The Financial Plan

Your financial plan is a model, which means it will certainly change, but it's important to put your estimated sales forecast down on paper to see if your menu, pricing, and sales estimates make sense. Consider whether it will be possible to generate as much business as you've projected given your resources, especially if you're going to be the primary salesperson and caterer. To give yourself an idea, research the amount of business other local caterers with similar resources generated in their first few years.

The first step in writing a solid business and financial plan is knowing what kind of catering services you'll offer. The concept, the menus, the pricing, and the competitive survey you've developed all contribute to a strong financial plan. In Chapter 6, you created a concept for your business and studied your key competitors. In Chapter 9, you took the time to carefully cost your menus and develop a cost estimate for preparation labor and overhead.

Your financial plan should include the following:

  • Summary of financial needs

  • Sales forecast

  • Profit margins

  • Income statement

  • Balance sheet

  • Cash flow forecast

  • Capital spending plan

Summary of Financial Needs

Start the financial portion of your business plan with a summary of how much money you'll need to operate the business for the first year. If you need to raise some of this money, specify how much you're looking for and how it will be spent. Show a breakdown for how much will be used for leases and equipment and how much will be used for operating expenses. If you have applied for loans, include information on loan repayment in this section.

Alert

If you need to borrow funds or lease equipment, it is likely that you will have to personally guarantee the payments. At the beginning of your business venture, you will not have much leverage with credit terms because you are an unknown entity.

Prior to your first month of operation, you'll need to have kitchen time lined up, a preliminary proposal with costs saved in your computer, sample menus that have been costed and priced, your business name registered, and a Web site ready to be published or launched. Explain how you will pay for all of these expenditures.

Sales Forecast

It will take more than a year for you to gain momentum and have a flow of steady jobs. By knowing what kind of catering services you're going to offer, you'll have a rough idea of how much revenue you can expect. Start with a blank spreadsheet with the months written across the top.

For Year 1, start with the month you expect to launch your business. If you plan to start catering jobs in April, then list April as the first month in your Year 1 Sales Forecast. To determine the number of events you'll cater each month, look at a calendar and focus on the number of weekends and holidays in the month. Enter the number of possible jobs you think you'll be hired to do each month. Be conservative with your estimate, showing moderate growth.

ssential

Remember that the business plan is only a plan, and your actual business will be constantly changing. As your business changes, update the sales forecast for Year 1 in your business plan to keep track of how you're doing and how close you are to generating a profit.

Your concept and location will dictate your busy seasons. If you're located in a resort area where the population swells in the summer but declines drastically in the winter, you'll have to factor that into your sales forecast. If you plan to be a wedding caterer, expect to be slow the first quarter of the year, peak in the second and third quarters, and slow down again in the fourth quarter.

Once you guesstimate the likely number of jobs a month, you'll need to forecast the average dollar amount of a job. If you assume that all jobs will average out to be medium sized, you can approximate the number of guests each job will have, determine an average price per person based on your menu pricing, and figure out an expected total revenue figure by multiplying the numbers together.

Fact

There are many off-the-shelf software programs available to help you write the business plan. They provide templates for the financial models and other sections of the plan, and you can input your own data and carefully customize each model and template.

Spreadsheet programs like Microsoft Excel and business plan software are great for this because it's easy to change your variables and assumptions and get a new revenue figure with just a few clicks of the mouse. Your financial plan is a starting point, and it's better to be on the low side than on the high side. Once you have a revenue estimate for Year 1, figure out estimates for Years 2 and 3. Grow Year 2 by 30–40 percent to be conservative.

You're starting with a base of zero, so you'll be expected to grow quickly. In Year 3, project growth to be around 20 percent, since you'll be starting with a higher base sales figure.

Catering Industry Profit Margins

After you've gotten a sense for how much revenue you can expect, it's time to put together a cost estimate, forecasting how much your expenses will be. Expenses tend to be high; catering involves a lot of labor, and food is expensive. Margins are low compared to other service industries like consulting and accounting.

When you start out, your food costs are likely to be high as you figure out exactly how much food you need to order. Your gross margin is likely to be on the low side during your first few years, as you learn the business and increase your efficiency. Reflect this in your financial plan.

Fact

Remember that you won't get every catering job you propose. You'll need to pitch, on average, at least two to three jobs for every contract you land.

