Business Plan Financials

Business Plan Financials Mike S. Reyes, MBA Sr. Certified Business Advisor UTSA Institute for Economic Development Small Business Development Center Agenda Brief review of business planning process  Analyze Market to arrive at Sales Projections  Financial Analysis  The Credit Process  Financing Needs-Purpose & Types of Loans  Q&A and Evaluations  Copyright - UTSA SBDC 2008 2 SBDC Mission Promote • • • • • Growth Expansion Innovation Increased Productivity Improved Management Copyright - UTSA SBDC 2008 3 UTSA SBDC Services Training        Feasibility Business Plan Internet IRS Tax Education QuickBooks Pro Accounting How to Market Your Business Money Management for Small Businesses Copyright - UTSA SBDC 2008 4 UTSA SBDC Counseling Services Counseling         Confidential, by appointment only Business Startups and Existing Businesses Analysis of Business Operation Financial Analysis-Format Human Resources Recordkeeping Marketing Research Information Copyright - UTSA SBDC 2008 5 Business Plan Development  Feasibility Analysis     Funding Needs Loan Proposal Structuring Lender Evaluation SBA Eligibility/Credit Copyright - UTSA SBDC 2008 6 Business Plan Tips      Purpose Your “reader” Content vs. length Organized information gathering system Financial proposal Copyright - UTSA SBDC 2008 7 Business Plan     Cover letter Executive Summary Table of Contents Definition of Product or Service   Operations Overview Market Analysis Copyright - UTSA SBDC 2008 8 Business Plan  Marketing Plan  Management Profile Financial Analysis Supporting documents As you are writing your business plan, keep a running log of all expenditures to make sure the narrative corresponds with the financials. Copyright - UTSA SBDC 2008   9 Market Research  Market    Research Industry trends Description of total market Competitive analysis   Demographic information Documentation of demand for product or service 10 Copyright - UTSA SBDC 2008 Research Strategies Free Small Business Resources Online SBDC National Information Clearinghouse http://sbdcnet.utsa.edu Links of interest for entrepreneurs. Of particular interest is the Industry Research section. SIC/NAICS U.S. Census Bureau http://www.census.gov/epcd/www/naics.html Identify the SIC and/or NAICS code for your line of business Copyright - UTSA SBDC 2008 11 Research Strategies Industry Trends BizJournals http://www.bizjournals.com/ Search Business Journals to find relevant business articles. Free site, requires registration. Searchable by industry and market (i.e. city). FindArticles http://www.findarticles.com/ Search for articles from numerous leading academic, industry and general interest publications. Industry Links http://www.irs.gov/businesses/small/industries/index.html Competitors/Suppliers SuperPages http://www.superpages.com/ Searchable by keyword by city, state or zip code. Also searchable by distance up to 100 miles from an address. Results can be viewed on a map. Copyright - UTSA SBDC 2008 12 Research Strategies Wage Setting Information U.S. Department of Labor - Bureau of Labor Statistics http://www.bls.gov/bls/blswage.htm Identify wages for specific occupations on a national, regional, state, or Metropolitan Statistical Data (MSA) level. America‟s Career InfoNet http://www.acinet.org//acinet/select_occupation.asp?stifips=&next=occ_rep Wages and trends by occupation and state. Demographics American FactFinder from the U.S. Census Bureau http://factfinder.census.gov View demographic information by a state, county, city, or zip code level. Copyright - UTSA SBDC 2008 13 Startup Costs Copyright - UTSA SBDC 2008 14 A. STARTUP COSTS DESCRIPTION Building Land Rem odeling/Im provem ents Fixtures & Equipm ent Furniture Outdoor Sign Inventory Depos its As s ociation Fee Advertis ing Licens e, Perm its , Ins urance Office/Operating Supplies Loan Fees (4.5%) Working C apital TOTAL STARTUP COSTS AMOUNT $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 75,000 20,000 30,000 8,500 1,000 1,500 25,000 5,000 200 1,800 500 200 6,300 25,000 200,000 HOW MUCH WILL IT COST YOU TO ACCOMPLISH YOUR PROJECT? These figures should be reflected in the pre-startup column of your cash flow statement. Allow enough working capital for expenses