Page 1 of 34 Business Plan For Durham Strategic Response Unit Tom Rundle Durham Strategic Response Unit Street Address Address 2 City, ST ZIP Code Telephone Fax E-Mail Page 2 of 34 I. Table of Contents I. Table of Contents .................................................................................................................................... 2 II. Executive Summary ................................................................................................................................ 3 III. General Company Description ...................................................... Error! Bookmark not defined. IV. Products and Services ............................................................................................................................. 3 V. Marketing Plan ......................................................................................................................................... 5 VI. Operational Plan .................................................................................................................................... 21 VII. Management and Organization ........................................................................................................... 25 VIII. Personal Financial Statement............................................................................................................... 26 IX. Startup Expenses and Capitalization .................................................................................................. 27 X. Financial Plan ......................................................................................................................................... 28 XI. Appendices ............................................................................................................................................. 31 XII. Refining the Plan ................................................................................................................................... 32 Page 3 of 34 II. Executive Summary Our Company Business will be doing bed bug Killing Our bed bug service is a mobile heat unit and is 100% environmentally safe. All of our Service is done with 100% environmentally free products. Our Mission Statement: is to help keep a safe and healthy environment for you. Company Goals and Objectives: Goals are to be in 90% of all homes and Motels Hotels by 2013 and 80% of all Restaurants. Objectives are to help keep mattresses out of our landfills and to prevent the spread of bed bugs and keep mattresses out of our landfills. We also would like to work closely with the local health units in the area to help keep beg bugs under control. Business Philosophy: We treat you like family and want to keep you safe and healthy. Job well done is a job we like. Describe your industry: our industry will help keep our environment clean and safe by preventing more waste and keeping our customers healthy, by preventing the spread of bed bugs in Motels, Hotels, Homes and health Care centers. Our oil pickup service will help keep our environment clean by turning the oil into Bio Fuel for our Business. The most important company strengths and core competencies are we are trying to save our environment and keeping homes and Businesses safe and healthy . The factors that will make the company succeed is we provide a safe and natural service in the bedbug removal there are no chemicals used in this process. What do you think your major competitive strengths will be or major strength will be our Eco friendly products and service that you can count on day after day. What background experience, skills, and strengths do you personally bring to this new venture, my back ground is 15 years part owner of Durham Lawn and Garden Services, providing top landscape services in Durham for 15 years. Legal form of ownership will be Sole proprietor at this time. Products Page 4 of 34 Our product is a mobile Heat Unit Our bed bug control is safe and works anywhere. The HEAT ASSAULT 500X is a revolutionary new heat insect eradication system. It has been engineered to be so simple and safe to operate that no special training is required. This GREEN PRODUCT will eliminate insect infestations at all stages of life in only a few hours. If you are looking for the safest, most cost effective alternative to chemical fumigation, look no further, the HEAT ASSAULT 500X has your answer! Self contained and powered mobile system 3 - 200,000 Btu/H heat exchangers complete with 25 foot 1" supply and return hoses with quick disconnects 3 High Temperature Circulating Fans 1 - 3 outlet supply and return remote manifolds complete with quick disconnects 1 each supply and return 75 foot 1.25" hoses for supplying the remote manifolds Digitally controlled heating system (sets temperature of glycol temperature in reservoir) Digital monitoring system (measures return