Notice after each account item that a note and a number is stated. These numbers refer to the Notes to the Financial Statements and allows readers (investors) the opportunity to see how J&B arrived at each account balance or value. This will become more apparent later on as we discuss Part C of the Financial Plan entitled "Notes to the Forecasted Financial Statements".
Also, notice J&B's three year Forecasted Income Statement is one page in length. The revenue and expense "items" are listed on the left hand side, while each year's forecasted revenues and expenses ("values") are shown in a column to the right. Your forecasted income statement for a three year period should appear in a similar fashion. Moreover, it is more professional and investors can compare your expected revenue and expense projections from year to year.
This concludes our discussion on how your forecasted income statements should appear in your Financial Plan. Remember it is imperative to understand the theory behind the income statement before attempting to forecast your own. To learn more about this statement, please refer to the section entitled " The Income Statement ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .
2. THE FORECASTED BALANCE SHEETS
The next statement to appear in the financial plan is your Forecasted Balance Sheets. Three, annual (year end) Forecasted Balance Sheets should follow your three year projected income statements. These forecasted balance sheets show investors the items your business anticipates to own at the beginning and end of each forecasted year. In addition, these statements will show investors how much your business anticipates to owe at the beginning and end of each forecasted period. By developing a forecasted annual balance sheet for three years into the future, you and investors will be able to determine if your proposed business provides an opportunity (IE profitable).
In addition to the three year forecasted balance sheets, investors will want to see an opening balance sheet. An opening balance sheet generally shows the businesses' assets, liabilities, and owner's investments into the business.
The three year forecasted balance sheets should be placed on one page. Moreover, the one page will consist of four columns - one column for your opening balance sheet, one column for the first year forecasted balance sheet, one column for the second year forecasted balance sheet, and one column for your third year forecasted balance sheet. Below provides an example of J&B Incorporated's forecasted Balance Sheet.
Ending Cash (note 21) | $ 63,314 | $ 57,608 | $ 61,968 | $ 94,091 |
Office Supplies (note 6) | $ 0 | $ 500 | $ 735 | $ 476 |
Finished Diskette Inventory (note 2) | $ 0 | $ 6,683 | $ 2,803 | $ 1,790 |
Finished CD Inventory (note 2) | $ 0 | $ 3,103 | $ 2,072 | $ 2,053 |
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Net Computer Equipment (note 16) | $ 7,602 | $ 9,426 | $ 10,034 | $ 11,642 |
Net Office Furniture (note 17) | $ 1,412 | $ 2,425 | $ 3,018 | $ 3,712 |
Net Intangible - Initial R&D (note 18) | $ 47,772 | $ 31,848 | $ 15,924 | $ 0 |
Net Intangible - Future R&D (note 19) | $ 0 | $ 74,161 | $140,923 | $179,789 |
Accounts Payable (note 22) | $ 0 | $ 4,975 | $ 5,274 | $ 6,394 |
Wages & Employee Benefits (note 23) | $ 0 | $ 1,686 | $ 2,049 | $ 2,336 |
Operating Loan Payable (note 13) | $20,000 | $ 0 | $ 0 | $ 0 |
Taxes Payable (note 20) | $ 0 | $ 29,698 | $ 31,728 | $ 34,919 |
100 Class A Common Shares(note 24) | $ 100 | $ 100 | $ 100 | $ 100 |
50 Class B Common Shares (note 24) | $100,000 | $100,000 | $100,000 | $100,000 |
Retained Earnings (note 25) | $ 0 | $ 49,294 | $ 98,326 | $149,804 |
* April 30, 1998 represents the forecasted account balances at the end of the product's development phase. | ||||
** April 30, 1999 represents the forecasted account balances at the end of the company's first year of operation. |
Notice J&B's three year Forecasted Balance is one page in length. The Asset, Liability, and Equity "items" are listed on the left hand side, while each year's forecasted account balances (values) are shown in a column to the right. Your forecasted balance sheet for a year three period should appear in a similar fashion. It is more tidy and investors can compare your expected financial position from year to year.
Also, notice after each account item that a note and a number is stated. These numbers refer to the Notes to the Financial Statements and allows readers (investors) the opportunity to see how J&B arrived at each account balance or value. This will become more apparent later on as we discuss Part C of the Financial Plan entitled "Notes to the Forecasted Financial Statements".
This concludes our discussion on how your projected balance sheet should appear in your Financial Plan. Remember it is imperative to understand the theory behind the Balance Sheet before attempting to forecast your own. To learn more about this statement, please refer to the section entitled " The Balance Sheet ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .
3. FORECASTED CASH FLOW STATEMENTS
The next statement to appear in the financial plan is your Forecasted Cash-flow Statements. The Cash Flow Statement is a tool used to forecast the movement of cash into and out-off the business. The movement of cash into a company may result from sales to customers, cash from investors, cash from bank loans, cash from the owners, cash from interest earned, cash from commission sales, or from any other source that provides cash to the business. The movement of cash out-off the company might include items such as advertising, wages and salaries, inventory purchases, payment on taxes, payment on business loans, utilities, owner withdrawals, rent, dividends, and so on.
Without the necessary cash, a business will not survive. Therefore, a forecasted cash flow statement is constructed to determine if an entrepreneur's business will have enough cash to carry out the day to day (month to month) operations.
A cash flow statement can be organized on a daily, weekly, monthly or quarterly bases. Most bankers and other investors, however, prefer see a monthly cash flow statement for a three year period. In other words, you will be required to develop three forecasted cashflow statements, each consisting of a twelve month period.
This may seem overwhelming at first, but with the aid of a spreadsheet program such as Lotus 123 or Excel, the task becomes rather simple. If you do not have a spreadsheet program, you are advised to purchase one and learn how it operates - It is an invaluable business tool that will save you lots of time and money. Below provides an example of J&B's forecasted cashflow statement for a three year period. (please note: normally each annual cashflow statement is constructed in a spreadsheet program and consist of a twelve month forecasted period. Due to the margins of this program, we are unable to place twelve columns on one page. As a result, we have used two pages for each year to illustrate J&B's annual forecasted cash flow statement).
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Percentage of Sales (per month) | 3% | 3% | 8% | 8% | 9% | 9% | 10% |
Total Unit Sales/ Month) | 236 | 236 | 631 | 631 | 709 | 709 | 788 |
Diskette Sales (note 26) | 142 | 142 | 378 | 378 | 426 | 426 | 473 |
CD Sales (note 26) | 83 | 83 | 221 | 221 | 248 | 248 | 276 |
Internet Sales (note 26) | 12 | 12 | 32 | 32 | 35 | 35 | 39 |
Weighed Average Selling Price (1) | $73.89 | $73.89 | $73.89 | $73.89 | $73.89 | $73.89 | $73.89 |
Cash From Product Sales (100%) | $17,472 | $17,472 | $46,592 | $46,592 | $52,416 | $52,416 | $58,240 |
Less: Bad Debt Expense (1%) | $ 175 | $ 175 | $ 466 | $ 466 | $ 524 | $ 524 | $ 582 |
Purchase of Diskettes (note 27 a) | $8,670 | $ 0 | $ 0 | $ 8,670 | $ 0 | $ 8,670 | $ 0 |
Purchase of CD (note 27 b) | $2,500 | $ 0 | $ 0 | $ 0 | $ 2,500 | $ 0 | $ 0 |
Credit Card Charges (note 27 c) | $ 877 | $ 877 | $ 2,339 | $ 2,339 | $ 2,632 | $ 2,632 | $ 2,924 |
Packaging Charges (note 27 d) | $ 130 | $ 130 | $ 347 | $ 347 | $ 391 | $ 391 | $ 434 |
Actual Shipping Charges (note 27 e) | $ 636 | $ 636 | $ 1,696 | $ 1,696 | $ 1,908 | $ 1,908 | $ 2,120 |
Toll Free Charges (note 27 f) | $ 0 | $ 471 | $ 471 | $ 1,255 | $ 1,255 | $ 1,412 | $ 1,412 |
Commission on Sales (note 27 g) | $ 0 | $ 236 | $ 236 | $ 631 | $ 631 | $ 709 | $ 709 |
Product Miscellaneous (note 27 h) | $ 118 | $ 118 | $ 315 | $ 315 | $ 355 | $ 355 | $ 394 |
Advertising | $5,000 | $5,000 | $12,000 | $12,000 | $12,000 | $12,000 | $12,000 |
Wages & Employee Benefits | $6,217 | $6,900 | $10,464 | $10,857 | $10,857 | $10,857 | $10,857 |
Research & Development | $7,630 | $8,240 | $ 8,240 | $ 8,240 | $ 8,240 | $ 8,240 | $ 8,240 |
Casual Labor | $ 0 | $ 0 | $ 0 | $ 800 | $ 0 | $ 0 | $ 0 |
Office Supplies | $ 0 | $ 500 | $ 0 | $ 0 | $ 500 | $ 0 | $ 0 |
Rent | $1,000 | $1,000 | $ 1,000 | $ 1,000 | $ 1,000 | $ 1,000 | $ 1,000 |
Telephone/Fax | $ 0 | $ 300 | $ 300 | $ 300 | $ 300 | $ 300 | $ 300 |
Professional Services | $ 0 | $2,250 | $ 2,250 | $ 250 | $ 250 | $ 250 | $ 250 |
Business Insurance | $1,500 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Toll-free Charges above Variable | $ 0 | $ 471 | $ 471 | $ 1,255 | $ 1,255 | $ 1,412 | $ 1,412 |
Miscellaneous Charges | $ 200 | $ 200 | $ 200 | $ 200 | $ 200 | $ 200 | $ 200 |
Office Furniture | $1,618 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Office Equipment | $4,966 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Payment on Operating Loan | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Interest on Loan | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Internet Storage and Accounts | $ 150 | $ 150 | $ 150 | $ 150 | $ 150 | $ 150 | $ 150 |
Dividends Paid (note 28) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $20,000 |
Net Cash Flow (Deficiency) | $-23,915 | $-10,183 | $5,646 | $-4,179 | $7,470 | $1,407 | $-4,744 |
Beginning Cash Balance (note 21) | $63,314 | $39,398 | $29,216 | $34,862 | $30,683 | $38,153 | $39,560 |
The remaining five (5) months of J&B's first year Forecasted Cashflow Statement is presented below. Recall this is not the correct format - the first year cashflow statement should be developed in a spreadsheet program and should appear on one page.
Percentage of Total Sales (per month) | 10% | 10% | 10% | 10% | 10% | 100% |
Total Unit Sales/ Month) | 788 | 788 | 788 | 788 | 788 | 7,882 |
Diskette Sales (note 26) | 473 | 473 | 473 | 473 | 473 | 4729 |
CD Sales (note 26) | 276 | 276 | 276 | 276 | 276 | 2,759 |
Internet Sales (note 26) | 39 | 39 | 39 | 39 | 39 | 394 |
Weighed Average Selling Price (note 1) | $73.89 | $73.89 | $73.89 | $73.89 | $73.89 | |
Cash From Product Sales (100%) | $58,240 | $58,240 | $58,240 | $58,240 | $58,240 | $582,401 |
Less: Bad Debt Expense (1%) | $ 582 | $ 582 | $ 582 | $ 582 | $ 582 | $ 5,824 |
Purchase of Diskettes (note 27 a) | $ 0 | $13,005 | $ 0 | $ 8,670 | $ 0 | $47,658 |
Purchase of CD (note 27 b) | $ 0 | $ 2,500 | $ 0 | $ 0 | $ 2,500 | $ 10,000 |
Credit Card Charges (note 27 c) | $2,924 | $ 2,924 | $ 2,924 | $ 2,924 | $ 2,924 | $ 29,242 |
Packaging Charges (note 27 d) | $ 434 | $ 434 | $ 434 | $ 434 | $ 434 | $ 4,343 |
Actual Shipping Charges (note 27 e) | $2,120 | $ 2,120 | $ 2,120 | $ 2,120 | $ 2,120 | $ 21,199 |
Toll Free Charges (note 27 f) | $1,569 | $ 1,569 | $ 1,569 | $ 1,569 | $ 1,569 | $ 14,117 |
Commission on Sales (note 27 g) | $ 788 | $ 788 | $ 788 | $ 788 | $ 788 | $ 7,094 |
Product Miscellaneous (note 27 h) | $ 394 | $ 394 | $ 394 | $ 394 | $ 394 | $ 3,941 |
Advertising | $12,000 | $12,000 | $12,000 | $12,000 | $12,000 | $130,000 |
Wages & Employee Benefits | $10,857 | $10,857 | $10,857 | $10,857 | $10,857 | $121,291 |
Research & Development | $8,240 | $8,240 | $ 8,240 | $ 8,240 | $ 8,240 | $ 98,271 |
Casual Labour | $ 800 | $ 0 | $ 0 | $ 0 | $ 800 | $ 2,400 |
Office Supplies | $ 500 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,500 |
Rent | $1,000 | $1,000 | $ 1,000 | $ 1,000 | $ 1,000 | $ 12,000 |
Telephone/Fax | $ 300 | $ 300 | $ 300 | $ 300 | $ 300 | $ 3,300 |
Professional Services | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 6,750 |
Business Insurance | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,500 |
Toll-free Charges above Variable | $1,569 | $1,569 | $ 1,569 | $ 1,569 | $ 1,569 | $ 14,117 |
Miscellaneous Charges | $ 200 | $ 200 | $ 200 | $ 200 | $ 200 | $ 2,400 |
Office Furniture | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,618 |
Office Equipment | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 4,966 |
Payment on Operating Loan | $20,000 | $ 0 | $ 0 | $ 0 | $ 0 | $ 20,000 |
Interest on Loan | $ 2,000 | $ 0 | $ 0 | $ 0 | $ 0 | $ 2,000 |
Internet Storage and Accounts | $ 900 | $ 150 | $ 150 | $ 150 | $ 150 | $ 2,550 |
Dividends Paid (note 28) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 20,000 |
Net Cash Flow (Deficiency) | $(9,187) | $ (642) | $14,863 | $ 6,193 | $11,563 | |
Plus Beginning Cash Balance (note 21) | $34,816 | $25,629 | $24,988 | $39,851 | $46,044 | |
* Numbers are rounded. |
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Percentage of Sales (per month) | 8% | 7% | 7% | 8% | 8% | 10% | 9% |
Total Unit Sales/ Month) | 793 | 693 | 693 | 793 | 793 | 991 | 892 |
Diskette Sales (note 26) | 317 | 277 | 277 | 317 | 317 | 396 | 357 |
CD Sales (note 26) | 396 | 347 | 347 | 396 | 396 | 495 | 446 |
Internet Sales (note 26) | 79 | 69 | 69 | 79 | 79 | 99 | 89 |
Weighed Average Selling Price (1) | $68.01 | $68.01 | $68.01 | $68.01 | $68.01 | $68.01 | $68.01 |
Product Cost Inflation Rate | 5% | 5% | 5% | 5% | 5% | 5% | 5% |
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Cash From Product Sales (100%) | $53,902 | $47,164 | $47,164 | $53,902 | $53,902 | $67,378 | $60,640 |
Less: Bad Debt Expense (1%) | $ 539 | $ 472 | $ 472 | $ 539 | $ 539 | $ 674 | $ 606 |
Purchase of Diskettes (note 27 a) | $ 0 | $ 9,100 | $ 0 | $ 0 | $ 9,100 | $ 0 | $ 0 |
Purchase of CD (note 27 b) | $ 0 | $ 0 | $ 2,630 | $ 0 | $ 0 | $ 3,945 | $ 0 |
Credit Card Charges (note 27 c) | $ 2,726 | $ 2,386 | $ 2,386 | $ 2,726 | $ 2,726 | $ 3,408 | $ 3,067 |
Packaging Charges (note 27 d) | $ 435 | $ 381 | $ 381 | $ 435 | $ 435 | $ 544 | $ 490 |
Actual Shipping Charges (note 27 e) | $ 1,752 | $ 1,533 | $ 1,533 | $ 1,752 | $ 1,752 | $ 2,190 | $ 1,971 |
Toll Free Charges (note 27 f) | $ 1,569 | $ 1,656 | $ 1,449 | $ 1,449 | $ 1,656 | $ 1,656 | $ 2,071 |
Commission on Sales (note 27 g) | $ 788 | $ 832 | $ 728 | $ 728 | $ 832 | $ 832 | $ 1,040 |
Product Miscellaneous (note 27 h) | $ 420 | $ 368 | $ 368 | $ 420 | $ 420 | $ 525 | $ 473 |
Advertising | $12,500 | $12,500 | $12,500 | $12,500 | $12,500 | $12,500 | $12,500 |
Wages & Employee Benefits | $11,298 | $11,346 | $11,346 | $11,346 | $11,346 | $11,346 | $11,346 |
Research & Development | $ 9,850 | $10,165 | $10,165 | $10,165 | $10,165 | $10,165 | $10,165 |
Casual Labour | $ 750 | $ 0 | $ 0 | $ 750 | $ 0 | $ 0 | $ 0 |
Office Supplies | $ 500 | $ 0 | $ 0 | $ 488 | $ 0 | $ 488 | $ 0 |
Rent | $ 1,050 | $ 1,050 | $ 1,050 | $ 1,050 | $ 1,050 | $ 1,050 | $ 1,050 |
Telephone/Fax | $ 300 | $ 320 | $ 320 | $ 320 | $ 320 | $ 320 | $ 320 |
Professional Services | $ 250 | $ 292 | $ 292 | $ 292 | $ 292 | $ 292 | $ 292 |
Business Insurance | $ 1,650 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Toll-free Charges above Variable | $ 1,569 | $ 1,656 | $ 1,449 | $ 1,449 | $ 1,656 | $ 1,656 | $ 2,071 |
Miscellaneous Charges | $ 217 | $ 217 | $ 217 | $ 217 | $ 217 | $ 217 | $ 217 |
Taxes Payable | $29,698 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Office Furniture | $ 1,500 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Office Equipment | $ 5,000 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Internet Storage & Accounts | $ 160 | $ 160 | $ 160 | $ 160 | $ 160 | $ 160 | $ 160 |
Dividends Paid (note 28) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $25,000 |
Net Cash Flow (Deficiency) | $-30,618 | $ -7,269 | $ - 281 | $ 7,115 | $ -1,265 | $15,410 | $-12,198 |
Plus Beginning Cash Balance | $57,608 | $26,989 | $19,721 | $19,440 | $26,555 | $25,290 | $40,700 |
The remaining five (5) months of J&B's second year Forecasted Cashflow Statement is presented below. Recall this is not the correct format - the second year cashflow statement should be developed in a spreadsheet program and should appear on one page.
