How To Write The Financial Section Of Your Business Plan
A well-written financial section will demonstrate that your business venture is viable, show your management skills, and could help you convince potential investors. Crunching numbers can seem intimidating, but it’s possible to create a clear snapshot of your business’ finances even if this is your first business venture.
Here are the different elements of the financial section of your business plan and how to write them.
The purpose of the income statement is to show where revenues come from, list all the different expenses of your business, and calculate profit over a period of time. You would typically include monthly statements to document the past year or go back further in time if needed for a well developed financial section.
If your business offers services, identify the different services that generate revenues and list monthly revenues per service. If you sell goods, calculate the total sales for each month and include the cost of goods sold. Subtract this cost to calculate your gross monthly profit.
Your income statement should also include your expenses. The cost of your inventory is already included in the cost of goods sold, but you would need to include costs associated with equipment, wages, advertising, insurance, utilities, rent, loan payments and depreciation and amortization.
You can then calculate your net income and net income after taxes.
Your sales forecast is a projection that should reflect how your business will grow in the future. If you are launching a new business venture, you won’t have enough data to put together an income statement and will need to rely on a detailed sales forecast to demonstrate that your project is viable in your financial section.
Your business plan should include a monthly sales forecast over the course of the next three years to show how your growth strategy will pan out. Start by identifying your different sources of revenues. Study the sales process for each source to make realistic predictions regarding growth.
For instance, your current performance in terms of new lead acquisitions could be a strong indicator of what sales will look like a few months from now. Your sales forecast needs to include a projection for the number of units sold on a monthly basis. You should also include any projected changes in unit prices.
You will also have to make predictions regarding the cost of goods sold. You can base these numbers on what suppliers are currently charging, or on the current cost of delivering a service. For instance, the cost of goods sold could slightly decrease as you purchase larger quantities for your suppliers.
You can then multiply the projected number of units sold by the price per unit and deduct the expected cost of goods sold. Use realistic projections when crunching numbers for your sales forecast.
Draw on the historical data that is available to you and look for sales numbers for similar businesses. Use a projected growth rate that is slow and steady for your industry.
Cash Flow Statement
A business can generate a profit but still struggle if cash flow isn’t properly managed. Ideally, money from sales should be available when bills and other expenses are due. Your cash flow statement of your financial section should outline your strategies for handling billing, repaying debt and managing cash and credit.
If you are putting together a business plan to secure funding, your cash flow statement needs to demonstrate your ability to make loan payments and handle other expenses. Be realistic about your invoice collection time and rate.
If you don’t have much data available for sales and other factors, you can create monthly cash flow statements based on your sales forecast. This statement should include all of your expected sources of cash. You can base this on your accounts payable or sales data.
You should also list all your expenditures. You can base this on your current expenses, but you should also forecast upcoming costs linked to your growth strategy, such as loan payments. Working on your cash flow statement will help you figure out the best billing policy for your business as well as how cash and credit should be handled, and how much short and long-term debt you can manage.
This document can also give you some insights into the ideal terms to negotiate with your suppliers. If you are launching a new business venture, this statement needs to show a point in time where your business will achieve positive cash flow, ideally within the first year.
Income Projection Statement
You might not have enough data to put together an income statement for your business plan. Think about replacing this document with an income projection statement for the next three years. An income projection statement will combine data from your sales forecast, projected expenses and cash flow.
Once you have crunched numbers for these documents, calculate your gross margin by subtracting the projected cost of goods from the projected sales. You can then calculate your net profit by subtracting projected expenses, taxes and interest from your gross margin.
The balance sheet is meant to capture the assets and liabilities of your business at a specific point in time. You can create a balance sheet to reflect your business’s finances at the end of the month or the end of the quarter.
Here are the main assets you would need to list:
- Cash on hand.
- Accounts receivable (invoices that are yet to be paid).
- Land or building owned.
- Any prepaid asset, such as an insurance policy, a service contract and others.
Your balance sheet also needs to include your different liabilities:
- Long-term debt such as loans.
- Short-term debt such as credit card balances.
- Invoices owed to vendors.
- Wages that are yet to be paid.
- Other upcoming expenses.
Calculate the difference between assets and liabilities to assess the owner’s equity. These different documents will demonstrate that you are in control of your business’ finances and have a strong sense of direction.
Remember to support your financial section with any relevant documents. You can include invoices, contracts with suppliers, documents that show your sales numbers, and more.
Don’t hesitate to include more elements, such as a detailed plan of how you will secure and invest new funds. Lastly, you should update your financial statement often. Review your projections and compare them with the actual numbers so you can adjust your sales forecast.
At HJR Global, our mission is to help existing businesses to operate with maximum efficiency and to help new ventures plan, fund, and grow into a thriving business. Contact a member of our team to find out how HJR Global can help your business today.
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