investors.

Working Capital

A business will need its most liquid capital assets to cover all of the daily expenses that the company will incur. This must be calculated regularly. This measures the company’s ability to pay for the debts and accounts payable within a year.

Trading Capital

This refers to the total amount of money available for people to buy and sell different securities. Investors or traders can increase their trading capital by utilizing various trade optimization methods.

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What Is Working Capital?

Business type, operating cycle, management goals.

• Working Capital FAQs

The Bottom Line

• Small Business
• How to Start a Business

How Much Working Capital Does a Small Business Need?

It depends on business type, operating cycle, and management goals

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating cycle , and the business owners’ goals for future growth; however, while very large businesses can get by with negative working capital because of their ability to raise funds quickly, small businesses should maintain positive working capital figures.

Key Takeaways

• Working capital is the cash on hand used to keep a business operational, less liabilities and obligations.
• Depending on the line of business, working capital needs may be significant in order to procure raw materials and labor.
• Service businesses, on the other hand, rely far less on working capital and can operate with less overhead.
• Businesses looking to grow and expand will require large levels of working capital than those looking to maintain their current size.
• A business's operation cycle will also impact working capital needs; those that have a shorter time frame from production to revenue generation require less working capital.

Working capital refers to the difference between a company’s current assets and current liabilities . Current assets are the items a business owns that can be turned into cash within the next 12 months, while current liabilities are the costs and expenses the business incurs within the same period.

Common current assets include checking and savings accounts; marketable securities, such as stocks and bonds; inventory; and accounts receivable. Current liabilities include the cost of materials and supplies that need to be purchased to produce goods for sale, payments on short-term debt, rent, utilities, interest, and tax payments.

Seasonal businesses require different amounts of working capital at different times of the year.

A company’s working capital is a reflection of its operational efficiency and budget management. If a business has more current liabilities than assets, its working capital is negative , meaning it may have difficulty meeting its financial obligations.

A company with a very high working capital figure , conversely, is easily able to pay all its expenses with ample funding left over. Whether a given business requires high working capital is determined by three key factors: business type, operating cycle, and management goals.

Certain types of businesses require higher working capital than others. Businesses that have physical inventory, like retailers , often need considerable amounts of working capital to run smoothly.

This can include both retail and wholesale businesses, as well as manufacturers. Manufacturers must continuously purchase raw materials to produce inventory in-house, while retailers and wholesalers must purchase pre-made inventory for sale to distributors or consumers.

In addition, many businesses are seasonal , meaning they require extremely high working capital during certain parts of the year as they ramp up for the busy season. Leading up to the winter holidays, for example, retail businesses such as department stores and grocery stores must increase inventory and staffing to accommodate the expected influx of customers.

Businesses that provide intangible products or services, such as consultants or online software providers, generally require much lower working capital. Businesses that have matured and are no longer looking to grow rapidly also have a reduced need for working capital.

Ideally, a business is able to pay its short-term debts with revenue from sales; however, the length of a company’s operating cycle can make this impossible. Companies that take a long time to create and sell a product need more working capital to ensure financial obligations incurred in the interim can be met.

Similarly, companies that bill customers for goods or services already rendered rather than requiring payment upfront need higher working capital in case collection on accounts receivable cannot be made in a timely manner .

The specific goals of the business owners are another important factor that determines the amount of working capital required by a small business. If the small business is relatively new and looking to expand, a higher level of working capital is needed relative to that required by a small business intending to stay small.

This is particularly true for businesses planning to expand product lines to venture into new markets, as the costs of research and developmen t, design, and market research can be considerable.

How Do You Calculate Working Capital?

Working capital is calculated as current assets - current liabilities. Both current assets and current liabilities can be found on a company's balance sheet as a line item. Current assets include cash, marketable securities, accounts receivable, and other liquid assets. Current liabilities are financial obligations due within one year, such as short-term debt, accounts payable, and income taxes.

