Planning is critical to successfully starting and building a business. From sample plans to a business plan primer, we’ll get you started on this very important activity.
A business plan precisely defines your business, identifies your goals, and serves as your firm's resume. The basic components include a current and pro forma balance sheet, an income statement, and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make good business decisions. As it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Additionally, it informs sales personnel, suppliers, and others about your operations and goals.
Plan Your Work
The importance of a comprehensive, thoughtful business plan cannot be overemphasized. Much hinges on it: outside funding, credit from suppliers, management of your operation and finances, promotion and marketing of your business, and achievement of your goals and objectives.
"The business plan is a necessity. If the person who wants to start a small business can't put a business plan together, he or she is in trouble," says Robert Krummer, Jr., chairman of First Business Bank in Los Angeles.
Despite the critical importance of a business plan, many entrepreneurs drag their feet when it comes to preparing a written document. They argue that their marketplace changes too fast for a business plan to be useful or that they just don't have enough time, but just as a builder won't begin construction without a blueprint, eager business owners shouldn't rush into new ventures without a plan.
Before you begin writing your business plan, consider four core questions:
Are you ready to start a business? This assessment tool is designed to help you better understand your readiness for starting a small business. It will prompt you with questions and assist you in evaluating skills, characteristics and experience – as they relate to your preparedness for starting a business.
Your responses will be scored automatically and an assessment profile provided, when you click the submit button. You will also receive, based on your score, a statement of Suggested Next Steps, directing you to the most appropriate SBA resources to help improve your business preparedness.
Learn the characteristics and habits of creative, successful entrepreneurs.
Many successful entrepreneurs have similar traits and characteristics. Learn what these are and what you can do to improve on your own.
FICTION: To be an entrepreneur, you must be born that way.
FACT: Anyone can learn to operate like an entrepreneur.
What are the similarities of successful entrepreneurs?
Many entrepreneurs also had a role model to influence them early on and parents who were entrepreneurs Two traits necessary for successful entrepreneurs are creativity and innovation.
What is Creativity?
Creativity is being able to create new ideas and ways to solve problems that provide cool opportunities.
Characteristics of Creative People
Can you improve your creativity? YES! How?
Gather as much information as you can (read, talk with experts, etc.); brainstorm over time. Just think about the problem or issue until an idea comes to you.
Is the solution reasonable? If so, try it. If not, keep thinking. Did it work? If so, great. If not, begin the process over again. Don't put barriers on your mind. Put these steps to use.
You need both sides of your brain when being creative, as they compliment each other.
What is an Innovation?
Something that is invented (ex. CDs), or
Something that is created from an existing idea or product (ex. Super Wal-Mart).
Where do innovative ideas come from?
Demographic changes in society
Look for new ideas
Keep it simple
Try, try, try again
A business plan should be a work-in-progress. Even successful, growing businesses should maintain a current business plan.
As any good salesperson knows, you have to know everything you can about your products or services in order to persuade someone to buy them. In this discussion, you are the salesperson and your products represent your business. Your customers are potential investors and employees. Since you want your customers to believe in you, you must be able to convince them that you know what you are talking about when it comes to your business.
To become an expert (or to fine-tune your knowledge if you already believe you are one), you must be willing to roll up your sleeves and begin digging through information. Since not all information that you gather will be relevant to the development of your business plan, it will help you to know what you are looking for before you get started. In order to help you with this process, we have developed an outline of the essential elements a good business plan.
Every successful business plan should include something about each of the following areas, since these are what make up the essentials of a good business plan:
Elements of a Plan for Growing Companies
Part 1: The Executive Summary
The executive summary is the most important section of your business plan. It provides a concise overview of the entire plan along with a history of your company. This section tells your reader where your company is and where you want to take it. It's the first thing your readers see; therefore it is the thing that will either grab their interest and make them want to keep reading or make them want to put it down and forget about it. More than anything else, this section is important because it tells the reader why you think your business idea will be successful.
The executive summary should be the last section you write. After you've worked out all the details of your plan, you'll be in a better position to summarize it - and it should be a summary (i.e., no more than 4 pages).
Contents of the Executive Summary
If you're just starting a business, you won't have a lot of information to plug into the areas mentioned above. Instead, focus on your experience and background as well as the decisions that led you to start this particular enterprise. Include information about the problems your target market has and what solutions you provide. Show how the expertise you have will allow you to make significant inroads into the market.Tell your reader what you're going to do differently or better. Convince the reader that there is a need for your service or product, then go ahead and address your (the company's) future plans.
To assist the reader in locating specific sections in your business plan, include a table of contents directly following the executive summary. Make sure that the content titles are very broad; in other words, avoid detailed descriptions in your table of contents.
Part 2: Market Analysis
The market analysis section should illustrate your knowledge about the particular industry your business is in. It should also present general highlights and conclusions of any marketing research data you have collected; however, the specific details of your marketing research studies should be moved to the appendix section of your business plan.
This section should include: an industry description and outlook, target market information, market test results, lead times, and an evaluation of your competition.
