The Business Plan For Home-Based Business
By Carol Eliason Research Management Corporation Falls Church, Virginia

Table of Contents
Information Gathering
The Entrepreneurial Personality
Selecting A Business
Writing The Business Plan
Marketing Plan
Management Plan
Operational Plans Summary
The Financial Plan


Homework has taken on new meaning for more than 10 million Americans. The drive for economic self-sufficiency has motivated large numbers of persons to market their skills and talents for profit from home. More than 400,000 persons launched home enterprises in 1985. Our increasingly service oriented economy offers a widening spectrum of opportunities for customized and personalized small business growth.

Though untrained entrepreneurs have traditionally had a high rate of failure, small businesses can be profitable. Success in small home based business is not an accident. It requires both skills in a service or product area and acquisition of management and attitudinal competencies.

The purpose of this SBA Management Aid is to help you take stock of your interests, aptitudes and skills. Many people have good business ideas but not everyone has what it takes to succeed. If you are convinced that a profitable home business is attainable, this Management Aid will provide step by step guidance in development of the basic written business plan.

Information Gathering

A helpful tool for use in determining if you are ready to take the risks of a home based business operation is the SBA Publication #MA 2.016, Checklist for Going Into Business. It will help you focus on the basic steps in information gathering and business planning.

While the reasons for the rapid growth of home based business operations may vary from the need to supplement family income with a few hundred dollars all the way to a sophisticated technical consulting service billing hundreds of thousands of dollars, there are many common characteristics and challenges to be considered in launching most home based businesses, regardless of size. Some tasks are universal to all small business startups, while others are unique to a home base.

The experience of the author and interviews with dozens of home based operators over the past decade indicate that special planning is required to research legal and tax issues, proper space utilization and to establish time management discipline. Inadequate or careless attention to development of a detailed business plan can be costly for you and your family in terms of lost time, wasted talent and disappearing dollars.

The Entrepreneurial Personality

A variety of experts have documented research that indicates that successful small business entrepreneurs, whether male or female, have some common characteristics. How do you measure up? On this checklist, write a "Y" if you believe the statement describes you; an "N" if it doesn't; and a "U" if you can't decide:

While not every successful home based business owner starts with a "Y" answer to all of these questions, three or four "N"'s and "U"'s should be sufficient reason for you to stop and give second thought to going it alone. Many proprietors who sense entrepreneurial deficiencies seek extra training and support their limitations with help from a skilled team of business advisors such as accountants, bankers and attorneys.

Selecting A Business

Perhaps you have already decided what your home based business will be. You know how you will serve your market and with what. If not, but you are determined to establish a home based source of income, then you need to decide exactly what business you will enter. A logical first step for the undecided is to list potential areas of personal background, special training, educational and job experience, and special interests that could be developed into a business. Review the following list of activities which have proven marketable for others. On a scale of "0" (no interest or strength) to 10 (maximum interest or strength) indicate the potential for you and a total score for each activity;

                      My Level     Personal      Market       Total
                     of Interest   Strength     Strength      Points
Personal services
-- house cleaning   ____________ ____________ ____________ ____________
-- baby-sitting     ____________ ____________ ____________ ____________
-- tutoring         ____________ ____________ ____________ ____________
-- secretarial      ____________ ____________ ____________ ____________
-- catering         ____________ ____________ ____________ ____________
-- direct mail      ____________ ____________ ____________ ____________
-- needle work      ____________ ____________ ____________ ____________
-- ceramics         ____________ ____________ ____________ ____________
-- jewelry design   ____________ ____________ ____________ ____________
-- upholstering     ____________ ____________ ____________ ____________
Artistic work
-- painting         ____________ ____________ ____________ ____________
-- photography      ____________ ____________ ____________ ____________
-- prints           ____________ ____________ ____________ ____________
-- wire sculpture   ____________ ____________ ____________ ____________
-- engraving        ____________ ____________ ____________ ____________
Repair services
-- small appliances ____________ ____________ ____________ ____________
-- furniture        ____________ ____________ ____________ ____________
-- clothing         ____________ ____________ ____________ ____________
-- TV and radio     ____________ ____________ ____________ ____________
-- automotive       ____________ ____________ ____________ ____________
Instruction skills
-- languages        ____________ ____________ ____________ ____________
-- math             ____________ ____________ ____________ ____________
-- gourmet cooking  ____________ ____________ ____________ ____________
-- music            ____________ ____________ ____________ ____________
-- home repairs     ____________ ____________ ____________ ____________
Mail order ideas
-- product sales    ____________ ____________ ____________ ____________
-- repairs          ____________ ____________ ____________ ____________
-- business service ____________ ____________ ____________ ____________
Seasonal products
-- foodstuffs       ____________ ____________ ____________ ____________
-- clothing         ____________ ____________ ____________ ____________
-- gift items       ____________ ____________ ____________ ____________
Party sales
-- cookware         ____________ ____________ ____________ ____________
-- plants           ____________ ____________ ____________ ____________
-- plastic goods    ____________ ____________ ____________ ____________
-- cosmetics        ____________ ____________ ____________ ____________
Your own ideas
___________________ ____________ ____________ ____________ ____________
___________________ ____________ ____________ ____________ ____________
___________________ ____________ ____________ ____________ ____________

For other ideas, check your local public library for one or more of the publications listed in the Resource Section of this Management Aid.

