the financial analysis component of a business plan is to describe

11.4 The Business Plan

Learning objectives.

By the end of this section, you will be able to:

• Describe the different purposes of a business plan
• Describe and develop the components of a brief business plan
• Describe and develop the components of a full business plan

Unlike the brief or lean formats introduced so far, the business plan is a formal document used for the long-range planning of a company’s operation. It typically includes background information, financial information, and a summary of the business. Investors nearly always request a formal business plan because it is an integral part of their evaluation of whether to invest in a company. Although nothing in business is permanent, a business plan typically has components that are more “set in stone” than a business model canvas , which is more commonly used as a first step in the planning process and throughout the early stages of a nascent business. A business plan is likely to describe the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. An in-depth formal business plan would follow at later stages after various iterations to business model canvases. The business plan usually projects financial data over a three-year period and is typically required by banks or other investors to secure funding. The business plan is a roadmap for the company to follow over multiple years.

Some entrepreneurs prefer to use the canvas process instead of the business plan, whereas others use a shorter version of the business plan, submitting it to investors after several iterations. There are also entrepreneurs who use the business plan earlier in the entrepreneurial process, either preceding or concurrently with a canvas. For instance, Chris Guillebeau has a one-page business plan template in his book The $100 Startup . 48 His version is basically an extension of a napkin sketch without the detail of a full business plan. As you progress, you can also consider a brief business plan (about two pages)—if you want to support a rapid business launch—and/or a standard business plan.

As with many aspects of entrepreneurship, there are no clear hard and fast rules to achieving entrepreneurial success. You may encounter different people who want different things (canvas, summary, full business plan), and you also have flexibility in following whatever tool works best for you. Like the canvas, the various versions of the business plan are tools that will aid you in your entrepreneurial endeavor.

Business Plan Overview

Most business plans have several distinct sections ( Figure 11.16 ). The business plan can range from a few pages to twenty-five pages or more, depending on the purpose and the intended audience. For our discussion, we’ll describe a brief business plan and a standard business plan. If you are able to successfully design a business model canvas, then you will have the structure for developing a clear business plan that you can submit for financial consideration.

Both types of business plans aim at providing a picture and roadmap to follow from conception to creation. If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept.

The full business plan is aimed at executing the vision concept, dealing with the proverbial devil in the details. Developing a full business plan will assist those of you who need a more detailed and structured roadmap, or those of you with little to no background in business. The business planning process includes the business model, a feasibility analysis, and a full business plan, which we will discuss later in this section. Next, we explore how a business plan can meet several different needs.

Purposes of a Business Plan

A business plan can serve many different purposes—some internal, others external. As we discussed previously, you can use a business plan as an internal early planning device, an extension of a napkin sketch, and as a follow-up to one of the canvas tools. A business plan can be an organizational roadmap , that is, an internal planning tool and working plan that you can apply to your business in order to reach your desired goals over the course of several years. The business plan should be written by the owners of the venture, since it forces a firsthand examination of the business operations and allows them to focus on areas that need improvement.

Refer to the business venture throughout the document. Generally speaking, a business plan should not be written in the first person.

A major external purpose for the business plan is as an investment tool that outlines financial projections, becoming a document designed to attract investors. In many instances, a business plan can complement a formal investor’s pitch. In this context, the business plan is a presentation plan, intended for an outside audience that may or may not be familiar with your industry, your business, and your competitors.

You can also use your business plan as a contingency plan by outlining some “what-if” scenarios and exploring how you might respond if these scenarios unfold. Pretty Young Professional launched in November 2010 as an online resource to guide an emerging generation of female leaders. The site focused on recent female college graduates and current students searching for professional roles and those in their first professional roles. It was founded by four friends who were coworkers at the global consultancy firm McKinsey. But after positions and equity were decided among them, fundamental differences of opinion about the direction of the business emerged between two factions, according to the cofounder and former CEO Kathryn Minshew . “I think, naively, we assumed that if we kicked the can down the road on some of those things, we’d be able to sort them out,” Minshew said. Minshew went on to found a different professional site, The Muse , and took much of the editorial team of Pretty Young Professional with her. 49 Whereas greater planning potentially could have prevented the early demise of Pretty Young Professional, a change in planning led to overnight success for Joshua Esnard and The Cut Buddy team. Esnard invented and patented the plastic hair template that he was selling online out of his Fort Lauderdale garage while working a full-time job at Broward College and running a side business. Esnard had hundreds of boxes of Cut Buddies sitting in his home when he changed his marketing plan to enlist companies specializing in making videos go viral. It worked so well that a promotional video for the product garnered 8 million views in hours. The Cut Buddy sold over 4,000 products in a few hours when Esnard only had hundreds remaining. Demand greatly exceeded his supply, so Esnard had to scramble to increase manufacturing and offered customers two-for-one deals to make up for delays. This led to selling 55,000 units, generating $700,000 in sales in 2017. 50 After appearing on Shark Tank and landing a deal with Daymond John that gave the “shark” a 20-percent equity stake in return for $300,000, The Cut Buddy has added new distribution channels to include retail sales along with online commerce. Changing one aspect of a business plan—the marketing plan—yielded success for The Cut Buddy.

Link to Learning

Watch this video of Cut Buddy’s founder, Joshua Esnard, telling his company’s story to learn more.

If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept. This version is used to interest potential investors, employees, and other stakeholders, and will include a financial summary “box,” but it must have a disclaimer, and the founder/entrepreneur may need to have the people who receive it sign a nondisclosure agreement (NDA) . The full business plan is aimed at executing the vision concept, providing supporting details, and would be required by financial institutions and others as they formally become stakeholders in the venture. Both are aimed at providing a picture and roadmap to go from conception to creation.

Types of Business Plans

The brief business plan is similar to an extended executive summary from the full business plan. This concise document provides a broad overview of your entrepreneurial concept, your team members, how and why you will execute on your plans, and why you are the ones to do so. You can think of a brief business plan as a scene setter or—since we began this chapter with a film reference—as a trailer to the full movie. The brief business plan is the commercial equivalent to a trailer for Field of Dreams , whereas the full plan is the full-length movie equivalent.

Brief Business Plan or Executive Summary

As the name implies, the brief business plan or executive summary summarizes key elements of the entire business plan, such as the business concept, financial features, and current business position. The executive summary version of the business plan is your opportunity to broadly articulate the overall concept and vision of the company for yourself, for prospective investors, and for current and future employees.

