Management and Planning Series

BUSINESS PLAN FOR THE SMALL CONSTRUCTION FIRM



Management and Planning Series


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TABLE OF CONTENTS

INTRODUCTION
A Note on Using This Publication 1
What's in This for You? 1
Why Are You in Business? 1
What Business Are You In? 1

MARKETING
Where Is Your Market? 2
Advertising 2
Competition 3
Sales Strategy 3

PLANNING THE WORK 4

GETTING THE WORK DONE
Personnel Requirements 7
Equipment Requirements 7

PUT YOUR PLAN INTO DOLLARS
Expenses 8
Matching Money and Expenses 8
Is Additional Money Needed? 8

CONTROL AND FEEDBACK 9

IS YOUR PLAN WORKABLE? 9

IMPLEMENTING YOUR PLAN 9

KEEPING YOUR PLAN CURRENT 10

APPENDIXES
A. Income Projection Statement 11
B. Cash Flow Projection Construction Firms 15
C. Balance Sheet 17
D. How to Write a Business Plan 21
E. Information Resources 25
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INTRODUCTION

A business plan can provide you, the owner-manager or
prospective owner-manager of a small construction firm, with a
pathway to profit. This publication is designed to help you
develop a business plan.

In building a pathway to profit you need to consider the
following questions: What business am I in? What do I sell? Where
is my market? Who will buy? Who is my competition? What is my
sales strategy? How much money is needed to operate my firm? How
will I get the work done? What management controls are needed?
How can they be carried out? When should I revise my plan? Where
can I go for help?

No one can answer such questions for you. As the owner-manager,
you have to answer them as you draw up your business plan. This
publication is a combination of text and work spaces so you can
write in the information you gather in developing your business
plan.

A Note on Using This Publication.

It takes time, energy and patience to draw up a satisfactory
business plan. Use this publication to record your ideas and the
supporting facts. And, above all, make any needed changes in your
plan as it unfolds. Keep in mind that anything you leave out of
the picture will create an additional drain on your money when it
unexpectedly crops up later. If you leave out or ignore too many
items, your business is headed for disaster.

Remember, your final goal is to put your plan into action. More
will be said about this step later.

What's in This for You?

The hammer, trowel, pliers and wrench are well-known tools of the
construction industry. Management is another tool that you as the
owner-manager of a construction firm must use. Each job must be
planned and organized if the firm is to run smoothly and
efficiently. A business plan will help you increase your
management skills.

Because of the diversification in the construction industry,
you may be engaged in residential, commercial or industrial
construction. You may be either a general or a specialty
contractor. Regardless of which field you're in, the same basic
managerial skills are needed. This plan is a guide to the various
areas that managers are concerned with. As you work through this
plan, adapt it to your particular needs.

When complete, your business plan will help guide your daily
business activities. When you know where you want to go, it is
easier to plan how to get there. Also, the business plan can help
you communicate your goals and the specifics of your operations
to employees, suppliers, bankers and others.

Whether you are just thinking about starting your own firm or
have already started it, the business plan can be a great
benefit. As your management skills increase so will the number of
jobs you can effectively control. The careful completion of this
plan may point out problems and limitations of your operation.
This is important. To be a successful contractor you must not
only know your business thoroughly, but also know your limits and
seek professional advice in these areas.

Why Are You in Business?

Most contractors are in business to make money and be their own
boss -- both very important reasons. But don't forget, no one is
likely to stay in business unless he or she also satisfies a
consumer need at a competitive price -- the reward of which is
profit.

In the first years of business, your profits may seem like a
small return for the long hours, hard work and responsibility of
being the boss. But there are other rewards associated with
having your own business. For example, you may find satisfaction
in helping to put groceries on your employees' tables. Or maybe
your satisfaction will come from building a business you can pass
on to your children.

Why are you in business? _______________________________________

________________________________________________________________

________________________________________________________________

What Business Are You In?

At first glance this may seem a rather silly question. You may
say, If there is one thing I'm sure of, it's what business I'm
in. But wait. Look further into the question. Suppose you say, I
build houses. Are you a speculative or custom builder? Are you a
remodeler? Are you a subcontractor? Can you schedule a complete
job and make money? Defining your business clearly and tailoring
your business plan to your definition will help increase your
profits.

Consider this example. For many years, Bob Rogers had a
construction business that specialized in designing and building
commercial bars. He had enough business to keep him and his crew
busy until the early 1980s, when sales began to fall off. By
moving his shop to smaller quarters with less overhead and by
laying off half his crew, Mr. Rogers was able to maintain his
business to his satisfaction for the rest of his life.

After his death, his son realized that he was not in the business
of building commercial bars but rather of custom finishing. Today
the son's business is prospering. He remodels kitchens and builds
cabinets in private homes and also does other types of finish
work and carpentry. The son's ability to redefine the nature of
the father's business allowed him to gain greater benefits.

In the space below, state what business you're really in.
________________________________________________________________

________________________________________________________________

What are your reasons for this choice?
________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________
________________________________________________________________

MARKETING

When you have decided what sort of construction business you're
in, you have made your first marketing decision. Now, in order to
sell your service or product, you must face other marketing
decisions.

Your marketing objective is to find enough jobs at the right
times to provide a steady flow of income for your business. Start
by coordinating your jobs to eliminate the down time between
them. An individual who cannot come up with enough ideas to keep
a crew working 12 months a year may not be ready to run a
construction business.

Where Is Your Market?

