Financial Projections in Business Plans

One of the most difficult sections to write in a business plan is the proforma and financial sections. After all it is most difficult to what exact costs you will incur or what level of sales volumes are actually achievable. So often businesses are faced with excess government controls at all levels which take thousands of dollars in fees, additionally legal fees, delays and lawsuits often ensue and slow the project. You cannot know in advance what roadblocks or brick walls city planners, country agencies or Federal Regulators will come up with, as they often change their minds and add new laws in the middle of your already delayed project. These are only a few of the problems facing entrepreneurs when writing financial projections. Other issues occur from an over enthusiastic entrepreneurial positive attitude and business plan writers should double the money needed and triple the time to complete the project to be on a reality based plain. Thus if you beat your projections everyone is happy. Including bankers, investors and yourself. If folks are not happy you may find yourself in court defending yourself and making excuses, many of which many not be your fault, but in the end you are hung out to dry as the buck stops with you.

To assist you in writing your financial projections section of your business plan, I have prepared a sample. This sample is from a most simple business model; a mobile car wash, which is part of a franchise system. Please feel free to print this article out and make notes in the margins and then take a legal pad and sketch out your own financial projections and start-up capital needed. I sincerely hope this sample helps you.

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Financial Projections

We will follow our business plan to keep us in a profitable situation at all times. We will try to keep our car wash truck busy at all times. We will stay on top of collections and make sure all invoices go out on time and are directed to the person who authorizes payment. We will treat cash flow as a primary objective in order to reach our financial projections. We will be sure to have the right mix of services.

Gross Revenue Percentage Breakdown

Personal Car Washing 60%

Graffiti, Industrial, Concrete 20%

Fleet Washing 15%

Other 5%

Gross Revenue:

Insert Graph or Pie Chart Here.

* Note: Car washing of personal vehicles will be 60% of our business. Over 80% of these monies will be collected at the point of sale by either:

· Cash

· Check

· Credit Card

Some will actually be paid in advance on credit cards thus keeping us on the proper course to achieve positive cash flow at all times. Very few customers will be allowed to be billed monthly.

** Note: Fleet washing and industrial (graffiti, concrete, etc.) will only account for 35% of gross receipts. Twenty-five percent of this will be collected at the time the work is done, leaving only 26.25% of gross receipts to be billed at month’s end.

Billing

On fleet accounts, all invoices will be net due in fifteen days. After fifteen days they will be considered late and 2% will be charged. If, in the future, our mix of percentages of services performed changes, we may offer a 2% discount for payment in ten days and a 1% discount for payment between ten and fifteen days. We don’t anticipate changing our mix. However, if our city awards us a graffiti contract for $75,000 a year we will definitely accept it.

Anticipated Gross Sales From Services

In the appendix there is a first year pro forma of projected sales. We believe these figures are attainable. For various reasons we will take a 70% scenario for budgeting purposes in case everything doesn’t go as planned. Just to be on the safe side. We project a conservative gross sales dollar amount to be:

$124,630 Projected Gross Revenue X .70 70% Of Projected Dollars = $ 87,241 A Conservative Safe Number To Project As First Year Gross Receipts

Anticipated Business Expenses

We project costs of $56,112 for our first year of expenses. Please see spreadsheet in the appendix. We will add in a 20% fudge factor just in case we have any unanticipated expenses in year one. We project a conservative business expense dollar amount to be:

$56,112 Anticipated Expenses X .20 20% Fudge Factor = $11,222 Possible Additional And Unanticipated Expenses During Year One

$56,111 Anticipated Expenses +11,111 Unanticipated Expenses = $67,334 Total Anticipated And Unanticipated Business Expenses For Year One.

Profit Per Truck

Please see the graph on the following page of the “Net Profit One Truck”. This graph is based on the spreadsheets “Anticipated Gross Sales From Services” minus “Anticipated Business Expenses”.

We realize that if a conservative approach is taken, we must use the 70% scenario for Gross Sales and add 20% to Business Expenses. We project a conservative net profit for the first truck in year one to be:

$ 87,241 Gross Receipts – 67,334 Expenses = $ 19,907 First Year Profit. $ 19,907 First Year Profit divided by 12 Number Of Months = $ 1,659 Per Month Profit, A Good Conservative Number.

