Writing the Business Plan: The Financial Plan
The Financial Plan Section of the Business Plan
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 business expenses 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:
- Business registration 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 costs of keeping your business running. Think of these as your monthly expenses. Your list of operating expenses may include:
- Salaries (including your own)
- Rent or mortgage payments
- Telecommunication expenses
- Raw materials
- Loan payments
- Office supplies
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 fiscal year, for the purposes of the business plan, 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.
|Workmen's Compensation Expense|
|Total Direct Costs|
|General and Administration (G&A)|
|Accounting and Legal Fees|
|Advertising and Promotion|
|Depreciation and Amortization|
|Credit Card Commissions|
|Credit Card Charges|
|NET INCOME BEFORE INCOME TAXES|
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:
|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 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 much capital investment your business idea needs.
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 good candidate for a line of credit, a short-term loan, 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 cash flow 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):
|Revenue from Product Sales|
|Revenue from Service Sales|
|TOTAL CASH REVENUES|
|Cash Payments to Trade Suppliers|
|Salaries and Wages|
|Promotion Expense Paid|
|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, 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, 3 Methods of Sales Forecasting, will help you avoid this and provides a detailed explanation of how to do accurate sales forecasting 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.
- Assets 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 total liabilities are subtracted from the total assets.
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 business plan, 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):
|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 reproduces the accounts in your General Ledger. 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.