A typical executive summary is generally no longer than a page, but because the brief business plan is essentially an extended executive summary, the executive summary section is vital. This is the “ask” to an investor. You should begin by clearly stating what you are asking for in the summary.

In the business concept phase, you’ll describe the business, its product, and its markets. Describe the customer segment it serves and why your company will hold a competitive advantage. This section may align roughly with the customer segments and value-proposition segments of a canvas.

Next, highlight the important financial features, including sales, profits, cash flows, and return on investment. Like the financial portion of a feasibility analysis, the financial analysis component of a business plan may typically include items like a twelve-month profit and loss projection, a three- or four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a breakeven calculation. You can explore a feasibility study and financial projections in more depth in the formal business plan. Here, you want to focus on the big picture of your numbers and what they mean.

The current business position section can furnish relevant information about you and your team members and the company at large. This is your opportunity to tell the story of how you formed the company, to describe its legal status (form of operation), and to list the principal players. In one part of the extended executive summary, you can cover your reasons for starting the business: Here is an opportunity to clearly define the needs you think you can meet and perhaps get into the pains and gains of customers. You also can provide a summary of the overall strategic direction in which you intend to take the company. Describe the company’s mission, vision, goals and objectives, overall business model, and value proposition.

Rice University’s Student Business Plan Competition, one of the largest and overall best-regarded graduate school business-plan competitions (see Telling Your Entrepreneurial Story and Pitching the Idea ), requires an executive summary of up to five pages to apply. 51 , 52 Its suggested sections are shown in Table 11.2 .

Are You Ready?

Create a brief business plan.

Fill out a canvas of your choosing for a well-known startup: Uber, Netflix, Dropbox, Etsy, Airbnb, Bird/Lime, Warby Parker, or any of the companies featured throughout this chapter or one of your choice. Then create a brief business plan for that business. See if you can find a version of the company’s actual executive summary, business plan, or canvas. Compare and contrast your vision with what the company has articulated.

• These companies are well established but is there a component of what you charted that you would advise the company to change to ensure future viability?
• Map out a contingency plan for a “what-if” scenario if one key aspect of the company or the environment it operates in were drastically is altered?

Full Business Plan

Even full business plans can vary in length, scale, and scope. Rice University sets a ten-page cap on business plans submitted for the full competition. The IndUS Entrepreneurs , one of the largest global networks of entrepreneurs, also holds business plan competitions for students through its Tie Young Entrepreneurs program. In contrast, business plans submitted for that competition can usually be up to twenty-five pages. These are just two examples. Some components may differ slightly; common elements are typically found in a formal business plan outline. The next section will provide sample components of a full business plan for a fictional business.

Executive Summary

The executive summary should provide an overview of your business with key points and issues. Because the summary is intended to summarize the entire document, it is most helpful to write this section last, even though it comes first in sequence. The writing in this section should be especially concise. Readers should be able to understand your needs and capabilities at first glance. The section should tell the reader what you want and your “ask” should be explicitly stated in the summary.

Describe your business, its product or service, and the intended customers. Explain what will be sold, who it will be sold to, and what competitive advantages the business has. Table 11.3 shows a sample executive summary for the fictional company La Vida Lola.

Business Description

This section describes the industry, your product, and the business and success factors. It should provide a current outlook as well as future trends and developments. You also should address your company’s mission, vision, goals, and objectives. Summarize your overall strategic direction, your reasons for starting the business, a description of your products and services, your business model, and your company’s value proposition. Consider including the Standard Industrial Classification/North American Industry Classification System (SIC/NAICS) code to specify the industry and insure correct identification. The industry extends beyond where the business is located and operates, and should include national and global dynamics. Table 11.4 shows a sample business description for La Vida Lola.

Industry Analysis and Market Strategies

Here you should define your market in terms of size, structure, growth prospects, trends, and sales potential. You’ll want to include your TAM and forecast the SAM . (Both these terms are discussed in Conducting a Feasibility Analysis .) This is a place to address market segmentation strategies by geography, customer attributes, or product orientation. Describe your positioning relative to your competitors’ in terms of pricing, distribution, promotion plan, and sales potential. Table 11.5 shows an example industry analysis and market strategy for La Vida Lola.

Competitive Analysis

The competitive analysis is a statement of the business strategy as it relates to the competition. You want to be able to identify who are your major competitors and assess what are their market shares, markets served, strategies employed, and expected response to entry? You likely want to conduct a classic SWOT analysis (Strengths Weaknesses Opportunities Threats) and complete a competitive-strength grid or competitive matrix. Outline your company’s competitive strengths relative to those of the competition in regard to product, distribution, pricing, promotion, and advertising. What are your company’s competitive advantages and their likely impacts on its success? The key is to construct it properly for the relevant features/benefits (by weight, according to customers) and how the startup compares to incumbents. The competitive matrix should show clearly how and why the startup has a clear (if not currently measurable) competitive advantage. Some common features in the example include price, benefits, quality, type of features, locations, and distribution/sales. Sample templates are shown in Figure 11.17 and Figure 11.18 . A competitive analysis helps you create a marketing strategy that will identify assets or skills that your competitors are lacking so you can plan to fill those gaps, giving you a distinct competitive advantage. When creating a competitor analysis, it is important to focus on the key features and elements that matter to customers, rather than focusing too heavily on the entrepreneur’s idea and desires.

Operations and Management Plan

In this section, outline how you will manage your company. Describe its organizational structure. Here you can address the form of ownership and, if warranted, include an organizational chart/structure. Highlight the backgrounds, experiences, qualifications, areas of expertise, and roles of members of the management team. This is also the place to mention any other stakeholders, such as a board of directors or advisory board(s), and their relevant relationship to the founder, experience and value to help make the venture successful, and professional service firms providing management support, such as accounting services and legal counsel.

Table 11.6 shows a sample operations and management plan for La Vida Lola.

Marketing Plan

Here you should outline and describe an effective overall marketing strategy for your venture, providing details regarding pricing, promotion, advertising, distribution, media usage, public relations, and a digital presence. Fully describe your sales management plan and the composition of your sales force, along with a comprehensive and detailed budget for the marketing plan. Table 11.7 shows a sample marketing plan for La Vida Lola.

Financial Plan

A financial plan seeks to forecast revenue and expenses; project a financial narrative; and estimate project costs, valuations, and cash flow projections. This section should present an accurate, realistic, and achievable financial plan for your venture (see Entrepreneurial Finance and Accounting for detailed discussions about conducting these projections). Include sales forecasts and income projections, pro forma financial statements ( Building the Entrepreneurial Dream Team , a breakeven analysis, and a capital budget. Identify your possible sources of financing (discussed in Conducting a Feasibility Analysis ). Figure 11.19 shows a template of cash-flow needs for La Vida Lola.