Describe your market area in terms of customer profile (age,
education, income, etc.) and geography. A customer profile will
help you focus your advertising to reach your potential
customers. For example, if you are a custom builder, you may
decide to build homes in the $100,000-$250,000 price range. This
would mean that your customers will have incomes in the middle-
to upper-middle-class ranges. You may also decide you can earn a
profit by building these homes within a radius of 30 miles from
your office. In the space below describe your market.

My product Types of Location
customers of customers
____________________ _____________________ ___________________

____________________ _____________________ ___________________

____________________ _____________________ ___________________

____________________ _____________________ ___________________

Now that you have described what you want in terms of customer
profile and location, what is it about your operation that will
make these people want to buy your product or service? For
instance, quality work, competitive prices, guaranteed completion
dates, effective advertising, unique design, etc., may set your
business apart from competitors. Write your answer below.

________________________________________________________________

________________________________________________________________

________________________________________________________________

Advertising

You have described what you're marketing (your product or
service), who is going to buy it and why they're going to buy it.
Now you must decide the best way to let your prospective
customers know about your product.

In the space below jot down key words and ideas that your
customers should remember about your product or service. This
will help you to create effective advertising.
________________________________________________________________

________________________________________________________________

What form of advertising should you choose? Ask the local media
(newspapers, radio and television stations and direct mail
printers) for information about their services and results they
offer.

How you spend advertising money is your decision, but don't fall
into the trap that snares many small business managers. They
consider themselves experts on advertising copy and media
selection without any experience in these areas. Be sure to seek
professional advice and compare what different advertisers offer.
Complete the work block to determine what form of advertising is
best for selling your construction services.
____________________________________________________

Advertising Workblock

Form of Size of Frequency Cost of Estimated
Advertising Audience of Use single ad cost

__________ ____ _____ x $ _________ = $ ________

__________ ____ _____ x $ _________ = $ ________

__________ ____ _____ x $ _________ = $ ________

__________ ____ _____ x $ _________ = $ ________

Total $ ________
_______________________________________________________

Competition

Competition in the construction industry often results in low
profit margins. However, if you are just starting or are a
relatively small firm, you may not be at a disadvantage. Often
smaller firms can compete with bigger outfits because of lower
overhead expenses. For example, your office may be in your home,
or you may be able to work right out of your truck, saving the
expense of a field office.

Competition is largely based on prices, although quality and
efficiency are factors also considered by potential customers.
Poor financial planners have a high failure rate. For this
reason, plan carefully, particularly in the areas of estimating
and bidding.

In order to measure your competition, answer the following
questions.

Who will be your major competitors?

_________________________________________________________________

How will you compete against them?

_________________________________________________________________

Sales Strategy

The market for the construction industry is unique in many ways.
It depends on such variables as the state of the economy, local
employment stability, the seasonal quality of the work, labor
relations, good subcontractors and interest rates.

Also, as a contractor, you are unavoidably dependent on others,
such as customers or financial institutions, for payment, and on
other contractors for performance of their work. Consider your
cash flow when you estimate and bid on a job. You must be paid in
time to meet your own obligations.

Estimating

Whether an owner-manager in the construction business
succeeds -- i.e., makes a profit -- depends to a great extent on
bidding practices. Therefore, you must make careful and complete
estimates.

Many successful contractors attribute their success to their
estimating procedures. Before submitting a bid, they calculate
all job costs by dividing the job into work units and pieces of
material, and then assigning a cost to each item. The total of
these costs will be the direct construction cost. They also
estimate the indirect costs of a job, such as overhead
expenses -- the costs of maintaining the office, trucks, license
fees, etc. The estimate should also include any interest charges
on borrowed money, insurance fees, surety bond premiums, travel
expenses, advertising costs, office salaries, lawyer's fees, etc.
These must also be paid out of gross income.

Trade associations, as one of their services, often provide
members with a package of business forms. The cost estimate form
is usually included in this package. The obvious advantage of
these forms is that they are specifically designed for a
particular trade.

Regardless of what cost estimate form you use, it should include
headings for activity, material, labor, subcontracts and
estimated cost. It also should have areas for direct construction
costs, indirect construction costs, overhead and profit. In
addition, a column for the actual cost compared to the estimated
cost of a specific work item will allow you to evaluate the
profitability of a job after it is completed. This will show you
where your estimates were high or low, and enable you to adjust
future bids on similar projects. This column will also be
necessary when it comes time for your financial accounting.

Bidding

Your decision to bid or not to bid on a particular job should be
determined by several factors. First, do you have the capacity to
complete the job on schedule and according to the specifications?
Beware of overextending yourself out of business. You must
operate within your known capabilities. On any job, you must
follow all the details of the work yourself, or find competent
supervision.

Bonding

Bonding companies work with construction companies to ensure that
the construction firm fully commits to the terms of its contract.
Usually bonding companies base their fees for bonds on a
percentage of the contract price. For example, if you have a
$100,000 and your bonding company charges 10 percent of the
contract price, you will pay $10,000 for bonds.

There are three main types of bonds. Bid bonds assure that the
successful bidder is prepared to perform the work according to
the terms of the contract. Performance bonds assure completion of
the job according to plans and specifications. Payment bonds
assure anyone dealing with the bonded contractor that he or she
will be paid.

The effect of being a bonded contractor is evident in the area of
competition. The customer, by requiring that the contractor be
bonded, is more or less assured of adequate completion of the
job. Therefore, customers are more likely to compare contractors
on the basis of price.

