The financial section of your business plan is a critical factor in determining the feasibility of your business idea and will be the focal point of any investor who may be attracted to your business concept. The financial section consists of four financial statements: the income statement, cash flow projections, the balance sheet, and the statement of shareholders’ equity. It should also include a brief explanation and analysis of these four statements.
Expense Estimation
Think of your business expenses in two categories: startup expenses and operating expenses. You should consider all costs associated with establishing and running your business as startup expenses. These expenses may include:
- Company registration fees
- Business licenses and permits
- Initial inventory
- Rent deposits
- Deposits on properties
- Deposits on equipment
- Utility setup fees
Your list of expenses will expand once you start detailing them.
Operating expenses are the costs of keeping your business running. Consider them as monthly expenses. Your list of operating expenses may include:
- Salaries (including your own salary)
- Rent or mortgage payments
- Communication expenses
- Utility bills
- Raw materials
- Storage
- Distribution
- Promotion
- Loan payments
- Office supplies
- Maintenance
Once you list all your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you will have an estimate of your operating expenses over six months. Adding this amount to your total startup expenses will provide you with a rough estimate of the complete startup costs for your business.
Now you can start preparing the financial statements for your business plan, beginning with the income statement.
Income Statement
The income statement shows your revenues, expenses, and profits for a specific period – a snapshot of your business that indicates whether your business is profitable or not. Subtract expenses from revenues to determine profit or loss.
While established companies typically produce income statements every financial quarter or once a year, an income statement should be created monthly for the first year as part of the business plan.
Note: Not all categories in this income statement will apply to your business. Remove those that do not apply, and add categories as needed to adapt this template to your business.
If you have a product-based business, the revenue section of the income statement will be different. Revenue will be referred to as sales, and you should account for any inventory.
Cash Flow Projections
Cash flow projections illustrate how cash is expected to flow in and out of your business. It is an important tool for managing cash flow as it indicates when your expenses are too high or if you might need a short-term investment to handle surplus cash flow. As part of your business plan, the cash flow projections will show how much capital investment your business idea needs.
For investors, cash flow projections demonstrate whether your business poses good credit risk and whether there is enough cash available to make your business a good candidate for a line of credit, a short-term loan, or a long-term investment. Cash flow projections should include forecasts for each month over one year in the financial section of your business plan.
Note: Do not confuse cash flow projections with the cash flow statement. The cash flow statement shows cash flowing in and out of your business. In other words, it describes cash flow that has occurred in the past. Cash flow projections show the cash expected to be generated or expended over a specific period in the future.
Cash flow projections consist of three parts:
- Cash revenues: Enter your estimates for monthly sales. Include only sales that can be collected in cash during each month you detail.
- Cash expenses: Take the various expense categories from your journal and list the cash expenses you expect to actually pay for each month.
- Reconciliation of cash revenues with cash expenses: This section shows the opening balance, which is the balance carried over from the previous month’s operations. The current month’s revenues are added to this balance, and the current month’s expenses are deducted, carrying the adjusted cash flow balance into the next month.
Balance Sheet
Balance Sheet
The balance sheet provides a report on the net worth of your business at a specific point in time. It summarizes all financial data related to your business in three categories:
- Assets: tangible items of financial value that the company owns.
- Liabilities: debts owed to the company’s creditors.
- Equity: the net difference when total liabilities are subtracted from total assets.
The relationship between these elements of financial data is expressed by the equation: Assets = Liabilities + Equity.
For your business plan, you should create a balance sheet summarizing the information in the income statement and cash flow projections. Companies typically prepare a balance sheet once a year.
Once your balance sheet is completed, write a brief analysis of each of the three financial statements. The financial statements themselves should be included in the appendices of your business plan.
Source: https://www.thebalancemoney.com/writing-the-business-plan-section-8-2947026
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