How to Write the Business Plan Financial Plan Section
A business plan financial plan helps businesses understand their financial status and make informed resource allocation decisions. If funding is needed, it is essential to support funding request discussions.
“If a proposal doesn’t prove out as expected when we run it, sometimes we change the model.” – Edgar Fiedler
You’ve made your pitch for funding and secured a meeting, and now you must support your position with accurate financial projections. Generally, investors and banks want to see at least your first three years’ forecasts ( and sometimes five-year economic forecasts). Therefore, financials are an essential requirement for your detailed business plan.
In this ninth article in our Creating a Business Plan series, we will focus on the financial projections and modeling requirements to include within your comprehensive business plan.
You must include a few specific projected forecast statements for your readers to take your business plan seriously.
Benefits of having a financial section in your business plan
A solid financial section in your business plan is essential to attracting potential investors. This section will determine the feasibility of your business idea and should include four critical financial statements: the income statement, cash flow projection, balance sheet, and statement of shareholders’ equity. Additionally, providing a brief explanation and analysis of each statement is essential.
It will help your business plan readers understand your expected financial performance. They’ll be looking for:
- Sales forecast and total revenues
- Startup and operations expenses statement
- Startup personal budget needs (what do you need to survive personally)
- Hiring Needs and Salary Details
- Asset and Depreciation Schedule
- Projected Statements
- Cash flow statement
- Income statement or Profit and Loss (P&L) statement
- Balance sheet
- Financing needs (for bank loans, soft loans, or investment)
- Break-even analysis
- Financial analysis and business ratios
Your accountant or financial business advisor can help you draft these, as well as suggest other statements that might be useful given your specific circumstances. If you’re uncomfortable with these financial management reports, it’s best to leave them to a professional.
Your financial projections should include the following information as a minimum.
A sales forecast can be challenging if you have no established sales history. But you can make reasonably educated guesses if you thoroughly understand your market and industry and prevailing market trends. Having this data will aid you in creating a meaningful sales forecast.
Break your sales forecast into monthly sales per separate revenue streams (i.e., by service type product sales). Focus on which units are selling, for what price, and quantity. If you have multiple revenue streams or varying categories of transactions, list them all separately, focusing on total annual sales.
A valid free 12-month sales forecast template is available on the Score website. Try this example for a three-year sales forecast.
Startup and Operations Expenses Statement
As you start your business, you’ll likely encounter costs in your ramp-up period. Typically, these are the costs to keep your business afloat. Be sure to include all relevant expenses for website design, legal or accountancy fees, Company registration costs (i.e., HMRC), any prototyping work that is part of your business feasibility plan, and other costs associated with your business setup.
An expense statement is of limited value if there’s doubt about its accuracy. Be sure to include rent, labor, legal expenses, hardware and software purchases, marketing expenses, web design investments, and every other relevant direct expense.
For your ongoing operations expenses, separate fixed and variable costs to give your readers a sense of which payments are stable and can change. As a guideline, here is a cost checklist to consider within your operations expenses (not a complete list, and example only):
Fixed costs typically include:
- rent or mortgage,
- business and local taxes
- financing costs
- maintenance and repairs
- utilities (i.e., electricity, gas, and water rates)
- salaries (including employer’s National Insurance, pension, holiday contributions, and other PAYE commitments)
- planned advertising and promotions
- administrative costs (i.e., accountancy or legal fees
- software and IT costs (i.e., bookkeeping, Sales CRM, website domains, emails)
- storage and transportation (if needed)
- research and development (if required)
- depreciation of fixed assets.
After compiling a list of your operating expenses, you can determine the monthly cost of running your business. Multiply this amount by six to get an estimated six-month cost. Add this figure to your startup expenses list for a rough estimate of your total startup costs. With this information, you can start creating financial statements for your business plan, beginning with the income statement (profit or loss statement).
Here is an example startup expense template.
Variable costs typically include (for service companies, you may not have any variable costs):
- raw materials and sourcing from suppliers
- overtime payments and temporary employees
- wages directly linked to output levels
One-off or project costs
One-time costs occur only once within a year, distinct from recurring monthly expenses—for example, planned capital expenditure or specific PR-related programs.
Can you explain project costs? Project costs are the total amount required to successfully complete a business transaction or work project. Direct costs are also involved, which are necessary for the project’s completion.