Entrepreneur In Action

Laughing man coffee.

Hugh Jackman ( Figure 11.20 ) may best be known for portraying a comic-book superhero who used his mutant abilities to protect the world from villains. But the Wolverine actor is also working to make the planet a better place for real, not through adamantium claws but through social entrepreneurship.

A love of java jolted Jackman into action in 2009, when he traveled to Ethiopia with a Christian humanitarian group to shoot a documentary about the impact of fair-trade certification on coffee growers there. He decided to launch a business and follow in the footsteps of the late Paul Newman, another famous actor turned philanthropist via food ventures.

Jackman launched Laughing Man Coffee two years later; he sold the line to Keurig in 2015. One Laughing Man Coffee café in New York continues to operate independently, investing its proceeds into charitable programs that support better housing, health, and educational initiatives within fair-trade farming communities. 55 Although the New York location is the only café, the coffee brand is still distributed, with Keurig donating an undisclosed portion of Laughing Man proceeds to those causes (whereas Jackman donates all his profits). The company initially donated its profits to World Vision, the Christian humanitarian group Jackman accompanied in 2009. In 2017, it created the Laughing Man Foundation to be more active with its money management and distribution.

• You be the entrepreneur. If you were Jackman, would you have sold the company to Keurig? Why or why not?
• Would you have started the Laughing Man Foundation?
• What else can Jackman do to aid fair-trade practices for coffee growers?

What Can You Do?

Textbooks for change.

Founded in 2014, Textbooks for Change uses a cross-compensation model, in which one customer segment pays for a product or service, and the profit from that revenue is used to provide the same product or service to another, underserved segment. Textbooks for Change partners with student organizations to collect used college textbooks, some of which are re-sold while others are donated to students in need at underserved universities across the globe. The organization has reused or recycled 250,000 textbooks, providing 220,000 students with access through seven campus partners in East Africa. This B-corp social enterprise tackles a problem and offers a solution that is directly relevant to college students like yourself. Have you observed a problem on your college campus or other campuses that is not being served properly? Could it result in a social enterprise?

Work It Out

Franchisee set out.

A franchisee of East Coast Wings, a chain with dozens of restaurants in the United States, has decided to part ways with the chain. The new store will feature the same basic sports-bar-and-restaurant concept and serve the same basic foods: chicken wings, burgers, sandwiches, and the like. The new restaurant can’t rely on the same distributors and suppliers. A new business plan is needed.

• What steps should the new restaurant take to create a new business plan?
• Should it attempt to serve the same customers? Why or why not?

This New York Times video, “An Unlikely Business Plan,” describes entrepreneurial resurgence in Detroit, Michigan.

• 48 Chris Guillebeau. The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future . New York: Crown Business/Random House, 2012.
• 49 Jonathan Chan. “What These 4 Startup Case Studies Can Teach You about Failure.” Foundr.com . July 12, 2015. https://foundr.com/4-startup-case-studies-failure/
• 50 Amy Feldman. “Inventor of the Cut Buddy Paid YouTubers to Spark Sales. He Wasn’t Ready for a Video to Go Viral.” Forbes. February 15, 2017. https://www.forbes.com/sites/forbestreptalks/2017/02/15/inventor-of-the-cut-buddy-paid-youtubers-to-spark-sales-he-wasnt-ready-for-a-video-to-go-viral/#3eb540ce798a
• 51 Jennifer Post. “National Business Plan Competitions for Entrepreneurs.” Business News Daily . August 30, 2018. https://www.businessnewsdaily.com/6902-business-plan-competitions-entrepreneurs.html
• 52 “Rice Business Plan Competition, Eligibility Criteria and How to Apply.” Rice Business Plan Competition . March 2020. https://rbpc.rice.edu/sites/g/files/bxs806/f/2020%20RBPC%20Eligibility%20Criteria%20and%20How%20to%20Apply_23Oct19.pdf
• 53 “Rice Business Plan Competition, Eligibility Criteria and How to Apply.” Rice Business Plan Competition. March 2020. https://rbpc.rice.edu/sites/g/files/bxs806/f/2020%20RBPC%20Eligibility%20Criteria%20and%20How%20to%20Apply_23Oct19.pdf; Based on 2019 RBPC Competition Rules and Format April 4–6, 2019. https://rbpc.rice.edu/sites/g/files/bxs806/f/2019-RBPC-Competition-Rules%20-Format.pdf
• 54 Foodstart. http://foodstart.com
• 55 “Hugh Jackman Journey to Starting a Social Enterprise Coffee Company.” Giving Compass. April 8, 2018. https://givingcompass.org/article/hugh-jackman-journey-to-starting-a-social-enterprise-coffee-company/

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Business Plan Example and Template

Learn how to create a business plan

What is a Business Plan?

A business plan is a document that contains the operational and financial plan of a business, and details how its objectives will be achieved. It serves as a road map for the business and can be used when pitching investors or financial institutions for debt or equity financing .

A business plan should follow a standard format and contain all the important business plan elements. Typically, it should present whatever information an investor or financial institution expects to see before providing financing to a business.

Contents of a Business Plan

A business plan should be structured in a way that it contains all the important information that investors are looking for. Here are the main sections of a business plan:

1. Title Page

The title page captures the legal information of the business, which includes the registered business name, physical address, phone number, email address, date, and the company logo.

2. Executive Summary

The executive summary is the most important section because it is the first section that investors and bankers see when they open the business plan. It provides a summary of the entire business plan. It should be written last to ensure that you don’t leave any details out. It must be short and to the point, and it should capture the reader’s attention. The executive summary should not exceed two pages.

3. Industry Overview

The industry overview section provides information about the specific industry that the business operates in. Some of the information provided in this section includes major competitors, industry trends, and estimated revenues. It also shows the company’s position in the industry and how it will compete in the market against other major players.

4. Market Analysis and Competition

The market analysis section details the target market for the company’s product offerings. This section confirms that the company understands the market and that it has already analyzed the existing market to determine that there is adequate demand to support its proposed business model.

Market analysis includes information about the target market’s demographics , geographical location, consumer behavior, and market needs. The company can present numbers and sources to give an overview of the target market size.

A business can choose to consolidate the market analysis and competition analysis into one section or present them as two separate sections.