Percentage of Total Sales (per month) | 8% | 7% | 10% | 9% | 9% | 100% |
Total Unit Sales/ Month) | 793 | 693 | 991 | 892 | 892 | 9,907 |
Diskette Sales (note 26) | 317 | 277 | 396 | 357 | 357 | 3,963 |
CD Sales (note 26) | 396 | 347 | 495 | 446 | 446 | 4,954 |
Internet Sales (note 26) | 79 | 69 | 99 | 89 | 89 | 991 |
Weighed Average Selling Price (note 1) | 68.01 | 68.01 | 68.01 | $68.01 | $68.01 | |
Product Cost Inflation Rate | 5% | 5% | 5% | 5% | 5% | |
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Cash From Product Sales (100%) | $53,902 | $47,164 | $67,378 | $60,640 | $60,640 | $673,775 |
Less: Bad Debt Expense (1%) | $ 539 | $ 472 | $ 674 | $ 606 | $ 606 | $ 6,738 |
Purchase of Diskettes (note 27 a) | $ 9,100 | $ 0 | $ 0 | $ 4,550 | $ 0 | $ 31,850 |
Purchase of CD (note 27 b) | $ 0 | $ 2,630 | $ 0 | $ 0 | $ 2,630 | $ 11,835 |
Credit Card Charges (note 27 c) | $ 2,726 | $ 2,386 | $ 3,408 | $ 3,067 | $ 3,067 | $ 34,080 |
Packaging Charges (note 27 d) | $ 435 | $ 381 | $ 544 | $ 490 | $ 490 | $ 5,439 |
Actual Shipping Charges (note 27 e) | $ 1,752 | $ 1,533 | $ 2,190 | $ 1,971 | $ 1,971 | $ 21,904 |
Toll Free Charges (note 27 f) | $ 1,864 | $ 1,656 | $ 1,449 | $ 2,071 | $ 1,864 | $ 20,411 |
Commission on Sales (note 27 g) | $ 936 | $ 832 | $ 728 | $ 1,040 | $ 936 | $ 10,254 |
Product Miscellaneous (note 27 h) | $ 420 | $ 368 | $ 525 | $ 473 | $ 473 | $ 5,251 |
Advertising | $12,500 | $12,500 | $12,500 | $12,500 | $12,500 | $150,000 |
Wages & Employee Benefits | $11,346 | $11,346 | $11,346 | $11,346 | $11,346 | $136,104 |
Research & Development | $10,165 | $10,165 | $10,165 | $10,165 | $10,165 | $121,662 |
Casual Labour | $ 750 | $ 0 | $ 0 | $ 0 | $ 750 | $ 3,000 |
Office Supplies | $ 0 | $ 488 | $ 0 | $ 0 | $ 488 | $ 2,450 |
Rent | $ 1,050 | $ 1,050 | $ 1,050 | $ 1,050 | $ 1,050 | $ 12,600 |
Telephone/Fax | $ 320 | $ 320 | $ 320 | $ 320 | $ 320 | $ 3,820 |
Professional Services | $ 292 | $ 292 | $ 292 | $ 292 | $ 292 | $ 3,458 |
Business Insurance | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,650 |
Toll-free Charges above variable | $ 1,864 | $ 1,656 | $ 1,449 | $ 2,071 | $ 1,864 | $ 20,411 |
Miscellaneous | $ 217 | $ 217 | $ 217 | $ 217 | $ 217 | $ 2,600 |
Taxes Payable | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 29,698 |
Office Furniture | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,500 |
Computer Equipment | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 5,000 |
Internet Storage & Accounts | $ 940 | $ 160 | $ 160 | $ 160 | $ 160 | $ 2,700 |
Dividends Paid | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 25,000 |
Net Cash Flow (Deficiency) | $-3,313 | $-1,286 | $20,360 | $ 8,252 | $ 9,453 | |
Plus: Beginning Cash Balance | $28,502 | $25,189 | $23,903 | $44,263 | $52,515 | |
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Percentage of Total Sales (per month) | 8% | 7% | 7% | 8% | 8% | 10% | 9% |
Total Unit Sales/ Month) | 928 | 812 | 812 | 928 | 928 | 1,160 | 1,044 |
Diskette Sales (note 26) | 186 | 162 | 162 | 186 | 186 | 232 | 209 |
CD Sales (note 26) | 603 | 528 | 528 | 603 | 603 | 754 | 679 |
Internet Sales (note 26) | 139 | 122 | 122 | 139 | 139 | 174 | 157 |
Weighed Average Selling Price ( 1) | $67.61 | $67.61 | $67.61 | $67.61 | $67.61 | $67.61 | $67.61 |
Product Cost Inflation Rate | 10% | 10% | 10% | 10% | 10% | 10% | 10% |
Cash From Product Sales (100%) | $62,753 | $54,909 | $54,909 | $62,753 | $62,753 | $78,441 | $70,597 |
Less: Bad Debt Expense (1%) | $ 628 | $ 549 | $ 549 | $ 628 | $ 628 | $ 784 | $ 706 |
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Purchase of Diskettes (note 27 a) | $ 0 | $ 9,540 | $ 0 | $ 0 | $ 0 | $ 0 | $ 9,540 |
Purchase of CD (note 27 b) | $ 0 | $ 5,500 | $ 0 | $ 0 | $ 5,500 | $ 0 | $ 0 |
Credit Card Charges (note 27 c) | $ 3,193 | $ 2,794 | $ 2,794 | $ 3,193 | $ 3,193 | $ 3,991 | $ 3,592 |
Packaging Charges (note 27 d) | $ 505 | $ 442 | $ 442 | $ 505 | $ 505 | $ 631 | $ 568 |
Actual Shipping Charges (note 27 e) | $ 1,554 | $ 1,360 | $ 1,360 | $ 1,554 | $ 1,554 | $ 1,943 | $ 1,748 |
Toll Free Charges (note 27 f) | $ 1,863 | $ 2,033 | $ 1,779 | $ 1,779 | $ 2,033 | $ 2,033 | $ 2,541 |
Commission on Sales (note 27 g) | $ 936 | $ 1,021 | $ 893 | $ 893 | $ 1,021 | $ 1,021 | $ 1,276 |
Product Miscellaneous (note 27 h) | $ 510 | $ 447 | $ 447 | $ 510 | $ 510 | $ 638 | $ 574 |
Advertising | $14,167 | $14,167 | $14,167 | $14,167 | $14,167 | $14,167 | $14,167 |
Wages & Employee Benefits | $13,694 | $13,952 | $13,952 | $13,952 | $13,952 | $13,952 | $13,952 |
Research & Development | $10,425 | $10,453 | $10,453 | $10,453 | $10,453 | $10,453 | $10,453 |
Casual Labour | $ 900 | $ 0 | $ 0 | $ 900 | $ 0 | $ 0 | $ 0 |
Office Supplies | $ 0 | $ 0 | $ 412 | $ 0 | $ 0 | $ 412 | $ 0 |
Rent | $ 1,102 | $ 1,102 | $ 1,102 | $ 1,102 | $ 1,102 | $ 1,102 | $ 1,102 |
Telephone/Fax | $ 320 | $ 340 | $ 340 | $ 340 | $ 340 | $ 340 | $ 340 |
Professional Services | $ 292 | $ 333 | $ 333 | $ 333 | $ 333 | $ 333 | $ 333 |
Business Insurance | $ 1,815 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Toll-free Charges above Variable | $ 1,864 | $ 2,033 | $ 1,779 | $ 1,779 | $ 2,033 | $ 2,033 | $ 2,541 |
Miscellaneous Charges | $ 233 | $ 233 | $ 233 | $ 233 | $ 233 | $ 233 | $ 233 |
Taxes Payable | $31,728 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Office Furniture | $ 0 | $ 2,000 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Office Equipment | $ 0 | $ 8,000 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Internet Storage & Accounts | $ 170 | $ 170 | $ 170 | $ 170 | $ 170 | $ 170 | $ 170 |
Dividends Paid (note 28) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $30,000 |
Net Cash Flow (Deficiency) | $-23,145 | $-21,560 | $3,704 | $10,261 | $ 5,026 | $24,204 | $-23,241 |
Plus Beginning Cash Balance | $61,968 | $38,823 | $17,263 | $20,967 | $31,228 | $36,254 | $60,457 |
The remaining five (5) months of J&B's third year Forecasted Cashflow Statement is presented below. Recall this is not the correct procedure - the third year cashflow statement should be developed in a spreadsheet program and should appear on one page.
Percentage of Total Sales (per month) | 8% | 7% | 10% | 9% | 9% | 100% |
Total Unit Sales/ Month) | 928 | 812 | 1,160 | 1044 | 1044 | 11,602 |
Diskette Sales (note 26) | 186 | 162 | 232 | 209 | 209 | 2320 |
CD Sales (note 26) | 603 | 528 | 754 | 679 | 679 | 7541 |
Internet Sales (note 26) | 139 | 122 | 174 | 157 | 157 | 1740 |
Weighed Average Selling Price (note 1) | $67.61 | $67.61 | $67.61 | $67.61 | $67.61 | |
Product Cost Inflation Rate | 10% | 10% | 10% | 10% | 10% | |
Cash From Product Sales (100%) | $62,753 | $54,909 | $78,441 | $70,597 | $70,597 | $784,411 |
Bad Debt Expense (1%) | $ 628 | $ 549 | $ 784 | $ 706 | $ 706 | $ 7,844 |
Purchase of Diskettes (note 27 a) | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,908 | $ 20,988 |
Purchase of CD (note 27 b) | $ 5,500 | $ 0 | $ 0 | $ 4,125 | $ 0 | $ 20,625 |
Credit Card Charges (note 27 c) | $ 3,193 | $ 2,794 | $ 3,991 | $ 3,592 | $ 3,592 | $ 39,911 |
Packaging Charges (note 27 d) | $ 505 | $ 442 | $ 631 | $ 568 | $ 568 | $ 6,311 |
Actual Shipping Charges (note 27 e) | $ 1,554 | $ 1,360 | $ 1,943 | $ 1,748 | $ 1,748 | $ 19,428 |
Toll Free Charges (note 27 f) | $ 2,287 | $ 2,033 | $ 1,779 | $ 2,541 | $ 2,287 | $ 24,985 |
Commission on Sales (note 27 g) | $ 1,149 | $ 1,021 | $ 893 | $ 1,276 | $ 1,149 | $ 12,550 |
Product Miscellaneous (note 27 h) | $ 510 | $ 447 | $ 638 | $ 574 | $ 574 | $ 6,381 |
Advertising | $14,167 | $14,167 | $14,167 | $14,167 | $14,167 | $170,000 |
Wages & Employee Benefits | $13,952 | $13,952 | $13,952 | $13,952 | $13,952 | $167,163 |
Research & Development | $10,453 | $10,453 | $10,453 | $10,453 | $10,453 | $125,411 |
Casual Labour | $ 900 | $ 0 | $ 0 | $ 0 | $ 900 | $ 3,600 |
Office Supplies | $ 0 | $ 412 | $ 0 | $ 0 | $ 412 | $ 1,650 |
Rent | $ 1,102 | $ 1,102 | $ 1,102 | $ 1,102 | $ 1,102 | $ 13,230 |
Telephone/Fax | $ 340 | $ 340 | $ 340 | $ 340 | $ 340 | $ 4,060 |
Professional Services | $ 333 | $ 333 | $ 333 | $ 333 | $ 333 | $ 3,958 |
Business Insurance | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1,815 |
Toll-free Charges above Variable | $ 2,287 | $ 2,033 | $ 1,779 | $ 2,541 | $ 2,287 | $ 24,985 |
Miscellaneous Charges | $ 233 | $ 233 | $ 233 | $ 233 | $ 233 | $ 2,800 |
Taxes Payable | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 31,728 |
Office Furniture | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 2,000 |
Office Equipment | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 8,000 |
Internet Storage & Accounts | $ 995 | $ 170 | $ 170 | $ 170 | $ 170 | $ 2,865 |
Dividends Paid (note 28) | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 30,000 |
Net Cash Flow (Deficiency) | $2,665 | $3,068 | $25,252 | $12,174 | $13,715 | |
Plus: Beginning Cash Balance | $37,217 | $39,882 | $42,949 | $68,202 | $80,376 | |
As you can see, the above forecasted cash flow statements project J&B's cash inflows (from customers, from a bank loan and investors) and all expected cash outflow (from purchases of inventory, for advertising, for rent etc,) each month for thirty-six months. The inflows and outflows are subtracted and the difference is known as the Net Cash Flow (Deficiency). The cash at the beginning of the month is then added to the Net Cash Flow (Deficiency) to produce the Ending Cash Balance for the month.
