9.0 Financial Plan
The financial 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. Together
they constitute a reasonable estimate of your company's financial future. More
important, the process of
thinking through the financial plan will improve your insight into the inner
financial workings of your company.
12-Month Profit and Loss Projection
Many business owners think of the 12-month profit
and loss projection as the centerpiece of their plan. This is where you put it
all together in numbers and get an idea of what it will take to make a profit
and be 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
.
Profit projections should be accompanied by a
narrative explaining the major assumptions used to estimate company income and
expenses.
Research Notes: Keep careful notes on your research
and assumptions, so that you can explain them later if necessary, and also so that
you can go back to your sources when it’s time to revise your plan.
Four-Year Profit Projection (Optional)
The 12-month projection is the heart of your
financial plan. This section is for those who want to carry their forecasts
beyond the first year.
Of course, keep notes of your key assumptions,
especially about things that you expect will change dramatically after the
first year.
Projected Cash Flow
If the profit projection is the heart of your
business plan, cash flow is the blood. Businesses fail because they cannot pay
their bills. Every part of your business plan is important, but none of it means
a thing if you run out of cash.
The point of this worksheet is to plan how much you
need before startup, for preliminary expenses, operating expenses, and
reserves. You should keep updating it and using it afterward. It will enable
you to foresee shortages in time to do something about them—perhaps cut
expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by
surprise.
There is no great trick to preparing it: The cash-flow projection is just a forward
look at your checking account. For each item, determine when you actually expect to
receive cash (for sales) or when you will actually have to 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.
You should also track cash outlays prior to opening
in a pre-startup column. You should have already researched those for your startup
expenses plan.
Your cash flow will show you whether your working
capital is adequate. Clearly, if your projected cash balance ever goes
negative, you will need more start-up capital. This plan will also predict just
when and how much you will need to borrow.
Explain your major assumptions, especially those that
make the cash flow differ from the Profit
and Loss Projection. For example, if you make a sale in month
one, when do you actually collect the cash? When you buy inventory or materials,
do you pay in advance, upon delivery, or much later? How will this affect cash
flow?
Are some expenses payable in advance? When?
Are there irregular expenses, such as quarterly tax
payments, maintenance and repairs, or seasonal inventory buildup, that should
be budgeted?
Loan payments, equipment purchases, and owner's
draws usually do not show on profit and loss statements but definitely do take
cash out. Be sure to include them.
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 fundamental financial
reports that any business needs for reporting and financial management. A balance sheet shows what items of value are
held by the company (assets), and what its debts are (liabilities). When liabilities
are subtracted from assets, the remainder is owners’ equity.
Use a startup expenses and capitalization
spreadsheet as a guide to preparing a balance sheet as of opening day. Then
detail how you calculated 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.
Break-Even Analysis
A break-even analysis predicts the sales volume, at
a given price, required to recover total costs. In other words, it’s the sales
level that is the dividing line between operating at a loss and operating at a
profit.
Expressed as a formula, break-even is:
Breakeven
Sales =
|
Fixed
Costs
|
1-
Variable Costs
|
|
(Where fixed costs are expressed in dollars, but
variable costs are expressed as a percent of total sales.)
Include all assumptions upon which your break-even
calculation is based.