Karate Athlete - Formal Business Plan

Put together by the Small Business Administration and Julian Forbes (mostly SBA... :-) ) This is the outline used for Karate Athlete, Inc.'s Business Plan.

This is by far the most useful item to put together both to give you a better view of your business and future potential as well as for the all important banker or investor. (Even if your initial investor is a family member - business should always be done in a business-like manner.)

Keep in mind that I kept this generic so that it would apply to any kind of business, not just Martial Arts schools.

Your business plan should be broken up into the following sections:

I. Executive Summary

A.   Description of Product/Service
B.   Definition of Target Market (s)
C.   Financial Summary
D.   Financial Plan
      1.  Proposed Uses of Funds
      2.  Sources of Financing
      3.  Payback Schedule

II.   Business Goals

A.   Short Range
B.   Long Range
C.   Outline of Operating Plan

III.  Product or Services

A.   Description of Product/Service Line
B.   Proprietary Position (s)
      1.   Patents and or Copyrights
      2.   Legal exclusivity (franchises, etc.)
      3.   Technical
C.   Customer/Client Analysis
      1.   Customer Buying Criteria
      2.   Competitive Comparison

A.   Description of Total Market
B.   Industry Trends
C.   Target Market (s)
D. Analysis of Competition

A.   Pricing and Terms of Sale
B.   Distribution Channels (if applicable)
C.   Advertising and Promotion
D.   Sales Plan
E.   Market and Sales Projections

A.   Material (s)
B.   Suppliers
C.   Production Methods
D.   Equipment Requirements
E.   Personnel Skills

A.   Form of Organization
     1.   Organization Documents
     2.   Organization Chart
     3.   Owners and Officers, etc.
B.   Resumes of Key Personnel
C.   Staffing Plan

1.   Two to Five Year Annual Projections:
      a)   Income Statement
      b)   Balance Sheets
      c)   Cash Flow Projections
2.   12 month (or more) Projections
      a)   Income Statement
      b)   Balance Sheets
      c)   Cash Flow Projections
3.   Capital Spending Plan
      a)   Facilities
      b)   Equipment
4.   Key Business/Financial Ratios
5.   Projection Assumptions
      a)   Market and Sales
      b)   Costs and Expenses
      c)   Loan Schedules

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., 1-2 and no more than 4 pages).

A.   Business Description - In less than 60 seconds, describe your business, what it is you sell, who it benefits and how.

B.   Definition of the Target Market - Summarize which specific groups of people or businesses you plan to sell your product or services to. To the extent that you can, this is an excellent place for a summary table showing market size and sales potential.

C.   Financial Summary - This should include a three to five year summary of sales, gross profits, operating expenses and profits, net profits, current assets and liabilities, plant equipment and long term liabilities. Additional details are shown in subsequent sections, but this section illustrates the anticipated profitability of the plan.

D.   Financing Plan - This is the section which answers lender's and investor's key questions:

A simple three to five year table, similar to the one in section C above will address this issue.

With the exception of the business description, all of the information in the Executive Summary should be highlighted in a brief, even bulleted, fashion. Remember, these facts are laid out in-depth further along in the plan.

As a new business you should 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.

II. Business Goals

Limit yourself to two or three specific, measurable goals, to be accomplished within a specific period of time. This has two purposes:
1. To allow you (or lender) to determine if you have met your goal (s) when you said you would
2. To provide a starting point for developing a plan to accomplish your goal (s).

To do this, start at the end-point, which is the date you want to complete the specific goal. Working backwards towards the beginning, identify every activity that has to be accomplished to meet your goal. At the same time, you need to identify time needed to complete each activity, the cost and who will be responsible. For example, if your goal is to open a retail store by September 1st, and it is now May 15th, a partial list might look like this:

Activity	Duration	Due By	Resp
Stock Inventory	3 Days	8-31	Joe
Order (and Ship) Inventory	30 Days	8-27	Joe
Arrange Credit Terms	15 Days	7-27	Sally
Select Suppliers	30 Days	7-12	Sally
Identify Potential Suppliers	15 Days	6-12	Joe
Specify Product Line (s)	30 Days	5-27	Joe

Complete Store Layout	15 days	8-25	Joe
Purchase Store Fixtures	30 days	8-10	Joe
Specify Needed Fixtures	15 days	7-10	Joe
Design Store Layout	7 days	6-25	Bill
Move in to Store	3 days	8-20	All
Review & Sign Lease	5 days	8-17	All
Negotiate Lease Terms	7 days	8-12	Atty
Select Store Site	20 days	8-5	Sue
Identify Location Criteria	15 days	7-15	Bill

As you can see in the above example, some of these activities are contingent on completion of another activity. For example, you can't complete design of the store layout before you negotiate the lease. Others take more time to complete in their entirety than your desired completion date allows. For example, if today is May 15th, Joe has only 12 days to complete selection of the product line, not the 30 days the plan calls for.

