The do's & don't's of writing a winning business plan.

IT IS RARE FOR BUSINESS OWNERS TO SECURE A BANK loan for seed money. But's that's exactly what Gilda and Amir Salmon did. They snagged a $30,000 small business loan from Bergen Commercial Bank in Paramus, N.J., and the Paterson Economic Development Corp. in Paterson, N.J., to help finance their namesake salon two years ago. A solid business plan helped seal the deal.

Through their well-honed plan, the couple showed financiers that their small coiffing operation could compete in the commercial downtown sector of Paterson, N.J., where mom-and-pop shops were increasingly being overshadowed by mini-malls.

"The business plan is the first thing bankers ask to see," says Amir, president of Gilda & Amir's Salon Inc. "They want to know how much of your own money is invested in the business and what you have to offer as collateral. For us, it was $5,000 in savings and our house."

The bank also scrutinized the management section of the company's plan as well as its financial projections. "We outlined our combined 15-year experience in the hair care field. We also showed that we had an established following, with an average clientele averaging about 200 customers per month," Amir adds.

Because he provided extended financial estimates, Salmon says the bank gave him an additional $5,000 (the maximum amount available through the Development Corp. was $25,000). He notes that the one-to-three-year projections were conservative, with estimated earnings of $100,000. In fact, the business has exceeded those expectations; Amir predicts that profits will double this year.

While enthusiasm alone may convince your friends and family members that your business is destined for greatness, investors and bankers want the facts. They want an objective, in-depth analysis of the business opportunity with all the attendant risks and obstacles laid out in your business plan.

Whether intended to attract a prospective financier or define a structure for management, your business plan is a blueprint for operating your business. Most entrepreneurs make the mistake of seeing a business plan as a start-up tool alone. In fact, it should be viewed as a living document that is referred to and revised throughout the life of your business.

"A business plan is a road map that gives a business direction," says Joseph Mancuso, founder of the Center For Entrepreneurial Management Inc. and author of How To Write A Winning Business Plan (Simon & Schuster). "It gives you your destination, and that's tremendously important, not so much for you, but for everyone involved, from employees to investors," he explains. "They don't want to just blindly follow your short-term directions; they want to know where the company is headed."

Like many fledgling business owners, the Salmons now realize that a business plan is a work in progress. They're in the process of rewriting the plan for their seven-employee concern.

"We outgrew our plan in the first year of operation," explains Amir, 31. "We need to more clearly spell out the duties of our board of directors. We also failed to give our employees any real direction about the business and knowledge about our products."

The Salmons, who also serve as platform artists for Joico International, a worldwide hair care products manufacturer, will include in their revised plan how that relationship with Joico will impact their revenues and market presence.

Some business owners write several different versions of a plan, tailoring them to specific players, (i.e., bankers, investors, distributors, suppliers and customers). Whatever its goal, the basic format of a business plan is essentially the same.

WRITING A WINNING BUSINESS PLAN

Experts agree that there is just no substitute for thinking your business through and taking the time to put it down on paper. Mancuso explains that doing so will expose the bugs of your business, adding, "If you can work them out on paper, you will save yourself some serious time and money."

If you're writing just one to start, it should serve several purposes: It should be a development tool for the company's founders; a planning and evaluation tool for managers and other key people; a mission statement for customers; and a sales document for raising capital.

It should be as long as is needed to tell your company's story. Most experts agree that 25 pages is an ideal length, and that a start-up plan shouldn't exceed 50 pages. A good one, they say, will take at least six months to write. And remember to adhere to a basic format.

The Executive Summary. Just as the term implies, you should summarize the company's objectives, history, management and financials in this opening section. Discuss the nature of the business, location and state of operation. Provide clear descriptions of your product, customers, suppliers and address obvious concerns. You need to identify your niche and state any specific advantages you hold over your competition.

Lay out your primary goals and achievements. If you envision turning a profit in three years, say so, and refer to financial projections to back it up. Also, describe current milestones reached and their results. The summary should give the feeling that your venture can be profitable.

If you're requesting money, state how much money is needed and for what purpose. Discuss the potential return on the investment and the payback period.