Start a spreadsheet to track your monthly expenditures. It should mirror your sales spreadsheet, but it will track the cash going out of your pocket instead of coming in. Fixed costs, or overhead, include things like rent, insurance, utilities, and computer costs. They don't generally change with the amount of catering jobs you get, and they don't disappear even if you're having a slow month. Variable costs fluctuate according to how much business you have. The more sales you generate, the more variable costs you'll incur. Variable costs include food costs, labor costs, and anything else that will increase as the number of events you cater increases.

xpertise

There are certain industry standards and rules of thumb for catering costs. According to Jo Herde, director of food and beverage operations for Great Performances catering in New York, the catering business tends to be more profitable than the restaurant business, especially if you can sell liquor to your catering clients.

An experienced, efficient, smoothly operating caterer can expect to spend 27–29 percent of sales on food costs, 9 percent on overhead, and 16–17 percent on production labor, resulting in a gross profit margin of 8–12 percent.

Income Statement

Once you have your estimated revenue and costs broken down by month, you'll be able to estimate by month how much you'll make or lose. This is known as a profit and loss forecast (P&;L) or an income statement. After you've developed your Year 1 P&;L, you'll need to model projections for years 2 and 3.

ssential

It's normal, even expected, that your total costs will be more than your total revenue in Year 1. New businesses that break even in Year 1 are doing very well. It's more common to lose money in Year 1, break even during Year 2, and show a profit in Year 3.

Your income statement tallies your total expenditures versus your total income. You should be conservative in your estimates. This may result in final figures that look less robust than you may like, but this keeps you from overestimating your profits. Following is an example of a general income statement.

Sample Income Statement for the Year Ending December 31, 200X

Income

Gross Sales

346,400

Less Chargebacks/Discounts

1,000

Net Sales

345,400

Cost of Goods

Merchandise Inventory, January 1

160,000

Purchases

90,000

Freight Charges

2,000

Total Merchandise Handled

252,000

Less Inventory, December 31

100,000

Cost of Goods Sold

152,000

Gross Profit

193,400

Interest Income

500

Total Income

193,900

Expenses

Salaries

68,250

Utilities

5,800

Rent

23,000

Office Supplies

2,250

Insurance

3,900

Advertising/P.R.

8,650

Telephone

2,700

Travel and Entertainment

2,550

Dues and Subscriptions

1,100

Interest Paid

2,140

Repairs and Maintenance

1,250

Taxes and Licenses

11,700

Total Expenses

133,290

Net Income

$60,110

Run a few different financial forecasts. Make sure your business will make money with up to 40 percent less business than you project in Years 1 and 2 and with 50 percent more costs. With spreadsheet programs, it's easy to change your numbers and calculate different scenarios. Don't rely on the best-case scenario. Things happen: supplier prices rise, you may get fewer bookings during a crucial holiday season, a competitor may launch a large advertising and promotional campaign. You need to be able to buy the necessary ingredients and rent the right type of equipment and still be able to make money.

Balance Sheet

You'll need to prepare a balance sheet showing your assets and liabilities and the difference between them. The balance sheet is a snapshot of what your business is worth. Under liabilities, show any outstanding loan payments and any leases for a facility or equipment, in addition to other monies owed to vendors for supplies.

Under assets, record accounts receivable (amounts your customers owe you) and any inventory you may have. If you own any large equipment or a vehicle, you can list it here. List available cash in the business bank accounts.

Cash Flow Forecast

This is a financial forecast that will show how you manage the cash coming in versus the cash going out. At the beginning, you'll most likely have a negative cash flow — spending more money than you're bringing in — until you have enough clients contacting you for jobs to cover your expenses. That's why it's important to start with a positive amount in your business bank account to cover at least eight months of expenses, so that you have enough money to last while you spread the word about your businesses and start getting clients.

Capital Spending Plan

This lists any large equipment you may have to purchase or lease to start your business. This may include convection ovens, a vehicle, or a walk-in fridge. Clearly, the less you have to spend on major purchases, the sooner you'll generate enough revenue to pay for your costs and break even.

xpertise

“Catering is a business where success comes from tracking your costs and cash flow. By creating detailed cash flow statements and costing each job carefully, you'll increase your chances for running a growing, profitable business.” — Eric Gelb, experienced business plan writer and president and CEO of PublishingGold.com, Inc.

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