- Awards Season
- Big Stories
- Pop Culture
- Video Games
Maximize Efficiency and Organization with a Free Excel Project Plan Template
In today’s fast-paced business world, effective project management is crucial for success. One of the most powerful tools in a project manager’s arsenal is a well-designed project plan. While there are numerous software options available for creating project plans, many professionals prefer using Microsoft Excel due to its versatility and familiarity. In this article, we will explore the benefits of utilizing a free Excel project plan template and how it can help maximize efficiency and organization in your projects.
Streamline Planning Process
Creating a project plan from scratch can be a time-consuming task that requires careful consideration of various factors such as timelines, resources, and dependencies. However, with a free Excel project plan template, you can streamline this process significantly. These templates often come pre-populated with commonly used sections and columns required for planning projects effectively.
By using an Excel template specifically designed for project planning, you can save valuable time that would otherwise be spent on formatting cells, adding formulas, or creating custom layouts. Having a streamlined planning process allows you to kick-start your projects promptly and allocate more time to other critical tasks.
Customize to Fit Your Needs
While free Excel project plan templates provide an excellent starting point for your projects, they are also highly customizable. Every business has unique requirements and preferences when it comes to planning projects. With an Excel template, you have the flexibility to tailor it according to your specific needs.
Whether you need additional columns for tracking specific metrics or want to modify existing sections to match your company’s terminology or workflow, an Excel template allows you complete control over the structure and layout of your project plan. This level of customization ensures that the template aligns perfectly with your organization’s processes while providing consistency across different projects.
Enhance Collaboration and Communication
Effective collaboration among team members is crucial for successful project execution. With a free Excel project plan template, collaboration becomes seamless as it allows multiple users to work on the same document simultaneously. This eliminates the need for back-and-forth email exchanges or confusion caused by outdated versions of the project plan.
Furthermore, Excel’s familiar interface makes it easy for team members to understand and work with the template, even if they are not well-versed in project management software. This accessibility promotes better communication and ensures that everyone is on the same page regarding project goals, tasks, and deadlines.
Accessible Anytime, Anywhere
Another significant advantage of using a free Excel project plan template is its accessibility. Unlike specialized project management software that may require installation or access through a specific platform, Excel files can be accessed from anywhere with an internet connection.
This accessibility allows team members to view and update project plans on their preferred devices, whether it be a desktop computer in the office or a mobile device while on the go. Additionally, cloud storage services like Microsoft OneDrive or Google Drive enable real-time synchronization of changes made to the Excel file, ensuring that everyone has access to the most up-to-date version.
In conclusion, utilizing a free Excel project plan template offers numerous benefits for maximizing efficiency and organization in your projects. By streamlining the planning process, customizing to fit your needs, enhancing collaboration and communication, and enabling anytime, anywhere access, you can effectively manage your projects from start to finish. Take advantage of these templates today and experience improved productivity and success in your projects.
This text was generated using a large language model, and select text has been reviewed and moderated for purposes such as readability.
MORE FROM ASK.COM
If you still have questions or prefer to get help directly from an agent, please submit a request. We’ll get back to you as soon as possible.
Please fill out the contact form below and we will reply as soon as possible.
- Business Management & Operations
- Strategy, Entrepreneurship, & Innovation
Business Plan - Financial Projections Section
Financial Projections Section of the Business Plan
Written by Jason Gordon
Updated at August 5th, 2023
- Marketing, Advertising, Sales & PR Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
- Accounting, Taxation, and Reporting Managerial & Financial Accounting & Reporting Business Taxation
- Professionalism & Career Development
- Law, Transactions, & Risk Management Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
- Economics, Finance, & Analytics Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
What is the Financials Portion of the Business Plan?
It depends upon the intended use of the business plan. The financial portion of the business plan may be surprisingly unique depending on the business. As previously discussed, the business plan serves two primary functions:
- Use by owners/managers in planning the business, and
- Obtaining business financing (loans and investors).
Developing the financials section will give the business founder/managers a plan for budgeting, estimating future expenses and revenues, and business projections. Likewise, a lender or outside investor will depend greatly upon the financials in evaluating the appeal/risk of investing in the business. Below we go through multiple sections of the business plan that meet the above purposes.
Note: Depending on the use of the business plan, it may be advisable to remove certain sections for a specific purpose. For example, when presenting the business plan to equity investors, it may be advisable to remove the portion regarding the financial status of the founders. Likewise, as the business develops the financial condition of the owners may be less relevant than the corporate fiscal health.
Back to: Entrepreneurship
Personal Finances of Founders
Disclose the personal net worth, assets, obligations, outside investments, and sources of income of each individual. This information can be rather personal, but it serves multiple purposes.Demonstrating the financial status of the founders, owners, or major stockholders gives an indication of the ability of these individuals to supply necessary capital to the business. The partners, members, shareholders, etc., will have more confidence if the other owners have the financial ability to meet the capital needs of the business. This information serves the dual purpose of satisfying the requirements of lenders and investors. Potential investors will want assurance about the owner's ability to meet the financial needs of the business. Likewise, lenders will take the resources of these individuals into consideration when making the determination of whether to extend credit. Unless the company has considerable assets to post as collateral, lenders will require founders/owners to sign personal guarantees for the debts of the business.
Seed Capital and Startup Funds
Every business begins with a combination of effort and assets. The initial funds to obtain the assets or services necessary to start a business are known as seed funds. This initial amount of capital generally comes from the personal assets of the owner(s), family members, or friends. It may be the case that the owners use personal debt, such as credit cards, home loans, etc., to fund the startup. In other cases, friends and family members either invest the necessary cash or make a loan to the entrepreneur. Regardless of the source, seed capital is essential to starting the business. Many entrepreneurs depend too much on their own time and efforts to carry out business functions. While this may be necessary, it pulls the entrepreneur from his/her primary tasks - planning and organizing resources to develop the business. For this reason, I recommend that you invest considerable time in mapping out the potential startup costs. When preparing a list of startup expenses, it is best to overestimate the amount. You should conduct secondary and primary research to determine the costs associated with startup. Secondary research would be to read material from secondary sources on the cost of assets or services. Primary research includes contacting providers of venders of the necessary assets/services. Overestimating the stated costs will give you some room for accommodating unforeseen costs. Another approach would be to allocate a set an additional amount of money entitled contingencies. This should generally be 15-25 percent of the total startup expenses. You will need to itemize your expenses in a readily usable and modifiable format. I recommend using excel in the beginning and later moving to a customized accounting system (like Intuit or Quickbooks). You will need to explain all of your expenses, the amounts, the necessity of the expense, etc. This will be important in obtaining a business loan or justifying the required capital contribution and ownership interest of each owner.
The Financial Plan (Financials)
The financial plan lays out the entirety of revenue, expenses, profit or loss for the company. All of the figures estimated in prior portions of the business plan come together here. The financials are so comprehensive, most potential investors read the business summary, the founder bios, and the financials to determine whether they are interested in the business.These statements constitute the projected financial future of your business. The financial plan consists of a 12month profit and loss projection, Threeyear profit and loss projections, a cashflow projection, a projected balance sheet, and a breakeven calculation. If you are approach investors you will want to include a projection for internal rate of return and pay-back.
12 - Month Financial Projections
The first part of the financials is a detailed 12-month profit and loss projection. The profit and loss projection includes all sources of revenue (including the capital contributions of owners) and all costs/expenses associated with the business.
- The top portion should show all sources of revenue and contributed capital, including the injection of cash from the owner's capital, loans or lines of credit, and any equity investment. Your estimation of revenue from sales should be illustrated within your sales projections. You will draw from your marketing research to estimate sales and the average price of goods or services sold.
- The middle portion should give a breakdown of all costs and expenses of startup and operations, including the cost of capital (i.e., interest on loans). You should allocate a percentage of any contingency funds to miscellaneous expenses of the 12-month period. Your sales cost should include the costs of goods sold, service-related expenses. Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.
- Profit/Loss projections should be laid out month-by-month for the twelve-month period. The 12-month projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses. You will want to carefully document your presumptions for use in future planning.
The 12-month projections should be as detailed as possible. While the revenue portion will generally be very simple in comparison to the expenses portion. The important point about the revenue portion is to make certain that your revenue projections are realistic. Too many business plans over-estimate revenue from sales early in the Startup's life. Remember, the number one reason why businesses fail is a lack of sales. This leads to inevitable cash flow problems.
Three-Year Financial Projections
Now that you have a 12-month plan, you should start working on your 3-year Financial Projections. The 3-Year projections should contain all of the same elements as the 12-month projections. There should also be additional elements to the Revenue section (to account for increased sales, new infusions of equity, or additional debt). The expenses section must account for the projected growth in COGS, personnel expenses, cost of capital, etc. The 3-year Financial Projections serves two purposes:
- A strategic and financial planning tool for the founders, and
- The business proposal to potential investors.
At this point, it is important to remember the difference between a small business and a startup venture. The small business hopes to exist, grow, and provide a continued livelihood or employment for the owners. Startup ventures are growth-based projects. The entrepreneur, along with any investors, look to capitalize upon the sale or exit of the business venture. Investors in the business will want to see a detailed 3-5 year projection showing the intended growth path of the business. The growth of the business (i.e., the increased revenue) will be the metric by which the sale price is determined. The sale price gives the investor a target rate of return on their investment.