      0 to 10    Almost a sure loser
     11 to 15    Reconsider, but proceed with caution
     16 to 20    Some potential here, worth further study
     21 to 25    Probably a winner, if you answered correctly
     26 to 30    How can you lose?

This checklist should give you a good idea of the kind of a business that would suit you best and why.

Time Management

For both the novice and the experienced business person planning a small home based enterprise, an early concern requiring self-evaluation is Time Management.

It is very difficult for some people to make and keep work schedules even in the disciplined setting of an employer's office. At home, as your own boss, the problem can be much greater. To determine how much time you can devote to your business, begin by drafting a weekly task timetable listing all current and potential responsibilities and the blocks of time required for each. When and how can business responsibilities be added without undue physical or mental stress on you and your family? Potential conflicts must be faced and resolved at the outset and as they occur. Otherwise, your business can become a nightmare. During the first year of operation, continue to chart, post and checkoff tasks on a daily, weekly, monthly basis.

Distractions and excuses for procrastination abound. It is important to keep both a planning and an operating log. These tools will help avoid oversights and provide vital information when memory fails. To improve the quality of home work time, consider installation of a separate telephone line for the business and attach an answering machine to take messages when you do not wish to be distracted or are away from home. A business line has the added advantage of allowing you to have a business listing in the phone book and, if you wish to buy it, an ad in the classified directory.

Is A Home Based Business Site Workable?

It will be important to set aside a specific work area. For example, more than one fledgling business ledger has gone up in smoke, been chewed by the family dog, or thrown out with the trash when business records were not kept separate from family papers. Ready access to business records during work hours is essential, but they must be protected.

Check the reasons below for and against working at home that apply to you. List any additional drawbacks or obstacles to operating this business at home.

  Pros                       Cons
Lower startup costs        Isolation
Lower fixed costs          Space limitations
Tax benefits               Zoning
Lifestyle flexibility      Security concerns
No commuting               Household interference

Note that changes in personal habits will be required. Examples:

Ask family members to comment on pros and cons. Their concerns may require reconsideration of some specifics.

Is A Home Based Business Site Allowable?

Now you will want to investigate potential legal and community problems associated with operating the business from home. You should gather, read and digest specialized information concerning federal, state, county and municipal laws and regulations concerning home based business operations.

Check first! Get the facts in writing. Keep a topical file for future reference. Some facts and forms will be needed for your business plan. There may be limitations enforced that can make your planned business impossible or require expensive modifications to your property.

Items to be investigated, recorded and studied are:

 ____   ____ county or city zoning code restrictions
 ____   ____ necessary permits and licenses for operation
 ____   ____ state and local laws and codes regarding zoning
 ____   ____ deed or lease restrictions such as covenants
             and restrictive conditions of purchase
 ____   ____ parking and customer access; deliveries
 ____   ____ sanitation, traffic and noise codes
 ____   ____ signs and advertising
 ____   ____ state and federal code requirements for space,
             ventilation, heat and light
 ____   ____ limitations on the number and types of workers
 ____   ____ reservations that neighbors may have about a
             business next to or near them

Here are some ways to collect your information. Call or visit the zoning office at county headquarters or city hall. In some localities the city or county Office of Economic Development has print materials available to pinpoint key "code", items affecting home based business. If not, check with the local Chamber of Commerce office.

Even in rural areas, the era of unlimited free enterprise is over. Although the decision makers may be in the state capital or in a distant regional office of a federal agency, check before investing in inventory, equipment or marketing programs. If in doubt call the state office of Industrial Development or the nearest SBA district office. In some states the county agent or home demonstration agent will have helpful information concerning rural or farm business development.

To cover the income tax rules regarding a home based business, be sure to secure the IRS Publication #587, BUSINESS USE OF YOUR HOME.

Is The Home Based Business Site Insurable?