When you add in the costs of each activity, you have the elements of the Operating Plan for each goal. Keep in mind that the only firm date is the starting point. The date you plan to complete the activity can always be moved, either back or ahead. This may be unpleasant or disappointing, but better to recognize problems ahead of time than later when it's too late. (This is why you do planning, to anticipate problems and opportunities.)

III. Product or Services

A. Description of Product Line - This would be as complete a list of products and/or services you propose to offer as possible. Don't forget to look at it from a customer's or client's point of view. Things you may take for granted, he or she may not. For example, do you include delivery? Credit? (How? Through credit cards, a regular line of credit, factoring etc.) Will you make house calls (go to the client - e.g. private training) or do they always come to you? Finally, what benefit (s) does the customer or client receive from product or service? For example, consider restaurants; what is the difference between them? It's the atmosphere, not just the food! (In fact, some of the better food comes from some of the less fashionable restaurants, and occasionally vice-versa.)

B. Proprietary Position - This involves both legal and "secret" areas of the business. Legal areas include patents, copyrights, franchises and exclusive agreements. Secrets might include the source code for your software (if it really is special), a manufacturing process which gives you an advantage, client information not available to others, and so forth. Each of these needs to be considered, evaluated and the real benefits identified.

C. Comparisons to your Competitor's Products (or Services) - You need to look at your competitors from two points of view, the industry view, covered later, and the customer's perspective. This can be done by identifying what we call "Buy Decision Factors", that is, the things customers consider in making their buying decisions. For example, in deciding to go into a store, customers might consider such factors as the store's product line, their interest in those products at that point in time, previous in-store service, location, price, other services available and so on. (People who prefer to pay by credit cards may not shop at stores that don't accept credit cards, despite other positive factors.)

Buying Decision Factor	Competitor A	Competitor B	Competitor C
Product Line	Very wide not deep	Designer only	Shabby goods, no consistent labels
Current Interest (Impulse??)	Few real impulse items	Only Jewelry	Lots of cheap junk items
Service Level	Minimal Delivery	Excellent Knowledgeable staff	None
Location	Big Mall	Downtown	Strip Mall
Price Level	Medium	High	Discount
Other factors	Credit Cards	Store Credit	Cash Only

In making these comparisons you should be sure to make them as comparable as possible. Use similar or like products (or services) as much as you can. Also. be sure to keep separate notes of your reasons for each comment. These will come in handy later when you have more experience. By looking at these factors you may discover an opportunity to distinguish your business from your competition. (in this example, a medium priced store with knowledgeable clerks and a narrower product line might work, possibly downtown.)

Keep in mind, this is how customers look at you and your competitors, not how you look at each other. That perspective comes later.

IV. Market Analysis

A. Description of Total Market - This is an overall look at the market, with reasonable constraints. Do include those you could serve, but not those you can't serve. For example, the market for computer consulting might include both individuals and businesses, but not governments or universities.

B. Industry Trends - These are available from industry magazines, industry surveys (such as Standard & Poors), trade sources and trade shows, to mention a few of the most common sources. In a nut shell, this is where your industry will be in the next few years (or sooner). You need to know this to keep up with your competition (or even gain a lead on them). Consider the shift towards computer controlled machine tools; older shops may have to pay heavily to upgrade, while a new entrant would be able to start with the most up-to-date equipment, at a savings in cost and efficiency.

C. Target Market (s) - These are the specific group (s) of customers you want to serve, now and in the immediate future. While it does not mean you wouldn't sell something to someone not in your target market, it does mean you would not go out of your way to find that customer and convince him (or her) to buy from you. Using the Computer Consulting business mentioned above as an example, target markets might include:

• small professional offices within the country;
• manufacturing companies with sales in the $5-10 million range; and
• retailers with 5-25 employees.