Business Planning For the New Financial Year

The new financial year it is a great time to put some thought into how your business is going. Has it progressed during the year? Are you still headed in the same direction that you had intended to go? It is not unusual to find one part of your business is taking off unexpectedly. lt catches us by surprise and we tend to wing it and see what happens. The new financial year is a great time to take stock of what is happening.

1. Revisit your business plan.

Is your plan still current? Does it take into account economic or circumstancial changes in your business? Take the time to plan for the coming year. You need to have a map for your business to follow or you could end up somewhere you don’t want to be.

2. Revisit your marketing plan.

If you don’t have one, now is the time to get one happening. Once you have your business direction and goals sorted out you will be able to look at the best way to market your business. Create your plan now or it won’t get done!

3. Outsource.

No one can do it all. In business these days you have to be everywhere! Serving clients, writing articles, balancing books, twittering….. There are just not enough hours in the average day. Consider outsourcing those parts of your business that you don’t enjoy or don’t have time to do. Don’t see it as an expense. It is a time saver and stress reliever that will actually end up saving you money.

4. Update yourself.

To stay ahead you need to be up to date with new developments in your area of business. In some professions it is a requirement that you undertake a certain number of hours of professional development each year. Those of us working from home need to do the same. Look for books, online classes. networks or webinars that are relevant to you and make sure that you know what is gong on in your area of business.

5. Get organised.

Set up your systems. Without systems you will end up in a mess. Organize the way your office works and the balance between home and work. You might like to read a blog like Organize Your Life for some hints.

The new financial year should be the start of a new year of business accounts, it should be all about a whole new year of prosperity. Take the time to prepare your business for the year and you will be well on your way.

Developing the Financial Projections For Your Business Plan

Developing the financial projections for your business plan may seem a daunting task. After all, how can you know what type of revenue and costs your business will encounter in its first year of operation, let alone the first five years? Putting the projections in the plan and presenting it to funders also seems so final, as if saying you promise stand by these numbers. How can this be the case when you feel extremely uncertain about the projections?

This is a common way for entrepreneurs to feel at first. It is important to understand the mindset of funders who are reading your plan, how you can feel better about your projections, and how to present projections in a way that shows why you feel they are probable outcomes, even though the future is uncertain.

Funder Mindset

Funders do understand that all financial projections are uncertain, and will not lose all trust in you if your projections do not pan out. They are mostly interested in knowing what your targets are and how you can support these projections through reasonable and rational assumptions about the future.

In a sense, reading the financial projections is a way for funders to understand your thought process when it comes to predicting future outcomes. If your thought process seems sound to funders, they will understand if there are variances from the projections you state. If your thought process seems to have no logic, funders will not want to work with you, regardless of how impressive the returns you project are.

Creating More Reasonable Projections

You can move toward creating more reasonable projections by basing your numbers in documented research. Costs are often much easier to research than revenues. You can make calls, do online research, and speak to others in the industry about both the startup costs and operating costs of a business. To project ahead over the next five years, you can rely on the average inflation rate (unless you are in a country where this rate is not at all steady).

Revenue projections should be based on a sense of the market size and how many potential customers your marketing will reach. Then use reasonable conversion rates based at least partly on research for how those customers reached will convert into paying customers.

Presenting Projections Well

Finally, explain the assumptions and research behind your financial projections in notes within the plan. Rather than hiding this thinking, make it transparent. Even if it is logical, funders may still find reasons to argue with it, but they will have the basis for conversation with you. Without explaining your assumptions, funders will be left to assume your projections are based just on wishful thinking and may drop your business plan without even a call back.

Business Planning For Recession Survival and Recovery

The New Basics of Business

With unemployment continuing to rise, home prices falling due to a surplus of inventory, and small business lending at a standstill, this recession doesn’t seem likely to end soon. The recovery will be slow and Americans will certainly not enjoy the prosperity of a few years ago for a long time to come. It’s not just economists who think this way. “Half the population in [a] new ABC News poll thinks both job security and retirement prospects in the years ahead will remain worse than their pre-recession levels.” (“Poll: Less Job Security is the ‘New Normal,'” ABC News The Polling Unit, June 15, 2009, analysis by Gary Langer) This confidence, or lack thereof, is an integral part of an economic cycle. The analysis goes on to say, “Those diminished expectations – plus the pain of the current downturn – are fueling retrenchments in consumer behavior that could fundamentally reshape the economy.”