What Is Working Capital Used for?

Working capital demonstrates a business's ability to fund its operations and pay its short-term expenses. When a business has enough liquidity to pay its short-term debt, accounts payable, and any other costs due within one year, it is functioning well and generating enough liquidity from its business operations to cover its costs; a sign of financial health.

How Can I Improve Working Capital?

Working capital can be improved by increasing assets and decreasing liabilities. Reducing your company's reliance on debt, negotiating better terms with suppliers on accounts payable, managing expenses more efficiently, and cutting extraneous costs can all improve current liabilities. Collecting receivables faster, increasing the value of marketable securities, and improving inventory efficiency can all help improve your current assets.

Working capital demonstrates how efficiently a business is operating. Having a positive working capital, meaning current assets exceed current liabilities, is important for a small business as it doesn't have many other options to fall back on if its assets don't cover its expenses.

The amount of working capital differs greatly depending on the type of company. Companies with a high inventory of physical goods require more working capital than ones that don't. Similarly, businesses looking to grow will need more working capital than those looking to maintain their size.

Lastly, a business's operating cycle determines how much working capital it needs; those that can produce and sell goods quickly will need little working capital than those with a longer duration between production and revenue generation.

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How to Plan Your Business’s Working Capital Requirements

Managing working capital is the biggest challenge faced by businesses while running their operations. Many business owners feel that acquiring clients or increasing revenue can only help their business flourish. While it is partly true, what is equally important for a business to grow is how well it manages and strikes a balance between cash inflows and outflows. 

The level of existing working capital available to a business is measured by comparing its current assets against current liabilities. It tells the business the short-term liquid assets remaining after paying short-term liabilities. 

Working capital requirements might differ from business to business, but it is an important metric to assess the long-term financial health of a business. Effective working capital management also ensures that a business always maintains sufficient cash to meet its short-term commitments.

When working capital requirements are not managed efficiently, the business can suffer from cash flow problems, in turn, affecting its ability to expand, improve processes or even operate its operations. Therefore, a business owner needs to know how to plan his or her business’s working capital requirements effectively. 

In this article, we will show you 6 steps that a business should follow to build a solid working capital plan. Meanwhile, if you’re interested in acquiring working capital for your businesses, click below: 

Assess future fund requirements 

An effective working capital plan should begin by evaluating the short-term funding needs of a business. These short-term funding needs include meeting payroll expenses, paying vendors, paying rent and taxes to the government. 

The due date of cash outflows may not correspond to cash inflows, so a business owner must assess future fund requirements in order to meet various financial obligations.

An organisation might have long-term fund requirements too like acquiring new land or building or upgrading manufacturing machines. A business should aim to secure requisite long-term funding before executing a large capital investment plan. 

Compute the working capital you will need 

Every business should determine whether its current working capital is adequate under various growth scenarios. 

To establish a reasonable expectation of growth opportunities available, the business has to consider the economy, its industry and competitions. For instance, how will the balance sheet get affected if current liabilities grew by 10%? Will the business still be able to pay salaries or rent on time? 

Also, the business can perform a shock analysis by running the growth numbers above or below the expected rates. This will help the stakeholders to make a sound contingency plan for their business.

Suggested Read: 6 Tips to Rebuild Your Small Business after COVID-19   

Evaluate your access to working capital and the alternatives

Businesses should review their current access to various funding sources, such as a line of credit , WC loan, account receivables, inventory, investment accounts and cash-in-hand. A business needs to ensure that these sources are sufficient to meet its strategic goals.  

Many medium and large business enterprises consider holding cash and investments with at least two separate institutions. This diversification helps businesses protect themselves from losing access to credit during uncertain times. 

Review your accounts receivables and payable processes

A business can employ several strategies and processes to maximise its working capital. 

On the receivables side, a business can offer direct debit to customers, so the payments arrive on the scheduled date. This approach is used by the companies providing services that call for periodic scheduled payments like a utility service provider. Also, accepting credit card payments can help businesses improve their cash inflow. 