In addition to community investigations, contact your insurance company or agent. It is almost certain that significant changes will be required in your coverage and limits when you start a home based business. When you have written a good description of your business, call your agent for help in insuring you properly against new hazards resulting from your business operations such as:

Overall Home Site Evaluation

After you have gathered as much information as seems practical you may wish to evaluate a home based site vs. one or more other nearby locations. Here's a handy checklist. Using the "0" to "10" scale, grade these vital factors:

Factors To Consider
                                      Grades For Each Factor
                                           Home  Other
 1. Customer convenience                   _____ _____
 2. Availability of merchandise or         _____ _____
    raw materials
 3. Nearby competition                     _____ _____
 4. Transportation availability and rates  _____ _____
 5. Quality and quantity of employees      _____ _____
 6. Availability of parking facilities     _____ _____
 7. Adequacy of utilities (sewer, water    _____ _____
    power, gas)
 8. Traffic flow                           _____ _____
 9. Tax burden                             _____ _____
10. Quality of police and fire services    _____ _____
11. Environmental factors                  _____ _____
12. Physical suitability of building       _____ _____
13. Provision for future expansion         _____ _____
14. Vendor delivery access                 _____ _____
15. Personal convenience                   _____ _____
16. Cost of operation                      _____ _____
17. Other factors including how big        _____ _____
    you can get without moving
                              Totals       _____ _____

The greater the difference between the totals of the two columns, the clearer your decision should be. In the space below, write out what your decision and the reasons that support it.


Writing The Business Plan

Now that your research and plan development is nearing completion, it is time to move into action. If you are still in favor of going ahead, it is time to take several specific steps. The key one is to organize your dream scheme into a business plan.

What is it?

A business plan:

Why create it?

* The process of putting the business plan together, including the thought
that you put in before writing it, forces you to take an objective,
critical, unemotional look at your entire business proposal

* The finished written plan is an operational tool which, when properly
used, will help you manage your business and work toward its success

* The completed business plan is a means for communicating your ideas to
others and provides the basis for your financing your business

Who should write it?

* The home based owner to the extent possible
* Seek assistance in weak areas, such as:
--capital requirements
--operational forecasting
--tax and legal requirements

When should a Business Plan be used?

* To make crucial startup decisions
* To reassure lenders or backers
* To measure operational progress
* To test planning assumptions
* As a basis for adjusting forecasts
* To anticipate ongoing capital and cash requirements
* As the benchmark for good operational management

Proposed Outline For Home Based Business Plan

This outline is suggested for a small proprietorship or family business.
Shape it to fit your unique needs. For more complex manufacturing or
franchise operations see the Resource Section for other options.

Part I. -- Business Organization

Cover Page:
A. Business Name:
Street Address:
Mailing Address:
Telephone number:
Owner(s) Name(s):
Inside Pages:
B. Business Form:
(proprietorship, partnership, corporation)
If incorporated:
(state of incorporation)

Include copies of key subsidiary documents in an appendix. Remember even
partnerships require written agreements of terms and conditions to avoid
later conflicts, and to establish legal entities and equities. Corporations
require charters, articles of incorporation and by-laws.

Part II. -- Business Purpose and Function

In this section write an accurate, yet concise description of the business.
Describe the business you plan to start in narrative form.

What is the principal activity? Be specific. Give
product and/or service description(s):
* retail sales?
* manufacturing?
* service?
* other?

How will it be started?
* a new startup
* the expansion of an existing business
* a franchise operation
* actual or projected start up date

Why will it succeed? Promote your idea!
* how and why this business will be successful.
* what is unique about your business
* what is its market "niche"

What is your experience in this business? If you have a current resume of
your career include it in an appendix and reference it here. Otherwise
write a narrative here and include a resume in the finished product. If you
lack specific experience, detail how you plan to gain it, such as training,
apprenticeship or working with partners who have experience.

The Marketing Plan

The marketing plan is the core of your business rationale. To develop a
consistent sales growth a home based business person must become
knowledgeable about the market. To demonstrate your understanding, this
section of the home based business plan should seek to concisely answer
several basic questions:

Who is your market?

*Describe the profile of your typical customer
Male, female, both:
How many in family:
Annual family income:
Buying patterns:
Reason to buy from you:

* Geographically describe your trading area: (i.e.
county, state, national, etc.)

* Economically describe your trading area: (single
family, average earnings, number of children, etc.)

How large is the market?

* Total units or dollars:
* Growing______Steady______Decreasing______
* If growing, annual growth rate:

Who is your competition? No small business operates in a vacuum. Get to
know and respect the competition. Target your marketing plans. Identify
direct competitors (both in terms of geography and product lines), and
those who are similar or marginally comparative. Begin by listing names,
addresses and products or services. Detail briefly but concisely the
following information concerning each of your competitors:

* Who are the nearest ones?
* How are their businesses similar or competitive to yours?
* Do you have a unique "niche"? Describe it.
* How will your service or product be better or more saleable than your competitors?
* Are their businesses growing? Stable? Declining? Why?
* What can be learned from observing their operations
and/or talking to their present or former clients?
* Will you have competitive advantages or
disadvantages by operating from home? Be honest!