Basically, consumers are hunkering down to limit spending, save money, conserve resources, and change the way they’ve been living. The major influence on the health of an economy is the psychological state of its consumers. When there exists a broad belief that spending beyond necessity is unwise, people will change their habits and as a result, some businesses will have to close their doors. The economy is molting into a new, leaner animal. Rather than react in desperation to avoid doom, firms should interact with the current situation with innovative and forward thinking actions.

No matter the economic slump, increasing profits is typically the number one goal of any business. To ensure profitability, a company must demonstrate a competitive advantage over others in its industry, either by cost leadership (same product as competitors, lower price), differentiation (same price, better services), or focusing on an exclusive segment of the market (niche). For long term maintenance of competitive advantage, a firm must ensure that its methods cannot be duplicated or imitated. This requires constant analysis and regular reinvention of competitive strategies.

A recession is the optimal time to reinvent competitive advantage because the pressure of a feeble economy will separate the strong businesses from the weak ones, with the weak falling out of the game entirely. Your business will be strong if you have a plan of action based upon a little industry research, an analysis of what you have and what you want, and continuous monitoring of the results of your plan. This kind of innovation is not only a necessity right now, but it is an opportunity to improve the quality and efficiency in the way you do business.

The three basic actions for growing a business in any economic climate are: improve efficiency (maintain output while reducing inputs, such as time and money); increase volume (produce more in order to spread fixed costs); reorganize the business (change goals, methods and/or philosophy). If you plan to implement one of these, you may as well plan to implement them all. By focusing on one of the above strategies, you will find a ripple effect that causes a need to address the others. This is a good thing.

Right now, growth may sound like an unattainable goal as businesses are grappling just to survive, but hey, “flat is the new up.” If a business can keep its doors open and lights on, then it’s doing better than many others. But lights and open doors don’t make sales, so making changes that attract business is in a sense, striving for growth. It won’t be this tough forever, but for now, putting some growth strategies into action may be what keeps your business alive, if not thriving.

Every Business Needs a Plan

Without a plan, there is little hope for growth, let alone survival. As my small business development counselor, Terry Chambers says, “If it’s not written, it’s not real.” That doesn’t mean it’s unchangeable, but it does show that you mean business. In order to accomplish your strategies of improving efficiency, increasing volume, and reorganizing your business, you’ve got to examine what you have, what you want, and how you plan to get there.

Sometimes it takes a significant event or change in existing conditions for a business to create a written plan. I think it’s safe to say that the state of the economy is a significant change that should prompt business owners to alter the way they’ve been doing things. If you already have a business plan, it’s time to get it out and revise it. Make sure your plan includes answers to these questions:

What do I want to accomplish?
What do I have to work with?
How have I done in the past?
What might I do in the future?
What will I do now?
How will I do it?
Is it working?

A business plan can be used as a vehicle for accurate communication among principals, managers, staff, and outside sources of capital. It will also help to identify, isolate, and solve problems in your structure, operations, and/or finances. Along with these advantages, a business plan captures a view of the big picture, which makes a company better prepared to take advantage of opportunities for improvement and/or handle crises.

Essentially, the three main elements of a business plan are strategies, actions, and financial projections. In order to cover all of the principle elements, you will engage in other types of planning:

Marketing plan: Includes analysis of your target market (your customers), as well as the competition within that market, and your marketing strategy. This plan is usually part of the strategic plan.
Strategic plan: Asses the impact of the business environment (STEER analysis: Socio-cultural, Technological, Economic, Ecological, and Regulatory factors). Includes company vision, mission, goals and objectives, in order to plan three to five years into the future.
Operational planning: With a focus on short-term actions, this type of planning usually results in a detailed annual work plan, of which the business plan contains only the highlights.
Financial planning: The numerical results of strategic and operational planning are shown in budgets and projected financial statements; these are always included in the business plan in their entirety.
Feasibility study: Before you decide to start a business or add something new to an existing business, you should perform an analysis of its strengths, weaknesses, opportunities, and threats (SWOT analysis), as well as its financial feasibility, then asses its potential sales volume.

