BUSINESS PLAN AND

PRE-FEASIBILITY STUDY
Sun Tzu says,
If you know the enemy and know yourself,
you need not fear the result of a hundred
battles. If you know yourself but not the
enemy, for every victory gained you will
also suffer a defeat. If you know neither
the enemy nor yourself, you will succumb
in every battle.
This is the essence of planning.
“Sometimes things left to chance
turn out well. Most people,
however, don’t leave important
things to chance. If you value your
time, effort, and money, you will
plan”.
- Meyer and Allen, 2000, 81
 What Is A Business Plan?
A business plan is any plan that
works for a business to look
ahead, allocate resources, focus
on key points, and prepare for
problems and opportunities.
- Tim Berry
 Why Make A Business Plan?
• To obtain financing;
• To serve as a living guide to the
business;
and,
• To provide a start-up blueprint.
- Allen and Meyer 2000, 80
Two Dimensions:
Sustainability and Growth

Feasibility
Stages of Enterprise Development
S V Expand or
I E
Diversify
E D N
L E T
F A U
Exit
- R
A G E
S E
C D
S
N Sustaining and Growing (Managing)
Feasibility R E
E The Enterprise
E E C
R Study
A
S L
A T
M I
T I
E N
I O
N E
O N
T N
 The BUSINESS PLAN Format

I. Executive Summary
II. Market Aspect
– Service [Product] Offerings
– Target Market
– Demand
– Supply
– Demand-Supply Gap
– Market Share
– Marketing Strategy [Marketing Mix]
– Pricing [Price of Products and Services]
– Place – Channels of Distribution
– Promotion [Promotional Strategy]
– Projected Sales / Revenues [3 Years]
The BUSINESS PLAN Format (continued)

III. Technical Aspect

– Services [Product]
– Process Flow [Flowcharts / Service Process]
– Machinery and Equipment
– Capacity [Rated Capacity / Capacity Utilization
Projection]
– Plant [Office] Location
– Plant [Office] Structures / Layout
– Utilities
– Projected Production
– Waste Disposal
The BUSINESS PLAN Format (continued)

IV. Organization and Management Aspect

– Project Proponent [Business Name]
– Type / Form of Organization
– Organization
– Office Facilities
– Project Timetable
The BUSINESS PLAN Format (continued)

V. Financial Aspect
– Total Project Cost
– Proposed Sources of Funds
– Proposed Collateral
– Projected Financial Statements
– Financial Analysis
VI. Social Benefit / Desirability
 Enterprise Flow
A. Business Idea B. Product Ideas

D. Production and Operations

Requirements C. Market Identification, Testing,
Validation

F. Structural Design, Layout and

E. Location Analysis Facility

H. Marketing the Whole Enterprise

G. Organization and Management

I. Funding Sources and Financial

Management
J. Exit Strategies
 Vision - Mission

• Keep the vision broad enough to last

through changing times;
• If your vision changes when something
happens, then it’s not really a vision;
• Don’t confuse vision with a mission. A
mission is an allotted or self-imposed duty
or task.
- Meyer and Allen 2000, 81
Ryan Allis says:
Here are three steps to coming up with a
short mission statement:
Step One: Identify the target customer;
Step Two: State what you’ll provide to
customers; and,
Step Three: State what differentiates your
firm.
 What Happens During The Feasibility
Phase?

Aspects:
• Market
• Production and Operations
• Organization and Management
• Financial
 Feasibility: Market

“Not every idea can become a good

business. Ideas must be tested before
they are put on the marketplace.”
(Meyer and Allen 2000, 75)
 Musts For Entrepreneurs:
Entrepreneurs must:
• understand entrepreneurial trends;
• constantly look for new products to satisfy
customers;
• find ways to stay ahead of the competition.
-Meyer and Allen 2000, 34
“The ability to recognize new
opportunities and to think creatively is
essential for success in today’s
market.”
- Meyer and Allen 2000, 34
 The Business Concept
What is the product being offered?
Who is the customer?
What are the features?
What are the benefits?
How will you get the product to the
customer?
From these questions:
1. Write the concept statement.
2. Test the concept on the market (Market
Research).
 Porter’s Five Forces of Industry Competition Model

