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How to Start a Clicks-and-Bricks Used Bookstore
An A to Z Guide

Writing a Used Bookstore Business Plan
Part IV: Sample Business Plan
(Sections 7 and Financial Glossary)

Clicks-and-Bricks Used Bookstore Series

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
Cost of Sales
Gross Profit Margin
Gross Profit Margin %
Operating Expenses:
Rent & CAM
Payroll (incl. taxes)
Telephone and utilities
Marketing (doesn't include Grand Opening)
Professional fees (accounting & tech support)
Bank & Merchant Fees (4% of 1/4 sales)
Trade publications
Office supplies (not including mailing supplies)
Total Expenses
Owner's Compensation Before Taxes & Depreciation

[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.

The best way to estimate utilities is to ask owners of other small businesses in your area what they are paying. Make sure to find out their square footage and whether they have gas or electric heat. Some landlords include water; others make you pay for it.

Insurance fees depend on your location and the value of your inventory, equipment, and buildout. You are usually responsible for replacing plate glass windows, so make sure to get this covered in your insurance. If the insurance quotes you are getting seem high, it may be worthwhile to join ABA or another organization that offers rates geared toward booksellers.

My accounting fees are based on my accountant doing only my year-end taxes. If you're going to need bookkeeping, payroll services, or more handholding, the fees will be higher. My inventory system, Visual Anthology, charges $600 per year in tech support. I don't pay to get the CD-ROM from Baker & Taylor with all the upcoming books. Instead I just enter them by hand. If you're planning to have an inventory control system, which you should, but you're not a fast typist, you'll probably need to pay for the new release CD, whether from Baker & Taylor, UBIC, or wherever.] 7.2 Financial Capital

All financing will be provided by the owner, Jill Hendrix, from the proceeds of the sale of her New York apartment. Please see accompanying bank documentation in the Appendix.

Table 7.2: Available Capital

Capital Available


Donated inventory


LLC capital contributions to date


Owner's personal savings


Total Capital Available





Projected Capital Expenditures


Startup Costs


3 months operating capital


FY1 "Loss"2


FY2 "Loss"


Total Capital Expenditures




Remaining Capital


[Ideally, you'll have remaining capital leftover in case your sales do not meet plan.

Most used bookstores are financed through the owner's personal assets - a home-equity loan, credit cards, etc. - rather than through a traditional business loan. This is partly because a used bookstore does not require a large amount of funding and oddly enough banks would rather lend more money than less since it takes the same amount of due-diligence and time to lend $50,000 as it does to lend $200,000. Also, banks want to know that your business will have assets that they can easily liquidate if you default on your loan. If you were opening a new bookstore, your inventory could be returned to your distributor but this is not the case with used bookstores.

Even if you organize your business as an LLC or corporation, keep in mind that you may have to personally guarantee your lease and other large purchases. This means that if your business is unsuccessful, your creditors can come after your personal assets, such as your house, car, retirement account, etc. Please do not start your business with money that you cannot afford to lose and make sure to discuss worst-case scenarios with your spouse, if applicable, before you decide to make the plunge.] 7.3 Break-Even Analysis

Fiction Addiction's breakeven point is projected to occur toward the end of its third year of business, when monthly sales reach $9,991.05 (i.e., yearly sales of $119,892.55).

As a double-check of the sales projections, consider that the initial inventory at our average sales price of $5.50 is $82,500.00. If the average sales price increases 3% each year, the 3rd year average sales price will be $5.84. Thus breakeven yearly sales could be achieved with an inventory turn of 1.4 at starting inventory levels. Alternatively, the owner's remaining capital could be used to add an additional 6,000 books in inventory, which would bring the inventory to a retail value of $122,640.00 and thus require only 1 turn to achieve break-even sales.

[Your break-even point is the point at which your income meets your expenses, including that of your own paycheck.] Glossary of Financial Terms

Break-even point: The point at which your business's income matches or exceeds its expenses (including a reasonable salary for the owner/manager).

Cash flow: Incoming payments minus outgoing payments over a given period of time. Many businesses may be making a profit according to the IRS but are chronically short of cash. This is usually the case if too much cash is tied up in slow-moving inventory since the cost of the inventory cannot be deducted until it actually sells. Paperback exchange stores often have poor cash flow because many of their customers build up a large credit balance and never have to actually pay cash for their purchases. This problem can be combated by keeping tighter control of inventory costs or by requiring customers to pay for half their purchases with cash, no matter how much credit they may have built up.