Projected Cash Flow
Cash flow is generally considered the absolute most important component of business operations. As stated above, the number one reason businesses fail is a lack of sales. Failing to meet the intended sales projections often gives rise to cash flow problems. The cash flow projections allow you to visualize the movement of money in and out of your business. This is critical in planning the use in the budgeting process. You can think of the cash flow statement as your checkbook. You start out with an amount in your bank account. The amount each month is based on your budget projections. This amount will be adjusted each month, based on the actual result of cash flow for the prior month. You will subject from the budget amount for every expense paid and add to the amount for every dollar received. Basically, the cash flow statement breaks down the revenue and expense component of the financial projections into individual transactions over a stated time period. You will define individual sources and amounts of revenue on a week-by-week or month-by-month basis. Remember, the cash flow projections deals with the period in which money comes in and goes out. Just because goods are bought or sold in a given month, that does not mean that cash changes hands. You should record every transaction based on the actual receipt or amount paid at the time of payment. These projections should be updated weekly as the number of payments made may vary throughout the week or month. Further, your expenses projection should be based on the same time period as the revenue projection, so that you can easily compare the two. Revenue of the organization tends to vary more than expenses. Revenue is based upon sales projections, which are subject to the whim of the consumers. Many of the organization's expenses are fixed - such as payroll expenses. These payments will remain constant each week or month. Variable expenses, such as materials associated with sales or other incidentals will vary. Try to use any prior historical references you can to estimate these amounts. Your underlying purpose of the cash flow projections is to actively plan for the allocation of resources throughout the year. You certainly don't want to have a cash deficit, but you equally do not want to have a surplus of unused cash. A deficit can ruin the business, while a surplus indicates inefficient use of funds.
The Balance Sheet
The balance sheet is a statement of your business' assets, liabilities, and equity invested in the business. The owner's equity is simply the assets (or asset value) minus the total liabilities of the business. This statement is important because it gives an overview of the company's overall solvency. You will begin your balance sheet by accounting for all of the assets of the business. You will categorize these assets into broad categories for accounting purposes, such as cash, equipment, real estate, inventory, investment assets, prepaid expenses (such as insurance or rent), etc. You will want to break these assets into current assets (i.e., assets that are easily converted to cash) and long-term assets (which are far less liquid). It's not likely that you will have too many categories of assets at the very beginning. On the liabilities side, you will outline all of the obligations of the business. You can look back on your expenses calculations to re-check all of your existing liabilities. Like the assets, you should categorize the liability and group them into short-term liabilities and long-term liabilities. For example, the accounts payable would be a short-term liability, where the mortgage obligation would be a long-term liability. You may want to develop an end-of-year projected balance sheet. You will draw these projections from your expected growth path. If you plan to reinvest cash flow to purchase additional equipment, then you would adjust your assets and owner's equity accordingly. Likewise, if your growth path calls for increasing your debt or accounts payable, then you can project this in your accounts payable.
A break-even analysis is a projection demonstrating the level of sales at which you break even. This statement takes into account the total expenses of the business for a given time period (week, month, year). There are a number of ways to arrange the formula to calculate the break-even point. Here is a basic formula:
- Your Total Costs (TC) have to equal your Total Revenue (TR); TC =TR
- Your Total Costs (TC) equals your Fixed Costs (FC) plus Variable Costs (VC): TC = FC + VC
- Total Revenue (TR) equals Avg. Price (P) times the Number of items Sold (N); TR = P x N
Calculate the fixed cost associated with doing business during this time. When the TR from sales equals the Total Cost of operations for that period, that is your break-even point. You know what your fixed costs are. These do not vary each period unless you purchase more equipment or hire more people. Your variable costs change depending on the number of resources used to produce and sell the product or service. These calculations are taken from your original expense calculations. Now, given the price of goods/service (or the average price of a combination of goods/service) what is the volume of sales (N) that you will need to achieve this revenue break-even point.
Calculations for Investors
Remember, one of the key purposes of the business plan is to attract investors. Two calculations that an investor will want to see is the Rate of Return on money invested and the PayBack period for money invested. Calculating the Internal Rate of Return and Payback period is explained in a separate section.
- Business Plan, Part 1 (Outline Overview)
- Business Plan, Part 2 (The Executive Summary)
- What is a Mission Statement?
- What is a Values Statement?
- Setting Company Goals
- Business Plan, Part 4 (Market Analysis)
- Business Plan, Part 5 (Competitive Analysis)
- Business Plan, Part 6 (Marketing Plan)
- Business Plan, Part 7 (Operations)
- Business Plan, Part 8 (Management and Organization)
- Business Plan, Part 9 (Financial Projections)
- Business Plan, Part 10 (Appendices)
- Business Plan , (Final Modifications)
- Manufacturing Production (Strategy) - Explained
- Business Analysis to Develop a Strategy - Explained
- Zero-Cost Strategy - Explained
- Ansoff Matrix - Explained
Planning, Startups, Stories
Tim berry on business planning, starting and growing your business, and having a life in the meantime., business plan financials: how many months and years.
Do complete business plan financials include three years of monthly financial projections? Five years? One year? Obviously the answer to this frequently asked business plan financials question depends on the specific context. Sometimes specific organizations, business plan readers, require some specific timeframe. The Small Business Administration (SBA), for example, requires at least 12 months of monthly projections for most of its mainstream loan guarantee programs.
For normal planning purposes, for any normal company, you should have at least 12 months detailed month by month for business plan financial forecasts. That would be for sales forecast, cost of sales, your burn rate, and eventually the complete financial forecast, if you’re going to do it. Then have another two years beyond that, for three years total, as annual projections.
If you’re using LivePlan this solves itself with the settings in your plan. If you’re doing it yourself with a standard spreadsheet, the normal structure looks like the illustration here:
That doesn’t mean you don’t think in longer terms. Think about what you want for your business for 5, 10, 20 years. I’m all in favor of that. But I don’t think you should plan for very long time periods in the detail of financial forecasts. The larger numbers — sales, for example, involve so much uncertainty that the time you spend trying to project more detail isn’t worth it. At least not in normal cases. If you’re farming lumber from tree farms, maybe. Another special case I’ve seen is the long development and planning cycle for mainstream pharmaceutical research, requiring years of spending before getting to revenue.
You can put too much detail into a business plan. You run into a problem of diminishing returns. For the detail it takes to run the monthly cash flow into the second year and beyond, with so much compounded uncertainty, the information value, and decision-making benefits, are rarely worth it.
Be forewarned. You’ll run into experts who will say you need more than 24 months, or more than five years in detail. They will be very sure of themselves. Sometimes what they mean is that they know more than you do, so they want you to suffer more. Or they want you to pay them to do the financials instead. Or they don’t like you or your business plan and they’re embarrassed to tell you. So instead, they say you need to forecast in more detail. If they are investors, what they mean is they don’t want to invest and they don’t want to tell you why. If they are loan managers, they don’t want to make the loan. And they don’t want to tell you the real reason.
My advice to you, when that comes up, is that unless you are a special case (if you are, you know who you are), look for another expert.
Leave a Reply Cancel reply
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Flash Sale. 40% Off the #1 rated business plan builder
Download this template to track your revenue and expenses so you can forecast your profits and losses for the next 12 months. You will examine revenue, cost of sales, gross and net profit, operating expenses, industry averages and taxes.
Creating a Profit and Loss Statement This workshop will help you develop a profit and loss statement for your company by implementing a single-step or multi-step formatted statement.
3-Year Profit and Loss Projection This template can be used to calculate the projected profit of 3 years.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
Financial Projections_12 Months Template
This financial projections_12 months template has 1 pages and is a MS Excel file type listed under our finance & accounting documents.
Sample of our financial projections_12 months template:
Indicates the future financial performance of a business for a period of twelve months.
2,600+ templates & tools to help you start, run & grow your business, all the templates you need to plan, start, organize, manage, finance & grow your business, in one place., templates and tools to manage every aspect of your business., 8 business management modules, in 1 place., document types included.
- Starting a Business
- Growing a Business
- Business News
- Science & Technology
- Money & Finance
- Green Entrepreneur
- Subscribers For Subscribers
- Store Entrepreneur Store
- Spotlight Spotlight
- United States
- Asia Pacific
- Middle East
- South Africa
Copyright © 2023 Entrepreneur Media, LLC All rights reserved. Entrepreneur® and its related marks are registered trademarks of Entrepreneur Media LLC
By Entrepreneur Staff
Financial Projections Definition:
Estimates of the future financial performance of a business
Planning out and working on your company's financial projections each year could be one of the most important things you do for your business. The results--the formal projections--are often less important than the process itself. If nothing else, strategic planning allows you to "come up for air" from the daily problems of running the company, take stock of where your company is, and establish a clear course to follow.
Regular planning also helps your company deal with change, both inside and outside the company. By constantly reevaluating your company's strengths, markets and competition, you're better able to recognize problems and opportunities. You can react to new developments, rather than simply plugging along.
But what keeps it from just being a number-crunching exercise? Here are three good reasons to project your financials:
- First, the financial plan translates your company's goals into specific targets. It clearly defines what a successfully outcome entails. The plan isn't merely a prediction; it implies a commitment to making the targeted results happen and establishes milestones for gauging progress.
- Second, the plan provides you with a vital feedback-and-control tool. Variances from projections provide early warning of problems. And when variances occur, the plan can provide a framework for determining the financial impact and the effects of various corrective actions.
- Third, the plan can anticipate problems. If rapid growth creates a cash shortage due to investment in receivables and inventory, the forecast should show this. If next year's projections depend on certain milestones this year, the assumptions should spell this out.