Industry Description and Outlook
This overview section should include: a description of your primary industry, the current size of the industry as well as its historic growth rate, trends and characteristics related to the industry as a whole (i.e., What life cycle stage is the industry in? What is its projected growth rate?), and the major customer groups within the industry (i.e., businesses, governments, consumers, etc).
Identifying Your Target Market
Your target market is simply the market (or group of customers) that you want to target (or focus on and sell to). When you are defining your target market, it is important to narrow it to a manageable size; many businesses make the mistake of trying to be everything to everybody. Often times, this philosophy leads to failure.
In this section, you should gather information which identifies the:
When you are including information about any of the market tests you have completed for your business plan, be sure to focus only on the results of these tests. Any specific details should be included in the appendix. Market test results might include: the potential customers who were contacted, any information or demonstrations that were given to prospective customers, how important it is to satisfy the target market's needs, and the target market's desire to purchase your business' products or services at varying prices.
Lead time is the amount of time between when a customer places an order and when the product or service is actually delivered. When you are researching this information, determine what your lead time will be for the initial order, reorders, and volume purchases.
When you are doing a competitive analysis, you need to identify your competition by product line or service as well as by market segment; assess their strengths and weaknesses, determine how important your target market is to your competitors, and identify any barriers which may hinder you as you are entering the market.
Be sure to identify all of your key competitors for each of your products or services. For each key competitor, determine what their market share is, then try to estimate how long it will take before new competitors will enter into the marketplace. In other words, what is your window of opportunity? Finally, identify any indirect or secondary competitors which may have an impact on your business' success.
The strengths of your competitors are also competitive advantages which you, too, can provide. The strengths of your competitors may take many forms, but the most common include:
Weaknesses are simply the flip side of strengths. In other words, analyze the same areas as you did before to determine what your competitors' weaknesses are. Are they unable to satisfy their customers' needs? Do they have poor market penetration? Is their track record or reputation not up to par? Do they have limited financial resources? Can they not retain good people? All of these can be red flags for any business. If you find weak areas in your competition, be sure to find out why they are having problems. This way, you can avoid the same mistakes they have made.
If your target market is not important to your competition, then you will most likely have an open field to run in if your idea is a good one - at least for a while. However, if the competition is keen for your target market, be prepared to overcome some barriers. Barriers to any market might include:
The final area that you should look at as you're researching this section is regulatory restrictions. This includes information related to current customer or governmental regulatory requirements as well as any changes that may be upcoming. Specific details that you need to find out include: the methods for meeting any of the requirements which will effect your business, the timing involved (i.e., How long do you have to comply? When do the requirements go into effect?), and the costs involved.
Part 3: Company Description
Without going into detail, this section should include a high level look at how all of the different elements of your business fit together. The company description section should include information about the nature of your business as well as list the primary factors that you believe will make your business a success.
When defining the nature of your business (or why you're in business), be sure to list the marketplace needs that you are trying to satisfy; include the ways in which you plan to satisfy these needs using your products or services. Finally, list the specific individuals and/or organizations that you have identified as having these needs.
Primary success factors might include a superior ability to satisfy your customers' needs, highly efficient methods of delivering your product or service, outstanding personnel, or a key location. Each of these would give your business a competitive advantage.
Part 4: Organization & Management
This section should include: your company's organizational structure, details about the ownership of your company, profiles of your management team, and the qualifications of your board of directors.
Who does what in your business? What is their background and why are you bringing them into the business as board members or employees? What are they responsible for? These may seem like unnecessary questions to answer in a one- or two-person organization, but the people reading your business plan want to know who's in charge, so tell them. Give a detailed description of each division or department and its function.
This section should include who's on the board (if you have an advisory board) and how you intend to keep them there. What kind of salary and benefits package do you have for your people? What incentives are you offering? How about promotions? Reassure your reader that the people you have on staff are more than just names on a letterhead.
A simple but effective way to lay out the structure of your company is to create an organizational chart with a narrative description. This will prove that you're leaving nothing to chance, you've thought out exactly who is doing what, and there is someone in charge of every function of your company. Nothing will fall through the cracks, and nothing will be done three or four times over. To a potential investor or employee, that is very important.
This section should also include the legal structure of your business along with the subsequent ownership information it relates to. Have you incorporated your business? If so, is it a C or S corporation? Or perhaps you have formed a partnership with someone. If so, is it a general or limited partnership? Or maybe you are a sole proprietor.
Important ownership information that should be incorporated into your business plan includes:
Experts agree that one of the strongest factors for success in any growth company is the ability and track record of its owner/management, so let your reader know about the key people in your company and their backgrounds. Provide resumes that include the following information:
Be sure you quantify achievements (e.g. "Managed a sales force of ten people," "Managed a department of fifteen people," "Increased revenue by 15% in the first six months," "Expanded the retail outlets at the rate of two each year," "Improved the customer service as rated by our customers from a 60% to a 90% rating").
Also highlight how the people surrounding you complement your own skills. If you're just starting out, show how each person's unique experience will contribute to the success of your venture.
Board of Directors' Qualifications
The major benefit of an unpaid advisory board is that it can provide expertise that your company cannot otherwise afford. A list of well-known, successful business owners/managers can go a long way toward enhancing your company's credibility and perception of management expertise.