With the widespread use of bonding requirements, the competition
generated often leads the inexperienced contractor to submit bids
that are unrealistically low. One or two such mistakes can spell
bankruptcy.

Being a bonded contractor is a good advertising point. Another
advantage is that banks are often more lenient toward bonded
contractors.

Will you need bonding:____often____occasionally, or ____seldom?

Where will you get your bond?

_________________________________________________________________

What will the terms be?

_________________________________________________________________

Bond companies usually require the contractor to have proven
experience and the financial capability to complete a project.
Meeting these requirements can be a real stumbling block to a new
construction firm.

The U.S. Small Business Administration (SBA) has a surety bond
program designed to help small and emerging contractors who might
previously have been unable to get bonding. SBA is authorized to
guarantee up to $1.25 million or 90 percent of losses incurred
under bid, payment or performance bonds. Applications for this
assistance are available from any SBA field office.
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PLANNING THE WORK

Once your marketing efforts result in jobs, the problem becomes
one of production. How will you plan the work so that the job
gets done on time?

No matter how you plan the work, your plan should help you
maintain your production schedule and adjust production to meet
changing conditions, such as bad weather.

As you plan your work schedule, keep in mind the timing of starts
and the timing of the various steps in the construction of your
projects. Don't forget to consider the size and nature of each
job also. With sufficient help and supervisory personnel, you can
engage in your maximum number of projects.

The work schedule should show the various operations in sequence
and assign a working day and calendar day to each. Several
operations may be in progress simultaneously. A glance at your
work schedule will let you know if work is progressing on time.
Many companies offer commercial scheduling boards designed for
this purpose.

Below is a partial work schedule to demonstrate how yours may be
set up. Note that there is a column that can be filled in with
either a solid mark or an X to indicate either partial or
completed work. When you look at a particular calendar day, an X
next to it would indicate that you're on schedule. An open square
indicates a delay. Here, then, is a convenient way to spot delays
so you can take corrective action.

You should save your work schedules as a basis for future
estimates. For example, if you are estimating a job similar to
one you've done before, you'll already have information on the
steps of production, what materials you'll need and when, how
long the job will take and any peculiarities that may affect job
completion. When you consider all these things, you'll be more
likely to submit an accurate bid.

Working Day
Calendar
Activity Start Finish day Complete
1. Layout 1 1 15 ( X )
2. Foundation forms 1 2 16 ( X )
3. Foundation pour 3 3 19 ( \ )
(indicates half
complete)

Careful records can also indicate how many workers you will need.
If the work falls behind schedule, you may need to bring more
workers to the job to complete it on time. In this way, you will
avoid a possibly larger financial loss from paying a penalty for
late work (if that is called for in your contract). Also, records
will indicate any changes needed in the organizational structure
of your firm.
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GETTING THE WORK DONE

If your firm is going to run efficiently, you will need
organization because, as your company grows, you will not be able
to do all the work. You have to delegate work, responsibility and
authority. An organizational chart is a useful device for
accomplishing this, as it clearly shows who is responsible for
the major activities of your business.

At first, many construction companies are single-person shows. It
is up to the owner to do almost everything. In this case the
organizational chart might look something like Chart 1.

Chart 1

Contractor
(owner)

Marketing Clerical Operations Personnel Controls Bonds

Financial Equipment Sales Purchasing Estimates/Bids
Mgmnt.
Job Supervision Time Keeper Job Supervision

All report to Contractor


As the company grows, perhaps specialists are added, such as an
engineer/estimator, an office manager and a general
superintendent. The organizational chart then begins to look like
Chart 2.

Chart 2

Contractor

Operations
Sales
Marketing
Personnel
Company Policy

Engineer/Estimator General Superintendent Office Manager
Estimates-Bids Job Foreman Financial Mgmt
Contract Administa. Job Foreman Bonds
Cost Analysis Clerical
Equipment Purchasing
Inspections


Often, people with complementary experience and skills, such as
work experience and office experience, will form a partnership.
The organizational chart will look like Chart 3.

Chart 3

Partners
(owners)

Partner Partner
Construction Office Administration

Operations Sales
Contracts Organization
Inspections Personnel
Job Management Financial Management
Equipment Purchasing
Estimates - Bids
Job Foreman
Job Foreman

In the space below, draw an organizational chart for your
company.
Chart 4

President
(Your Name)










Personnel Requirements

Will you carry a permanent crew or hire workers as the need
arises? _______________________________________________________

Will you use union or nonunion labor? __________________________

How many workers will you need? _________________________________

What hourly rate will you pay?___________________________________

What will fringe benefits cost? _________________________________

Will you supervise the work yourself or hire a foreman? _________

If you hire a foreman, what will his or her salary be?___________

Will you need clerical help? ____________________________________

What will it cost? _____________________________________________


Equipment Requirements

What special equipment will you need (assuming your work force
will supply its own hand tools)?

Equipment Rent Buy Your cost

____________________ ___________ ___________ $______________
____________________ ___________ ___________ $______________
____________________ ___________ ___________ $______________
____________________ ___________ ___________ $______________
____________________ ___________ ___________ $______________
____________________ ___________ ___________ $______________

Will you need an office or use your home?________________________

If you will need an office, what will the rent, utilities and
other expenses cost? ____________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

PUT YOUR PLAN INTO DOLLARS

The basic unit of financial management in the construction
business is the job. The financial aspects of the job must be
planned as carefully as the construction work necessary to do the
job. The payment for each job must cover the direct and indirect
construction costs as well as the allocated share of overhead.