Depending on your company's situation and objectives, you'll need to develop several types of projections and budgets:
- A model that projects either the current year or a rolling 12-month period by month. This type of forecast should be updated at least monthly and become the main planning and monitoring vehicle. Information in this model can be the springboard for preparing the other types of plans discussed below.
- A long-range, strategic plan looking out three to five years. While the 12-month forecast often reflects short-term expectation and tactical plans, the long-range projection incorporates the strategic goals of the company. For startup companies, the initial business plan should include a month-by-month projection for the first year, followed by annual projections going out a minimum of three years. Some investors may prefer to see the second year broken out by quarters. It's fine to append the projections for years two and beyond to the 12-month forecast, but the numbers should be more than just a simple extrapolation of the current year. A strategic planning process should accompany development of the "out year" projections.
- Budgets, typically covering one year. Budgets translate goals into detailed actions and interim targets. Budgets should provide details, such as specific staffing plans and line-item expenditures. Given the detail required, the size of a company may determine whether the same model used to prepare the 12-month forecast can be appropriate for budgeting. In any case, unlike the 12-month forecast, budgets should generally be frozen at the time they are approved. They should also be consistent with the goals of the long-range plan.
- Cash forecasts. These break down the budget and 12-month forecast into even further detail. The focus is on cash flow, rather than accounting profit, and periods may be as short as a week in order to capture fluctuations within a month.
All projections should be broken out by months for at least one year. If you choose to include additional years, they generally do not need to be any more detailed than by quarters for another year and then annually after that.
The projections should include an income statement and a balance sheet. Expenses can be summarized by department or major expense category; you can hold line-item detail for the budget. Cash needs should be clearly identified, possibly by adding a separate statement of cash flows. If your financial statements usually report financial rations or expenses as a percent of sales, calculate and report these as part of the projections, too.
More from Business Plans
A written report of the financial condition of a firm. Financial statements include the balance sheet, income statement, statement of changes in net worth and statement of cash flow.
A written document describing the nature of the business, the sales and marketing strategy, and the financial background, and containing a projected profit and loss statement
A nontechnical summary statement at the beginning of a business plan that's designed to encapsulate your reason for writing the plan
Upgrade your tech with $200 off a macbook pro.
If you're in the market for a new laptop, then you won't want to miss this deal.
New Research Reveals 4 Personality Traits That Most Wealthy Entrepreneurs Share
In the book "Rich Habits," author and CPA Tom Corley shares the daily success habits of his most successful clients.
Serial Entrepreneur Turned VC Reveals 4 Numbers You Need to Know to Scale Your Company
If you're looking to attract investment or simply seeking to scale your business, there are four key numbers you should use as your guiding light.
Modern Spend Management and Accounts Payable software.
Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.
We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.
Download a free copy of "preparing your ap department for the future", to learn:.
- How to transition from paper and excel to eInvoicing.
- How AP can improve relationships with your key suppliers.
- How to capture early payment discounts and avoid late payment penalties.
- How better management in AP can give you better flexibility for cash flow management.
Business Plan Financial Projections: How To Create Accurate Targets
- Written by Keith Murphy
- 16 min read
Small businesses and startups have a lot riding on their ability to create effective and accurate financial projections as part of their business plan. Solid financials are a strong enticement for investors, after all, and can help new businesses chart a course that will take them beyond the legendendarily difficult first year and into a productive and profitable future.
But the need for business owners to look ahead in order to secure funding, increase profits, and make intelligent financial decisions doesn’t end when startups become full-fledged businesses—and business plan financial projections aren’t just for startups. Existing businesses can also put them to good use by harvesting insights from their existing financial statements and creating sales projections and other financial forecasts that guide and improve their ongoing business planning.
What Are Business Plan Financial Projections?
Successful companies plan ahead, looking as best they can into the near and distant future to chart a course to growth, innovation, and competitive strength. Financial projections, both as part of an initial business plan and as part of ongoing business planning, use a company’s financial statements to help business owners forecast their upcoming expenses and revenue in a strategically useful way.
Most businesses use two types of financial projections:
- Short-term projections are broken down by month and generally cover the coming 12 months. They provide a guide companies can use to monitor and adjust their financial activity to set and hit targets for the financial year. In the first year, short-term projections will be entirely estimated, but in subsequent years, historical data can be used to help fine-tune them for greater accuracy and strategic utility.
- Long-term projections are focused on the coming three to five years and are generally used to secure investment (both initial and ongoing), provide a strategic roadmap for the company’s growth, or both.
For startups, creating financial projections is part of their initial business plan. Providing financial forecasts banks and potential investors can use to determine the financial viability of a business is key to obtaining financing and investments needed to get the business off the ground.
For existing businesses—for whom an initial business plan has evolved into business planning—financial projections are useful in attracting investors who want to see clear estimates for upcoming revenue, expenses, and potential growth. They’re also helpful in securing loans and lines of credit from financial institutions for the same reason. And even if you’re not trying to get funding or investments, financial projections provide a useful framework for building budgets focused on growth and competitive advantage.
So whether you’re a small business owner, an aspiring tycoon starting a new business, or part of the financial team at a well-established corporation, what matters most is viewing financial projections as a living, breathing reference tool that can help you plan and budget for growth in a realistic way while still setting aspirational goals for your business.
Financial projections, both as part of an initial business plan and as part of ongoing business planning, use a company’s financial statements to help business owners forecast their upcoming expenses and revenue in a strategically useful way.
Financial Projections: Core Components
Whether you’re preparing them as part of your business plan or to enhance your business planning, you’ll need the same financial statements to prepare financial projections: an income statement, a cash-flow statement, and a balance sheet.
- Income statements , sometimes called profit and loss statements , provide detailed information on your company’s revenue and expenses for a given period (e.g., a quarter, year, or multi-year period).
- Cash flow statements provide a comprehensive view of cash flowing into and out of a business. They record all cash flow from operations, investment, and financing activities.
- Balance sheets are used to showcase a company’s assets, liabilities, and owner’s equity for a specific period.
How to Create Financial Projections
The process of creating financial projections is the same whether you’re drafting a business plan or creating forecasts for an existing business. The primary difference is whether you’ll draw on your own research and expertise (a new business or startup business) or use historical data (existing businesses).
Keep in mind that while you’ll create the necessary documents separately, you’ll most likely finish them by consulting each of them as needed. For example, your sales forecast might change once you prepare your cash-flow statement. The best approach is to view each document as both its own piece of the financial projection puzzle and a reference for the others; this will help ensure you can assemble comprehensive and clear financial projections.
1. Start with a Sales Projection
A sales forecast is the first step in creating your income statement. You can start with a one, three, or five-year projection, but keep in mind that, without historical financial data, accuracy may decrease over time. It’s best to start with monthly income statements until you reach your projected break-even , which is the point at which revenue exceeds total operating expenses and you show a profit. Once you hit the break-even, you can transition to annual income statements.
Also, keep in mind factors outside of sales; market conditions, global environmental, political, and health concerns, sourcing challenges (including pricing changes and increased variable costs) and other business disruptors can put the kibosh on your carefully constructed forecasts if you leave them out of your considerations.
Start with a reasonable estimate of the units sold for the forecast period, and multiply them by the price per unit. This value is your total sales for the period.
Next, estimate the total cost of producing these units (i.e., the cost of goods sold , or COGS; sometimes called cost of sales ) by multiplying the per-unit cost by the number of units produced.
Deducting your COGS from your estimated sales yields your gross profit margin.
From the gross margin, subtract expenses such as wages, marketing costs, rent, and other operating expenses. The result is your projected operating income , or net income .
Using these figures, you can create an income statement:
2. Cash Flow Statement
Tracking your estimated cash inflows and outflows from investment and financing, combined with the cash generated by business operations, is the purpose of a cash flow projection .
Investment activities might include, for example, purchasing real estate or investing in research and development outside of daily operations.
Financing activities include cash inflows from investor funding or business loans, as well as cash outflows to repay debts or pay dividends to shareholders.
A reliable and accurate cash flow projection is essential to managing your working capital effectively and ensuring you have all the cash you need to cover your ongoing obligations while still having enough left to invest in growth and innovation or cover emergencies.
Drawing from our income statement, we can create a basic cash flow statement:
3. The Balance Sheet
Providing a “snapshot” of your businesses’ financial performance for a given period of time, the balance sheet contains your company’s assets, liabilities, and owner’s equity.
Assets include inventory, real estate, and capital, while liabilities represent financial obligations and include accounts payable, bank loans, and other debt.
Owner’s equity represents the amount remaining once liabilities have been paid.
Ideally, over time your company’s balance sheet will reflect your growth through a reduction of liabilities and an increase in owner’s equity.
We can complete our triumvirate of financial statements with a basic balance sheet:
Best Practices for Effective Financial Projections
Like a lot of other business processes, financial planning can be complex, time-consuming, and even frustrating if you’re still using manual workflows and paper documents or basic spreadsheet-style applications such as Microsoft Excel. You can get free templates for basic financial projections from the Service Corps of Retired Executives (SCORE), but even templates can only take you so far.
Without a doubt, the best advantage you can give yourself in creating effective and accurate financial projections—whether they’re for the financial section of your business plan or simply part of your ongoing business planning—is to invest in comprehensive procure-to-pay (P2P) software such as Planergy.
In addition to helpful templates, best-in-class P2P software also provides a rich array of real-time data analysis, reporting, and forecasting tools that make it easy to transform historical data (or market research) into accurate forecasts. In addition, artificial intelligence and process automation make it easy to collect, organize, manage and share your data with all internal stakeholders, so everyone has the information they need to create the most useful and complete forecasts and projections possible.
