Business Modeling

UNIT II
BUSINESS MODEL
• startup is a temporary organization in search of a
scalable, repeatable, profitable business model. – Blank
and Dorf (2012, p. xvii)
• Today countless innovative business models are
emerging. Entirely new industries are forming as old
ones crumble. Upstarts are challenging the old guard,
some of whom are struggling feverishly to reinvent
themselves.
• How do you image your organization’s business model
might look two, five, or ten years from now? Will you be
among the dominant players? Will you face competitors
brandishing formidable new business models? –
Learning objectives
• After completing this chapter you will be able to
• Describe what a business model is
• Analyse existing and proposed businesses to determine
what business models they are applying and what
business models they plan to apply
• Develop and analyze alternative business models for
new entrepreneurial ventures
What is a business model?

A business model is an outline for how your company

plans to make money. In general, a business model
explains four things:
• What product or service a company will sell.
• How it intends to market that product or service.
• What kind of expenses the company will face.
• How the company expects to turn a profit.
What are Business Models?

Magretta (2002) described business models as “stories

that explain how enterprises work” (p. 87) and
Osterwalder, et al. (2010) said that they describe “the
rationale of how an organization creates, delivers, and
captures value” (p. 14). Chatterjee (2013) said that “A
business is about selling what you make for a profit. A
business model is a configuration (activity systems) of
what the business does (activities) and what it invests in
(resources) based on the logic that drives the profits for a
specific business” (p. 97).
• he Business Model Canvas
• The Business Model Canvas tool is based on the premise that
a start-up is something quite different than an ongoing
venture. A start-up should not be viewed as a smaller version
of a company because starting-up a company requires very
different skills than operating one does. A start-up that is still
a start-up after some time—maybe after a couple of years for
some kinds of start-ups—is actually a failed enterprise since it
hasn’t converted into an ongoing venture (Osterwalder et al.,
2010).
• The business model canvas is made up of nine parts that,
together, end up describing the business model.
Figure 3 – Business Model Canvas from
http://www.businessmodelgeneration.com (Designed by:
Strategyzer AG, strategyzer.com, Creative Commons
• The following elements of the Business Model Canvas
were taken, with permission, from
http://www.businessmodelgeneration.com.
• Key partners
• Who are our key partners?
• Who are our key suppliers?
• Which key resources are we acquiring from partners?
• Which key activities do partners perform?
• Motivations for partnerships: optimization and economy;
reduction of risk and uncertainty; acquisition of particular
resources and activities
• Key activities
• What key activities do our value propositions require?
• Our distribution channels?
• Customer relationships?
• Revenue streams?
• Categories: production; problem-solving; platform/network
• Key resources
• What key resources do our value propositions require?
• Our distribution channels?
• Customer relationships?
• Revenue streams?
• Types of resources: physical; intellectual (brand patents,
copyrights, data); human; financial
• Value propositions
• What value do we deliver to the customer?
• Which one of our customer’s problems are we helping to solve?
• What bundles of products and services are we offering to each customer
segment?
• Which customer needs are we satisfying?
• Characteristics: newness; performance; customization; “getting the job
done”; design; brand/status; price; cost reduction; risk reduction;
accessibility; convenience/usability
• Customer relationships
• What type of relationship does each of our customer segments expect us to
establish and maintain with them?
• Which ones have we established?
• How are they integrated with the rest of our business model?
• How costly are they?
• Examples: personal assistance; dedicated personal assistance; self-service;
automated services; communities; co-creation
• Customer segments
• For whom are we creating value?
• Who are our most important customers?
• Mass market; niche market; segmented; diversified; multi-sided
platform.
• Channels
• Through which channels do our customer segments want to be
reached?
• How are we reaching them now?
• How are our channels integrated?
• Which ones work best?
• Which ones are most cost-efficient?
• How are we integrating them with customer routines?
 • Channel phases:
• Awareness – How do we raise awareness about our company’s products and services?
• Evaluation – How do we help customers evaluate our organization’s value proposition?
• Purchase – How do we allow customers to purchase specific products and services?
• Delivery – How do we deliver a value proposition to customers?
• After sales – How do we provide post-purchase customer support?