5. Sales and Marketing Plan

The sales and marketing plan details how the company plans to sell its products to the target market. It attempts to present the business’s unique selling proposition and the channels it will use to sell its goods and services. It details the company’s advertising and promotion activities, pricing strategy, sales and distribution methods, and after-sales support.

6. Management Plan

The management plan provides an outline of the company’s legal structure, its management team, and internal and external human resource requirements. It should list the number of employees that will be needed and the remuneration to be paid to each of the employees.

Any external professionals, such as lawyers, valuers, architects, and consultants, that the company will need should also be included. If the company intends to use the business plan to source funding from investors, it should list the members of the executive team, as well as the members of the advisory board.

7. Operating Plan

The operating plan provides an overview of the company’s physical requirements, such as office space, machinery, labor, supplies, and inventory . For a business that requires custom warehouses and specialized equipment, the operating plan will be more detailed, as compared to, say, a home-based consulting business. If the business plan is for a manufacturing company, it will include information on raw material requirements and the supply chain.

8. Financial Plan

The financial plan is an important section that will often determine whether the business will obtain required financing from financial institutions, investors, or venture capitalists. It should demonstrate that the proposed business is viable and will return enough revenues to be able to meet its financial obligations. Some of the information contained in the financial plan includes a projected income statement , balance sheet, and cash flow.

9. Appendices and Exhibits

The appendices and exhibits part is the last section of a business plan. It includes any additional information that banks and investors may be interested in or that adds credibility to the business. Some of the information that may be included in the appendices section includes office/building plans, detailed market research , products/services offering information, marketing brochures, and credit histories of the promoters.

Business Plan Template

Here is a basic template that any business can use when developing its business plan:

Section 1: Executive Summary

• Present the company’s mission.
• Describe the company’s product and/or service offerings.
• Give a summary of the target market and its demographics.
• Summarize the industry competition and how the company will capture a share of the available market.
• Give a summary of the operational plan, such as inventory, office and labor, and equipment requirements.

Section 2: Industry Overview

• Describe the company’s position in the industry.
• Describe the existing competition and the major players in the industry.
• Provide information about the industry that the business will operate in, estimated revenues, industry trends, government influences, as well as the demographics of the target market.

Section 3: Market Analysis and Competition

• Define your target market, their needs, and their geographical location.
• Describe the size of the market, the units of the company’s products that potential customers may buy, and the market changes that may occur due to overall economic changes.
• Give an overview of the estimated sales volume vis-à-vis what competitors sell.
• Give a plan on how the company plans to combat the existing competition to gain and retain market share.

Section 4: Sales and Marketing Plan

• Describe the products that the company will offer for sale and its unique selling proposition.
• List the different advertising platforms that the business will use to get its message to customers.
• Describe how the business plans to price its products in a way that allows it to make a profit.
• Give details on how the company’s products will be distributed to the target market and the shipping method.

Section 5: Management Plan

• Describe the organizational structure of the company.
• List the owners of the company and their ownership percentages.
• List the key executives, their roles, and remuneration.
• List any internal and external professionals that the company plans to hire, and how they will be compensated.
• Include a list of the members of the advisory board, if available.

Section 6: Operating Plan

• Describe the location of the business, including office and warehouse requirements.
• Describe the labor requirement of the company. Outline the number of staff that the company needs, their roles, skills training needed, and employee tenures (full-time or part-time).
• Describe the manufacturing process, and the time it will take to produce one unit of a product.
• Describe the equipment and machinery requirements, and if the company will lease or purchase equipment and machinery, and the related costs that the company estimates it will incur.
• Provide a list of raw material requirements, how they will be sourced, and the main suppliers that will supply the required inputs.

Section 7: Financial Plan

• Describe the financial projections of the company, by including the projected income statement, projected cash flow statement, and the balance sheet projection.

Section 8: Appendices and Exhibits

• Quotes of building and machinery leases
• Proposed office and warehouse plan
• Market research and a summary of the target market
• Credit information of the owners
• List of product and/or services

Related Readings

Thank you for reading CFI’s guide to Business Plans. To keep learning and advancing your career, the following CFI resources will be helpful:

• Corporate Structure
• Three Financial Statements
• Business Model Canvas Examples
• See all management & strategy resources
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• How to Write a Great Business Plan: Financial Analysis

The last article in a comprehensive series to help you craft the perfect business plan for your startup.

This article is part of a series on  how to write a great business plan .

Numbers tell the story. Bottom line results indicate the success or failure of any business.

Financial projections and estimates help entrepreneurs, lenders, and investors or lenders objectively evaluate a company's potential for success. If a business seeks outside funding, providing comprehensive financial reports and analysis is critical.

But most importantly, financial projections tell you whether your business has a chance of being viable--and if not let you know you have more work to do.

Most business plans include at least five basic reports or projections:

• Balance Sheet: Describes the company cash position including assets, liabilities, shareholders, and earnings retained to fund future operations or to serve as funding for expansion and growth. It indicates the financial health of a business.
• Income Statement: Also called a Profit and Loss statement, this report lists projected revenue and expenses. It shows whether a company will be profitable during a given time period.
• Cash Flow Statement: A projection of cash receipts and expense payments. It shows how and when cash will flow through the business; without cash, payments (including salaries) cannot be made.
• Operating Budget: A detailed breakdown of income and expenses; provides a guide for how the company will operate from a "dollars" point of view.
• Break-Even Analysis: A projection of the revenue required to cover all fixed and variable expenses. Shows when, under specific conditions, a business can expect to become profitable.

It's easy to find examples of all of the above. Even the most basic accounting software packages include templates and samples. You can also find templates in Excel and Google Docs. (A quick search like "google docs profit and loss statement" yields plenty of examples.)

Or you can work with an accountant to create the necessary financial projections and documents. Certainly feel free to do so... but I'd first recommend playing around with the reports yourself. While you don't need to be an accountant to run a business, you do need to understand your numbers... and the best way to understand your numbers is usually to actually work with your numbers.

But ultimately the tools you use to develop your numbers are not as important as whether those numbers are as accurate as possible--and whether those numbers help you decide whether to take the next step and put your business plan into action.

Then Financial Analysis can help you answer the most important business question: "Can we make a profit?"

Some business plans include less essential but potentially important information in an Appendix section. You may decide to include, as backup or additional information:

• Resumes of key leaders
• Additional descriptions of products and services
• Legal agreements
• Organizational charts
• Examples of marketing and advertising collateral
• Photographs of potential facilities, products, etc
• Backup for market research or competitive analysis
• Additional financial documents or projections

Keep in mind creating an Appendix is usually only necessary if you're seeking financing or hoping to bring in partners or investors. Initially the people reading your business plan don't wish to plow through reams and reams of charts, numbers, and backup information. If one does want to dig deeper, fine--he or she can check out the documents in the Appendix.

