This is the third in a multi-part series to ensure
that your new business is successful. This
article concerns business plans. We previously
covered how to estimate revenue 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

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.    

In the next section we will proceed to the interest,
dividends and income tax sections leading to net
income, the bottom line.  

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Small Business: Setting Up a Business
Plan (Part 3)                    
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