during the early period. NOTES: __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ Copyright - UTSA SBDC 2008 __________________________________________________________________________ _ 15 15 B. SOURCE AND USE OF FUNDS Description Inventor y Fur niture and Equipment Land Building Improvements Deposits Wor king Capital Or ganizational Costs TOTAL Loan $ $ $ $ $ 4,000 11,000 20,000 75,000 30,000 Owne r Injection $ 21,000 Total $ 25,000 $ 11,000 $ 20,000 $ 75,000 $ 30,000 $ 5,000 $ 25,000 $ 9,000 $ 200,000 $ 140,000 $ 5,000 $ 25,000 $ 9,000 $ 60,000 Of the total project cost you've identified for starting the bus iness, how much are you contributing, and how much comes from the financial institutionor investor? What is the money being spent on? NOTES: __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ __________________________________________________________________________ _ Copyright - UTSA SBDC 2008 16 16 Profit & Loss Statement (Income Statement)  Purpose - to show how money for transactions is accounted for in a given time period. Indicates revenue, expenses, and resulting profits for that period of time.  Copyright - UTSA SBDC 2008 17 Key Elements of the Income Statement     Gross Sales Cost of Goods Sold Gross Income Operating Costs      General & Admin      Rent, Wages Utilities Ad & Promotions Etc.   Operating Income Interest Income Interest Expense Income Before Taxes Income Taxes Net Income  Depreciation & Amortization Expense Copyright - UTSA SBDC 2008 18 Income/P&L Statement Year 1 Gross Sales Less COGS Gross Profit Less Operating Exp. Rent, wages, utilities, etc. Profit before Tax Copyright - UTSA SBDC 2008 $300,000 $218,000 $82,000 $58,000 $24,000 19 Cash Flow Projections    Use assumptions from market research and industry averages Realistic seasonal sales by the month Method of payment for services    Cash / Checks Credit / Debit cards Credit terms (30 days)    Inventory purchasing Use several different ways to project sales Can the business sustain slow periods 20 Copyright - UTSA SBDC 2008 Key Elements of the Cash Flow Statement 1) Cash inflow and outflow from operations 2) Cash inflow and outflow from investing 3) Cash inflow and outflow from financing Inflow Copyright - UTSA SBDC 2008 CASH Outflow 21 Cash Flow Month 1 Cash on Hand 25,000 Plus Revenues Available Cash Less Expenses 12,000 37,000 14,000 Month 2 23,000 19,000 42,000 18,000 24,000 Month 3 24,000 22,000 46,000 20,000 26,0000 End of Month 23,000 Copyright - UTSA SBDC 2008 22 Balance Sheet  Purpose- to provide a „snapshot‟ of a business‟s financial position at a given point in time. Illustrates what the business owns, what it owes and what the business‟s net worth is at a given point in time. Total assets should equal the sum of the total liabilities and the net worth. 23   Copyright - UTSA SBDC 2008 Key Elements of the Balance Sheet  Current Assets       Fixed Assets  Cash & Cash Equivalents Accounts Receivable Inventories Property, Plant & Equipment Liabilities & Capital /Net Worth Current Liabilities     Intangible Assets   Long term Liabilities  Current portion of long term debt Accounts Payable Accrued Payroll Net Worth (Equity) Long-term Debt Copyright - UTSA SBDC 2008 24 F. BALANCE SHEET PROJECTION Start-up Curre nt Ass et s Cas h Accounts R eceivable Inventory Dep os it s Other C urr ent Ass ets Total Current Asse ts Property & Equipm e nt Furniture & Equip ment Land Building Imp rovements Acc. Dep reciation Total Prope rty & Equipm ent O ther Ass ets Organizational Cost s (Net Amort.) Total Ass ets Curre nt Liabili ties Accounts Pay able Income T axes Pay able Pay roll T ax Pay able Sales T ax Pay able Current LT . Debt (B ank) Total Current Liabilitie s Long-Te rm Liabilitie s Long- T erm Debt Total Long-Te rm Liabil itie s Total Li abiliti es Capital O wne r's Equity Dividend Dis tributions Retained Earnings Current Profit or (Loss ) Total Capi tal Total Capi tal & Liabil itie s 25,000 0 25,000 5,000 0 55,000 Year-End 52,218 1,350 31,706 5,000 0 90,274 23.0% 0.6% 13.9% 2.2% 0.0% 39.7% 11,000 20,000 75,000 30,000 0 136,000 11,000 20,000 75,000 30,000 -6,018 129,982 4.8% 8.8% 33.0% 13.2% -2.6% 57.1% 9,000 200,000 7,200 227,456 3.2% 100.0% 0 0 0 0 4,063 4,063 6,033 