Porter’s Five Forces High Moderate Low

Threats of Potential Entrants
Economies of scale
Resource requirements
Access to distribution channels
Brand and customer loyalty
Cost disadvantages

Threats of Substitutes
Availability of attractively priced substitutes
How satisfactory are the substitutes in terms of quality
Performance and other relevant attributes
Cost of switching

Supplier’s Bargaining Power

Are they supplying major customers?
Do they sell it at much cheaper price?
Are you an established supplier or just starting to build
customer base?

Customer’s Bargaining Power

Are switching costs low?
Are there few buyers?
Are buyers more informed?
Do they practice discretion when buying the product?

Intensity of Rivalry Among Existing Firms

Is the number of competitors increasing?
Is demand growing?
Is competition undercutting prices?
Are switching costs involved?
How aggressive is the competition in its marketing efforts?
Have competitors been acquiring weaker firms?

Enriquez 2007, 49
Competitive Grid

Competitor Customer Benefits Distribution Strengths and

Channels Weaknesses

Meyer and Allen 2000, 77

Note:
Product: A good or a service.
Total Product Offering:
• More than materials transformed into a
product. To be marketable the basic
product must be named (branded), have a
package, perhaps have a warranty.
• Components: Brand, Package, Label,
Warranties
(Longenecker et al. 2000)
 Brand – a verbal or symbolic means of
identifying the product.
Tips:
• Select a name that is easy to pronounce and
remember.
• Choose a descriptive name.
• Use a name the can have legal protection.
• Select a name with promotional possibilities.
• Select a name that can be used on several
product lines of a similar nature.
 Trademark and Service Mark

• Trademark: an identifying feature used to

distinguish a manufacturer's product.
• Service mark: a legal term indicating the
exclusive right to use a brand to identify a
service.
Segmentation and Marketing Guidelines:
• The market segment should be
measurable.
• The segment should be large enough to
be profitable.
• The segment should be reachable.
• The segment should be responsive.
(Meyer and Allen 2000, 93)
 Targeting Your Market
1. “Learn (if you don't already know) who buys
your products and services and why. Develop a
picture of your ideal buyer, their
demographics, concerns and motivations. Use
this information to identify marketing tactics that
will attract them to you”.
2. Review secondary data to obtain some insights
regarding the ideal picture mentioned above.
3. Your secondary data can help you create a
description of your target market. Your primary
data can validate your secondary data.
Targeting Your Market (Continued)
4. Methods for determining your market:
Survey
Focus Group Discussion (FGD)
Interviews
Your interview schedule or survey questionnaire should contain
questions that will yield answers to the following questions:
• Who will buy our product (goods/services)?
– Have they tried the products?
– Do they like the description?
• Where are they located?
• Can they afford our products?
• How much are they wiling to pay?

http://www.marketingforsuccess.com/marketing-ideas/5marketing-
principles.html
 On Pricing Strategies

THE FUNDAMENTALS OF PRICING STRATEGY

FOR SMALL BUSINESS CENTER ON: COST,
CUSTOMER, COMPETITION

(KAO 1992, 168)