While on the payable side, businesses can use controlled disbursement accounts to know every morning which issued cheques will hit its bank account that day. This will help the business maintain sufficient cash balance and maximise its working capital at the same time.

Don’t eat up cash, use borrowings or credit facilities

It is advisable for businesses to not use up the cash as they grow since a positive cash flow position improves the business’s access to capital and reduces its cost of capital as well. So, when the economy improves, and investments generate positive returns, the business will likely have access to credit at lower interest rates. 

Test and update the plan regularly

Ideally, a business should update its working capital plan annually, supplemented with a quarterly or monthly financial position review to see if adjustments are needed. 

For instance, if a business has downsized or has been merged with or taken over by another entity, its working capital requirements change drastically. This happens due to the changes in the level of current assets and current liabilities. 

Therefore, a business should regularly access the state of the economy to test their access to credit facilities and improvise its plan accordingly. 

Given the pandemic situation, many small and medium businesses are facing a lack of cash flow and are unable to manage their working capital requirements effectively.  They are willing to take a working capital loan or open up a line of credit with banks or other sources. But, challenges in raising funds from formal sources have increased in this new-normal situation.   

To disrupt the lending segment in India and provide capital to small businesses, Razorpay has built a product called Working Capital Loans . 

Now businesses can get collateral-free working capital loans within 24 hours. The loans can be rapid in daily, weekly or monthly instalments as per the borrower’s convenience. 

Just click on the ‘Loans’ tab to apply through our Razorpay dashboard, upload a few documents and receive a loan offer within 3 working days followed by a quick disbursal within a day. It’s that simple!

To summarise, while it is tough to predict the future, businesses must prepare their working capital plans and ensure access to capital when the economy bounces back to growth. 

Also read: Razorpay Disrupts Working Capital Loan Processes for MSMEs

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If you're working on setting up your own business, there's a good chance you're looking to open a limited liability company, or LLC. This business structure gives you limited liability protection similar to a corporation, plus the flexibility of a sole proprietorship or partnership, making it a popular choice for small business owners.

The main perk of an LLC is that it generally can protect your personal assets (like the money you're saving up to buy a home or retire) from certain liabilities or debt that come with owning your business. In other words, in many cases, a creditor you owe money to through your business usually won't be able to come for the money in your personal accounts. Having an LLC can also legitimize your business, which may be a benefit to many small business owners.

If that sounds good, follow these steps to open your LLC.

• Check what requirements your state has
• Name your business
• Pick a registered agent
• File your articles of organization
• Create an operating agreement
• Plan for the future
• Consider a professional service 

LLCs are regulated by states, which means that you'll have to meet the specific requirements outlined by the state where you're registering the LLC. You'll find this information easily on your Secretary of State's website.

While most steps necessary to establish an LLC will need to be done no matter which state you live in, the specific guidance for how to do each step — like naming your business and picking a registered agent — can vary.

Now that you have a business, it's time to choose a name for it. While you'll want something catchy and easy to market, it's also important to make sure that the name you choose meets your specific state's requirements.

First, you'll need to ensure that the name you choose isn't being used by another LLC in your state. You can typically do a name search on the Secretary of State's website ( here's Illinois' search tool , for example).

In general, you'll need to have certain words in the name that make it clear your business is an LLC, such as "Limited Liability Company," "LLC," or "L.L.C." Many states will also prohibit you from including certain words in the name. In New York, for instance, you can't include the words "academy," "bank," "finance," "union" and many more .

Every LLC has to have a registered agent who acts as the point person for any legal matters that may come up and for the Secretary of State to send any official paperwork to. Generally, that person (or business) must have a physical address in the state where your LLC is registered and be available to receive mail there during working hours. They also have to be at least 18 years old.