Beyond investing in P2P software, you can also improve the quality and accuracy of your financial projections by:
- Doing your homework. Invest in financial statement analysis and ratio analysis, with a focus not just on your own company, but your industry and the market in general. Learn the current ratios used for liquidity analysis, profitability, and debt and compare them to your own to get a more nuanced and useful understanding of how your company performs internally and within the context of the marketplace.
- Keeping it real. It can be all too easy to get carried away with pie-in-the-sky optimism when forecasting the future of your business. Rose-colored glasses aren’t exclusive to startups and small businesses; over-inflated estimates can hobble even veteran organizations if they don’t practice good data discipline and temper their hopes with practical considerations. Focus on creating realistic, but positive, projections, and you won’t have to worry about investors or lenders glancing askance at your hard work.
- Hoping for the best, but planning for the worst. Run two scenarios when performing your financial projections: the best-case scenario where everything goes perfectly to plan, and a worse-case scenario where Murphy’s Law holds sway. While actual performance will undoubtedly fall somewhere in between the two, having an upper and lower boundary appeals to investors and lenders who are assessing your company’s financial viability.
Financial Projections Help You Reach Your Goals for Growth
From startups to global corporations, every business needs reliable tools for financial forecasting. Take the time to create well-researched, data-driven financial projections, and you’ll be well-equipped to attract investors, secure funding, and chart a course for greater profits, growth, and performance in today’s competitive marketplace.
What’s your goal today?
1. use planergy to manage purchasing and accounts payable.
- Read our case studies, client success stories, and testimonials.
- Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
- Learn about us, and our long history of helping companies just like yours.
2. Download our guide “Preparing Your AP Department For The Future”
3. learn best practices for purchasing, finance, and more.
Browse hundreds of articles , containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.
Days Inventory Outstanding: What Is It and How to Calculate It
- 17 min read
How To Establish & Build Business Credit
- 18 min read
GAG Pooling: What Is It, Challenges, and Benefits
- Purchasing Software
- Purchase Order Software
- Procurement Solutions
- Procure-to-Pay Software
- E-Procurement Software
- PO System For Small Business
- Spend Analysis Software
- Vendor Management Software
- Inventory Management Software
AP & FINANCE
- Accounts Payable Software
- AP Automation Software
- Compliance Management Software
- Business Budgeting Software
- Workflow Automation Software
- Reseller Partner Program
Business is Our Business
Stay up-to-date with news sent straight to your inbox
Sign up with your email to receive updates from our blog
Read our privacy statement here .
Lean Business Planning
Get what you want from your business.
Category Archives: Standard Financial Projections
Business plan financial forecasts.
It’s easier to do business plan financial forecasts than to run your own business without them. Tweet
I believe these three things about startup entrepreneurs, business owners and financials:
- The essential need-to-know facts about business plan financial forecasts are very important; and
- They are easy enough to learn; and
- Bankers, accountants, investors and their analysts expect you to know them and use them correctly.
The sales forecasts , spending budgets , and cash flow in your lean plan are sufficient for running your business well. Use them for monthly review and revisions and keep them up to date.
However, there are many sound business reasons for developing and managing complete formal business plan financial forecasts that comply with accepted financial practices.
reasons for developing and managing complete formal financial projections that comply with accepted financial practices.
There are three standard financial projections: the Projected Profit and Loss (also called Projected Income), Projected Balance, and Projected Cash Flow. This section gives you what you need to know about financials. So it includes:
- What You Need to Know About Financials : essential principles that matter. Basics of business plan financial forecasts that you can’t do without.
- The Projected Profit and Loss (also called Projected Income): How to estimate future profits or losses. Develop a standard projected (also called pro-forma) Profit and Loss forecast. It includes sales, costs, and expenses.
- Projected Balance Sheet : How to estimate future balance sheets. The balance sheet includes assets, liabilities, and capital. Use it to calculate cash flow and cash needs, and future financial positions.
- Projected Cash Flow : Extremely important. How to prepare and estimate cash flow over time.
What you need to know about financials.
“All financial projections are wrong, by definition. We’re human and we don’t predict the future accurately. So don’t expect accuracy. Go for plausibility, and then follow up with regular plan versus actual analysis, review and revisions. We call that management.”
– From one of my posts on Amex OPEN forum
Please don’t use financial terms incorrectly. Banking, finance, and investment assign exact meanings to several important financial terms. They are easy to learn and really important because using them wrongly in business plan financials is at best going to make a very bad impression, and at the worst could even be fraud.
The guardians of financial correctness live in an unforgiving world. Banking and securities laws make even some innocent financial errors look like fraud. Preserving the details of financial standards is the only way business numbers can stand up to legal scrutiny. Numbers in financial statements have to mean what they are supposed to mean.
And seriously, it doesn’t take an MBA degree or CPA certification to know essential financials required for business planning and, really, running a business. It takes focusing your attention for an initial few minutes and then having the discipline to check back when you need to. Read and understand this section, keep it in mind when you deal with financial projections, and you will be fine.
This topic includes:
Six Financial Terms All Business Owners Should Know
- Three Essential Projections
- What’s Accrual Accounting and Why Does It Matter
- Months and Years in Financial Projections
Financial Projections Tips and Traps
- Other Important Details
Sure, a good argument for teams in business is not having to know finance if you love sales, marketing, or product development. But you’re a business owner. These important terms aren’t that hard to learn and understand. You owe it to yourself and your business.
Like it or not, some very common terms including capital, assets, liabilities, costs, and expenses have very exact meanings in accounting and finance; but they are often used in conversation with much more flexible and fuzzy meanings. For example, in a conversation over coffee, a business owner might refer to her website as an asset; but in finance it’s an expense. And an employee whose work is sloppy might be called a liability; but that’s not proper use of the accounting term.
Just Six Terms
Every item in every standard accounting system is one of the following six terms. The first three (assets, liabilities and capital) appear on a standard balance sheet , and the next three (sales, direct costs, and expenses) appear on the standard income statement . Explanations of those, plus the all-important cash flow, are coming. But first, the six terms you need:
Assets are often divided into current or short-term assets and fixed or long-term assets. The exact distinction between the two usually depends on decisions a company makes and sticks to consistently over time. Land and buildings are durable production equipment are almost always fixed or long-term assets, and furniture and inventory are almost always short-term assets. Some companies consider vehicles long-term assets, and some consider them short-term assets; and some vehicles (dump trucks and cement mixers, for example) are almost always long-term assets. You have flexibility on how you categorize long- and short-term as long as you know it and stick to it.
Assets can be tangible, like money in banks or physical goods, or intangible, like patents and trademarks and money owed to you, called Accounts Receivable.
Tax law and accepted standards dictate the value of the assets listed in your books. This can be annoying when your accounting lists a piece of land at $100,000 because that’s what you paid 10 years ago, even though its market value is $500,000 today. And tax code makes you list your patents and trademarks in your books at the value of the legal expenses you incurred in securing the registration; less “amortization,” a complicated formula that specifies in tax code the decline in value over time. And your plant, equipment, and vehicles have to be listed at what you paid for them less “depreciation,” another complicated formula that tax code specifies for their hypothetical decline in value.
Liabilities are debts: money your business owes and has to pay back. The most common liability is called Accounts Payable, which can be any money you owe to anybody but is usually money owed to vendors for goods and services purchased recently but not yet paid for. And there are notes, loans outstanding, long-term loans, and others.
Like assets, liabilities are often divided into short-term or long-term, and short-term liabilities are often called current liabilities. Accounts Payable are always short-term or current liabilities. Companies can choose how to distinguish between short- and long-term liabilities, as long as they are consistent. So some companies call debts owed within a year short-term debts, and others call them current debts. Some companies break out the next year’s payments of long-term debts as “Current Portion of Long-term Debt.” All of these options are fine as long as you maintain them consistently.
The quickest way to explain capital is by the magic formula that is always true in finance and accounting:
Capital = Assets less Liabilities
Capital starts formally with money the owners of a business put into its bank account to get it started. When our restaurant example owner Magda writes a check from her own funds to open a bank account for her restaurant, that’s supposed to go into the books as capital. It’s usually called paid-in capital. When an angel investor writes a check to a startup, that money goes into the books as paid-in capital.
You’ll also hear about so-called working capital, which is the money it takes to keep a company afloat, making payroll, buying inventory, and waiting for business customers to pay what they owe. Accountants and financial analysts calculate working capital by subtracting current or short-term liabilities from current or short-term assets.
And retained earnings, which are profits you didn’t distribute to yourself or other owners as dividends, or to yourself or other co-owners as a draw, add to capital in standard accounting. If there are no dividends, then last year’s earnings in the balance sheet are added to previous Retained Earnings to calculate this year’s Retained Earnings. And both Earnings and Retained earnings are part of capital, while dividends and distributions or draws decrease capital.
But none of those common interpretations of capital change the basic rule. The capital in a business is always, exactly, in every case, the number that results from subtracting the liabilities from the assets.
Most of us understand sales from an early age. Sales is exchanging goods or services for money. Technically, in standard accounting, the sale happens when the goods or services are delivered, whether or not there is immediate payment. Do you know it can be a criminal offense to report financial results including sales that you haven’t actually made, even if you are 99% sure your client intends to buy? Some very big companies have gotten into legal trouble for confusing optimism with actual sales, when for example they book a full year’s service contract into sales in the same month the customer signed the agreement. Technically the sale is for 1/12 th of the annual contract value each month.