 On Pricing Strategies
(continued)
• For retailing: full cost should contain merchandise cost,
freight, variable sales variable administrative cost, share
of overhead;
• For service: cost of labor and materials, a share of the
overhead (can be rent, utilities), opportunity cost of the
owner’s time and any other contribution he or she has
made (use of personal car and tools, office or work
space in the house and so on) -Kao 1992, 168
• In pricing for services also consider:
– Length and cost of service so that this service can be
adequately provided
– Cost of tools needed to provide the services
– Supply and demand for the services to be provided
 On Pricing Strategies
(continued)
Additional tips on pricing services:
• Set an hourly charge when providing a service. Do not set prices on
a per job or “pakiaw” basis. Example: Some compressors may have
more efficient problems and can take longer to repair. Therefore the
cost repair…must be priced accordingly (Sanchez 2000, 103).
On pricing food products:
• For the food business, you can normally charge a price based on
the value of raw ingredients. Rule of thumb, to arrive at your retail
price in a ‘karinderia’ food business is to charge double your raw
ingredients cost (Sanchez 2000, 103).
(Take note: This might work on dishes not preserved food)
• You can charge more in your food business if you consider two
additional factors:
– Packaging and handling
– Distribution outlet
Some more tips:
• Try to make you product different;
• Make it difficult for the consumer to
compare your product with the competitor;
• Change the consumer’s perception of
value (marketing is all about turning wants
into needs) [Dychiu 2002, 40]
Forecasting:
“The process of planning and estimating
something in the future”. (Cabrera 2004, 39)
Jon Ryan Ng says:
“If past figures aren’t available, like the business
is about to be established, the most accurate
way of forecasting sales is to use competitor’s
sales data or sales growth as basis.”
This may be sourced from SEC.
 In Summary…
Target Market

Potential customers described

Market accessibility described

Potential for market growth described

Market size described

Purchasing power described

Willingness to buy discussed

Cost of targeting the market discussed

Problems, issues and corresponding solutions discussed

In Summary…

Marketing Plan and Sales Strategies

Product strategies (packaging, branding etc.) discussed

Pricing Strategies discussed

Distribution strategies discussed

Promotions strategies discussed

Costs discussed

Sales forecasts and methods discussed

Problems, issues and corresponding solutions discussed

Feasibility: Operations
 INPUTS

Money Raw Labor Equipment Information Energy

Materials

OERATIONS
Designing Processing Treating Storing Advising

Fabricating Refining Assembling Shipping Instructing

OUTPUTS

Products Services
Examples: Examples:
Clothing Dry cleaning
Baked Goods Appliance Repair
Paint Automobile Painting

Source : Longenecker et al. 2000, 438

 Capital Equipment List
Item Mode of Acquisition Depreciation
Acquisition Cost Schedule
Layout Planning

The basic steps in layout planning are the

same for all types of business according to
Meyer and Allen:
1. Define the objectives of the facility;
2. Identify the primary and supporting activities
that will take place in the facility;
3. Determine the interrelationships access,
arrangement and flow among all the activities;
4. Design alternative layouts for the facility;
5. Evaluate the various layouts and choose one .
Gantt Chart

Task January February

W1 W2 W3 W4 W1 W2 W3 W4

T1

T2

T3

Key: Scheduled Time

Progress
 PERT-CPM: Performance Evaluation Review Technique –
Critical Path Method ( Network Path Analysis)

()
()

() ()

Start

Key: Completion of
Activity
()
()
Critical Path

() Time
Work-Flow Process Symbols

Operation

Transport

Inspection

Storage

Kao 1992, 344

Human Resource Requirements

2 Levels: Direct Labor and Indirect Labor

Position: Code:

Job Description:

Job Specifications:

Basic Salary: Benefits:

Source:
 Some Guidelines To Help You Find A Good Location:
• Know the population of the trading area. Is the neighborhood starting to
be run down? Is the population moving away? Or is it new and on the way
up? Determine the purchasing power of the population. Do they own cars?
Big, affluent homes?
• Study the competition - How many stores look prosperous in the area?
How many look as though they are barely getting by? How many similar
stores went out of business in this area last year? How many new stores
opened last year? What price line does competition carry? Pinpoint which
stores will be your greatest competitors. If you intend to put up a variety
store, you may find it profitable to locate your store adjacent to that of your
competitors’ because the combined appeal of two or more similar stores
creates greater customer traffic.
• Study the location's accessibility – See if the location is accessible to your
customers, employees and of course, to you. Ask yourself the following
questions: How close is the store to jeepney and bus, and other transport
facilities? Are there adequate parking spaces near the store? Are the
sidewalks in good repair? Is the street lighting good? (DTI)
 Specific Considerations for Site Selection
Retail business:
• If you start a retail business, you will be selling
directly to consumers. Therefore, you will need
to be accessible to your target market. You will
need to determine your trade area, the region or
section of the community from which you can
expect to draw your customers (Meyer and Allen
2000, 143).
 Specific Considerations for Site Selection