If you have a board of directors, be sure to gather the following information when developing the outline for your business plan:
Part 5: Marketing and Sales Strategies
Marketing is the process of creating customers, and customers are the lifeblood of your business. In this section, the first thing you want to do is define your marketing strategy. There is no single way to approach a marketing strategy; your strategy should be part of an ongoing self-evaluation process and unique to your company. However, there are steps you can follow which will help you think through the strategy you would like to use.
An Overall Marketing Strategy would include a:
Your Overall Sales Strategy should include:
Part 6: Service or Product Line
What are you selling? In this section, describe your service or product, emphasizing the benefits to potential and current customers. For example, don't tell your readers which 89 foods you carry in your "Gourmet to Go" shop. Tell them why busy, two-career couples will prefer shopping in a service-oriented store that records clients' food preferences and caters even the smallest parties on short notice.
Focus on the areas where you have a distinct advantage. Identify the problem in your target market for which your service or product provides a solution.
Give the reader hard evidence that people are, or will be, willing to pay for your solution. List your company's services and products and attach any marketing/promotional materials. Provide details regarding suppliers, availability of products/services, and service or product costs. Also include information addressing new services or products which will soon be added to the company's line.
Overall, this section should include:
Part 7: Funding Request
In this section, you will request the amount of funding you will need to start or expand your business. If necessary, you can include different funding scenarios, such as a best and worst case scenarios, but remember that later, in the financial section, you must be able to back up these requests and scenarios with corresponding financial statements.
You will want to include the following in this section: your current funding requirement, your future funding requirements over the next five years, how you will use the funds you receive, and any long-range financial strategies that you are planning that would have any type of impact on your funding request.
When you are outlining your current and future funding requirements, be sure to include the amount you want now and the amount you want in the future, the time period that each request will cover, the type of funding you would like to have (i.e., equity, debt), and the terms that you would like to have applied.
How you will use your funds is very important to a creditor. Is the funding request for capital expenditures? Working capital? Debt retirement? Acquisitions? Whatever it is, be sure to list it in this section.
Last of all, make sure that you include any strategic information related to your business that may have an impact on your financial situation in the future, such as: going public with your company, having a leveraged buyout, being acquired by another company, the method with which you will service your debt, or whether or not you plan to sell your business in the future. Each of these are extremely important to a future creditor, since they will directly impact your ability to repay your loan(s).
Part 8: Financials
The financials should be developed after you've analyzed the market and set clear objectives. That's when you can allocate resources efficiently. The following is a list of the critical financial statements to include in your business plan packet.
Historical Financial Data
If you own an established business, you will be requested to supply historical data related to your company's performance. Most creditors request data for the last three to five years, depending on the length of time you have been in business.
The historical financial data you would want to include would be your company's income statements, balance sheets, and cash flow statements for each year you have been in business (usually for up to 3 to 5 years). Often creditors are also interested in any collateral that you may have that could be used to ensure your loan, regardless of the stage of your business.
Prospective Financial Data
All businesses, whether startup or growing, will be required to supply prospective financial data. Most of the time, creditors will want to see what you expect your company to be able to do within the next five years. Each year's documents should include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, you should supply monthly or quarterly projections. After that, you can stretch it to quarterly and/or yearly projections for years 2 through 5.
Make sure that your projections match your funding requests; creditors will be on the lookout for inconsistencies. It's much better if you catch mistakes before they do. If you have made assumptions in your projections, be sure to summarize what you have assumed. This way, the reader will not be left guessing.
Finally, include a short analysis of your financial information. Include a ratio and trend analysis for all of your financial statements (both historical and prospective). Since pictures speak louder than words, you may want to add graphs of your trend analysis (especially if they are positive).
Part 9: The Appendix
The appendix section should be provided to readers on an as-needed basis. In other words, it should not be included with the main body of your business plan. Your plan is your communication tool; as such, it will be seen by a lot of people. Some of the information in the business section you will not want everyone to see, but, specific individuals (such as creditors) may want access to this information in order to make lending decisions. Therefore, it is important to have the appendix within easy reach.
The appendix would include:
Any copies of your business plan should be controlled; keep a distribution record. This will allow you to update and maintain your business plan on an as-needed basis. Remember, too, that you should include a private placement disclaimer with your business plan if you plan to use it to raise capital.
A market in its entirety is too broad in scope for any but the largest companies to tackle successfully. The best strategy for a smaller business is to divide demand into manageable market niches. Small operations can then offer specialized goods and services attractive to a specific group of prospective buyers.
There are undoubtedly some particular products or services you are especially suited to provide. Study the market carefully and you will find opportunities. As an example, surgical instruments used to be sold in bulk to both small medical practices and large hospitals. One firm realized that the smaller practices could not afford to sterilize instruments after each use like hospitals did, but instead simply disposed of them. The firm's sales representatives talked to surgeons and hospital workers to learn what would be more suitable for them. Based on this information, the company developed disposable instruments which could be sold in larger quantities at a lower cost. Another firm capitalized on the fact that hospital operating rooms must carefully count the instruments used before and after surgery. This firm met that particular need by packaging their instruments in pre-counted, customized sets for different forms of surgery.
