Writing the Business Plan: The Financial Plan

Writing the Business Plan: The Financial Plan explained by professional Forex trading experts the “ForexSQ” FX trading team.

Writing the Business Plan: The Financial Plan

It’s at the end of your business plan, but the financial plan section is the section that determines whether or not your business idea is viable, and is a key component in determining whether or not your plan is going to be able to attract any investment in your business idea.

Basically, the financial plan section consists of three financial statements, the income statement, the cash flow projection and the balance sheet and a brief explanation/analysis of these three statements.

This article will lead you through the preparation of each of these three financial statements on the following pages. First, however, you need to gather together some of the financial data you’ll need by examining your expenses.

Think of your business expenses as broken into two categories; your start-up expenses and your operating expenses.

All the costs of getting your business up and running go into the start-up expenses category. These expenses may include:

business registration fees
business licensing and permits
starting inventory
rent deposits
down payments on property
down payments on equipment
utility set up fees

This is just a sampling of start up expenses; your own list will probably expand as soon as you start writing them down.

Operating expenses are the costs of keeping your business running. Think of these as the things you’re going to have to pay each month. Your list of operating expenses may include:

salaries (yours and staff salaries)
rent or mortage payments
telecommunications
utilities
raw materials
storage
distribution
promotion
loan payments
office supplies
maintenance

Once again, this is just a partial list to get you going. Once you have your operating expenses list complete, the total will show you what it will cost you to keep your business running each month.

Multiply this number by 6, and you have a six month estimate of your operating expenses. Then add this to the total of your start up expenses list, and you’ll have a ballpark figure for your complete start up costs.

Now let’s look at putting some financial statements for your business plan together, starting with the Income Statement.

The Income Statement

The Income Statement is one of the three financial statements that you need to include in the Financial Plan section of the business plan.

The Income Statement shows your Revenues, Expenses, and Profit for a particular period. It’s a snapshot of your business that shows whether or not your business is profitable at that point in time; Revenue – Expenses = Profit/Loss.

While established businesses normally produce an Income Statement each fiscal quarter, or even once each fiscal year, for the purposes of the business plan, an Income Statement should be generated more frequently – monthly for the first year.

Here’s an Income Statement template for the 1st quarter for a service-based business. It’s followed by an explanation of how to adapt this Income Statement template to a product-based business.

YOUR COMPANY NAME
Income Statement for the 1st quarter of (year)
	Jan	Feb	Mar	Total
REVENUE
Services
Service 1
Service 2
Service 3
Service 4
Total Services

Miscellaneous
Bank Interest
Total Miscellaneous
TOTAL REVENUE

EXPENSES
Direct Costs
Materials
Equipment Rentals
Salary (Owner)
Wages
Pension Expense
Workmen’s Compensation Expense
Total Direct Costs

General and Administration (G&A)
Accounting and Legal Fees
Advertising and Promotion
Bad Debts
Bank Charges
Depreciation and Amortization
Insurance
Interest
Office Rent
Telephone
Utilities
Credit Card Commissions
Credit Card Charges
Total G&A
TOTAL EXPENSES

NET INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME

Not all of the categories in this Income Statement will apply to your business. Leave out those that don’t apply and add categories where necessary to adapt this template to your business.

To use this template as part of the business plan, you’ll need to set it up as a table and fill in the appropriate figures for each month (as indicated by the line “row listing each month”). There are links to two excellent examples of Income Statements provided by the Royal Bank in the sidebar of this article.

If you have a product-based business, the Revenue section of the Income Statement will look different. Revenue will be called Sales, and inventory needs to be accounted for. For instance, if you look at the Royal Bank’s example of an Income Statement for Kamiko’s Fine Foods, you’ll see the Revenue section of the Income Statement described as:

SALES

COST OF SALES
OPENING INVENTORY
PURCHASES
ENDING INVENTORY
GROSS PROFIT

The Expense portion of the Income Statement, however, is very similar to the template I’ve provided above.

Ready to move on to the next financial statement that you need to include in the Financial Plan section of your business plan? The Cash Flow Projection is next.

The Cash Flow Projection

The Cash Flow Projection shows how cash is expected to flow in and out of your business. For you, it’s an important tool for cash flow management, letting you know when your expenditures are too high or when you might want to arrange short term investments to deal with a cash flow surplus. As part of your business plan, a Cash Flow Projection will give you a much better idea of how much capital investment your business idea needs.

For a bank loans officer, the Cash Flow Projection offers evidence that your business is a good credit risk and that there will be enough cash on hand to make your business a good candidate for a line of credit or short term loan.

Do not confuse a Cash Flow Projection with a Cash Flow Statement. The Cash Flow Statement shows how cash has flowed in and out of your business. In other words, it describes the cash flow that has occurred in the past. The Cash Flow Projection shows the cash that is anticipated to be generated or expended over a chosen period of time in the future.