Four Considerations For Retail

Businesses:
• Number and size of competing
businesses.
• Nature of the competition.
• Character of the area (attractiveness).
• Accessibility and Traffic.
(Meyer and Allen 2000, 145)
 Specific Considerations for Site Selection

Service/Wholesale Business Considerations:

• Some service and wholesale businesses have
the same needs as retail businesses. This is true
when customers come to a restaurant, dry
cleaner, or wholesale business, all the factors
relevant to site apply.
• Many service and wholesale businesses do not
have customers or clients coming to their
business sites. Exterminators and plumbers go
to their customers’ homes (Meyer and Allen
2000, 145).
 Specific Considerations for Site
Selection
Manufacturing/Extraction Business considerations:
If you start a manufacturing or extraction business, your
location will largely be predetermined by the nature of
your business. An extraction business must be near
whatever it is extracting…A manufacturing firm can
locate only where the local zones allow. Most
communities have set aside certain areas for industrial
sites called industrial parks.
Also include:
– Supply and major transportation routes
(Meyer and Allen 2000, 146)
 Plant Location Criteria
Factor Points Weight Score
Accessibility to and availability
of raw materials

Availability of moderately-
priced utilities (power, water,
fuel)
Combined cost of transporting
raw materials and fuel to the
plant site
The proximity to distributing
outlets

Availability of skilled and

unskilled labor
Building and Facilities
Site, type and costs of the building and
land should be accurately presented.

Raw Materials and Supplies

The required raw materials and supplies
should be listed down and the basis for
their selection must be presented.
(DAP)
Utilities
Describes the amount, cost and sources of
electricity, fuel, water required. This must
be determined in relation to the production
schedule and capacity utilization defined.
Alternative sources of these utilities and
the feasibility of their use must also be
described.
(DAP)
Waste Disposal
A description of the quantity, manner of
disposal, and the cost involved in doing
away with expected waste form the
production is necessary. The analysis
must be expanded to consider the
possibilities of further using their wastes.
(DAP)
In Summary…

Operations/Production
Raw Materials needed listed and described
Machinery and equipment discussed
Facilities discussed
Location criteria established
Labor requirements and source discussed

Disposal methods discussed

Tests and pretests discussed
Processes discussed
Schedule of operations (shifts) presented
Production flow/service blueprint discussed
Timeline (pre-op, date of opening) discussed
Cost of operations/production discussed
Quality controls discussed
Problems, issues and corresponding solutions discussed
Feasibility: Organization and
Management
 Laws Affecting New Businesses
Product Ideas
Patents Trade Issues
Copyrights Price Discrimination
Trademarks Consumer Protection

Start-up
Permits Employees’
Licenses Equal Employment
Contracts New Opportunity
Business Hours and
Compensation
Health and safety

Location Taxes
Zoning Laws Sales Tax
Building Codes Payroll Taxes
Leases VAT
Contracts for Real
Estate Purchase
 Characteristics of Business Forms

Sole Proprietorship
• A business owned and managed by one
person;
• Proprietor means owner: therefore,
proprietorship means owned by one
person;
• From the legal point of view – the sole
proprietor is subject to unlimited liability
from the debts of the business.
 Characteristics of Business Forms