The process of business planning does not end when the written plan is complete. Business planning is a cycle, which includes the following steps:

Put your plan of action in writing.
Make decisions and take action based upon the plan.
Gauge the results of those actions against your expectations.
Explore the differences, whether positive or negative, and write it all down.
Modify your business plan based upon what you learned.

President of Palo Alto Software, Inc. and business planning coach Tim Berry says, “Planning isn’t complete unless you’ve planned for review.” Review is the fundamental action that initiates putting your business plan into action. In his blog at Entrepreneur.com, Berry lists some insightful strategies to making good use of your plan review, a few of which include keeping the review meetings as brief as possible and an emphasis on metrics as key to effective review.

Write your business plan in sessions. Don’t think that you have to produce a business plan before go to bed tonight or you won’t be able to open your doors for business tomorrow. I like Tim Berry’s Plan-As-You-Go method of business planning. The practice of planning is an effective way to really get to know your business and you might end up discovering some important things about your company and about yourself.

There are various strategies and outlines available that will guide you in choosing the appropriate format for your business plan. Check out the collection of sample business plans for a variety of businesses at Bplans dot com. Every business is different, therefore every business plan will be structured differently, but for the purposes of this white paper, I will present the fundamental elements that make up strategic, operational, and financial planning. Here is a basic outline, thanks to NxLevel® for Entrepreneurs (2005, Fourth Edition):

General Business Plan Outline
Cover Page
Table of Contents
Executive Summary

Mission, Goals and Objectives

General Description of the Business
Stage of Development
General Growth Plan Description
Mission Statement
Goals and Objectives

Background Information

The Industry
Background Industry Information
Current/Future Industry Trends
The Business Fit in the Industry

Organizational Matters

Business Structure, Management and Personnel
Management
Personnel
Outside Services/Advisors
Risk Management
Operating Controls
Recordkeeping Functions
Other Operational Controls

The Marketing Plan

Products/Services
Products/Services Description
Features/Benefits
Life Cycles/Seasonality
Growth Description (Future Products/Services)
The Market Analysis
Customer Analysis
Competitive Analysis
Market Potential
Current Trade Area Description
Market Size and Trends
Sales Volume Potential (Current and Growth)
Marketing Strategies
Location/Distribution
Price/Quality Relationship
Promotional Strategies
Packaging
Public Relations
Advertising
Customer Service

The Financial Plan

Financial Worksheets
Salaries/Wages & Benefits
Outside Services
Insurance
Advertising Budget
Occupancy Expense
Sales Forecasts
Cost of Projected Product Units
Fixed Assets
Growth (or Start-Up) Expenses
Miscellaneous Expenses
Cash Flow Projections
Break-Even Analysis
Monthly Cash Flow Projections – First Year
Notes to Cash Flow Projections (Assumptions)
Annual Cash Flow Projections – Years Two and Three
Financial Statements
Projected Income Statement
Balance Sheet
Statement of Owner’s Equity
Additional Financial Information
Summary of Financial Needs
Existing Debt
Personal Financial Statement

Appendix Section

Action Log
Supporting Documents (Resumes, Research Citations, etc.)

Executive Summary

A business plan starts with an executive summary, which is a one or two page summary of your business plan, or an introduction to your business. Although this section is at the beginning of the business plan, it is the last thing to be written. You’ll be able to condense your business plan more succinctly once you have the opportunity to work through the other parts of the plan. The executive summary may be the only thing a potential investor or financier will read, so write it last because it has to be the most compelling.

Start by writing a description of your business, including what stage of development it is currently in (conception, start-up, first year, mature, exit) and your plans for growth. Discuss the nature of your business, the main products and services you offer, the market for your products and services, and how and by whom the business is operated.

Mission Statement

Then work on your mission statement. Here is where you concisely state the focus, scope and hope of your business (or values, vision, philosophy, and purpose). What is the customer pain you are soothing, the need you fulfill? Here’s an example from Coca-Cola:

Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.

