How to Write the Financial Section of Your Business Plan?
The financial section is one of the most important aspects of your business plan. It Includes your projected costs, anticipated return on investment, and any financial resources you have at your disposal to attract investors, lenders and determine whether or not this is a good idea.
The Financial Plan describes a business’s historical financial state (if applicable) and future financial projections. The financial section of a business plan is composed of:
· Assumptions used for projections,
· Three financial statements (income statement, cash flow statement, balance sheet) and projections made for these statements,
· Break-even analysis,
· Funding request,
· Exit strategy
· The statement of shareholders’ equity should also be included to give a brief idea about company’s ownership and equity structure.
If your business is already established, include income statements, balance sheets, and cash flow statements for the last three years.
If you are just starting up, include your start-up expenses and assets to fund.
Provide a prospective financial outlook for the next three to five years. Include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets.
For the first year make monthly projections.
This is a the ideal place to use graphs and charts.
Now, let’s have a closer look at these three financial statements:
1. INCOME STATEMENT
An income statement, also called a profit and loss statement (or P&L) summarizes your revenue, costs and expenses and shows your net profit in your business plan. It’s a table that lists all of your revenues and all of your expenses, and at the very bottom, the total amount of your net profit or loss.
What is included in your profit and loss statement?
· Your revenue (also called sales)
· Your “cost of sales” or “cost of goods sold” (COGS) — or, if you are a service firm, “cost of services sold”.
· Your revenue less your cost of goods sold is your gross margin.
Revenues– COGS =Gross Margin
· Your operating expenses : Expenses related with running your business and which are not directly associated with making a sale. These are expenses such as : Office supplies and Rent, salaries, wages, consumables, travel expenses, Accounting and legal fees, utilities, etc.
· Gross margin less operating expenses will is your operating income.
Gross Margin– Operating Expenses =Operating Income
· Operating income will usually be equal to “earnings before interest, taxes, depreciation, and amortization” in other words, EBITDA. This is basically, how much profit you made before interest expenses, depreciations and your tax obligations .
· Your net income is your EBITDA less the “interest, taxes, depreciation, and amortization.” Just subtract your expenses for interest, taxes, depreciation, and amortization from your EBITDA, and you have your net income:
Operating Income — Interest, Taxes, Depreciation, and Amortization Expenses = Net Income
To make future financial projections for your business plan, Start with a sales forecast.
Project your sales over the course of three to five years. For the first year, make monthly projections.
After projecting sales, calculate your cost of sales (also called COGS or direct costs). This will let you calculate gross margin. Gross margin is sales less cost of sales, and it’s a useful number for comparing with different standard industry ratios.
Proceed with projecting your operating expenses.
Having projected the sales, cost of sales and operating expenses, now you are ready to calculate earnings before inter
est, taxes, depreciation, and amortization” in other words, EBITDA. Gross margin less operating expenses is your operating income or, EBITDA.
Then, as a final step, subtract your expenses for interest, taxes, depreciation, and amortization from your EBITDA, and you have your net income.
2. CASH-FLOW STATEMENT
A Cash Flow Statement (also called the Statement of Cash Flows) shows how much cash is generated and used during a given period of time. It tracks all the money flowing in and out of your business.
The cash flow statement is divided into three categories — cash flow from operating, cash flow from financing, and cash flow from investing activities. The cash flow statement can be prepared using either the direct or indirect method. The cash flow from financing and investing activities’ sections is identical under both the indirect and direct method.
Here, we will use direct method as an example.
Make estimations and projections for your future cash-flows in the given order.
- Opening balance
This is your opening bank and petty-cash balance. In future months it will be the closing balance from the previous month.
- Cash incoming
Cash incoming is the money that is flowing into the business. During your forecast, consider what types of income your business may have and when. You can anticipate cash incoming by looking at previous years, identifying seasonal trends and accounting for regular sources of income. Some examples to cash incoming are:
· Sales
· Debtor receipts
· Grants
· Tax refunds
- Total incoming
Calculate the total incoming by adding all cash incoming items.
- Cash outgoing
Cash outgoing is the payments that your company makesIn your forecast, consider what expenses will be required to operate your business and when they need to be paid. Some examples to cash outgoing are:
· Rent,
· Salaries, wages,
· Consumables
- Total outgoing
Calculate the total outgoing by adding all cash outgoing items.
- Monthly cash balance
Calculate the monthly cash balance by subtracting the total outgoing cash from the total incoming cash.
- Closing balance
Calculate the closing balance by adding the opening balance and total incoming, then minus total outgoing.
3. BALANCE SHEET STATEMENT
The balance sheet is a snapshot of a business’s financial position at a particular moment in time. A balance sheet adds up everything your business owns, subtracts all debts, and the difference that you get shows the net worth of the business, also referred to as equity. This statement consists of three parts: assets, liabilities, equity.
Assets include your money in the bank, accounts receivable, inventories, etc.
Liabilities include your accounts payables, credit card balances, loan repayments, etc.
Equity: For most small businesses, this is just the owner’s equity, but it could include
investors’ shares, retained earnings, stock proceeds, etc.
The balance sheet always has to balance with assets on one side, and liabilities and equity on the other.
The formula for every balance sheet is:
Assets = Liabilities + Equity
4. BREAK-EVEN ANALYSIS:
Break-even analysis will tell you at what point your company, or a new product or service, will be starting to make profit. In other words, it is used to determine the units of products or services you need to sell at least to cover your production costs.
To understand break-even analysis, you need to know the difference between fixed costs and variable costs.
Fixed costs are the expenses that stay the same, regardless of how much you sell or don’t sell. For example, expenses such as rent, wages, Accounting fees, etc.
Variable costs are the expenses that change in accordance with production or sales volume.
Generally, to calculate the breakeven point in business, fixed costs are divided by the gross profit margin. This produces a dollar figure that a company needs to break even.
In other words, your break-even point is equal to your fixed costs, divided by your average selling price, minus variable costs.
BREAK-EVEN POINT = Fixed Costs / (Average Selling Price-Variable Costs)
5. Funding request
Detail your funding request here. Include how much you are looking for, list ideal terms (e.g., 10-year loan or 15% equity), and how long your request will cover.
Remember to discuss why you are requesting money and what you plan on using the money for (e.g., equipment).
Back up your funding request by emphasizing your financial projections.
6. Exit strategy
Last but not least, your financial section should also discuss your business’s exit strategy. An exit strategy is a plan that outlines what you’ll do if you need to sell or close your business, retire, etc.
Investors and lenders want to know how their investment or loan is protected if your business doesn’t succeed. Your exit strategy should detail when they get repaid, what interest rate they’ll receive, when the original debt will be paid off, whether they can sell their shares in the company for cash before it’s listed on an exchange
Visit us at www.peakplans.co if you need a professional assistance in writing your Business Plan or Pitch Deck. We are Business Plan and Pitch Deck consultants and it’s our pleasure to help you through your way in every stage of your Business.