Notice at the beginning of each cash flow statement, an ASSUMPTION section has been used. This assists the reader (investor) in understanding how the entrepreneur arrived at various values throughout the Cash Flow Statement (optional).
Also notice, after some of the account items, a note and a number is stated. These numbers refer to the Notes to the Financial Statements and allows readers (investors) the opportunity to see how J&B arrived at each account balance or value. This will become more apparent later on as we discuss Part C of the Financial Plan entitled "Notes to the Forecasted Financial Statements".
We can not stress enough that you should have three cash flow statements; one for each forecasted year. In addition, each cash flow statement will consist of a twelve month forecasted period; for a total of thirty-six months.
This concludes our discussion on how your forecasted cash flow statement should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the cash flow statement before attempting to forecast your own. To learn more about this statement, please refer to the section entitled " The Cash-Flow Statement ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .
4. FORECASTED BREAK-EVEN ANALYSIS
The next analysis to appear in your financial plan is the Forecasted Break-even Analysis. A Break Even Analysis, in its simplest form, is a tool used to determine the level of sales a business must earn in order to achieve neither a profit nor a loss. In other words, the point at which a business' Net Income is ZERO (revenues - expenses = 0).
The break-even analysis focuses mainly on the items included in a company's income statement (revenues and expenses). Moreover, the Break-even Analysis relies on your forecasted Fixed Costs, your forecasted Variable Costs and your forecasted Selling Price(s). Forecasted Fixed Costs are costs and expenses that do not fluctuate with sales increases or decreases. Forecasted Variable Costs are costs and expenses that do fluctuate with sales increases or decreases. A Forecasted Selling Price (s) is the price or prices you plan to sell your product at.
Your Forecasted Break-even analysis can consist of one page or two pages; depending upon how much detail you decide to offer. For example, J&B Incorporated's forecasted break-even analysis, presented below, consists of two parts. PART A. provides the reader with all information required in making the break-even calculation, and PART B shows the actual break-even calculation.
Selling Price per unit (note 1) | $73.89 | $68.01 | $67.61 |
Weighted Average Variable Cost per unit | $16.50 | $14.79 | $12.10 |
Advertising Expense (note 3) | $130,000 | $150,000 | $170,000 |
Wages & Employee Benefits (note 4) | $122,366 | $136,153 | $167,421 |
Casual Labor (note 5) | $ 2,400 | $ 3,000 | $ 3,600 |
Office Supplies (note 6) | $ 1,500 | $ 1,715 | $ 1,908 |
Rent Expense (note 7) | $ 12,000 | $ 12,600 | $ 13,230 |
Telephone/Fax Expense (note 8) | $ 3,600 | $ 3,840 | $ 4,080 |
Professional Services (note 9) | $ 7,000 | $ 3,500 | $ 4,000 |
Insurance Expenses (note 10) | $ 1,500 | $ 1,650 | $ 1,815 |
Toll-free Charges above Variable Cost (note 11) | $ 15,685 | $ 20,706 | $ 25,408 |
Bad Debt Expense (note 12) | $ 5,824 | $ 6,738 | $ 7,844 |
Interest on Operating Loan (note 13) | $ 2,000 | $ nil | $ nil |
Internet Storage & Accounts Expense (note 14) | $ 2,550 | $ 2,700 | $ 2,865 |
Miscellaneous Expenses (note 15) | $ 2,400 | $ 2,600 | $ 2,800 |
Depreciation Expense - Equipment (note 16) | $ 3,142 | $ 4,392 | $ 6,392 |
Depreciation Expense- Furniture (note 17) | $ 606 | $ 906 | $ 1,306 |
Amortization of Initial Development Costs (note 18) | $ 15,924 | $ 15,924 | $ 15,924 |
Amortization of Future Development Costs (note 19) | $ 24,720 | $ 55,215 | $ 86,575 |
Forecasted Sales in units per year | = | 7,882 units | 9,907 units | 11,602 units |
Forecasted Sales above Break-even | = | 1,727 units | 1,984 units | 2,321 units |
J&B is forecasting sales of 1,727 units above its break-even point in year one, 1,984 units above break-even in year two and 2,321 units above break-even in year three. |
In the above example, notice that J&B calculates its break-even point and provides an indication of how many units it plans to sell above its break-even point. To do this, J&B simply subtracts each years' forecasted break-even point from the number units it plans to sell in each forecasted year.
Also notice, J&B provides readers with all figures needed to calculate the break-even point. You may elect to use this format or you may decide to only provide the break-even calculations. Whichever format you decide, be sure your break-even point is calculated over a three year period - one column for each forecasted year. You may also decide to provide the reader with an explanation on why your forecasted break-even point is increasing or decreasing. For example, J&B's break-even point is increasing due to the company's planned decrease in its selling price, its estimated increase in variable costs, and its planned increase in fixed costs. As a result, the company is earning a lower contribution margin on each sale made during year two and three. Thus less "money" is contributing to their higher fixed costs.
This concludes our discussion on how your projected break-even analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the break-even analysis before attempting to forecast your own. To learn more about this financial analysis, please refer to the section entitled " The Break-even Analysis ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .
5. SENSITIVITY ANALYSIS
A sensitivity analysis shows the effects on Net Income when forecasted sales are increased or decreased by various percentages. Since your forecasted sales will NEVER be one hundred percent accurate, the sensitivity analysis shows investors how your net income will change if your original sales forecast increases by 30%, 20% and 15% or if your original sales forecast decreases and a 15% or 20 %, for example. The percentages chosen for your sensitivity analysis is up to you, however, avoid percentages of 14% or lower.
Many entrepreneurs develop only one sensitivity analysis ( for their first year operation). Others develop three sensitivity analysis; one for each forecasted year of operation. Whichever format you plan to use is not important, what is important, however, is that you include this analysis in your business plan. It shows the investor that you understand; 1) the forecasting process and 2)that your original sales forecasts generally do NOT materialize as envisioned.
Like Break-even Analysis, the Sensitivity Analysis uses your forecasted income statement as its starting point. The analysis relies on distinguishing between Forecasted Fixed Costs and Forecasted Variable Costs. Recall, Forecasted Fixed Costs are costs and expenses that do not fluctuate with sales increases or decreases. Forecasted Variable Costs are costs and expenses that do fluctuate with sales increases or decreases.
Below provides an example of J&B's sensitivity analysis for its first forecasted year of operations. Notice, J&B has chosen a sales percentage increase of 15% of its original sales forecast and a sales percentage decrease of 20% of its original sales forecast.
| | | |
Sales in Units (note 1) | 6,306 units | 7,882 units | 9,064 units |
Weighted Average Selling Price (note 1) | $73.89 | $73.89 | $73.89 |
Cost of Goods Sold (note 2) | $104,153 | $130,191 | $149,720 |
: | |||
Advertising Expense | $130,000 | $130,000 | $130,000 |
Wages & Employee Benefits | $122,366 | $122,366 | $122,366 |
Casual Labor | $ 2,400 | $ 2,400 | $ 2,400 |
Office Supplies | $ 1,500 | $ 1,500 | $ 1,500 |
Rent Expense | $ 12,000 | $ 12,000 | $ 12,000 |
Telephone/Fax Expense | $ 3,600 | $ 3,600 | $ 3,600 |
Professional Services | $ 7,000 | $ 7,000 | $ 7,000 |
Insurance Expenses | $ 1,500 | $ 1,500 | $ 1,500 |
Toll-free above Variable | $ 15,685 | $ 15,685 | $ 15,685 |
Bad Debt Expense (note 12) | $ 5,824 | $ 5,824 | $ 5,824 |
Interest on Operating Loan | $ 2,000 | $ 2,000 | $ 2,000 |
Internet Storage & Accounts | $ 2,550 | $ 2,550 | $ 2,550 |
Miscellaneous Expenses | $ 2,400 | $ 2,400 | $ 2,400 |
Depreciation Exp. - Equipment | $ 3,142 | $ 3,142 | $ 3,142 |
Depreciation Exp.- Furniture | $ 606 | $ 606 | $ 606 |
Amortization of Initial R&D Costs | $ 15,924 | $ 15,924 | $ 15,924 |
Amortization of Future R&D Costs | $ 24,720 | $ 24,720 | $ 24,720 |
Net Income Before Taxes | $ 8,579 | $ 98,992 | $166,801 |
Less: Estimated Tax Rate (30%) | $ 2,574 | $ 29,698 | $ 50,040 |
* All Operating Expenses are considered Fixed Costs. ** The only Variable Cost is J&B's Cost of Goods Sold. *** Figures are rounded. |
Notice, J&B's forecasted Operating Expenses are considered to be Fixed Costs (they do not fluctuate with sales increases or decreases. Also, the company's Variable Costs, in this example, include only the Cost of Goods Sold (COGS will always fluctuate with sales increases or decreases and therefore will always be considered variable). The only other item, in the above example, that fluctuates with sales is Sales itself! In other words, if you increase the original forecasted sales by a certain percentage, then sales will have to increase by that amount (in units sold and in dollars). Alternatively if you decrease the original sales forecast by any amount, then SALES in units sold and in dollar will certainly change by that amount or percentage.
This concludes our discussion on how your projected sensitivity analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the sensitivity analysis before attempting to forecast your own. To learn more about this financial analysis, please refer to the section entitled " The Sensitivity Analysis ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .
6. RATIO ANALYSIS
The next analysis appearing in the financial plan should be your Forecasted Ratio Analysis. In a nutshell, Ratio Analysis is a general technique for analyzing the performance of an existing or potential business.
Ratios involve dividing numbers from the Balance Sheet and Income Statement to create percentages and decimals. When aspiring entrepreneurs and existing business owners apply for a loan, for example, bankers usually look at their forecasted ratios and compare them to ratios of other businesses operating within the same industry.
Your projected ratios should be calculated over a three year forecasted period. Many business plan writers calculate the ratios and provide a narrative discussion, depicting how each has changed over the three year forecasted period. Others calculate the ratios and provide a footnote stating "a complete analysis regarding the forecasted ratios is available upon request. Yet other business plan writers feel the need to calculate various ratios and compare them to ratios of other businesses within the industry. The later approach can be time consuming and may not be "cost effective". Below provides an example of J&B's forecasted Ratio Calculations.
Current Assets Current Liabilities | = | $67,894 $36,359 | $67578 $39051 | $98410 $43649 |
Current Assets -Current Liabilities Current Liabilities | = | $31,535 $36,359 | $28,526 $39,051 | $54,761 $43,649 |
Total Debt Total Assets | = | $36,359 $185,753 | $39,051 $237,477 | $43,649 $293,553 |
: | ||||
Total Debt Total Equity | = | $ 36,359 $149,394 | $ 39,051 $198,426 | $ 43,649 $249,904 |
: | ||||
Net Income after tax Sales | = | $ 69,294 $582,401 | $ 74,032 $673,775 | $81,478 $78,441 |
: | ||||
Net Income after tax Total Equity | = | $ 69,294 $149,394 | $ 74,032 $198,426 | $ 81,478 $249,904 |
NOTE: Complete analysis on above ratios is available upon request . |
Notice the information provided in the above example. The name of each ratio, the formula required in calculating each ratio, the dollar amounts for each formula item, and the ratio calculation for each of the forecasted years. It is important to stress that these dollar amounts have been taking from J&B's forecasted Balance Sheet and Forecasted Income Statement. Therefore, the forecasted balance sheet and income statement must be complete before ratios can be calculated.
Also notice that J&B decided to calculate the ratios without providing any narrative discussion. Moreover, the company states that a "complete analysis is available upon request". If you want to impress the investor, it might in your best interest to provide the ratio analysis (narrative discussion) in your business plan. To do this, simply calculate each ratio for the three year forecasted period and then briefly discuss the variables attributing to change in ratio value.
This concludes our discussion on how your projected ratio analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the ratio analysis before attempting to forecast your own. To learn more about how to read or determine the meaning behind ratios, please refer to the section entitled " Ratio Analysis ". This section will also provide you with other ratio formulas which you may decide to include in your analysis.
This concludes PART B of the financial plan entitled "Forecasted Financial Statements".The purpose of this section was not to show you how to develop forecasted financial statements, rather the purpose was to show you how the statements generally appear in the Financial Plan.
To learn the theory behind each financial statement, please refer to the section entitled " Learning and Understanding Financial Statements ". To learn how to forecast your own financial statements, please refer to the section entitled " Forecasting your Own Financial Statements ".
In summary, be sure your forecasted financial statements and analysis provide for a three year forecasted period and include the following;
Forecasted Income Statements | all on one page |
Forecasted Balance Sheets | all on one page |
Forecasted Cash Flow Statements | one page for each cash flow statement |
Break-even Analysis | Calculations on one page, analysis is unlimited |
Sensitivity Analysis | One page for each sensitivity, analysis is unlimited |
Ratio Analysis | on one to three pages depending upon your format |
Please Note: as mentioned earlier, you will save yourself time and money if you develop the above financial items using a spreadsheet program.
PART C - NOTES TO THE FINANCIAL STATEMENTS
The third and final part of the financial section of the Business Plan is known as the notes to the forecasted financial statements. Notes to the Forecasted Financial Statements summarize the "activities" and "assumptions" made when creating the forecasted financial statements.. The Notes will give the readers (bankers, investors, and other readers) the necessary information needed to understand and comprehend your forecasts and projections. It also alleviates any guessing or questioning a reader may have when analyzing the financial section of the business plan. NOTE: never, ever, ever, create the notes to the forecasted financial statements until you have" fully completed" all forecasted statements and analysis.
There is no set structure nor specific guideline that dictate which topics should be included in the notes to the financial statements. Rather it is left up to the individual to decide which items warrant a "note" and which items are self explanatory. The following list provides some suggestions you may use when creating your notes section.