Aim to be concise and comprehensive, and remember that first impressions count: Your one-to-three-page opener should aggressively sell your business. It should entice the reader to "read on."

Market Analysis. Many experts who review business plans say that too often the marketing section is one of the weakest parts.

They advise that you must begin by sizing up your market. Who are your customers, and will they be attracted to your product or service? What is your price structure and how did you arrive at it based on standard markup, production costs and perceived value? A market overview should include the demographics of your target market, industry trends, the competition and future outlook.

For assistance, you can hire a professional market research firm, but bear in mind that most charge upwards of $2,000 per analysis. Don't despair: Most sources you'll need are easily accessible.

A good place to start is trade associations. Many are happy to provide data on their respective industries. Check the Encyclopedia of Associations. In addition to the U.S. Census Bureau's divisions of population and housing, you can get demographic and competitive information from the Rand McNally Commercial Atlas and Marketing Guide, Thomas Register of Manufacturers and back issues of American Demographics magazine.

Once, you've analyzed the market and demand for your product or service, you need to define marketing strategies. Your plan must spell out the best ways to reach potential customers (i.e., direct marketing, advertising or special promotions).

Management Team. A plan is as good as the people who implement it. Investors often put more stock in the management of the company than in the product. Include biographies of yourself and other managers in the company. Treat these bios as expanded resumes, spelling out each person's role and financial stake in the company. Also, note relevant skills, degrees, certifications and prior experience.

"Entrepreneurs bring their own work history with them. Though most are very good at what they have done, they aren't necessarily skilled in all the details necessary to support a successful venture," says Annette C. Darnes, vice president and manager of the woman and minority assistance program at Union Bank in San Francisco. "One of the biggest downfalls of start-up companies is not developing in advance the internal plans for managing the business."

If there are more than five players on board, you should include an organizational chart. If you haven't hired everyone yet, describe each post and its required qualifications.

Financial Statements. Financial data and calculations are the make-or-break component of any business plan. After all, the goal is to be profitable. Whether you are a start-up or an existing business, provide projections for three to five years out. Indicate the expected highs and lows of the business. If your company is already in operation, you'll need to provide a profit-and-loss statement and a balance sheet. Other basic elements of the financial section are the cash-flow forecast and break-even analysis.

A balance sheet shows the status of the company's assets, liabilities and equity ownership. You should have a current financial snapshot of the business as well as a projected balance sheet showing how these figures are likely to change over time. A balance sheet should be updated yearly.

The profit-and-loss (or income) statement shows the results of operations over a period of time. It compares total revenues against all operating costs and expenses (i.e., salaries, supplies, insurance, marketing, overhead). Organized by fiscal year, these tables are used to determine net income and should be updated annually.

Cash-flow forecasts chart the movement of funds in (receipts) and out (disbursements) of the company. By monitoring the sources and uses of cash, you will have an idea of how much money or credit you'll need to carry out planned operations, and you'll be alerted when cash runs short. Forecast three to five years out.

The break-even analysis shows how long it will take for the business to make a profit. This figure is arrived at by calculating the business' fixed and variable costs and measuring them against projected revenue. You break even when sales revenues equal total cost.

"Few business plans have realistic financial projections," says Richard Magary, senior vice president of administration and former chief financial officer of American Shared Hospital Services, a publicly traded medical services company. Too often, entrepreneurs get caught up in wishful thinking. "Wring all the optimism out of your projections," Magary urges. "Realism is more convincing than naive enthusiasm." An alternative is to provide two scenarios, one that lists conservative projections based on weak market performance and the other, aggressive projections based on robust demand.

While a good business plan is one that raises money, it's important that you tailor your plan to the type of financing you need. There are two major categories of financing: debt (loan) and equity (ownership interest).

Bankers will be interested primarily in the company's fixed assets, such as building, equipment, etc., and the collateral the business owner can offer. The bank's main concern is how and if you are going to pay back the loan at the going interest rate.

On the other hand, venture capitalists and other investment groups will want a chunk of your company and its profits. Usually, they want to earn at least a 30% to 35% risk-adjusted annual return on investment. In other words, they want to get back six times their money in three to five years.

