Every investor will want to know how you, as an entrepreneur, plan to turn their investments into a profit. This makes writing the financial sections of your business plan absolutely critical.
As a new entrepreneur, if you are courting investors you will soon find that they all want to see details about how you are going to keep your numbers in the black. Even if you are not looking for investors, you need a clear blueprint for your business. The financial section of your business plan is not strictly an accounting report; a lot of it has to do with projections and estimates based on your research. Six key elements should be part of your business plan’s financial section.
Create a spreadsheet that breaks your estimated sales on a monthly basis for at least the first year. You also should do projections for your second and third years in business as well to show that your business has growth potential. For projections after the first year, you can break the total sales down into monthly or quarterly figures. It may seem impossible to project your businesses’ sales, but that is where the research comes in. Research past results for other businesses like yours and make your best educated estimations.
Expenses and Budgeting
Tally up how much it is going to cost to meet your projected sales quota. Include fixed costs such as lease space and payroll as well as variable costs such as supplies, i.e. the more you sell, the more supplies you will need. Not all of this information will be set in stone, but the rise of sales and supplies should work out in proportion to each other. You will have to estimate certain things like taxes and interest. Your key objective is to present a workable financial plan for sustaining your business’s growth.
The tricky part of determining cash flow is that you also have to figure in accounts payable and receivable. For example, if you invoice customers, you cannot always assume that you will collect 100% of those invoices within 30 days. Use business planning software or pick reasonable percentage of the number you think will collect on time. You also have to account for invoices that you have to pay to vendors, so you will have to factor those in based on the vendor’s payment terms. Match this up with your projected sales and budgeted expenses to be certain that you have a positive cash flow every month.
This is a basic profit and loss statement projected over a three-year period. This is where you bring all the previous figures together to show how much money you expect to make. A very simple formula is to take your gross profits, subtract your expenses including projected variables like interest and taxes and come up with your net profit. You need to show monthly figures for at least the first year, and ideally for the second and third years, but you can also do quarterly projections for years two and three.
The Balance Sheet
There is where you deal with things like assets and liabilities. Assets are inventory that is paid for, equipment and property. Liabilities are things that you own money on, such as a lease, past due bills or loans. Another important thing to add in to your balance sheet is depreciation. Computers and equipment lose value over time and become less of an asset. Speak with your accountant to figure out what items you have will depreciate over time and he or she will be able to give you a good estimate of how to factor that into your balance sheet.
The Break-Even Point / Exit Strategy
Assuming that things do not go as planned, you need to go back to your income projections and figure out much you need to make in gross profit to pay your expenses. While the goal is obviously to stay profitable, investors will want to know that you will recognize when the business is no longer viable. Knowing at what point you are just barely getting by, will help you plan an exit strategy. Investors will want reassurance that if sales do not go as forecasted, you will be able to close down the business without incurring major losses.
While this may seem like a lot of work for just one part of your multi-part business plan, it is the most important part of your business plan. Investors like to see realistic numbers, and preferably graphics like charts and spreadsheets. Later on, as your business matures, you can also use this information as a benchmark for how well you are doing. The business plan is not just your starting point; it is also a reference point for how you measure your business’s success.