While researching your own company's niche, consider the results of your market survey and the areas in which your competitors are already firmly situated. Put this information into a table or a graph to illustrate where an opening might exist for your product or service. Try to find the right configuration of products, services, quality, and price that will ensure the least direct competition. Unfortunately, there is no universally effective way to make these comparisons. Not only will the desired attributes vary from industry to industry, but there is also an imaginative element that cannot be formalized. For example, only someone who had already thought of developing pre-packaged surgical instruments could use a survey to determine whether or not a market actually existed for them.
A well-designed database can help you sort through your market information and reveal particular segments you might not see otherwise. For example, do customers in a certain geographic area tend to purchase products that combine high quality and high price more frequently? Do your small business clients take advantage of your customer service more often than larger ones? If so, consider focusing on being a local provider of high quality goods and services or a service-oriented company that pays extra attention to small businesses.
If you do target a new niche market, make sure that this niche does not conflict with your overall business plan. For example, a small bakery that makes cookies by hand cannot go after a market for inexpensive, mass-produced cookies, regardless of the demand.
Trade accounts of businesses representing obligations to pay for goods and services received.
Trade accounts of businesses representing moneys due for goods sold or services rendered evidenced by notes, statements, invoices, or other written evidence of a present obligation.
The recording, classifying, summarizing, and interpreting in a significant manner and in terms of money, transactions, and events of a financial character.
The act of assuming/undertaking another's debts or obligations.
A public sale of goods to the highest bidder.
AUTOMATIC DATA PROCESSING
Data processing largely performed by automatic means.
The discipline which deals with methods and techniques of automatic data processing.
Pertaining to data processing equipment such as electrical accounting machines and electronic data processing equipment.
A condition in which a business cannot meet its debt obligations and petitions a federal district court for either reorganization of its debts or liquidation of its assets. In the action the property of a debtor is taken over by a receiver or trustee in bankruptcy for the benefit of the creditors. This action is conducted as prescribed by the National Bankruptcy Act, and may be voluntary or involuntary.
The breakeven point in any business is that point at which the volume of sales or revenues exactly equals total expenses - the point at which there is neither a profit nor loss - under varying levels of activity. The breakeven point tells the manager what level of output or activity is required before the firm can make a profit; reflects the relationship between costs, volume, and profits.
Formation of a new establishment or enterprise.
Voluntary or involuntary closure of a firm or establishment.
For enumeration purposes, the absence from any current record of a business that was present in a prior time period.
The closure of a business causing a loss to at least one creditor.
A comprehensive planning document which clearly describes the business developmental objective of an existing or proposed business applying for assistance in SBA's 8(a) or lending programs. The plan outlines what and how and from where the resources needed to accomplish the objective will be obtained and utilized.
For enumeration purposes, a business with a name or similar designation that did not exist in a prior time period.
The annulment or rescission of an approved loan prior to disbursement.
Assets less liabilities, representing the ownership interest in a business;
a stock of accumulated goods, especially at a specified time and in contrast to income received during a specified time period;
accumulated goods devoted to the production of goods; (4) accumulated possessions calculated to bring income.
Business spending on additional plant equipment and inventory.
Personal property of the agency which has an average dollar value of $300.00 or more and a life expectancy of one year or more. Capitalized property shall be depreciated annually over the expected useful life to the agency.
An incentive offered by the seller to encourage the buyer to pay within a stipulated time. For example, if the terms are 2/10/N 30, the buyer may deduct 2 percent from the amount of the invoice (if paid within 10 days); otherwise, the full amount is due in 30 days.
An accounting presentation showing how much of the cash generated by the business remains after both expenses (including interest) and principal repayment on financing are paid. A projected cash flow statement indicates whether the business will have cash to pay its expenses, loans, and make a profit. Cash flows can be calculated for any given period of time, normally done on a monthly basis.
A letter, digit, or other symbol that is a part of the organization, control, or representation of data used in computer systems.
An accounting transaction removing an uncollectible balance from the active receivable accounts.
CHARGED OFF LOAN
An uncollectible loan for which the principal and accrued interest were removed from the receivable accounts.
Actions and procedures required to affect the documentation and disbursement of loan funds after the application has been approved and the execution of all required documentation and its filing and recording where required.
Any loan for which funds have been disbursed and all required documentation has been executed, received, and reviewed. For statistical purposes, first or total disbursement is counted as a closed loan.
Something of value - securities, evidence of deposit, or other property - pledged to support the repayment of an obligation.
A legal document covering the item(s) pledged as collateral on a loan, i.e., note, mortgages, assignment, etc.
A coalition of organizations, such as banks and corporations, set up to fund ventures requiring large capital resources.
A group of persons granted a state charter legally recognizing them as a separate entity having its own rights, privileges, and liabilities distinct from those of its members. The process of incorporating should be completed with the state's secretary of state or state corporate counsel, and usually requires the services of an attorney.
The settlement of a claim resulting from a defaulted loan for less than the full amount due. Compromise settlement is a procedure available for use only in instances where the government cannot collect the full amount due within a reasonable time, by enforced collection proceedings, or where the cost of such proceedings would not justify such effort.
