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
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.
The Four-Year Profit projection 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
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
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
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
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
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
Expressed as a formula, break-even is:
Sales = Fixed Costs
1- Variable Costs
(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.