The financial plan is a crucial element in a business plan. While writing your business plan the financial plan carries the heart of your business. Therefore, it is vital to hire a professional to work on your financial projections and provide advice on how to achieve your business goals.
Financial plan section entails several parts;
- Capital projections
- Revenue/sales projections
- Build projections: cash flow statements, income statement, balance sheets
Capital projections or startup capital costs
The amount injected by the owner and the investors of the business is called the startup capital, which helps to finance the startup costs/ expenses. Other expenses which are not funded by the capital investment require to be funded by borrowing and debts. For instance, if the startup costs are 100,000, and the capital injected by the investors and owners is 70,000, then the remaining balance of 30,000 is apparently required to be funded from debts, e.g., Lease finance, supplier credit, business loans, etc
After investors and owners inject their capital in the investments, they receive a certain percentage of the equity of the business, and return on their investments is realized by either way of dividends paid out of business, or by capital appreciation after the company sold. While writing your business plan, the level of startup financing of the business depends on various aspects, which includes; business type, the current state of the company and potential growth of the industry.
You may face a challenge in identifying the potential sources on how to raise capital for your business. Keep this in mind the more startup capital you build, the more the growth potential you create. There are several sources of small business loans/money you may consider while sourcing capital for your business, including:
• Venture capital
• Friends and family
• Personal saving
• Crowdfunding and peer-to-peer lending
• Angel investors
You may use the following formula to get a reasonable future financial status. If the business starts making sales immediately after opening, you may decide to multiply the monthly fixed expenses by a figure which is less than six.
Total Required Capital =
Six Months of Fixed Expenses + Asset Purchases + Start-up Expenses
|Monthly Fixed Expenses||Column 1||Column 2|
|Advertising & Marketing||49,600|
|Telephone & Utilities||13,000|
|Salaries (include owner)||34,000|
|Accounting & Legal||2,500|
|Payroll taxes at 20%||6,800|
|Monthly Fixed Expense Sub-total||226700x6=||1,360,200|
|Purchase of Land and Building||236,000|
|Fixtures and Equipment (plus installation)||40,000|
|Deposits on Rental Property and Utilities||48,000|
|Asset Purchase Sub-Total||434,000||434,000|
|Start-up Expense You Pay Once|
|Legal and Accounting Organization Costs||6,750|
|Licenses and Permits||70,200|
|Initial Advertising and Promotion||50,000|
|Start-up Expense Sub-total||126,950||126,950|
|Total Estimated Cash Needed to Start (Add Column 2)||1,921,150|
Revenue forecast does not give the accurate prediction of the future. You will be in a position to prove it immediately after the business starts running. All you need is to understand sales projections and track the dependencies, which will help you to compare your plan and the actual results in every month and make necessary corrective measures. The sales forecast is the backbone of your business plan since it is used to measure the business growth, the standard of your expenses and the profits.
An essential aspect of matching your forecast to your accounting, make sure that the way your accounting or bookkeeping are organized matches with the forecast sales items. For instance, if your accounting categorizes sales into dessert, meals, drinks, and others, then your business plan should also have the same arrangements for easy tracking; so, if your business plan forecasts your sales by channel, don’t track your sales by products.
Compare your profit and loss statement and keep it in check while preparing your future projections. If your categories in your accounting do not match with your projected sales, making track for plan vs. actual will be next to impossible. This may result in loss of focus in your business planning.
Let us take a case of fast ceviche,
Sales - ceviche +side dish+ drinks =10$
No of customers per operation hour:
Lunch = 50 customers
Afternoon = 20 customers
Evening= 50 customers.
No of days in operation: 5 days a week; 48 weeks a year
Total sales/ revenue per year = price of the ceviche per customer * total number of customer * number of days
• $10 * 120 =$1,200 - daily revenues
• $1,200 *5= $6,000 - weekly revenues
• $6,000*48=288,000 - annual revenues
They include income statements, balance sheet, and cash flow statement:
Projected Income statements/profit and loss statement
The projected income statement shows profits and losses for a specific duration in future; it might be quarterly, or next fiscal year. Projected income statement is also referred to as budgeted income statement. Your projected income statement is very crucial while preparing your business plan in that it is the section that attracts investors by showing your business future revenue. It has to be as accurate as possible, despite being a future aim, the strategies of making projected income statements may depend on the age of your business and the experience you have regarding that business.