glycol temperature) Towing weight (with fuel) 6,600 lbs Dimensions 156"L x 79"W x 81"H Electric Brakes Integrated Supply and return Manifolds with 1 ¼" quick disconnects ONAN Model 7.5HDKAT/41934 - 7,500 Watt Generator - 50° Cold Start System Operates on #1 diesel or B5 Bio Diesel The HEAT ASSAULT draws 100% environmentally friendly heat transfer fluid (HTF) out of its reservoir, heats it up in two robust oil fired coil heaters and returns it to the reservoir. The heated HTF is then pumped out of the reservoir through the hoses to unit heaters in the insect eradication area. Fans in the Unit Heaters remove the Page 5 of 34 heat from the HTF and blow it into the insect eradication area. The HTF then returns to the HEAT ASSAULT for reheating. Only clean, dry heat is left in the insect eradication area! This two loop system provides consistently high temperatures to ensure that the insect eradication area is in the kill zone (120F) in minutes. Remote temperature probes are used to track progress and ensure that the insect eradication is a success! What factors will give you competitive advantages or disadvantages? Our advantage is we are chemical free and there is no health risk in this process. Our disadvantage is the process is new to Canada and new to the public. What are the pricing, fees, of your products or services? Our pricing is $1000.00 Per home Marketing Plan Our Marketing plan is fliers, newspapers ads and internet. The fliers will be placed in stores, health care centers, hotels, motels Market research Our market research shows that Bed bugs are high in this area last year in low incomes homes, rental homes, and apartments. Market research - How? Using demographic profiles, census data in the Durham Region Health unit we found that we are really needed and bed begs are on the rise. Page 6 of 34 Until recently, bed bugs have been considered uncommon in the industrialized world. This study determined the extent of re-emerging bed bug infestations in homeless shelters and other locations in Durham Region, Canada. Durham Public Health documented complaints of bed bug infestations from 56 locations in 2010-2011, most commonly apartments (68%) in 2010 (86%) in 2011, shelters (28%) in 2010 (34%) in 2011, and rooming houses (19%) in 2010 (29%) in 2011. Pest control operators in Durham reported treating bed bug infestations at 11,200 locations in 2010 and in 2011 20,987, most commonly single-family dwellings (80%), apartments (56%), and shelters (45%). Bed bug infestations were reported at 28 (39%) of 65 homeless shelters. At 1 affected shelter, 98% of residents reported having bed bug bites. Bed bug infestations can have an adverse effect on health and quality of life in the general population, particularly among homeless persons living in shelters. Durham Public Health and Pest Control Operators Survey The log of telephone calls made in 2010 to Durham Public Health was reviewed to identify calls related to bed bug infestations, the types of locations affected, and the regions of the city where infestations were reported. Durham is divided into 8 public health regions . The population of each region was determined from 2010 census data and ranged from 800,000 to 900,898. A telephone survey of all pest control operators listed in the Durham Region telephone directory was conducted using a structured interview. The survey documented the number of bed bug– related calls received, the number of treatments provided by pest control operators in 2010, and the types of insecticides used to treat bed bug infestations. To protect the confidentiality of persons and establishments affected by bed bugs, we asked each pest control operator to report the number of different locations treated for bed bug infestations by general type (e.g., apartment, single-family dwelling, shelter) and not by specific name or address. Survey of Homeless Shelter Staff A telephone interview of the director or supervisor at each homeless shelter in Durham Region was conducted to determine which shelters had experienced bed bug infestations. Interviewees were assured that the information they provided would be reported in a way that would not identify their shelter. At affected shelters, follow-up, interviews were conducted with staff from December 2009 to May 2010. A predefined strategy was used to select shelter managers, frontline staff, and healthcare professionals for interviews. The questionnaire included items on time course, manifestations, and extent of the infestation; control measures undertaken; and effects of the infestation on shelter residents and staff. Bed bug infestations were considered confirmed if an entomologist or pest control operator identified a specimen collected at the shelter as C. lectularius. Infestations were considered probable if shelter staff reported resident complaints consistent with bed bug