Direct costs (COGS, unit costs, cost of sales)
Direct costs are different down the value chain of a business. The direct costs of a bookstore are its COGS, what it pays to buy books from a distributor. The distributor’s direct costs are COGS, what it paid to get the books from the publishers. The direct costs of the book publisher include the cost of printing, binding, shipping, and author royalties. The direct costs of the author are very small, probably just printer paper and photocopying; unless the author is paying an editor, in which case the editor’s income is part of the author’s direct costs.
The costs of manufacturing and assembly labor are always supposed to be included in COGS. And some professional service businesses will include the salaries of their professionals as direct costs. In that case, the accounting firm, law office, or consulting company records the salaries of some of their associates as direct costs.
Direct costs are important because they determine Gross Margin. Gross Margin, which is part of the Profit and Loss , is an important basis for comparison with other companies.
It’s hard to define expenses because we all have a pretty good idea. Expenses include rent, payroll, advertising, promotion, telephones, Internet access, website hosting, and all those things a business pays for but doesn’t resell. They are amounts you spend on business goods and services that aren’t direct costs but reduce your taxable income and profits.
You have to understand what isn’t an expense. Repaying loan principle isn’t an expense. Buying an asset isn’t an expense. Purchasing inventory isn’t an expense; amounts spent on inventory go into direct costs when goods are sold, but they aren’t expenses.
3 Essential Statements/Projections
The six essential financial terms work into three essential statements (for past results) or projections (in business plans or anything referring to the future). A pro-forma statement , by the way, is another way to say projection . TheProfit and Loss (also called Income) includes Sales, Costs and Expenses. The Balance includes Assets, Liabilities, and Capital.
And these three are conceptually linked and interconnected. The following illustration shows how they relate to each other:
The standards of accounting, like double-entry bookkeeping, make a delightfully automatic error check with the three statements. They link up conceptually so that if the balance doesn’t balance, it’s wrong. If assets are not the sum of capital plus liabilities, it’s wrong. If retained earnings don’t add up to profits less distributions to owners (as in dividends, or owners’ draw), it’s wrong. If your spreadsheet, or your software, doesn’t reflect every change in the profits to the cash and balance, and every change in balance to cash, then it’s wrong.
I’ve heard an intelligent successful lawyer claim that double-entry bookkeeping was the most important invention of the western world. I’m not going to go there in this book. I’m not doing debits and credits. But knowing how these statements link up is important.
What’s Accrual Accounting and Why You Care
Your business bookkeeping is going to be either cash basis or accrual. Too bad “cash basis” sounds so simple and attractive, because accrual is way better, and easier to manage too. Cash basis accounting only works right if you absolutely always pay immediately for every business purchase, and you never buy something before you sell it, and all of your customers pay you in full whenever they buy something from you. That case is extremely rare. So accrual is better.
Here’s why, in a few obvious examples.
- You make a sale when you deliver the goods. If the customer doesn’t pay you immediately, in cash basis nothing is recorded. The sale doesn’t even show up in your books until the customer pays. In accrual, you record the accrued amount as Accounts Receivable, so you keep track of the amount, the date, and the customer who owes it to you. It’s obvious that unless you never sell without immediate payment, accrual basis is better.
- You order some goods. When you receive them, you don’t pay for them. You owe the money. You have an invoice to pay. In cash basis, nothing happens until you pay up. In accrual basis, you record the accrued amount as Accounts Payable, along with the date, a record of what you bought, and who and when you are supposed to pay. So cash basis is better only if you pay everything immediately; all normal businesses need accrual.
I’m so sorry that the accounting standards that were set a few generations ago chose to call it “cash basis” when you don’t record money owed into your books until it’s paid; or money you owe until you pay it. It’s a terrible idea to keep that information in your head instead of in your bookkeeping. That causes many mistakes as we business owners fail to keep track and remind ourselves of these outstanding obligations. And yet, ironically, they call that “cash basis” accounting. I do wish that the right way to do it, which is accrual accounting, didn’t have such an off-putting name.
How Many Months and Years in Financial Projections
That doesn’t mean you don’t think in longer terms. Think about what you want for your business for 5, 10, 20 years. I’m all in favor of that. But I don’t think you should plan for very long time periods in the detail of financial forecasts. The larger numbers — sales, for example, involve so much uncertainty that the time you spend trying to project more detail isn’t worth it. At least not in normal cases. If you’re farming lumber from tree farms, maybe.
Be forewarned. You’ll run into experts who will say you need more than 24 months, or more than five years in detail. They will be very sure of themselves. Sometimes what they mean is that they know more than you do, so they want you to suffer more. Or they want you to pay them to do the financials instead. Or they don’t like you or your business plan and they’re embarrassed to tell you. So instead, they say you need to forecast in more detail. If they are investors, what they mean is they don’t want to invest and they don’t want to tell you why. If they are loan managers, they don’t want to make the loan. And they don’t want to tell you the real reason.
My advice to you, when that comes up, is that unless you are a special case (if you are, you know who you are), look for another expert.
Just a quick note. I hope it’s obvious. With examples in this book I’m not showing you the full columns of the spreadsheets, because that would be awkward. Numbers would have to be very small and difficult to read. I use my spreadsheets for sales forecasting and other normal monthly projections with a standard layout.
I base my tables on the standard spreadsheet layout as used in Microsoft Excel, Lotus 1-2-3, AppleWorks, Quattro Pro, and even the true pioneer, VisiCalc, the first spreadsheet, from 30 years ago. The rows are labeled from 1 to whatever, and the columns are labeled from A to whatever. When you get past the 26 letters of the alphabet you start over again, with AA, AB, AC, etc.
Profit and Loss is Also Called Income
The two phrases have the same meaning. An Income Statement, or Projected Income, is exactly the same as a Profit and Loss Statement, or Projected Profit and Loss. Too bad both exist because every time I write about them I always have to clarify. Now you know.
Cash vs. Profits
This is critical. I covered this basic concept in How to Plan Cash Flow in Section 2, as part of your lean plan. However, I can’t do this list without starting with this very big one. It’s one of the most dangerous misunderstandings in business. Profitable companies can run out of money, and fail. It happens, for example, when an important customer stops paying in time and there isn’t enough working capital. Or when too much money is invested in inventory.
If you have a business that sells only for cash, credit card, or checks, then the cash flow implications of sales on credit and accounts receivable don’t affect you. If you don’t make, distribute, or resell products, then the cash flow implications of inventory don’t affect you. If you have a very simple cash flow, then profits are pretty close to cash. If you don’t, watch that difference very carefully. Profits are an accounting fiction. You spend cash, not profits.
Understand sales on credit and accounts receivable . When your business sells anything to another business, you usually have to deliver an invoice and wait to get paid. That’s called sales on credit, which has nothing to do with credit cards, but plenty to do with B2B sales. When you make the sale and deliver the invoice, the invoice amount increases sales and accounts receivable. When that money gets paid, it decreases accounts receivable and increases cash.
Assets vs. Expenses
Although many accounting and financial definitions are rigid, use and application aren’t. Much depends on interpretation and application.
For example, take development expenses. As you pay a construction company to build a new building for your business, you are buying an asset. What you pay is not deductible as an expense. But when a software business pays programmers to build a new software product, that company is spending on an expense, not an asset. Lines of programming code aren’t normally assets. Nor is a product design, packaging design, or a prototype. Those are expenses.
Who decides these things? The government does, in tax code. A smart business owner would prefer to book every dollar spent as either direct cost or business expense, because that would reduce taxable income and mean more money in the bank. Tax law decides what you can call an expense and what has to be booked as an asset.
So U.S. federal tax code makes buying office equipment an expense, at least up to an annual limit that changes, but has been more than $100,000 for several years now. That’s good for businesses because they can buy computers, phones, and other office equipment and deduct the cost from taxable income. But it’s odd because logically that’s buying assets, so it should increase the sum of the assets and not affect the profits or taxes. And you could choose to book those computers as assets, if you’d rather show higher profits on your books, and more assets, but have less money.
Costs vs. Expenses vs. Inventory
In Section 2 with Essential Projections I made the distinction between direct costs and expenses, for the lean plan spending budget. Direct costs are also called COGS for Cost of Goods Sold and unit costs. These are costs that happen only if the business makes a sale, such as the cost of the bicycles our bike storeowner sells, or the cost of gasoline used by the taxi. Although the distinction between costs and expenses makes no difference to the profits in the bottom line, we use this distinction to calculate Gross Margin. Gross Margin is sales less direct costs. It is a useful basis of comparison between different industries and between companies within the same industry. Furthermore, the direct costs number helps in understanding variable costs and fixed costs, which is another useful analysis in itself, and it’s the core of a break-even analysis as well.
The distinction isn’t always obvious. For example, manufacturing and assembly labor are supposed to be included in direct costs, but factory workers are sometimes paid even when there is no work. And some professional firms put lawyers,’ accountants,’ or consultants’ salaries into direct costs. These are judgment calls. When I was a young associate in a brand-name management consulting firm, I had to assign all of my 40-hour work week to specific consulting jobs for cost accounting.
When in doubt, remember that consistency is the rule. Whichever way you do it, stick to it over time.
Depreciation and Amortization
Depreciation is something you learn once and it usually sticks. Most business owners understand it. Tax codes and accounting standards prevent business owners from deducting the cost of business assets such as a vehicle, a building, office furniture, or land when you buy them. We’d all prefer to call those things expenses because they reduce our taxable income and therefore our taxes; but we can’t. So our consolation prize is that we get to depreciate them, and depreciation is an expense that reduces taxable income.
