Set Up a Business Plan for Your Small Business

This is the third in a multipart series to ensure that your new business is successful. This article also concerns business plans. We previously covered how to estimate revenue and certain expenses for the first three years.

The last article ended with a short discussion of Selling, General and Administrative expenses, or SG&A expenses. Here we will delve into that a little deeper. The largest component of general expenses is compensation. After some analysis, determine the number of employees you will need in the first year. Of course, this can require its own careful analysis, but it will most likely be tied to the volume of product you believe you will sell. Next, find the average salary of your employees. Multiplying one by the other will provide your total salary expense.

You should also calculate what your total sales incentive compensation expense will be for the year. This should also be tied to your sales volume. Calculate whatever your total sales plan will pay out to all sales employees assuming they achieve 100% of the sum of their targets. Of course some will be higher and some lower, so assume 100%. Next add total Salary and Incentive Comp expenses. A standard industry assumption for fringe benefits is 30% of employee compensation. You may want to adjust that figure based on the particular benefits you provide and state mandated expenses.

Fringe benefits include everything from Workers Comp expense to 401k employer matching expense. Other items include health insurance and Social Security contributions. Any other benefit that is provided to or on behalf of the employees would be included here. Account for all of these expenses to come up with an average percent of compensation that they represent. Multiply this percent by your total compensation figure to get your first year estimate for fringe benefits expense.

If we add all of the above expenses we have our total compensation and related expense figure. Now project this figure forward to the second and third years, based on expected growth.

To complete the SG&A picture we'll estimate all other general/office expenses. There will be probably be expenses such as marketing, office supplies, training, and possibly travel / entertainment expenses. Of course all of this will vary depending on your type of business. Refer back to your separate customer acquisition analysis to come up with your marketing expense. Hopefully you've traced your customer acquisition expense to a per unit basis and have multiplied it by expected volume, to come up with total marketing expense. Combine this with your other general expenses to complete your SG&A expenses picture. Project forward for years two and three.

If you have any equipment (ex: trucks or computers), that you will purchase and that need to be depreciated, you can do that next. Simply take the total of expected purchases for the year, and divide by 3. Most equipment will be depreciated over 3 years. Project that forward to years two and three, adjusting for any new equipment you will acquire in those years.

In the previous article we discussed Gross Margin. Now take that figure and deduct all of the SG&A expenses we have discussed here. This will leave you with your Operating Income. Do the same for years two and three. Operating income is a very important measure for your business. It shows what your general profitability is, before taking into account financial considerations like interest and dividends to be paid, or income tax.

It is at this point that you may look at your business plan and see things that need to be adjusted. A big part of your profitability may be dictated by the market. However, you may have discovered changes that could be made as part of the analysis in your business plan to improve your bottom line. Often one will go back and forth throughout the different sections to make different assumptions to reflect improved operations that you've uncovered.