• Revenue streams
• For what value are our customers really willing to pay?
• For what do they currently pay?
• How are they currently paying?
• How would they prefer to pay?
• How much does each revenue stream contribute to overall revenues?
• Types: asset sale; usage fee; subscription fees; lending/renting/leasing; licensing;
brokerage fees; advertising
• Fixed pricing: list price; product feature dependent; customer segment dependent;
volume dependent
• Dynamic pricing: negotiation (bargaining); yield management; real-time-market
• Cost structure
• What are the most important costs inherent in our business
model?
• Which key resources are most expensive?
• Which key activities are most expensive?
• Is your business more: cost driven (leanest cost structure, low
price value proposition, maximum automation, extensive
outsourcing); value driven (focused on value creation,
premium value proposition).
• Sample characteristics: fixed costs (salaries, rents, utilities);
variable costs; economies of scale; economies of scope
• The idea is to keep adding descriptions or plans to the nine
components to create the initial business model and then to
actually do the start-up activities and replace the initial
assumptions in each of the nine parts with newer and better
information or plans to let the business model evolve. This model
is partly based on the idea that the owner should be the one
interacting with potential customers so he or she fully
understands what these potential customers want. These
interactions should not only be done by hired sales people, at
least until the business model has evolved into one that works,
which can only happen when the venture owner is completely
engaged with the potential customers and the other business
operations (Osterwalder et al., 2010).
• A business plan shouldn’t be created until the above has been
done because you need to know what your business model is
before you can really create a business plan (Osterwalder et al.,
2010). This seems to imply that the Business Model Canvas is best
suited to technology-based and other types of companies that can
be basically started and operated in some way that can later be
converted into an ongoing venture. By starting operations and
making adjustments as you go, you are actually doing a form of
market research that can be compiled into a full business plan
when one is needed.
• According to Osterwalder, et al. (2010), the things we typically
teach people in business school are geared to helping people
survive in larger, ongoing businesses. What is taught—including
organizational structures, reporting lines, managing sales teams,
advertising, and similar topics—is not designed to help students
understand how a start-up works and how to deal with the volatile
nature of new ventures. The Business Model Canvas idea is meant
to help us understand start-ups.
• The Business Model Canvas tool is intended to be applied when business
operations can be started on a small scale and adjustments can continually be
made until the evolving business model ends up working in real life. This is in
contrast to the more traditional approach of pre-planning everything and then
going through the set-up and start-up processes and ending up with a business
venture that opens for business one day without having proven at all that the
business model it is founded upon will even work. These traditional start-ups
sometimes flounder along as the owners find that their plans are not quite
working out and they try to make adjustments on the fly. It can be difficult to
make adjustments at this time because the processes are already set up. For
example, sales teams might be in the field trying to make sales and blaming the
product developers for the difficulty they are having, and the product developers
might be blaming the sales teams for not being able to sell the product properly.
The real issue might be that the company simply isn’t meeting customers’ needs
and they don’t have any good mechanism for detecting and understanding and
fixing this problem.
• Lean Start-up
• Consistent with the Business Model Canvas approach, Ries (2011) advanced the idea of
the lean start-up. His definition of a startup is “a human institution designed to create a
new product or service under conditions of extreme uncertainty” (p. 27), and the lean
start-up approach involves releasing a minimal viable product to customers with the
expectation that this early prototype will change and evolve frequently and quickly in
response to customer feedback. This is meant to be a relatively easy and inexpensive way
to develop a product or service by relying on customer feedback to guide the pivots in
new directions that will ultimately—and relatively quickly—lead to a product or service
that will have the appeal required for business success. It is only then that the actual
business can truly emerge.
• Ries’s (2011) five lean start-up principles start with the idea that entrepreneurs are
everywhere and that anyone working in an environment where they seek to create new
products or services “under conditions of extreme uncertainty” (27) can use the lean
start-up approach. Second, a start-up is more than the product or service; it is an
institution that must be managed in a new way that promotes growth through innovation.
Third, startups are about learning “how to build a sustainable business” (p. 8-9) by
validating product or service design through frequent prototyping that allows
entrepreneurs to test the concepts. Forth, startups must follow this process or feedback
loop: create products and services; measure how the market reacts to them; and learn
from that reaction to determine whether to pivot or to persevere with an outcome the
market accepts. Finally, Ries (2011) suggested that entrepreneurial outcomes and
innovation initiatives need to be measured through innovative accounting.