Remember, your business can become more profitable by adopting the good
competitive practices and by avoiding their errors.

To help you evaluate how successful your product or service will be, go
down the following list of standard characteristics (you may want to add
more from your knowledge of your field) and make a candid evaluation of
your competitive "edge:' On a scale of "0" (theirs puts mine to shame) to
10 (mine puts their to shame) indicate the potential for you and a total

     Price                                   _______
     Performance                             _______
     Durability                              _______
     Versatility                             _______
     Speed/accuracy                          _______
     Ease of operation or use                _______
     Ease of maintenance or repair           _______
     Ease or cost of installation            _______
     Size or weight or color                 _______
     Appearance or styling or packaging      _______
                                Total Points _______

A Total Points score of less than 60 indicates that you might reconsider
the viability of your product or service and/or think about how you can
improve it. Over 80 points indicates a clear competitive edge.

What percent of the market will you penetrate?

1. estimate the market in total units or dollars
2. estimate your planned volume
3. amount your volume will add to total market
4. subtract 3 from 2

Line 4 represents the amount of your planned volume
that must be taken away from the competition.

What pricing and sales terms are you planning? The primary consideration in
pricing a product or service is the value that it represents to the
customer. If, on the previous checklist of features, your product is truly
ahead of the field, you can command a premium price. On the other hand, if
it is a "me too" product, you may have to "buy" a share of the market to
get your foothold and then try to move price up later. This is always risky
and difficult. One rule will always hold: ultimately, the market will set
the price. If your selling price does not exceed your costs and expenses by
the margin necessary to keep your business healthy, you will fail. Know
your competitors pricing policies. Send a friend to comparison shop. Is
there discounting? Special sales? Price leaders? Make some "blind" phone
calls. Detail your pricing policy.

What is your sales plan? Describe how you will sell, distribute and/or
service what you sell. Be specific. Below are outlined some common

Direct sales by telephone or in person. The tremendous growth of individual
sales representatives who sell by party bookings, door to door, and through
distribution of call back promotional campaigns suggests that careful
research is required to be profitable.

Mail Order

Specialized markets for leisure time or unique products have grown as more
two income families find less time to shop. Be aware of recent mail order
legislation and regulation.


a. You may decide to either buy into someone else's franchise as a
franchisee or

b. Create your own franchise operation that sells rights to specific
territories or product lines to others. Each will require further legal,
financial, and marketing research.

An excellent starting point if you are considering franchise involvement is
the SBA Publication #MA 7.007, Evaluating Franchising Opportunities. The
International Franchise Association also publishes a number of valuable
aids in this field.


You may decide to work as a local or regional distributor for several
different product lines.

Outline your sales plan.

What is your advertising plan? Each product or service will need its own
advertising strategy as part of the total business marketing plan. Before
developing an advertising campaign for your business plan, take time to
review a few basic assumptions. By definition, advertising is any form of
paid, non-personal promotion that communicates with a large number of
potential customers at the same time. The purpose of advertising is to
inform, persuade and remind customers about your company's products or
services. Every advertising activity should have specific goals. Common
examples are:

* To bring in sales orders or contracts
* To promote special events such as sales, business
openings, new products
* To bring in requests for estimates or for a sales
representative to call
* A special goal at the outset may be to use special
media to establish yourself even before startup and to
get potential customer "feedback."

These might include one or more of the following;

* Purchase and distribution of business cards to
potential clients
* Posting notices on free bulletin boards in area
supermarkets or office complexes
* A telephone survey of potential clients to alert them
to your startup plans.

To assist in determining what types of advertising are appropriate and
within company budget projections, it will be necessary to carefully review
your customer profile. From this review, establish a clear statement of
advertising goals. Write down what you want your advertising to

The next step will be to develop answers to the following crucial questions:

What should be said about the business and how should it be stated?
What media should be used?
How much can be afforded?
How can the advertising program be implemented?
How can its effectiveness be measured?

The basic criteria for selecting specific types of media will include
concise answers to the following:

* Trading Area -- Do you plan to serve or sell to an industrial market, a
national market, a neighborhood or specialized market? Describe yours.

* Customer Type -- What does your potential customer read or listen to?
Where? How often? What image does the media you are considering suggest?
Does it fit your customer? Describe your customer.