Cost of goods sold (COGS): Also known as cost of sales. This is the amount you paid for the inventory that you sold over a set time period. It only includes inventory that sold during that time period, not inventory that you paid for but is still sitting on the shelves. Unfortunately, you cannot deduct inventory as an expense the minute you pay for it. Instead, the IRS makes you wait until you actually receive income for the item. Thus, businesses with higher turns often have better cash flow because they do not have as much money tied up in inventory. If you don't want to have to keep track of exactly what you paid for every single book in your store, you can instead average your cost of goods. Using this method, you simply keep a log of the number of items you buy and the amount you paid. For example, if you buy 5 books for a total of $2.50 at a flea market and then you buy 10 books from a customer for a total of $20 in store credit, then simply average those amounts together (a total of $22.50 was spent for 15 books) to give an average inventory cost of $1.50. Then if you sell 10 of those books, your cost of goods sold will be $15.00 (10 * 1.5) no matter which 10 books you sell. There are other methods approved by the IRS as well, so this is another matter to discuss with your accountant.

Gross profit margin: To calculate your gross profit margin, take your total sales over a set period of time minus your cost of sales and then divide by your total sales and express it as a percentage. For example, say you paid $1,000 for a collection of books and then you turned around and sold that collection for $2,000 to another dealer. Your gross profit margin would be your total sales of $2,000 minus your cost of sales of $1,000, which result is then divided by the total sales of $2,000, giving a 50% gross profit margin. If you sold the collection for $3,000 instead, your gross profit margin would be ($3,000 - $1,000)/$3,000, which equals 66.67%. The higher your gross profit margin, the more money you will have available out of every sale to pay yourself, your rent, and your other expenses. 60% is a good target gross profit margin for a used bookstore.

Inventory turnover: Often referred to simply as turn. The ratio of a company's sales to the retail value of its inventory. Also thought of as the length of time that the average item remains in inventory. If your bookstore makes $100,000 / year and on average has an inventory stickered at $100,000 then your inventory turn is 1 and an item usually remains in inventory for a year. If an inventory valued at $200,000 is only producing $100,000 per year in sales then the inventory turn is .5 and an item usually remains in inventory for 2 years before selling. If an inventory valued at $50,000 is producing $100,000 per year in sales the inventory turn is 2 and an item is only remaining in inventory for 6 months before selling. The higher the turn, the better, but some industries tend to turn inventory faster than others. Unfortunately the used book business only averages turns of 1-2. Whereas the new book business may see turns of 3-4.

Net profit: Net profit is often referred to as the bottom line. It is the amount you have left after you subtract the business's total expenses (including a reasonable salary for yourself) from total income. Ideally you should set up your business so that you as owner/manager are taking a set salary. Then at the end of the year any net profit above that can be distributed to yourself as a bonus or plowed back into the business. If you wish to eventually sell your business or hire a manager to take over for you, the business needs to be making a profit above the owner/manager's salary. I don't have any industry-wide figures for the used book business, but independent new bookstores usually have a net profit of only 2-5%. For tax purposes, net profit may be calculated differently and may not include the owner's salary, depending on whether your company is set up as a sole proprietorship, LLC, or corporation.

Net sales: Your total sales, less returns, discounts, etc. When paying a sales commission to an online aggregator such as Amazon or Alibris you have the choice of recording the amount the customer paid as income and then the aggregator's commission as an expense or simple recording the net income paid to you by the aggregator. There are advantages and disadvantages to both methods and this decision should be one discussed with your accountant.

Operating capital: A business does not necessarily earn 1/12 of its yearly sales each month. Depending on your industry and location, sales may swing wildly from month to month. Thus, you may need to set aside enough money to meet several months' expenses to smooth out the rough edges of your sales cycle. This money is called operating capital.

Operating expenses: The normal day-to-day expenses involved in running your business, such as rent, payroll, marketing, etc. Operating expenses do not include the cost of your inventory. Large equipment purchases over $500 may be considered capital costs for accounting purposes instead of a normal operating expense.

Profit and loss statement: Often abbreviated P&L. A chart showing net sales, cost of sales, expenses, and net profit over a set time period.

Return on investment (ROI): The profit or return realized from an investment. If you invest $1000 in a bank savings account paying 5% interest per year, your yearly ROI is 5%. If you invest $50,000 to start your business and make a net profit (over a reasonable owner/manager salary) of $3,000 each year, your yearly ROI is 6%.

Startup capital: The amount of money you will need to start your business and keep it operating until the break-even point has been reached. This usually consists of startup costs, 3-6 months operating capital, and enough capital to cover your losses until the break-even point has been reached.

Startup costs: For accounting purposes, startup costs are usually one-time costs for equipment, inventory, buildout, etc. that the business incurs before it opens for operation. These costs are lumped together and then deducted over time (i.e., amortized) rather than being expensed against your company's first year of income. Startup costs make up a portion of the startup capital you will need, but not the entire amount.

If you have any comments or questions about this article please email me at Stay tuned for more articles addressing your bookstore startup concerns. Next up: Naming Your Business!

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

2Although the company itself is projected to operate at a profit from inception, that profit will not be great enough to support the owner's living expenses until Fiscal Year 3.

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Contact the editor, Craig Stark

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