• Growth Wheel
• According to its website, GrowthWheel® (
http://www.growthwheel.com/) is a decision-making tool
for start-up and growth companies to help business
advisers and entrepreneurs focus, set agendas, make
decisions, and take action (GrowthWheel, 2015). It is
effectively a more complex and detailed tool than the
Business Model Canvas for describing a business model.
A web search will yield a variety of tools, like the
Business Model Canvas and the GrowthWheel®, that
can be used to describe business models.
• Franchises as Business Models
• Franchises are basically business models developed by others
(franchisors) that have been proven to work in multiple contexts
and that are sold to entrepreneurs (franchisees) who will
implement the business model in contexts that the franchisor
believes will result in a successful enterprise. Franchises apply
various business models. Some are turnkey franchises, like
McDonald’s, where the entire business structure is set up from the
design of the stores to the supply system, and the franchisor sets
up virtually everything for the new franchisee. Other franchise
models, like that defining Tap ‘N’ Pay Canada (
http://www.tapnpay.ca/)—a business that provides debit and credit
card machines and point of sale equipment—advertise relatively
low fees charged to franchisees and quick set-ups in as little as
two weeks (http://www.betheboss.ca/franchises/tap-n-pay).
• Types of business models and examples
• Because there are many different businesses, the list of business
model types is constantly changing. Here are 12 common business
model options, all of which can be customized for a specific
company or industry.
• A “disruptive business model” innovates on these basic structures.
And lots of businesses earn money from multiple revenue streams,
meaning their business models include several of these types.
• 1. Retailer model
• A retailer is the last link in the supply chain. These businesses
purchase goods from manufacturers or distributors and then sell
them to customers for a price that will both cover expenses and
turn a profit. Retailers may specialize in a particular niche or carry a
range of products.
• Examples: Many of the businesses you patronize day to day are
probably retailers, from grocery stores to pharmacies to florists.
• 2. Manufacturer model
• A manufacturer converts raw materials into products. Then, they sell those
products to distributors, retailers or directly to consumers.
• Example: Manufacturing businesses build everything from furniture to
pharmaceuticals. They can be companies of any size and in almost any
industry.
• 3. Fee-for-service model
• A fee-for-service is just what it sounds like: A business charges a set fee for
a specific service. A business set up on this model can increase its earnings
by doing work for additional clients or by raising its rates.
• Depending on what type of work the business does, it might charge an
hourly rate, monthly retainer or commission. It may also create a fee
schedule with a set rate for different types of services.
• Example: Hairstylists, accountants and real estate agents all charge fees
for their specialized services. They may work independently or be affiliated
with a salon, office or brokerage that provides resources in exchange for a
percentage of their earnings.
• 4. Subscription model
• A subscription business model can be applied to both traditional brick-and-mortar
stores and e-commerce businesses alike. Essentially, the customer makes a
recurring payment for ongoing access to a service or product. A company may
directly ship its product in the mail, or you may pay a fee to use its services.
• Example: Many local farms offer farm shares or community-supported agriculture
subscriptions, where clients get access to fresh produce on an ongoing basis while
crops are in season.
• » MORE: Business startup costs you need to plan for
• 5. Bundling model
• The bundling business model involves companies selling two or more products
together as a single unit, often for a lower price than they would charge selling the
products separately.
• This type of business model allows companies to generate a greater volume of sales
and perhaps market products or services that are more difficult to sell. However,
profit margins often shrink since businesses sell the products for less.
• Example: Many class-based fitness centers and gyms use a type of bundling model,
where clients pay fees for a certain number of classes per month. The more classes
a client buys, the cheaper each individual class becomes, even though their total
spend increases.
• 6. Product-as-a-service model
• Product-as-a-service businesses charge customers to use physical products. They
may charge a subscription fee, a per-use or per-mile fee, or a combination of both.
• Example: Bike rental companies offer products as a service. Customers might
pay an annual membership fee plus a per-mile fee each time they ride, or they
might have the option to rent a bike for the day.