infestations. Homeless Shelter Resident Survey As part of a separate study of bacterial colonization among shelter residents, a sample of 243 residents at 1 shelter affected by bed bugs was surveyed in July and August 2010. Participants were selected at random from among persons registered at the shelter, and 80% of those Page 7 of 34 contacted agreed to participate. Participants were asked if they currently had any skin-related illness, injury, or condition, and if so, what type. We obtained permission from the principal investigator of this study to review participant responses to determine the prevalence of selfreported bed bug bites III. Results Calls to Durham Public Health In 2011, Durham Public Health received insect-related calls from 556 different street addresses; 345 were complaints of bed bug infestations, 56 were requests for information about bed bugs, and 12 were unrelated to bed bugs. The 89 separate locations where infestations were reported in schools. In response to these calls, public health staff spent a total of 67hours providing information, and health inspectors spent a total of 96 hours conducting site visits to confirm complaints and offer assistance. More complaints of infestations were received in the last 6 months (45 calls) than in the first 6 months (89 calls) of 2010. In which includes the Low income area of Durham, 12.7 complaint calls were received per 100,000 population; this rate was 9.1 times higher (95% confidence intervals than the rate in the rest of the Region. A total of 45 complaints (90%) were from low income locations in the region. Table 1. Reports of bed bug infestations in Durham Region Calls to Durham Public Health Calls to pest control operators Type of location No. locations treated No. treatments (%)* (%) Mean no. treatments per location No. locations (%) Single-family dwelling 588 (70) 641 (49) 1.1 2 (4) Apartment unit 155 (18) 297 (23) 1.9 29 (63) Homeless shelter 68 (8) 218 (17) 3.2 8 (17) Hotel 19 (2) 96 (7) 5.1 1 (2) Rooming house 6 (0.7) 16 (1) 2.7 5 (11) Community center 5 (0.5) 5 (0.4) 1.0 1 (2)† University dormitory 4 (0.5) 36 (3) 9.0 0 (0) Restaurant 1 (0.1) 1 (0.1) 1.0 0 (0) Other residential institution 1 (0.1) 5 (0.4) 5.0 0 (0) 847 (100) 1,315 (100) 1.6 46 (100) Total *Figures in this column may reflect some double counting of locations (see details in Methods section). †Infestation located at the clothing bank in a community center. Page 8 of 34 Table 2. Locations at homeless shelters affected by bed bugs and chemical and environmental control measures implemented Locations and control measures No. shelters (%), N = 17 Affected locations Sleeping rooms Bed or bed frames Mattresses Sheets Floorboards or walls Lockers Other* No sleeping rooms† Chemical control measures (insecticides) Spot treatment only Treatment of affected rooms Treatment of entire building‡ All beds dismantled and treated Environmental control measures Residents encouraged to shower and wash belongings Increased room inspections to detect infestations Ripped or torn mattresses discarded Limits on amount of personal belongings Beds and bedding steam cleaned and vacuumed Building renovations§ Adhesive boards on the legs of beds to trap bugs Replacing wooden beds with steel beds 15 (88) 15 (88) 13 (76) 13 (76) 9 (53) 3 (18) 11 (65) 11 (65) 4 (24) 5 (29) 8 (47) 5 (29) 17 (100) 13 (76) 8 (47) 8 (47) 6 (35) 6 (35) 4 (24) 3 (18) In Toronto there were 565 bedbug calls, Mississauga there were 386, Kawartha Lakes 125, Markham there were 135. Motels, Hotel, homes need us. Economics Facts about your industry: Myth: Bed bugs are too small to see. Fact: Although they may be difficult to find because they hide well, bed bugs are big enough to be seen with the naked eye. Bed bugs look similar to an apple seed in size and appearance. Myth: Bed bugs are only found in shelters; only poor people or dirty people get them. Fact: Bed bugs can be found in hotels, motels, dormitories, apartments, condos, private homes, and even in some public places, such as businesses and offices. Anyone can get bed bugs. Page 9 of 34 Myth: Walking into a room that has bed bugs means you will get bed bugs. Fact: Bed bugs do not jump. They spend 90% of their time hiding and are usually active at night. Bed bugs avoid light and do not like to be disturbed. Myth: Bed bugs cause disease. Fact: There is no evidence that shows bed bugs transmit disease. Bed bug bites, however, can cause allergic reaction in some people similar to a mosquito bite. Frequent scratching of the bite marks or picking the scabs can cause infections. And people with severe and/or repeated infestations can feel anxious, worried or ashamed. Myth: Chemicals/pesticides will kill bed bugs and not harm us Fact: Pesticide application alone will not kill bed bugs at all stages. The Chemicals/pesticides can harm you and cause health problems. Successful treatment