Chapter 4: Developing a Business Plan for the Facility

1. Introduction
2. Preparing a Strategic Plan
3. Preparing a Detailed Business Plan
4. The Business Plan Worksheet
5. Financial Planning

I. Introduction

A written business plan is an important initial step that helps formalize and document efforts to construct a child care facility.  A plan is also necessary to assess whether the lead agency has sufficient resources to operate the facility on an ongoing basis.  Developing a plan and putting it in writing are crucial to laying the groundwork for the ultimate goal—implementing the plan.  A formal business plan is as important for an established agency as it is for a start-up project because it serves four critical functions:

• Helps organize, focus, and clarify a program’s development and prospects;
• Provides a framework within which the agency can develop and pursue business strategies over the next one to five years;
• Serves as a basis for discussion with third parties such as funding agencies, collaborative partners, banks, and stakeholders; and
• Offers a benchmark against which actual performance can be measured and reviewed.

Just as no two businesses are alike, no two business plans are alike.  It is therefore important to tailor a plan's contents to suit individual circumstances. Nonetheless, most plans follow a similar structure, and general advice on preparing a plan is universally applicable.  A business plan should be a realistic view of the expectations and the short- and long-term objectives of the agency. It provides the framework within which the agency must operate and, ultimately, succeed or fail.  The plan serves as a key sales document for management seeking external support (such as additional funding) since it shows that the project is well-conceived and viable.  Preparation of a comprehensive plan will not guarantee success in raising funds or mobilizing support, but lack of a sound plan will almost certainly ensure failure.

Preparing a satisfactory business plan forces managers and other stakeholders to clarify what they want to achieve as well as how and when they can do it.  Even if no external support is needed, a business plan can play a vital role in helping the agency avoid mistakes or recognize hidden opportunities.  Many find that the process of planning (thinking, discussing, researching, and analyzing) is just as, or even more, useful than what emerges as the final plan.  

The CCDF Administrator or child care construction project manager should determine who will take part in the business plan development and ensure that all stakeholders are represented on the business plan development team.  Staff, management, tribal leaders, policy groups, community members, collaborative partners, and others with an interest in the tribal child care program’s operation and success are all potential team members.  The leaders of the team should develop a timeline that is sensitive to the schedules of all participants.  The schedule should allow for the possibility of many days of hard work and several drafts to get the job done right.

A clearly written and attractively packaged business plan makes it easier to interest potential supporters, funding agencies, and other sources of financing.  A well-prepared business plan demonstrates knowledge of the project and shows that stakeholders have thought through its development in terms of finances and management.  The plan should also take into consideration the child care supply and demand in the tribal service area.  This issue should receive attention during the community assessment described in Chapter 1 and the business plan should incorporate the relevant data gathered through that process.

II. Preparing a Strategic Plan

A short strategic plan (2-3 pages) can provide a useful foundation upon which to base a more detailed business plan.  As the prelude to developing the strategic plan, identify the current status, objectives and strategies of existing programs along with the latest thinking in respect to a new venture.  For example, you should evaluate and consider collaboration among programs as part of current and proposed program design. If you define your plan elements correctly, you can use them as the basis for a critical examination on existing or perceived strengths, weaknesses, opportunities, and threats (S.W.O.T. analysis).  Analysis will then allow you to address the following issues:

• Vision;
• Mission;
• Objectives;
• Values;
• Strategies; and
• Goals.

First, develop a realistic vision for the agency.  Present a realistic picture of the future in three or more years in terms of its likely physical appearance, size, and activities.  Answer this question: "If someone visited us in three years, what would they see or sense?"

Second, express the nature of the program through its mission, which indicates its purposes for service delivery. For example, “to offer affordable, quality child care services that will meet the needs of our target population.” A statement along these lines indicates what the program is about and is clearer than saying, for instance, "we're in child care.” Some people confuse mission statements with value statements; the former should be concise while the latter can deal with "softer" issues.

Third, state the program's objectives in terms of the results you need and want to achieve in the medium- and long-term. Objectives should relate to the expectations and requirements of all the major stakeholders, including employees and clients, and should reflect the underlying reasons for operating the program.

Next, address the values governing the operation of the program and its conduct or relationships with the community, clients, and employees.

Develop strategies to define the rules and guidelines by which you will achieve your mission and objectives.  They may cover the business as a whole, including such matters as diversification, growth, or funding strategies, or they may relate to primary matters in key functional areas:

• The agency's collaborative efforts with other child care providers;
• New services that will enhance existing ones over the next three years; and
• Facilities enhancement. 