That way your business plan can share your story clearly and concisely.

Otherwise, since you created your business plan... you should already have the backup.

And one last thing: always remember the goal of your business plan is to convince you that your idea makes sense--because it's your time, your money, and your effort on the line.

More in this series:

• How to Write a Great Business Plan: Key Concepts
• How to Write a Great Business Plan: the Executive Summary
• How to Write a Great Business Plan: Overview and Objectives
• How to Write a Great Business Plan: Products and Services
• How to Write a Great Business Plan: Market Opportunities
• How to Write a Great Business Plan: Sales and Marketing
• How to Write a Great Business Plan: Competitive Analysis
• How to Write a Great Business Plan: Operations
• How to Write a Great Business Plan: Management Team

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How to Write the Financial Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Taking Stock of Expenses

The income statement, the cash flow projection, the balance sheet.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Raw materials
• Distribution
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.

The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  much capital investment  your business idea needs.

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a  short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:

• Assets :  Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when the  total liabilities  are subtracted from the total assets.

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .

For your  business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.

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Types of Financial Statements

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Financial Statement Analysis: How It’s Done, by Statement Type

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

Key Takeaways

• Financial statement analysis is used by internal and external stakeholders to evaluate business performance and value.
• Financial accounting calls for all companies to create a balance sheet, income statement, and cash flow statement, which form the basis for financial statement analysis.
• Horizontal, vertical, and ratio analysis are three techniques that analysts use when analyzing financial statements.

Jiaqi Zhou / Investopedia

How to Analyze Financial Statements

The financial statements of a company record important financial data on every aspect of a business’s activities. As such, they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United States. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP, which requires accrual accounting. Private companies have greater flexibility in their financial statement preparation and have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis , vertical analysis , and ratio analysis . Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets ,  liabilities , and  shareholder equity . Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit . It then moves to operating profit , which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the net income is reached.

Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.

Free Cash Flow and Other Valuation Statements

Companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company . Free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may keep a valuation statement as they progress toward potentially going public.

Financial statements are maintained by companies daily and used internally for business management. In general, both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall financial performance .

When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results. Finally, ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively.

Below is a breakdown of some of the most common ratio metrics:

• Balance sheet : This includes asset turnover, quick ratio, receivables turnover, days to sales, debt to assets, and debt to equity.
• Income statement : This includes gross profit margin, operating profit margin, net profit margin, tax ratio efficiency, and interest coverage.
• Cash flow : This includes cash and earnings before interest, taxes, depreciation, and amortization (EBITDA) . These metrics may be shown on a per-share basis.
• Comprehensive : This includes return on assets (ROA) and return on equity (ROE) , along with DuPont analysis .

What are the advantages of financial statement analysis?

The main point of financial statement analysis is to evaluate a company’s performance or value through a company’s balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical, or ratio analysis, investors may develop a more nuanced picture of a company’s financial profile.

What are the different types of financial statement analysis?

Most often, analysts will use three main techniques for analyzing a company’s financial statements.

First, horizontal analysis involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods.

Second, vertical analysis compares items on a financial statement in relation to each other. For instance, an expense item could be expressed as a percentage of company sales.

Finally, ratio analysis, a central part of fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.

What is an example of financial statement analysis?

An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it generates profits and shareholder value. For instance, gross profit margin will show the difference between revenues and the cost of goods sold. If the company has a higher gross profit margin than its competitors, this may indicate a positive sign for the company. At the same time, the analyst may observe that the gross profit margin has been increasing over nine fiscal periods, applying a horizontal analysis to the company’s operating trends.

Congressional Research Service. “ Cash Versus Accrual Basis of Accounting: An Introduction ,” Page 3 (Page 7 of PDF).

Internal Revenue Service. “ Publication 538 (01/2022), Accounting Periods and Methods: Methods You Can Use. ”

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12 Key Elements of a Business Plan (Top Components Explained)

Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .

You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.

When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.

Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.

This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.

Let’s get started.

Why Are Business Plans Important?

Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .

1. Proves Your Business Viability

A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.

2. Guides You Throughout the Business Cycle

A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .

During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.

After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.

Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.

3. Helps You Make Better Business Decisions

As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.

A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.

4. Eliminates Big Mistakes

Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.

Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.

5. Secures Financing and Attracts Top Talents

Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.

A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).

You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.

Key Elements of Business Plan

Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.

A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.

With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.

Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.

Here are some of the components of an effective business plan.

1. Executive Summary

One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.

In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.

A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.

The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.

A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.

An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.

Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.

Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.

Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.

Components of an Executive Summary

Here are some of the information that makes up an executive summary:

• The name and location of your company
• Products and services offered by your company
• Mission and vision statements
• Success factors of your business plan

2. Business Description

Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.

What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.

A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.

Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.

Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.

In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.

Components of a Business Description

Your business description needs to contain these categories of information.

• Business location
• The legal structure of your business
• Summary of your business’s short and long-term goals

3. Market Analysis

The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.

Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.

All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.

In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.

The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.

Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.

Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.

Market Analysis Factors

Here are some of the factors to be included in your market analysis.

• The geographical location of your target market
• Needs of your target market and how your products and services can meet those needs
• Demographics of your target audience

Components of the Market Analysis Section

Here is some of the information to be included in your market analysis.

• Industry description and statistics
• Demographics and profile of target customers
• Marketing data for your products and services
• Detailed evaluation of your competitors

4. Marketing Plan

A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.

Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.

Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.

The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.

5. Sales Strategy

Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.

Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.

Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.

Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.

6. Competitive Analysis

Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.

Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.

The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.

This section should define the following:

• Your competitors' identified advantages in the market
• How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
• The standout qualities that distinguish you from other companies
• Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks

In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.

7. Management and Organization

Management and organization are key components of a business plan. They define its structure and how it is positioned to run.

Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.

Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.

The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.

Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.

Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.

This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.

8. Products and Services

This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.

Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.

At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.

The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.

Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.

You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.

Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.

This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.

9. Operating Plan

An operations plan describes how you plan to carry out your business operations and processes.

The operating plan for your business should include:

• Information about how your company plans to carry out its operations.
• The base location from which your company intends to operate.
• The number of employees to be utilized and other information about your company's operations.
• Key business processes.

This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.

The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.

What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.

10. Financial Projections and Assumptions

Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.