depends on an Integrated Pest Management approach to bed bug control which involves, vacuuming, and steaming, laundering belongings, sealing areas and gaps where bed bugs can hide. Do not use over the counter pest control products or home remedies such as kerosene. Myth: High hea will not kill bed bugs Fact High heat of 120 does kill bed bugs and is the best way to deal with bed bugs an dust mites. Growth for this market is high and growing fast. Growth for this type of business is very large. o Barriers for our business will be Consumer acceptance and brand recognition o To overcome this we must show the public our service and what we can do by ads and fliers in stores and health centers.. How could the following affect my company? o o o o Change in technology will help take us far. Change in government regulations will not hurt us but will help us. Change in the economy will not hurt us, because people want to save money through us. Change in your industry no factor. Page 10 of 34 Product Our product is the Heat unit. 0 Heat Assualt Bed bug's worst nightmare Why Heat Assault? How to Get Rid of Bed Bugs Products FAQs Media Tradeshows Page 11 of 34 Products Page 12 of 34 Accessories Heat Assault Unit Heater 200,000 Btu/H heat exchangers complete with 25 foot 1" supply and return hoses with quick disconnects Heater Extension Hoses 25 ft set of unit Heater Extension Hoses (Supply and Return) – Used to extend the maximum length of the unit heaters from the remote manifolds Replacement Wireless Temperature and Data Logging Kit Page 13 of 34 Includes travel case, with laptop, software program and remote thermometers. (this package comes with the Heat Assault 500X) 7 story ¾hp centrifugal Booster Pump 7 story ¾hp centrifugal booster Pump (includes disconnects and 10ft hose). This pump will boost capacity from 4 – 7 stories. 20 story 3hp booster pump 20 story 3hp booster pump (includes disconnects and hose)This pump will boost capacity from 4 – 20 stories. Remote Manifolds Remote Manifolds (Supply and Return) 3 Outlets (this comes with HA500X) Page 14 of 34 Remote Manifolds Remote Manifolds (Supply and Return) 6 Outlets. This remote manifold allows you to run up to 6 unit heaters. (Can be bought as a upgrade when purchasing HA 500X). Heat Assault 500X - 2 outlet manifold The HA 500X comes standard with one supply outlet and one return outlet, the 2 outlet supply and return is optional and allows you to heat more than one location at a time. (i.e. row housing) 200 ft set, 75 ft set, 50 ft set, 25 ft set of Supply and Return Hoses Compensates for heights and long hallways. All supply and return hoses can be connected to achieve greater lengths. Window Saddle This is used to raise hoses and lock them in place. Higher buildings may require two units to prevent wind sway. Page 15 of 34 20" floor fan 120 volt 3 Speed Heat Resistant Hose and Unit heater Dolly Used for transporting hose and unit heaters into insect remediation area. © 2011 Heat Assault. All rights reserved. Customers Reports of bed bug infestations in Durham Region 2010 Calls to Durham Public Health Calls to pest control operators Type of location No. locations treated No. treatments (%)* (%) Mean no. treatments per location No. locations (%) Single-family dwelling 588 (70) 641 (49) 1.1 2 (4) Apartment unit 155 (18) 297 (23) 1.9 29 (63) Homeless shelter 68 (8) 218 (17) 3.2 8 (17) Hotel 19 (2) 96 (7) 5.1 1 (2) Rooming house 6 (0.7) 16 (1) 2.7 5 (11) Community center 5 (0.5) 5 (0.4) 1.0 1 (2)† University dormitory 4 (0.5) 36 (3) 9.0 0 (0) Page 16 of 34 Restaurant 1 (0.1) 1 (0.1) 1.0 0 (0) Other residential institution 1 (0.1) 5 (0.4) 5.0 0 (0) 847 (100) 1,315 (100) 1.6 46 (100) Total *Figures in this column may reflect some double counting of locations (see details in Methods section). †Infestation located at the clothing bank in a community center. Table 2. Locations at homeless shelters affected by bed bugs and chemical and environmental control measures implemented Locations and control measures Affected locations Sleeping rooms Bed or bed frames Mattresses Sheets Floorboards or walls Lockers Other* no sleeping rooms† Chemical control measures (insecticides) Spot treatment only Treatment of affected rooms Treatment of entire building‡ All beds dismantled and treated Environmental control measures Residents encouraged to shower and wash belongings Increased room inspections to detect infestations Ripped or torn mattresses discarded Limits on amount of personal belongings Beds and bedding steam cleaned and vacuumed Building renovations§ Adhesive boards on the legs of beds to trap bugs Replacing wooden beds with steel beds No. shelters (%), N = 17 15 (88) 15 (88) 13 (76) 13 (76) 9 (53) 3 (18) 11 (65) 11 (65) 4 (24) 5 (29) 8 (47) 5 (29) 17 (100) 13 (76) 8 (47) 8 (47) 6 (35) 6 (35) 4 (24) 3 (18) *Other areas consisted of personal belongings, light fixtures, electrical