You can name yourself as the registered agent, but it may not be the best idea. If you're worried you might not be available to serve as the point person or might not be able to keep up with important mail, it might be best to outsource this role. There are registered agent services you can use, though they'll come at a cost.

Next, head back to the Secretary of State's website to find the articles of organization that you'll need to file. You can also meet with someone in the department in person or by phone if you prefer.

The exact information you'll have to fill out for the articles of organization will vary by state. Still, you can expect to be asked for basic information like your LLC's name, address, services, and how you expect it to be managed. You'll also need to pay a filing fee.

Keep in mind that the articles of an organization may be called something different, depending on the state. Alabama and Texas, for example, call it a "certificate of formation." Some states also have publication requirements, which means you need to publish an announcement of your new business in a newspaper.

While you'll likely divvy up responsibilities for anyone in your business on your own, you may also be required to do so via an operating agreement. These agreements outline how your business will be run and delegate roles and power to different members. That may include voting procedures, rules around daily operations, and ownership rights within the company.

Only some states require you to create this type of agreement, but it is a good idea to do so even if you don't technically have to.

Opening an LLC may be your first priority, but there are other tasks to take care of during the process, like getting your employer identification number (EIN). An EIN is an identifying number that the IRS will use for tax reasons, but it's not always required for opening an LLC.

You may also want to open a business bank account to ensure you keep your personal and business assets separate for bookkeeping and tax purposes. Plus, look into what exactly you need to keep your LLC active in your state, which may include filing an annual report.

A lot goes into opening and operating your own business, but you don't have to take care of everything on your own. Block Advisors , part of H&R Block, can help you decide which type of business structure is best for you, such as an LLC, and help you open that business. Using an online service to incorporate your business will help ensure that you submit all of the necessary paperwork required in your state of incorporation. This could save you time now and headaches later.

With Block Advisors, you're not on your own once your business is up and running. The service provides tax help, including filing your taxes with a professional or on your own with help from a live expert. You can also opt for one of its bookkeeping services , which range from a step-by-step guide to doing your own bookkeeping to working with your own dedicated accountant.

If you're looking to scale, Block Advisors also offers payroll services, which help you pay your employees each pay cycle and can make sure you stay compliant. There are three tiers to choose from — the basic service comes with a dedicated accountant, up to the premium service, which includes timekeeping, human resources assistance, and more.

*This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations in forming a business entity. 

**Block Advisors discount may not be combined with any other offer or promotion. Void if transferred and where prohibited. Discount will appear in your cart automatically when you use the link. No cash value. Expires June 30, 2024.

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Raising private capital: tips for startups in today's market.

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Jeff Bartel is chairman and managing director of Hamptons Group, a private investment and strategic advisory firm headquartered in Miami.

Private capital activity has increased in recent years . For startups, raising private capital offers financial support for development and innovation.

Our firm's capital raises have included obtaining capital through funds and direct investment. Drawing from that experience, here is a look at the current private capital landscape and strategies for successfully raising capital.

The Current Private Capital Landscape

Private capital includes venture capital, private equity and other investment funding sources, where venture capital can help drive technological advancement through industries such as biotech, fintech and artificial intelligence.

Mature companies are a primary focus for investors interested in raising private equity capital to inject funds for strategic initiatives, acquisitions or operational improvements.

Private capital markets attract a large amount of their investments from institutional and high-capital investors. This focus stems from the flexibility in private capital transactions and the possibility of higher returns over more traditional investments.

Microsoft Warns Windows Users Of Ongoing Russian Hack Attack

New apple id password reset issue hitting iphone ipad and macbook users, new ios 18 ai security move changes the game for all iphone users, strategies for raising capital.

Building strong, personal relationships with potential investors is essential to capital acquisition. Developing genuine connections based on shared values and principles creates the trust and confidence necessary for securing investment.

Our firm endeavors to discern whether a smaller business or startup can demonstrate mission and vision alignment. When we confirm aligned impact goals and value sets, our teams build solid partnerships that ensure all deals flow seamlessly.