Accounting requirements will vary from company to company and
from trade to trade. Your accountant will help you set up the
accounting system that will best meet your needs. However, you
must make the overall plans yourself. You must develop the goals
necessary to guide and manage your business. This overview will
prove invaluable in establishing a good working relationship with
your banker (or other lender) and your bonding company.

In your financial planning, the first consideration is the source
of income. In dollars, how much business (sales) will you be able
to do in the next 12 months? $ _________

Expenses

In connection with annual sales volume, you need to think about
expenses. For example, how much will it cost you to do $100,000
worth of work? And even more important, what will be left as
profit at the end of the year?

Profit is your pay. Even if you pay yourself a salary for living
expenses, your business must make a profit if it is to continue
and pay back the money and time you have invested in it. Profit
helps your firm to be strong and to have a financial reserve for
any lean periods.

The income projection statement in Appendix A is designed to help
you figure your yearly expenses. To use this worksheet, you need
to get one set of figures -- the operating ratios (expenses as a
percentage of sales) for your line of business. These operating
ratios will help you determine if the figures on your income
projection are in the proper range for your business in your
location. If you don't have these figures, check with the trade
association that serves your area of the construction industry.

Matching Money and Expenses

After you have planned your month-to-month expenses, the next
question is, Will there be enough money coming in to meet these
expenses and to sustain your company in the event that there is
down time until your next job?

The cash flow projection is a management tool that can eliminate
much of the anxiety during lean months. Use the cash flow
projection in Appendix B or ask your accountant to estimate the
amounts of cash that you expect to flow through your business
during the next 12 months.

Remember that the expenses of buying the materials and supplies
for a particular job may occur a month or two before a payment is
made. The estimated cash flow projection should show this.

Is Additional Money Needed?

Your planning may show periods when you will be short of cash.
For example, when you start a job you will need materials and
supplies. It may be a month or two before your first payment.
What do you do in the interim if trade credit will not completely
satisfy your cash needs?

Your bank may be able to help with a short-term loan. A banker
who is to lend you money on either a short- or long-term basis
will want to know your company's financial condition. The bank
officer will ask to see a balance sheet.

A blank balance sheet is included in Appendix C. Even if you
don't need to borrow money, use it as an outline of your firm's
financial condition. You may want to show your plan to the bank
that handles your company's account. It is never too early to
build good relations with your banker. A time may come when you
may have to seek funds from your banker.
_________________________________________________________________

CONTROL AND FEEDBACK

To make your plan work you will need feedback at the various
stages of your management process -- i.e., when planning,
directing and controlling the job as well as adequate financing.
The management controls you set up should supply the information
you need to keep your operation on the money.

During the planning stage, you will need to calculate your bid
carefully. To direct a job, you will need your job cost analysis
to make sure that the job is going to make a profit. To control
the job, you must organize your employees' work schedules.
Personal follow up ensures efficient performance by your
personnel.
_________________________________________________________________

IS YOUR PLAN WORKABLE?

Now that you've planned this far, step back and take a look at
your plan. Is it realistic? Can you do enough business to make a
living?

If your plan isn't workable, now is the time to revise it, not
after you've invested your time and money. If you feel that some
revisions are needed before you start your own business, then
make them. Go back to the cash flow projection and adjust the
figures. Show your business plan to someone not involved in
developing the plan. Your banker, contact person at SBA (SCORE
counselor) or any outside advisor may be able to point out strong
points that, if emphasized, could turn into dollars.

If you have serious doubts about your business or your ability to
run it, it might be better to delay going into business until you
feel as comfortable with the tools of management as you do with
the tools of your trade.
_________________________________________________________________

IMPLEMENTING YOUR PLAN

When your plan is as specific as possible, you are ready to
implement it. Keep in mind that action is the difference between
a plan and a dream. If a plan is not acted on, it is of no more
value than a pleasant dream that evaporates over the breakfast
coffee.

The first step will be acquiring enough capital to get started.
Do you already have the money? Will you borrow it from friends,
relatives or a bank? What else needs to be done? Look for
positive action steps that will get your business rolling. For
example, where and when will you hire competent employees? Where
and how will you get whatever licenses you need to be a
contractor? (These requirements differ from state to state. A
summary of licensing, prequalification and tax information can be
found in the Summary of State Regulation and Taxes Affecting
General Contractors, available from the American Insurance
Association, 1130 Connecticut Avenue, NW, Washington, DC 20036,
ATTN: Publications.)

In the following space, list what you must do to get your
business off the drawing board and into action, and give each
item a completion date.

Action Completion date

________________________ _____________________
________________________ _____________________
________________________ _____________________
________________________ _____________________
_________________________________________________________________

KEEPING YOUR PLAN CURRENT

Expect business conditions to change and be ready to adjust your
plan accordingly. The difference between successful and
unsuccessful planning is often the ability to watch for changes.
Review your plan once a month. As an owner-manager, you must

* Be alert to the changes that come about in your industry,
market and customers.

* Check your plan against these changes periodically.