1,088 231 0 4,510 11,861 2.7% 0.5% 0.1% 0.0% 2.0% 5.2% 135,937 135,937 140,000 131,427 131,427 143,288 57.8% 57.8% 63.0% 60,000 60,000 26.4% 0 60,000 200,000 24,168 84,168 227,456 10.6% 37.0% 100.0% Copyright - UTSA SBDC 2008 21 25 Personal Financial Data Personal Balance Sheet •Resources •Obligations •Dependence on business o Credit Report Copyright - UTSA SBDC 2008 26 22 Financing Needs Purpose & Types of Loans Determining Sources & Uses of Funds  Sources should match Uses Long lasting (fixed) assets funded by long term or equity funds   Ex. Buildings with mortgage loans  Short term (current) assets funded by short or “current” liabilities Copyright - UTSA SBDC 2008 29 Purpose of Loans (Short term)  Short term (< 1 year):  Working capital A/R financing  Inventory increases  Raw material increases  Payroll gaps   Business cycle (Seasonal) loans Peak selling seasons  Ag loans   Interim construction loans 30 Copyright - UTSA SBDC 2008 Types of (Short Term) Loans Term loans (90-180 days)  Revolving lines of credit  Letters of credit  Business Credit cards  Interim construction loans(< 1 year)  Shareholder (subordinated) loans Copyright - UTSA SBDC 2008 31 Purpose (long term) Loans  Long term loans (> 1 year)      Equipment loans Leasehold improvements Permanent working capital Product development ( R&D) Real Estate Expand existing facilities  Build new facility  Copyright - UTSA SBDC 2008 32 Types of (long term) Loans  Installment  Principal & interest    Self amortizing Balloon payment Real estate   Interim Permanent Copyright - UTSA SBDC 2008 33 Forecasting Techniques  Existing Businesses  Historic Information  Past three year trend analysis Market Share Analyze Competition Production Capacity  Start-up Businesses    Copyright - UTSA SBDC 2008 34 Projected Target Market Sales     Total hair salon sales, Your City = $2 mm Total number of hair salons = 12 Average Sales per salon ($2mm/12) = $167k Projected sales    Conservative $167 x .80= $133k Expected $ 167 x 1.0 = $167k Best case $167 x 1.2 = $200k Copyright - UTSA SBDC 2008 35 Factors to Consider when Targeting the Right Price     Industry related factors Competitor related factors Customer related factors Other factors    Economy Regulations Etc. Copyright - UTSA SBDC 2008 36 Pricing Characteristics     Elasticity of demand Competitors price range Perceived image Intangibles     Quality Service Added value Convenience Copyright - UTSA SBDC 2008 37 Lender Evaluation Copyright - UTSA SBDC 2008 38 The Expectations of the Banker Copyright - UTSA SBDC 2008 39 A Banker ... …is not a venture capitalist. …is not a private investor. …is not a microloan lender. When developing your business plan and loan proposal, remember to address the needs of your reader. Copyright - UTSA SBDC 2008 …wants reasonable assurance of repayment ability from the cash flow of the business. 40 Six C‟s of Credit  Character    Honesty Reliability Trustworthiness Past payment record Public records Financial strength Ability to manage business 41  Credit History    Capacity   Copyright - UTSA SBDC 2008 Six C‟s of Credit  Capital    Cushion for recessionary times Commitment to business Value as investment Secondary repayment source Reduces loss to bank (liquidation) Willingness to pledge personal assets  Collateral    Copyright - UTSA SBDC 2008 42 Six C‟s of Credit  Conditions  External forces that can affect business (From Market Research)     Economic Social psychographics Regulatory   Poor business cycle timing Competitive environment (Market Research) Copyright - UTSA SBDC 2008 43 Borrowing Reality •Owner Injection: 25-30% for startup •Existing: 20-25% equity •Good Credit •Collateral •Repayment ability Copyright - UTSA SBDC 2008 44 Choosing a Bank  Talk to your present banker:     Knows your business Track record Credit history Help from SBA/SBDC for banker  SBA PLP/CLP bank list (www.sba.gov) Copyright - UTSA SBDC 2008 45 SBA Programs & Eligibility Copyright - UTSA SBDC 2008 46 Benefits  Reduces Risk to Lender Longer Terms Lower Interest Supports Start-up Position 47    Copyright - UTSA SBDC 2008 SBA Eligibility/Credit  Eligibility   Business size Type of business   Legal Non-investment property  Use of proceeds   Credit Analysis Role as