When it comes to asking the bank or an investor for money to sink into your small business, few things are as important as the financial section of your business plan. It demonstrates how financially viable your business is and how quickly stakeholders will recoup their investments.
Even if you aren’t actively seeking capital, the financial section should establish a very clear and forward-thinking fiscal picture of the business. Armed with that information, you will be able to make smarter, more calculated financial decisions. As you create your business plan, include the following critical components in its financial section.
1. Operational Expenses
The first thing you should do is calculate all of your expenses, categorizing them as either fixed or variable.
Fixed expenses are those that remain constant from month to month. Examples of fixed expenses include salaries, rent or mortgage payments, insurance costs and payroll taxes. On the other hand, variable expenses are those that fluctuate depending on production costs, seasonal variations, vendors’ price increases or decreases, and increases in marketing and advertising spend. Examples of variable expenses include utilities, raw materials, hourly wages, commissions and bonuses, inventory, shipping costs and supplies, office supplies and printing services.
Experts suggest using the last 12 months’ worth of data to calculate future expenses. If you haven’t been in business for 12 months, you will need to estimate what those costs will be based on your initial research and vendor agreements. Also, make sure to include any taxes and interest.
2. Sales Forecast
A sales forecast is your educated estimate about how many sales you plan to make in a given timeframe. To present your forecast, create a spreadsheet that is broken down by your different lines of sales and includes columns for sales for each month over the next three years. If possible, calculate a unit sales price, and forecast the number of units you anticipate selling per month, along with the units’ estimated prices.
If you have past data, use your most recent sales figures to project what you could sell in the future. If you don’t have any data because you are selling a brand-new product or a product for the first time, base your estimates off of sales for similar products in the market. You can also consider other factors like, for example, the number of customers you can realistically serve in one day. As a real-world example, a salon owner would take the number of chairs in the salon and multiply that number by an average of what a typical customer spends in the salon; the owner will then project income over time based on average revenue per seat.
3. Cash Flow Statement
Your cash flow statement indicates the cash you have coming in and going out of your business. Organize your statement by:
- Operating activities:Calculate the inflow and outflow of cash as a result of your daily business operations, including any money you collect from sales and any expenses you accrue.
- Investing activities: Calculate the inflow or outflow of cash from the purchase or sale of any business assets (e.g. purchasing or selling a large piece of equipment).
- Financing activities: Calculate any financing activities that change the business’s long-term financing structure, including repaying a mortgage or other loans, issuing stocks or paying out dividends.
Once you have included all of that information, you can calculate the ending cash balance.
4. Income Projections (Profit and Loss Statement)
The income projection estimates how much profit you stand to make over the course of several years. To calculate the figure, use your sales forecast, expenses and cash flow statement numbers to learn your expected profit.
5. Assets and Liabilities
For a business plan’s financial section, assets include tangible items like buildings or office equipment. Liabilities include debts that you owe to creditors, banks and vendors (e.g. as bills for services, raw materials, utilities, etc.). Other liabilities include salaries and wages, insurance premiums, owed taxes, loan interest and more. When you draft the financial section of your business plan, include under the assets and liabilities category any unpaid obligations.
6. Breakeven Analysis
Your breakeven point tells you when you can expect to recoup the cost of operating your business and finally turn a profit. To calculate your break-even point, use this break-even point calculator.
There’s no doubt that creating the financial section of your business plan takes time and effort, but it offers you the surest way to keep your financials in good shape, which is imperative to running and growing a successful business.