To refresh the world…
To inspire moments of optimism and happiness…
To create value and make a difference.

PepsiCo has a different take:

Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.

This is the mission statement of Inspiration Software, Inc.:

Our company strives to support improvements in education and business and to make a positive difference in our users’ lives by providing software tools that help people of all ages use visual thinking and visual learning to achieve academic, professional and personal goals.

Goals and Objectives

Next, outline your company goals and objectives, including long-term and short-term goals. You will get into more detail on how the goals will be accomplished in your operational plan and annual work plan, so focus on brevity at this stage. There is a difference between goals and objectives and it’s important to know what that is. I like how Andrew Smith explains it in The Business Plan Blog. Objectives are non-emotional, precise descriptions of what is needed to achieve a goal. Goals can involve emotion and don’t have to be as specific as objectives. Objectives are the steps to actualizing the goal. Here’s an example:

Goal:

To increase revenues by 50% by the end of the year.

Objectives:

Add a new product to our line.
Expand marketing outside of local area.
Develop a new customer retention strategy.

Of course, you will need a plan of strategies in order to accomplish each objective, but those details will be expounded upon in your annual work plan. A list of three short-term and three long-term goals, along with the objectives necessary to achieve them, is sufficient for most business plans. Remember to replace the goals and objectives with new ones as you check them off your list.

Background Information

The section that details the background information should start with identifying the industry your business is in. Even if you are not a member or have no intention of becoming involved, you should list any trade associations within that industry; you never know when you made need those connections. Find out what publications, magazines or journals are available to businesses in your industry. Use these and other sources of business information to identify how past trends (economic, social, political) affected the industry, as well as any current or future trends that may have an impact.

How does your business fit in the industry? What is the history of your business, including who started it, what changes have occurred, when was it started, where was and is it located, how was it started and operated, and why it was started? What barriers to entry, if any, have you recognized?

Organizational Matters

The ownership hierarchy of your business, the management structure, and the personnel are described in the section on organizational matters. This part of the plan deals with who, what and how your business runs. Who is in charge of what and how are they qualified? Discuss how the various parts of your business interact together; include details about outside contractors and consultants and what functions they perform. See the example below, thanks to Edraw Soft Vector-Based Graphic Design.

The organizational section of the business plan also needs to include an explanation of your record keeping process, checks and balances, and control management systems. Anyone who reads your business plan should be able to understand the organizational procedures for running your business day-to-day, as well as in an emergency situation.

The risk management plan needs to be fleshed out in the organizational section as well, including your risk strategy, the different types of insurance required, your contingency plans, and problem-solving protocols. What will you do if a natural disaster ruins part of your inventory? How will you handle the sudden illness or long-term absence of a key manager? What happens if you are unable to finish a project on schedule? What are some early warning signs to watch for?

It may not be pleasant to imagine all the “what ifs,” but doing it now and planning for those unexpected events will improve your company’s chances of surviving a storm. For an excellent step-by-step guide on the details of developing a risk management plan, see the article “How to Develop a Risk Management Plan,” by Charles Tremper at wikiHow.com.

Marketing Plan

The next section, themarketing plan, gets into the details of what your business offers and what market it serves. Marketing is the communication of how your products and services “ease customer pain.” Show the problem and how your business solves it. Marketing is a necessity for every business because once your doors are open, you must invite customers to come in. Everything you do in your business that affects customers is marketing because it sends a message about your company.

This part of the plan details the features and benefits of your products and services, their seasonality and life cycle, as well as any future products and services you are planning. It also includes a thorough market analysis, in which you will study your customers, your competition and the market itself. Here you should include a PEST analysis, in which you will consider the impact of various factors upon your business. The factors include combinations of the following, depending upon your business: social, technological, economic, environmental, political, legal, ethical, and demographic.

Studying your market will give you insight as to how you can make your business more appealing to people. Market research is more than just noticing trends in your customers’ buying habits; it’s discovering what motivates your customer to buy. Don’t assume that you already know because you’ve been in this business for years. This study often unearths characteristics about your market that are hidden or new. It’s best to discover these things before your competition.

