A good business plan is an entrepreneur’s best friend. It is an essential document, and each section counts, from the executive summary to the market analysis via the appendix; however, no section is as important as the finance section. You are in business to make money, after all, and your business plan should clearly and numerically reflect a lucrative business activity, preferably with visuals, especially if you want funding.
The financial section of your business plan tells you and your potential investors, lenders or partners whether your business idea makes economic sense. Without an impressive finance section, you face an uphill battle when it comes to scoring capital; disappointing financial data may indicate the need to change your approach.
So how do you create an impressive finance section? As with all things in small business, there is no one-size-fits-all approach; this varies according to the activities and the fields. But there are some general guidelines that can give you a clear idea of where to start and what kind of data you will need to collect.
You must include at least three documents in the financial section of your business plan:
1. Income statement: Are you profitable?
2. Cash Flow Statement: How much cash do you have on hand?
3. Balance sheet: What is your net worth?
There’s other financial information you can — and often should — add to your business plan, such as sales forecasts and personnel plans. But the income statement, cash flow projections, and balance sheet are the ones you can’t omit.
Here is a brief overview of the three main datasets.
Also called a profit/loss statement, this is where your reader can see if your business is profitable. If you are not yet operating the business, this will be a projected income statement, based on a knowledgeable analysis of the first year of your business.
The income statement is broken down by month and shows income (sales), expenses (operating costs) and the resulting profit or loss for a fiscal year. (Income – expense = profit/loss.)
Cash flow statements
This is where your reader can see how much money you will need in the first year of operation. If you are not yet operational, you will only have projections.
For cash flow projections, you predict the cash that will flow in and out of your business in a given month. You will need a year of monthly projections. If you are already in business, also include cash flow statements from previous months showing actual numbers.
Cash flow statements have three basic components: cash income, cash disbursements, and reconciliation of income and disbursements. For each month, you start with the previous month’s balance, add income, and subtract disbursements. The ending balance becomes the opening balance for the following month.
This is where your reader sees the net worth of your business. It breaks down into monthly balance sheets and final net assets at the end of the financial year. There are three parts to a balance sheet:
• Accounts Receivable
• Inventory, equipment
• Real estate
• Accounts payable
• Loan debts
3. Equity: total assets minus total liabilities (assets = liabilities + equity.)
It’s good to offer readers an analysis of the three basic financial statements — how they fit together and what they mean for the future of your business. This doesn’t need to be in-depth; focus is good. Simply interpret the data in each statement, put it into context, and indicate what the reader should take away from the financial section of your business plan.
Other financial documents
These are the basics of your finances, but you will need to fill in the section with other data depending on the specifics of your business and your capital needs. Other financial information you may provide includes:
• Sales forecasts: estimates of future sales volumes
• Staffing plan: who do you plan to recruit/hire and how much will it cost?
• Break-even analysis: projected point at which your sales will match your expenses
• Financial History: summary of your business finances from the start of operations until today
To make easy
Much of this can be simplified with business planning software, which can not only walk you through the process and make sure you don’t leave anything else out, but can also generate charts, tables and other visuals to accompany your financial section data. . These types of visuals are highly recommended as some readers will skim over them. Anything you can do to convey information at a glance brings an advantage.
Once in operation, remember to review your financial statements each month to update your projections with actual numbers, then adjust all future projections accordingly. Regular updates will let you know if you’re on track with your predictions and meeting your goals, as well as if you need to make any adjustments. Don’t forget this part: when you’re just starting out, planning really is your best friend.