This section of your business plan is crucial if you’re presenting your plan to potential lenders or investors, but it’s also important if you’re using it in-house as a roadmap to get started and continue to grow. You may have the best idea in the world for a business—or it may need tweaking. You won’t actually know until you sit down and work up the numbers.
As a startup, spelling out your sales projections for the future will help you closely examine your business model and costs, how you’ll allocate your resources, and figure out whether you actually do have a viable idea. For existing businesses, think of this as a financial checkup: a way to examine your previous sales figures and ensure your health going forward.
If you’re applying for a loan or making a presentation to investors, this section is the companion piece to your Funding Request. It’s where you support the numbers you put together in your sales and marketing plan, and demonstrate why you’re a good investment. In this section, you’ll take all of the marketing, sales, and product information you’ve amassed, and show how they translate into dollars. Sharpen your pencil and get your spreadsheet on!
Writing the Financial Section
There are two parts to the financial component of a business plan: historical data and prospective data. If you’re a startup, you obviously won’t have any previous financial information for the company, so many lenders will want to see your personal financial information in lieu of, or in addition to, your business financials.
Spell out how much money you’re investing in the business, along with specifics about the assets you plan to use. If you’re looking for financing, you’ll probably have to show personal income tax returns for the last few years. Be prepared with documentation for the last three to five years, depending on how long you’ve been in business. You’ll need income statements, balance sheets, cash flow statements, and tax returns.
Income statements document how much money you’ve taken in for the business, where the money came from, what your expenses were, and your net income, or how much you wound up with after paying all the expenses. The statements are usually prepared quarterly, and will show at a glance whether the company is making money or operating at a loss.
Balance sheets list the type and value of all of your business's assets and liabilities, along with ownership interest (who owns what in the company, and how much). Assets will include your cash on hand, accounts receivable, inventory, equipment, and property you own. Liabilities are things such as your accounts payable and long-term debt. The balance sheet is a snapshot of your company’s financial position at the time it’s prepared, comparing what you own with what you owe.
Cash Flow Statements
Cash flow statements show all the cash you have coming in and out of the company, whether as a direct result of your business activities or from any outside investments you’ve made.
How your business is structured will determine which tax forms you have to file with the Internal Revenue Service each year, so these may be your personal tax returns with a Schedule C attachment, or separate corporate tax returns.
If you’re looking for a loan, you’ll most likely also need to show the value of any collateral you’re offering to ensure payments, like real estate, vehicles, inventory, stocks and bonds, and equipment.
Now, everyone knows you don’t have a crystal ball and can’t actually predict what will happen over the next five years, but there’s a point to putting the projections together. Lenders and investors really want to see that you have thought things through and considered the possible outcomes as your business progresses. They want to understand the thought process behind your numbers and why you’ve made those assumptions.
This means you need to do a significant amount of planning before sitting down to work on your projections, critically thinking through different scenarios. Again, the work and research you’ve already done for previous sections of your business plan will be invaluable here in making the assumptions needed to put your projections together.
Include projected income statements, balance sheets, and cash flow statements, which we described above, along with a capital expenditure budget.
Capital Expenditure Budget
A capital expense is a tangible, physical asset like property, buildings or equipment. This budget is your plan for how much you’ll spend to buy or upgrade these assets, whether that might be purchasing new machinery or repairing your HVAC system.
The International Finance Corporation has a primer as part of its Small Business Toolkit that offers great tips on putting all of these statements together.
Funders may also want to see an analysis of how your results would change if some of the variables changed, so consider including a section on that, as well. As an added benefit, this isn’t just a theoretical exercise on your part, but will actually help you run the business and make adjustments as they become necessary. Business Insider offers a look at how to make realistic projections that will be meaningful to your business as well as to lenders and investors.
If you’re just at the beginning stages of business, make sure to also include any startup costs you'll have. Some may be specific to your industry, such as particular types of equipment, tools or store fixtures. Others are fairly common across the board, like professional fees for lawyers or accountants, licensing and incorporation fees, security deposits and rent, and computers.
As a rule, the financial part of your plan should follow generally accepted accounting principles (GAAP) as set by the Federal Accounting Standards Advisory Board, especially if you’re putting it together primarily to get a loan or a line of credit. For this section, it helps to be fluent with spreadsheets, as that’s the best and most accepted way to present this information. This is one part of the business plan that you may want to get some outside assistance with, perhaps from your accountant or financial advisor, to help put the numbers together and present them properly. If you use an accountant, and your financial statements have been audited, make a note of that in the plan. If you want to give it a go on your own, SCORE, the Service Corps of Retired Executives, has a financial projections template available on its website.
Attention to detail is very important throughout the whole process of writing a business plan, but we can’t stress it strongly enough with regards to your finances. Be VERY careful to make sure that your projections match the numbers you put together for the funding request portion of the plan. At best, any inconsistencies here could delay consideration of your application, and at worst, could be a signal that you’re not as on top of things as you should be, disqualifying you altogether.
Visuals help. Yes, there may be professional number crunchers going over your data, but consider showing your projections graphically along with the requisite spreadsheets, especially if the graphs demonstrate a positive trend.
Include a brief analysis of the information you’re presenting to explain the numbers, putting them into context for someone that has less of an understanding about your business and industry than you do.
Whether you have a startup or existing business, there’s an excellent likelihood you’ll also be asked for personal financial information, so consider including that as part of your business plan. Your credit history or a copy of a recent credit report can go in the appendix, together with copies of your tax returns or any additional information a lender may request.
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