Financial Plans

financial plan imageOur financial plans include a series of table and charts that help explain the company’s economic future. The purpose of the financial plan section is two-fold. First, you are going to need it if you are seeking investment from venture capitalists, angel investors, or even family members. They are going to want to see numbers that say your business will grow and quickly, that there is an exit strategy for them on the horizon, and that during your operations they can make a profit. Secondly, any bank or lender will also ask to see these numbers as well to ensure your ability to repay the loan.

  • Start with a sales forecast – set up a spreadsheet projecting your sales over the course of three or five years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second, third, fourth, and fifth year. Ideally, you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth multiplies unit cost to calculate cost of sales (also called COGS or direct costs). These allow you to calculate gross margin. Gross margin is sales less cost of sales, and it is a useful number for comparing with different standard industry ratios. If it is a new product or service, you have to make an educated guess based on companies with a similar product or service.
  • Create an expense budget – you are going to need to understand how much it is going to cost you to actually make the sales you have forecast. It is important to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it is a good thing for a business to know. Lower fixed costs means less risk, which are very critical when you have rent and payroll checks to sign. Most of your variable costs are in direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates. Since this is a forecast, you are going to have to estimate interest and taxes, both federal and state taxes. You should multiply estimated profits times your best guess tax percentage to estimate taxes. And then, multiply you estimated debts balance times an estimated interest rate to estimate interest.
  • Develop a cash flow statement – This is the statement that displays physical dollars moving in and out of the company. “Cash flow is king,” is an old cliche that still holds true. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have your historical documents, such as profit and loss statements and balance sheets from years past to use as a guide. If you are starting a new company and do not have these historical financial statements, you should start by projecting a cash flow statement broken down into 12 months. It is important to understand when compiling this cash flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30-days, 60-days and so forth. You do not want to be surprised that you only collect 80 percent of your invoices in the first 30-days when you are counting on 100 percent to pay your expenses.
  • Income projections – This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three to five years. Use the number that you used for sales forecast, expense projections, and cash flow statement. Sales, less cost of sales, allows you to obtain gross margin. Gross margin, less expenses, interest and taxes, is net profit.
  • Deal with assets and liabilities – You also need a projected balance sheet. You have to deal with assets and liabilities that aren’t in the profits and loss and project the net worth of your company at the end of the fiscal year. Some of those are obvious and only affect you at the beginning, like start-up assets. Taking out a loan, giving out a loan, and inventory show up only in assets, until you pay for them. So the way to compile this is to start with assets, and estimate what you will have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like hand, buildings and equipment. Then figure what you have as liabilities, meaning debt. That’s money you owe because you haven’t paid bills (which is called accounts payable) and the debts you have because of outstanding loans.