A potential obligation that may be incurred dependent upon the occurrence of a future event. Two examples are: (1) the liability of an endorser or guarantor of a note if the primary borrower fails to pay as agreed and (2) the liability that would be incurred if a pending lawsuit is resolved in the other party's favor.
Money obligated for goods and services received during a given period of time, regardless of when ordered or whether paid for.
A grade assigned to a business concern to denote the net worth and credit standing to which the concern is entitled in the opinion of the rating agency as a result of its investigation.
The basic unit of identifiable and definable information. A data element occupies the space provided by fields in a record or blocks on a form. It has an identifying name and value or values for expressing a specific fact. For example, a data element named "Color of Eyes" could have recorded values of "Blue (a name)," "Bl (an abbreviation)," "06 (a code)." Similarly, a data element named "Age of Employee" could have a recorded value of "28" (a numeric value).
Debt instrument evidencing the holder's right to receive interest and principal installments from the named obligor. Applies to all forms of unsecured, long-term debt evidenced by a certificate of debt.
Business financing that normally requires periodic interest payments and repayment of the principal within a specified time.
The provision of long term loans to small business concerns in exchange for debt securities or a note.
DEED OF TRUST
A document under seal which, when delivered, transfers a present interest in property. May be held as collateral.
The nonpayment of principal and/or interest on the due date as provided by the terms and conditions of the note.
Loans whose principal and or interest installments are postponed for a specified period of time.
The actual payout to borrower of loan funds, in whole or part. It may be concurrent with the closing or follow it.
An employee authorized to pay out cash or issue checks in settlement of vouchers approved by a certifying officer.
Change of ownership and/or control of a business from a majority (non-disadvantaged) to disadvantaged persons.
The demonstrated ability of a business to earn a profit, over time, while following good accounting practices. When a business shows a reasonable profit on invested capital after fully maintaining the business property, appropriately compensating its owner and employees, servicing its obligations, and fully recognizing its costs, the business may be said to have demonstrated earning power. Demonstrated earning power is the foremost test of the business risk in pressing upon an application for a loan.
A right or privilege that a person may have on another's land, as the right of a way or ingress or egress.
EMPLOYEE ASSISTANCE PROGRAM (EAP) COORDINATOR
Coordinates the activities of Central Office or regional counselors, maintains a community resource list of available professional assistance to troubled employees, and a current roster of EAP counselors for the area of his/her jurisdiction.
Conducts confidential consultations with troubled employees who so request, who are referred for objective analysis of a personal problem, and for identification of the best available assistance and/or professional services needed to resolve the employee's problem.
Aggregation of all establishments owned by a parent company. An enterprise can consist of a single, independent establishment or it can include subsidiaries or other branch establishments under the same ownership and control.
One who assumes the financial risk of the initiation, operation, and management of a given business or undertaking.
An ownership interest in a business.
The provision of funds for capital or operating expenses in exchange for capital stock, stock purchase warrants, and options in the business financed without any guaranteed return, but with the opportunity to share in the company's profits. Equity financing includes long-term subordinated securities containing stock options and/or warrants. Utilized in SBIC financing activities.
A limited partnership arrangement for providing startup and seed capital to businesses.
Funds placed in trust with a third party by a borrower for a specific purpose and to be delivered to the borrower only upon the fulfillment of certain conditions.
A single-location business unit, which may be independent - called a single- establishment enterprise - or owned by a parent enterprise.
Reports commonly required from applicants request for financial assistance, e.g.: Balance Sheet - A report of the status of a firm's assets, liabilities and owner's equity at a given time.
Income Statement - A report of revenue and expense which shows the results of business operations or net income for a specified period of time.
A report which analyzes the actual or projected source and disposition of cash during a past or future accounting period.
New funds provided to a business, by either loans, purchase of debt securities, or capital stock.
A graphical representation for the definition, analysis, or solution of a problem, in which symbols are used to represent operations, data, flow, equipment, etc.
The act by the mortgagee or trustee upon default in the payment of interest or principal of a mortgage of enforcing payment of the debt by selling the underlying security.
A continuing relationship in which the franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing, and managing in return for a consideration. Franchising is a form of business by which the owner (franchisor) of a product, service, or method obtains distribution through affiliated dealers (franchisees). The product, method, or service being marketed is usually identified by the franchisor's brand name, and the holder of the privilege (franchisee) is often given exclusive access to a defined geographical area.
GROSS DOMESTIC PRODUCT (GDP)
The most comprehensive single measure of aggregate economic output. Represents the market value of the total output of the goods and services produced by a nation's economy.
GROSS NATIONAL PRODUCT (GNP)
A measure of a nation's aggregate economic output. Since 1991 GDP, a slightly different calculation, has replaced GNP as a measure of U.S. economic output.
A loan made and serviced by a lending institution under agreement that a governmental agency will purchase the guaranteed portion if the borrower defaults.
A term used to describe the mechanical, electrical, and electronic elements of a data processing system.
Insurance required showing lender as loss payee covering certain risks on real and personal property used for securing loans.