* Determine what revisions, if any, are needed in your plan
and implement them.
_________________________________________________________________

APPENDIX A: INCOME PROJECTION STATEMENT

Industry J F M A M J J A S O N D Annual Annual
% total %

Total net sales
(revenues) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Cost of sales _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Gross profit _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Gross profit
margin _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Controllable
expenses
Salaries/wages _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Payroll expenses _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Legal/accounting _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Advertising _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Automobile _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Office supplies _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Dues/subscriptions _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Utilities _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Miscellaneous _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Total controllable
expenses _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Fixed expenses
Rent _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Depreciation _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Utilities _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Insurance _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Licenses/permits _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Loan payments _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Miscellaneous _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Total fixed
expenses _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Total expenses _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Net profit (loss)
before taxes _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Taxes _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Net profit (loss)
after taxes _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

The income projection (profit and loss) statement is valuable as
both a planning tool and a key management tool to help control
business operations. It enables the owner-manager to develop a
preview of the amount of income generated each month and for the
business year, based on reasonable predictions of monthly levels
of sales, costs and expenses.

As monthly projects are developed and entered into the income
projection statement, they can serve as definite goals for
controlling the business operation. As actual operating results
become known each month, they should be recorded for comparison
with the monthly projections. A completed income statement allows
the owner-manager to compare actual figures with monthly
projections and to take steps to correct any problems.

Industry Percentage

In the industry percentage column, enter the percentages of total
sales (revenues) that are standard for your industry which are
derived by dividing

cost/expense items by total net sales x 100%

These percentages can be obtained from various sources, such as
trade associations, accountants or banks. The reference librarian
in your nearest public library can refer you to documents that
contain the percentage figures, for example, Robert Morris
Associates' Annual Statement Studies (1 Liberty Place,
Philadelphia PA 19103)

Industry figures serve as a useful benchmark against which to
compare cost and expense estimates that you develop for your
firm. Compare the figures in the industry column to those in the
annual percentage column

Total Net Sales (Revenues)

Determine the total number of units or products or services you
realistically expect to sell each month in each department at the
prices you expect to get. Use this step to create the projection
to review your pricing practices.

* What returns, allowances and markdowns can be expected?

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

Cost of Sales

The key to calculating your cost of sales is that you do not
overlook any costs that you have incurred. Calculate cost of
sales for all products and services used to determine total net
sales. Where inventory is involved, do not overlook
transportation costs. Also include any direct labor.

Gross Profit

Subtract the total cost of sales from the total net sales to
obtain gross profit.

Gross Profit Margin.

The gross profit margin is expressed as a percentage of total
sales (revenues) it is calculated by dividing

gross profits by total net sales

Controllable Expenses

* Salary expenses -- Base pay plus overtime.

* Payroll expenses -- Include paid vacations, sick leave,
health insurance unemployment insurance and social security
taxes.

* Outside services -- Include costs of subcontracts, overflow
work and special or one-time services.

* Supplies -- Services and items purchase for use in the
business.

* Repairs and maintenance -- Regular maintenance and repair,
including periodic large expenditures such as painting.

* Advertising -- Include desired sales volume and classified
directory advertising expenses.

* Car, delivery and travel -- Include charges if personal car
is used in business, including parking, tolls, buying
trips, etc.

* Accounting and legal -- Outside professional services.

Fixed Expenses

* Rent -- List only real estate used in the business

* Depreciation -- Amortization of capital assets.

* Utilities -- Water, heat, light, etc.

* Insurance -- Fire or liability on property or products.
Include workers' compensation.

* Loan repayments -- Interest on outstanding loans.

* Miscellaneous -- Unspecified; small expenditures without
separate accounts.

Net Profit (loss) * Subtract total expenses from gross
(before taxes) profit.

Taxes * Include inventory and sales taxes,
excise tax, real estate tax, etc.

Net Profit (loss) * Subtract taxes from net profit
(after taxes) (before taxes)

Annual Total * For each of the sales and expense
items in your income projection
statement, add all the monthly
figures across the table and put the
results in the annual total column.

Annual Percentage * Calculate the percentage by dividing
annual total by
total net sales x 100%

* Compare this figure to the industry
percentage in the first column
_________________________________________________________________