These are the specific groups of customers and prospects you are going to focus your marketing and product development efforts towards satisfying. In identifying target market (s) some other factors, such as the ease of communicating with them, the return on your expected advertising and marketing dollar each target market can be expected to generate, and the competitive situation in each target market. These may make otherwise marginal target markets more attractive to you.

D. Competition - This is the place to look at your competitors from an industry perspective. How big are they? How many employees? Sales volume? Personalities of owners/managers? Brands carried, areas of expertise and so forth. While there may be some duplication with customer interests, this is your view from the perspective of an industry "insider".

A. Overall Strategy - This is a general description of your strategy to market your product or service: is it going to be a high volume, low price strategy; a market niche strategy where you focus on a small part of the total market; an "expert" strategy, where you specialize in a specific area within your product or service area (brain surgery, for example); or some other definable approach to marketing your product or service.

B. Pricing Policy - More thought is needed than you might think in developing a pricing policy. This involves a combination of economics, marketing strategy and cost considerations. There are several different approaches to setting prices, each of which are discussed briefly below:

Cost Plus - This involves simply adding a fixed amount to the product cost. The additional amount must be enough to cover both overhead costs and a reasonable profit level. This approach is most often used in fixed fee contracts, where the costs and time requirements are fairly well known.

Standard Mark-up - A commonly used version of the Cost Plus approach, substituting, a standard percentage for the fixed amount. Widely used in retailing, this approach tends to provide a steady Gross Margin percent. It is easy to compare to industry statistics and practices and to apply to a large, varied array of products.

Competitive Pricing - match (or undercut) your competition's prices. This method is more common in industrial products where product differentiation is more difficult, or even non-existent. It requires considerable ongoing market research to track competitors. This approach is also used in retailing and wholesaling, where comparative shopping by customers is common. Service providers sometimes adopt this approach, based on industry or local surveys.

Market Expansion - Used for newer products, this approach calls for setting prices at the level they are expected to reach when large sales volumes are reached. This price level is typically much lower than the normal introductory or initial price might be. The objective is two fold: to encourage customers to try the product in the early stages of introduction and adopt it quickly; and to raise the barriers to entry to later competitors by locking up large market shares. This does tend to build volume quickly, and make it difficult for followers to enter the market. The disadvantage is that this approach typically calls for selling the product substantially under the actual initial cost for the introductory period. A good example of this approach is computer software, which is frequently priced to penetrate rapidly and gain market dominance in its own niche.

Value Added - The most difficult approach to implement, this requires a careful analysis of the value of the product of service to the user. This approach tends to maximize profits but frequently presents substantial problems in identifying what the value actually is to users. Industrial products are usually the most susceptible to this approach.

In actually setting prices you must consider all of these strategies in order to both receive fair value for your product and still remain within a reasonable (to your customers) price range. By evaluating your pricing structure against each of these approaches you should get a better picture of where your own pricing strategy stands. In setting prices remember that you must understand all of your costs, both variable (those which vary with product volume and sales) and fixed (which you incur regularly throughout the year).

C. Sales Channels and Terms - This section contains two separate yet connected areas of marketing. First, how do you propose to put your product or service in the hands of the ultimate consumer; and secondly, under what overall conditions of sale. Let's consider each separately, and then look at them together.

Ultimately you will have to combine your terms with your distribution structure to find a combination which is acceptable both to your customers (and channels) and to yourself. This is where the art of business comes in.

A. Material (s) - A complete list of materials needed to manufacture the product or stock the store, including costs.

For retailers and wholesalers this would be more general, limited to product lines (cereals, snacks, etc.) and would include the normal mark-ups to provide gross profit levels for your accountant and you to work with.

B. Sources of Supply - List the companies you plan to buy from and their terms of sale. Will vendors provide credit lines? How soon? What are their discounts and delivery terms. Look for alternate sources and check those out with other customers if possible. These companies are going to be a critical part of your business success, so you would be wise to get to know them as well as possible before you start.

C. Production Methods - This section should include both a written description and appropriate schematics and visuals. A scale layout of the plant or store should be included. This should include any equipment, machinery, tables, etc. Bear in mind, the reader (or lender) may not be as familiar with your industry as you are, and may well depend on these visuals to understand how you plan to do things. For manufacturing processes a schematic of the process may also be helpful. For non-manufacturing businesses a floor layout may be sufficient to provide a picture of the business to the reader. In either case, include a list of equipment, building improvements or modifications, furniture and fixtures, along with costs, delivery schedules and so forth. (You want to summarize these in the plan and put the complete details in an appendix.)

