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Getting Comfortable with Financial Plans in the Business Plan
Say the words “profit and loss statement or “cash flow statement” and expect some blank stares. If there is one area of the business plan that scares small business entrepreneurs (and some bigger business managers) it is the financial section. Get it right and the business can start on solid footing. Get it wrong and the business could easily fail due to lack of financial resources.
Where Financial Planning and Business Planning Meet
This is the section where the rubber meets the road, so to speak. It is a snapshot of projected revenues, required expenses, cash flow, asset and liability accumulations, sales projections, personnel costs, and the breakeven point. The financial plan presents in dollars and cents the end result of the entrepreneur’s extensive research conducted during business planning. It must satisfy traditional financial requirements for running and growing a successful business.
Following are the main financial statements included in the typical financial section of the business plan:
• Sales forecast – Project sales over 3-5 years. The gross sales numbers feed into the profit and loss statement as revenue. The forecast will include also include calculations showing how the numbers were derived (units x sales price), the unit costs, and the cost of sales. With this information, the gross margin (sales less cost of goods sold) can be calculated to serve as an industry benchmark.
• Profit and Loss – This statement shows revenues, cost of goods sold, operating expenses, and net profit or loss.
• Cash flow – Projecting cash flow is critical. This statement shows how much cash will flow in and out of the business and the projected expenses. Cash is not necessarily the same as revenues, especially if customers are extended credit. The cash outflows are not always the same as expenses either. For example, expenses on the profit and loss statement may include items like depreciation expense which is not a cash outflow item.
• Balance sheet – This statement identifies the value of assets and liabilities, and it calculates equity or net business value.
• Staffing costs – Some businesses need to hire a staff, and that can quickly get expensive when considering salaries or wages, benefits, and employer taxes. Each position included on the statement should be a position that is critical to business success.
• Break-even analysis – How much revenue does the business need to generate to cover expenses? That is the breakeven point. Including this statement in the financial plan ensures the entrepreneur has considered minimum sales figures for staying in business.
This is a bird’s eye view of the financial statements. Entrepreneurs are encouraged to use consultants experienced in business plan development. They can use their expertise to give unbiased input into the process.
Justify the Business
The financial plan justifies the business idea and strategies for success. It is considered one of the most crucial sections and needs to use valid assumptions, and incorporate in-depth research. For this reason, it is inaccurate to describe the proforma statements (projections) as “best guess” because the numbers should be supported by a foundation of facts.
The financial statements are also not accounting reports because accounting considers historical financial results. In the business plan, the financial statements are forward looking. When the financial forecast are valid, they give the entrepreneur something to measure progress against and can trigger changes in operations as the business unfolds. Keep the numbers realistic and honest, and they will serve the business well.
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