Founders who focus on the value proposition to the investor rather than looking only at the value of the potential investor's capital have the right approach. The best venture leaders focus on proposing versus convincing others to invest.

Other ways to build relationships with investors and improve your chances of raising capital are outlined below:

• Attending industry events. These provide a valuable opportunity to connect with investors, share insights and showcase your venture.

• Leveraging social platforms. You can strengthen your networking efforts by using social media to connect with a larger audience and participate in relevant discussions.

• Holding one-on-one meetings. These allow a personalized approach, letting you dive deeper into your business proposition and address individual investor concerns.

The Implications Of Seed Funding

Early-stage startups typically seek seed funding, which provides initial capital to validate concepts, conduct market research and develop minimum workable products. When startups begin exploring Series A funding, investors often expect clear proof of concept, market traction and a scalable business model. Series B and additional funding rounds focus on scaling operations and expanding market share to show sustainable revenue growth, operational efficiency and a solid profitability plan.

Challenges And Mitigation Strategies

Industries with a reputation for high failure rates are a problem for entrepreneurs trying to build capital due to investor concerns about stability. Investors are often cautious when looking at various opportunities, especially in biotech or new technology projects.

To mitigate skepticism, consider proactively addressing the perceived risks by offering comprehensive and transparent risk assessments that illustrate a well-researched market need. You can also demonstrate a deep understanding of your industry's challenges and present a clear strategy for overcoming them.

A robust business model is a powerful tool for lowering investor concerns; it should outline a clear value proposition, articulate revenue streams and show adaptability to market dynamics.

Path To Profitability

Equally crucial is showcasing a practical path to profitability, inspiring confidence that your business is scalable and sustainable in the long run. A practical path starts with defining a vision and setting key strategic goals necessary for success. Helpful strategies when determining the vision include:

• Involving the entire business team in planning to consider all perspectives and create free-flowing discussions.

• Expanding services to meet all potential client needs and target specialized or niche markets.

• Prioritizing honest client communication and building a foundation of satisfaction, loyalty and referrals.

• Putting in place detailed accounting practices and using technology effectively and efficiently.

• Regularly checking progress to adapt to market changes and keep the long-term vision on track.

Ultimately, actual profitability is about more than just revenue; it should include cost management, client retention and an overall focus on returning value.

Final Thoughts On Raising Private Capital

With a shift toward venture capital and private equity over traditional funding sources, one needs careful strategies for capital acquisition. The importance of seed funding, understanding volatility in high-risk industries and building trust are essential to securing financing.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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UBS flags 'serious' concern about new Swiss capital requirements

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• UBS voices concern over capital requirements
• Additional capital is wrong remedy, chairman says
• Shares down 2%
• Merger of Swiss entities seen in Q3, painful decisions ahead-CEO
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Reporting by Noele Ilien, writing by Andrey Sychev Editing by Dave Graham and Tomasz Janowski

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Activist investor Elliott buys stake in Japan's Sumitomo, source says

U.S. hedge fund Elliott Management Corp has bought a stake in Sumitomo Corp worth several tens of billions of yen, a person familiar with the situation said on Tuesday.

UBS Chairman Says Swiss Capital Plan Is ‘Wrong Remedy’ (4)

By Myriam Balezou

UBS Group AG Chairman Colm Kelleher said that the Swiss government’s proposal to require the bank to hold substantially more capital is the “wrong remedy” to the failings that brought down Credit Suisse over a year ago.

“We are seriously concerned about some of the discussions related to additional capital requirements,” Kelleher said at the bank’s annual general meeting in Basel, Switzerland, on Wednesday. “It is imperative that our regulatory policies ensure a level playing field. In other words, Switzerland’s regulation must remain broadly aligned with global standards.”

The Swiss government unveiled a raft of regulatory proposals earlier this month ...

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