Sales Forecast note to the financial statements |
Gross Margin note to the financial statements |
Management and Staff note to the financial statements |
Office or Store Supplies note to the financial statements |
Bad Debt Expense Rate note to the financial statements |
Marketing Expenses Breakdown note to the financial statements |
Income Tax Rate notes to the financial statements |
Income Tax Payable note to the financial statements |
Net Income note to the financial statements |
Accounts Receivable note to the financial statements |
Personal Assets Invested by the Owner note to financial statements |
Fixed Asset Purchases note to the financial statements |
Total Fixed Assets Available note to the financial statements |
Deprecation Rates on Fixed Assets note to the financial statements |
Inventory note to the financial statements |
Accounts Payable note to the financial statements |
Short-term Loans note to the financial statements |
Long-term Debt (mortgage) note to the financial statements |
Sales Tax note to the financial statements |
Owner (s)Capital Account note to the financial statements |
Retained Earnings note to the financial statements |
Dividend Distribution note to the financial statements |
Your notes should provide details on each of the required three year forecasted periods. Below provides a link to J&B's Notes to the Forecasted Financial Statements. BUT FIRST - recall from above, the word "note" and a "number" followed several account items on J&B's forecasted income statement, balance sheet and cash flow statement, etc. For instance, on the company's income statement, an account called revenue from sales is present. Following the revenue from sales account is a "note 1". This refers to the first note under the Notes to the Forecasted Financial Statements. When investors read J&B's income statement and see note 1 beside the account item entitled "Total Revenue From Sales", they can quickly refer to the Notes section for information on how the entrepreneur arrived at these dollars amounts. As a result, the investor better understands the financial statements and the assumptions used when creating them. . Try is yourself - print off all J&B's financial statements and refer to the Notes below. You'll find your understanding of the financial statements as well as the company's initiatives is much better. Remember, when investors understand your financial projections, it reduces their risk, and in many cases, it increases your chances of receiving financing.
Link to: J&B Incorporated's Notes to their Forecasted Financial Statements
For additional information on this topic, please refer to the section entitled " Notes to the Financial Statements ".
CONCLUSION OF THE FINANCIAL PLAN
This concludes our discussion on the Financial Plan section of a business plan. Remember the Financial Plan generally consists of three parts:
The Introduction |
The Forecasted Financial Statements |
The Notes to the Forecasted Financial Statements |
Below provides examples of how your Financial Plan should appear in its entirety. (Please note, the financial statements and analysis for two of the examples below; namely The Internet Company and Scholarship Information Services provide forecasts for a two year period. Your financial statements and analysis, however, generally provide projections for at least a three year period.
EXAMPLES OF THE FINANCIAL PLAN SECTION OF A BUSINESS PLAN J&B Incorporated Scholarship Information Services The Internet Company
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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.
Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .
Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders
Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.
Download Financial Plan Template
Word | PDF | Smartsheet
This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.
Download Startup Financial Projections Template
Excel | Smartsheet
Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.
Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.
Download Pro Forma Income Statement Sample - Excel
Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.
Download Small Business Profit and Loss Template - Excel
Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.
Download 3-Year Income Statement Template
For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”
Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.
Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.
Download Simple Cash Flow Template
Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.
Download 12-Month Cash Flow Forecast
Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.
Download 3-Year Cash Flow Statement Template
For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”
Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.
Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.
Download Pro Forma Balance Sheet Template
Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.
Download Monthly/Quarterly Balance Sheet Template - Excel
Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.
Download Yearly Balance Sheet Template - Excel
For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”
Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.
Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month.
Download Basic Sales Forecast Sample Template
Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.
Download 12-Month Sales Forecasting Template for Multiple Products
Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.
Download 3-Year Sales Forecast Template - Excel
For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”
A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.
Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.
Download Break-Even Analysis Template
For additional resources, visit, “ Free Financial Planning Templates .”
These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.
Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.
Download Startup Budget Template
This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.
Download Small Business Budget Template
Established organizations will appreciate this customizable business budget template, which contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts.
Download Professional Business Budget Template
For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”
In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.
This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.
Download Startup Funding Requirements Template - Excel
Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure.
Download Personnel Plan Template - Excel
Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan.
Below, you’ll find a quick overview of the components of a solid financial plan.
Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan here .
Visit this free non-profit business plan template roundup or download a fill-in-the-blank business plan template to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to Microsoft Excel , Microsoft Word , and Adobe PDF business plan templates. Read our articles offering startup business plan templates or free 30-60-90-day business plan templates to find more tailored options.
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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.
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:
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:
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:
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:
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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Financial projections: how to write the financial plan in business plan.
So, you’ve decided to write a business plan? Good for you! It’s an important document that will help you outline your business goals, strategies, and tactics.
But it’s not just a document for you, as the business owner in charge of everything – it’s also important for potential investors and lenders.
In particular, one of the most important sections of your business plan should be your financial plan or, in other words, your overall financial projections for the next few years – understand, three to five years – distilled in a specific and highly codified format.
Why? Because the financial projections in a business plan are the numbers’ version of your pitch – if something doesn’t add-up, that’s where you see it.
Now, we know that numbers can be impressive (not to say daunting), so in this post, we’ll explain to you how to write a financial plan in your business plan.
We’ll also explain the logic you are supposed to follow to do things right (because financiers expect you to follow a very specific logic).
And we’ll explain what your business plan absolutely needs to include from a financial standpoint.
If that makes sense to you, then let’s get going!
Before we dig into the financial projections’ discussion, let us give you a tiny bit of background!
We are professional business coaches, and our job is to push entrepreneurs and business owners to their next steps.
Business planning and business plans are part of that, obviously, therefore we have written a series of free articles on how to write a business plan – of which this page is a part.
We are on a mission to make entrepreneurship fun and accessible, so we provide about 80 percent of our content for free – including a free business plan template to be downloaded down this page.
Still, in case that’s not sufficient, we’ve also created our Business Plan Builder Module , which has been designed to make your life super easy.
Shameless plug: it gives you access to:
There’s simply no way to make things easier!
Now, having said that, let’s get going.
To start the discussion, remember that a business plan is about much more than just numbers. As we’ve explained in our article What are Business Plans For? , the role of such a document is to show that beyond a nice business plan pdf nobody really cares about, you have a real business and a plan to get it somewhere.
First, a business plan’s purpose is to help you explain what your project is about. In that sense, the document you need to write should be written as a storytelling instrument, designed, and formulated to tell people a story they will want to read AND remember.
Second, it should give you a way to showcase your main business objectives for the next few years, as well as the strategy you will put into place to get there and deliver on your promises.
Third, your business plan should also provide a market analysis, and a description of your main target segment. That gives the reader a better understanding of your ecosystem’s potential, but more importantly the exercise forces you to look around, open your eyes and do some meaningful research.
You wouldn’t want to drive blindfolded, would you?
Of course, your document should also have a financial component – which is the topic of this article – and there the challenge is to ensure that your financial projections make sense, that they are clear, accurate and easy to follow.
Long things short, investors and bankers expect you to match a very specific business plan outline and format (there’s a code!) and you don’t have much wiggle room there – so be careful in your approach!
Now, let’s get into the core of this article: financial plans and financial projections. What are they, why are they important – there is a lot to explore.
First things first, what is a financial plan? How important is it in a business plan? And what type of elements is it made of? What are the projected financial statements you need to provide? Oh, and what do we mean by ‘financial projections’ in the first place, by the way?
A financial plan is the financial part of your business plan. Its purpose is simple: explain to the reader what should be the ins and outs of your project from a financial perspective, and help them see if their own business projections are aligned with yours.
On the one hand, the idea is to put numbers on your project, to make it tangible and show that your vision includes the end and the means.
On the other, it is also to show that you are capable of defending your big idea as well as the projected financials that need to come with it – something that many wannabe entrepreneurs are actually unable to do…
As a side note, and as silly as that might sound, this means that your business plan should include a lot more than just a financial plan and a smart cash flow projection!
That point brings us back to the one we made earlier when we said that a business plan should follow a specific structure (go read that article!), but we mention it again because we want things to be very clear: your business plan should be a matter of storytelling, not just a matter of financial projections!
Typically, we often see accountants work on business plans, and what they produce is rarely enough because they only deliver financial estimates that make no real sense to non-accountants (even less to the entrepreneurs at stake) and leave aside the rest of the topics – particularly the storytelling!
Said differently? The numbers are one aspect of the story, but you still have to come up with the pitch – which is where the rest of the business plan comes in handy.
Make sure to deliver an easy-to-read mix!
To get into the technical part of the discussion, the financial plan in your business plan should include your financial projections, organized in a very formal format.
That makes two distinct points to consider!
On the one hand, you should be able to show with clear numbers what money should come in and when (that’s the income forecasts), for this year but also for the next, the ones after that for three to five years.
On the other, you should also be able to show what money needs to go out to make the business roll. What are the production costs, the fixed and variable expenses, the salaries, and of course the various marketing expenses needed to generate the development you are planning on getting to.
On that point, remember that your cost of client acquisition should also be part of the formalized projections – otherwise your numbers will be flawed (and doomed).
Ultimately, you need to be very clear as to when your new business (or existing business) should break even, as to when should profits be expected, as to when lenders and investors will get their money back, so forth and so on.
From a very formal perspective, you shouldn’t be trying to make one single projection sheet. Nope! Your readers will expect to see three important financial documents in the financial section of the business plan you will introduce to them.
First, the P&L table or income statement should show what money is expected to come in or go out, but it should also show if and when the business will make a profit or a loss, year by year, for the next five years.
The sales forecast and the operating expenses should be easy to understand at that stage, and you should also be able to provide your estimated gross profit, your gross margin, as well as your net profit and net margin.
In case you are wondering, your gross profit corresponds to your sales minus your cost of production. Your net profit corresponds to the gross profit minus all the remaining costs.
It’s okay to read that twice…
Not being profitable is also okay, by the way. That’s the game. However, you must be able to explain why you won’t be profitable in a given year, and how you plan on filling the gap in the bank – otherwise your business dies, right?
Second, the cashflow statement should explain your cash flow management strategy and indicate when you will need to fill the bank account in, and why.
For instance, important account receivables could justify a temporary cashflow need, but the gaps left from the previous years should also be visible. Obviously, the funding needs should also be there and aligned with the financial situation of the business.
Third, the balance sheet is a summary of the previous two tables, except that it shows the various elements in terms of assets or liabilities. For instance, the account receivables we mentioned just before would be an asset (because some money is owed to the business) while account payables would be a liability (since the business owes money to someone else).
Does all this sound a little complex?
That’s because it is.
No need to worry, though. We have you covered and will provide all the templates and tools you need further below. For now, just keep reading.
To conclude, the financial plan in business plan should act as a financial cartography of what you have in mind for that business of yours.
Getting your financial business plan right is a lot simpler than it seems.
Now, when you’re pitching that business of yours to potential partners, investors or lenders, you’ll need to provide them with a series of financial statements.
Yet, how to produce those documents without jumping into a living nightmare? How to come up with cash flow projections that make sense instead of being purely random?
The question is not only fair, but it is also super-duper common and literally blocks tons of entrepreneurs and small business owners on a daily basis.
Because financial planning for businesses is typically complex.
Because most people aren’t comfortable with numbers.
And because the vast majority of small business owners simply don’t know where to start.
That’s probably why you were looking for either a financial plan pdf template or an example of financial plan for small business owners a few minutes ago, isn’t it?
Typically, here is what happens.
Some try and do their best, but then they don’t feel confident with pitching and defending their financial analysis, so they keep delaying and nothing happens.
Others end up having recourse to external help, even though external business plan consultants usually aren’t a good idea at that stage.
And the rest gives up.
That’s a shame, especially if consider that financial planning for a small business and building a financial plan for a business plan are only a matter of having access to the right method and tools!
Yes, a big (big) part of the work is to guestimate, but the rest is about trusting the process with the right logic, method and tools – and there’s nothing you can’t manage here.
Especially with the right tools!
Now that you understand the different sections of a financial plan, let us talk about how to build financial forecasting.
In plain English, this part of the exercise is where you’ll estimate your company’s income and expenses for the next few years. Therefore, you should keep a few things in mind.
One, you need to have a good understanding of your business in order to create realistic forecasts.
Sounds silly? Maybe, but this is a mistake people make way too much, and when they fail at justifying their financial projections, everything else goes down.
Two, you absolutely want to make sure that your projections can explore various trends, i.e. your pessimistic, optimistic, and most likely scenarios.
Can you see the idea?
Be sure to also factor in any potential changes or risks that could affect your business.
For example, if you’re expecting a new competitor to enter the market, you’ll need to account for that in your projections. By being realistic and accounting for as many variables as possible, you’ll give yourself the best chance of success so give it some thought!
It’s all a question of common sense, really.
Right, that’s a long list. But! Answering those questions should give you a strong basis to build financial projections that make sense, because that’s literally how you would read your income statement in the end.
If you were trying to translate boring numbers into a meaningful story, that’s exactly where you would start!
Again, we have you covered with all this.
If you are looking for a concrete and practical financial plan example, make sure to download our business plan template down the page. It will give you the basic pro forma financials you’ll need.
If you need to understand the logic behind the template and would rather use an automated spreadsheet to get everything done, however, then it’s time to stop struggling.
The Impactified Business Plan Builder will provide everything you need: the automated tables and two hours of business coaching videos designed to explain all the logic you’ll need – what are you waiting for?
So, overall, why is creating financial projections so important? Are there various types of financial projections anyway? There are several things to keep in mind here.
First, your financial projections are important because they give bankers and investors the numbers they need (to make an informed decision) in a format they expect to see.
Second, your projections show whether your strategy is aligned with the means at your disposal to achieve it and whether you are aware of the financial engineering required to make your business roll.
Third, and in a related way, forecasts will give you, as the entrepreneur in charge, an opportunity to show if you understand the business for real (or if someone else not present during the discussion wrote the plan for you).
All of these documents are important, but you (nobody else!) will need to be able to tell a story around them.
Investors aren’t just looking for numbers! They invest in teams and people before investing in projects, so they want to know that you understand your business and that you have a plan for the future!
So, make sure your financial projections are accurate and be prepared to answer any questions investors have about them.
To understand how to handle the exercise properly, understanding the investment and funding process in general is important.
What do bankers and investors expect when they are looking at a business plan? How do they decide whether to invest or not? And how do the financial projections help them make that decision?
In short, investors are looking for a return on their investment. So, they want to know what they can expect to earn from their investment, and how that compares to the risks they’re taking.
Your projected income statement is important there, but so are your cashflow projections!
Your financial estimates should therefore show how your business will grow and what profits you’ll generate, both in the short-term and long-term. This information will help investors determine whether or not your business is a good investment.
In contrast, bankers have a much lower risk tolerance and are not interested in funding you – they lend money to those who have money to repay the debt (or some assets to engage as collateral in case something goes wrong). Hence, what they look for is not a high return on investment based on risk, but a repayment capacity based on predictability and wise financial management.