* Budget Restrictions -- How will the amount of money you have to spend
limit the media you can use? How can you spread your budget out over a year
to give a repetitive, continuous message? While you may have to spend more
at the start, a good ongoing guideline is that advertising should not
exceed one or two percent of sales. Set forth how much you are willing to
invest in advertising in the first year: $_______

Break it down into months or quarters:
       $______ $______ $______ $______ $______ $______
       $______ $______ $______ $______ $______ $______

* Continuity of Message -- How will the type of product or service,
customer profile and seasonal buying patterns affect your choice of media
and the frequency with which you advertise? Explain your message.

* Past Performance -- What is the track record for use of the medium you
are considering for your type of business? What do your competitors use?
What does your trade association suggest? Note appropriate comments.

For more on media selection and creating your advertising plan, see SBA

Management Plan

Who will do what? Be sure to include four basic sets of information:

1. State a personal history of principals and related
work, hobby or volunteer experience (include
formal resumes in Appendix)
2. List and describe specific duties and
responsibilities of each
3. List benefits and other forms of compensation for each
4. Identify other professional resources available to
the business: Example: Accountant, lawyer,
insurance broker, banker, etc. Describe the
relationship of each to business: Example:
"accountant available on part time hourly basis,
as needed, initial agreement calls for services not
to exceed x hours per month at $ xx.xx per

To make this section graphically clear, start with a simple organizational
chart that lists specific tasks and shows who (type of person is more
important than individual name other than for principals) will do what
indicated by arrows, work flow and lines of responsibility and/or
communications. Consider the following examples:

                       Company President
           Shop Manager   Sales Manager     Office
                         (owner-manager)  (owner-manager)
                        Company President
           Sales Manager   Shop Manager     Office
                          (owner-manager) (owner-manager)
As the service business grows, its organization chart
could look like this:
                        Company President
           Shop Manager   Sales Manager     Office
         Foreman   Parts

Concisely answer the following questions:

What are your personnel needs now?
What skills must each key person have?
Are the people needed available? Name them and
indicate full or part time and salary rates:

Detail a proposed work schedule by week and month for at least the first

Calculate total salaries, wages, fringe benefits and payroll taxes for each
month of the first year:

            Compen-    Fringe   Payroll
            sation    Benefits   Taxes
1st Mo      $______   $______   $______
2nd Mo.     $______   $______   $______
3rd Mo.     $______   $______   $______
4th Mo.     $______   $______   $______
5th Mo.     $______   $______   $______
6th Mo.     $______   $______   $______
7th Mo.     $______   $______   $______
8th Mo.     $______   $______   $______
9th Mo.     $______   $______   $______
10th Mo.    $______   $______   $______
11th Mo.    $______   $______   $______
12th Mo.    $______   $______   $______
Full Yr.    $______   $______   $______

If you have identified any gaps in personnel skills, state how these will
be overcome by training, purchase of outside services, or subcontracting.
Check with the nearest state employment service office for assistance.
Write your plan.

What is your banking plan?

What will be the location and type of bank accounts opened for the
business. A word of caution, keep business accounts separate from personal
or family accounts. These vital records will be necessary for future tax
and accounting purposes. Describe your banking plan.

How is Your Credit Rating?

There may be several partial answers to this question. All will be of
importance to the future of the business. First, what is your personal
history of paying debts? Just to be safe, purchase a copy of your personal
credit record from the local credit bureau for a small fee and make sure
that it is accurate. Look in the classified telephone directory under
"Credit Reporting Agencies."

To establish a credit rating, it is necessary to secure credit with a
number of businesses and to use it. Your rating will be based upon your
record for paying for goods and services based upon the agreed terms. If
your prior credit rating is poor, discuss with your lawyer accountant and
banker options for improvement before seeking and being refused business

Operational Plans Summary

The purpose of this section is to summarize from previous sections the
various operations of your business and link them to the finance section of
your business plan. In addition, you will want to summarize the advantages
and disadvantages of a home based business operation. Refer to your earlier
checklist, and write your summary.

The Financial Plan

Clearly the most critical section of your Business Plan Document is the
Financial Plan. In formulating this part of the planning document, you will
establish vital schedules that will guide the financial health of your
business through the troubled waters of the first year and beyond.

Before going into the details of building the Financial Plan, it is
important to realize that some basic knowledge of accounting is essential
to the productive management of your business. If you are like most home
business owners, you probably have a deep and abiding interest in the
product or services that you sell or intend to sell. You like to do what
you do, and even more fulfilling is that you are making money doing it.
There is nothing wrong with that. Your conviction that what you are doing
or making is worthwhile is vitally important to success. Nonetheless, the
income of a coach who takes the greatest pride in producing a winning team
will largely depend on someone keeping score of the wins and losses.