The practical result is that any business owning assets has depreciation as an expense. Tax code specifies formulas for depreciation based on the type of asset, but as a simple example, assume you can deduct one-fifth of the purchase price of a business vehicle every year for five years. That deduction is depreciation. The book value of the asset starts at the purchase price, and declines by one fifth every year for five years. At the end of the five years, the book value is zero, so if you sell the vehicle, the entire sales price is profit. Profit is based on book value, for tax purposes.
Depreciation shows up as an expense even though it doesn’t actually cost money. The asset did cost money, but that went somewhere else in your books, not into profit and loss.
Most people count depreciation as an operating expense, but some don’t.
Amortization is depreciation’s sidekick, which works like depreciation but applies to assets like legal expenses, which weren’t really assets anyhow (it’s tax law — don’t try to understand; just be aware of it.) You can also think of it essentially as depreciation of intangible assets, like intellectual property, or so-called goodwill.
EBIT vs. EBITDA
Profit and Loss set up for EBITDA calculations
The classic Profit and Loss includes EBIT, which stands for Earnings Before Interest and Taxes. Lately EBITDA has become more fashionable. The DA in EBITDA stands for “depreciation and amortization” and the EBIT is the same EBIT, so EBITDA is probably a more useful term because of the nature of depreciation and amortization.
Timing is Very Important
As I explained in What’s Accrual Accounting and why does it matter , accrual accounting gives you a more accurate financial picture, unless you’re very small and do all your business, both buying and selling, with cash only. I know that seems simple, but it’s surprising how many people decide to do something different. And the penalty of doing things differently is that then you don’t match the standard, and the bankers, analysts, and investors can’t tell what you meant.
Your Profit and Loss (Chapter 17) depends on timing. It’s supposed to show financial performance over some specified period of time, like a month or a year. What you call sales on that statement is supposed to be sales made during that period. The goods changed hands or the services were delivered. When you were paid for it, and when you originally bought what you sold, is supposed to be irrelevant.
Therefore, the direct costs are supposed to be the costs of the items or services reported as sales during that period.
So when Garrett the bike storeowner buys a bicycle he wants to sell, the money he spent on it remains in inventory until he sells it. It goes from inventory (an asset) to direct costs for the income statement in the month when it was sold. If it is never sold, it never affects profit or loss, and remains an asset until some day when the accountants write off old never-sold obsolete inventory, at which time its lowered value becomes an expense. In that case, it was never a direct cost.
Expenses have timing issues too. If you contract a television advertisement in October, and it appears in December, then it should go into the December Profit and Loss. And that’s true even if you end up paying for it in February. The idea is that sales, direct costs, and expenses go into the month they happen.
- Tax law allows businesses to establish so-called fiscal years instead of calendar years for tax purposes. For example, your fiscal year might go from February through January, or October through September. Use “FY” (as in “FY07”) to specify the year in your plan. The year is always the calendar year in which a plan ends, not the year it starts.
- Don’t call your investment venture capital unless it comes from one of the few hundred actual VC firms. If you’re getting venture capital, you’ll know it. If not, just call it investment.
- Pro forma is just a dressed up way to say projected or forecast. It’s one of those potentially daunting buzzwords that really isn’t complicated. The pro forma income statement, for example, is the same as the projected profit and loss or the profit and loss forecast.
Projecting Profit and Loss
“Business is all about solving people’s problems – at a profit.”
― Paul Marsden
The Standard Profit and Loss (Income Statement)
- It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
- It then shows Direct Costs (or COGS, or Unit Costs).
- Then Gross Margin, Sales less Direct Costs.
- Then operating expenses.
- Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
- Then it shows depreciation, interest expenses, and then taxes…
- Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.
The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.
A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.
Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.
Notice that the Profit and Loss involves only four of the Six Fundamental Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.
Projected Balance sheet
“Think of it as your business dashboard, providing a snapshot of the financial health of your company at a specific moment in time. The purpose is simple: balance sheets list assets, liabilities and owner equity, typically in order from shortest- to longest-term assets and liabilities divided on either side of the balance sheet.”
The Balance Sheet includes spending and income that isn’t in the Profit and Loss. For example, the money you spend to repay a loan or buy new assets doesn’t show up in the Profit and Loss. And the money you take in as a new loan or a new investment doesn’t show up in the Profit and Loss either. The money you are waiting to receive from customers’ outstanding invoices shows up in the Balance Sheet, not the Profit and Loss. The Balance Sheet shows many reasons why profits are not cash, and why cash flow isn’t intuitive. It’s all related to the essential principles of cash flow .
The Balance Sheet shows your financial picture – assets, liabilities, and capital – at some specific moment. It helps to understand that the Profit and Loss shows financial performance over a length of time, like a month, quarter, or year. The Balance, in contrast, is a moment. Usually it’s the end of the month, quarter, or year. Sometimes it’s the end of the business day.
Balancing is a common term associated with bookkeeping, accounting, and finance. We “balance the books.” It’s a lot like reconciling a checkbook: if it isn’t right down to the last penny, then it’s wrong. Assets have to equal liabilities plus capital. Always.
A traditional Balance Sheet statement shows assets on the left side and liabilities and capital on the right side or the bottom, as in this illustration:
The balance sheet involves the other three of the six key financial terms (the ones that aren’t on the Profit and Loss: Assets, Liabilities, and Capital).
- Assets. Cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns. Assets can usually be sold to somebody else. One definition is “anything with monetary value that a business owns.”
- Liabilities. Debts, notes payable, accounts payable, amounts of money owed to be paid back.
- Capital (also called equity). Ownership, stock, investment, retained earnings. Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital. That means you can subtract liabilities from assets to calculate capital.
Although traditional printed balance sheet statements are usually arranged horizontally, as in the illustration above, balance sheets in financial projections are usually arranged vertically, showing the assets first, then the liabilities, and then the capital. Here, for example, is the balance sheet for the first few months of the bike store I mentioned earlier. It’s the balance sheet associated with the Profit and Loss for the same company, Garrett’s bicycle store:
The Link Between Balance and Profit
The balance sheet is so different from the Profit and Loss that there is only one direct link between the two, a vital one that connects them so that when the books are right, the balance balances: That is the direct line from profits (Net Profits) on the Profit and Loss to Earnings and Retained Earnings on the Balance Sheet. The illustration here shows the link with the bicycle store sample:
Keep Projected Balance Sheets Simple
A projected Balance Sheet is a perfect example of the critical difference between planning and accounting . The Balance Sheet statement produced by accounting is full of important detail about each item, while the Balance Sheet projection in forecasting is necessarily summarized and aggregated.
This means that your balance sheet categories should be summary categories from your accounting. For example, assets categories are probably only Cash, Accounts Receivable, Inventory, Other Current (or Short-term) Assets, and Long-term Assets (or Plant and Equipment). Liabilities are probably only Accounts Payable, Current Notes (or Loans), Other Current Liabilities, and Long-term Liabilities. Capital is only Paid-in Capital, Retained Earnings, and Earnings.
There are two good reasons for this:
- You can only produce properly linked and correct fully balanced projections of Profit and Loss, Balance Sheet, and Cash Flow if there are exact links between the items on the Projected Balance Sheet and those in the Projected Cash Flow. That’s a fact of math and financial principles.
- It’s useless to try to predict future assets and liabilities in detail; nobody can do it. So you might be able to estimate the total amounts of future purchases of assets, using some reasonable assumptions; but trying to estimate the month of purchase and value of each future asset is a waste of time.
In contrast to the Projected Balance Sheet, the Balance Sheet as a financial statement is a compiled report drawn from a database of details. Accounting knows each transaction: exactly when each asset was purchased, for how much, and its depreciation history and schedule. Accounting knows each loan (called notes) history. Every detail in the statement is based on actual transactions. It goes into tax reports and legal reporting. The projection, on the other hand, is a collection of educated guesses that help you plan your financial needs in advance.
Handling of depreciation is the best example. The accumulated depreciation in a Balance Sheet Statement is a summary of detailed depreciation for each asset the business owns. It comes from the depreciation in the Profit and Loss Statement, which is compiled from the detailed depreciation of each asset. Tax code defines allowable depreciation schedule for each asset according to type, so for example, buildings are normally depreciated over 30 years, while vehicles might be over three or five years. Depreciation in a Projected Profit and Loss, in contrast, is an estimated guess of an aggregated future amount. A good forecaster will look at depreciation over the recent past, plus projected purchases of new assets, to estimate future depreciation. That estimate ends up in the Balance Sheet as Accumulated Depreciation, which subtracts from the value of Long-term Assets.
- 👍 Template: Business Plan for a Startup Business
- General Partner at OperatorVC
Template: Business Plan for a Startup Business
The business plan consists of a narrative and several financial worksheets. The narrative template is the body of the business plan. It contains more than 150 questions divided into several sections. Work through the sections in any order that you want, except for the Executive Summary, which should be done last. Skip any questions that do not apply to your type of business. When you are finished writing your first draft, you’ll have a collection of small essays on the various topics of the business plan. Then you’ll want to edit them into a smooth-flowing narrative.
The real value of creating a business plan is not in having the finished product in hand; rather, the value lies in the process of researching and thinking about your business in a systematic way. The act of planning helps you to think things through thoroughly, study and research if you are not sure of the facts, and look at your ideas critically. It takes time now, but avoids costly, perhaps disastrous, mistakes later.