Finally, set goals with specific interim or time-based measurements to be achieved using strategies in pursuit of the agency's objectives.  For example: “We will provide services to an additional 20 families within the next 24 months.”

Remember that the mission, objectives, values, strategies, and goals must be interlinked and consistent with each other.  Upon completion, review all aspects of the plan to ensure they are consistent in purpose and outcome. 

III. Preparing a Detailed Business Plan

Before commencing any detailed work on the plan, the authors should:

• Clearly define the target audience;
• Determine its requirements in relation to the contents and levels of detail;
• Map out the plan's structure (table of contents page);
• Decide on the likely length of the plan; and
• Identify all the main issues to be addressed.

You must identify shortcomings in the concept and gaps in supporting evidence and data.  This will allow for completion of an assessment of research prior to starting the draft.  Remember that a business plan is the end result of a careful process of research, discussion, and evaluation.

Structure and Content

A typical business plan includes the following main elements:

1. A brief Introduction, which defines the plan’s background and structure;
2. A Summary, which highlights the main issues and proposals (1-3 pages);
3. The Main Body, which contains chapters divided into numbered sections and subsections; and
4. Appendices, which contain tables, exhibits, and other detailed information referenced in the text.

Length and Timeframe

While the length of a business plan may bear no relation to the underlying prospects of a business, well-developed plans generally run at least 20 pages long, plus appendices. Set aside 5–20 days to produce the plan. While the task of writing the plan itself may take a relatively short time, be sure to allow sufficient time for the research, preparatory work, and underlying brainstorming and discussion, as well as time to have the plan reviewed by others.

Practical Hints

Outside help and guidance in preparing a business plan can be extremely valuable.  If you use outside help, you must ensure that the final plan remains your own and not that of your advisers.

The following suggestions may be of assistance:

1. Use a spreadsheet program (such as Microsoft Excel) or other financial modeling software package for the financial projections.
2. When drafting the plan, be positive but realistic about the agency's prospects and acknowledge and respond honestly to shortcomings and risks.
3. The plan’s management section is crucial.  Consider forming a management team or strengthening management as part of the plan.
4. When writing the plan, remember to:
• Avoid unnecessary jargon;
• Economize on words;
• Use short crisp sentences and bullet points;
• Concentrate on relevant and significant issues;
• Break the text into numbered paragraphs and sections;
• Provide detail in appendices;
• Number the pages of the plan and provide a table of contents page; and
• Write the summary last.
5. Have a qualified outsider review your draft plan, then revise the plan.
6. Back up revenue and expense projections with market research.  Ensure that there is a direct relationship between market analysis, revenue forecasts, and financial projections.
7. Be realistic about revenue expectations (e.g., consider the impact of non-attendance), cash flow analysis, and funding requirements.  Do not underestimate the cost and time required for advertising, start-up costs, securing external support, or raising funds. Consider hidden costs such as employee absences.
8. If seeking external funding, be realistic about the future of the project, the risks involved, and possible returns.  Give consideration to contingencies such as emergency building-repair costs and vehicle repair.
9. Incorporate available data such as market rate analysis, census information, and financial information such as grant proposals and funding awards.  Include data found on construction checklists and funding requests.  Don't reinvent the wheel.

IV. The Business Plan Worksheet

The Model Business Plan Structure (below) could serve as the basis for a "full-blown" business plan by expanding the level of detail given. Ideal page lengths for a straightforward but comprehensive plan are given in parentheses. Include detail in accompanying appendices.

V. Financial Planning

The financial projections that are included in your business plan are often considered to be the "heart" of the plan.  They quantify your plan in terms of dollars and cents and units of service, and serve as an evaluation point for the viability of the program or project.  It will be helpful to enlist assistance from your agency’s accounting department in the preparation of these estimations.

Break down your financial data into monthly projections for years one and two and into annual projections thereafter.  Based upon this, include the following in your plan:

• Profit and Loss Statement (also called Statement of Revenue and Expense)
• Balance Sheet
• Cash Flow Statement

Profit and Loss Statement

Based upon the operations plan you have developed, determine projected revenues and expenditures over time. Take into consideration the following:

• Include all sources of revenue, including projected revenue from USDA’s Child and Adult Care Food Program, grant income, and parent fees (be realistic about your collection rate).
• Include all expenditures, including "hidden costs" such as employee absence, indirect costs, and annual costs such as licenses and fees.
• Be aware that some costs, such as food, vary (variable costs); some costs, such as administrative salaries, are fixed (fixed costs).
• Use historical data for estimations, but be aware of potential fluctuations in variable costs such as salary and fringe benefits.
• Take into consideration in-kind revenue, which may reduce actual costs of the program. 
• Remember to consider the effects of collaborative agreements and cost allocation on your forecasts. 

