Writing a Business Plan: Financials

This is the 8th post in our “Writing a Business Plan” series.

To me, the financials sections is a bit of a dichotomy. It’s a very detailed and specific analysis… of your guesses. You’ve finished all of the visionary aspects to your plan and now you’re making things much more “concrete” by putting all the details into a complete financial analysis. Except all those details really are just your best guess at the future. It can be a bit strange forecasting to the penny for something that doesn’t exist now, let alone in 3 years.  You have to get over that when writing your Financials section.

What You Getbusinessplanchalk

For the first time in writing this plan, you’ll get to figure out if your idea has any chance for success.  If the numbers don’t make sense when you’re using your current marketing and sales plans, you’re either going to have to change your marketing or change your numbers.

One of the most useful outcomes you’ll generate with your financials are the break-even analysis and the sales forecast.  The break-even point will show you exactly where you need to be to start making money.  Your business is losing money at any point before that, and you can add that all up to determine if the company can survive long enough to make it to that point on the current balance. It gives you a starting point for the number to use when an investor asks you how much funding you’re seeking.  The sales forecast will show you specifically how many sales you’ll need to make.

You’ll get your first versions of your accounting reports (but remember, these are NOT accounting reports; these are all forward looking projections). You’ll get to organize all your forecasted income and expenses and determine how and where to spend money to make money.

For me, the hardest part of the financials is dealing with all the uncertainty.  It’s all just complete guesses.  But, they’re educated guesses that you need to understand. It’s a way to organize all those guesses to make sure they all fit together and make sense in the bigger picture of your company.

What To Include

Almost all of the parts I list below are required. Even if you don’t include them in the plan, you should have them ready in an Appendix or follow on letter.  To make sure they all fit together, you need to make them anyway, so have them ready if an investor asks for them.

I like to start off with my Sales Forecast section. It fun to think about how much revenue my company will generate. Who doesn’t love doing that, right?  As I’m forecasting the sales, I’ll also start working on the Expenses section, since sales are usually directly related to how much you’re spending on marketing (HINT: you’ll be heavily dependent on your customer acquisition cost).  If your business requires you to have large expenses up front, you should split the expenses into “startup expenses” and “operating expenses.”  This will make your operating margins clear.

“Cash Flow is King” is a well known saying for a reason. When you include the Cash Flow statement, you’ll easily determine if you can stay in business. If not, you’ll need to adjust the plan. You’ll also need to include a Profit and Loss statement.  This is where you’ll include things like your cost of sales, margins, taxes, and net profits.

Finally, I recommend including a summary at the start of the entire section to summarize all the details.  The summary should to include all of the standard business/financial metrics and ratios like the break-even point, margins, etc. This makes it much easier for non-financial types to make sense of all those numbers. It also gives you a place where you can put some “spin” on why things look the way they do.

Most of the spreadsheets you’ll need are available online. Just use a search engine with “filetype:xlsx” and you should find plenty of examples. Pick one that makes sense to you, but don’t be afraid to include sections that help you describe your business.

What The Reader Wants

In business plan competitions, this is often the first place the judges will look. The reason is because its where the most mistakes will happen.  Most investors I’ve talked with don’t get to this section until they’re seriously looking at investing.  So, small errors won’t be too detrimental (like they would be in a business plan competition).  However, large and conceptual errors could send your plan right into the garbage.  This section needs to make sense, and if the reader sees lots of careless mistakes or fundamental misunderstandings they’ll wonder about the rest of the plan.

The reader will also want to know the highlights, and including the summary at the start of the section tends to be very helpful. Showing them that you understand what they’re looking for is a good first step. Make their job easier by pointing out all the good and bad parts of your projections.  They really want to know that you understand the financials, what they all mean, how they’re linked together, and all the assumptions you made when creating all these guesses about the future.  They know you can’t predict the future, they want to know you plan for it.

And, I’m begging you, please, please, please, resist the urge to say anything like “these projections are conservative.” Don’t do that. Ever.

Steve Cook

Coming up next: The Conclusion

 

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