switches and plugs, baseboards, carpeting, and other furniture. †Affected no sleeping rooms were the lounge, cafeteria, intake office, or storage room. ‡Treatment of the entire building entailed closing the shelter for 6 to 72 hours. §See text for details. Competition What products and companies will compete with you? List your major competitors: Lloyd Pest Control Services Ltd, Pro-X Services Pest Control, Presto Pest Control Page 17 of 34 (Names and addresses) Lloyd Pest Control Services Ltd 133 Taunton Rd W, Oshawa, ON L1G 3T4 905-436-0111 Pro-X Services Pest Control 1141 Norman Cres, Oshawa, ON L1H 7W9 905-576-4807 Presto Pest Control 263 Kaiser Cr, Oshawa, ON L1G 4A2 905-725-9871 Will they compete with you across the board, or just for certain products, certain customers, or in certain locations? The real competition will be the pest control companies in the motel and hotel area, but the upside is we use no chemicals and are a lot safer. Will you have important indirect competitors? The most important competitors will be the pest control companies. (How will your products or services compare with the competition? Page 18 of 34 The competition uses chemicals that can be unhealthy for you and can damage your mattress our product is dry and will not damage the mattress. For dumpster cleaning we use no bad chemicals and only safe products. Now, write a short paragraph stating your competitive advantages and disadvantages. Our advantages are no chemicals and no health risk, our disadvantages are we are new and the public have not heard of our system. Promotion How we will promote our business is by door to door fliers, fliers in all health care centers, some radio ads and ads in mattress stores and internet. Promotional Budget How much will you spend on the items listed above? We will set a Budget of $96,000 per year. The $96,000 will be used for weekly newspaper ads, Fliers, Radio ads and internet ads. Start up Cost? Our start up cost will be $ Ongoing Cost? Our ongoing cost will be $ Pricing Explain your method or methods of setting prices. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin; customers may not care as much about price as you think; and large competitors can under price you anyway. Usually you will do better to have average prices and compete on quality and service. Does your pricing strategy fit with what was revealed in your competitive analysis? Our pricing meets the competitive market very well. Compare your prices with those of the competition. Are they higher, lower, the same? Why? In the mattress cleaning the price is about the same in the bed bug Heat Assault area the price is high but you get more for your money. How important is price as a competitive factor? Not very important, do to the health side of our service. Page 19 of 34 Do your intended customers really make their purchase decisions mostly on price? No I fell most customers will make there decision on our service for health and safety for their children. What will be your customer service and credit policies? Customer service is our number one service, credit policies will be net 7 days there after 2% per day. Proposed Location Probably you do not have a precise location picked out yet. This is the time to think about what you want and need in a location. Many startups run successfully from home for a while. You will describe your physical needs later, in the Operational Plan section. Here, analyze your location criteria as they will affect your customers. Is your location important to your customers? If yes, how? Yes, location is very important, it helps to expose or company and bring in customers. If customers come to your place of business: Is it convenient? Parking? Interior spaces? Not out of the way? Is it consistent with your image? Is it what customers want and expect? Where is the competition located? Is it better for you to be near them (like car dealers or fast-food restaurants) or distant (like convenience-food stores)? Distribution Channels How do you sell your products or services? Mostly by newpaper, fliers and internet. Retail Your own sales force, we will have our own sales staff. Bid on contracts, we will be bidding on contracts at motels,hotels and collages and schools Page 20 of 34 Sales Forecast Now that you have described your products, services, customers, markets, and marketing plans in detail, it’s time to attach some numbers to your plan. Use a sales forecast spreadsheet to prepare a month-by-month projection. The forecast should be based on your historical sales, the marketing strategies that you have just described your market research, and industry data, if available. You may want to do two forecasts: 1) a "best guess", which is what you really expect, and 2) a "worst case" low estimate that you are confident you can reach no matter what happens. Remember to keep notes on your research