Another key element to the marketing section of your business plan is an outline of your marketing objectives, strategies, and tactics. Writing down the avenues you travel in order to market your business will afford you the opportunity to record what worked and what didn’t work. You must be able to measure and calculate the results of your marketing efforts, otherwise, what’s the point? If you don’t know if something is working for or against you, then it’s working against you.

Include details about all of the following that are applicable to your business in the marketing section of your plan: location and distribution, and promotional strategies, such as packaging, public relations, advertising, and customer service. As a result of exploring these areas, you will naturally need to consider how much you will budget for your marketing efforts. This question is closely connected to your sales forecast, which leads us into the next section of the business plan.

Financial Plan

The financial plan consists of four sections: Financial Worksheets, Cash Flow Projections, Financial Statements, and Additional Financial Information. All of these components will tell the story of how you plan to start or grow your business from a financial perspective. It is vital that you explain the assumptions under which you have based your projections, for example, “We assume that there are no unforeseen changes in economic policy to make our products and service immediately obsolete.” or “We assume interest rates will stay the same over the next three years.” (both quotes from Bplans.com sample business plans)

I suggest that you construct easy to read tables and graphs for the financial portion of the plan. The worksheets suggested are: Salaries/Wages and Benefits, Outside Services, Insurance, Advertising Budget, Occupancy Expense, Sales Forecasts, Cost of Projected Product Units, Fixed Assets, Growth (or Start-Up) Expenses, and Miscellaneous Expenses. You may find some of the worksheet templates at PlanWare.org to be useful.

The expected revenues and expenses for at least a year should be projected in the cash flow section of the Financial Plan. It’s better to make conservative predictions rather than be too optimistic when it comes to cash flows. As part of this section, a break-even analysis is essential. This is the “amount of units sold or sales dollars necessary to recover all expenses associated with generating these sales.” (NxLevel for Entrepreneurs, 2005) The formula for calculating the break-even quantity is Total Fixed Costs/(Price – Average Variable Costs).

The financial statements section should show the way things are now if you have an existing business, as well as a forward look at your checking account, or projected income statement. The only way a start-up company can provide an income statement and balance sheet is by projecting these figures based upon well defined assumptions. Both start-ups and existing businesses should include a statement of owner’s equity.

An income statement shows revenues minus expenses, in order to calculate net income or net loss. Start-ups should project these expected results for the first twelve months of business, then quarterly for the next two years. A list of a company’s assets (what you own), liabilities (what you owe), and net worth (assets minus liabilities) is called a balance sheet. The statement of owner’s equity shows the owner’s initial investment, additional investments, and retained earnings, minus owner withdrawals.

The additional financial information at the end of this part of the plan should give a summary of your business’s financial needs in order to grow, show its debt position, and state the owner’s financial status.

Appendix

In the appendix, which is the final section, an action plan or timeline for implementing the business plan should be presented. This is where the detailed goals and objectives are expanded in a work plan. Also, include in this section any additional information or supporting documents that are relevant to your business plan, such as important research, marketing materials, product specifications, and owner and employee résumés.

Executive Summary

Now that you have written the hard part of your business plan, it’s time to write the fun part, the executive summary. As mentioned in the beginning of this white paper, this is the most important piece of the business plan because it illustrates the very essence of your business in a captivating and condensed form. If you ever share your business plan with a potential investor or potential buyer, the executive summary may be the only thing that is read.

Make the executive summary brief (no more than two pages), but make sure you showcase the best qualities of your business without glossing over important information; show why yours is a winning business. Write one to three sentences about each of the following:

General description of the business
Mission statement
Management structure
Business operations
Products/services, the market and your customer
Your marketing plan, including the competition
Financial projections and plans

A clear, concise, and convincing executive summary will intrigue your audience and inspire them to read the rest of your plan. If the plan is never seen by anyone outside of your business, don’t assume it was a waste of time. During the planning process, you will have worked through an enlightening exercise that prepares you to run and grow a better business.

Having this written document available for frequent consultation and review will improve your chances of not only surviving, but coming out strong on the other side of this recession. Most people think that knowing in the back of their mind what they plan to do is sufficient for survival or recovery, but the difference between a written plan and an idea is usually the difference between failure and success.