Partnership
• The term “partners” implies two or more people;
• Partners jointly provide capital required, share in the
management of the business concern, and share in the
profits and losses;
• The partners are subject, jointly to unlimited liability for
the debts of the business. This means that a partner with
many personal assets could lose all her private property
if other partners have few possessions or personal
assets to be seized by the court.
 Characteristics of Business Forms
Corporation
• A corporation is a legal entity with power to sue or be sued in its
own name;
• It has its own finances or capital;
• It acts through human agents who sign documents, etc.;
• It is often called an “artificial person”;
• It is owned by persons called shareholders;
• Shareholders elect directors on the basis of one vote for each share
owned;
• A person with more shares can have more control of the company;
• Directors appoint managers who are usually not owners;
• The liability of each shareholder for the debts of the company is
limited to the share capital invested in the company.
 Characteristics of Business Forms

Cooperative
• Regulated by the Cooperative
Development Authority;
• Primary objective of the cooperative is to
provide maximum benefits to each
member (at least 15 members);
• Has limited liability feature .
(Gaston, 2007, 71)
Registering the Business
• Corporations and Partnerships: Securities
and Exchange Commission (SEC)
• Sole Proprietorship: Department of Trade
and Industry
• Cooperative: Cooperative Development
Authority (CDA)
-Gaston 2007, 76-78
 Working Management Plan
Meyer and Allen:
“You’ll need an effective management plan
to keep your daily business focused and
your long-term goals attainable (2000,
245)".
Policies to Consider:
• Day to Day Operational Policies
• Hiring Policies
• Personnel Policies
• Policies are general statements of intent about
how to run your business. They simplify day-to-
day management so you don’t have to make the
same decisions over and over again.
• Procedures are steps and sequences.
• Rules tell employees exactly what they should
or should not do (no room for interpretation)
- Meyer and Allen 2000, 283
Human Resource Requirements
The Management Team
Position: Code:

Job Description:

Job Specifications:

Basic Salary: Benefits:

Source:
Creating the Organizational Chart

Position

Position Position Position

 In Summary…
Organizational and Management Strategies
Form of ownership discussed
Management team presented and discussed
Consultants and other specialists described
Management and organizational structure
presented
Salary schedule (compensation and incentives)
discussed
Problems, issues and corresponding solutions
discussed
Feasibility: Financial Aspect
Note:
• The finance section is your opportunity to
determine how viable your business is
financially. It will also act as a benchmark for you
to gauge your progress against your original
projections.
• To create your financial plan you'll first need to
determine the type and amount of expenses
your business will incur. This information will
help you create the core financial statements for
your business. (RBC)
List of One-Time Expenses (Start-up Costs)
May include, but is not limited to:
• Downpayment on property or deposit on rent
• Downpayment or deposit on fixtures and equipment (computer
printer, fax machine, photocopier)
• Cars/trucks
• Decorating, remodelling, installation of equipment/fixtures, leasehold
improvements
• Starting inventory
• Utility set-up fees
• Promotion for opening
• Licenses and permits
• Incorporation costs (where applicable)
• Product development costs or franchise fees where applicable
• Unexpected expenses
(RBC)
What Comprises Cost?

Cost = value of materials, labor and other services given to produce a

good or service (i.e. product).
Elements:
• Direct Material: major raw materials, identified with the finished
product
• Direct Labor: value of the required number of hours t finish the
product
• Overhead:
indirect materials (supplies and consumables)
indirect labor ( helper at the shop)
other expenses to make production or the rendering of
service possible (rent, utilities, salaries of supervisor)
Question: Are they fixed or variable? How do they behave?
• Margin of Contribution (MC): what a single product is capable of
giving back to the business to help defray the fixed investments
and other fixed periodic costs which the business has to incur to
stay in operation.
 For Organizations selling multiple
products, the relative proportion of
each type of product sold is called a
Sales Mix

Fixed Expenses

= B – E Point
Weighted Average-
Unit Contribution Sales Mix is used for computing a
Margin weighted average-unit contribution
margin
Note:
Avoid the following common mistakes when preparing
your Income Statement and Cash Flow Statement:
• Projecting overly optimistic sales growth - most
businesses grow gradually
• Ignoring seasonality - is your business busiest during
summer or rainy season?
• Underestimating increases in expenses or cash outflows
that come with an increase in sales
• Assuming that collections will always be made in 30-60
days
 In Summary…
Project Costs and Financial Strategies