A facility designed to encourage entrepreneurship and minimize obstacles to new business formation and growth, particularly for high technology firms, by housing a number of fledgling enterprises that share an array of services. These shared services may include meeting areas, secretarial services, accounting services, research libraries, on-site financial and management counseling, and word processing facilities.
INDEPENDENT AND QUALIFIED PUBLIC ACCOUNTANTS
Public accountants are independent when neither they nor any of their family have a material, direct, or indirect financial interest in the borrower other than as an accountant. They are qualified, unless there is contrary evidence, when they are either (1) certified, licensed, or otherwise registered if so required by the state in which they work, or (2) have worked as a public accountant for at least five years and are accepted by SBA.
INDUSTRIAL REVENUE BOND (IRB)
A tax-exempt bond issued by a state or local government agency to finance industrial or commercial projects that serve a public good. The bond usually is not backed by the full faith and credit of the government that issues it, but is repaid solely from the revenues of the project and requires a private sector commitment for repayment.
Introduction of a new idea into the marketplace in the form of a new product or service or an improvement in organization or process.
The inability of a borrower to meet financial obligations as they mature or having insufficient assets to pay legal debts.
An amount paid a lender for the use of funds.
INVERSE ORDER OF MATURITY
When payments are received from borrowers that are larger than the authorized repayment schedules, the overpayment is credited to the final installments of the principal, which reduces the maturity of the loan and does not affect the original repayment schedule.
Businesses specializing in the formation of capital. This is done by outright purchase and sale of securities offered by the issuer, standby underwriting, or "best efforts selling."
INVITATION FOR BIDS
Formal solicitations for offerings to perform procurements by competitive bids when the specifications describe the requirements of the government clearly, accurately, and completely, but avoiding unnecessarily restrictive specifications or requirements which might unduly limit the number of bidders.
A written statement listing the elements of a particular job or occupation, e.g., purpose, duties, equipment used, qualifications, training, physical and mental demands, working conditions, etc.
Judicial determination of the existence of an indebtedness or other legal liability.
JUDGMENT BY CONFESSION
The act of debtors permitting judgment to be entered against them for a given sum with a statement to that effect, without the institution of legal proceedings.
A high-yield corporate bond issue with a below-investment rating that became a growing source of corporate funding in the 1980s.
A contract between the owner (leassor) and the tenant (leassee) stating the conditions under which the tenant may occupy or use the property.
LEGAL RATE OF INTEREST
The maximum rate of interest fixed by the laws of the various states which a lender may charge a borrower for the use of money.
Any institution, including a commercial bank, savings and loan association, commercial finance company, or other lender qualified to participate with SBA in the making of loans.
The purchase of a business with financing provided largely by borrowed money, often in the form of junk bonds.
A charge upon or security interest in real or personal property maintained to ensure the satisfaction of a debt or duty ordinarily arising by operation of law.
The disposal, at maximum prices, of the collateral securing a loan and the voluntary and enforced collection of the remaining loan balance from the obligators and/or guarantors.
The net value realizable in the sale (ordinarily a forced sale) of a business or a particular asset.
Refers to a loan in "liquidation status" which has been referred to attorneys for legal action.
Also: The practice of taking legal action through the judicial process.
Agreement to be executed by borrower, containing pertinent terms, conditions, covenants, and restrictions.
LOAN PAYOFF AMOUNT
The total amount of money needed to meet a borrower's obligation on a loan. It is arrived at by accruing gross interest for one day and multiplying this figure by the number of days that exist between the date of the last repayment and the date on which the loan is to be completely paid off. This amount, known as accrued interest, is combined with the latest principal and escrow balances that are applicable to what is now referred to as the loan payoff amount. In the case where prepaid interest exceeds the accrued interest, the latter is subtracted from the former and the difference is used to reduce the total amount owed.
A rate developed by comparing the ratio of total loans charged off to the total loans disbursed from inception of the program to the present date.
LOSS RESERVE ADJUSTMENT RATE A reserve rate based upon the ratio of the aggregate net chargeoffs (chargeoffs less recoveries) for the most
recent five years to the total average loans outstanding for the comparable 5-year period.
Markup is the difference between invoice cost and selling price. It may be expressed either as a percentage of the selling price or the cost price and is supposed to cover all the costs of doing business plus a profit. Whether markup is based on the selling price or the cost price, the base is always equal to 100 percent.
As applied to securities and commercial paper, the period end date when payment of principal is due.
Extensions of payment beyond the original period established for repayment of a loan.
A combination of two or more corporations wherein the dominant unit absorbs the passive ones, the former continuing operation usually under the same name. In a consolidation two units combine and are succeeded by a new corporation, usually with a new title.
An instrument giving legal title to secure the repayment of a loan made by the mortgagee (lender). In legal contemplation there are two types: (1) title theory - operates as a transfer of the legal title of the property to the mortgagee, and (2) lien theory - creates a lien upon the property in favor of the mortgagee.
The face to face process used by local unions and the employer to exchange their views on those matters involving personnel policies and practices or other matters affecting the working conditions of employees in the unit and reduced to a written binding agreement. Used also by contracting officers to reach agreement with potential contractors.
That point in negotiations where labor and management cannot come to an agreement on some or all of the issues on the bargaining table and the services of the FMCS have not been utilized.
