Writing the Financial Plan
How to write the financial section of a business plan is one of the most common questions people ask.
The important financial elements that you need to include in your financial plan are:
A business plan is relatively meaningless until you can start to fill in the numbers. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you ain't got that swing - i.e. your figures weren't real. The financial section of a business plan is one of the most essential components of the plan, as it will prove absolutely crucial if you have any hope of winning over investors or obtaining a bank loan. But even if you don't require financing, you should compile a financial forecast for your own good. This is usually a mistake that start ups that require no funding make - their business plan is in their head with no solid foundations - it's more a case of "I'm sure this will work", "it has to work", "it better work" without any figures behind it to back it up. Figures tend not to lie...although of course the figures you put in are usually guestimates...you don't know for sure until you actually start your business. A lot of the time these figures will tell people that they are about to start a very difficult business - which is highly competitive.
A common comparison people make regarding a business plan is that it is accounting, and accounting is boring - so straight away people are put off in dealing with the financials. The two are poles apart in a couple of ways - accounting is a look back into your businesses past, while a business plan financials is looking forward into projected earnings. Accounting is usually accurate, you know what you have spent and what you have taken (you have kept records right?), a financial plan is merely your best guess.
The main purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, a bank or even family members. They are going to want to know if they are going to get paid back and for some they will want to be able to show a profit from the investment that is going to be worthwhile for them. Family members might be happy to just get their money back and be happy that they've helped you out.
But the most important reason to compile this financial forecast is for your own benefit, so that you understand how you project that your business will do. If you project growth after 2 years this can keep you motivated during the first difficult 18 months or so where you probably won't see any returns. You may feel like you're working for nothing and feel like your wasting your time - but when you look at your financial projections you can see the potential is there in your business.
Don't forget to be realistic when filling in the numbers of how many sales you are going to make - get real - air on the side of caution rather than on the side of plenty. If you are looking for funding you need to pitch somewhere in the middle - too optimistic and you'll get laughed out of the room, too pessimistic and you'll put all the investors off.
Begin your financial plan with a sales forecast. Ideally you'll want 3 years figures - the first year should be broken down monthly and years 2 and 3 can be broken down into quarters. If you have multiple products then it's advisable to break the spreadsheet into sections relating to various products or set of products if you have hundreds of products - e.g. clothing / food (bread/sweets/meat etc.). Your spreadsheet should include cost per unit / price per unit, number of sales, costs for those sales. This will give you your gross margin (sales - sales cost). Investors love to know this figure so they can compare industry averages. If you are selling a new product then you simply have to make your best guess by comparing it to the closest to it.
The next thing you need to do is to create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. It's important you include your fixed costs and variable costs. You may have to buy machinery to produce your products (fixed costs), and you might need raw materials in order to make your products (variable costs), if you have lots of widgets to be made then your costs go up - but you don't mind this assuming you've found a buyer for the items your producing. Staff cost money even if they have nothing to do - you still have to pay them assuming you are paying them per hour. A lot of these costs are pretty tangible such as rent, you sign a contract and you know what you need to pay every month. While you might want to run some google ads and these might fluctuate depending on the cost of keywords going up and down....if you want to achieve a set number of clicks to your website for instance.
Once you've budgeted you need to create a cash flow statement. This is the statement that shows physical money moving in and out of the business. Clearly it is critical to have money in the bank at the right time when you need to pay your staff or when you need to buy that bigger expensive machine that makes more widgets per hour than the previous one. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash flow statement broken down into 12 months. If you are doing business to business - you might offer 30/60/90 days credit notes so it's important you choose carefully - you might be owed money but cannot spend it as the other company doesn't need to pay for another 30 days.
Next you need to calculate your income projections which is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put you're your sales forecast, expense projections, and cash flow statement.
Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like start-up assets. Taking out a loan, giving out a loan, and inventory show up only in assets, until you pay for them. So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure what you have as liabilities i.e your debts. That's money you owe because you haven't paid bills (accounts payable) and the debts you have because of outstanding loans.
Next is your breakeven analysis. The break-even point is when your business expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. If your business is viable, at a certain period of time your overall revenues will exceed your overall expenses, including interest. This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.
One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. This is stupid because as each month passes - you you should have actual figures of your sales, costs etc. Put these actual figures into your guesses financial plan and then re-evaluate - were your figures etter than projected or worse - what were the reasons for this - can you make any changes to improve the figures for next month? Examine your ratios of similar businesses and compare them - are you doing better or worse than expected?
Don't make your financial statement to dry - by adding visuals such as pie charts, graphs you can break up the text and make it more readable to interested investors.
If you have historic financial data that is accurate - i.e. from previous businesses that you have run successfully or/and your personal wealth if you are after a bank loan.