APPENDIX B: CASH FLOW PROJECTION--CONSTRUCTION FIRMS

J F M A M J J A S O N D
1. Expected available cash _ _ _ _ _ _ _ _ _ _ _ _

2. Cash balance (beginning of
month) _ _ _ _ _ _ _ _ _ _ _ _

3. Expected Receipts
Job A _ _ _ _ _ _ _ _ _ _ _ _
Job B _ _ _ _ _ _ _ _ _ _ _ _
Job C _ _ _ _ _ _ _ _ _ _ _ _

4. Bank loans _ _ _ _ _ _ _ _ _ _ _ _

Total expected cash _ _ _ _ _ _ _ _ _ _ _ _

5. Expected cash requirements
Job A _ _ _ _ _ _ _ _ _ _ _ _
Job B _ _ _ _ _ _ _ _ _ _ _ _
Job C _ _ _ _ _ _ _ _ _ _ _ _

Equipment payments _ _ _ _ _ _ _ _ _ _ _ _

Taxes _ _ _ _ _ _ _ _ _ _ _ _

Insurance (including surety
bond payments) _ _ _ _ _ _ _ _ _ _ _ _

Overhead _ _ _ _ _ _ _ _ _ _ _ _

6. Loan repayments
1. _ _ _ _ _ _ _ _ _ _ _ _
2. _ _ _ _ _ _ _ _ _ _ _ _
3. _ _ _ _ _ _ _ _ _ _ _ _

Total cash required

Cash balance (end of month)_ _ _ _ _ _ _ _ _ _ _ _

7. Total loans due to bank _ _ _ _ _ _ _ _ _ _ _ _
_____________________

INSTRUCTIONS FOR CASH FLOW PROJECTION--CONSTRUCTION FIRMS

1. EXPECTED AVAILABLE CASH
The total balance in all your business bank accounts.

2. CASH BALANCE
The cash balance, positive or negative, in the business at
the beginning of each month.

3. EXPECTED RECEIPTS
Separate your income by all of the jobs (e.g., A,B,C) you
have at one time.

4. BANK LOANS
List proceeds from each bank loan in the month that you
receive it.

5. EXPECTED CASH REQUIREMENTS
Separate your expenses by all of the jobs (A,B,C) that you
list under receipts.

6. LOAN REPAYMENTS
Separate monthly payments for each of your loans. Your debt
load for a given month will vary depending on the
repayment schedule of the loan. Commercial loans are
typically figured on different schedules; for example, some
of your equipment may be paid on monthly installments, other
equipment may be on a quarterly installment schedule, and a
capital asset loan may be repaid in annual installments.

7. TOTAL LOANS DUE TO BANK
Add up all loan repayments for each month and place them on
the bottom line of your cash flow projection. This will
help you monitor the amount of money from your business
that is going to debt service.

_________________________________________________________________

APPENDIX C: BALANCE SHEET

COMPANY NAME

As of _________________________, 19_____

Assets Liabilities

Current assets Current Liabilities

Cash __________ Accounts Payable __________

Petty Cash __________ Notes Payable __________

Accounts Receivable__________ Interest Payable __________

Inventory __________ Taxes Payable
Fed. income tax __________
Short-term Invest- State income tax __________
ments __________ Self-employment __________
Sales tax (SBE) __________
Prepaid expense __________ Property tax __________

Long-term invest- Payroll accrual __________
ments __________
Long-term liabil-
Fixed assets bilities

Land __________ Notes payable __________
____________
Buildings __________
Total liabilities __________
Improvements __________ ______________________________

Equipment __________ Net worth (owner equity)

Furniture __________ Proprietorship __________
or Partnership
Automobiles/ (name's) equity __________
vehicles __________ (name's) equity __________
or
Other assets Corporation
Capital stock __________
1. __________ Surplus paid in __________

Retained earnings__________
3. __________ _____________

4. __________ Total net worth __________

_____________ _____________
Total liabilities
Total assets __________ and net worth _____________
(Total assets will always equal total liabilities and
total net worth)
____________________________________________________

INSTRUCTIONS FOR BALANCE SHEET

Figures used to compile the balance sheet are taken from the
previous and current balance sheet as well as the current income
statement. The income statement is usually attached to the
balance sheet. The following text covers the essential elements
of the balance sheet.

At the top of the page fill in the legal name of the business,
the type of statement and the day, month and year.

Assets

List anything of value that is owned or legally due the business.
Total assets include all net values. These are the amounts
derived when you subtract depreciation and amortization from the
original costs of acquiring the assets.

Current Assets

* Cash -- List cash and resources that can be converted into
cash within 12 months of the date of the balance sheet (or
during one established cycle of operations). Include money
on hand and demand deposits in the bank, e.g., checking
accounts and regular savings accounts.

* Petty cash -- If your business has a fund for small
miscellaneous expenditures, include the total here.

* Accounts receivable -- The amounts due from customers in
payment for merchandise or services.

* Inventory -- Includes raw materials on hand, work in
progress and all finished goods, either manufactured or
purchased for resale.

* Short-term investments -- Also called temporary investments
in marketable securities, these include interest- or
dividend-yielding holdings expected to be converted into
cash within a year. List stocks and bonds, certificates of
deposit and time-deposit savings accounts at either their
cost or market value, whichever is less.

* Prepaid expenses -- Goods, benefits or services a business
buys or rents in advance. Examples are office supplies,
insurance protection and floor space.

Long-term investments

Also called long-term assets, these are holdings the business
intends to keep for at least a year and that typically yield
interest or dividends. Included are stocks, bonds and savings
accounts earmarked for special purposes.

Fixed Assets

Also called plant and equipment. Includes all resources a
business owns or acquires for use in operations and no intended
for resale. Fixed assets, except for land, are listed at cost
less depreciation. Fixed assets may be leased. Depending on the
leasing arrangement, both the value and the liability of the
leased property may need to be listed on the balance sheet.

* Land -- List original purchase price without allowances
for market value.

* Buildings

* Improvements

* Equipment

* Furniture

* Automobiles/vehicles

Liabilities

Current liabilities

List all debts, monetary obligations and claims payable within 12
months or within one cycle of operations. Typically they include
the following:

* Accounts payable -- Amounts owed to suppliers for goods and
services purchased in connection with business operations.

* Notes payable -- The balance of principal die to pay off
short-term debt for borrowed funds. Also include the
current amount due of total balance on notes whose terms
exceed 12 months.

* Interest payable -- Any accrued fees due for use of both
short- and long-term borrowed capital and credit extended
to the business.

* Taxes payable -- Amounts estimated by an accountant to have
been incurred during the accounting period.

* Payroll accrual -- Salaries and wages currently owed.

Long-term Liabilities

Notes payable -- List notes, contract payments or mortgage
payments due over a period exceeding 12 months or one cycle of
operations. They are listed by outstanding balance less the
current portion due.

Net Worth

Also called owner's equity, net worth is the claim of the
owner(s) on the assets of the business. In proprietorship or
partnership, equity is each owner's original investment plus any
earnings or withdrawals.

Total Liabilities and Net Worth

The sum of these two amounts must always match at of total
assets.
_________________________________________________________________

APPENDIX D: HOW TO WRITE A BUSINESS PLAN

The following pages provide a suggested outline of the material
that should be included in your business plan. Your final plan
may vary according to your needs or because of the individual
requirements of your lender.