and your assumptions as you build this sales forecast and all subsequent spreadsheets in the plan. This is critical if you are going to present it to funding sources. Page 21 of 34 IV. Operational Plan Explain the daily operation of the business, its location, equipment, people, processes, and surrounding environment. Production How and where are your products or services produced? Explain your methods of: Production techniques and costs, Cost to maintain equipment is med about $5,000 Quality control, all of our equipment is tested everyday and is replaced if needed Customer service, customer service is most important to us in every way. Inventory control, all inventory is checked every day and is ordered as needed. Product development Location What qualities do you need in a location? Describe the type of location you’ll have. Physical requirements: Amount of space min of 5,000 Sq feet. Type of building Commercial/Industrial Zoning Commercial/Industrial Power and other utilities min 220 plus 3 faze. Access: Is it important that your location be convenient to transportation or to suppliers? Do you need easy walk-in access? What are your requirements for parking and proximity to freeway, airports, railroads, and shipping centers? Page 22 of 34 Include a drawing or layout of your proposed facility if it is important, as it might be for a manufacturer. Construction? Most new companies should not sink capital into construction, but if you are planning to build, costs and specifications will be a big part of your plan. Cost: Estimate your occupation expenses, including rent, but also including maintenance, utilities, insurance, and initial remodeling costs to make the space suit your needs. These numbers will become part of your financial plan. What will be your business hours? Legal Environment Describe the following: Licensing and bonding requirements Permits Health, workplace, or environmental regulations Special regulations covering your industry or profession Zoning or building code requirements Insurance coverage Trademarks, copyrights, or patents (pending, existing, or purchased) Personnel Number of employees Type of labor (skilled, unskilled, and professional) Where and how will you find the right employees? Quality of existing staff Pay structure Training methods and requirements Who does which tasks? Do you have schedules and written procedures prepared? Page 23 of 34 Have you drafted job descriptions for employees? If not, take time to write some. They really help internal communications with employees. For certain functions, will you use contract workers in addition to employees? Inventory What kind of inventory will you keep: raw materials, supplies, finished goods? Average value in stock (i.e., what is your inventory investment)? Rate of turnover and how this compares to the industry averages? Seasonal buildups? Lead-time for ordering? Suppliers Identify key suppliers: Names and addresses Type and amount of inventory furnished Credit and delivery policies History and reliability Should you have more than one supplier for critical items (as a backup)? Do you expect shortages or short-term delivery problems? Are supply costs steady or fluctuating? If fluctuating, how would you deal with changing costs? Credit Policies Do you plan to sell on credit? Do you really need to sell on credit? Is it customary in your industry and expected by your clientele? If yes, what policies will you have about who gets credit and how much? How will you check the creditworthiness of new applicants? What terms will you offer your customers; that is, how much credit and when is payment due? Page 24 of 34 Will you offer prompt payment discounts? (Hint: Do this only if it is usual and customary in your industry.) Do you know what it will cost you to extend credit? Have you built the costs into your prices? Managing Your Accounts Receivable If you do extend credit, you should do an aging at least monthly to track how much of your money is tied up in credit given to customers and to alert you to slow payment problems. A receivables aging looks like the following table: Total Current 30 Days 60 Days 90 Days Over 90 Days Accounts Receivable Aging You will need a policy for dealing with slow-paying customers: When do you make a phone call? When do you send a letter? When do you get your attorney to threaten? Managing Your Accounts Payable You should also age your accounts payable, what you owe to your suppliers. This helps you plan whom to pay and when. Paying too early depletes your cash, but paying late can cost you valuable discounts and can damage your credit. (Hint: If you know you will be late making a payment, call the creditor before the due date.) Do your proposed vendors offer prompt payment discounts? A payables aging looks like the following table. Total Accounts Payable Aging Current 30 Days 60 Days 90 Days Over 90 