The Financial Section of Your Business Plan: What You Need to Know
A business plan won’t be complete without the numbers to support it. Unfortunately, these numbers are what make a business plan quite tricky. But since you can’t simply skip them, it’s good to note a few important things that will guide you in creating the financial section of your business plan.
Your business plan’s financial section plays a major role in your business. If you are trying to convince investors or you wish to obtain a loan, the financial section is what they will be looking at. This section’s main purpose is different from the purpose of accounting. While accounting records the historical financial data, your business plan looks ahead. The financial section of the plan should therefore include mostly financial projections.
This, however, is what complicates matters. Remember that projections have to be estimated based on historical data and growth studies. Unfortunately, a lot of businesses experience problems in the long run due to inaccurate forecasts. Thus, one important thing to remember when preparing this section is to be realistic.
Another important thing to remember about making the financial section of your business plan is to use visuals. There are a lot of programs and tools nowadays that can help you create bar graphs and pie charts, which will score some points among your prospective investors.
Components of the Financial Section
Now on to the components of the financial section, which includes:
- Sales forecast. Your sales forecast should project your sales over a total of 3 years, at the last. The forecast should also include different columns for every month of the first year or for every quarter.
- Expense budget. The expense budget is very important because it will keep you from making incorrect profit estimates. Before you can achieve a particular sales level, you will have to incur costs. The expense budget will help you understand how much you will spend before you can achieve your sales forecast.
- Cash flow statement. This is a statement showing the physical movement of money in and out of your business. Cash flow is based on both your sales forecast and your expense budget.
- Income projections. This is a profit and loss statement detailing the projected income or loss of your business for the first three years. Income refers to the earnings you make less expenses, taxes, and interest.
- Assets and liabilities. Outline all assets and liabilities in a projected balance sheet. Assets include any ownerships such as land, buildings, or equipment, while liabilities include debts or accounts payables.
- Break-even analysis. Your business plan should also give you an idea of your business’ break-even point, or the point at which your sales volume meets your business expenses.
Remember that you are not just preparing these sections for the sake of having them on your plan. The data that you will reap after preparing all these documents will also have a significant impact on the future of your business. Many businesses make plans then forget about them as time goes by, but the right thing to do is to use your financial statements to measure the performance of your business. This said, make it a habit to update your business plan, including the financial section, at least once every year.