VII. Financials
Financials are used to document, justify, and convince. This is
the section in which you make your case in words and back up what
you say with financial statements and forms that document the
viability of your business and its soundness as an
investment. It's also where you indicate that you have evaluated the risks associated with your
venture. If you are writing a plan for investors, include the
following sections:
Even if your plan will be used only as a road map for your
business development, you still should create a cash flow
statement and an income statement so you have figures by which you
can gauge your company's performance.
Risks
No business is without risks. Your ability to identify and discuss
them demonstrates your skills as a manager and increases your
credibility with potential investors. You will show that you've taken
the initiative to confront these issues and are capable of handling
them. The opposite is also true. Should a potential investor discover
any unstated negative factors, it will undermine the credibility of
your plan and endanger your chances of gaining financing or other support.
The following list of problems is by no means complete, but should give you an
idea of some possibilities.
- Your competitors cut their prices
- A key customer cancels a contract
- The industry's growth rate drops
- Design or manufacturing costs exceed your projections
- Your sales projections are not achieved
- An important ad campaign flounders
- Important subcontractors fail to make deliveries
- Your competitors up the ante by releasing a new, better product or service
- Public opinion of your product or service changes
- You can't find trained labor
Tips
- Evaluate your risks honestly. Put yourself in a "what if" situation. What if my competition meets my Unique Selling Proposition...what sets my product apart? What if I can't find the right employees?
- Instead of putting your risks in a separate section, you can incorporate them into the various parts of your plan. For instance, you could discuss possible long lead times for subcontracted parts in the "manufacturing process" section of the plan, or the impact of a lower than anticipated response rate to a direct mail campaign in the "sales tactics" section.
- In many industries, small companies innovate and large companies copy and take the credit. This is always a risk you need to consider. Think of ways you can stay ahead of your competition and retain your Unique Selling Proposition.
- To generate a complete list of risks, examine all of your assumptions about how your business will develop. The flipside of many of them may be risks.
- Consider some commonly-made small business mistakes as potential risks. Some of the biggies include: paying employees too much; hiring friends rather than the most qualified candidates to fill positions; underestimating costs; underestimating the sales cycle; overlooking competition; trying to be all things to all customers.
Cash Flow Statement
A cash flow statement shows readers of your business plan how much
money you will need, when you will need it, and where the money will
come from. In general terms, the cash flow statement looks at cash and
sources of revenue minus expenses and capital requirements to derive a
net cash flow figure. A cash flow statement provides a glimpse of how
much money a business has at any given time and when it is likely to
need more cash. Analyze the results of the cash flow statement briefly
and include this analysis in your business plan.
Tips
- As with all financial documents, have your cash flow statement prepared or at least reviewed by a reputable accountant.
- Avoid an unrealistically quick ramp-up of sales. Most companies experience a gradual increase in sales, even on a monthly basis. A sudden unexplained spike will stand-out and not look like an honest appraisal of your business.
- Include effects of seasonality and business cycles in all projections. For example, if you are in the gift business, you would need to show the Christmas buying season or the Wedding season. If you're a consultant, you might experience higher sales late in the year when companies are trying to use up their annual funds, or at the beginning of the year after budgets are approved.
- Do not fall in to the common trap of underestimating cash flow needs. This can lead to undercapitalization, which means your funds will prove inadequate for meeting your obligations.
- Do not include "projections" that include dates and events already in the past. Old projections are more tolerable if your projections were right than wrong.
- Avoid large income or expense categories that are lumped together without backup information about the components.
Balance Sheet
Unlike other financial statements a balance sheet is created only once
a year to calculate the net worth of a business. If your business plan
is for a start-up business, you will need to include a personal
balance sheet summarizing your personal assets and liabilities. If
your business exists already, include past years' balance sheets up to
the balance sheet from your last reporting period. Analyze the results
of the balance sheet briefly and include this analysis in your
business plan.
Tips
- As with all financial documents, have your balance sheet prepared or at least reviewed by a reputable accountant.
- Do not include "projections" that include dates and events already in the past. Old projections are more tolerable if your projections were right than wrong.
- Avoid large income or expense categories that are lumped together without backup information about the components.
Income Statement
The income statement is where you make a case for your business'
potential to generate cash. This document is where you record
revenue, expenses, capital, and cost of goods. The outcome of the
combination of these elements demonstrates how much money your
business made or will make, or lost or will lose, during the
year. An income statement and a cash flow statement differ in that
an income statement does not include details of when revenue was
collected or expenses paid.
An income statement for a business plan should be broken out by
month the first year. The second year can be broken down
quarterly, and annually for each year after. Analyze the results
of the income statement briefly and include this analysis in your
business plan. If your business already exists, include income
statements for previous years.
Tips
- As with all financial documents, have your income statement prepared or at least reviewed by a reputable accountant.
- Avoid insufficiently documented assumptions about your
company's growth. In other words, if you say
you expect your firm to grow by 30% in the first year and
50% in the second, you need to document why those numbers
are attainable. It can be because similar companies have
had this growth path; because the industry is growing at
this rate (site the source for this data); or because of
projections from a specific market researcher, industry
association, or other source.
- Include effects of seasonality and business cycles in all
projections.For example, if you are in the gift
business, you would need to show the Christmas buying season
or the Wedding season. If you're a consultant, you might
experience higher sales late in the year when companies are
trying to use up their annual funds, or at the beginning of
the year after budgets are approved.
- Do not include "projections" that include dates and events already
in the past. Old projections are more tolerable if your
projections were more right than wrong.
- Avoid large income or expense categories that are lumped together
without backup information about the components.
Funding Request and Return
State the amount of funding and the type (debt or equity) of
investment you seek. It is important here to provide a breakdown of
how the money will be applied. Discuss what effect the capital will have on the business'
potential to grow and profit, when the money is needed, and what
investment has already been made in the company.
Investors will also want to know what they will receive in
return for their capital. Be as clear as you can in this section both
about the potential upside and the potential downside of investing in
your business. A common mistake in a business plan is to be unclear in
this section, which turns potential investors away. If the company
founders have invested in the company, include this in your plan. Some
investors are encouraged by founders putting their own money on the
line.
Finally, create an exit plan that describes how investors will get
their money out of your company. One common investor worry is that
even if a business is profitable, it may be difficult for them to
get a good price for their shares. A cash-out option in five years or
assurance that the company will become a strong candidate for a
purchase or an IPO (Initial Public Offering) are what many venture capitalists and lenders will
insist upon.
Include the following elements as appropriate:
- minimum amount to participate;
- how this capital and future investment will dilute current and subsequent ownership;
- payback period and return on investment;
- why the investment is sound;
- collateral being offered;
- current investors;
- access to additional funding sources;
- what percent, if any, an investor could recoup via tax benefits, liquidation or other means if the business goes sour
Tips
- Include future financing needs. In other words, don't just look
at what you need today, but give an idea of what financing you
will need in the future to take your company to the next step
toward success.
- Be sure to document how investors will make money and what
return they will get. This can't be stressed enough. If you're
asking for money, you can't just say something like "you'll make
lots of money from this." You need to show how much money they
should expect to make from their investment.
- Avoid unrealistic company valuation.
- Don't be penny-wise and pound-foolish by asking for less money
than you think you'll need because you think it will help you
get the money. It may be better to ask for more than to have to
go back to your financial resources when you've run out of cash.