Sources and uses of funds discussed

Total project costs presented

Financial tools and computations presented, and discussed:

Cash flows

Income statements

Balance sheets

Payback period

Return on Investment

Break-even point

Problems, issues and corresponding solutions discussed

Fitting the Pieces
Tim Berry Says:
A feasibility plan is a very simple start-up
plan that includes a summary, mission
statement, keys to success, basic market
analysis, and preliminary analysis of costs,
pricing, and probable expenses. This kind
of plan is good for deciding whether or not
to proceed with a plan, to tell if there is a
business worth pursuing.
Stages of Enterprise Development
S V Expand or
I E
Diversify
E D N
L E T
F A U
Exit
- R
A G E
S E
C D
S
N Sustaining and Growing (Managing)
Feasibility R E
E The Enterprise
E E C
R Study
A
S L
A T
M I
T I
E N
I O
N E
O N
T N
Tim Berry says,
The most standard business plan is a start-up
plan, which defines the steps for a new
business. It covers standard topics including the
company, product or service, market, forecasts,
strategy, implementation milestones,
management team, and financial analysis. The
financial analysis includes projected sales, profit
and loss, balance sheet, cash flow, and probably
a few other tables. The plan starts with an
executive summary and ends with appendices
showing monthly projections for the first year.
Stages of Enterprise Development
S V Expand or
I E
Diversify
E D N
L E T
F A U
Exit
- R
A G E
S E
C D
S
N Sustaining and Growing (Managing)
Feasibility R E
E The Enterprise
E E C
R Study
A
S L
A T
M I
T I
E N
I O
N E
O N
T N
What Happens During The Sustainability
Phase?

Aspects:
• Market
• Production and Operations
• Organization and Management
• Financial
Stages of Enterprise Development
S V Expand or
I E
Diversify
E D N
L E T
F A U
Exit
- R
A G E
S E
C D
S
N Sustaining and Growing (Managing)
Feasibility R E
E The Enterprise
E E C
R Study
A
S L
A T
M I
T I
E N
I O
N E
O N
T N
Managing the Enterprise
 Managing the Market
Product
• If you have a good product, getting the other three Ps right will be
that much easier. The ‘product’ includes both the actual physical
product as well as product decisions such as function, appearance,
packaging, labeling, and warranty. The word ‘product’ also
encompasses any services you may provide. The service you
provide is your product.
Price
• If your price is too high, not enough people will be able to afford it. If
your price is too low, you will not make any profit. On the other
hand, if your price is too low, many will not buy it because they may
see it as an inferior good. To best manage these forces and
optimize your net profits, you will have to test many different prices
of your product(s).
 Managing the Market
Place
• Place is essential to building sales. Place essentially
rests on positioning—the positioning of your marketing
message and the positioning of your product.
• In both retail stores and online, how to properly position
your product is a very important skill. Without proper
positioning, no one will know you exist. If you are hidden
in the back corner of a store on the bottom shelf and
your web site is number 3425 in the search engines for
your targeted keywords, you likely will not make many
sales, no matter how good your product is.
 Managing the Market
• The positioning of your product is also known as
your distribution strategy. A distribution
strategy is developed by determining where on
the value chain you want your business to be
positioned, and who the buyer will be. You may
sell your product to a retail store who then
resells it to the buyer, a manufacturer who sells
exclusively to jobbers and regional
representatives, or directly to your end
consumers. We’ll talk more about distribution
models and strategies later in this section.
 Managing the Market
Promotion
Promotion is an essential part of the
marketing process. Promotion decisions
include those related to communicating
your message, advertising, and public
relations.
Sample Marketing Budget Worksheet
January February… …December Total for 200_

