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HOW TO READ A BUSINESS PLAN, PART 1
INSTRUCTIONS: Before you begin, print Exhibits A, B, C and D, for "Start-Up Company" [Links below].
We know that a first look at spreadsheets can be frustrating - and you may be tempted to "go around" rather than through this process of learning how to read one. Yet here is the foundation of your dreams, and the cornerstone of your knowledge of what makes a financially healthy business. So persevere, we promise you will learn something amazing!
(Still thinking this is going to be hard? Here's a helpful hint: Read each section twice!)
A) Average monthly/yearly sales
B) Pace at which sales increase
C) Cost of Sales
Let's begin! Turn to Exhibits C and D, and look at the top items, "Selling Expenses." These figures are tied to the same monthly and total sales of both Exhibits A and B. Exhibit A and Exhibit C are for the very same company. These are just two views of that company's business plan. As you might have guessed (see, you are learning!), Exhibits B and D go together for another company.
In both companies we have the same sales volume. The only difference is one company is a traditional franchise set-up (A+C) and the other is a non-franchised business (B+D). Expenses are based on the "modest’ sales scenario, reflecting a revenue start of $10,000 in month one, and ramping up fairly aggressively to $25,900 in month six, as shown on Exhibits A and B. In the examples we use here, we have assumed 37% direct cost of sales.
DIRECT COST OF SALES: This means all costs incurred to make and package the product (or service). For example, the Custom Blotter Company has built a business offering "Custom Desk Blotters" (fictitious-- used for illustration purposes only!) Each blotter is created from a piece of artwork or photograph supplied by a client, including custom reminders and quotes, and so the direct costs CBC incurs would include:
Material Costs: Blotter paper, binding or mounting supplies, the leather or vinyl backing, glues, paper for drafts, the cardboard box used for shipping the product, etc. For our example we assume 22% of the selling price.
Direct Labor Expense: Graphic artist time (employee or contracted), and your time spent actually working on or guiding the project. For our example we assume 11% of the selling price.
Other Direct Costs: Charges for shipping product, printing the final blotter, and /or outside binding service charges, etc. For our example we assume 3% of the selling price.
In our spreadsheet, therefore, our Total Direct Cost of Sales is 37% of the product (service) selling price. Note: Rounding up accounts for small figure discrepancies.
SELLING EXPENSES & OVERHEAD
This 37% figure does not include our selling expenses nor our overhead, both of which come into the picture for every business! Even a "virtual company" on the web, while not necessarily incurring "rent" or even clerical overhead, will still have utilities (electric, phone / dsl / cable service) as well as hardware and software maintenance, web-hosting fees, and other overhead expenses related to that type of business.
Let's continue to see how these two additional factors, selling expenses and overhead come into play to yield a surprising outcome!
Go to PART 2