Said differently? You need to create financial projections that make sense and adapt your financial pitch to your audience accordingly.
Show investors that there is a great opportunity to make money at a later stage and show bankers you will be able to start repaying as soon as possible.
Again, if you need to explore the question of investors’ mindsets, we elaborate on that in our video module – it’s time to give it a try!
Last but not least, understanding the investment process means that you also need to start thinking in terms of valuation and exit.
Or, said differently, the financial plan in your business plan must lead you to think about what your business will be worth a few years from now, and about how you will be able to make money (for you and your investment partners) by selling it.
On the one hand, exit thinking relates to the idea that investors invest in a business with the expectation that the business will raise more money later on, at which stage a larger investor will come in and buy the existing investors out.
To make your investors some money, therefore, you have to start thinking in terms of exiting the business at some point – which means progressively turning the business into an asset that works on its own, for you and as much as possible without you.
This mindset is absolutely key – think about it!
On the other hand, the discussion leads us to think in terms of business valuation – understand, how much is the business worth, and how much could it be sold for.
That topic is probably getting too technical for this article’s discussion, so we’ll explore it in another post.
Meanwhile, make sure to listen to the exit & valuation video in The Business Plan Builder module . We explain all this and even go as far as giving you an automated valuation calculator in the financial tables part of the tool – again, you have no excuse!
To finish with the discussion, what should you keep in mind if you wanted to turn your financial plan into an asset that generates money rather than frustration?
Like it or not, but small business financial planning isn’t an intuitive thing and people tend to make very typical mistakes you should avoid at all costs!
First piece of advice, you really (really, really) want to know your business from every angle.
When you are writing the financial plan in your business plan, it’s important to remember that your projections should represent an estimate of future performance. That’s how investors and lenders will read your numbers anyway.
So, your financial projections and forecasts should be based on realistic assumptions and calculations that you should always be prepared to adjust as needed.
In order to make accurate projections, it is therefore extremely important to have a good understanding of your business and the industry it operates in. You should also consult with industry experts and other professionals who can help you make informed decisions about your business.
When you’re writing your financial plan, it’s important to avoid making common mistakes. One of the most common errors is underestimating how much money your business will need to operate.
Another is to rely on business plan consultants to write your financial projections without being able to understand the numbers yourself. This can lead to mistakes if the numbers are incorrect, and it can lead to embarrassing ahem! moments if you can’t explain how this or that number ended up in the document.
The best way to ensure accuracy is to do the exercise yourself with the right tools in hand and the brainstorming support of someone you trust to challenge your thoughts and conclusions.
This can be done with your acting CFO or close financial advisor if you have one, or with a fellow entrepreneur if anyone around you has the right mindset to dig into the discussion with you.
Alternatively, hiring a business coach is another way to brainstorm and challenge yourself – follow the link to find out more about that.
Third piece of advice: don’t enter into a discussion with a potential partner as a tourist – this is stupid, and that could very well kill you.
We have seen countless entrepreneurs walk into a room (let alone into a large startup event) saying that they were raising money for their startup. Yet, more often than not, their financial targets are not set or beyond approximative, which means they can’t explain why they need money and how they are going to spend it.
When you do that, the only thing you do is be stupid and make sure everyone knows about it.
First, because they won’t take you seriously. Would you invest money into someone who can’t tell you how they’ll use it and with what return on investment expectations?
And second, because the people you talk to will most likely ask you to come back to them once you have more information to provide. Which either means “don’t come back before six months to a year” or “please don’t come back at all, I have better things to do with my time and more competent people to talk to”.
Don’t be a tourist or you’ll just burn yourself. That’s stupid.
The fourth piece of advice is going to be a repeat from earlier, but it’s important so let’s be redundant.
Now that you’ve written your financial projections, it’s time to go beyond the numbers and start telling your business story. The financial plan in your business plan is a great place to start but remember that it’s just one part of your overall pitch.
You’ll also need to be ready to pitch your idea, product, or service, and be ready to defend your financial plan against questions from investors or lenders.
Think holistically and build a story people will want to listen to, remember and act on. Period!
Now that you understand the different components of a financial plan, it’s time to learn how to write it. The key to writing a good financial plan is to be realistic. Don’t make assumptions that are unrealistic or impossible to achieve.
Start by estimating your sales and expenses for the first year of business. Be as specific as possible, and remember to include both fixed and variable costs. From there, you can create a cash flow statement that shows how your business will generate and spend money over time.
The goal of a financial plan is to paint a realistic picture of your business’s financial future. So make sure to update your plan as your business changes and grows. With careful planning and accurate numbers, you can ensure that your business will be successful for years to come.
It’s built around over 2 hours of explanatory videos and comes with everything you’ll need to:
If you want to stop wasting your time, this is THE most simple business plan template, and you can’t afford to miss it!
Wanna’ start with something free? Our free business plan template is also here to help !
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Hey coach! I’m writing a business plan and I’m wondering how to build the financial projections part of the document. What’s the importance of financial projections exactly – I mean, isn’t it absolute BS? How do I write the financial plan in business plan, and even more importantly, how can I make sense of all those messy tables? Can you help me understand this? Thanks in advance!
Hey there Coach! I’m a small business owner and I need to find some support with my business plan. People suggested that I find a business plan consultant near me, but that’s a big cost and I’m not too sure about what to expect from that. What’s your opinion about business plan consultants in general? Is there any alternative you would highly recommend? Thanks!
Hey coach! I was wondering – how much does a business plan cost? I need one, and I’m thinking about having it written for me, so I’d love your insights. Also, I’ve heard business plan writers cost a lot of money, so I’m interested if you have tips for writing a low-cost business plan! Thanks!
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Improve your chances of growth by covering these bases in your plan.
Many small businesses lack a full financial plan, even though evidence shows that it is essential to the long-term success and growth of any business.
For example, a study in the New England Journal of Entrepreneurship found that entrepreneurs with a business plan are more successful than those without one. If you’re not sure how to get started, read on to learn the six key elements of a successful small business financial plan.
A business financial plan is an overview of a business’s financial situation and a forward-looking projection for growth. A business financial plan typically has six parts: sales forecasting, expense outlay, a statement of financial position, a cash flow projection, a break-even analysis and an operations plan.
A good financial plan helps you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you budget for daily and monthly expenses and plan for taxes each year.
Importantly, a financial plan helps you focus on the long-term growth of your business. That way, you don’t get so caught up in the day-to-day activities that you lose sight of your goals. Focusing on the long-term vision helps you prioritize your financial resources.
1. sales forecasting.
You should have an estimate of your sales revenue for every month, quarter and year. Identifying any patterns in your sales cycles helps you better understand your business, and this knowledge is invaluable as you plan marketing initiatives and growth strategies .
For instance, a seasonal business can aim to improve sales in the off-season to eventually become a year-round venture. Another business might become better prepared by understanding how upticks and downturns in business relate to factors such as the weather or the economy.
Sales forecasting is also the foundation for setting company growth goals. For instance, you could aim to improve your sales by 10 percent over each previous period.
A full expense plan includes regular expenses, expected future expenses and associated expenses. Regular expenses are the current ongoing costs of your business, including operational costs such as rent, utilities and payroll.
Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing, and the office holiday party. It’s a good idea to distinguish essential expenses from expenses that can be reduced or eliminated if needed.
Expected future expenses are known future costs, such as tax rate increases, minimum wage increases or maintenance needs. Generally, a part of the budget should also be allocated to unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters. Planning for future expenses ensures your business is financially prepared via budget reduction, increases in sales or financial assistance.
Associated expenses are the estimated costs of various initiatives, such as acquiring and training new hires, opening a new store or expanding delivery to a new territory. An accurate estimate of associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities.
As with expected future expenses, understanding how much capital is required to accomplish various growth goals helps you make the right decision about financing options.
Assets and liabilities are the foundation of your business’s balance sheet and the primary determinants of your business’s net worth. Tracking both allows you to maximize your business’s potential value.
Small businesses frequently undervalue their assets (such as machinery, property or inventory) and fail to properly account for outstanding bills. Your balance sheet offers a more complete view of your business’s health than a profit-and-loss statement or a cash flow report.
A profit-and-loss statement shows how the business performed over a specific time period, while a balance sheet shows the financial position of the business on any given day.
You should be able to predict your cash flow on a monthly, quarterly and annual basis. Projecting cash flow for the full year allows you to get ahead of any financial struggles or challenges.
It can also help you identify a cash flow problem before it hurts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after invoicing you expect payment .
A cash flow projection gives you a clear look at how much money is expected to be left at the end of each month so you can plan a possible expansion or other investments. It also helps you budget, such as by spending less one month for the anticipated cash needs of another month.
A break-even analysis evaluates fixed costs relative to the profit earned by each additional unit you produce and sell. This analysis is essential to understanding your business’s revenue and potential costs versus profits of expansion or growth of your output.
Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful. A break-even analysis is also the best way to determine your pricing.
In addition, a break-even analysis can tell you how many units you need to sell at various prices to cover your costs. You should aim to set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive.
To run your business as efficiently as possible, craft a detailed overview of your operational needs. Understanding what roles are required for you to operate your business at various volumes of output, how much output or work each employee can handle, and the costs of each stage of your supply chain will aid you in making informed decisions for your business’s growth and efficiency.
It’s important to tightly control expenses, such as payroll or supply chain costs, relative to growth. An operations plan can also make it easier to determine if there is room to optimize your operations or supply chain via automation, new technology or superior supply chain vendors.
For this reason, it is imperative for a business owner to conduct due diligence and become knowledgeable about merchant services before acquiring an account. Once the owner signs a contract, it cannot be changed, unless the business owner breaks the contract and acquires a new account with a new merchant services provider.
Business owners should create a financial plan annually to ensure they have a clear and accurate picture of their business’s finances and a realistic view for future growth or expansion. A financial plan helps the business’s leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead.
A business financial plan is essential if a business owner is looking to sell their business, attract investors or enter a partnership with another business. Here are some tips for writing a business financial plan.
It’s a good idea to compare the previous year’s plan against actual performance and finances to see how accurate the previous plan and forecast were. That way, you can address any discrepancies or overlooked elements in next year’s plan.
A business owner or other individual charged with creating the business financial plan should collaborate with the finance department, human resources department, sales team , operations leader, and those in charge of machinery, vehicles or other significant business tools.
Each division should provide the necessary data about projections, value and expenses. All of these elements come together to create a comprehensive financial picture of the business.
The Small Business Administration (SBA) and SCORE, the SBA’s nonprofit partner, are two excellent resources for learning about financial plans. Both can teach you the elements of a comprehensive plan and how best to work with the different departments in your business to collect the necessary information. Many websites, including business.com , and service providers, such as Intuit, offer advice on this matter.
If you have questions or encounter challenges while creating your business financial plan, seek advice from your accountant or other small business owners in your network. Your city or state has a small business office that you can contact for help.
Many business organizations offer free information that small business owners can use to create their financial plan. For example, the SBA’s Learning Platform offers a course on how to create a business plan. It also offers worksheets and templates to help you get started. You can seek additional help and more personalized service from your local office.
SCORE is the largest volunteer network of business mentors. It began as a group of retired executives (SCORE stands for “Service Corps of Retired Executives”) but has expanded to include business owners and executives from many industries. Advice is free and available online, and there are SBA district offices in every U.S. state. In addition to participating in group or at-home learning, you can be paired with a mentor for individualized help.
SCORE offers templates and tips for creating a small business financial plan. SCORE is an excellent resource because it addresses different levels of experience and offers individualized help.
Other templates can be found in Microsoft Office’s template library, QuickBooks’ online resources, Shopify’s blog and other places. You can also ask your accountant for guidance, since many accountants provide financial planning services in addition to their usual tax services.
Diana Wertz contributed to the writing and research in this article.
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Basics of a business plan financials section.
A good business plan is an entrepreneur’s best friend. It’s an indispensable document, and every section matters, from the executive summary to the market analysis to the appendix; however, no section matters as much as the financials section. You’re in business to make money, after all, and your business plan has to clearly, numerically reflect a lucrative business pursuit, preferably with visuals, especially if you want funding.
The financials section of your business plan tells you and your potential investors, loan providers or partners whether your business idea makes economic sense. Without an impressive financials section, you’re looking at an uphill battle when it comes to scoring capital; underwhelming financials may indicate a need to make some revisions to your approach.
Basic Financials
So, how to build an impressive financials section? As with all things in small business, there’s no one-size-fits-all approach; it varies by business and field. But there are some general guidelines that can give you a clear idea of where to start and what kind of data you’ll need to gather.
You need to include at least three documents in the financials section of your business plan:
1. Income statement: Are you profitable?
2. Cash flow statement: How much cash do you have on hand?
3. Balance sheet: What’s your net worth?
There’s other financial information you can — and often should — add to your business plan, like sales forecasts and personnel plans. But the income statement, cash flow projections and balance sheet are the ones you can’t leave out.
Here's a brief run-down of the three major data sets.
Income Statement
Also called a profit/loss statement, here’s where your reader can see if your business is profitable. If you’re not operating the business yet, this will be a projected income statement, based on a well-informed analysis of your business’s first year.
The income statement is broken down by month and shows revenue (sales), expenses (costs of operating) and the resulting profit or loss for one fiscal year. (Revenue - expenses = profit/loss.)
Cash Flow Statements
Here’s where your reader can see how much money you’re going to need in the first year of operations. If you’re not yet up and running, you’ll only have projections.
For cash flow projections, you’ll predict the cash money that will flow into and out of your business in a particular month. You’ll need a year’s worth of monthly projections. If you’re already operating, also include cash flow statements for past months showing actual numbers.
Cash flow statements have three basic components: cash revenues, cash disbursements and reconciliation of revenues to disbursements. For each month, you start with your previous month’s balance, add revenues and subtract disbursements. The final balance becomes the opening balance for the following month.
Balance Sheet
Here’s where your reader sees your business’s net worth. It breaks down into monthly balance sheets and a final net worth at the end of the fiscal year. There are three parts to a balance sheet:
• Accounts receivable
• Inventory, equipment
• Real estate
2. Liabilities
• Accounts payable
• Loan debts
3. Equity: Total assets minus total liabilities (Assets = liabilities + equity.)
It’s good to offer readers an analysis of the three basic financial statements — how they fit together and what they mean for the future of your business. It doesn’t have to be in depth; focus is good. Just interpret the data from each statement, putting it in context and indicating what the reader should take away from the financials section of your business plan.
Other Financial Documents
These are the basics of your financials, but you’ll need to fill out the section with other data based on the specifics of your business and your capital needs. Other financial information you might provide includes:
• Sales forecast: Estimates of future sales volumes
• Personnel plan: Who you plan to recruit/hire and how much it will cost
• Breakeven analysis: Projected point at which your sales will match your expenses
• Financial history: Summary of your business finances from the start of operations to the present time
Make It Easy
A lot of this can be made easier with business planning software, which can not only guide you through the process and make sure you don’t leave anything else but may also generate graphs, charts and other visuals to accompany the data in your financials section. Those types of visuals are highly recommended because some readers will skim. Anything you can do to convey information in a glance imparts a benefit.