The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.

All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.

The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.

Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.

Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:

• Projected income statements
• Cash flow statements
• Balance sheets
• Income statements

Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.

11. Request For Funding

The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.

When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.

If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.

When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.

Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.

12. Exhibits and Appendices

Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.

Some of the documents that comprise the exhibits and appendices section includes:

• Legal documents
• Licenses and permits
• Credit histories
• Customer lists

The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.

Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.

There are key points to include in the appendix and exhibits section of your business plan.

• The management team and other stakeholders resume
• Marketing research
• Permits and relevant legal documents
• Financial documents

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Martin luenendonk.

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.

Advanced FP&A practices for a volatile macroeconomic and business environment

It isn’t easy to forecast the next two to three years when macroeconomic conditions and business dynamics are profoundly complex. Yet as technology races ahead—a major (but by no means only) driver of disruption—many companies continue to build models with the same flawed approaches they’ve been using for years. Even when their forecasts do approach the bull’s-eye, critical data points and assumptions are unclear, inconsistent, or missing entirely.

The mark of a great model is that it’s not an oracle. Instead, a best-in-class forecast presents actionable insights by being transparent, consistent, and ever-improving. Projections need to be flexible and quickly adaptable. In this article, we identify six practical steps for financial planning and analysis (FP&A) teams to deliver more accurate forecasts—particularly under uncertainty.

Use a clear probability value for all major assumptions and for the model overall

As we’ve noted for years, probability-weighted , scenario-based  forecasts produce the most reliable results. In many FP&A models, however, probability levels are applied haphazardly or not at all, which can lead to very poor decisions. Consider a choice to allocate the same amount of capital for a 90 percent chance of $100 million net present value (NPV) over the next three years versus a 50 percent chance over the same period for $150 million NPV (that is, an expected NPV of $90 million versus $75 million). Framed that way, the choice seems obvious—or, at least, lends itself to more informed debate. But too often, probabilities aren’t stated. At one recent North American conference, about 15 percent of senior executives shared that they had never seen a probability value in a cash flow forecast.

If an FP&A department is not using explicitly stated and aligned upon probability values in its forecasting, the results will likely vary widely. For example, in building a cash flow mode, a colleague from one business unit may have used a P10 (that is, a plan that has a 10 percent chance of occurring), and a counterpart from a different business unit may have used a P90 (a plan with a 90 percent chance of occurring) in their consolidating cash flow models, while neither stated the probability value they used . These inconsistencies, multiplied across businesses, can lead to highly flawed results.

Being clear about probability values, on the other hand, has second-order benefits. Identifying, for example, a 60 percent probability is a helpful spur to understand what it would take to achieve much higher probability (such as by diversifying suppliers, if the uncertainty hinges on supply constraints). Moreover, when one business unit head presents results by using probability values and confidence levels, we tend to see that other business unit heads feel compelled to do the same. This allows both the head of FP&A and the CFO to develop a better sense of consistency across the businesses. Effective finance leaders, in fact, recognize that a discussion about core assumptions is in itself a process that leads to better decision making. That feeds into another, related best practice: there should always be one—and only one—owner of the model, ideally the head of FP&A. When a model lacks a single, identifiable owner who specifically vets probability values, those values (even when they are indicated in the model) may not be as robust as they appear.

Lay out the true momentum case—and then show management initiatives on top of that

A great forecast starts with a do-nothing momentum case, which presents how the company’s businesses are likely to perform based on current trends if managers were to take no additional initiatives. It may sound obvious, but in practice very few businesses model a base case this way. Instead, even when a base case is shown to be declining—let alone when it is presented as plateauing or increasing—it usually builds in planned management initiatives. Strip those out. A momentum case is your bedrock; when you can’t show it starkly, every subsequent investment decision can be distorted and amplified by errors such as double counting, overly optimistic (or pessimistic) assumptions, and numbers based on nonrecurring gains or losses.

Once the true momentum case is laid out, the model should then identify management initiatives and present their potential outcomes in layers (exhibit).

Forecasting this way allows for greater accountability—and credit—based on how the initiatives actually fare. It also allows companies to set high but realistic stretch goals. For example, a plan could show that if a company were to introduce a high-potential new product, get to market within 12 months, and achieve a market share of 15 percent within two years, operating profit would increase by seven percentage points. If it were to beat those targets by specified amounts, the plan should show the percentage-point difference that would flow through the P&L. That level of clarity allows not just the CFO but also the CEO and other senior leaders to focus specifically on what’s needed to achieve transformative results.

Spell out the ‘bear case’

Mike Tyson, the former champion heavyweight boxer, once observed that “everyone has a plan until they get punched in the mouth.” Few things, after all, go perfectly as planned, and there’s at least a chance that a forecast (even one that makes sound assumptions, disaggregates key inputs, clearly layers management initiatives, and assigns appropriate probability levels) will fall well short of the best case—or even a good one. After all, if a forecast has a 70 percent chance of happening, that means it has a 30 percent chance of not happening.

Remarkably, we find that many companies are more likely to plan for a true left-tail event (that is, an outcome that, in a normal distribution, would occur less than 5 percent of the time) than for a not-quite-as-bad bear case, which would be much more probable. A one-in-three or one-in-four chance is not remarkable, and management should not find itself blindsided if it occurs. A great forecast explicitly lays out a bear case, showing what the likely drivers would be, what the consequences would mean for cash flow, and how future investments and decisions about capital structure could be affected. Understanding a bear case helps planners not only manage a poor outcome should it occur but also adjust probability levels as key indicators change in advance of that outcome. Too often, postmortems reveal that companies could have taken mitigating actions much sooner. They failed to do so because they never rigorously thought a bear case through.

Make macroeconomic assumptions clear and consistent

We’ve all seen them: complex, multi-input models that seem at first glance to be comprehensive. But dig a little deeper, and you can find that some of the most important assumptions are inconsistent, unsourced, or missing entirely. This is particularly true for macroeconomic assumptions.

Consider, for example, investment decisions in a country that sees wide swings in GDP. A robust model in that case should clearly highlight the country’s GDP assumptions. In fact, even when making forecasts for mature industries that operate in historically stable economies, it’s worth pressure testing whether growth (or costs) don’t appear unmoored from macroeconomic realities. Yet in too many forecasts, GDP growth is either not an input or is simply inputted without a source—or differs across business units in the same country . For example, a forecast for a consumer-packaged-goods company might assume a two-percentage-point increase in GDP growth when modeling sales of “Product A” in one country, and a five-percentage-point increase in GDP growth in the same country for sales of “Product B.” That means that at least one of these forecasts is flawed. Possibly, they both are. While not all industries are highly dependent on GDP (high-tech and pharmaceutical companies, for example, are much less affected than companies in, say, the banking or construction sectors), a good rule of thumb is to at least question how changes to GDP or other macroeconomic factors have historically affected the business—and include in your projections the changes that have been most material.