Brochures

Media Advertising

Broadsheets

Magazines

Radio

TV

Others

Tradeshows

Direct mail

Promotional Items

Others

Total Cost
 Pricing the Products

Price Skimming and Penetration Pricing

 Pricing the Products
Price Skimming:
Involves charging a high price to recover
costs as quickly as possible. The price is
dropped when the product is no longer
unique.
 Pricing the Products
Penetration Pricing:
Builds sales by charging a low initial price
to keep unit costs to customers as low as
possible. This approach can discourage
competition.
 Pricing the Products
Meyer and Allen :
In the growth stage, sales are increasing
and unit costs are decreasing
(assumption). If you skimmed, you would
need to lower prices to appeal to price-
conscious customers. If you were
penetrating, very little price change would
be necessary, but promotion will increase
(2000, 187).
 Forecasting
The practice of making educated
assumptions about trends about trends
and events to calculate your company’s
future revenues, costs , profits, capital
expenditures, financing and cash
requirements and financial condition.
(Cabrera 2004, 39)
 Forecasting’s three steps:
1. Projecting your company’s revenues and
expenses over the planning period.
2. Estimating the level of investments in current
assets and the capital assets required to
support your projected revenues and
expenses over the planning period.
3. Determine the financing requirement
throughout the planning period and calculating
your cash inflow and outflows (Cabrera).
 Sample Sales Forecast Worksheet
Unit Price Units to Total Units to be Total Sale Total for
per be Sold: Sale for Sold: for: 2007
Unit January January December December
Product # 1

Product # 2

Product # 3

Total Sales

Unit Cost Units to Total Units to be Total Total for

per be Sold: Cost for Sold: Cost for 20007
Unit January January December January
Product # 1

Product # 2

Product # 3

Total Cost
Bases for sales forecast:
• Pricing policy
• Economic outlook and conditions within
your industry
• The company’s position in the company
 Managing Your Operations
• Review Policies
• Training and Development
• Motivating Employees
• Succession Planning
(Creation of Replacement charts)
 Managing Purchasing and
Inventory
“At the start, you will be handling only a
small amount of goods but as you grow,
you inevitably increase quantities. You will
need to keep supply and demand, quality
and profitability in mind (Allen and Meyer
2000, 254)”.
Minimum and Maximum Rated Capacity

Minimum Capacity: The level of production

where the resources are not fully used, but
are employed at a minimum economical
level (fixed costs are covered by the
resulting revenue).
- DAP
Maximum Rated Capacity
• Level of production where all resources
are fully used;
• Actual capacity, the number of shifts per
day and the number of operating days per
year may be defined. (DAP)
Inventory Management: Calculating Supply

Find your industry’s average turn-

over rate first

12

= Number of Months Supply to

Average Stock Turnover Rate Keep on Hand
 Calculating Inventory Cost
You will have to make different
calculations for different
product lines and materials

Cost of Goods Sold

= Inventory Cost
Average Stock Turnover Rate
Inventory Systems
• Perpetual
• Partial Inventory Systems
• Just-in-Time Inventory Systems
 Managing Finances
“Understanding your financial documents
will help you keep control of your
company’s financial situation.”
(Meyer and Allen 2000, 338)
“If you have been in business
for over two years and have
been operating profitably, you
would have a good chance of
getting loan from the bank
when you need it.”
(Henry Ong 2007, 20)
What bankers look for:
• Character: credibility and the value of a
good management team;
• Capacity: the ability to pay in view of its
income and obligations (sufficient cash
flow);
• Capital: stable capital structure;
• Collateral: things of value they can claim if
a business could no longer pay its loan.
-Meyer and Allen
• If you are creating a business plan for an
ongoing business, include financial
statements from previous years.
• It's important to be realistic in your
financial projections and be skeptical of
overly optimistic projections. You may
even want to include best, worst and most
likely case scenarios. (RBC)
“Understanding your financial
documents will help you keep
control of your company’s
financial situation.”
- Meyer and Allen 2000, 338
 Gross revenues
less returns

Sales Direct cost of

Less: Cost of Goods Sold producing the items
= Gross Profit
Profit from
Less: Operating Expenses manufacturing the
Salaries and wages products