While both types of Cash Flow reports are important business decision-making tools for businesses, we’re only concerned with the Cash Flow Projection in the business plan. You will want to show Cash Flow Projections for each month over a one year period as part of the Financial Plan portion of your business plan.

There are three parts to the Cash Flow Projection. The first part details your Cash Revenues. Enter your estimated sales figures for each month. Remember that these are Cash Revenues; you will only enter the sales that are collectible in cash during the specific month you are dealing with.

The second part is your Cash Disbursements. Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay that month for each month.

The third part of the Cash Flow Projection is the Reconciliation of Cash Revenues to Cash Disbursements. As the word “reconciliation” suggests, this section starts with an opening balance which is the carryover from the previous month’s operations. The current month’s Revenues are added to this balance; the current month’s Disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

Here is a template for a Cash Flow Projection that you can use for your business plan (or later on when your business is up and running):

YOUR COMPANY NAME
CASH FLOW PROJECTIONS
	Jan	Feb	Mar	Apr	May	Jun
CASH REVENUE
Revenue from Product Sales
Revenue from Service Sales
TOTAL CASH REVENUES

CASH DISBURSEMENTS
Cash Payments to Trade Suppliers
Management Draws
Salaries and Wages
Promotion Expense Paid
Professional Fees Paid
Rent/Mortgage Payments
Insurance Paid
Telecommunications Payment
Utilities Payments
TOTAL CASH DISBURSEMENTS

RECONCILIATION OF CASH FLOW

OPENING CASH BALANCE
ADD: TOTAL CASH REVENUES
DEDUCT: TOTAL CASH DISBURSEMENTS
CLOSING CASH BALANCE

Remember, the Closing Cash Balance is carried over to the next month. Once again, to use this template for your own business, you will need to delete and add the appropriate Revenue and Disbursement categories that apply to your own business.

The main danger when putting together a Cash Flow Projection is being over optimistic about your projected sales. Terry Elliott’s article, 3 Methods of Sales Forecasting, will help you avoid this and provides a detailed explanation of how to do accurate sales forecasting for your Cash Flow Projections.

Once you have your Cash Flow Projections completed, it’s time to move on to the Balance Sheet.

The Balance Sheet

The Balance Sheet is the last of the financial statements that you need to include in the Financial Plan section of the business plan. The Balance Sheet presents a picture of your business’ net worth at a particular point in time. It summarizes all the financial data about your business, breaking that data into 3 categories; assets, liabilities, and equity.

Some definitions first:

Assets are tangible objects of financial value that are owned by the company.

A liability is a debt owed to a creditor of the company.

Equity is the net difference when the total liabilities are subtracted from the total assets.

Retained earnings are earnings kept by the company for expansion, i.e. not paid out as dividends.

Current earnings are earnings for the fiscal year up to the balance sheet date (income – cost of sales and expenses).

All accounts in your General Ledger are categorized as an asset, a liability or equity. The relationship between them is expressed in this equation: Assets = Liabilities + Equity.

For the purposes of your business plan, you’ll be creating a pro forma Balance Sheet intended to summarize the information in the Income Statement and Cash Flow Projections. Normally a business prepares a Balance Sheet once a year.

Here is a template for a Balance Sheet that you can use for your business plan (or later on when your business is up and running):

YOUR COMPANY NAME
BALANCE SHEET As At __________ (Date)
ASSETS	$	LIABILITIES	$
Current Assets		Current Liabilities
Cash in Bank		Accounts Payable
Petty Cash		Vacation Payable
Net Cash		Income Tax Payable
Inventory		Customs Fees
Accounts Receivable		Pension Payable
Prepaid Insurance		Union Dues Payable
Total Current Assets		Medical Payable
		Workers Compensation Payable
		State/Provincial Tax Payable
Fixed Assets:		Total Current Liabilities
Land
Buildings		Long-Term Liabilities
Less Depreciation		Long-Term Loans
Net Land & Buildings		Mortgage
		Total Long-Term Liabilities
Equipment
Less Depreciation		TOTAL LIABILITIES
Net Equipment
		EQUITY
		EARNINGS
		Owner’s Equity – Capital
		Owner – Draws
		Retained Earnings
		Current Earnings
		Total Earnings

		TOTAL EQUITY

TOTAL ASSETS		LIABILITIES AND EQUITY

Once again, this template is an example of the different categories of assets and liabilities that may apply to your business. The Balance Sheet will reproduce the accounts you have set up in your General Ledger. You may need to modify the categories in the Balance Sheet template above to suit your own business.

Once you have your Balance Sheet completed, you’re ready to write a brief analysis of each of the three financial statements. When you’re writing these analysis paragraphs, you want to keep them short and cover the highlights, rather than writing an in-depth analysis. The two Financial Plan samples in the sidebar (under “Elsewhere On The Web”) will show you what these analyses will look like. The financial statements themselves (the Income Statement, Cash Flow Projections, and Balance Sheet) will be placed in your business plan’s Appendices.