Revisit Monthly
Once in operation, don’t forget to go back into your financials every month to update your projections with actual numbers and then adjust any future projections accordingly. Regular updates will tell you if you’re on track with your predictions and hitting your goals, as well as whether you need to make adjustments. Don’t forget this part — when you’re starting out, planning really is your best friend.
Any successful endeavor begins with a robust plan – and running a prosperous business is no exception. Careful strategic planning acts as the bedrock on which companies build their future. One of the most critical aspects of this strategic planning is the creation of a detailed business financial plan. This plan serves as a guide, helping businesses navigate their way through the complex world of finance, including revenue projection, cost estimation, and capital expenditure, to name just a few elements. However, understanding what a business financial plan entails and how to implement it effectively can often be challenging. With multiple components to consider and various economic factors at play, the financial planning process may appear daunting to both new and established business owners.
This is where we come in. In this comprehensive article, we delve into the specifics of a business financial plan. We discuss its importance, the essential elements that make it up, and the steps to craft one successfully. Furthermore, we provide a practical example of a business financial plan in action, drawing upon real-world-like scenarios and strategies. By presenting the best practices and demonstrating how to employ them, we aim to equip business owners and entrepreneurs with the tools they need to create a robust, realistic, and efficient business financial plan. This in-depth guide will help you understand not only how to plan your business finances but also how to use this plan as a roadmap, leading your business towards growth, profitability, and overall financial success. Whether you're a seasoned business owner aiming to refine your financial strategies or an aspiring entrepreneur at the beginning of your journey, this article is designed to guide you through the intricacies of business financial planning and shed light on the strategies that can help your business thrive.
At its core, a business financial plan is a strategic blueprint that sets forth how a company will manage and navigate its financial operations, guiding the organization towards its defined fiscal objectives. It encompasses several critical aspects of a business's financial management, such as revenue projection, cost estimation, capital expenditure, cash flow management, and investment strategies.
Revenue projection is an estimate of the revenue a business expects to generate within a specific period. It's often based on market research, historical data, and educated assumptions about future market trends. Cost estimation, on the other hand, involves outlining the expenses a business anticipates incurring in its operations. Together, revenue projection and cost estimation can give a clear picture of a company's expected profitability. Capital expenditure refers to the funds a company allocates towards the purchase or maintenance of long-term assets like machinery, buildings, and equipment. Understanding capital expenditure is vital as it can significantly impact a business's operational capacity and future profitability. The cash flow management aspect of a business financial plan involves monitoring, analyzing, and optimizing the company's cash inflows and outflows. A healthy cash flow ensures that a business can meet its short-term obligations, invest in its growth, and provide a buffer for future uncertainties. Lastly, a company's investment strategies are crucial for its growth and sustainability. They might include strategies for raising capital, such as issuing shares or securing loans, or strategies for investing surplus cash, like purchasing assets or investing in market securities.
A well-developed business financial plan, therefore, doesn't just portray the company's current financial status; it also serves as a roadmap for the business's fiscal operations, enabling it to navigate towards its financial goals. The plan acts as a guide, providing insights that help business owners make informed decisions, whether they're about day-to-day operations or long-term strategic choices. In a nutshell, a business financial plan is a key tool in managing a company's financial resources effectively and strategically. It allows businesses to plan for growth, prepare for uncertainties, and strive for financial sustainability and success.
A comprehensive financial plan contains several crucial elements, including:
Developing a business financial plan requires careful analysis and planning. Here are the steps involved:
The initial stage in crafting a robust business financial plan involves the establishment of clear, measurable financial goals. These objectives serve as your business's financial targets and compass, guiding your company's financial strategy. These goals can be short-term, such as improving quarterly sales or reducing monthly overhead costs, or they can be long-term, such as expanding the business to a new location within five years or doubling the annual revenue within three years. The goals might include specific targets such as increasing revenue by a particular percentage, reducing costs by a specific amount, or achieving a certain profit margin. Setting clear goals provides a target to aim for and allows you to measure your progress over time.
The cornerstone of any business financial plan is a robust sales forecast. This element of the plan involves predicting the sales your business will make over a given period. This estimate should be based on comprehensive market research, historical sales data, an understanding of industry trends, and the impact of any marketing or promotional activities. Consider the business's growth rate, the overall market size, and seasonal fluctuations in demand. Remember, your sales forecast directly influences the rest of your financial plan, particularly your budgets for expenses and cash flow, so it's critical to make it as accurate and realistic as possible.
The next step involves preparing a comprehensive expense budget that covers all the costs your business is likely to incur. This includes fixed costs, such as rent or mortgage payments, salaries, insurance, and other overheads that remain relatively constant regardless of your business's level of output. It also includes variable costs, such as raw materials, inventory, marketing and advertising expenses, and other costs that fluctuate in direct proportion to the level of goods or services you produce. By understanding your expense budget, you can determine how much revenue your business needs to generate to cover costs and become profitable.
One of the most crucial elements of your financial plan is the cash flow statement. This document records all the cash that enters and leaves your business, presenting a clear picture of your company's liquidity. Regularly updating your cash flow statement allows you to monitor the cash in hand and foresee any potential shortfalls. It helps you understand when cash comes into your business from sales and when cash goes out of your business due to expenses, giving you insights into your financial peaks and troughs and enabling you to manage your cash resources more effectively.
Another vital part of your business financial plan includes the preparation of income statements and balance sheets. An income statement, also known as a Profit & Loss (P&L) statement, provides an overview of your business's profitability over a certain period. It subtracts the total expenses from total revenue to calculate net income, providing valuable insights into the profitability of your operations.
On the other hand, the balance sheet provides a snapshot of your company's financial health at a specific point in time. It lists your company's assets (what the company owns), liabilities (what the company owes), and equity (the owner's or shareholders' investment in the business). These documents help you understand where your business stands financially, whether it's making a profit, and how your assets, liabilities, and equity balance out.
It's important to remember that a financial plan is not a static document, but rather a living, evolving roadmap that should adapt to your business's changing circumstances and market conditions. As such, regular reviews and updates are crucial. By continually revisiting and revising your plan, you can ensure it remains accurate, relevant, and effective. You can adjust your forecasts as needed, respond to changes in the business environment, and stay on track towards achieving your financial goals. By doing so, you're not only keeping your business financially healthy but also setting the stage for sustained growth and success.
Now, let's look at a practical example of a financial plan for a hypothetical business, Joe’s Coffee Shop.
When constructing his sales forecast, Joe takes into account several significant factors. He reviews his historical sales data, identifies and understands current market trends, and evaluates the impact of any upcoming promotional events. With his coffee shop located in a bustling area, Joe expects to sell approximately 200 cups of coffee daily. Each cup is priced at $5, which gives him a daily sales prediction of $1000. Multiplying this figure by 365 (days in a year), his forecast for Year 1 is an annual revenue of $365,000. This projection provides Joe with a financial target to aim for and serves as a foundation for his further financial planning. It is worth noting that Joe's sales forecast may need adjustments throughout the year based on actual performance and changes in the market or business environment.
To run his coffee shop smoothly, Joe has identified several fixed and variable costs he'll need to budget for. His fixed costs, which are costs that will not change regardless of his coffee shop's sales volume, include rent, which is $2000 per month, salaries for his employees, which total $8000 per month, and utilities like electricity and water, which add up to about $500 per month.
In addition to these fixed costs, Joe also has variable costs to consider. These are costs that fluctuate depending on his sales volume and include the price of coffee beans, milk, sugar, and pastries, which he sells alongside his coffee. After a careful review of all these expenses, Joe estimates that his total annual expenses will be around $145,000. This comprehensive expense budget provides a clearer picture of how much Joe needs to earn in sales to cover his costs and achieve profitability.
With a clear understanding of his expected sales revenue and expenses, Joe can now proceed to develop a cash flow statement. This statement provides a comprehensive overview of all the cash inflows and outflows within his business. When Joe opened his coffee shop, he invested an initial capital of $50,000. He expects that the monthly cash inflows from sales will be about $30,417 (which is his annual revenue of $365,000 divided by 12), and his monthly cash outflows for expenses will amount to approximately $12,083 (his total annual expenses of $145,000 divided by 12). The cash flow statement gives Joe insights into his business's liquidity. It helps him track when and where his cash is coming from and where it is going. This understanding can assist him in managing his cash resources effectively and ensure he has sufficient cash to meet his business's operational needs and financial obligations.
With the figures from his sales forecast, expense budget, and cash flow statement, Joe can prepare his income statement and balance sheet. The income statement, or Profit & Loss (P&L) statement, reveals the profitability of Joe's coffee shop. It calculates the net profit by subtracting the total expenses from total sales revenue. In Joe's case, this means his net profit for Year 1 is expected to be $220,000 ($365,000 in revenue minus $145,000 in expenses).
The balance sheet, on the other hand, provides a snapshot of the coffee shop's financial position at a specific point in time. It includes Joe's initial capital investment of $50,000, his assets like coffee machines, furniture, and inventory, and his liabilities, which might include any loans he took to start the business and accounts payable.
The income statement and balance sheet not only reflect the financial health of Joe's coffee shop but also serve as essential tools for making informed business decisions and strategies. By continually monitoring and updating these statements, Joe can keep his finger on the pulse of his business's financial performance and make necessary adjustments to ensure sustained profitability and growth.
While crafting a business financial plan, consider the following best practices:
The importance of a meticulously prepared business financial plan cannot be overstated. It forms the backbone of any successful business, steering it towards a secure financial future. Creating a solid financial plan requires a blend of careful analysis, precise forecasting, clear and measurable goal setting, prudent budgeting, and efficient cash flow management. The process may seem overwhelming at first, especially for budding entrepreneurs. However, it's crucial to understand that financial planning is not an event, but rather an ongoing process. This process involves constant monitoring, evaluation, and continuous updating of the financial plan as the business grows and market conditions change.
The strategies and best practices outlined in this article offer an invaluable framework for any entrepreneur or business owner embarking on the journey of creating a financial plan. It provides insights into essential elements such as setting clear financial goals, creating a sales forecast, preparing an expense budget, developing a cash flow statement, and preparing income statements and balance sheets. Moreover, the example of Joe and his coffee shop gives a practical, real-world illustration of how these elements come together to form a coherent and effective financial plan. This example demonstrates how a robust financial plan can help manage resources more efficiently, make better-informed decisions, and ultimately lead to financial success.
Remember, every grand journey begins with a single step. In the realm of business, this step is creating a well-crafted, comprehensive, and realistic business financial plan. By following the guidelines and practices suggested in this article, you are laying the foundation for financial stability, profitability, and long-term success for your business. Start your journey today, and let the road to financial success unfold.
larry-alton
A new business means freedom like you’ve never experienced. It could also mean wealth untold, but only if you’re smart with your finances. Too many businesses shut down prematurely because their finances were out of order, but yours doesn’t have to be that way.
There are a few financial considerations to make at the start of a new business. After you’ve secured initial financing, keep the financial aspect of your business a priority.
Here are some considerations that will help you thrive.
1. Keep a Line of Credit
You’ll likely need access to funds other than your initial investment to keep your business going. Taking out a line of revolving credit helps many businesses stay afloat.
“Revolving credit is a unique form of credit that is much different than a traditional loan,” explains Jason Smith of Small Business Loans. “With revolving credit, a lender will extend you a set credit limit. This limit will be determined by a range of things, but will ultimately depend on what the lender thinks you are capable of borrowing. Once a limit is set, you can borrow from the limit when you need to. If you don’t end up using any of the limit, then you won’t end up paying any of it back – nor will you have to pay any interest on it.”
Credit cards and business lines of credit are the two most common forms of revolving credit, each with its own pros and cons. Having a line of credit available is vital to bridging gaps when cash is tight.
2. Minimize Overhead
Everything you spend in a business eats your profits. Prioritize purchases to minimize costs.
“Make a list of all the items you’ll need to purchase or lease to get a true sense of your start-up and operating costs,” suggests John Gin , a financial advisor and contributor for Nola.com. “Will you need big ticket items such as business or office space, manufacturing and computer equipment? What about smaller purchases like office supplies and software? It’s beneficial to have a detailed list of your needs when making a plan and figuring out your costs.”
Additionally, factor in labor costs, utilities, property-related expenses, and other costs of running a business. Look for ways to minimize spending so that you can maximize your profits.
3. Track and Monitor Spending
“Most startups fail for a variety of reasons, but one is far more common than others—running out of money,” says Jonathan Long , founder of Market Domination Media. “You need to know where every single dollar is coming from and where every single dollar is going. If you don’t stay on top of your cash flow, you are going to put your business in a very dangerous position.”
Consider hiring a full-time employee to manage your expenses. You might also invest in quality software like QuickBooks to handle accounts and send money to the right places. It will not only prevent a serious cash disruption, but will also help make tax season easier.
4. Invest Appropriately
Spending money is the best way to make money in business, but only if you’re smart with your investments.
“Thinking about investing also means you have to think about your priorities,” says Nazlin Amirudin of the online publication Entrepreneur Insight. “What does your startup really need as opposed to what you want it to have? For example, you can cut back on the expenses of renting an office at a popular area by starting off working at co-working spaces instead…Remember, this is just the beginning. There are many more things you will have to invest in in the future.”
Plan accordingly.
5. Maintain Cash Reserves
It won’t take long for your initial savings to dry up. You can rely on lines of credit and loans, but it’s often better to have liquid assets.
“Having a savings plan in place can help your business avoid paying interest when making major purchases, provide a financial cushion during economic downturns or enable you to expand your business when the time is right,” says Craig Sievertson , SVP, Small Business & Consumer Loan Manager at Banner Bank. “…No matter what your business goals are, having a solid financial cushion in place can help increase the long-term stability of the company.”
Each of these financial considerations requires careful planning and sharp monitoring. Money can work for or against you, so make it a priority as you manage your cash fl
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Course: financial literacy > unit 4.
Goal | Amount | Time Frame | Type |
---|---|---|---|
Emergency fund | | months | Short term |
Certification course | | years | Medium term |
Down payment for a house | | years | Long term |
Component | Amount | Next Steps | Tool |
---|---|---|---|
Budget | Earn: from his full-time job + from freelancing jobs = Spend: Save: for emergency fund + for certification course = for down payment = | Review and update monthly, adjust for changes in income or expenses, set aside money for irregular or unexpected costs | Mint |
Savings Plan | Save: for emergency fund; for certification course; for down payment | Complete emergency fund in months, increase savings amount for certification course and down payment, research and compare savings and investment products and services | Nerd Wallet |
Debt Repayment Plan | Pay: for credit card debt | Increase payment once emergency fund and certification course are done, pay more than the minimum whenever possible | Bankrate |
Investment Plan | Invest: in a retirement plan | Monitor and readjust, if needed | Robo-advisor |
Reviewed by subject matter experts.