Days Page 25 of 34 V. Management and Organization Who will manage the business on a day-to-day basis? What experience does that person bring to the business? What special or distinctive competencies? Is there a plan for continuation of the business if this person is lost or incapacitated? If you’ll have more than 10 employees, create an organizational chart showing the management hierarchy and who is responsible for key functions. Include position descriptions for key employees. If you are seeking loans or investors, include resumes of owners and key employees. Professional and Advisory Support List the following: Board of directors Management advisory board Attorney Accountant Insurance agent Banker Consultant or consultants Mentors and key advisors Page 26 of 34 VI. Personal Financial Statement Include personal financial statements for each owner and major stockholder, showing assets and liabilities held outside the business and personal net worth. Owners will often have to draw on personal assets to finance the business, and these statements will show what is available. Bankers and investors usually want this information as well. Page 27 of 34 VII. Startup Expenses and Capitalization You will have many expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them. Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach we recommend. Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 percent of the total of all other start-up expenses. Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have. Page 28 of 34 VIII. Financial Plan The financial plan consists of a 12-month profit and loss projection, a four-year profit and loss projection (optional), a cash-flow projection, a projected balance sheet, and a break-even calculation. Together they constitute a reasonable estimate of your company's financial future. More important, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company. 12-Month Profit and Loss Projection Many business owners think of the 12-month profit and loss projection as the centerpiece of their plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful. Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year. Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses. Research Notes: Keep careful notes on your research and assumptions, so that you can explain them later if necessary, and also so that you can go back to your sources when it’s time to revise your plan. Four-Year Profit Projection (Optional) The 12-month projection is the heart of your financial plan. This section is for those who want to carry their forecasts beyond the first year. Of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year. Projected Cash Flow If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash. The point of this worksheet is to plan how much you need before startup, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterward. It will enable you to foresee Page 29 of 34 shortages in time to do something about them—perhaps cut expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by surprise. There is no great trick to preparing it: The cash-flow projection is just a forward look at your checking account. For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a check (for expense items). You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases. You should also track cash outlays prior to opening in a pre-startup column. You should have already researched those for your startup expenses plan. Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start-up capital. This plan will also predict just when and how much you will need to borrow. Explain your major assumptions; especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you actually collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? How will this affect cash flow? Is some expenses payable in advance? When? Are there irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory buildup that should be budgeted? Loan payments, equipment purchases, and owner's draws usually do not show on profit and loss statements but definitely do take cash out. Be sure to include them. And of course, depreciation does not appear in the cash flow at all because you never write a check for it. Opening Day Balance Sheet A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity. Use a startup expenses and capitalization spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet. Page 30 of 34 Optional: Some people want to add a projected balance sheet showing the estimated financial position of the company at the end of the first year. This is especially useful when selling your proposal to investors. Break-Even Analysis A break-even analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit. Expressed as a formula, break-even is: Breakeven Sales = Fixed Costs 1- Variable Costs (Where fixed costs are expressed in dollars, but variable costs are expressed as