The Financial Section of a Business Plan

Financial section of the business plan

The purpose of the majority of business plans is to raise finance. Many investors will skip to this section of the plan instead of reading the plan in sequence. A mixture of financial projections and narrative are provided to help the investor understand the financial health of the business venture. Investors need to know the amount of money required to establish the business. Depending on the type of business, some of this money may be recoverable should the business fail before trading. The financial section needs to provide a realistic overview of the profitability and cash flow of the business. The rate of return on investment and payback period are key concerns to any investor regardless of their impression of the management team or the market for the product. Projections are usually provided for a 3 year period, the first of those years will include a breakdown by month. A business with a longer time to revenue and profitability may wish to show projections for 5 years plus.

Projections

The statements will include profit and loss accounts, balance sheets and cash flow statements. Detailed product costing must be provided to show the costs related to selling the product or service. Costing should be provided for each significant product or service offering. Breakeven analysis is supplied to show the investor how many units of the product or service must be sold to cover businesses costs.

The figures used in the projections must correspond with other sections of the business plan e.g. if the operational section states that three people will be employed in year two, the profit and loss account in year two must include the cost of those three employees. It is useful to summarise any significant assumptions made when preparing projections e.g. seasonal sales. It is possible to include additional detailed financial workings in the appendix of the business plan.

In many cases, the financials are one of the first sections of the business plan to be read by investors. This part of the plan informs the reader the amount, sources and timing of the funds required to establish and grow the business.

Source of funds

The sources of funding could include yourself, friends and family. Other external sources include venture capital money, specialist funds exist depending on the industry sector your business operates. Financial institutions offer a range of loan and lease products for businesses. Support is may also available from government agencies in the form of grants

Financial projections (discussed in article 3) should clearly illustrate the funding needs of the business for the first three years. The projected cash flow will show the cash injections required to fund the business. The investor needs to understand the amount of money required to initially start the business and any ongoing funding requirements. You must clearly distinguish between capital business development needs and working capital amounts e.g. you could refer to the cash flow projections demonstrating the amount needed to buy stock in month three of Year 1 or the amount required to cover salaries in month 12 of Year 1. An example of capital requirements could be the purchase of a second piece of machinery in Year 2.

The investor may place certain conditions upon their funding e.g. insist that money be spent on product research. Investors are interested in the financial commitment made by the business promoter for example they may decide to match the amount of funds invested by the promoter

There are broad types of finance available to a business: equity, debt and grants

Equity

This can be your own or from external sources. Equity investors receive shares in the business in return for their investment. In deciding how much of an equity stake to offer an investor one must consider the issues surrounding control of the business. In addition to voting rights the percentage share held can also have tax implications. Although flexibility in negotiations is important it is vital that you know the percentage of shares you are willing to relinquish. On reviewing your business plan the investor will also have a minimum amount of voting rights in mind.

Debt

It is again possible to have your own or external debt to finance the business. Your ability to raise external debt will largely depend on the investor’s perception of your company’s ability to repay that debt. The cost of the borrowings will be linked to the perceived level of risk, the length of time and the rates offered by other investment opportunities in the market at that point in time. Banks in particular have ratios to assess the repayment capacity of the business based on cash flow and profitability.

Grants

Depending on the country you operate there may be government agencies that offer grants. The best agency and individual scheme depends largely upon the size of the business, its stage of development and the sector in which it operates. As a general rule local agencies cater for businesses with 1 to 10 employees. They may offer feasibility, employment and capital grants. National agencies tend to cater for larger businesses and those that have the potential to export products or services. Specialist government agencies may assist businesses based in certain rural areas. These agencies may take an equity or debt stake under certain circumstances.

Summary

The financial section of the plan needs to illustrate the amount of money required to establish and run the business. Potential investors need to know the money already being committed by various parties. The plan needs to show how much further funding is needed, when it is required and illustrate the capacity of the business to repay the investor. A list of potential funding sources should be made and a brief reason for choosing these. The projections should correspond to the business scenario outlined in other sections of the plan and all major assumptions should be explained and further supporting calculations included in the appendix if necessary