Updated on September 02, 2023
Table of contents, financial plan overview.
A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.
For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ensure sustainable growth.
The strength of a financial plan lies in its ability to offer a clear roadmap for businesses.
Especially for small businesses that may not have a vast reserve of resources, prioritizing financial goals and understanding where every dollar goes can be the difference between growth and stagnation.
It lends clarity, ensures informed decision-making, and sets the stage for profitability and success.
Role of financial planning in business success.
Financial planning is the backbone of any successful business endeavor. It serves as a compass, guiding businesses toward profitability, stability, and growth.
With proper financial planning, businesses can anticipate potential cash shortfalls, make informed investment decisions, and ensure they have the capital needed to seize new opportunities.
For small businesses, in particular, tight financial planning can mean the difference between thriving and shuttering. Given the limited resources, it's vital to maximize every dollar and anticipate financial challenges.
Through diligent planning, small businesses can position themselves competitively, adapt to market changes, and drive consistent growth.
Every financial plan comprises several core components that, together, provide a holistic view of a business's financial health and direction. These include setting clear objectives, estimating costs , preparing financial statements , and considering sources of financing.
Each component plays a pivotal role in ensuring a thorough and actionable financial strategy .
For small businesses, these components often need a more granular approach. Given the scale of operations, even minor financial missteps can have significant repercussions.
As such, it's essential to tailor each component, ensuring they address specific challenges and opportunities that small businesses face, from initial startup costs to revenue forecasting and budgetary constraints.
Identifying business's short-term and long-term financial goals.
Every business venture starts with a vision. Translating this vision into actionable financial goals is the essence of effective planning.
Short-term goals could range from securing initial funding and achieving a set monthly revenue to covering startup costs. These targets, usually spanning a year or less, set the immediate direction for the business.
On the other hand, long-term financial goals delve into the broader horizon. They might encompass aspirations like expanding to new locations, diversifying product lines, or achieving a specific market share within a decade.
By segmenting goals into short-term and long-term, businesses can craft a step-by-step strategy, making the larger vision more attainable and manageable.
Profitability and cash flow, while closely linked, are distinct concepts in the financial realm. Profitability pertains to the ability of a business to generate a surplus after deducting all expenses.
It's a metric of success and indicates the viability of a business model . Simply put, it answers whether a business is making more than it spends.
In contrast, cash flow represents the inflow and outflow of cash within a business. A company might be profitable on paper yet struggle with cash flow if, for instance, clients delay payments or unexpected expenses arise.
For small businesses, maintaining positive cash flow is paramount. It ensures that they can cover operational costs, pay employees, and reinvest in growth, even if they're awaiting payments or navigating financial hiccups.
Fixed vs variable costs.
When embarking on a new business venture, understanding costs is paramount. Fixed costs remain consistent regardless of production levels. They include expenses like rent, salaries, and insurance . These are predictable outlays that don't fluctuate with business performance.
Variable costs , conversely, change in direct proportion to production or business activity. Think of costs associated with materials for manufacturing or commission for sales .
For a startup, delineating between fixed and variable costs aids in crafting a more dynamic budget, allowing for adaptability as the business scales and evolves.
Startups often grapple with numerous upfront costs. From purchasing equipment and setting up a workspace to initial marketing campaigns, these one-time expenditures lay the foundation for business operations.
They differ from ongoing expenses like utility bills, raw materials, or employee wages that recur monthly or annually.
For a small business owner, distinguishing between these costs is critical. One-time expenditures often demand a larger chunk of initial capital, while ongoing expenses shape the monthly and annual budget.
By categorizing them separately, businesses can strategize funding needs more effectively, ensuring they're equipped to meet both immediate and recurrent financial obligations.
Personal savings.
This is often the most straightforward way to fund a startup. Entrepreneurs tap into their personal savings accounts to jumpstart their business.
While this method has the benefit of not incurring debt or diluting company ownership, it intertwines the individual's personal financial security with the business's fate.
The entrepreneur must be prepared for potential losses, and there's the evident psychological strain of putting one's hard-earned money on the line.
Loans can be sourced from various institutions, from traditional banks to credit unions . They offer a substantial sum of money that can be paid back over time, usually with interest .
The main advantage of taking a loan is that the entrepreneur retains full ownership and control of the business.
However, there's the obligation of monthly repayments, which can strain a business's cash flow, especially in its early days. Additionally, securing a loan often requires collateral and a sound credit history.
Investors, including angel investors and venture capitalists , offer capital in exchange for equity or a stake in the company.
Angel investors are typically high-net-worth individuals who provide funding in the initial stages, while venture capitalists come in when there's proven business potential, often injecting larger sums. The advantage is substantial funding without the immediate pressure of repayments.
However, in exchange for their investment, they often seek a say in business decisions, which might mean compromising on some aspects of the original business vision.
Grants are essentially 'free money' often provided by government programs, non-profit organizations, or corporations to promote innovation and support businesses in specific sectors.
The primary advantage of grants is that they don't need to be repaid, nor do they dilute company ownership. However, they can be highly competitive and might come with stipulations on how the funds should be used.
Moreover, the application process can be lengthy and requires showcasing the business's potential or alignment with the specific goals or missions of the granting institution.
Income statement (profit & loss).
An Income Statement , often termed as the Profit & Loss statement , showcases a business's financial performance over a specific time frame. It details revenues , expenses, and ultimately, profits or losses.
By analyzing this statement, business owners can pinpoint revenue drivers, identify exorbitant costs, and understand the net result of their operations.
For small businesses, this document is instrumental in making informed decisions. For instance, if a certain product line is consistently unprofitable, it might be prudent to discontinue it. Conversely, if another segment is thriving, it might warrant further investment.
The Income Statement, thus, serves as a financial mirror, reflecting the outcomes of business strategies and decisions.
The Balance Sheet offers a snapshot of a company's assets , liabilities , and equity at a specific point in time.
Assets include everything the business owns, from physical items like equipment to intangible assets like patents .
Liabilities, on the other hand, encompass what the company owes, be it bank loans or unpaid bills.
Equity represents the owner's stake in the business, calculated as assets minus liabilities.
This statement is crucial for small businesses as it offers insights into their financial health. A robust asset base, minimal liabilities, and growing equity signify a thriving enterprise.
In contrast, mounting liabilities or dwindling assets could be red flags, signaling the need for intervention and strategy recalibration.
While the Income Statement reveals profitability, the Cash Flow Statement tracks the actual movement of money.
It categorizes cash flows into operating (day-to-day business), investing (buying/selling assets), and financing (loans or equity transactions) activities. This statement unveils the liquidity of a business, indicating whether it has sufficient cash to meet immediate obligations.
For small businesses, maintaining positive cash flow is often more vital than showcasing profitability.
After all, a business might be profitable on paper yet struggle if clients delay payments or unforeseen expenses emerge.
By regularly reviewing the Cash Flow Statement, small business owners can anticipate cash crunches and strategize accordingly, ensuring seamless operations irrespective of revenue cycles.
Importance of budgeting for a small business.
Budgeting is the financial blueprint for any business, detailing anticipated revenues and expenses for a forthcoming period. It's a proactive approach, enabling businesses to allocate resources efficiently, plan for investments, and prepare for potential financial challenges.
For small businesses, a meticulous budget is often the linchpin of stability, ensuring they operate within their means and avoid financial pitfalls.
Having a well-defined budget also fosters discipline. It curtails frivolous spending, emphasizes cost-efficiency, and sets clear financial boundaries.
For small businesses, where every dollar counts, a stringent budget is the gateway to financial prudence, ensuring that funds are utilized judiciously, fostering growth, and minimizing wastage.
Bulk purchasing.
When businesses buy supplies in large quantities, they often benefit from discounts due to economies of scale . This can significantly reduce per-unit costs.
However, while bulk purchasing leads to immediate savings, businesses must ensure they have adequate storage and that the products won't expire or become obsolete before they're used.
Regularly reviewing and renegotiating contracts with suppliers or service providers can lead to better terms and lower costs. This might involve exploring volume discounts, longer payment terms, or even bartering services.
Building strong relationships with vendors often paves the way for such negotiations.
Simple changes, like switching to LED lighting or investing in energy-efficient appliances, can lead to long-term savings in utility bills. Moreover, energy conservation not only reduces costs but also minimizes the environmental footprint, which can enhance the business's reputation.
Modern software and technology can streamline business processes. Automation tools can handle repetitive tasks, reducing labor costs.
Meanwhile, data analytics tools can provide insights into customer preferences and behavior, ensuring that marketing budgets are used effectively and target the right audience.
Regularly reviewing and refining business processes can eliminate redundancies and improve efficiency. This might mean merging roles, cutting down on unnecessary meetings, or simplifying supply chains. A leaner operation often translates to reduced expenses.
Instead of maintaining an in-house team for every function, businesses can outsource tasks that aren't central to their operations.
For instance, functions like accounting , IT support, or digital marketing can be outsourced to specialized agencies, often leading to cost savings and access to expert skills.
Encouraging employees to adopt a cost-conscious mindset can lead to collective savings. This can be fostered through incentives, regular training, or even simple practices like recycling and reusing office supplies.
When everyone in the organization is attuned to the importance of cost savings, the cumulative effect can be substantial.
Techniques for predicting future sales in a small business, past sales data analysis.
Historical sales data is a foundational element in any forecasting effort. By reviewing previous sales figures, businesses can identify patterns, understand seasonal fluctuations, and recognize the effects of past initiatives.
This information offers a baseline upon which to build future projections, accounting for known recurring variables in the business cycle .
Understanding the larger market dynamics is crucial for accurate forecasting. This involves tracking industry trends, monitoring shifts in consumer behavior, and being aware of potential market disruptions.
For instance, a sudden technological advancement can change consumer preferences or regulatory changes might impact an industry.
For small businesses, localized insights can be especially impactful. Observing local competitors, understanding regional consumer preferences, or noting shifts in the local economy can offer precise data points.
These granular details, when integrated into a larger forecasting model, can enhance prediction accuracy.
Direct feedback from customers is an invaluable source of insights. Surveys, focus groups, or even informal chats can reveal customer sentiments, preferences, and potential future purchasing behavior.
For instance, if a majority of loyal customers express interest in a new product or service, it can be indicative of future sales potential.
This technique involves analyzing a series of data points (like monthly sales) by creating averages from different subsets of the full data set.
For yearly forecasting, a 12-month moving average can be used to smooth out short-term fluctuations and highlight longer-term trends or cycles.
Regression analysis is a statistical tool used to identify relationships between variables. In sales forecasting, it can help understand how different factors (like marketing spend, seasonal variations, or competitor actions) relate to sales figures.
Once these relationships are understood, businesses can predict future sales based on planned actions or expected external events.
The cash cycle encompasses the time it takes for a business to convert resource investments, often in the form of inventory, back into cash.
This involves the processes of purchasing inventory, selling it, and subsequently collecting payment. A shorter cycle implies quicker cash turnarounds, which are vital for liquidity.
For small businesses, a firm grasp of the cash cycle can aid in managing cash flow more effectively.
By identifying bottlenecks or delays, businesses can strategize to expedite processes. This might involve renegotiating payment terms with suppliers, offering discounts for prompt customer payments, or optimizing inventory levels to prevent overstocking.
Ultimately, understanding and optimizing the cash cycle ensures that a business remains liquid and agile.
Seasonality affects many businesses, from the ice cream vendor witnessing summer surges to the retailer bracing for holiday shopping frenzies.
By analyzing historical data and market trends, businesses can prepare for these cyclical shifts, ensuring they stock up, staff appropriately, and market effectively.
Small businesses, often operating on tighter margins , need to be especially vigilant. Beyond seasonality, they must also brace for unexpected changes – a local construction project obstructing store access, a sudden competitor emergence, or unforeseen regulatory changes.
Building a financial buffer, diversifying product or service lines, and maintaining flexible operational strategies can equip small businesses to weather these unforeseen challenges with resilience.
Role of debt and equity financing.
When businesses seek external funding, they often grapple with the debt vs. equity conundrum. Debt financing involves borrowing money, typically via loans. While it doesn't dilute ownership, it necessitates regular interest payments, potentially impacting cash flow.
Equity financing, on the other hand, entails selling a stake in the business to investors. It might not demand regular repayments, but it dilutes ownership and might influence business decisions.
Small businesses must weigh these options carefully. While loans offer a structured repayment plan and retained control, they might strain finances if the business hits a rough patch.
Equity financing, although relinquishing some control, might bring aboard strategic partners, offering expertise and networks in addition to funds.
The optimal choice hinges on the business's financial health, growth aspirations, and the founder's comfort with sharing control.
A staple in the lending arena, term loans offer businesses a fixed amount of capital that is paid back over a specified period with interest. They're often used for significant one-time expenses, such as purchasing machinery, real estate , or even business expansion.
With predictable monthly payments, businesses can plan their budgets accordingly. However, they might require collateral and a robust credit history for approval.
Unlike term loans that provide funds in a lump sum, a line of credit grants businesses access to a pool of funds up to a certain limit.
Businesses can draw from this line as needed, only paying interest on the amount they use. This makes it a versatile tool, especially for managing cash flow fluctuations or unexpected expenses. It serves as a financial safety net, ready for use whenever required.
As the name suggests, microloans are smaller loans designed to cater to businesses that might not need substantial amounts of capital. They're particularly beneficial for startups, businesses with limited credit histories, or those in need of a quick, small financial boost.
Since they are of a smaller denomination, the approval process might be more lenient than traditional loans.
A contemporary twist to the traditional lending model, peer-to-peer (P2P) platforms connect borrowers directly with individual lenders or investor groups.
This direct model often translates to quicker approvals and competitive interest rates as the overheads of traditional banking structures are removed. With technology at its core, P2P lending can offer a more user-friendly, streamlined process.
However, creditworthiness still plays a pivotal role in determining interest rates and loan amounts.
In an increasingly digital age, crowdfunding platforms like Kickstarter or Indiegogo have emerged as viable financing avenues.
These platforms enable businesses to raise small amounts from a large number of people, often in exchange for product discounts, early access, or other perks. This not only secures funds but also validates the business idea and fosters a community of supporters.
Other alternatives include invoice financing, where businesses get an advance on pending invoices, or merchant cash advances tailored for businesses with significant credit card sales.
Each financing mode offers unique advantages and constraints. Small businesses must meticulously evaluate their financial landscape, growth trajectories, and risk appetite to harness the most suitable option.
Basic tax obligations for small businesses.
Navigating the maze of taxation can be daunting, especially for small businesses. Yet, understanding and fulfilling tax obligations is crucial.
Depending on the business structure—whether sole proprietorship , partnership , LLC , or corporation—different tax rules apply. For instance, while corporations are taxed on their earnings, sole proprietors report business income and expenses on their personal tax returns.
In addition to income taxes, small businesses may also be responsible for employment taxes if they have employees. This covers Social Security , Medicare , federal unemployment, and sometimes state-specific taxes.
There might also be sales taxes, property taxes, or special state-specific levies to consider.