The business owner is no different. Your product or service may improve the
condition of mankind for generations to come, but, unless you have access
to an unlimited bankroll, you will fail if you don't make a profit. If you
don't know what's going on in your business, you are not in a very good
position to assure its profitability.

Most home based businesses will use the "cash" method of accounting with a
system of record keeping that may be little more than a carefully annotated
checkbook in which is recorded all receipts and all expenditures, backed up
by a few forms of original entry (invoices, receipts, cash tickets, etc.)
For a Sole Proprietorship, the business form assumed by this Management
Aid, the very minimum of recorded information is that required to
accurately complete the federal Internal Revenue Service Form 1040,
Schedule C. Other business types (partnerships, joint ventures,
corporations) have similar requirements but use different tax forms.

If your business is, or will be, larger than just a small supplement to
family income, you will need a something more sophisticated. Stationery
stores can provide you with several packaged small business accounting
systems complete with simple journals and ledgers and detailed instructions
in understandable language.

Should you feel that your accounting knowledge is so rudimentary that you
will need professional assistance to establish your accounting system, the
classified section of your telephone directory can lead you to a number of
small business services that offer a complete range of accounting services.
You can buy as much as you need, from a simple "peg-board" system all the
way to computerized accounting, tax return service, and monthly
profitability consultation. Rates are reasonable for the services rendered
and an investigative consultation will usually be free. Look under the
heading, "Business Consultants", and make some calls. Be sure to let them
know the size of your business so you get to the ones who specialize in
home based operations. Many of them are home-based entrepreneurs themselves
and know what you will be going through. Let's start by looking at the
makeup of the Financial Plan for the business.

The Financial Plan includes the following:

1. Financial Planning Assumptions -- these are short statements of the
conditions under which you plan to operate.

* Market health:
* Date of startup:
* Sales buildup ($):
* Gross profit margin:
* Equipment, furniture and
fixtures required:
* Payroll and other key expenses that will affect
the financial plan:

2. Operational Plan -- Profit and Loss Projection -- this is prepared for
the first year, broken into twelve individual months. It should become your
first year's budget. See Exhibits A & A-1.

3. Source of Funds Schedule -- this shows the source(s) of your funds to
capitalize the business and how they will be distributed among your fixed
assets and working capital.

4. Pro Forma Balance Sheet -- "Pro forma" refers to the fact that the
balance sheet is before the fact, not actual. This form displays assets,
liabilities and equity of the business. This will indicate how much
investment will be required by the business and how much of it will be used
as working capital in its operation.

5. Cash Flow Projection -- this will forecast the flow of cash into and out
of your business through the year It helps you plan for staged purchasing,
high volume months and slow periods.

Creating the Profit and Loss Projection

Refer to Exhibits A & A-1. Create a wide sheet of analysis paper with a
three inch wide column at the extreme left and thirteen narrow columns
across the page. Write at the top of the first page the planned name of
your business. On the second line of the heading, write "Profit and Loss
Projection". On the third line, write "First Year".

Then, note the headings on Exhibit A and copy them onto your 13-column
sheet. If startup is indefinite, just write "Month #1", "Month #2", etc.
Column 13 should be headed "Total Year".

In the wide, unnumbered column on the left of your 13 column sheet, copy
the headings from the similar area on Exhibit A. Then follow the example
set by Exhibit A and list all of the other components of your income, cost
and expense structure. You may add or delete specific lines of expense to
suit your business plan. Guard against consolidating too many types of
expense under one account lest you lose control of the components. At the
same time, don't try to break down expenses so discretely that accounting
becomes a nuisance instead of a management tool. Once again, Exhibit A
provides ample detail for most home based businesses.

Now, in the small column just to the left of the first monthly column, you
will want to note which of the items in the left-hand column are to be
estimated on a monthly (M) or a yearly (Y) basis. Items such as Sales, Cost
of Sales and Variable Expenses will be estimated monthly based on planned
volume and seasonal or other estimated fluctuations. Fixed Expenses can
usually be estimated on an yearly basis and divided by twelve to arrive at
even monthly values. The "M" and "Y" designations will be used later to
distinguish between variable and fixed expense.

Depreciation allowances for Fixed Assets such as production equipment,
office furniture and machines, vehicles, etc. will be calculated from the
Source of Funds Schedule,

Exhibit A-1 describes line by line how the values on the Profit and Loss
Projection are developed. Use this as your guide.