A common mistake entrepreneurs make is inadequately addressing the return on the investment, says Liz Harris, vice president of Boston-based UNC Partners, a venture capital investment management firm. She says that venture capitalists want to know what they are getting into and when can they get out and how. So, provide an exit strategy that has timetables plus projected returns.

TAILORING AND UPDATING YOUR PLAN

When Harry Davis started Real-to-Reel Pictures Entertainment Inc. in February of 1992, he needed to raise about $20,000 in a private placement stock offering to produce two short films. Davis and his partners in this New York-based production company, Cornelius Pitts and Percy Davis (no relation), went to work on a business plan that took three months to complete.

By November, some 40 shares were sold to 12 people. The firm then raised another $100,000 to finance a 30-minute television pilot, called street Games, a sports show that features interviews with today's star athletes, their families and childhood neighbors. While Real-To-Reel's five-year business plan provided a market study of the targeted audience for Street Games, financial projections for production costs were more than the company had anticipated, says Davis, the company's 38-year-old vice president.

As a result, Davis decided to change the name of the company to the Reel Deal Inc. and to restructure the firm as a nonlinear television and multimedia pre- and post-production house. "We had to change our business plan to accommodate changes in the company," says Davis. "It necessitated new subsections, namely staffing, and another layer of details, such as how we were going to rent out the studio to earn additional funds." Specifically, the Reel Deal needed an additional $300,000 for state-of-the-art equipment and training courses.

"The idea now is to do everything ourselves. To shoot the film [or video], edit it, add the graphics and record the sound or music," says Kymbali Craig, creative director. The Reel Deal expects to do $350,000 worth of business this year by securing sizable budgets to produce film, television and music video projects and by selling shows the company produces. It also plans to do licensing and merchandising under the brand name, A Raw Art Vibe.

Davis and his partners now know the one secret to the success of seasoned entrepreneurs: that it's essential to constantly update your business plan. "You should use your business plan as a guide for the fiscal year that you are working in," says Kenneth Shead, president of Drew Pearson Marketing Inc. in Addison, Texas. "We are constantly revising our plan to reflect changes in the industry as it affects our market share." The 11-year-old firm (No. 22 on the BE INDUSTRIAL/SERVICES 100 list with $65 million in revenues) is the world's largest black-owned licensed sports and character headwear manufacturer.

"Every year we add elements to the plan's executive summary on what's happening politically, socially and economically as it pertains to our business," adds Shead, a former national account executive for Xerox. "Unless you monitor and record ongoing trends in your market, it's imposible to chart your company's future."

Don Sutton learned the hard way the value of a business plan in understanding one's market. Last year, Sutton, founder and president of the Just Chairs furniture dealership in San Francisco, decided to raise $1 million through a private placement stock offering for expansion capital.

Sutton's first mistake was to operate the 11-year-old firm, which regularly posts sales of about $3 million annually, without a business plan for expansion.

His second faux pas was to hire a writer to assist with the prose and an accountant to crunch the numbers. Sutton says he relied too heavily on both, allowing the writer to direct the content and the accountant to develop the ratios for the financial projections. "The business plan was too long and the numbers didn't pan out," Sutton says. In fact, the long-winded plan made his proposal less attractive to investors.

But writing it did force Sutton to scrutinize his customers and competition in a way he'd never done before. He realized that he was missing a big share of the firm's potential market by focusing on corporate customers and the high-end of home office business.

"We had been sitting on excess inventory that was crying out for an outlet," says Sutton. "Our customers didn't care if a fabric was discounted-- they wanted top quality goods at a good price." Sutton opened a clearance outlet, offering discountinued products but at discounted prices. Now Just Chairs can compete with superstores like OfficeMax and Office Depot without having any detrimental impact on the company's core business. Just Chairs recently opened its fourth Bay area showroom. A prototype of the business plan, this Silicon Valley outlet is the firm's highest volume location thus far is the San Francisco store.

It's been close to a year since the plan was completed; Sutton still intends to do a private placement stock route. Instead, he's using the business plan as a guide for the ongoing operation of his business.

By writing a business plan in the later stages of your company's life cycle, you may find gaps or things you hadn't thought about, says Sutton. "Once you find holes, you have to spend a lot of time and hard work filling them up." That's OK, experts say. Better late than never.