The profit and loss statement prepared for your business plan can serve as the basis for your ongoing operating budget and should be adjusted periodically as necessary to reflect the actual operations of the program. 

Balance Sheet

The balance sheet provides a profile of the monetary "worth" of the program or agency at a given point in time. This statement lists all of the program's assets (cash, accounts receivable, inventory, real estate, etc.) and all of the program's liabilities (accounts payable, payroll taxes payable, notes payable, etc.).  The difference between these two amounts is the agency or program's "net worth," or for non-profit agencies "fund balance." The Balance Sheet will give you an idea of whether you "owe more than you have." Be sure to enlist the help of the agency’s accounting department in developing this statement.

Cash Flow Statement

When planning the short- or long-term funding requirements of your program, it is important to forecast the likely cash requirements.  While profit—the difference between revenue and expenses within a specified period—is a vital indicator of the performance of the program, the generation of a profit does not necessarily guarantee its development, or even the survival.  Lack of operating cash can result in the failure of a program.

Revenues and costs, and therefore profits, do not necessarily coincide with their associated cash inflows and outflows.  While revenue may have been generated (for example, a day of service may have been provided), the related payment may be deferred as a result of the billing process.  However, at the same time, payments must be made to staff and suppliers, cash must be invested in purchasing food, and new equipment may have to be purchased.

The net result is that cash receipts often lag behind cash payments and, while profits may be reported, the program may experience a short-term cash shortfall.  (Remember, it is not acceptable to "borrow" from other programs that may have cash available, such as Head Start.)  For this reason, it is essential to forecast cash flows as well as potential project profits.

The simplified example in Figure A (below) illustrates the timing differences between profits and cash flows for a one-month period.

The table shows that the cash associated with the reported profit for Month 1 will not fully materialize until Month 3 and that a serious cash shortfall will be experienced during Month 1, when receipts from revenue will total only $2,000 as compared with cash payments to staff and suppliers of $4,000.  Normally, the main sources of cash inflows to a program are grant proceeds, increases in bank loans, parent fees, donations, asset disposals, and other income such as interest earned.  Cash outflows include payments to staff and suppliers, capital and interest repayments for loans, and capital expenditure for equipment.

Net cash flow is the difference between the inflows and outflows within a given period.  A projected cumulative positive net cash flow over several periods highlights the capacity of a program to generate surplus cash and, conversely, a cumulative negative cash flow indicates the amount of additional cash required to sustain the program.  Cash flow planning entails forecasting and tabulating all significant cash inflows relating to revenue, new loans, interest received, etc., and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, interest payments, etc.  The difference between the cash in- and out-flows within a given period indicates the net cash flow.  When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be determined. 

Using a Computer

With the aid of a computer, a mathematical model can be used to prepare cash flow projections and project short-term cash requirements for a program.  The use of a computer-based model reduces the tedium of carrying out numerous repetitive calculations and simplifies the alteration of assumptions and the presentation of results.  A computer-based model can be constructed using a spreadsheet.  A cash flow model can be used to compile forecasts, assess possible funding requirements, and explore the likely financial consequences of alternative strategies.  Used effectively, a model can help prevent major planning errors, anticipate problems, identify opportunities to improve cash flow, or provide a basis for negotiating short-term funding from a bank.

However, the quality of these projections will be determined by the standard and reliability of the underlying assumptions.  For example, if forecasts for revenue or costs are unrealistic or inadequately researched, then the value of the model's output is greatly diminished.  An impressive set of projections is of little benefit if it is unsupported by experience or research, or based on mere speculation.  In fact, it could be very damaging, or even destroy the project.

Remember the following points when preparing a Statement of Cash Flows:

• Check that all key assumptions and data are at hand and have been adequately researched.
• Compile opening balances for all items that will involve cash flows within the forecasting period.
• Estimate collection rates for parent fees realistically.
• Consider billing cycle time frames for grant payments and contract payments.

Once the cash flow projections have been prepared, they should be critically examined and used as a management tool to control and improve the program's expected cash position.  All projections should be periodically reviewed and adjusted to reflect the status of current operations.

Chapter 3 | Table of Contents | Chapter 5