5 Part Financial Section of a Business Plan
Any million-dollar business starts with a golden idea. But, to become and remain profitable, it needs an organized, well-constructed business plan. As all entrepreneurs know, business plans should lay out company goals, discuss products and services, and explain strategies. These sections are important, but pale in comparison to the financial section of your business plan. A well-researched and thorough financial section substantiates your theoretical claims, and certifies your business as a practical prospect. In fact, many investors (whether they are family, friends, or independent) will not fund your business without a financial section that dictates precisely how you intend to utilize your resources. In this post, we’ll detail how you can write this financial section to appeal to investors.
What is the Goal of the Financial Section of a Business Plan?
Like online bookkeeping or accounting reports, financial projections use terms like profit and loss, balance sheet and cash flow. Instead of cataloging previous transactions, though, the financial section of a business plan uses these figures to inform elaborate guesses about the profitability of the company.
So, this information should demonstrate to people on your team (potential employees, venture capitalists, etc.) how you plan to make money. Equally important, though, is how this section should act as a reference guide for running your business. Generally, the most important part of writing a valid business plan is realism. Being too conservative or liberal may be an obstacle if, in the future, you plan to expand. We can help you to present this information in a way that makes sense to potential investors.
It’s difficult to write this section of your business plan from start to finish without changing around the numbers based on other outcomes. Based on your individual business model and strategies, you will likely find a unique way to present this information.
- Sales Forecast
Unsurprisingly, a sales forecast is essential to a proper business model. Predicting your sales over the next few (usually three) years is a great indicator of your potential to make a profit. However, you will want to do much more than just that.
Including information about product pricing, amount sold, and cost will also shape your own expectations. Subtracting the cost of sales from sales results in the gross margin. With this information, you can deduce the cost of each sale, a figure that is essential for determining how you market your product.
- Expenses Budget
Making money is all about spending money– wisely. Understanding the amount of money you spend in order to make these sales will elucidate the impact that each sale makes. These expenses are generally split into two categories:
- Fixed costs: Rent, payroll, utilities, etc. These costs will remain the same, regardless of the amount of sales you make. They cannot be adjusted to improve overall operation without restructuring the business plan entirely.
- Variable costs: Print or digital advertising, consulting services, software subscriptions, etc. These costs can easily change with time, though they should not change to a large degree without concrete evidence of an improvement.
In both of these cases, you’ll have to estimate interest and taxes– two essential pieces of the puzzle. We can assist you in figuring these numbers into the overall equation.
- Cash-Flow Statement
A cash-flow statement illustrates how money enters and leaves a business’s bank accounts. In doing so, it shows the various levels of wealth along the way.
For new businesses, it’s imperative to break this statement out into 12 different months, each with the projected monthly sales. Most businesses derive these numbers from sales forecasts, balance sheets, and other available data. Additionally, new businesses without established payment methods should note that not all customers pay invoices in a timely fashion. So, just because you are owed money for a particular month does not mean that you will be paid for those services.
We can help you to write these cash-flow statements strategically to receive immediate payment.
- Projected Income
Rather than expected sales, which does not account for expenses, projected income should be a business’s true measure of success. In essence, this section of your business plan acts as a profit and loss statement.
Deduct the interest, taxes, expenses, and the cost of sales from your gross margin, and this is the true indicator of your company’s efficiency.
If prospective investors are going to look at any figure in your business plan, this is a likely choice.
- Assets and Liabilities
The balance sheet is another essential element of any company’s decision-making process. The balance sheet dictates how your assets (income, machinery, inventory, owned office buildings, etc.) compare to liabilities (debts, rent, etc.). Ideally, your assets should far outweigh your liabilities. This information should be laid out in the format of a balance sheet in your business proposal as well. While this information is difficult to predict, it is an important measure for your sake, as well as your investors. We can help you to determine these figures, ensuring accuracy and a positive momentum.
Once you have determined your assets and liabilities, you can determine your equity– or the amount of money you would have after selling your liquid assets and paying off all debts– by subtracting your liabilities from your assets. Equity is also occasionally referred to as net worth.
These figures give investors an idea of your overall financial situation– and how you expect it to progress as time goes by.
- Breakeven Analysis
After much diligent hard work and effort, your business will eventually allow you to break even– and then become profitable. Based on your projections, you should show potential investors where along the way the transition will occur. The sooner the breakeven period, the sooner they can begin to make a profit for themselves.
Alternatively, your investors may want to know that, if things are not heading in a favorable direction, they can exit without a personal loss.
Follow Through With Your Plan
A well-reasoned plan is great, but offers no value without diligent, detail-oriented execution. While there are sure to be unexpected changes along your path, your goal should always be to return to the linear path detailed in your business plan. This applies to all sections of the plan, but doubly so to the financial section. In order to maintain a viable business, you must also compare the state of your business to previous years/months, and similar businesses. These are some of the best metrics of progress in the foreseeable future.
Above all, it’s important to recognize when your business would benefit from some external professional help. As Maxol, we are experienced in consulting with startups and small businesses to bolster growth early on. We can help your business to enact budget-conscious policies that ensure sustainable growth. For more information, contact us.