This business plan is a generic model suitable for all types of businesses. However, you should modify it to suit your particular circumstances. Before you begin, review the section titled Refining the Plan , found at the end. It suggests emphasizing certain areas depending upon your type of business (manufacturing, retail, service, etc.). It also has tips for fine-tuning your plan to make an effective presentation to investors or bankers. If this is why you’re creating your plan, pay particular attention to your writing style. You will be judged by the quality and appearance of your work as well as by your ideas.
It typically takes several weeks to complete a good plan. Most of that time is spent in research and re-thinking your ideas and assumptions. But then, that’s the value of the process. So make time to do the job properly. Those who do never regret the effort. And finally, be sure to keep detailed notes on your sources of information and on the assumptions underlying your financial data.
Your Business Name
City, ST ZIP Code
Write this section last.
We suggest that you make it two pages or fewer.
Include everything that you would cover in a five-minute interview.
Explain the fundamentals of the proposed business: What will your product be? Who will your customers be? Who are the owners? What do you think the future holds for your business and your industry?
Make it enthusiastic, professional, complete, and concise.
If applying for a loan, state clearly how much you want, precisely how you are going to use it, and how the money will make your business more profitable, thereby ensuring repayment.
General Company Description
What business will you be in? What will you do?
Mission Statement: Many companies have a brief mission statement, usually in 30 words or fewer, explaining their reason for being and their guiding principles. If you want to draft a mission statement, this is a good place to put it in the plan, followed by:
Company Goals and Objectives : Goals are destinations—where you want your business to be. Objectives are progress markers along the way to goal achievement. For example, a goal might be to have a healthy, successful company that is a leader in customer service and that has a loyal customer following. Objectives might be annual sales targets and some specific measures of customer satisfaction.
Business Philosophy: What is important to you in business?
To whom will you market your products? (State it briefly here—you will do a more thorough explanation in the Marketing Plan section).
Describe your industry. Is it a growth industry? What changes do you foresee in the industry, short term and long term? How will your company be poised to take advantage of them?
Describe your most important company strengths and core competencies. What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills, and strengths do you personally bring to this new venture?
Legal form of ownership: Sole proprietor, Partnership, Corporation, Limited liability corporation (LLC)? Why have you selected this form?
Products and Services
Describe in depth your products or services (technical specifications, drawings, photos, sales brochures, and other bulky items belong in Appendices ).
What factors will give you competitive advantages or disadvantages? Examples include level of quality or unique or proprietary features.
What are the pricing, fee, or leasing structures of your products or services?
Market research - why.
No matter how good your product and your service, the venture cannot succeed without effective marketing. And this begins with careful, systematic research. It is very dangerous to assume that you already know about your intended market. You need to do market research to make sure you’re on track. Use the business planning process as your opportunity to uncover data and to question your marketing efforts. Your time will be well spent.
Market research - How?
There are two kinds of market research: primary and secondary.
Secondary research means using published information such as industry profiles, trade journals, newspapers, magazines, census data, and demographic profiles. This type of information is available in public libraries, industry associations, chambers of commerce, from vendors who sell to your industry, and from government agencies.
Start with your local library. Most librarians are pleased to guide you through their business data collection. You will be amazed at what is there. There are more online sources than you could possibly use. Your chamber of commerce has good information on the local area. Trade associations and trade publications often have excellent industry-specific data.
Primary research means gathering your own data. For example, you could do your own traffic count at a proposed location, use the yellow pages to identify competitors, and do surveys or focus-group interviews to learn about consumer preferences. Professional market research can be very costly, but there are many books that show small business owners how to do effective research themselves.
In your marketing plan, be as specific as possible; give statistics, numbers, and sources. The marketing plan will be the basis, later on, of the all-important sales projection.
Facts about your industry:
What is the total size of your market?
What percent share of the market will you have? (This is important only if you think you will be a major factor in the market.)
Current demand in target market.
Trends in target market—growth trends, trends in consumer preferences, and trends in product development.
Growth potential and opportunity for a business of your size.
What barriers to entry do you face in entering this market with your new company? Some typical barriers are:
High capital costs
High production costs
High marketing costs
Consumer acceptance and brand recognition
Training and skills
Unique technology and patents
Tariff barriers and quotas
And of course, how will you overcome the barriers?
How could the following affect your company?
Change in technology
Change in government regulations
Change in the economy
Change in your industry
In the Products and Services section, you described your products and services as you see them. Now describe them from your customers’ point of view.
Features and Benefits
List all of your major products or services.
For each product or service:
Describe the most important features. What is special about it?
Describe the benefits. That is, what will the product do for the customer?
Note the difference between features and benefits, and think about them. For example, a house that gives shelter and lasts a long time is made with certain materials and to a certain design; those are its features. Its benefits include pride of ownership, financial security, providing for the family, and inclusion in a neighborhood. You build features into your product so that you can sell the benefits.
What after-sale services will you give? Some examples are delivery, warranty, service contracts, support, follow-up, and refund policy.
Identify your targeted customers, their characteristics, and their geographic locations, otherwise known as their demographics.
The description will be completely different depending on whether you plan to sell to other businesses or directly to consumers. If you sell a consumer product, but sell it through a channel of distributors, wholesalers, and retailers, you must carefully analyze both the end consumer and the middleman businesses to which you sell.
You may have more than one customer group. Identify the most important groups. Then, for each customer group, construct what is called a demographic profile:
Social class and occupation
Other (specific to your industry)
For business customers, the demographic factors might be:
Industry (or portion of an industry)
Size of firm
Quality, technology, and price preferences
What products and companies will compete with you?
List your major competitors:
(Names and addresses)
Will they compete with you across the board, or just for certain products, certain customers, or in certain locations?
Will you have important indirect competitors? (For example, video rental stores compete with theaters, although they are different types of businesses.)
How will your products or services compare with the competition?
Use the Competitive Analysis table below to compare your company with your two most important competitors. In the first column are key competitive factors. Since these vary from one industry to another, you may want to customize the list of factors.
In the column labeled Me , state how you honestly think you will stack up in customers' minds. Then check whether you think this factor will be a strength or a weakness for you. Sometimes it is hard to analyze our own weaknesses. Try to be very honest here. Better yet, get some disinterested strangers to assess you. This can be a real eye-opener. And remember that you cannot be all things to all people. In fact, trying to be causes many business failures because efforts become scattered and diluted. You want an honest assessment of your firm's strong and weak points.
Now analyze each major competitor. In a few words, state how you think they compare.
In the final column, estimate the importance of each competitive factor to the customer. 1 = critical; 5 = not very important.
Table 1: Competitive Analysis
Now, write a short paragraph stating your competitive advantages and disadvantages.
Now that you have systematically analyzed your industry, your product, your customers, and the competition, you should have a clear picture of where your company fits into the world.
In one short paragraph, define your niche, your unique corner of the market.
Now outline a marketing strategy that is consistent with your niche.
How will you get the word out to customers?
Advertising: What media, why, and how often? Why this mix and not some other?
Have you identified low-cost methods to get the most out of your promotional budget?
Will you use methods other than paid advertising, such as trade shows, catalogs, dealer incentives, word of mouth (how will you stimulate it?), and network of friends or professionals?
What image do you want to project? How do you want customers to see you?
In addition to advertising, what plans do you have for graphic image support? This includes things like logo design, cards and letterhead, brochures, signage, and interior design (if customers come to your place of business).
Should you have a system to identify repeat customers and then systematically contact them?
How much will you spend on the items listed above?
Before startup? (These numbers will go into your startup budget.)
Ongoing? (These numbers will go into your operating plan budget.)
Explain your method or methods of setting prices. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin; customers may not care as much about price as you think; and large competitors can under price you anyway. Usually you will do better to have average prices and compete on quality and service.
Does your pricing strategy fit with what was revealed in your competitive analysis?
Compare your prices with those of the competition. Are they higher, lower, the same? Why?
How important is price as a competitive factor? Do your intended customers really make their purchase decisions mostly on price?
What will be your customer service and credit policies?
Probably you do not have a precise location picked out yet. This is the time to think about what you want and need in a location. Many startups run successfully from home for a while.
You will describe your physical needs later, in the Operational Plan section. Here, analyze your location criteria as they will affect your customers.
Is your location important to your customers? If yes, how?
If customers come to your place of business:
Is it convenient? Parking? Interior spaces? Not out of the way?
Is it consistent with your image?
Is it what customers want and expect?
Where is the competition located? Is it better for you to be near them (like car dealers or fast-food restaurants) or distant (like convenience-food stores)?
How do you sell your products or services?
Direct (mail order, Web, catalog)
Your own sales force
Bid on contracts
Now that you have described your products, services, customers, markets, and marketing plans in detail, it’s time to attach some numbers to your plan. Use a sales forecast spreadsheet to prepare a month-by-month projection. The forecast should be based on your historical sales, the marketing strategies that you have just described, your market research, and industry data, if available.
You may want to do two forecasts: 1) a "best guess", which is what you really expect, and 2) a "worst case" low estimate that you are confident you can reach no matter what happens.
Remember to keep notes on your research and your assumptions as you build this sales forecast and all subsequent spreadsheets in the plan. This is critical if you are going to present it to funding sources.
Explain the daily operation of the business, its location, equipment, people, processes, and surrounding environment.
How and where are your products or services produced?
Explain your methods of:
Production techniques and costs
What qualities do you need in a location? Describe the type of location you’ll have.