Source of Funds Schedule

To create this schedule, you will need to create a list of all of the
Assets that you intend to use in your business, how much investment each
will require and the source of funds to capitalize them. A sample of such a
list is shown below:

ASSET                     COST   SOURCE OF FUNDS
Cash                   $ 2,500   Personal savings
Accounts Receivable      3,000   From profits
Inventory                2,000   Vendor credit
Pickup truck             5,000   Currently owned
Packaging machine       10,000   Installment purchase
Office desk and chair      300   Currently owned
Calculator                  75   Personal cash
Electric Typewriter        500   Personal savings

Before you leave your Source of Funds Schedule, indicate the number of
months (years x 12) of useful life for depreciable fixed assets. (In the
example, the pickup truck, the packaging machine and the furniture and
office equipment would be depreciable.) Generally, any individual item of
equipment, furniture, fixtures, vehicles, etc., costing over $100 should be
depreciated. For more information on allowances for depreciation, you can
get free publications and assistance from your local Internal Revenue
Service office. Divide the cost of each fixed asset item by the number of
months over which it will be depreciated. You will need this data to enter
as monthly depreciation on your Profit and Loss Projection. All of the data
on the Source of Funds Schedule will be needed to create the Balance Sheet.

Creating the Pro Forma Balance Sheet

Refer to Exhibit B. This is a Balance Sheet form. There are a number of
variations of this form and you may find it prudent to ask your banker for
the form that the bank uses for small business. It will make it easier for
them to evaluate the health of your business. Use Exhibit B to get started
and transfer the data to your preferred form later. Accompanying Exhibit B
is Exhibit B-1 which describes line by line how to develop the Balance

Even though you may plan to stage the purchase of some assets through the
year, for the purposes of this pro forma Balance Sheet, assume that all
assets will be provided at the startup.

Cash Flow Projection

An important subsidiary schedule to your financial plan is a monthly Cash
Flow Projection. Prudent business management practice is to keep no more
cash in the business than is needed to operate it and to protect it from
catastrophe. In most small businesses, the problem is rarely one of having
too much cash. A Cash Flow Projection is made to advise management of the
amount of cash that is going to be absorbed by the operation of the
business and compares it against the amount that will be available.

SBA has created an excellent form for this purpose and it is shown as
Exhibit C. Your projection should be prepared on 13-column analysis paper
to allow for a twelve month projection. Exhibit C-1 represents a line by
line description and explanation of the components of the Cash Flow
Projection which provides a step-by-step method of preparation.

Outside Sources of Assistance

The U.S. Small Business Administration's Office of Business Development
programs are extensive and diversified. They include free individual
counseling, courses, conferences, workshops, problem clinics, and a wide
range of publications. Counseling is provided through community based
organizations such as:

SCORE and ACE which help small business owners solve their operating
problems through a one-on-one relationship. Counseling is not limited to
small businesses that have a problem. It is available as well to managers
of successful firms who wish to review their objectives and long-range
plans for expansion and diversification.

SMALL BUSINESS INSTITUTES (SBIs) which have been organized through SBA on
over 500 university and college campuses as another way to help small
business. At each SBI, senior and graduate students at schools of business
administration, and their faculty advisors, provide on-site management
counseling. Students are guided by the faculty advisors and SBA management
assistance experts and receive academic credit for their work.

SMALL BUSINESS DEVELOPMENT CENTERS (SBDCs) which draw from resources of
local, state and federal government programs, the private sector, and
university facilities to provide managerial and technical help, research
studies, and other types of specialized assistance of value to small
business. These university based centers provide individual counseling and
practical training for small business owners.

BUSINESS MANAGEMENT TRAINING programs are co-sponsored by SBA in
cooperation with educational institutions, Chambers of Commerce, and trade
associations. Courses generally take place in the evening and last from six
to eight weeks. In addition, conferences covering such subjects as working
capital, business forecasting, and marketing are held for established
businesses on a regular basis. SBA conducts, Pre-Business Workshops,
dealing with finance, marketing assistance, types of business
organizations, and business site selection, for prospective business
owners. Clinics that focus on particular problems of small firms in
specific industrial categories are held on an as-needed basis.

A Final Word

In completing this Management Aid, you have put in a great deal of time and
effort. You should now have all of the elements needed to present as simple
or sophisticated a prospectus for your enterprise as you desire. More
important, you have created the management tools to guide you in your
venture. Once the business opens its doors, you will be inundated by the
details, problems, challenges and joys of going it alone. It will be
difficult to hold to your course through the rough seas ahead, but don't
forget this "chartbook", it will see you through to "Port Profit." It
should be a living document, referred to regularly, massaged constantly,
and revised to reflect your experience. Begin a planning cycle that expands
this first year plan into one that spans three or five years out. Update it
at regular intervals. Set your goals and live by them. Your success is in
your hands. Good planning and good execution!