What Are the Benefits?

Every business can benefit from the preparation of a carefully
written plan. There are two main purposes for writing that plan:

1. To serve as a guide during the lifetime of the business.
It is the blueprint of your business and will provide you
with the tools for analysis and change.

2. A business plan is a requirement if you are planning to
seek a loan. It will provide potential lenders with
detailed information on all aspects of your company's past
and current operations and provide future projections.

Business Plan Outline

I. Cover sheet

Serves as the title page of your business plan. It
should contain the following:

* Name of the company
* Company address
* Company phone number (include area code)
* Logo (if you have one)
* Names titles addresses phone numbers (include area code)
of owners
* Month and year your plan was issued
* Name of preparer

II. Statement of purpose

(Same as executive summary.) This is the thesis statement
and includes business plan objectives. Use the key words
(who, what, where, when, why, how, and how much) to
briefly tell about the following:
* What your company is (also who what where and when).
* What your objectives are.
* If you need a loan why you need it.
* How much you need.
* Why you will be successful.
* How and when you plan to repay your loan.

III. Table of contents

A page listing the major topics and references.

IV. The business

Covers the details of your business. Include information
about your industry in general, and your business in
particular. Address the following:

* Legal structure -- Tell what legal structure you have
chosen and state reasons for your choice.
* Description of the business -- Detail your business. Tell
about your history present status and future projections.
Outline your product or service in terms of marketability.
Project a sense of what you expect to accomplish in the
next few years.
* Products or services -- Give a detailed description of
your products from raw materials to finished items. Tell
about your manufacturing process. If you provide a service
tell what it is how it is provided and why it is unique.
List future products or services you plan to provide.
* Location -- Describe site and why it was chosen. (If
location is important to your marketing plan focus on this
in the marketing section below.)
* Management -- Describe who is behind the business. For
each owner tell about responsibilities and abilities.
Support with resumes.
* Personnel -- Who will be doing the work why are they
qualified what is their wage what are their
responsibilities?
* Methods of record keeping -- What accounting system will
you use? Who will do your record keeping? Do you have a
plan to help you use your records in analyzing your
business?
* Insurance -- What kinds of insurance will you need? What
will these cost and who will you use for a carrier?
* Security -- Address security in terms of inventory control
and theft of information.

V. Marketing

Covers the details of your marketing plan. Include
information about the total market with emphasis on your
target market. Identify your customers and tell about the
means to make your product or service available to them.

* Target market -- Identify characteristics of your
customers. Tell how you arrived at your results. Back up
information with demographics questionnaires and surveys.
Project size of your market.

* Competition -- Evaluate indirect and direct competition.
Show how you can compete. Evaluate competition in terms
of location market and business history.

* Methods of distribution -- Tell about the manner in which
products and services will be made available to the
customer. Back up decisions with statistical reports rate
sheets etc.
* Advertising -- How will your advertising be tailored to
your target market? Include rate sheets promotional
material and time lines for your advertising campaign.
* Pricing -- Pricing will be determined as a result of
market research and costing your product or service. Tell
how you arrived at your pricing structure and back it up
with materials from your research.
* Product design -- Answer key questions regarding product
design and packaging. Include graphics and proprietary
rights information.
* Timing of market entry -- Tell when you plan to enter the
market and how you arrived at your decision.
* Location -- If your choice of location is related to
target market cover it in this section of your business
plan. (See location in the business section of this
outline.)
* Industry trends -- Give current trends project how the
market may change and what you plan to do to keep up.

VI. Financial documents

These are the records used to show past, current and
projected finances. The following are the major documents
you will want to include in your business plan. The work is
easier if these are done in the order presented.

* Summary of financial needs -- This is an outline
indicating why you are applying for a loan and how much
you need.
* Sources and uses of funds statement -- It will be
necessary for you to tell how you intend to disperse the
loan funds. Back up your statement with supporting data.
* Cash flow statement (budget) -- This document projects
what your business plan means in terms of dollars. It
shows cash inflow and outflow over a period of time and
is used for internal planning.
* Cash flow statements show both how much and when cash
must flow in and out of your business.
* Three-year income projection -- A pro forma income
statement showing your projections for your company for
the next three years. Use the pro forma cash flow
statement for the first year's figures and project the
next according to economic and industry trends.
* Break-even analysis -- The break-even point is when a
company's expenses exactly match the sales or service
volume. It can be expressed in total dollars or revenue
exactly offset by total expenses or total units of
production (cost of which exactly equals the income
derived by their sales). This analysis can be done either
mathematically or graphically.

Note: The following are actual performance statements
reflecting the activity of your business in the past. If
you are a new business owner your financial section will
end here and you will add a personal financial history.
If you are an established business you will include the
actual performance statements that follow.

* Balance sheet -- Shows the condition of the business as
of a fixed date. It is a picture of your firm's financial
condition at a particular moment and will show you
whether your financial position is strong or weak. It is
usually done at the close of an accounting period and
contains assets liabilities and net worth.
* Income (profit and loss) statement -- Shows your business
financial activity over a period of time (monthly
annually). It is a moving picture showing what has
happened in your business and is an excellent tool for
assessing your business. Your ledger is closed and
balanced and the revenue and expense totals transferred
to this statement.
* Business financial history -- This is a summary of
financial information about your company from its start
to the present. The business financial history and loan
application are usually the same. If you have completed
the rest of the financial section you should be able to
transfer all the needed information to this document.

