Starting a business is generally about making money. You should have a sense of your current financial position, funding needs and projected income. Therefore, a key part of the business plan is the financial section.
Lenders and investors will look carefully into the financial section as it will determine whether or not your business idea is viable.
Based on your financial details, investors or lenders will be attracted to your business idea. Therefore, you should include your current financial situation and future goals.
What to include in the financial section of a business plan
In the financial section of a business plan you should provide break-even-analysis and three financial statements;
- Projected Income statement
- Cash flow projections
- Projected Balance sheet
Based on the type of business plan, you need to include additional financial details. For example, you can add a sales forecast and expenses budget under this section.
Fund requirement details should be included in the funding request section of a business plan.
Break even analysis shows when you will cover all your expenses and start making profit.
If you are breaking even, then profits are equal to your costs.
You need to find out the number of days your business will take to be profitable after getting back all expenses spent initially.
Based on the number of days it takes to get back all initial expenses, you can find a date on which your business becomes profitable. After that date, every amount of sales after taking out operating expenses is pure profit.
Projected Income statement – Tells you how profitable the business is
Income statement, which is also known as a profit and loss account, provides information on the income and expenses for a specified period. It’s a snapsort to show whether or not your business is profitable.
In your business plan, you need to prepare a projected income statement showing sales projection, expenses budgeted and net profit expenses over the years.
We suggest you prepare a projected income statement for at least 5 years showing expected net profit for each year.
The current year in which you are preparing the business plan should be mentioned as an estimated income statement and the rest of the four succeeding financial years should be mentioned as a projected income statement.
If you have a existing business, then include actual income statement for at least 3 years.
In general, you can break down your expenses into start-up and operating expenses, if newly started.
Costs incurred up to running the business should be taken as a start-up cost. Here is a list of expenses considered as start-up cost;
- Business registration fee
- Cost of getting license and permits
Operating costs are the expenses that your business incur to keep it running.
If you have different types of income, then list them separately showing expenses sales from each such source.
Include a percentage of growth into your profit and loss account to help analyze the income statement better.
Cash Flow Projection – Provides financial details to know how funds are used
Do not confuse the cash flow projection with the cash flow statement.
Cash flow statements show the flow of cash in and out of your business for a period. Which means, cash flow has already occurred for a period in the past.
On the other hand, cash flow projection shows the cash anticipated to be in and out of your business for a particular period. It will indicate your financial requirements in the short and long term. Therefore, you should include monthly cash flow projection over a year in the financial section of your business plan.
This projection is basically a statement which shows how much cash is expected to come into the business and how much is expected to go out.
This part will be easier for you if you have already prepared a sales forecast and expenses budget.
To write cash flow projections for your specified period, you need to concentrate on following things;
- Cash sales projections
- Expected cash disbursements
- Reconciliation of cash revenue projections to disbursement
If you have an existing business, then include 3 years actual cash flow statement under this section.
Projected Balance Sheet – Tells you the financial Position as on the year end
Balance sheet is a statement that shows the assets, liabilities and capital of your business. It’s a snapsort of the business financially at a specific point of time.
The relationship between these elements of financial data expressed in following equation;
Assets = liabilities + equity
Assets are tangible objects that businesses own at the end of a date.
Liabilities are the debt owed to outsiders of the company.
Equity is the difference between assets and liabilities.
Which means, what the business owns = what the business owes to outsiders + the value of the owner’s investment
You need to break down each head in the balance sheet based on the type of assets and liabilities you own.
For a start-up, the balance sheet shows the value of assets you are purchasing for the business, liability shows how much you will owe to outsiders and the capital invested to get started.
Here are the steps to prepare projected balance sheet;
- List the value of all the assets in the entity as of the start-up date.
- List all liabilities that the entity owes to outsiders
- The difference between total assets and liabilities is shown on the balance sheet as owner’s equity.
In financial projection, you need to assume certain things in order to have a projection. While making projections, you need to be very realistic in your assumption.
While writing the financial projection section, you need to take all the assumptions that you have taken into consideration in other sections of the business plan.
If you are not familiar with the format, forecasting, specific numbers or finding any difficulty in preparing the financial projection, then you can hire a financial expert to prepare these projections for you. These professionals can help you provide structures, in-depth financial data for this section.