It’s not until you start filling in the terms and numbers of your business plan that it shifts from the conceptual to the actual. While your marketing strategy is an interesting read, it’s the figures on the bottom line that will help you get a business loan or investors.
To justify your plan with good numbers, you need a distinct section in your business plan, where you can lay out your financial forecasts and statements. The financial section of your business plan is one of the most critical parts of the whole document if you wish to acquire funding.
The Purpose of the Financial Section of a Business Plan
Before you start organizing your business financials, it’s important to be aware that this is not the same as keeping accounts. There is a significant difference. Accounting takes a historical view of financial information, whereas financial business planning looks to the future. The financial section of a business plan has two primary purposes.
This first is to attract investors. They will want to see your numbers growing and that you have an exit strategy in place for them when they can make a profit. A bank will also want to view these figures, so they know you will be able to pay back your loan. The second purpose of the financials is for your benefit. It gives you a dependable guideline to see how your business is going to do.
What to Include in the Financial Side of a Business Plan
The financial side of a business plan includes various financial statements that show where you want to take your company. This plan helps lenders, and investors see how much financing your business needs and if it is worth their while getting involved.
There are four financial statements that are essential to include in a structured financial plan. These can help you arrange your financial projections for the next three to five years. Your financial plan should consist of the following financial statements:
1. The Sales Forecast
A sales forecast can be laid out in a spreadsheet as a projection of your sales for the next three to five years. Use different sections for each sale type and a separate column for every month for the first year, and monthly or quarterly columns for the next three to five years.
The most definite way to indicate your sales forecast is by providing separate blocks for pricing, unit sales, calculated sales, unit costs, and unit cost of sales. Including all these figures will help you calculate your gross margin, which amounts to sales less the cost of sales. It gives you a useful figure for comparing your forecast with other industry reporting ratios.
2. The Expenses Budget
An expense budget helps you figure out how much it will cost you to make the sales you forecast in the previous section. To make it completely clear you are going to need to differentiate between fixed costs (such as utilities, rent, and payroll) and variable costs (such as marketing costs).
Again, don’t forget that this is a business statement, not accounting, so you will have to estimate things like taxes and interest. Keep it as simple as possible when making your operating expenses estimates. For example, to calculate your expected taxes, multiply your estimated profits by your tax percentage. To evaluate and determine interest, multiply your estimated debts by an interest rate.
3. Income Projections
The income projections statement is the section where you list your projected profits and loss for the next three to five years. You can use the numbers you’ve included in your sales forecast and expenses to help you calculate these figures. You’ll also have to assess your assets and liabilities which are not covered under your income projections. You may wish to create a separate statement for these or include them here. Think about inventory, money owed to you, and assets such as equipment. Under liabilities, you will list any possible outstanding loans and any other bills you may not be able to pay.
4. The Cash-Flow Statement
The cash-flow section of your financial business plan indicates the movement of money in and out of your business. This section is based on a combination of your sales forecast and balance between your projected income and expenses.
If your business plan for the year is to start a new business, you will need to create a cash-flow projection. For an existing business and most clients we serve, you can base your cash-flow statement on balance sheets and profit and loss statements from previous years. Be realistic about the time it takes for your invoices to be paid in full. Being practical in this way can ensure you have no surprised down the road; primarily if you rely on invoices to pay 100 percent of your expenses.
Other Statements for a Financial Business Plan
There are other statements that you can include in the financial section of your business program. While not essential, they can be beneficial for you as you grow your business. These include:
The Personnel Plan
You may decide to create a personnel plan. By creating this plan, you can describe the different members of your management team and what they offer the rest of the workforce regarding management, training, and knowledge of your market. The plan should justify their salary and/or equity share.
This financial condition section can also be used to list each different department in your company, if applicable. You should even name members of staff or departments that you have yet to hire.
The Break-Even Analysis
The break-even analysis is a calculation of how much your company will have to sell to cover your expenses.
For example, consider a landscaping business. It will need to be ready to function with all the vehicles, equipment, business cards, marketing, and all the landscapers working to generate income. If you were to only landscaped one garden, your business would be operating at a loss. You may not even make enough money to pay for gas and materials, let alone wages.
Creating a break-even analysis can give you an idea of how many landscaping jobs you would need to do to cover your expenses.
You may feel overwhelmed at the prospect of creating a financial plan, and it can undoubtedly be challenging. But it is essential that you fully understand each section. As a business owner, you may consider hiring a bookkeeper to handle your account once your business is running. You will need to understand your business’ financial statements and use them as a basis for making decisions about your company. Numerous available software programs can help you put it together and lighten your load.
In the long run, the financial statements in your business plan will outline the growth and potential of your business. And once you can show where your financial performance figures are coming from, you will significantly increase your chances of getting funding from lenders or investors. So, don’t skimp on your financial statements, take the time to learn how to do them properly, and get them right. It will be worth it in the long run.
We Can Help
If you need help determining which financial statements you need or require consultation when setting up a business plan, we can help. As an outsourced accounting firm, we provide ongoing accounting support and financial analysis to small and mid-size businesses. Our team of highly experienced accountants will act as your entire accounting department (CFO to staff accountant).
We complement and work alongside your internal staff to provide ongoing accounting and finance support for your business. These areas are necessary to effectively run your company, analyze operations, and guide business decisions. Contact us today so we can get started.