• » MORE: Best mobile business ideas for on-the-go entrepreneurs
• 7. Leasing model
• Under a leasing business model, a company buys a product from a seller. That
company then allows another company to use the product they purchased for a
recurring fee. Leasing agreements are usually most efficient with big-ticket items
like manufacturing and medical equipment, but some companies lease smaller
items too.
• Leasing is similar to the product-as-a-service business model, but leases usually
have longer terms — days or weeks compared to minutes or hours. Leasing
companies are unlikely to charge a subscription or membership fee for access to
their products.
• Example: A business that rents machinery like backhoes, augers and dozers to
individuals for their home construction projects is using a leasing business model.
• 8. Franchise model
• A franchise is an established business blueprint that a franchisee
purchases and reproduces. The franchiser, or original owner, works
with the franchisee to help them with financing, marketing and other
business operations to ensure the business functions as it should. In
return, the franchisee pays the franchiser a percentage of the
profits.
• Example: Domino’s, Anytime Fitness and Ace Hardware are all
examples of the franchise model.
• » MORE: 15 of the best franchise opportunities
• 9. Distribution model
• A company operating as a distributor is responsible for taking
manufactured goods to the market. To make a profit, distributors buy
the product in bulk and sell it to retailers at a higher price.
• Example: A chain of beauty salons that buys supplies in bulk and
sells some of them to other salons is using a distribution business
model, though they may have other revenue streams too.
• 10. Freemium model
• In a freemium model, customers can use parts of a product or service for free but must
pay for access to more advanced features. This model is common in the software-as-a-
service space — Spotify, for instance, has a free ad-supported tier, but subscribers get to
listen ad-free.
• Example: Some news and internet publishing companies use a freemium model, where
some or all content is free but premium content or special features are paywalled.
• 11. Advertising or affiliate marketing model
• The advertising and affiliate marketing business models leverage a business’s audience
as an asset.
• With advertising, a business sell its audience’s attention. Advertisers pay for space —
whether it’s in the pages of a magazine or on the side of a vehicle — with rates usually
determined by the size of the business's audience.
• With affiliate marketing, a business earns a commission when a member of its audience
buys a product or service it recommends. If you’ve ever heard a podcaster encourage you
to use a specific offer code when you buy a product they’re promoting, affiliate marketing
is probably part of the podcaster's business model.
• Example: A fashion blogger who sells ads on their podcast or website is using an
advertising model. If they post outfit-of-the-day photos with links that viewers can click to
“get the look,” they might also earn an affiliate marketing commission on those
purchases.
• » MORE: Online business ideas you can start now
• 12. Razor blades model
• To understand the razor blades model, you can simply look to your local
drugstore. You’ll notice that replacement razor blades may cost more than
razors themselves.
• Companies offer a cheaper razor with the understanding that you’ll continue
to purchase more expensive accessories — in this case, razor blades — in the
future.
• In addition to the traditional razor blades model, you'll also see companies
use the reverse razor blades model, in which they offer customers a high-
margin product and then promote the sales of lower-margin products that
accompany that initial product.
• Examples: This business model is most common among companies that sell
physical products. Printers that require a specific type of ink or water pitchers
that require a specific type of filter are examples of the razor blades model.
• How to design a business model
• There is no one-size-fits-all business model. Many businesses include elements of
several models — the yoga studio that bundles classes may also sell retail products in
its lobby, for instance.
• To design your own business model, start by answering the following questions:
• How will you make money? Outline one or several revenue streams, which are the
different ways your company plans to generate earnings.
• What are your key metrics? Having a profitable business is great, but it usually
doesn’t happen right away. You’ll want to identify other ways your company will measure
its success, like how much it costs to acquire a customer or how many repeat customers
you'll have.
• Who’s your target customer? Your product or service should solve a specific problem
for a specific group of consumers. Your business model should consider how big your
potential customer base is.
• How will your product or service benefit those customers? Your business model
should have a clear value proposition, which is what makes it uniquely attractive to
customers. Ideally, your value proposition should be specialized enough that
competitors can’t easily copy it.