a guarantor  Benefits to obtaining an SBA guarantee 48 Copyright - UTSA SBDC 2008 Most Common Ineligible Businesses or Situations          Non-profit Financial Institutions Real Estate Investment (non-owner occupied) Limited membership clubs Over 1/3 revenue from legal gambling Default on federal loans Probation/Parole Religious teaching Prurient sexual nature 49 Copyright - UTSA SBDC 2008 Loan Purposes        Working Capital Machinery &Equipment Inventory Furniture & Fixtures Leasehold Improvements Expansion Renovations Copyright - UTSA SBDC 2008 50 Loan Purposes       Construction of new building Land Debt-refinancing Buy existing business Franchise Home-Based Copyright - UTSA SBDC 2008 51 SBA Loan Programs Regular 7(a) Loan Guaranty Program Guaranty up to $1,500,000 Specialized  MicroLoan <$50,000  Accion & South Tx. Bus. Fund      SBA Express up to $350,000 SBA Patriot Express up to $500K 504 Loan Program <$1.MM Debenture CAPLines; Standard Line <$2,000,000 Small Asset Based <$200,000 International Trade & Export Working Capital >$1.25MM Disaster FEMA LOANS 52   Copyright - UTSA SBDC 2008 SBA Patriot Express-Highlights   Purpose to help vets with Small Business ventures Service related      Veteran Service – disabled vets Reservists & National Guard Current spouses of above Widowed spouse of veteran  See counselor for more details 53 Copyright - UTSA SBDC 2008 SBA Loan Guarantees: Step By Step        Develop a business plan Present to lender, who screens/recommends Loan Committee decision may stipulate SBA SBA Loan Officer review SBA approve, withdraw or decline Closing with lender Payments to lender Copyright - UTSA SBDC 2008 54 Additional Funding Sources    Leasing Account Payable A/R Management   Collection policies Borrowing base for RLOC    Factoring Business Angels Venture Capitalists 55 Copyright - UTSA SBDC 2008 Additional Sources - Leasing Pros   Cons      Way to stretch funds Use for rapidly changing equipment Increase level of equipment No equity in equipment Capital lease shows as liability Negative exit terms (upside down) Can‟t use depreciation Copyright - UTSA SBDC 2008 56 Non-Traditional Sources (Factoring)       Selling your A/Rs (invoices) As compared to A/R financing Normally younger or weaker companies Factoring charges & discount fees  Approx. 4-5% Factor looks at debtor credit worthiness Tries to be transparent to you client 57 Copyright - UTSA SBDC 2008 Factoring Pros       Increased cash flow Immediate funding Approval not based on your credit rating Doesn‟t increase your debt to equity ratio Factor does own collection Non-recourse Copyright - UTSA SBDC 2008 58 Factoring Cons     Short term cash source Relatively more expensive Factor does not own collection Recourse A/R have some liability to you Copyright - UTSA SBDC 2008 59 Non-traditional ( Angels & VCs)  Business Angels    (apparently) invisible Fleeting Got to be good to find one  Angels are small investor groups   More informed in their industry Doctors, lawyer, successful business people 60 Copyright - UTSA SBDC 2008 Business Angels  Usually prefer technology or bio-techs Early (intro) stage capital Equity position       Substantial but not controlling Presence on board of directors Size - $100k to 1,000k Usually look for exit plan Copyright - UTSA SBDC 2008 61 Venture Capitalists (VCs)   Big brother version of Angels Larger investment  $500k to $10mm and beyond      Middle and later stage investors Try to get controlling interest Daily management oversight 10 X returns in 5-9 years Popular funding sources for Dot.coms Copyright - UTSA SBDC 2008 62 The Next Step o Rough Draft of business plan/financial proposal o Last three years financial statements (if available) o Current copy of credit report? o Appointment with SBDC counselor Copyright - UTSA SBDC 2008 63 Getting Through the Process  Feasibility Analysis Business Plan Development Resource: UTSA SBDC    Confidential counseling Technical assistance Workshops Loan Proposal Structuring Lender Evaluation SBA Copyright - UTSA SBDC Eligibility/Credit 2008   Location: 501 W. Durango Call for appointment: 458-2460 64 Questions & Answers Evaluation ?????????????? Evaluation Speaker  Mike – Reyes 458-2469 Copyright - UTSA SBDC 2008 65