Financial Plan - Projections
The financial portion
of the business plan consists of a 12-month profit
and loss projection, a four-year profit and loss
projection (optional), a cash-flow projection, a
projected balance sheet, and a break-even calculation.
These projections combine to give a reasonable estimate
of your company's financial future. And, the process
of researching and developing your financial plan
will help you gain insight into the inner financial
workings of your company.
12-Month
Profit and Loss Projection
For most business owners, the 12-month profit and
loss projection is the main part of their financial
plan. This is where you crunch all the numbers and
get an idea of what it is required to make your
business profitable and successful.
Your sales projections
will come from a sales forecast in which you forecast
sales, cost of goods sold, expenses, and profit
month-by-month for one year.
You should include
a narrative explaining the major assumptions used
to estimate company income and expenses, along with
your business profit projections.
Always keep your
research notes and assumptions, so that if you need
to later explain them, and you’ll have the sources
on hand, especially if you later need to revise
your plan.
Four-Year
Profit Projection (Optional)
The four-year profit projection is for those business
owners that want to carry their forecasts beyond
the first year. When you are starting a business,
it can be difficult to make assumptions about performance
so far in the future. Keep notes of your key assumptions,
especially about things that you expect will change
dramatically after the first year.
Projected Cash Flow
Cash flow is the necessary vehicle to keep your
business afloat. Many of the small businesses that
fail do so because they simply cannot pay their
bills. Every part of your business plan is essential
to your operation, but you simply can’t survive
if you run out of cash.
This worksheet
allows you to plan how much cash you need before
startup, for preliminary expenses, operating expenses,
and how much cash reserves you’ll need to maintain.
You should continually update your cash flow projections
as you use it. Frequent updates help you foresee
any cash shortages and give you an opportunity to
do something about them— for example, you could
cut expenses, or even find a loan. But most importantly,
you won’t be taken by surprise.
There is no automatic
way to prepare a cash flow projection: it is basically
just a forward look at your checking account.
For each item on
the projection, determine when you actually anticipate
receiving cash (for sales) or when you plan to actually
write a check (for expense items).
You should track essential operating data, which
is not necessarily part of cash flow but allows
you to track items that have a heavy impact on cash
flow, such as sales and inventory purchases.
Keep track of any
cash outlays prior to opening the business in a
pre-startup column. Your initial research for the
startup expenses should provided you with assumptions
about you necessary cash outlays.
Your cash flow
projection will show you whether you have sufficient
working capital. Clearly, if your projected cash
balance ever becomes negative, you know that you
will need additional start-up capital. This plan
helps you predict just when and how much capital
you will need to borrow.
Include an explanation
for any of your major assumptions, especially if
any of those differ from the Profit
and Loss Projection. For example,
if you make a sale in month one, when do you anticipate
that you would actually collect the cash? When you
buy inventory or materials, will you pay in for
the materials in advance, upon delivery, or later?
How does this affect cash flow?
Will you have to
pay some expenses in advance? When?
Are there expenses
that are periodic or irregular, such as quarterly
tax payments, routine maintenance and repairs, or
a seasonally based inventory buildup, that should
be included in budget projections?
You typically don’t
consider including loan payments, equipment purchases,
or owner's draws on profit and loss statements,
but they do result in cash being taken out. Be sure
to include them in the projections.
And of course,
depreciation does not appear in the cash flow at
all because you never write a check for it.
Opening
Day Balance Sheet
A balance sheet is one of the basic cornerstones
of the financial reports for any business needs
for reporting and financial management. A balance
sheet shows what items of value the company holds
(the assets), and what the company owes (the liabilities).
When liabilities are subtracted from the business
assets, the remainder amount is the owners’ equity.
Use your startup
expenses and capitalization spreadsheet as a foundation
for preparing a balance sheet as of the business’
opening day. Prepare a narrative that details how
you reached the account balances on your opening
day balance sheet.
Optional: Some
people want to add a projected balance sheet showing
the estimated financial position of the company
at the end of the first year. This is especially
useful when selling your proposal to investors.
Break-Even
Analysis
A break-even analysis predicts your sales volume,
at a given price, required to recover total costs.
In other words, it’s a balancing act: the sales
level that is the dividing line between operating
at a loss and operating at a profit.
The break-even
formula is:
Breakeven
Sales = |
Fixed
Costs
___________________
1-Variable
Costs |
Include all assumptions
upon which your break-even calculation is based.
Back to more Business
Plan for a Startup Business
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