Financial Plan
The Financial Plan section in a Business Plan consists of a 12-month profit and loss projection, an optional four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a break-even calculation. Together they constitute a reasonable estimate of your company's financial future. More important, the process of thinking through the Financial Plan will improve your insight into the inner financial workings of our company.
12- Month Profit and Loss Projection
A Financial Plan includes a 12-month profit and loss projection, an optional four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a break-even calculation. Combined, they present a reasonable estimate of your company’s financial future. Most importantly, preparing this plan will help you to better understand the inner financial workings of your business.
The 12-month profit and loss projection is considered to be the keystone of the plan. It is where you compile all the numbers and information to get an idea of what will make a profit and bring success.
For the sales projections, simply forecast the sales, cost of goods sold, expenses, and profit month-by-month for one year. Combining them together makes the Sales Forecast.
Include a narrative with your profit projections explaining the information used to estimate the company’s income and expenses.
Tip: Be sure to take careful notes on your research so that you can back it up later if necessary. It also helps if you need to go back to your sources when it’s time to revise and perfect your plan.
Four-Year Profit Projection (Optional)
The 12-month projection is very important to your Financial Plan, but the optional four-year profit projection shows that your company has plans beyond the first year.
Tip: keep notes of your assumptions, especially about things you expect may change dramatically after the first year. Including any plans in preparation for the changes will help you during interviews.
Projected Cash Flow
Businesses fail because they cannot pay their bills. Every part of the Business Plan is essential, but it is all completely useless if you run out of cash.
This section will help you to plan how much money is required before startup, for preliminary expenses, operating expenses, and reserves. Be sure to keep updating it and use it often. It will help you to anticipate any shortages in time to do something—perhaps cut expenses or negotiate a loan. Point is, you won’t be taken by surprise.
There’s no magic trick to preparing it: the cash-flow projection is simply a look into the future of your checking account.
For each item, determine when you can expect to receive payment (for sales) and when you will have to write a check (for expense items).
Be sure to track essential operating data. It’s not always a part of cash flow but allows for tracking items that have a heavy impact on it, such as sales and inventory purchases.
You should also track cash outlays before opening in a pre-startup column and have already researched those for your startup expenses plan.
The cash flow will show if the working capital is sufficient. If the projected cash balance goes into the negative, you obviously need more startup money. It will also show you how much, and when, you will need to borrow money.
Explain your assumptions, especially any that make the cash flow contrary to the Profit and Loss Projection. For example, if a sale is made the first month, when are you to expect payment? When buying inventory or materials, do you pay in advance, upon delivery, or much later? Will this affect cash flow?
Are any of the expenses payable in advance? If so, when?
Are there any irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory buildup, that need to be budgeted?
Equipment purchases, loan payments, and owner’s draws don’t normally show up on profit and loss statements, but be sure to take cash out and include them.
Depreciation does not appear in cash flow because a check is never written for it.
Opening Day Balance Sheet
The balance sheet is a fundamental financial report that every business needs for reporting and financial management. It shows what is considered an asset (things that are of value) and what is considered a liability (debts) to the company. When you subtract liabilities from assets, you are left with the owner’s equity.
Assets – Liabilities = Equity
A startup expenses and capitalization spreadsheet can be used as a guide for preparing the balance sheet (as of opening day). Include details on how you calculated the account balances on the opening day balance sheet.
Tip: If you plan on selling your proposal to investors, you may want to add a projected balance sheet showing the estimated financial position of the company by the end of the first year.
Break-Even Analysis
A break-even analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit.
Expressed as a formula, break-even is:
Break-Even Sales = Fixed Costs
1- Variable Costs
(Where fixed costs are expressed in dollars, but variable costs is expressed as percent of total sales.)
Be sure to include all information used for the break-even calculation.
Next section in the business plan: Appendices
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