For instance, for startups, if you have experience in the industry in line with your new business, use that experience while making your projections. If no experience, hire an accountant who has the expertise to make your predictions. Make projections for at least next three years; first-year forecasts should include monthly budgeted income statements; the rest can be quarterly.
Expenses and sales
While making projections, check on sales volume. Ask yourself few questions: how many customers do you expect? What price are you charging per customer? How many units sold in operating hours if you have already opened? Also, project the cost of goods sold. Outline other expenses, which include fixed costs and marketing expenses.
Drawing the projected income statement
When making projections for the next quarter, start with the business’ projected sales, income than less the cost of goods sold to result in the gross profit/margin less other expenses (include things like; insurance, rent, legal fees, salaries, utilities, and many more) to get the operating net income, finally less any interest to get your net income.
The projected income statement for the year beginning……… year1…year2…year3. Year 1
|Less costs of goods sold|
|Less Closing stock||(76,000) (54,000)|
|Operating net income||196,500|
|Less payable tax 20%||(20,900)|
|Net profit||$ 175,600|
Projected balance sheet
It’s a complex task to create projected balance sheets since it takes a lot of time and experience to ensure the balance sheet balances and it is in line with the projected cash flow and profit and loss statements.
Balance sheet format: the basic thing is to format your balance sheet in the easiest way possible. Note that: Assets= Liabilities + Owners Equity.
The first thing you need to enter is the starting balances. Sales are the next thing to consider; expenses make a follow which incurred during the process of generating the sales and charged on the balance sheet as less retained earnings. In case you had received a bank loan to finance your initial capital, you will treat it as an increase in liability and also an increase in assets if the credit was used to purchase an asset. Keep in mind that any changes /transaction that affects assets, also affect the liabilities or equity account to keep the balance sheet balanced.
|Account receivable||60,000||Account payables||66,000|
|Other assets||19,000||Total stockholder’s equity||315,000|
|Total assets||$415,000||Total liabilities and equity||$415,000|
When your idea is realistic, the initial step is to analyze whether your new business will survive and succeed. Break-even analysis will be the first tool to use to calculate what your revenues must be to yield the profit. Break-even analysis helps to check the expected revenues and cost/ expenses in your regular business. It will push you further to do more research on whether you should continue with your business idea or it requires some modifications.
It is essential to do your break-even analysis early enough to measure your business idea’s vitality and also give the go-ahead to complete the entire business plan.
Revenues above the break-even point will automatically result in profit, and vice versa is true. There are basic concepts you should understand before doing a break-even analysis.
A complete break-even analysis requires you to base your forecast sales on the volume of business expected, and not how much you need making a reasonable profit.
Fixed costs (overhead)
The fixed costs do not differ much from time to time; these are insurance, rent, utilities, and other expenses. During fixed cost forecasting, it is good to give a room for miscellaneous expenses which you can’t predict.
Variable costs are made up of direct costs and indirect costs. Variable costs changes with the change in business activity and vary with the number of units produced. Variable costs and fixed costs add up to total costs.
Break-even point occurs where, the total number of units you intend to sell for total revenue received equals the total costs (variable and fixed costs). When preparing the break-even point for your potential business, make a wise decision on the number of units you may sell and the average price per unit, variable and fixed costs achieved with thorough research.
After considering the above aspects, it becomes easy to calculate the break-even point using the following formula;
Breakeven point= fixed costs (selling price per unit- variable costs)
After break-even analysis, you find out that your sales estimate does not break-even, consider the following before you start the business;
Adjust your sales per unit, price higher
Get a more substantial market niche to increase unit sales
Consider reducing your fixed costs; you may keep fewer employees or save on rent
Discover a less expensive way to produce your products
If you can’t do any of the above, you may consider changing your business idea!