Writing The Financial Portion Of A Business Plan
This is the section in which you make your case in words and back up what you say with financial statements and forms that document the viability of your business. If your plan will be presented to potential investors, this part of the business plan should contain the following sections: (1) Risk statement, (2) Cash Flow Statement, (3) Balance Sheet, (4) Income Statement, and (5) Funding Request and Return. If the plan is to remain an internal document, you should still create a Cash Flow Statement and Income Statement so you have figures by which you can gauge your company's performance.
A Business Plan Should Highlight Business Risks
No business is without risks. Your ability to identify and discuss them in a business plan demonstrates your skills as a manager and increases your credibility with potential investors. By identifying the risks in a business plan and setting forth a plan to deal with them, you show you have the ability to confront these issues and handle them. This is ultra important. Failure to state negative factors, will often undermine the credibility of your business plan in the eye of an experienced investor. If you are still wary, try to incorporate each of the identified negative risk factors into the various relevant parts of your business plan instead of stating all of the potential risks in a separate section.
To generate a complete list of the potential risks, first examine each of your assumptions about how your business will develop. The flipside of many of these assumptions if often a risk. Some common risks faced by companies include: (1) overpaying employees; (2) hiring friends rather than the most qualified candidates; (3) underestimating costs; (4) failing to meet sales projections; (5) overlooking competition; (6) trying to be all things to all customers; (7) losing a key customer; (8) inability to find skilled labor; (9) a decline in the industry's growth rate; and (10) a competitor releasing a new, better product or service.
Cash Flow Statement
The Cash Flow Statement informs the reader of a business plan about how much money you will need, when you will need it, and where the money will come from. As with all financial documents, your Cash Flow Statement should be prepared by a reputable accountant. Do not underestimate your cash flow needs, make sure you include the effects of seasonality and business cycles in each of your projections, and try to account for a gradual increase in sales. Once the Cash Flow Statement is prepared, briefly analyze its results and include this analysis in your business plan.
Unlike other financial statements, a balance sheet is created only once a year to calculate the net worth of a business. If your business plan is for a new start-up business, you will need to include a personal balance sheet summarizing your personal assets and liabilities. If your business is operating, include last years' balance sheet. Analyze the results of the balance sheet briefly and include this analysis in your business plan.
The income statement is where you make a case for your company's potential to generate cash. This financial statement is where you record revenue, expenses, capital, and the cost of goods. So how is this different from a cash flow statement? The only difference is that an income statement does not include the details of when revenue are collected or when expenses are paid. An income statement for a business plan should be broken out by month for the first year; quarterly for the second year; and annually for each year thereafter. Analyze the results of the income statement briefly and include this analysis in your business plan. If your business already exists, include income statements for previous years.
A Business Plan Should End With A Funding Request & Return
The end of your business plan, should conclude with a one to three page Funding Request and Return. The funding request should clearly:
- state the amount and type (debt or equity) of funding you are seeking, when the money is needed, and the minimum amount to participate;
- provide a breakdown of how the money will be applied;
- explain what the investor will receive in return for their capital (e.g. payback period, return on investment, collateral), and why this is a sound investment; and
- briefly mention future financing needs and how this initial capital and future investment may dilute current and subsequent ownership;
- discuss the effect the initial capital infusion will have on the business' potential to grow and profit;
- state what investment has already been made in the company, and by whom including the founders themselves; and
- provide an exit plan describing how an investor should be able to get their money out of the company (e.g. a cash-out option in 5 years, or assurance that the company will become a strong candidate for a purchase or an IPO).
Before presenting a business plan to a potential investor be sure to have it reviewed by an attorney for possible errors, misrepresentaions, etc.... You do not want to fly in the face of any state security, or federal SEC rules and regulations.