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Business Plan Financials, Part 5 of 6
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Developing realistic and consistent financial forecasts is one of the main purposes of a business plan. Presenting those financials clearly and succinctly is almost as hard as developing them. This article provides some tips for both challenges.

Developing the Financials

Keep a list of the assumptions you make while forecasting financial results, and the source you used. Experienced business plan readers will focus on the accuracy of your assumptions before they even look at your forecasts. If the assumptions don’t seem reasonable, they will stop reading!

  1. Identify all your startup requirements. Research to find likely costs for each.
  2. Make a monthly sales forecast for the first two years.
  3. Do a Cash Flow Forecast for the first twelve months. This is your tool to figure out how much cash your business needs before it becomes self-supporting. Knowing that, you can determine if you need to borrow money, and if so, how much. See below for direction.
  4. Decide whether you need investors or a loan. If you need money from others, describe the deal you want. For loans: amount, when received, interest rate, term of loan, monthly payment, date you start making payments. For investments, the deal issues are valuation of the business, who has control, and how investors can sell their stake.
  5. Develop a three year Profit & Loss Statement (P&L or Income Statement). This is just an annual total of revenue, major cost categories, and profit. Copy the first year’s sales and expense data into the P&L from your Cash Flow Forecast. Then estimate two more years. Don’t forget to show loan repayments!
  6. Have your accountant prepare a forecast Balance Sheet for the first three years, using the information from these other forecasts.

Sample forms (spreadsheets) for these forecasts are available many places. For example, at www.scorefoxvalley.org, see the Resources tab, and go to Business Planning.

Monthly Cash Flow Forecast: The Mechanics

Top left: enter cash available before paying for startup costs. Below, enter itemized start-up costs. At bottom, find the cash remaining.

2nd Column top: Cash available BOP (beginning of period) = cash remaining at bottom of prior column. Enter sales revenue, then variable expenses by type, and then fixed or overhead expenses by type. 2nd Column bottom is Cash EOP (end of period) = Cash BOP plus new revenue and minus all those expenses.

This then becomes the 3rd column’s Cash BOP, and so on, just like starting a new page in your checkbook record.

Using the Cash Flow Forecast

Find your “most negative” Cash EOP. It will be your largest negative number, usually the last month before you start to show regular monthly positive cash flow.

Then, increase it by at least 15% or so, as a “contingency” for unknown costs. This is your protection for not knowing the future perfectly!

The result is the amount of cash you need to start the business. Figure out where to get it. Bank loans are feasible only if you have collateral and you yourself can put up about 25% of the amount needed. Microloans are also a possibility. Now go back to item 4 above: define the deal you want if you need a loan. Note: 70% of startups use their own savings as the main source of their funding, according to the Ewing Marion Kauffman Foundation quoted in the Wall Street Journal November 12, 2012.

Presenting the Financials in Your Plan

Your forecasts will be on spreadsheets attached to the Business Plan. Use five sections to present that information in your plan:

6.1 Projected Results

Present a table with 3 years of data for unit sales, revenue, variable cost, gross margin, overhead, loan repayment (if any) and profit. Precede the table with some words explaining the conclusion you want the reader to draw from reading the table. You’ll copy this into the Executive Summary.

6.2 Milestones

List the expected dates for major events in business success, such as first sale, first cash flow positive month, first 100 customers, add some facility or staff, etc. Both you and lenders can use these as objectives to measure progress and success.

6.3 Financial Requirements

State the loan or investment you need, the terms you have assumed, and when you expect to begin repayment. Then point to key financials in the 6.1 table to show that there will be ample funds available to repay the loan. Copy/paste this into the Executive Summary.

 6.4 Key Assumptions

List five to ten assumptions crucial to the most important revenue and expense items. These assumptions must be reasonable for the rest of your plan to be credible.

6.5 Risks and Mitigation

List two to four things that could go wrong and have serious impact on your forecasts. Identify the profit impact for each one (you can re-run your spreadsheets with the bad event replacing your original estimates). Then state your plan to prevent the risk, and to minimize its financial impact if it does occur. This shows you are realistic, not just blindly hopeful!

Now re-read and edit the plan to make sure all the parts, numbers, and assumptions are consistent.

Then, create 1.0 Executive Summary by copy/paste of summary paragraphs from the important sections. Add a few transition words to link them all into a nice 2 page narrative, and you’re done!

Tom GrayMentor, SCORE Fox Valley
Tom helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), and a SCORE Mentor.
www.SCOREFoxValley.org | SCORE Mentors | @SCOREFoxValley | More from Tom

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