by Jill Hendrix #97, 25 June 2007

The last section of the sample business plan for Fiction Addiction is included below, along with a glossary of financial terms that you will need to know. As before, below each subsection are comments in brackets discussing other ways you could handle the section, areas to consider, etc. 7.0 Financial Plan

The most important assumptions in the financial plan are the gross profit margin of 60% and the estimated average sales price of $5.50. Fiction Addiction will price most paperbacks at 60% of the current retail price. Thus, an old copy of Old Man and the Sea with a cover price of $1.25 would be priced at $6.00 since a brand-new copy retails for $10.00.

Trade-ins from customers will typically be purchased for 20% of cover price (in trade credit), giving an average gross profit margin of 66.67%. Since we plan to cap our credit at $2.00 per book, books with an original cover price of $10.00 or higher and books purchased in bulk via estate sales, the Internet, etc. will give an even higher margin.

We anticipate that online sales will primarily be for collectible books, and thus their higher prices will offset the additional commission fee to the online aggregator. If not, we have the option of increasing our online sales prices to counteract the commission.

Taking markdowns and other inventory missteps into considerations, we're estimating a gross profit margin of 60%.

[If you pay $1.00 for a book and sell it for $2.00, your theoretical margin is 50%, but what happens if the book doesn't sell for $2.00 and has to be marked down to $1.00 or even $.50? Inventory markdowns, teacher discounts, coupons, etc., will work to together to lower your theoretical margin to a lower actual margin. Usually you set aside 5-10% of your theoretical margin to cover these issues. The higher you can mark your books, assuming they actually sell, the fewer times you'll have to turn over your inventory to make the same amount of income. Antiquarian bookstores may have an abysmally low turn rate, but used bookstores are usually doing well if they are in the 1-1.5 rate. I suggest marking your books as high as you think the market will bear from the get-go. It's a lot easier to drop your prices if necessary (either with coupons or permanently) than it is to raise them later.] 7.1 Projected Profit and Loss

Most operating expenses are expected to increase 3% each year.

We are assuming that any shipping & handling monies received will be enough to offset mailing supplies and postage and thus these income and expense lines have not been itemized.

Table 7.1: Projected Profit and Loss Statement

	FY 1	FY 2	FY 3
Net Sales1	$85,000.00	$110,000.00	$125,000.00
Cost of Sales	$34,000.00	$44,000.00	$50,000.00
Gross Profit Margin	$51,000.00	$66,000.00	$75,000.00
Gross Profit Margin %	60.00%	60.00%	60.00%
Operating Expenses:
Rent & CAM	$23,400.00	$24,102.00	$24,825.07
Insurance	$750.00	$772.50	$795.68
Payroll (incl. taxes)	$1,000.00	$1,030.00	$1,060.90
Telephone and utilities	$4,500.00	$4,635.00	$4,774.05
Marketing (doesn't include Grand Opening)	$5,000.00	$5,150.00	$5,304.50
Professional fees (accounting & tech support)	$1,000.00	$1,030.00	$1,060.90
Bank & Merchant Fees (4% of 1/4 sales)	$850.00	$1,100.00	$1,250.00
Trade publications	$300.00	$309.00	$318.27
Office supplies (not including mailing supplies)	$1,200.00	$1,236.00	$1,273.08
Miscellaneous	$1,200.00	$1,236.00	$1,273.08
Total Expenses	$39,200.00	$40,600.50	$41,935.53
Owner's Compensation Before Taxes & Depreciation	$11,800.00	$25,399.50	$33,064.47

[To make things easier, I've done one P&L for the in-store and online sales combined. However, online sales are usually charged a commission of 15-20%. The Net Sales figure above should include the amount you received for the sale after commissions. It does not include any monies received for shipping & handling. The P&L assumes that any S&H monies received will be enough to cover postage and mailing supplies and thus these line items have been omitted.

For the P&L above, I've used my actual sales for my first three fiscal years, but raised the rent and some of the other expenses to my current expenses. The rent shown above is about the highest you'd ever want to go. Ideally you'd want to be around $13/square foot or less for your total rent cost including CAM (common area maintenance). When a landlord tells you that the rent is $x/square foot, make sure to ask whether there are any additional charges on top of that, such as CAM.

¹Projected sales figures are net sales after returns, online aggregator commissions, etc.