Financial
Projections: Business Plan Basics
Your financial plan will be highly scrutinized
by your business plan reader. All the ideas, concepts and
strategies discussed throughout your entire business plan
form the basis for, and should flow into, your financial statements
and projections in some manner. When it gets down to it, your
reader wants to know if and when you will make money and become
profitable.
Financial statements and projections should
follow Generally Accepted Accounting Standards and must (at
a minimum) include properly prepared balance sheets, income
statements and cash flow statements. Bankers and investors
are familiar with the correct content, organization and presentation
of financial statements, and expect to see them in your business
plan.¾ Don't cut corners or attempt to devise your own method
of financial and pro forma statement presentation.
In most cases, capital sources expect financial
projections for a three to five year period, and historical
statements for the past three years (or since inception if
operating period is less than three years).
Consider organizing your financial statements
as follows:
Income Statements
- Year 1 - Monthly Projections
- Years 2 thru 5 - Quarterly or Yearly
Projections
- Existing businesses should provide income
statements for the last 3 years if available.
Balance Sheets
- Year 1 - Quarterly Projections
- Years 2 thru 5 - Yearly Projections
- Existing businesses should provide current
balance sheet and balance sheets from the prior 2 years
if available.
Cash Flows
- Year 1 - Monthly Projections
- Years 2 thru 5 - Quarterly or Yearly
Projections
Other information that you may consider including:
Financial Assumptions
These are critical to properly
convey the "reasons behind the numbers" for outsiders reviewing
your financial projections. Explain how you calculated the
numbers you used in your financial statements.¾ For example,
we will sell 1000 units per month at $5.00 per unit. This
is projected to increase by 4% every month, etc.
Break-Even Analysis
These figures demonstrate the volume of sales, in
units and dollars that must be generated to cover fixed and
variable expenses. At the break-even point, you start becoming
profitable. Normally this data is presented in a graph format
with sales on the X-axis and units sold on the Y-axis.
Sources and Uses
of Funds
This section explains to your reader which sources
you expect to secure capital from, and what you specifically
plan to spend it on.
Investment Structure
and Objectives
This section outlines the amount of capital needed,
various investment structures, and the estimated return to
your investor. ¾It is critically important to tell your investor
how they will recoup their money, when they can cash out,
and what they will receive as a return.
Financial Ratios
Providing standard financial ratios helps your business
plan reader to analyze how well your company will perform
compared to other companies within your industry. For existing
companies, show the trends over the last 3 to 5 years to outline
any improvements in your performance.
For more information about preparing the financial projection
section of your business plan, check out:
Email
us at BizPlanIt if you have comments or suggestions about
our Virtual Business Plan.
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