The profit and loss statement (P&L) is valuable as a planning tool and as a
key management tool to help control operations to reach business goals. It
enables the owner/manager to develop a "preview" of the amount of profit,
or loss, generated each month, and for the business year -- based on
reasonable predictions of monthly levels of sales, costs, and expenses. The
owner/manager can compare the year's expected profits or losses against the
profit goals and needs established for the business. A completed P&L
statement allows the owner/manager to compare actual figures with the
monthly projections, and to take steps to correct any problems.


* List the departments within the business, e.g., assume your business is
appliance sales and service: New appliances, used ones, parts, in-shop
service, on-site service.

* In the "Estimate" columns, enter a reasonable projection of monthly sales
for each department of the business. Include cash and on-account sales. In
the "Actual" columns, enter the actual sales for the month as they become

* Exclude from the Revenue section any revenue that is not strictly related
to the business.


* Cite costs by department of the business, as above.

* In the "Estimate" columns enter the cost of sales estimated for each
month for each department. For product inventory, calculate the cost of the
goods sold for each department (beginning inventory plus purchases and
transportation costs during the month, minus the inventory). Enter "Actual"
costs when known each month.

Gross Profits -- Subtract the total cost of sales from the total revenue.


* Salary Expenses: Base pay plus overtime.
* Payroll Expenses: Include paid vacations, sick leave, health
insurance, unemployment insurance, social security taxes.
* Outside Services: Include costs of subcontracts, overflow
work farmed out, special or one-time services.
* Supplies: Services and items purchased for use in the
business, not for resale.
* Repairs and Maintenance: Regular maintenance and repair,
including periodic large expenditures such as painting or decorating.
* Advertising: Include desired sales volume, and yellow pages
expenses, e.g.
* Car, Delivery and Travel: Include charges if personal car used
in business, including parking, tolls, buying trips, etc.
* Accounting and Legal: Outside professional services.
* Rent: List only real estate used in the business.
* Telephone: Self-explanatory.
* Utilities: Water, heat, light, etc.
* Taxes (real estate, etc.): Inventory, sales, excise tax, others.
* Interest: Self-explanatory.
* Depreciation: Amortization of capital assets.
* Other Expenses (specify each): e.g., tools, leased equipment.
* Miscellaneous (unspecified): Small expenditures without
separate accounts.

Net Profit -- To find net profit, subtract total expenses from gross profit.


                              Company Name
                           1  BALANCE SHEET
                           As of (current date)
2 ASSETS                             LIABILITIES                         7
  Current Assets                     Current Liabilities
  Cash                        $____  Accounts payable              $____
  Accounts receivable $____          Short-term notes              $____
   less allowance for                Current portion
   doubtful accounts  $____           of long-term notes           $____
     Net realizable value     $____  Interest payable              $____
  Inventory                   $____  Taxes payable                 $____
  Temporary investments       $____  Accrued payroll               $____
  Prepaid expenses            $____   Total Current Liabilities    $____ 8
3  Total Current Assets       $____  Long-Term Liabilities
  Long-Term Investments              Notes payable                 $____
   (detailed list)            $____   Total Long-Term Liabilities  $____ 9
4    Total Investments        $____   TOTAL LIABILITIES            $____ 7
  Fixed Assets                       EQUITY
  Land                        $____  Total Owner's Equity
  Buildings: $____ at                 (proprietorship)             $____
   cost, less accumulated                                   or
   depreciation of $____             (Name's) Equity               $____
   Net book value             $____  (Name's) Equity               $____
  Equipment: $____ at                 (partnership)
   cost, less accumulated              Total Partners' Equity      $____ 10
   depreciation of $                                        or
   Net book value             $____  Shareholders' Equity
  Furniture/Fixtures: $____ at         (corporation)
   cost, less accumulated             Capital stock                $____
   depreciation of $____              Capital paid-in in excess
   Net book value             $____   of par                       $____
  Autos/Trucks: $____ at             Retained earnings             $____
   cost, less accumulated              Total Shareholders' Equity  $____
   depreciation of $____               TOTAL LIABILITIES
   Net book value             $____      AND EQUITY                $____ 11
5   Total Net Fixed Assets    $____  RECONCILEMENT OF EQUITY
  Other Assets                       As of (current date)
   (detailed list)            $____  Equity at beginning of period $____
6    Total Other Assets       $____  Plus: Net income (or Minus:
     TOTAL ASSETS             $____   Net loss) after taxes        $____
                                     Plus: Additional capital
                                      (investments by owner(s)
                                      or stock purchases by
                                       shareholders                 $____
                                     Less: Total deductions
                                      (withdrawals by owner(s) or
                                      dividends to shareholders)   $____
                                     Equality as shown on current
                                      Balance sheet                $____ 12

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