Writing the Business Plan: The Financial Plan
The Financial Plan Section of the Business Plan
It's at the end of your , but the financial plan section is the section that determines whether or not your business idea is viable, and is a key component in determining whether or not your plan is going to be able to attract any investment in your business idea.
Basically, the financial plan section consists 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 lead you through the preparation of each of these three financial statements. First, however, you need to gather together some of the financial data you'll need by examining your expenses.
Think of your as broken into two categories; your start-up expenses and your operating expenses.
All the costs of getting your business up and running go into the start-up expenses category. These expenses may include:
- Business licensing and permits
- Starting inventory
- Rent deposits
- Down payments on property
- Down payments on equipment
- Utility set up fees
This is just a sampling of start up expenses; your own list will probably expand as soon as you start writing them down.
Operating expenses are the . Think of these as the things you're going to have to pay each month. Your list of operating expenses may include:
- Salaries (yours and staff salaries)
- Rent or mortgage payments
- Raw materials
- Loan payments
- Office supplies
Once again, this is just a partial list to get you going. Once you have your operating expenses list complete, the total will show you what it will cost you to keep your business running each month.
Multiply this number by 6, and you have a six month estimate of your operating expenses. Then add this to the total of your start up expenses list, and you'll have a ballpark figure for your complete start up costs.
Now let's look at putting some financial statements for your business plan together, 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.
The Income Statement shows your revenues, expenses, and profit for a particular period. It's a snapshot of your business that shows whether or not your business is profitable at that point in time; 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.
Here's an Income Statement template for the first quarter for a service-based business. It's followed by an explanation of how to adapt this Income Statement template to a product-based business.
|Total Direct Costs|
|General and Administration (G&A)|
|Accounting and Legal Fees|
|Advertising and Promotion|
|Depreciation and Amortization|
|NET INCOME BEFORE INCOME TAXES|
Not all of the categories in this Income Statement will apply to your business. Leave out those that don't apply and add categories where necessary to adapt this template to your business.
To use this template as part of the business plan, you'll need to set it up as a table and fill in the appropriate figures for each month (as indicated by the line "row listing 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 the inventory needs to be accounted for. Here is an example showing how the cost of inventory is calculated in the Revenue section:
|Cost of Goods Sold|
|Minus Closing Inventory||-$1200||-$1000||-$900||-$3100|
|Total Cost of Goods Sold||$1000||$2000||$2150||$5150|
The Expense portion of the Income Statement, however, is very similar to the template I've provided above.
Ready to move on to the next financial statement that you need to include in the Financial Plan section of your business plan? The Cash Flow Projection is next.
The Cash Flow Projection
The Projection shows how cash is expected to flow in and out of your business. For you, it's an important tool for cash flow management, letting you know when your expenditures are too high or when you might want to arrange short term investments to deal with a cash flow surplus. As part of your business plan, a Cash Flow Projection will give you a much better idea of how your .
For a bank , the Cash Flow Projection offers evidence that your business is a good credit risk and that there will be enough cash on hand to make your business a or .
Do not confuse a Cash Flow Projection with a Cash Flow Statement. The Cash Flow Statement shows how cash has flowed 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 of time in the future.
While both types of reports are important business decision-making tools for businesses, we're only concerned with the Cash Flow Projection in the business plan. You will want to show Cash Flow Projections for each month over a one year period as part of the Financial Plan portion 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. Remember that these are Cash Revenues; you will only enter the sales that are collectible in cash during the specific month you are dealing with.
The second part is your . 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 is the Reconciliation of Cash Revenues to Cash Disbursements. As the word "reconciliation" suggests, this section starts with 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 on when your business is up and running):
|Revenue from Product Sales|
|Revenue from Service Sales|
|TOTAL CASH REVENUES|
|Cash Payments to Trade Suppliers|
|Salaries and Wages|
|Professional Fees Paid|
|TOTAL CASH DISBURSEMENTS|
|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, you will need to delete and add the appropriate Revenue and Disbursement categories that apply to your own business.
The main danger when putting together a Cash Flow Projection 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.
Once you have your Cash Flow Projections completed, it's time to move on to the Balance Sheet.
The Balance Sheet
The is the last of the financial statements that you need to include in the Financial Plan section of the business plan. The Balance Sheet presents a picture of your business' net worth at a particular point in time. It summarizes all the financial data about your business, breaking that data into 3 categories; assets, liabilities, and equity.
Some definitions first:
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, i.e. 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 are categorized as an asset, a liability or equity. The relationship between them is expressed in this equation: Assets = Liabilities + Equity.
For the purposes of your , you'll be creating a pro forma Balance Sheet intended to summarize the information in the Income Statement and Cash Flow Projections. Normally a business 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 on when your business is up and running):
|Current Assets||Current Liabilities|
|Cash in Bank||Accounts Payable|
|Petty Cash||Vacation Payable|
|Net Cash||Income Tax Payable|
|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|
|Less Depreciation||Long-Term Loans|
|Net Land & Buildings||Mortgage|
|Total Long-Term Liabilities|
|Less Depreciation||TOTAL LIABILITIES|
|Owner's Equity - Capital|
|Owner - Draws|
|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 will reproduce the accounts you have set up in your . You may need to modify the categories in the Balance Sheet template above to suit your own business.
Once you have your Balance Sheet completed, you're ready to write a brief analysis of each of the three financial statements. When you're writing these analysis paragraphs, you want to keep them short and cover the highlights, rather than writing an in-depth analysis. The financial statements themselves (the Income Statement, Cash Flow Projections, and Balance Sheet) will be placed in your business plan's Appendices.