D. Method of Selling, Distributing and Servicing Products - Somewhat of an overlap on the preceding section, this area largely deals with communicating with both channels and customers through a combination of sales people, advertising, display or merchandising and other promotional efforts. The object is to communicate the benefits of the product or service to all concerned parties and to get the order or sale. Because of the complexity inherent in this challenge, you should try to stay fairly broad in scope in the planning stages, and not try to be too specific. For example, you might plan on having four manufacturer's representatives, each generating an average of $150,000 in sales per year at a commission rate of 3% and direct sales by your own sales staff of six of $1,000,000 per year. Alternatively, your advertising plan might call for weekly insertions in three neighborhood weeklies at a budget cost (overall) of $50,000 per year. At this stage you should not attempt to identify the specific manufacturer's representatives (although you may compile a list of desirable ones) or write the copy for your advertisements. Leave that for the actual operating plan.

E. Market and Sales Projections - This is the end result of your marketing strategy, this quantifies your plan in terms of how many units you plan to sell, the price, and hopefully the overall size of the target markets. Books have been written on defining market size and potential but the well-known bottom line is a sales forecast; your best estimate of what your sales will be. Keep in mind that this is going to be a primary input into your cost structure as well. Wherever possible, we suggest you separate sales into discrete units of some sort and an average price per unit. This helps in two ways: first of all, manufacturing costs are typically related to unit volume, not selliing price; secondly, this approach allows you to experiment on the effect of volume versus price relationships. Depending on the level of fixed costs, a small change in the price may result in a significant change in volume and a dramatic change in profits. HINT: Once you set up the assumptions for your sales forecast leave them alone unless you change the basic underlying assumptions. Don't change it simply to increase projected profits to a more acceptable level.

A. Forms of Organization - How do you plan to set your business up from a legal perspective? There are three primary methods:

B. Board of Directors - This only applies to corporations, and is simply a list of directors of the company. Corporations must have the lesser of three directors or the number of shareholders. You may wish to identify the type of people or experience you want on your board, but usually the owners make up the board in small businesses.

C. Officers: Organization and Responsibilities - For larger organizations a formal Table of Organization with boxes and titles is typical. For smaller businesses a list of the owners and major players and their individual areas of expertise is usually sufficient. In either case, you should make a concerted effort to identify the major responsibilities within the business and who will handle each of them. This may include services such as attorneys and accountants.

D. Resumes of Key Personnel - In addition to the conventional resume (which may be found in an Appendix), you should include a brief summary of the particular skills and experience each major player brings to the business.

E. Staffing Plan - A key part of the plan, since it involves one of the largest expenses in most businesses, is payroll. Individual names are not necessary but job functions are. Supervision and staff support are also critical here, as is "down-time", due to coffee breaks, vacations, sick time etc. Keep in mind that no-one works at 100% efficiency, or continuous sixteen hour days. The more specific the staffing plan the better the cost estimates of payroll will be. HINT: Payroll taxes (FICA etc - U.S.) typically run to 15% of payroll, or more.

F. Facilities Plan/Capital Improvements - Here is where you identify the major spending elements, particularly in the opening portion of the business. Facilities include layout of the physical plant (or store, offices, etc.) and capital expenditures include buildings, equipment, vehicles, etc. Contractor's estimates, catalogs and supplier quotations are all important here, along with delivery and installation times and expenses. Don't forget permits for building and/or renovations as well as any electrical or plumbing work needed to meet regulations. Don't overlook sales taxes, license fees and warranty contracts and installation. Hint: Add at least 10% contingency expense to anything not covered by a firm, fixed price contract. You don't have to spend the money, but it is better than running out at the last minute, or opening for business without any reserve cash.

On-going operating costs are included in the Facilities section, and typically include:

Most of these expenses occur at regular intervals, usually monthly. Others occur at random (repairs for example) but should be budgeted for on a regular basis. The remainder, such as real estate taxes, occurs at predetermined times and can be better planned for.

This section provides a financial overview of your plan, and is based on the information you have developed as part of the previous sections. This section should be prepared by your accountant of someone knowledgeable in accounting and financial practices. With that said, it will be based on your assumptions and plan and will be only as good as the assumptions are. TIP: If you pump lousy assumptions into a financial model, you will get a mathematically correct piece of trash!