Writing the Business Plan: The Financial Plan

The Financial Plan Section of the Business Plan

Businessman working on financial plan at his computer

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of three financial statements: the income statement, the cash flow projection and the balance sheet and a brief explanation/analysis of these three statements.

This article will guide you in the preparation of each of these three financial statements.

Before you begin, however, you must gather the financial data you will need including all of your expenses.

Taking Stock of Expenses

Think of your as two cost categories; your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These expenses may include:

  • fees
  • Business licensing and permits
  • Starting inventory
  • Rent deposits
  • Down payments on property
  • Down payments on equipment
  • Utility setup fees

This is just a sample of startup expenses; your own list will expand as soon as you start to itemize them.

Operating expenses are the . Think of these as your monthly expenses. Your list of operating expenses may include:

  • Salaries (including your own)
  • Rent or mortgage payments
  • Telecommunication expenses
  • Utilities
  • Raw materials
  • Storage
  • Distribution
  • Promotion
  • Loan payments
  • Office supplies
  • Maintenance

Once again, this is just a partial list. Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by 6, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you  have a ballpark figure for your complete start up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The Income Statement

The income statement is one of the three financial statements that you need to include in the financial plan section of the business plan. It shows your revenues, expenses, and profit for a particular period - a snapshot of your business that shows whether or not your business is profitable. Revenue - Expenses = Profit/Loss.

While established businesses normally produce an income statement each fiscal quarter, or even once each , , an income statement should be generated more frequently - monthly for the first year.

Below is an income statement template for the first quarter for a service-based business. It is followed by an explanation of how to adapt this income statement template to a product-based business.

YOUR COMPANY NAME
Income Statement for the 1st quarter of (year)
  Jan Feb  Mar  Total 
REVENUE
  Services
    Service 1    
    Service 2    
    Service 3    
    Service 4    
  Total Services    
     
  Miscellaneous
    Bank Interest    
  Total Miscellaneous    
TOTAL REVENUE    
     
EXPENSES
  Direct Costs
    Materials    
    Equipment Rentals    
    Salary (Owner)    
    Wages    
        
        
  Total Direct Costs    
     
  General and Administration (G&A)
    Accounting and Legal Fees    
    Advertising and Promotion    
    Bad Debts    
    Bank Charges    
    Depreciation and Amortization    
    Insurance    
    Interest    
    Office Rent    
    Telephone    
    Utilities    
        
        
  Total G&A    
TOTAL EXPENSES    
     
NET INCOME BEFORE INCOME TAXES    
INCOME TAXES    
NET INCOME    

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

To use this template as part of your business plan or each quarter, set it up as a table and fill in the appropriate amounts for each item for each month. 

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory. Here is an example showing how to calculate the cost of inventory in the revenue section for a product-based business:

Company Name
Income Statement for the 1st quarter of (year)
  Jan Feb  Mar  Total 
REVENUE    
  Sales$3000$4,100$4,300$11,400
    Cost of Goods Sold
    $1000$1500$1500$4000
    Purchases$1000$1200$1200$3400
    Freight$200$300$350$850
    Minus Closing Inventory-$1200-$1000-$900-$3100
  Total Cost of Goods Sold$1000$2000$2150$5150
  Gross Profit$2000$2100$2150$6250

The expense portion of the income statement, however, is similar to the template above.

The cash flow projection is the next financial statement that you need to include in the financial section of your business plan.

The Cash Flow Projection

The cash flow projection shows how cash is expected to flow in and out of your business. For you, it is an important tool for cash flow management because it indicates when your expenditures are too high or you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  your .

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a , a , or a longer term investment.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

While both types of c reports are important business decision-making tools for businesses, only the cash flow projection needs to be in the business plan. You should include cash flow projections for each month over one year in the financial section of your business plan.

There are three parts to the cash flow projection. The first part details your cash revenues. Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.

The second part of the cash flow projection lists your cash disbursements. Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay that month for each month.

The third part of the cash flow projection is the reconciliation of cash revenues to cash disbursements. As the word "reconciliation" suggests, this section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance; the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

Here is a template for a cash flow projection that you can use for your business plan (or later when your business is up and running):

YOUR COMPANY NAME
CASH FLOW PROJECTIONS
  Jan Feb  Mar  Apr  May  Jun 
CASH REVENUE
  Revenue from Product Sales      
  Revenue from Service Sales      
TOTAL CASH REVENUES      
       
CASH DISBURSEMENTS
  Cash Payments to Trade Suppliers      
  Management Draws      
  Salaries and Wages      
 Paid      
  Professional Fees Paid      
  Rent/Mortgage Payments      
  Insurance Paid      
  Telecommunications Payment      
  Utilities Payments      
TOTAL CASH DISBURSEMENTS      
       
CASH FLOW      
       
OPENING CASH BALANCE      
CLOSING CASH BALANCE      

 

CASH FLOW = TOTAL CASH REVENUES - TOTAL CASH DISBURSEMENTS

OPENING CASH BALANCE = CLOSING CASH BALANCE from the previous month

CLOSING CASH BALANCE = OPENING CASH BALANCE + CASH FLOW

Once again, to use this template for your own business, delete and add the appropriate revenue and disbursement categories that apply to your business.

When building your cash flow projection, a common pitfall is being over-optimistic about your projected sales. Terry Elliott's article, , will help you avoid this and provides a detailed explanation of  for your cash flow projections.

The balance sheet if the last financial statement that needs to be included in your business plan.

The Balance Sheet

The Balance Sheet reports your business' net worth at a particular point in time. It summarizes all the financial data about your business in three categories; assets, liabilities, and equity.

  •  are tangible objects of financial value that are owned by the company.
  • A liability is a debt owed to a creditor of the company.
  • Equity is the net difference when the  are subtracted .

Retained earnings are earnings kept by the company for expansion; that is, not paid out as dividends.

Current earnings are earnings for the fiscal year up to the balance sheet date (income - cost of sales and expenses).

All accounts in your general ledger are categorized as an asset, a liability, or equity. The relationship between them is expressed in this equation: Assets = Liabilities + Equity.

For your , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Here is a template for a balance sheet that you can use for your business plan (or later when your business is up and running):

YOUR COMPANY NAME
BALANCE SHEET as of __________ (Date)
ASSETS$LIABILITIES$
Current AssetsCurrent Liabilities
  Cash in Bank   Accounts Payable 
  Petty Cash   Vacation Payable 
  Net Cash   Income Tax Payable 
  Inventory   Customs Fees 
  Accounts Receivable   Pension Payable 
  Prepaid Insurance   Union Dues Payable 
Total Current Assets   Medical Payable 
    Workers Compensation Payable 
    State/Provincial Tax Payable 
Fixed Assets: Total Current Liabilities 
  Land    
  Buildings Long-term Liabilities 
  Less Depreciation   Long-term Loans 
Net Land & Buildings   Mortgage 
  Total Long-term Liabilities 
Equipment   
Less Depreciation TOTAL LIABILITIES 
Net Equipment   
  EQUITY 
  EARNINGS 
  Owner's Equity - Capital 
  Owner - Draws 
  Retained Earnings 
  Current Earnings 
  Total Earnings 
    
  TOTAL EQUITY 
    
TOTAL ASSETS LIABILITIES AND EQUITY 

 

Once again, this template is an example of the different categories of assets and liabilities that may apply to your business. The balance sheet reproduces the accounts in your . Modify the categories in the balance sheet template to suit your own business.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves (the income statement, cash flow projections, and balance sheet) should be placed in your business plan's appendices.