VII. Supporting documents

These are the records that back up the statements and
decisions made in the three main parts of your business
plan. Those most commonly included are as follows:

* Personal resumes -- Should be limited to one page and
include work history educational background professional
affiliations and honors and special skills.
* Personal financial statement -- A statement of personal
assets and liabilities. For a new business owner this
will be part of your financial section.
* Credit reports -- Business and personal from suppliers or
wholesalers credit bureaus and banks.
* Copies of leases -- All agreements currently in force
between your company and a leasing agency.
* Letters of reference -- Letters recommending you as being
a reputable and reliable business person worthy of being
considered a good risk. (Include both business and
personal references.)
* Contracts -- Include all business contracts both
completed and currently in force.
* Legal documents -- All legal papers pertaining to your
legal structure proprietary rights insurance titles etc.
* Miscellaneous documents -- All other documents that have
been referred to but are not included in the main body of
the plan (e.g. location plans demographics advertising
plan etc.).

Putting Your Plan Together

When you are finished: Your business plan should look
professional, but the lender needs to know that it was done by
you. A business plan will be the best indicator he or she has to
judge your potential for success. It should be no more than 30 to
40 pages long. Include only the supporting documents that will be
of immediate interest to your potential lender. Keep the others
in your own copy where they will be available on short notice.
Have copies of your plan bound at your local print shop, or with
a blue, black or brown cover purchased from the stationery store.
Make copies for yourself and each lender you wish to approach. Do
not give out too many copies at once, and keep track of each
copy. If your loan is refused, be sure to retrieve your business
plan. For a more detailed explanation of each section of the
business plan outline, see SBA's publication, How to Write a
Business Plan, which includes step-by-step directions and sample
sections of actual business plans. Also available from the SBA is
a VHS videotape and workbook, The Business Plan: Your Roadmap for
Success.

_________________________________________________________________

APPENDIX E: INFORMATION RESOURCES

U.S. Small Business Administration (SBA)
The SBA offers an extensive selection of information on most
business management topics, from how to start a business to
exporting your products.

This information is listed in The Small Business Directory. For a
free copy contact your nearest SBA office.

SBA has offices throughout the country. Consult the U.S.
Government section in your telephone directory for the office
nearest you. SBA offers a number of programs and services,
including training and educational programs, counseling services,
financial programs and contract assistance. Ask about

Service Corps of Retired Executives (SCORE),a national
organization sponsored by SBA of over 13,000 volunteer
business executives who provide free counseling, workshops
and seminars to prospective and existing small business
people.

Small Business Development Centers (SBDCs),sponsored by the
SBA in partnership with state and local governments, the
educational community and the private sector. They provide
assistance, counseling and training to prospective and
existing business people.

Small Business Institutes (SBIs),organized through SBA on
more than 500 college campuses nationwide. The institutes
provide counseling by students and faculty to small business
clients.

For more information about SBA business development programs and
services call the SBA Small Business Answer Desk at
1-800-U-ASK-SBA (827-5722).

Other U.S. Government Resources

Many publications on business management and other related topics
are available from the Government Printing Office (GPO). GPO
bookstores are located in 24 major cities and are listed in the
Yellow Pages under the bookstore heading. You can request a
Subject Bibliography by writing to Government Printing Office,
Superintendent of Documents, Washington, DC 20402-9328.

Many federal agencies offer publications of interest to small
businesses. There is a nominal fee for some, but most are free.
Below is a selected list of government agencies that provide
publications and other services targeted to small businesses. To
get their publications, contact the regional offices listed in
the telephone directory or write to the addresses below:

Consumer Information Center (CIO)
P.O. Box 100
Pueblo, CO 81002
The CIO offers a consumer information catalog of federal
publications.

Consumer Product Safety Commission (CPSC)
Publications Request
Washington, DC 20207
The CPSC offers guidelines for product safety requirements.

U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
The USDA offers publications on selling to the USDA. Publications
and programs on entrepreneurship are also available through
county extension offices nationwide.

U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Room 5898C
Washington, DC 20230
DOC's Business Assistance Center provides listings of
business opportunities available in the federal government. This
service also will refer businesses to different programs and
services in the DOC and other federal agencies.

U.S. Department of Health and Human Services (HHS)
Public Health Service
Alcohol, Drug Abuse and Mental Health Administration
5600 Fishers Lane
Rockville, MD 20857
Drug Free Workplace Helpline: 1-800-843-4971. Provides
information on Employee Assistance Programs.
National Institute for Drug Abuse Hotline:
1-800-662-4357. Provides information on preventing substance
abuse in the workplace.
The National Clearinghouse for Alcohol and Drug Information:
1-800-729-6686 toll-free. Provides pamphlets and resource
materials on substance abuse.

U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor laws.

U.S. Department of Treasury
Internal Revenue Service (IRS)
P.O. Box 25866
Richmond, VA 23260
1-800-424-3676
The IRS offers information on tax requirements for small
businesses.

U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
401 M Street, SW (A-149C)
Washington, DC 20460
1-800-368-5888 except DC and VA
703-557-1938 in DC and VA
The EPA offers more than 100 publications designed to help small
businesses understand how they can comply with EPA regulations.

U.S. Food and Drug Administration (FDA)
FDA Center for Food Safety and Applied Nutrition
200 Charles Street, SW
Washington, DC 20402
The FDA offers information on packaging and labeling
requirements for food and food-rel