Moreover, all macroeconomic assumptions used should be sourced and kept consistent within their specific country. Better practice is to adopt a median from a few credible, independent sources, making the methodology transparent or, better yet, allowing the model to weight those sources by historical accuracy. Best practice is to look at the patterns of assumptions and compare them with actual results so leaders can learn and ensure that their models learn as well.

Disaggregate inflation rates—‘average’ inflation can be wildly inapplicable

In our experience, companies typically include industry-specific metrics that matter most for their businesses, such as revenue per available room if they manage a chain of hotels, the size of a country’s carbonated-beverage market if they manufacture soft drinks, and the costs of key resources. Sophisticated companies also include publicly available competitor data.

But as well as they know their own businesses, they often make a common, critical mistake when modeling one driver—inflation. In too many forecasts, the inflation rate is presented as a single number, such as the consumer price index (CPI), across every business in a single country (and sometimes worldwide). But why? In the United States, the CPI is a basket of approximately 94,000 goods and services. Large companies don’t buy baskets. Instead, they depend heavily on a few, select components whose individual inflation rates can vary substantially. While businesses are at least indirectly affected by hundreds or even thousands of those components, the Pareto principle invariably applies: a few goods or services have tremendously outsize effects. These should be modeled based on disaggregated inflation rates.

As is the case with macroeconomic assumptions, inflation and industry-specific sources should always be clearly identified and can be weighted and automatically adjusted. And though it seems extraneous to add, disaggregated inflation rates should match not only across business units in the same country but also on the revenue and cost sides. Sometimes, we see models where inflation rates for a single product in a single country fail to align—typically because one part of the model defaults to a broader average, and another incorporates a more specific number. That means there’s a mistake. Fortunately, it’s easily fixed, particularly when sources are clearly indicated.

Relentlessly back test models and reduce variances

Building a model is a process; the point is not just to produce accurate numbers but to generate a constant, evolving series of outputs that become even more accurate, more rapidly, as the forecasted period plays out. It should be obvious that a sophisticated model cannot be one that you “set and forget.” On the contrary, setting up the model is just the first step. Projections can be compared with actual results every week—and, sometimes, more often than that.

Sophisticated back testing delves into aggregating details. It may be, for example, that overestimations of some stores canceled out underestimations of others, or that cost of goods sold was very close to the forecasted amount, but components of, for instance, SG&A varied wildly—and that the divergence was netted out by interest expenses that were higher (or lower) than predicted. Companies can’t manage a variance if they don’t measure results with granularity.

As teams examine variances, they can often identify clear patterns. In one North American–based consumer-packaged-goods company, for example, back testing revealed that forecast monthly sales were overestimated by about five percentage points, month after month—a variance that proved easy to address but could have been corrected much earlier if the team had been conducting back testing every week. Moreover, back testing enables companies to get smarter about how much weight to assign a given component used to make macroeconomic assumptions (such as forecasts of GDP or inflation) and continually fine-tune the model. Revisiting assumptions has always been best practice, even if the process was tedious and too infrequently undertaken. Today, back testing can be automated significantly, and patterns can be identified more precisely by using AI, including generative AI.

It’s hard to make an accurate forecast in the easiest of times; it’s almost impossible when conditions are uncertain. But even—indeed, especially—in the face of tremendous complexity, FP&A teams can take specific actions to achieve clearer insights. Six of the most consequential practices are remarkably straightforward. CFOs and their FP&A teams can begin adopting them today.

John Kelleher is a senior partner in McKinsey’s Toronto office, Marla Capozzi is a partner in the Boston office, and Dean Di Giorgio is an associate partner in the Montreal office.

This article was edited by David Schwartz, an executive editor in the Tel Aviv office.

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6 steps to create a financial plan

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Financial planning basics: How to create a financial plan

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• Financial planning is a practice that helps you track and manage your money with the purpose of reaching your financial goals.
• Create a strong financial plan by setting goals, tracking cash flow, budgeting, investing, and paying down debt. 
• A CFA or CFP can assist you in creating a personalized financial plan.

Life may be full of twists and turns, but a strong financial plan can help you stay on track toward reaching your goals. From paying off your student loans to buying a house, a comprehensive individualized plan is the best way to go. 

Financial planning is a broad and encompassing practice that aids you and your family in better managing your money and preparing for potential risks. No matter what your current financial situation is, a solid financial plan offers guidance and insight beneficial to all households.

Read about our picks for the best financial advisors here.

What is financial planning? 

Financial planning is essential to achieving long-term and short-term financial goals, while also preparing you for potential future risks and obligations. No two financial plans are the same. Your plan should accurately reflect your own financial needs, goals, and best course of action. 

"The purpose of a financial plan is to help clients — whether it be an individual, family, or business — achieve their financial goals and objectives by creating a structured roadmap for managing their finances effectively," says Chloe Wohlforth, CFP, Partner at Angeles Wealth Management . "A well-crafted financial plan considers a person's current financial situation, future financial goals, and risk tolerance."

Financial plans often address retirement savings, wealth-building strategies, emergency savings plans, tax optimization strategies, college funds, and debt consolidation .

To create a comprehensive plan, you'll need to thoroughly evaluate your current financial situation, such as household income and debt (including car payments, loans, and credit card debt). Most plans tend to involve budgeting, saving, and routine investing. 

You can craft a financial plan yourself or enlist professional assistance. Search for the best online financial advisors or planners, or look for in-person advisors.

"Financial advisors can help you create a financial plan by understanding your goals, values and risk tolerance, and then building a customized path that they can guide you along to enrich your life to its fullest potential," says Jordan Gilberti, CFP and senior lead planner at Facet.

Financial planning isn't as hard as you might think. Here are six steps you can take to create your own financial plan. 

1. Set financial goals

The first step in creating a strong financial plan is identifying your goals. Whether by yourself or with a partner, you should know what you're aiming for. 

"Set your goals and priorities by envisioning a future for yourself over the short, medium, and long term, and what you would like to achieve financially," says Gilberti. "Get yourself organized by gathering all relevant financial documents, including your investment accounts, insurance policies, debts, and other assets."