NEGOTIATED GRIEVANCE PROCEDURE
The sole and exclusive procedure available to all employees in a bargaining unit and the employer for processing grievances and disputes.
Property owned (assets), minus debts and obligations owed (liabilities), is the owner's equity (net worth).
NOTES AND ACCOUNTS RECEIVABLE
A secured or unsecured receivable evidenced by a note or open account arising from activities involving liquidation and disposal of loan collateral.
Technically defined as "amount of orders placed, contracts awarded, services received, and similar transactions during a given period which will require payments during the same or a future period."
Simple interest based on a year of 360 days, contrasting with exact interest having a base year of 365 days.
Net disbursements (cash payments in excess of cash receipts) for administrative expenses and for loans and related costs and expenses (e.g., gross disbursements for loans and expenses minus loan repayments, interest and fee income collected, and reimbursements received for services performed for other agencies).
A legal relationship existing between two or more persons contractually associated as joint principals in a business.
A patent for an invention is the grant of a property right to the inventor, issued by the Patent and Trademark Office. The term of a new patent is 20 years from the date on which the application for the patent was filed in the United States or, in special cases, from the date an earlier related application was filed, subject to the payment of maintenance fees. US patent grants are effective only within the US, US territories, and US possessions.
Interest rate which is charged to business borrowers having the highest credit ratings for short term borrowing.
An Internet-based database of information of small, disadvantaged, 8(a), and women-owned businesses seeking procurement contracts.
Type of tort or civil liability that applies to product manufacturers and sellers.
PROFESSIONAL AND TRADE ASSOCIATIONS
Non-profit, cooperative, and voluntary organizations that are designed to help their members in dealing with problems of mutual interest. In many instances, professional and trade associations enter into an agreement with the SBA to provide volunteer counseling to the small business community.
The most common legal form of business ownership; about 85 percent of all small businesses are proprietorships. The liability of the owner is unlimited in this form of ownership.
A statement in writing by any bidder or offeror on a particular procurement alleging that another bidder or offeror on such procurement is not a small business concern.
Denotes relationships of items within and between financial statements, e.g., current ratio, quick ratio, inventory turnover ratio, and debt/net worth ratios.
REQUEST FOR PROPOSALS
Solicitations for offerings for competitive negotiated procurements when it is impossible to draft an invitation for bids containing adequate detailed description of the required property and services. There are 15 circumstances in the Federal Acquisition Regulations (FAR) which permit negotiated procurements.
RETURN ON INVESTMENT
The amount of profit (return) based on the amount of resources (funds) used to produce it. Also the ability of a given investment to earn a return for its use.
Those who purchase an interest in a loan from an original lender, such as banks, institutional investors, insurance companies, credit unions, and pension funds.
SERVICE CORPS OF RETIRED EXECUTIVES (SCORE)
Retired and working successful business persons who volunteer to render assistance in counseling, training, and guiding small business clients.
SMALL BUSINESS DEVELOPMENT CENTERS (SBDC)
The SBDC is a university-based center for the delivery of joint government, academic, and private sector services for the benefit of small business and the national welfare. It is committed to the development and productivity of business and the economy in specific geographical regions.
Turnover is the number of times that an average inventory of goods is sold during a fiscal year or some designated period. Care must be taken to ensure that the average inventory and net sales are both reduced to the same denominator; that is, divide inventory at cost into sales at cost or divide inventory at selling price into sales at selling price. Do not mix cost price with selling price. The turnover, when accurately computed, is one measure of the efficiency of a business.
The amount of orders for goods and services outstanding for which the liability has not yet accrued. For practical purposes, represents obligations incurred for which goods have not been delivered or services not performed.
UNFAIR LABOR PRACTICE
Action by either the employer or union which violates the provisions of EO 11491 as amended.
UNIFORM COMMERCIAL CODE
Codification of uniform laws concerning commercial transactions. In SBA parlance, generally refers to a uniform method of recording and enforcing a security interest or charge upon existing or to be acquired personal property.
Interest which exceeds the legal rate charged to a borrower for the use of money.
Money used to support new or unusual commercial undertakings; equity, risk, or speculative capital. This funding is provided to new or existing firms that exhibit above-average growth rates, a significant potential for market expansion, and the need for additional financing for business maintenance or expansion.
The efficient and effective production of written communications at the lowest possible cost through the combined use of systems management procedures, automated technology, and accomplished personnel. The equipment used in word processing applications includes but is not limited to the following: dictation and transcription equipment, automatic repetitive typewriters, visual display text editing typewriters, keyboard terminals, etc.
A state-mandated form of insurance covering workers injured in job-related accidents. In some states the state is the insurer; in other states insurance must be acquired from commercial insurance firms. Insurance rates are based on a number of factors, including salaries, firm history, and risk of occupation.
The Interactive Business Planner (IBP) is the first business planning software product designed specifically to operate on the World Wide Web. The IBP uses the capabilities of the Internet to assist entrepreneurs in preparing a 3 year business plan for their new or existing business.
With the IBP, you will:
The IBP is not intended to replace legal, accounting or other professional services or advice. You may want to consult a professional business counselor or seek out accounting advice before completing your business plan.
