BUSINESS PLAN 101: SHOW THEM THE MONEY! Your financial products

Your financial projections are the heart of your business plan. This section quantifies dollars and cents over months and years, and it had better be built to stand up to scrutiny. The professionals looking at your numbers will bring jaundiced eyes to their review of your forecasts. They’re looking for a specific format and a sense that you’re being realistic in your estimates. Here’s how to do it right.

THE BASICS
Your financial projections must include these fundamentals: profit and loss statements, balance sheets, and cash flow statements. While the income is what you’re interested in, your potential funders will want to know how much you plan to leave in the business as retained earnings and how much more financing you’ll need to grow your company.

Learn accounting principles and formats, or hire an accountant familiar with your industry to help prepare this section.

Hopefully, you’re keeping monthly statements already, which provide you with a base for your projection. Include monthly data for the first year, quarterly or annual data for year two, and annual data for the following years. (It’s tough enough to estimate monthly data for the first year; so there’s no point in including monthly projections for the following years, when they’ll certainly be inaccurate.)

Your balance sheet shows what your company’s assets are worth, including cash, accounts receivable, inventory, land machinery and equipment. On the flipside, it whose your liabilities, including accounts payable, notes payable, taxes and interest payable, salaries and wage. The difference is your company’s net worth (which is the owner or stockholder equity) at any moment.

Don’t forget the interest – it’s a common oversight, and the amounts can be substantial. Include a realistic amount; if you end up paying less, there’s nothing wrong with that. And don’t forget to specify the owner’s compensation, particularly if you’re drawing a higher salary in order to reduce business income taxes.

When projecting cash flow, include expected revenues, expenses, assets, liabilities and equity, leaving nothing to the imagination.

FINANCIAL ASSUMPTIONS
This section explains the thinking and the rationale behind the numbers. Include a one-page summary explaining how you arrived at the numbers you’re presenting. This will include assumptions about revenue growth (for example, you’ll sell 100 units a month at $80 per unit, and you’re projecting that will increase by five percent each month for the first year); cost of goods sold; operating and interest expenses; accounts receivable turnover; inventory turnover; accounts payable turnover; income-tax rates; and other assumptions. Think everything through, including future space requirements for warehousing or manufacturing.

IMPLEMENTATION SCHEDULE
Include a schedule identifying when you expect your financing to kick in and what you intend to do with it, including scheduled production and delivery dates.

THE EXTRAS
Additional elements can help your financial projections convey a clear picture. Just don’t bog it down.

BREAK-EVEN ANALYASIS
A graph with sales on the x-axis and units sold on the y-axis demonstrates the volume of sales you need to generate to cover your fixed and variable expenses – and shows the point at which you become profitable.

FUND SOURCES AND USE
Show where you expect to find capital, and what you plan to spend it on.

THREE TIPS FOR WINNIG FINANCIAL PROJECTIONS

1. Include only the likely scenario and the break-even scenario. Don’t bother with worth-case and best- (or super-duper-case) scenarios. The likely case will what you realistically expect, and the break-even case will show how low sales would have to go before your business starts to lose money.

2. Make sure your numbers reconcile. Don’t just plug in figures to make things settle up; make sure your asset column and your liability plus equity numbers add up. If they don’t you look like you’re being sloppy – or even worse, trying to mislead the funder.

3. Don’t paint too pretty a picture. While you want to convey confidence and ambition, don’t let your fantasies take over from reality. Two common overstatements include a steady year-by-year growth (when sales often rise dramatically early on then level out a bit) and assuming you’ll become efficient as you grow) when growth often means reduces profit margins as fixed costs increase.)

SMALL BUSINESS FUNDING REPORT
January 2005, Volume VII, Number 1
www.grants-loans.org

Article Source: http://www.cursebustersound.com/article

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