The financial section of a business plan could be regarded as the lifeline of the business. It is what breathes an air of life and practicality into the business. The financial section many times appears at the back of the plan, but this does not downplay its importance. In fact, it is the most scrutinized section of the plan. Investors may actually pay more attention to it than other parts of the plan because the value of a business is in its figures.
The financial section gives insight into the profitability of the business, aspects of debt and equity estimated operating expenses, financial statement forecasts, future growth projections and business financing.
The financial data that’s contained in this section is quite structured and in-depth. You may find charts, formulas, tables, graphs, and spreadsheets. It may require the input of a financial expert such as an accountant in order to write it accurately.
This article will consider how you can go about writing the financial section of your business plan.
Introduction to the Financial Plan
The financial section of a business plan normally starts with the introduction to the financial plan. The format and structure of the introduction is purely left to the drawer of the business plan.
The introduction basically gives the reader a basic outline to what is contained in the section.
An example of an introduction is as follows:
“This financial plan gives the forecasted financial statements of Company ABC for a three year projected period. The income statement, cash flow statement and balance sheet have been drawn and the assumptions made have been outlined.
The end of each fiscal year has been set for September 2nd.
The business capital requirements at startup are valued at $100,000. The business owner will inject $50,000 while the remaining $50,000 will be financed through a bank loan.”
Financial Statements and Analyses
The second part of the financial section will revolve around the forecasted financial statements and analyses. Here, the following financial statement and analyses are laid down:
I Forecasted income statement
II Cash flow statement (Forecasted)
III Forecasted balance sheet
IV Sensitivity analysis
V Breakeven analysis
VI Ratio analysis
It is best to put each statement and analysis on its own page. It is also time saving to use spreadsheets when drawing these statements and analyses.
There are three financial statements that are normally written in business plans. They include:
1) Balance Sheet (Statement of Assets and Liabilities)
This statement shows what the business is worth. It states all the assets that a business has and their respective values; as well as all the liabilities and debt that the business may have.
Simply, it adds all that the business owns (assets) and what it owes (liabilities) and the difference between these two forms the business’ net worth.
The net worth of the business is referred to as equity in some circles. The balance sheet normally states the net worth of the business as at a certain date. Most businesses draw it at the end of their fiscal year.
2) Income Statement (Profit and Loss Statement)
This statement shows the earnings of a business over a given period. It adds all the revenues and subtracts all the expenditures to get the net profit or loss in that trading period. When writing the plan, one can use the statistics of other businesses in the industry to get the figures that are useful in drawing the income statement.
3) Cash Flow Statement
As the name suggests, this statement tracks the flow of cash in a business over a period. It also shows the users of the statement the cash at hand at any given moment in time.
The cash flow statement typically analyzes the changes that occur on the balance sheet. The inflow and outflow of cash in the company is captured, and the description of how the cash was spent is given.
The Break-Even Analysis
This financial tool is used to determine the point of sales that a business should reach for it to get neither profit nor loss from trading. Simply, it is the point at which the difference between the total revenues and total expenses of the business is zero.
Important elements that are considered in the break even analysis include:
- The fixed costs
- Variable costs
- Selling price
Also, the items present in the income statements are quite vital when doing the break-even analysis.
When calculating the break even points, it is recommended to do them over a three year period for consistency. It also remains your own prerogative to decide whether you will provide readers of the business plan with explanations on the finer details of the analysis.
The Sensitivity Analysis
This analysis is used to identify the effect that increased and decreased forecasted sales have on the net income of the business. This increase and decrease are usually in percentage form. The reader of the business plan will see how your net income changes when your sales go up or down by say, 15%, 20%, and 30%. The percentage chosen remains in the prerogative of the business plan writer. However, when using the sensitivity analysis, one should know that a forecasted sale is never 100% accurate. Also, values below 14% should be avoided.
A ratio analysis is a general tool used by investors to ascertain the performance of a business (existing or potential).
Values from the balance sheet are divided with other values from the income statement. This is done mostly under the time frame of three fiscal years. A percentage or decimal is then deduced.
The ratios are then compared to other businesses’ in the industry to gauge performance. Financiers may also use ratio analyses to inform their financing decisions particularly regarding the feasibility and return on equity.
A business plan writer can describe how the ratio has changed over the three years of the forecast.
- Ratios have specific labels, for example:
- Current ratio
- Quick ratio
- Debt ratio
- Debt to equity ratio
- Return on Equity
In each ratio, the formula used to calculate is given, and the corresponding dollar value is assigned to each item.
Notes to the Financial Statements
This is the last part of the financial section of the business plan. It summarizes every idea, assumption, and thought-processes that were used to create the forecasted financial statements. It is usually written in the period of three years of the forecast.
These notes are vital to the readers of the business plan as they give the detailed information that aids them to understand the forecasts and projections.
The notes should always come after the financial statements and analyses. It beats logic to have them before the statements and analysis. It also serves to avoid confusion and incomprehension by readers.
The notes should also have labels with specific reference to the item being described. For example:
- Net income note to the financial statements
- Accounts payable note to the financial statements
- Accounts receivable note to the financial statements
- Retained earnings note to the financial statements
The positive value that notes to the financial statements in the financial section have is that they make readers of the business plan understand your projections. Hence, the investors and financiers are more certain of your business. Certainty is a motivating factor for financiers and investors to invest in a business.
The financial section of a business plan benefits not only the investors and financiers but also the business owner. It aids them to understand their business better. It is also a vital aid in running the business. Most writers prefer the turabian paper format when writing the financial section and in extension the whole business plan.
The credibility of the financial section will purely rely on how realistic you are when writing it. A good way of doing this is by breaking the figures into components such that they can be analyzed on an individual basis.
The highlighted tips on how to write the financial section of your business plan are sure to help you run your business better. They can also draw more investors to your business. Hence, a win-win situation for your business.