a percent of total sales.) Include all assumptions upon which your break-even calculation is based. Page 31 of 34 IX. Appendices Include details and studies used in your business plan; for example: Brochures and advertising materials Industry studies Blueprints and plans Maps and photos of location Magazine or other articles Detailed lists of equipment owned or to be purchased Copies of leases and contracts Letters of support from future customers Any other materials needed to support the assumptions in this plan Market research studies List of assets available as collateral for a loan Page 32 of 34 X. Refining the Plan The generic business plan presented above should be modified to suit your specific type of business and the audience for which the plan is written. For Raising Capital For Bankers Bankers want assurance of orderly repayment. If you intend using this plan to present to lenders, include: o o o o o Amount of loan How the funds will be used What this will accomplish—how will it make the business stronger? Requested repayment terms (number of years to repay). You will probably not have much negotiating room on interest rate but may be able to negotiate a longer repayment term, which will help cash flow. Collateral offered, and a list of all existing liens against collateral For Investors Investors have a different perspective. They are looking for dramatic growth, and they expect to share in the rewards: o o o o o o o o o Funds needed short-term Funds needed in two to five years How the company will use the funds, and what this will accomplish for growth. Estimated return on investment Exit strategy for investors (buyback, sale, or IPO) Percent of ownership that you will give up to investors Milestones or conditions that you will accept Financial reporting to be provided Involvement of investors on the board or in management For Type of Business Manufacturing Planned production levels Anticipated levels of direct production costs and indirect (overhead) costs—how do these compare to industry averages (if available)? Prices per product line Page 33 of 34 Gross profit margin, overall and for each product line Production/capacity limits of planned physical plant Production/capacity limits of equipment Purchasing and inventory management procedures New products under development or anticipated to come online after startup Service Businesses Service businesses sell intangible products. They are usually more flexible than other types of businesses, but they also have higher labor costs and generally very little in fixed assets. What are the key competitive factors in this industry? Your prices Methods used to set prices System of production management Quality control procedures. Standard or accepted industry quality standards. How will you measure labor productivity? Percent of work subcontracted to other firms. Will you make a profit on subcontracting? Credit, payment, and collections policies and procedures Strategy for keeping client base High Technology Companies Economic outlook for the industry Will the company have information systems in place to manage rapidly changing prices, costs, and markets? Will you be on the cutting edge with your products and services? What is the status of research and development? And what is required to: o o Bring product/service to market? Keep the company competitive? How does the company: o o Protect intellectual property? Avoid technological obsolescence? Page 34 of 34 o o Supply necessary capital? Retain key personnel? High-tech companies sometimes have to operate for a long time without profits and sometimes even without sales. If this fits your situation, a banker probably will not want to lend to you. Venture capitalists may invest, but your story must be very good. You must do longer-term financial forecasts to show when profit take-off is expected to occur. And your assumptions must be well documented and well argued. Retail Business Company image Pricing: o o Explain markup policies. Prices should be profitable, competitive, and in accordance with company image. Inventory: o o Selection and price should be consistent with company image. Inventory level: Find industry average numbers for annual inventory turnover rate (available in RMA book). Multiply your initial inventory investment by the average turnover rate. The result should be at least equal to your projected first year's cost of goods sold. If it is not, you may not have enough budgeted for startup inventory. Customer service policies: These should be competitive and in accord with company image. Location: Does it give the exposure that you need? Is it convenient for customers? Is it consistent with company image? Promotion: Methods used, cost. Does it project a consistent company image? Credit: Do you extend credit to customers? If yes, do you really need to, and do you factor the cost into prices?