Advertising expenses
Expenses
Supplies incurred when
Depreciation running the
business
Rent
Telephone
= Net Profit The BASIS for
computing your income
tax
The Income Statement
BALANCE SHEET

ASSETS LIABILITIES
Current Assets: Current Liabilities:
Cash Accounts Receivable Accounts Payable
Inventory Salaries Payable
Prepaid Expenses Accrued Expenses
Total Current Assets: _______ Total Current Liabilities:______
Fixed Assets: Long-term Liabilities:
Land Mortgage Payable on
Equipment
Building
Less: Accumulated
Depreciation OWNER’S EQUITY (O.E.)

Total Fixed Assets:_________ Capital: ____________

TOTAL ASSETS = TOTAL LIABILITIES + O.E.

THE CASH FLOW STATEMENT

Beginning Cash Balance

Cash Inflow:
Cash Collection
Credit Collections
Investment Income
Total Cash Inflow:________
Cash Outflow:
Expenses (can be itemized)
Others
Equipment Purchase
Total Cash Outflow: ________
Sources and Uses of
Cash within a period as
money coming in and
going out.
It alerts the owner when
cash level is
dangerously low and
would not be able to
meet current liabilities
and expenses.

Ending Cash Balance

 Ability of business to pay its
Financial Tools bills

Current Assets

= Current Ratio
Current Liabilities

Capital needed to carry out

daily operations
Current Assets

- Current Liabilities

Working Capital
 % of total amount provided by
creditors. Owners prefer a higher
debt ratio with others financing the
business.

Total Liabilities

= Debt Ratio
Total Assets
 The profit gained for every Peso
of Sales after expenses and
income taxes.

Net Income after taxes

= Net Profit on Sales Ratio

Net Sales

Compare this ratio with

competitors. If it’s lower than
average, your prices may be too
low or your costs too high.
 Shows the relationship between
each expense on the income
statement and sales.

Expense

= Operating Ratio
Sales
 Shows whether a company is
liquid without having to depend
on inventory.

Current Assets - Inventory

= Quick Ratio
Current Liabilities
 Represents the Amount of
Money earned for every peso
invested by the owner

Net Income

= Return on Equity
Total O. E.
 Payback Period

Investment

= Payback Period
Cash Flow

The Payback Period is defined as the length of

time required to recover an initial investment
through cash flows generated by the
investment. The Payback Period lets you see
the level of profitability of an investment in
relation to time. The shorter the time period the
better the investment opportunity:

http://www.odellion.com/pages/online
%20community/Payback/financialmodels_payback_definition.htm
 Keeping Records
Daily Record Keeping
Journals
– Cash Receipts Journal
– Cash Disbursements Journal
– Sales Journal
– Purchases Journal
Summary of Sales and Cash Receipts
 Keeping Records

Weekly Record Keeping

• Posting to a ledger
• Keeping track of payments
• Aging of amounts owed you
• Keeping payroll records
• Keeping up with taxes
• Maintaining other records
– Insurance, Maintenance, Quality Control, Inventory,
General Office Records
(Meyer and Allen 2000, 361-363)
 Keeping Records
Monthly Record Keeping
• Financial Statements
• Statement of Profit or Loss
• Cash Flow
• Balance Sheet
Fitting the Pieces
Tim Berry says,

A growth plan or expansion plan or new product plan will sometimes

focus on a specific area of business, or a subset of the business.
These plans could be internal plans or not, depending on whether or
not they are being linked to loan applications or new investment. For
example, an expansion plan requiring new investment would include
full company descriptions and background on the management
team, as much as a start-up plan for investors. Loan applications
will require this much detail as well. However, an internal plan, used
to set the steps for growth or expansion funded internally, might skip
these descriptions. It might not include detailed financial projections
for the whole company, but it should at least include detailed
forecasts of sales and expenses for the company.
http://www.bplans.com/dp/article.cfm/193
While you will
need plenty of
I encourage you to

With this…

And for everything….