Income or Profit and Loss Statement
Your Income statement, commonly known as the profit and loss statement or P&L, is a financial document that summarizes the revenues, operating costs, and expenses incurred within a specified period, typically a fiscal quarter or year. By analyzing all three components, you can forecast potential profits or losses and generate three-year projections based on your input.
If you’re a new corporate body, you may find it helpful to run different financial scenarios and make various assumptions.
- Will you have a profit or loss in year one?
- Do your results differ over the years if you alter the sales forecast and cash flow figures?
- Is it more attractive to use freelance labor versus hiring permanent staff?
Again, giving diverse interpretations demonstrates you’ve done your homework.
Here is an example of a P&L account sheet; an accessible template is available for download.
Showing the cash flow within your business plan financial plan
It’s important to differentiate between the cash flow projection and the cash flow statement. The cash flow statement outlines the cash movement in and out of your business, detailing past cash flow. On the other hand, the cash flow projection predicts cash flow that is expected to be generated or spent during a chosen period.
Cash flow statement
This statement details your likely cash flow turnover in and out — how much money flows into your business (from sales and invoices) and how much is leaving (from bills and purchases). Again, a startup must make educated guesses (and will likely not have a past cash flow statement). At the same time, an established company can base its projections on historical data. Your account can answer questions such as how you’ll manage your cash flow in practical terms.
- Does your cash flow differ per revenue stream?
- What are your payment terms?
- How will you pay suppliers via credit card or in arrears?
- If that is, in how many days?
The cash flow projection
Your business’s cash flow projection is vital for managing cash flow. It shows the expected cash inflow and outflow, helping you identify high expenditures or potential short-term investment opportunities to handle a cash flow surplus. When included in your business plan, the cash flow projection reveals the capital investment required for your business idea.
The cash flow projection typically consists of three parts:
- Cash Sales: Enter the amount of cash sales you expect to collect each month.
- Cash expenditures: From your ledger, list the expected monthly cash expenditures for each expense category.
- Matching cash inflows to cash outflows: To reconcile cash revenues to cash disbursements, we start with an opening balance from the previous month’s operations. We then add the month’s payments and subtract the month’s disbursements to determine the adjusted cash flow balance. This adjusted balance is carried over to the next month.
Investors rely on the cash flow projection to determine if your business is a reasonable credit risk and whether adequate cash is available for a line of credit, short-term loan, or longer-term investment. To provide a comprehensive financial section in your business plan, ensure that you include cash flow projections for each month over a year.
A valid cash-flow forecast free template is available from Startup Loans.
Balance sheet for your business plan financial plan
The balance sheet is a deeper dive into your projected finances. It includes the projections you made in your sales forecast, expenses statement, and all other assets and liabilities, like heavy equipment, property, and unsold inventory.
The balance sheet summarizes a business’s financial data into three categories and reports its net worth at a specific time.
- Assets: These are physical assets that hold financial value and are owned by the company.
- Liabilities: The amount of money that the company owes to one of its creditors.
- Equity: The net difference is calculated by subtracting total liabilities from total assets.
The equation expressing the relationship between financial data elements is Assets = Liabilities + Equity.
These are assets that need to be valued.
- Are you owed money?
- Do you owe others?
- What is your expected capital investment?
- Do you have any inventory?
- Do you have any assets and depreciation?
The balance sheet must value and include all of your assets and provide a detailed accounting of any liabilities the company will be carrying. Remember to include your asset depreciation and whether or not you intend to sell your assets once they have reached maturity.
When creating a business plan, it is essential to include a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. Your accountant or Chief Financial Officer (CFO) prepares a balance sheet annually.
Here is a projected balance sheet template available for download.
Create a business plan financial plan for your business.
Previously, most people created their financial projections using Microsoft Excel or perhaps a free download of an Excel template from the internet. You must manually input your business data regularly, typically monthly, or pass it on to your bookkeeper or accountant.
The modern way of processing your financial bookkeeping is to use online accounting software systems, which have the additional benefit of automatically generating your financial statements.
If you’re familiar with accounting software like Xero or QuickBooks, you can create financial projections for your detailed business plan. In addition, the software will help you organize your baseline budget data. Microsoft Excel is also a commonly used tool for this purpose.
Alternatively, you can use business plan creation software like LivePlan (an online business planning and financial management software) or talk with your financial advisor.
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