The financial portion of the business plan consists of a 12-month profit and loss projection, a four-year profit and loss projection (optional), a cash-flow projection, a projected balance sheet, and a break-even calculation. These projections combine to give a reasonable estimate of your company’s financial future. And, the process of researching and developing your financial plan will help you gain insight into the inner financial workings of your company.
12-Month Profit and Loss Projection
For most business owners, the 12-month profit and loss projection is the main part of their financial plan. This is where you crunch all the numbers and get an idea of what it is required to make your business profitable and successful.
Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year.
You should include a narrative explaining the major assumptions used to estimate company income and expenses, along with your business profit projections.
Always keep your research notes and assumptions, so that if you need to later explain them, and you’ll have the sources on hand, especially if you later need to revise your plan.
Four-Year Profit Projection (Optional)
The four-year profit projection is for those business owners that want to carry their forecasts beyond the first year. When you are starting a business, it can be difficult to make assumptions about performance so far in the future. Keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year.
Projected Cash Flow
Cash flow is the necessary vehicle to keep your business afloat. Many of the small businesses that fail do so because they simply cannot pay their bills. Every part of your business plan is essential to your operation, but you simply can’t survive if you run out of cash.
This worksheet allows you to plan how much cash you need before startup, for preliminary expenses, operating expenses, and how much cash reserves you’ll need to maintain. You should continually update your cash flow projections as you use it. Frequent updates help you foresee any cash shortages and give you an opportunity to do something about them- for example, you could cut expenses, or even find a loan. But most importantly, you won’t be taken by surprise.
There is no automatic way to prepare a cash flow projection: it is basically just a forward look at your checking account.
For each item on the projection, determine when you actually anticipate receiving cash (for sales) or when you plan to actually write a check (for expense items). You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases.
Keep track of any cash outlays prior to opening the business in a pre-startup column. Your initial research for the startup expenses should provided you with assumptions about you necessary cash outlays.
Your cash flow projection will show you whether you have sufficient working capital. Clearly, if your projected cash balance ever becomes negative, you know that you will need additional start-up capital. This plan helps you predict just when and how much capital you will need to borrow.
Include an explanation for any of your major assumptions, especially if any of those differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you anticipate that you would actually collect the cash? When you buy inventory or materials, will you pay in for the materials in advance, upon delivery, or later? How does this affect cash flow?
Will you have to pay some expenses in advance? When?
Are there expenses that are periodic or irregular, such as quarterly tax payments, routine maintenance and repairs, or a seasonally based inventory buildup, that should be included in budget projections?
You typically don’t consider including loan payments, equipment purchases, or owner’s draws on profit and loss statements, but they do result in cash being taken out. Be sure to include them in the projections.
And of course, depreciation does not appear in the cash flow at all because you never write a check for it.
Opening Day Balance Sheet
A balance sheet is one of the basic cornerstones of the financial reports for any business needs for reporting and financial management. A balance sheet shows what items of value the company holds (the assets), and what the company owes (the liabilities). When liabilities are subtracted from the business assets, the remainder amount is the owners’ equity.
Use your startup expenses and capitalization spreadsheet as a foundation for preparing a balance sheet as of the business’ opening day. Prepare a narrative that details how you reached the account balances on your opening day balance sheet.
Optional: Some people want to add a projected balance sheet showing the estimated financial position of the company at the end of the first year. This is especially useful when selling your proposal to investors.
A break-even analysis predicts your sales volume, at a given price, required to recover total costs. In other words, it’s a balancing act: the sales level that is the dividing line between operating at a loss and operating at a profit.
The break-even formula is:
Breakeven Sales =
Include all assumptions upon which your break-even calculation is based.
Business Plan Appendices
Include details and studies used in your business plan; for example:
- Brochures and advertising materials
- Industry studies
- Blueprints and plans
- Maps and photos of location
- Magazine or other articles
- Detailed lists of equipment owned or to be purchased
- Copies of leases and contracts
- Letters of support from future customers
- Any other materials needed to support the assumptions in this plan
- Market research studies
- List of assets available as collateral for a loan