• What expenses will you have? Make a list of the fixed and variable expenses your
business requires to function, and then figure out what prices you need to charge so
your revenue will exceed those costs. Keep in mind the costs associated with the
physical, financial, and intellectual assets of your company.
• From the outset, you may not have a clear idea of what
each of these components will look like for your
business. Writing a business plan can help them
become more evident.
• It may also be helpful to research other businesses that
are similar to yours and see how they've structured
their operations. This market research may reveal
things you want to imitate, as well as gaps in the
market that your business can fill.
• Your business model will inform your operations and
vice versa. As your business grows, you'll be able to
change and adapt your strategy based on your
A business plan
• A business plan is a document that outlines your
business’s financial goals and explains how you’ll
achieve them. A strong, detailed plan will provide a road
map for the business’s next three to five years, and you
can share it with potential investors, lenders or other
important partners.
• How to Write a Business Plan, Step by Step
• A well-written business plan should include details about your
business's goals, products or services, and finances.
• STEPS
• 1. Write an executive summary
• 2. Describe your company
• 3. State your business goals
• 4. Describe your products and services
• 5. Do your market research
• 6. Outline your marketing and sales plan
• 7. Perform a business financial analysis
• 8. Make financial projections
• 9. Add additional information to an appendix
• Business plan tips and resources
• 1. Write an executive summary
• This is the first page of your business plan. Think of it as your elevator pitch. It
should include a mission statement, a brief description of the products or services
offered, and a broad summary of your financial growth plans.
• Though the executive summary is the first thing your investors will read, it can be
easier to write it last. That way, you can highlight information you’ve identified while
writing other sections that go into more detail.
• » MORE: How to write an executive summary in 6 steps
• 2. Describe your company
• Next up is your company description, which should contain information like:
• Your business’s registered name.
• Address of your business location.
• Names of key people in the business. Make sure to highlight unique skills or
technical expertise among members of your team.
• Your company description should also define your business structure — such as a
sole proprietorship, partnership or corporation — and include the percent ownership
that each owner has and the extent of each owner’s involvement in the company.
• Lastly, it should cover the history of your company and the nature of your business
now. This prepares the reader to learn about your goals in the next section.
• » MORE: How to write a company overview for a business plan
• 3. State your business goals
• The third part of a business plan is an objective statement. This section spells out exactly
what you’d like to accomplish, both in the near term and over the long term.
• If you’re looking for a business loan or outside investment, you can use this section to
explain why you have a clear need for the funds, how the financing will help your
business grow, and how you plan to achieve your growth targets. The key is to provide a
clear explanation of the opportunity presented and how the loan or investment will grow
your company.
• For example, if your business is launching a second product line, you might explain how
the loan will help your company launch the new product and how much you think sales
will increase over the next three years as a result.
• 4. Describe your products and services
• In this section, go into detail about the products or services you offer or plan to offer.
• You should include the following:
• An explanation of how your product or service works.
• The pricing model for your product or service.
• The typical customers you serve.
• Your supply chain and order fulfillment strategy.
• Your sales strategy.
• Your distribution strategy.
• You can also discuss current or pending trademarks and patents associated with your
• 5. Do your market research
• Lenders and investors will want to know what sets your product apart from your
competition. In your market analysis section, explain who your competitors are. Discuss
what they do well, and point out what you can do better. If you’re serving a different or
underserved market, explain that.
• » MORE: How to write a market analysis for a business plan
• 6. Outline your marketing and sales plan
• Here, you can address how you plan to persuade customers to buy your products or
services, or how you will develop customer loyalty that will lead to repeat business.
• 7. Perform a business financial analysis
• If you’re a startup, you may not have much information on your business financials yet.
However, if you’re an existing business, you’ll want to include income or profit-and-loss
statements, a balance sheet that lists your assets and debts, and a cash flow statement
that shows how cash comes into and goes out of the company.
• You may also include metrics such as:
• Net profit margin: the percentage of revenue you keep as net income.
• Current ratio: the measurement of your liquidity and ability to repay debts.
• Accounts receivable turnover ratio: a measurement of how frequently you collect on
receivables per year.
• This is a great place to include charts and graphs that make it easy for those reading
your plan to understand the financial health of your business.