You can start by asking yourself: What do you want to achieve in five years? How about in 10 or 20 years? Are you looking to buy a house? Have kids? Plan a huge trip? 

Financial planning should feel intentional, and you can more easily draw motivation from clear, obtainable objectives. Consider at least three goals with the following information: 

• How much will it cost? If you're looking to save for a house or pay off student debt, for example, you should have a number you're aiming for. For instance, how much will it cost to buy a house and how much are you needing to save to make it happen?
• What is my deadline? Once you know how much you need to save, you'll need to set a realistic timeline. For example, how long do you think it will take to save up for a down payment on a house? 
• Where should I store the funds? While you can store all your funds in the same bank account, you may want to separate your funds into different savings accounts or brokerage accounts. 

2. Track your finances

What's coming in and what's going out? Before you can start responsibly budgeting, review your cash flow to reveal more ways to save. While some expenses — like rent or gas — are mandatory expenses, you may uncover nonessential charges that are draining your funds.

"The best way to budget is to ask for help. Often clients don't budget because they don't know where to begin. An advisor can help you think about your expenses in different categories. What is discretionary, what is non-discretionary? What is an expense that might be costly now, but only for a fixed amount of time?" says Wohlforth.

Once you have a grasp on your spending habits, you can budget. A beginner-friendly method of budgeting is the 50/30/20 rule , which is suitable for both consistent and irregular-income households. Basically, this plan is a rule of thumb that designates 50% of your income to mandatory expenses, 30% to wants, and 20% to debt or savings.

But keep in mind that everyone's financial situation is unique and the 50/30/20 budget plan won't be suitable for everyone. 

3. Create an emergency fund

Part of establishing a realistic budget is setting aside cash in case of emergencies.

"An emergency fund is typically a savings account that serves as a safety net from unforeseen financial difficulties that you may face throughout your life," Gilberti says. "Examples may include a job loss, disability, home appliance breaking, and more."

Emergencies are unexpected, so having the extra funds on hand can help you pay for medical emergencies and other sudden bills. An emergency budget may also protect you against racking up credit card debt and interest. 

Check out Insider's picks for the best budgeting apps

4. Reduce and manage debt

Reducing and managing debt is a crucial step in financial planning. Even if you're storing a good chunk of cash in a savings or brokerage account, high-interest debt will weigh you down. The longer your debt accumulates interest, the more money you'll lose in the long run. 

You may want to pay down expenses like credit card balances, student loans , and car payments sooner rather than later. You may want to include regular debt payments in your budget plan. 

5. Diversify your investment portfolio

One of the best ways to save for future financial goals and build wealth is through investing. While investing can be risky, a diverse portfolio of stocks, bonds, ETFs, and alternative investments can significantly lower the risk. There are plenty of beginner-friendly online brokerages, robo-advisors, and investing platforms.

The best investing apps for beginners and the best online brokerages for beginners are low-cost and best for passive traders. These sites also allow you to customize your investing portfolio based on your financial goals, risk tolerance, and time horizon.

Automatic investing platforms like SoFi Invest , Fidelity Go , and Wealthfront are also ideal for new investors. Robo-advisors are a flexible and accessible way for hands-off traders to buy and sell assets. 

6. Plan for retirement

A retirement account is one type of investing account. Early retirement may even be one of your long-term financial goals. The best retirement plan for you depends on your individual situation. 

One of the easiest ways to start savings for retirement is through an employee-sponsored retirement plan like a 401(k) , 403(b) , or SEP IRA . These are tax-advantaged accounts that collect a portion of your salary. Some plans, like most 401(k)s, may offer to match an employee's contributions up to a certain percentage. 

In order to grow your account faster, find out how much your employer matches and contribute enough to reach the maximum contribution amount.  In 2023, you can contribute up to $22,500 if you're under 50 years old (people age 50 or older can add an additional $7,500), but keep in mind that you can't withdraw funds until you're 59 1/2. 

Another option is an individual retirement account (IRA), which functions similarly to a 401(k) but it is not sponsored by an employer. IRAs are also tax-advantaged accounts and are often more flexible. In 2023, you can contribute up to $6,500 if you're under 50 (up to $7,500 if you're 50 or older). You also can't withdraw until you're at least 59 1/2. 

A well-thought-out plan not only helps you meet your financial goals but will also map out an accessible course of action based on your individual circumstances. Not only can you better your understanding of your own finances, but you can also focus on reaching important steps. Plus, you're more likely to reach your goals faster. 

While it may be stressful in the beginning, having a clear insight into your income and spending can reduce future stress and financial worry. The more you understand your own financial needs, the more realistic your expectations about the future.

You may also be better prepared for emergencies, like disability or financial trouble. Routinely contributing to an emergency fund is a great way to reduce financial stress and prevent your savings from being drained if trouble arises. 

Financial planning frequently asked questions (FAQs)

Financial planning means that an individual(s) tracks cash flow, budgets expenses, saves for retirement, pays down/manages debt, and invests funds in order to reach long and short-term financial goals. It's a personalized plan based on individual values, risk tolerances, and time horizons.

An example of financial planning may look like a young couple with dual income devising a plan to buy a home in five years based on their current cash flow. In order to reach this goal, the couple establishes a reasonable budget based on necessary monthly expenses (including debt payments), consistent monthly income, and what's left over to save. They develop a plan to pay down their high-interest credit card debt first. Then they open a high-yield savings account and put savings for their down payment into this account, while also contributing to an emergency fund in case any unexpected expenses come up in the next five years.

You can start financial planning by determining your financial goals and tracking your cash flow. If you're struggling to start, you can reach out to a financial planner, financial advisor, or financial consultant for help. 

How to start financial planning

Everyone can benefit from financial planning, no matter what your current financial situation is. A plan can lay out the steps you need to take to reach your long and short-term goals. Whether it's early retirement, buying a house, savings up for a wedding or creating a college fund , a personalized financial plan can help you get there. 

You can start planning by setting goals, tracking your cash flow, budgeting, paying down debt , investing in a diversified investment portfolio, and saving for retirement.

But remember that financial plans aren't static. You'll need to consistently reevaluate your plan in order to make sure it reflects your current situation and goals. 

"While you should be constantly monitoring and adjusting your plan as your life changes, some typical triggers for an update in your financial plan may include a change in income/employment, change in marital status, birth of a child, receiving an inheritance, and much more," says Gilberti. 

If you're having trouble getting started, a certified financial advisor or financial planner can guide you through the process. You can find a financial advisor through online reviews or by talking with friends and family. 

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