Access the Interactive Business Plan.
In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business - but you can improve your chances of success with good planning, preparation, and insight. Start by evaluating your strengths and weaknesses as a potential owner and manager of a small business. Carefully consider each of the following questions:
Are you a self-starter? It will be entirely up to you to develop projects, organize your time, and follow through on details.
How well do you get along with different personalities? Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers, and professionals such as lawyers, accountants, or consultants. Can you deal with a demanding client, an unreliable vendor, or a cranky receptionist if your business interests demand it?
How good are you at making decisions? Small business owners are required to make decisions constantly - often quickly, independently, and under pressure.
Do you have the physical and emotional stamina to run a business? Business ownership can be exciting, but it's also a lot of work. Can you face six or seven 12-hour workdays every week?
How well do you plan and organize? Research indicates that poor planning is responsible for most business failures. Good organization of financials, inventory, schedules, and production can help you avoid many pitfalls.
Is your drive strong enough? Running a business can wear you down emotionally. Some business owners burn out quickly from having to carry all the responsibility for the success of their business on their own shoulders. Strong motivation will help you survive slowdowns and periods of burnout.
How will the business affect your family? The first few years of business startup can be hard on family life. It's important for family members to know what to expect and for you to be able to trust that they will support you during this time. There also may be financial difficulties until the business becomes profitable, which could take months or years. You may have to adjust to a lower standard of living or put family assets at risk in the short-term.
Why Small Businesses Fail
Success in business is never automatic. It isn't strictly based on luck - although a little never hurts. It depends primarily on the owner's foresight and organization. Even then, of course, there are no guarantees.
Starting a small business is always risky, and the chance of success is slim. According to the U.S. Small Business Administration, roughly 50% of small businesses fail within the first five years.
In his book Small Business Management, Michael Ames gives the following reasons for small business failure:
Gustav Berle adds two more reasons in The Do It Yourself Business Book:
More Reasons Why Small Businesses Fail
These figures aren't meant to scare you, but to prepare you for the rocky path ahead. Underestimating the difficulty of starting a business is one of the biggest obstacles entrepreneurs face. However, success can be yours if you are patient, willing to work hard, and take all the necessary steps.
On the Upside
It's true that there are many reasons not to start your own business. But for the right person, the advantages of business ownership far outweigh the risks.
Too many people think strategic planning is something meant only for big businesses, but it is equally applicable to small businesses. Strategic planning is matching the strengths of your business to available opportunities. To do this effectively, you need to collect, screen, and analyze information about the business environment. You also need to have a clear understanding of your business - its strengths and weaknesses - and develop a clear mission, goals, and objectives. Acquiring this understanding often involves more work than expected. You must realistically assess the business you are convinced you know well.
In addition, strategic planning has become more important to business managers because technology and competition have made the business environment less stable and less predictable. If you are to survive and prosper, you should take the time to identify the niches in which you are most likely to succeed, and to identify the resource demands that must be met.
View the Free Online Course on How to Prepare a Business Plan to learn more about this topic.
A business plan is a tool with three basic purposes: communication, management, and planning. As a communication tool, it is used to attract investment capital, secure loans, convince workers to hire on, and assist in attracting strategic business partners. The development of a comprehensive business plan shows whether or not a business has the potential to make a profit. It requires a realistic look at almost every phase of business and allows you to show that you have worked out all the problems and decided on potential alternatives before actually launching your business.
As a management tool, the business plan helps you track, monitor, and evaluate your progress. The business plan is a living document that you will modify as you gain knowledge and experience. By using your business plan to establish timelines and milestones, you can gage your progress and compare your projections to actual accomplishments.
As a planning tool, the business plan guides you through the various phases of your business. A thoughtful plan will help identify roadblocks and obstacles so that you can avoid them and establish alternatives. Many business owners share their business plans with their employees to foster a broader understanding of where the business is going.
Sample Business Plans
Writing The Plan
What goes in a business plan? The body can be divided into four distinct sections:
1) Description of the business
Agenda should include an executive summary, supporting documents, and financial projections. Although there is no single formula for developing a business plan, some elements are common to all business plans. They are summarized in the following outline:
Elements of a Business Plan
1. Cover sheet
2. Statement of purpose
3. Table of contents
I. The Business
A. Description of business
D. Operating procedures
F. Business insurance
II. Financial Data
A. Loan applications
B. Capital equipment and supply list
C. Balance sheet
D. Breakeven analysis
E. Pro-forma income projections (profit & loss statements)
F. Three-year summary
G. Detail by month, first year
H. Detail by quarters, second and third years
I. Assumptions upon which projections were based
J. Pro-forma cash flow
III. Supporting Documents
A. Tax returns of principals for last three years Personal financial
statement (all banks have these forms)
B. For franchised businesses, a copy of franchise contract and all
supporting documents provided by the franchisor
C. Copy of lease or purchase agreement for building space
D. Copy of licenses and other legal documents
E. Copy of resumes of all principals
F. Copies of letters of intent from suppliers, etc.
One of the best ways to learn about writing a business plan is to study the plans of estalished businesses in your industry.
Review examples of real business plans.