• 8. Make financial projections
• This is a critical part of your business plan if you’re seeking financing
or investors. It outlines how your business will generate enough profit
to repay the loan or how you will earn a decent return for investors.
• Here, you’ll provide your business’s monthly or quarterly sales,
expenses and profit estimates over at least a three-year period — with
the future numbers assuming you’ve obtained a new loan.
• Accuracy is key, so carefully analyze your past financial statements
before giving projections. Your goals may be aggressive, but they
should also be realistic.
• 9. Add additional information to an appendix
• List any supporting information or additional materials that you
couldn’t fit in elsewhere, such as resumes of key employees, licenses,
equipment leases, permits, patents, receipts, bank statements,
contracts and personal and business credit history. If the appendix is
long, you may want to consider adding a table of contents at the
beginning of this section
• Business plan tips and resources
• Here are some tips to help your business plan stand out:
• Avoid over-optimism: If you’re applying for a business
loan at a local bank, the loan officer likely knows your
market pretty well. Providing unreasonable sales
estimates can hurt your chances of loan approval.
• A feasibility study is done before starting a business, when you
have the idea for the business but you want to make sure it's
feasible, or advisable. Put another way, is it worth your time,
effort and money to create this business? Several different
professionals may contribute to the study, such as an accountant,
entrepreneurs who have opened successful businesses, and
Realtors who advise on the worth of the location and pricing,
comparing similar businesses in the area.
• A business plan details how the business will operate. It assumes
your feasibility study has been completed and it was determined
the idea is viable. Now you're going to spell out your financial and
other objectives, the methods you plan to use to achieve them,
and your proposed organizational structure.
• Conducting a Feasibility Study
• If you're doing the feasibility study yourself, conduct a complete competitive
analysis considering the following:
• Product demand: Is there a need or want for your product or service? Is the
need already being met, or is there room for another product?
• Market conditions: Who would buy your product and where are they? Can
you serve their location? Is the market saturated, or is there room/need for
more products?
• Pricing: What do current users pay for similar products? What do you need to
charge so that you will be profitable, and will consumers pay your price?

• Risks: What are the risks associated with your idea?

• Probability of Success: Can you reasonably overcome the risks to become
profitable?
• Writing a Business Plan
• Writing a business plan may seem daunting, but if you take it step-by-step, it will come to fruition. The
Small Business Administration advises that business plans should include the following:
• Executive Summary: Include your mission statement, products and or services, some brief information
about your leadership team and key employees, as well as the location of your business. To attract
investors, add current financial information and projections for growth.
• Company description: Detail the problems your business solves; its target market; its competitive
advantages, compared with the competition, and anything else that makes your company superior to
others: i.e., product awards or recognition, big increases in sales, and so on.

• Market analysis: Perform competitive research of what other businesses are doing; their strengths and
weaknesses, and how and why your business will be competitive and successful in the market.
• Organization or management: State the legal status of your business, such as a corporation or
partnership, and include an organizational chart showing management levels, departments, and so on.

• Service or product line: State what you will sell or provide and describe the benefits of each. Explain
any research done, and any patents filed, and so on.
• Marketing and sales: Explain in detail your marketing strategy and how sales will be made.
• Funding request: If necessary, detail the amount of funding you’ll need for the next five years -
specifically, what you’ll do with the funds, and the terms you’re asking for.
• Financial projections: This is the business’s financial outlook for the next five years. Include current
financial statements, if the business is in operation.
• Appendix: This includes supporting documents or requested materials, such as resumes, product
photos, letters of reference, patents, licenses and so on.
Unit III
• Business Financial Statements for Startup
Financing
• Financial Statements You'll Need for Your Startup
Business Plan

• You're ready to start your small business and your're

working on a great business plan to take to a bank or
other lender. A key part of that plan is the financial
statements. These statements will be looked at carefully
by the lender, so here are some tips for making these
• Financial Statements You Will Need
• You may need several different types of statements,
depending on the requirements of your lender and your
own technical expertise.
• The statements you will certainly need are:
• A startup budget or cash flow statement
• A startup costs worksheet
• A pro forma (projected) profit and loss statement
• A pro forma (projected) balance sheet
• Your lender may also want these financial statements:
• Sources and uses of funds statement
• Break-even analysis
• Putting these Statements in Order
• First, work on your startup budget and your startup costs worksheet.