Amount of space
Type of building
Power and other utilities
Is it important that your location be convenient to transportation or to suppliers?
Do you need easy walk-in access?
What are your requirements for parking and proximity to freeway, airports, railroads, and shipping centers?
Include a drawing or layout of your proposed facility if it is important, as it might be for a manufacturer.
Construction? Most new companies should not sink capital into construction, but if you are planning to build, costs and specifications will be a big part of your plan.
Cost: Estimate your occupation expenses, including rent, but also including maintenance, utilities, insurance, and initial remodeling costs to make the space suit your needs. These numbers will become part of your financial plan.
What will be your business hours?
Describe the following:
Licensing and bonding requirements
Health, workplace, or environmental regulations
Special regulations covering your industry or profession
Zoning or building code requirements
Trademarks, copyrights, or patents (pending, existing, or purchased)
Number of employees
Type of labor (skilled, unskilled, and professional)
Where and how will you find the right employees?
Quality of existing staff
Training methods and requirements
Who does which tasks?
Do you have schedules and written procedures prepared?
Have you drafted job descriptions for employees? If not, take time to write some. They really help internal communications with employees.
For certain functions, will you use contract workers in addition to employees?
What kind of inventory will you keep: raw materials, supplies, finished goods?
Average value in stock (i.e., what is your inventory investment)?
Rate of turnover and how this compares to the industry averages?
Lead-time for ordering?
Identify key suppliers:
Names and addresses
Type and amount of inventory furnished
Credit and delivery policies
History and reliability
Should you have more than one supplier for critical items (as a backup)?
Do you expect shortages or short-term delivery problems?
Are supply costs steady or fluctuating? If fluctuating, how would you deal with changing costs?
Do you plan to sell on credit?
Do you really need to sell on credit? Is it customary in your industry and expected by your clientele?
If yes, what policies will you have about who gets credit and how much?
How will you check the creditworthiness of new applicants?
What terms will you offer your customers; that is, how much credit and when is payment due?
Will you offer prompt payment discounts? (Hint: Do this only if it is usual and customary in your industry.)
Do you know what it will cost you to extend credit? Have you built the costs into your prices?
Managing Your Accounts Receivable
If you do extend credit, you should do an aging at least monthly to track how much of your money is tied up in credit given to customers and to alert you to slow payment problems. A receivables aging looks like the following table:
You will need a policy for dealing with slow-paying customers:
When do you make a phone call?
When do you send a letter?
When do you get your attorney to threaten?
Managing Your Accounts Payable
You should also age your accounts payable, what you owe to your suppliers. This helps you plan whom to pay and when. Paying too early depletes your cash, but paying late can cost you valuable discounts and can damage your credit. (Hint: If you know you will be late making a payment, call the creditor before the due date.)
Do your proposed vendors offer prompt payment discounts?
A payables aging looks like the following table.
Management and Organization
Who will manage the business on a day-to-day basis? What experience does that person bring to the business? What special or distinctive competencies? Is there a plan for continuation of the business if this person is lost or incapacitated?
If you’ll have more than 10 employees, create an organizational chart showing the management hierarchy and who is responsible for key functions.
Include position descriptions for key employees. If you are seeking loans or investors, include resumes of owners and key employees.
Professional and Advisory Support
List the following:
Board of directors
Management advisory board
Consultant or consultants
Mentors and key advisors
Personal Financial Statement
Include personal financial statements for each owner and major stockholder, showing assets and liabilities held outside the business and personal net worth. Owners will often have to draw on personal assets to finance the business, and these statements will show what is available. Bankers and investors usually want this information as well.
Startup Expenses and Capitalization
You will have many expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them.
Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach we recommend.
Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 percent of the total of all other start-up expenses.
Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.
The financial plan consists of a 12-month profit and loss projection, a four-year profit and loss projection (optional), a cash-flow projection, a projected balance sheet, and a break-even calculation. Together they constitute a reasonable estimate of your company's financial future. More important, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.
12-Month Profit and Loss Projection
Many business owners think of the 12-month profit and loss projection as the centerpiece of their plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful.
Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year.
Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.
Research Notes: Keep careful notes on your research and assumptions, so that you can explain them later if necessary, and also so that you can go back to your sources when it’s time to revise your plan.
Four-Year Profit Projection (Optional)
The 12-month projection is the heart of your financial plan. This section is for those who want to carry their forecasts beyond the first year.
Of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year.
Projected Cash Flow
If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash.
The point of this worksheet is to plan how much you need before startup, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterward. It will enable you to foresee shortages in time to do something about them—perhaps cut expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by surprise.
There is no great trick to preparing it: The cash-flow projection is just a forward look at your checking account.
For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a check (for expense items).
You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases.
You should also track cash outlays prior to opening in a pre-startup column. You should have already researched those for your startup expenses plan.
Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start-up capital. This plan will also predict just when and how much you will need to borrow.
Explain your major assumptions, especially those that make the cash flow differ from the Profit and Loss Projection . For example, if you make a sale in month one, when do you actually collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? How will this affect cash flow?
Are some expenses payable in advance? When?
Are there irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory buildup, that should be budgeted?
Loan payments, equipment purchases, and owner's draws usually do not show on profit and loss statements but definitely do take cash out. Be sure to include them.
And of course, depreciation does not appear in the cash flow at all because you never write a check for it.
Opening Day Balance Sheet
A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity.
Use a startup expenses and capitalization spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet.
Optional: Some people want to add a projected balance sheet showing the estimated financial position of the company at the end of the first year. This is especially useful when selling your proposal to investors.
A break-even analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit.
Expressed as a formula, break-even is:
(Where fixed costs are expressed in dollars, but variable costs are expressed as a percent of total sales.)
Include all assumptions upon which your break-even calculation is based.
Include details and studies used in your business plan; for example:
Brochures and advertising materials
Blueprints and plans
Maps and photos of location
Magazine or other articles
Detailed lists of equipment owned or to be purchased
Copies of leases and contracts
Letters of support from future customers
Any other materials needed to support the assumptions in this plan
Market research studies
List of assets available as collateral for a loan
Refining the Plan
The generic business plan presented above should be modified to suit your specific type of business and the audience for which the plan is written.
For Raising Capital
Bankers want assurance of orderly repayment. If you intend using this plan to present to lenders, include:
Amount of loan
How the funds will be used
What this will accomplish—how will it make the business stronger?
Requested repayment terms (number of years to repay). You will probably not have much negotiating room on interest rate but may be able to negotiate a longer repayment term, which will help cash flow.
Collateral offered, and a list of all existing liens against collateral
Investors have a different perspective. They are looking for dramatic growth, and they expect to share in the rewards:
Funds needed short-term
Funds needed in two to five years
How the company will use the funds, and what this will accomplish for growth.
Estimated return on investment
Exit strategy for investors (buyback, sale, or IPO)
Percent of ownership that you will give up to investors
Milestones or conditions that you will accept
Financial reporting to be provided
Involvement of investors on the board or in management
For Type of Business
Planned production levels
Anticipated levels of direct production costs and indirect (overhead) costs—how do these compare to industry averages (if available)?
Prices per product line
Gross profit margin, overall and for each product line
Production/capacity limits of planned physical plant
Production/capacity limits of equipment
Purchasing and inventory management procedures
New products under development or anticipated to come online after startup
Service businesses sell intangible products. They are usually more flexible than other types of businesses, but they also have higher labor costs and generally very little in fixed assets.
What are the key competitive factors in this industry?
Methods used to set prices
System of production management
Quality control procedures. Standard or accepted industry quality standards.
How will you measure labor productivity?
Percent of work subcontracted to other firms. Will you make a profit on subcontracting?
Credit, payment, and collections policies and procedures
Strategy for keeping client base
High Technology Companies
Economic outlook for the industry
Will the company have information systems in place to manage rapidly changing prices, costs, and markets?
Will you be on the cutting edge with your products and services?
What is the status of research and development? And what is required to:
Bring product/service to market?
Keep the company competitive?
How does the company:
Protect intellectual property?
Avoid technological obsolescence?
Supply necessary capital?
Retain key personnel?
High-tech companies sometimes have to operate for a long time without profits and sometimes even without sales. If this fits your situation, a banker probably will not want to lend to you. Venture capitalists may invest, but your story must be very good. You must do longer-term financial forecasts to show when profit take-off is expected to occur. And your assumptions must be well documented and well argued.
Explain markup policies.
Prices should be profitable, competitive, and in accordance with company image.
Selection and price should be consistent with company image.
Inventory level: Find industry average numbers for annual inventory turnover rate (available in RMA book). Multiply your initial inventory investment by the average turnover rate. The result should be at least equal to your projected first year's cost of goods sold. If it is not, you may not have enough budgeted for startup inventory.
Customer service policies: These should be competitive and in accord with company image.
Location: Does it give the exposure that you need? Is it convenient for customers? Is it consistent with company image?
Promotion: Methods used, cost. Does it project a consistent company image?
Credit: Do you extend credit to customers? If yes, do you really need to, and do you factor the cost into prices?
💳 Credits: OperatorVC https://www.crunchbase.com/organization/operator-vc
💭 Like this template? Buy me a beer!
Quarterly Business Review (QBR) Memo Template
Brie wolfson, guide: asynchronous communication, darren murph, andrew logemann, product roadmap template, clare price, weekly standup template, allison daley, go-to-market plan (gtm plan) template, yelena kozlova, template: the build/measure/learn loop worksheet, prd template, katherine kampf, team and org chart.