You'll need to do a lot of estimating.
• Note
• The trick is to underestimate income and overestimate expenses, so
you can create a more realistic picture of your business over the first
year or two.
• Then work on a profit and loss statement for the first year. A lender will
definitely want to see this one. And, even though it's not going to be
accurate, lenders like to see a startup balance sheet.
• Some lenders may ask for a break-even analysis, a cash flow
statement, or a sources and uses of funds statement. We'll go over
these statements so you can quickly provide them if asked.
• 01of 09
• Business Startup Budget
• A startup budget is like a projected cash flow statement, but with a little more guesswork.
• Your lender wants to know your budget - that is, what you expect to bring in and how much to expect to
spend each month. Lenders want to know that you can follow a budget and that you will not over-spend.
• They also want to see how much you will need to pay your bills while your business is starting out (working
capital), and how long it will take you to have a positive cash flow (bring in more money than you are
spending).
• Include some key information on your budget:
• What products or services you are selling, including prices and estimated volumes
• Key drivers for expenses, like how many employees you'll need and your marketing initiatives1
• A typical budget worksheet should be carried through three years, so your lender can see how you expect to
generate the cash to make your monthly loan payments.
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• Startup Costs Worksheet
• A startup costs worksheet answers the question "What do you need the money for?" In other words, it shows
all the purchases you will need to make in order to open your doors for business. This could be called a
"Day One" statement because it's everything you will need on your first day of business.
• Include:
• Facilities costs, like deposits on insurance and utilities
• Office equipment, computers, phones
• Supplies and advertising materials like signs and business cards
• Fees to set up your business website and email
• Legal fees licenses and permits
• Profit and Loss Statement/Income Statement
• After you have completed the monthly budget and you have
gathered some other information, you should be able to
complete a Profit and Loss or Income Statement. This
statement shows your business activity over a specific period
of time, like a month, quarter, or year.
• To create this statement, you'll need to list all your sources to
get your gross income over that time. Then, list all expenses
for the same time.
• Note
• Because you haven't started yet, this statement is a called a
projected P&L, because it projects out your estimates into the
future.2
• This statement gathers up all your sources of income,
including shows your profit or loss for the year and how much
• Break-Even Analysis
• A break-even analysis shows your lender that you know the point at which
you will start making a profit or the price that will cover your fixed costs. The
break-even analysis is primarily for businesses making or selling products, or
to set the right price for a product or service.3
• It's usually shown as a graph with sales volume on the X axis and revenue on
the Y axis. Then fixed an variable costs (those you must pay) are included.
The break-even point marks the place where costs are covered.
• This analysis can also be useful for service-type businesses to show an
overall profit point for specific services. If you include a break-even analysis,
be sure you can explain it.
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• Beginning Balance Sheet
• A startup balance sheet is difficult to prepare, even if there isn't much to
include. The balance sheet shows the value of the assets you have
purchased for startup, how much you owe to lenders and other creditors, and
any initial investments you have made to get started. The date for this
spreadsheet is the day you open the business.
• Sources and Uses of Funds Statement
• Large businesses use Sources and Uses of Funds statements in
their annual reports, but you can create a slightly different simple
statement to show your lender what you need the money for, what
sources you have already, and what's left over to be financed.
• To create this statement, list all your startup and working
capital(on-going cash needs), how much collateral you will be
bringing to the business, other sources of funding, and how much
you need to borrow.
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• Optional: A Business Requirements Document
• A business requirements document is similar to a proposal
document, but for a larger, more complex project or startup. It
gives a complete picture of the project or the business plan. It goes
into more detail on the project that will be using the financial
statements.
• Include Financial Statements in Your Business Plan
• You will need a complete startup business plan to take to a
bank or other business lender. The financial statements are a
key part of this plan. Give the main points in the
executive summary and include all the statements in the
financial section.
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• Finally, Check for Mistakes!
• Before you submit your startup business plan and financial
statements, check this list. Don't make these
common business plan mistakes!
• Check all numbers for accuracy and consistency. Especially
make sure the amounts you are requesting are specific and
that they are the same throughout all the parts of your
business plan.