Consistently maintaining accurate financial records, being aware of filing deadlines, and setting aside funds for tax obligations are essential practices to avoid penalties and ensure compliance.
Tax planning is the strategic approach to minimizing tax liability through the best use of available allowances, deductions, exclusions, and breaks.
For small businesses, effective tax planning can lead to significant savings.
This might involve strategies like deferring income to a later tax year, choosing the optimal time to purchase equipment, or taking advantage of specific credits available to businesses in certain sectors or regions.
Several potential deductions can reduce taxable income for small businesses. These include expenses like rent, utilities, business travel, employee wages, and even certain meals.
By keeping abreast of tax law changes and actively seeking out eligible deductions, small businesses can optimize their financial landscape, ensuring they're not paying more in taxes than necessary.
While it's feasible for small business owners to manage their taxes, the intricate nuances of tax laws make it beneficial to consult professionals.
An experienced accountant or tax consultant can not only ensure compliance but can proactively recommend strategies to reduce tax liability.
They can guide businesses on issues like whether to classify someone as an employee or a contractor, how to structure the business for optimal taxation, or when to make certain capital investments.
Beyond just annual tax filing, these professionals offer year-round counsel, helping businesses maintain clean financial records, stay updated on tax law changes, and plan for future financial moves.
The investment in professional advice often pays dividends , saving businesses from costly mistakes, penalties, or missed financial opportunities.
Setting checkpoints and milestones.
Like any strategic blueprint, a financial plan isn't static. It serves as a guiding framework but should be flexible enough to adapt to evolving business realities.
Setting regular checkpoints— quarterly , half-yearly, or annually—can help businesses assess whether they're on track to meet their financial objectives.
Milestones, such as reaching a specific sales target, launching a new product, or expanding into a new market, offer tangible markers of progress. Celebrating these victories can bolster morale, while any shortfalls can serve as lessons, prompting strategy tweaks. F
or small businesses, where agility is an asset, regularly revisiting the financial plan ensures that the business remains aligned with its overarching financial goals while being responsive to the dynamic marketplace.
Financial ratios offer a distilled snapshot of a business's health. Ratios like the current ratio ( current assets divided by current liabilities ) can shed light on liquidity, indicating whether a business can meet short-term obligations.
The debt-to-equity ratio , contrasting borrowed funds with owner's equity, offers insights into the business's leverage and potential financial risk.
Profit margin , depicting profitability relative to sales, can highlight operational efficiency. By consistently monitoring these and other pertinent ratios, small businesses can glean actionable insights, understanding their financial strengths and areas needing attention.
In a realm where early intervention can stave off major financial setbacks, these ratios serve as vital diagnostic tools, guiding informed decision-making.
In the ever-evolving world of business, flexibility is paramount. If financial reviews indicate that certain strategies aren't yielding anticipated results, it might be time to pivot.
This could involve tweaking product offerings, revising pricing strategies, targeting a different customer segment, or even overhauling the business model.
For small businesses, the ability to pivot can be a lifeline. It allows them to respond swiftly to market changes, customer feedback, or internal challenges.
A robust financial plan, while offering direction, should also be pliable, accommodating shifts in strategy based on real-world performance. After all, in the business arena, adaptability often spells the difference between stagnation and growth.
Financial foresight is integral for the stability and growth of small businesses. Effective revenue and cash flow forecasting, anchored by historical sales data and enhanced by market research, local trends, and customer feedback, ensures businesses are prepared for future demands.
With the unpredictability of the business environment, understanding the cash cycle and preparing for unforeseen challenges is essential.
As businesses contemplate external financing, the decision between debt and equity and the myriad of loan types, should be made judiciously, keeping in mind the business's health, growth aspirations, and risk appetite.
Furthermore, diligent tax planning, with professional guidance, can lead to significant financial benefits. Regular reviews using financial ratios allow businesses to gauge their performance, adapt strategies, and pivot when necessary.
Ultimately, the agility to adapt, guided by a well-structured financial plan, is pivotal for businesses to thrive in a dynamic marketplace.
What is the importance of a financial plan for small businesses.
A financial plan offers a structured roadmap, guiding businesses in making informed decisions, ensuring growth, and navigating financial challenges.
Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.
Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.
Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.
Regular reviews, ideally quarterly or half-yearly, ensure alignment with business goals and allow for strategy adjustments based on real-world performance.
About the Author
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .
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While there are many ways to go about developing a financial plan—do it yourself, use a robo-advisor, work with a financial planner, or a combination thereof—Schwab has identified eight critical components every plan should include, regardless of the method used to create it. So, what does a good financial plan look like?
You can't make a financial plan until you know what you want to accomplish with your money—so whether you're creating it yourself or working with a professional, your plan should start with a list of your goals, both big and small, and the time horizons to accomplish them. Doing so can help to organize each objective by how soon you'll need the money:
For each goal, specify a dollar figure and a target date. "The more specific your goals, the easier it is to measure your progress toward them," said Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.
A host of online tools can help you run the numbers, weigh competing priorities, and determine the best course of action for you. Also, if you have multiple goals to work toward, a robo-advisor, or automated investing platform, can help you weigh the importance of each goal, ranking them by needs, wants, and wishes.
Ideally, you start investing for financial goals early in life, but any time is a good time to check in on your current financial situation and assess how you're doing. Are you still on track? Do you have other goals you hadn't previously considered? Having a financial plan helps you assess where you are today and where you want to go next.
Knowing your net worth today can serve as a baseline for framing your financial goals and setting a target for your net worth at some point in the future, like in retirement. To determine your net worth, make a list of all your assets (bank and investment accounts, real estate, valuable personal property) and another one of all your debt (credit cards, mortgages, or student loans). Your assets minus your liabilities equals your net worth.
"Don't be discouraged if your liabilities outweigh your assets," Rob said. "That's not uncommon when you're just starting out—especially if you have a mortgage and student loans."
Your budget is really where the rubber meets the road, planning-wise. It can help you determine where your money is going each month and where you can cut back to meet your goals.
A budget calculator can help ensure you don't overlook irregular but important expenses, such as car repairs, out-of-pocket health care costs, and real estate taxes. As you're compiling your list, separate your expenses into two buckets: must-have items like groceries and rent, and nice-to-haves like eating out and gym memberships.
When considering how your goals fit into your budget, you may want to pressure-test it using "what if" scenarios: What if you want or need to retire earlier? What if you downsized your mortgage? Some robo-advisors offer tools that allow you to adjust certain assumptions to see how they could affect your savings strategy.
Debt is sometimes treated like a four-letter word, but not all debt is bad debt. A mortgage, for example, can help build equity—and boost your credit score in the bargain. High-interest consumer debt like credit cards, on the other hand, can weigh heavily on your credit score. Plus, every dollar you pay in finance charges and interest is one you can't put toward other goals.
If you have high-interest debt, make sure you create a plan that can help you pay it off as quickly as possible. If you're not sure where to start, a financial advisor can help you prioritize, then determine how much of your budget should go toward your debt each month.
An old guideline says you'll need approximately 80% of your present income in retirement. However, this assumes that retiring will free you from any work-related expenses, that you've paid off your mortgage, that any children will be financially independent, and you'll likely fall into a lower tax bracket.
It's also important to keep in mind that Medicare doesn't cover everything, and health care expenses that Medicare doesn't cover—such as long-term care—can add up quickly. You also might spend more on other things in retirement, like travel, dining out, gifts, or financial support to a relative or friend.
Plugging in different scenarios into a retirement savings calculator can help you figure out what you may need in retirement.
If you're saving 20% – 30% of your pre-retirement income, then the 80% income-replacement rule is a good place to start. Otherwise, it's safer to aim at covering 100% of your pre-retirement income, minus whatever you're saving for retirement . As with any general rule, there are plenty of exceptions. So be sure to sit down and fine-tune your retirement budget as the time draws near. This should be your top priority because you can borrow for most other goals but not for retirement.
When something unexpected happens—say you lose your job or get hit with an unexpected medical bill—an emergency fund can help you avoid tapping your long-term savings to make ends meet.
It's generally a good idea to save enough to cover at least three months'—but ideally six months'—worth of essential living expenses (for example, groceries, housing, transportation, and utilities). Save this money in a checking or savings account so you can access it in a hurry should the need arise.
Insurance is an important part of protecting your financial downside—but try to ensure you're not overpaying for coverage you don't need and make sure to cover all your bases:
At a minimum, most people want a will in place, which states your final wishes with regards to your assets, dependents, and who you want to administer your estate. You should also keep the beneficiaries of your insurance policies and retirement accounts up to date. Also consider establishing powers of attorney for financial and health care decisions, in case you become incapacitated.
For help getting started or tackling more complex estate-planning tasks, consider working with an estate attorney or a qualified financial planner.
5 times in life when financial planning matters most.
Managing finances as a university student can pose a challenge, with the need to account for tuition fees, textbooks, and the cost of living. To avoid financial stress, it is crucial to budget wisely and plan ahead. This article provides budgeting and financial planning tips to help you attain financial stability during your university years.
These tips include creating a practical budget, monitoring your expenses, seeking ways to save money, and exploring opportunities such as part-time work or scholarships to boost your income. By following these techniques, you can minimise financial stress and focus on your studies.
Before you start university, it’s important to create a budget. This will help you manage your expenses and ensure that you have enough money to cover your tuition fees, accommodation, food, textbooks, and other essentials.
To create a budget, you should:
For help with budgeting, check out earlier article about how to create a realistic student budget .
According to recent research, the typical student budget in the United States is $15,000 per year, which covers tuition fees, room and board, transportation, textbooks, and other living expenses. However, it’s important to note that your budget may differ based on the country you’re living in, what part of that country you’re living in, your course of study, and lifestyle.
It is important to carefully consider all of these factors and create a realistic budget that takes into account any potential unforeseen expenses. Additionally, seeking out scholarships, grants, and other forms of financial aid can help alleviate some of the financial burdens.
Financial planning is the process of identifying goals, developing a plan to accomplish those goals, and reviewing your progress. It is a necessary tool for financial stability and success. Here are some financial planning tips for university students:
Here are some budgeting tips specifically for university students:
Managing your finances as a university student can be challenging, but it’s essential to plan and budget wisely to avoid financial stress. By creating a realistic budget, tracking your expenses, setting financial goals, and considering part-time work or scholarships, you can reduce the financial burden and focus on your studies. Remember to live frugally, save money on textbooks, and build an emergency fund for unexpected expenses.
Starting early and investing in your future can achieve financial stability and success. With these budgeting and financial planning tips, you can navigate your finances with confidence and ease during your time at university.
Starting early can also be a way to save some money on accommodation. When you book your student housing early, you can often get better deals for some great student rooms. On Student.com we list properties in over 400 cities across the world, so make sure to check out our student accommodation listings !
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Paying off student loan debt is a significant milestone. It's an accomplishment that frees up hundreds of dollars in monthly budgets for many borrowers.
However much you owe, paying it off quickly may offer peace of mind and the room to pursue other financial goals. Here's what you need to know about how to get out from under your student loan debt fast.
The path to paying down your student loans starts with a budget. Mark Reyes , a certified financial planner with the personal-finance app Albert, recommends the 50/20/30 budget , where 50% of your income goes toward your essentials, 20% to your savings and investing, and 30% to whatever you want.
Begin this process by making a spreadsheet on your computer, using a budgeting app , or trying out a budget worksheet from a student loan company like Sallie Mae.
"Know who you owe and how much you owe," says Rick Castellano , spokesperson at the student loan company Sallie Mae. "It sounds simple, but that's one of the first things that we talk to students about. When it's a federal student loan, that means knowing who your federal student loan servicer is, and that can change from time to time. That'll help you to build the strategy around paying it down faster."
When deciding between prioritizing your federal or private student loans , Reyes recommends the "avalanche method." With the avalanche method, you make minimum payments on all of your debt and then focus any extra money on paying down your highest interest rate debt.
Private loans often come with higher interest rates and with fewer protections, so in many cases it makes sense to pay them off first. For example, the interest-free repayment pause on federal loans during the pandemic provided a good opportunity to pay down private loans — which continued charging interest — more aggressively.
On the other hand, any payments on federal student loans made during the payment applied directly to the balance, potentially reducing the amount of interest you pay over the life of your loan by hundreds or even thousands of dollars.
Reyes says you should make sure you have paid off all of your so-called toxic debt with high interest rates such as credit cards and personal loans before making substantial payments toward your student loans.
"A lot of folks get kind of fixated on just becoming debt-free and don't realize that there's good kinds of debt, and then there's bad," Reyes says. "Making sure that you prioritize paying off your toxic debt first is always a great sign to make sure that you know you're healthy enough to pay off your student loans."
Reyes also suggests building an emergency fund to cover three to six months of your essential expenses. This can help protect your finances if you lose your job, face a large medical bill, or incur other unexpected costs. You'll have a safety net to fall back on instead of having to take on high-interest credit card debt or a personal loan.
You may also consider starting to pay off your student loans while in school, an option some students might not know they have. A recent report from Sallie Mae finds that 56% of families are making student loan payments while in school, which helps save on the overall cost of the loan.
"If you're a current student and you want to start making payments now, you can definitely knock out some of the principal and make small payments to make sure that the interest doesn't accrue," Reyes says. "That way, you're taking actionable steps to lower that debt."
There are many pros to paying down your debt quickly, including the freedom to take your money and put it somewhere else, Castellano says. It may help you accomplish other financial goals and achieve financial independence, he says.
Many of the clients Reyes meets with at Albert talk about feeling like their student loan debt is never going to end, which takes a toll on their mental well-being. Reyes says paying off student loan debt early helps free borrowers of the emotional burden that accompanies it.
"If you can get the win of paying off your student loan debt, it encourages you to realize, 'Oh, what else can I do with my finances? What other financial goals may I be able to achieve?,'" Reyes says. "Maybe I can afford that house. Maybe I can get this car. Maybe I can get my credit score even higher now because I know that I can accomplish this."
Paying off your student loans early frees up cash in your budget that you can then reallocate to other financial goals. You'll also lower your debt-to-income ratio, which you calculate by dividing all your monthly debt payments by your gross monthly income. The lower this ratio, the more likely you are to get approved for a loan and for better terms.
You may be able to start putting extra money toward your retirement savings once you pay off your student loans, setting yourself up for future financial success.
Castellano emphasizes that trying to pay off your student loan debt fast shouldn't come at the expense of ignoring other financial obligations. High interest credit card debt or a car loan may have higher interest rates than your student loan, so trying to pay off your student loan first might cost you more in total interest across all your debt.
Deciding how to manage your student debt depends on interest rates and your goals. High-interest debt might need to take priority. Consider consulting a financial advisor.
If you're looking for student loan forgiveness programs, explore options like Public Service Loan Forgiveness or income-driven repayment plans.
To calculate how long it will take to pay off your loans, student loan calculators can help. Experiment with different payment amounts and interest rates.
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Objectives. The primary objectives of the business plan for Cooper's Cup are below: To increase revenues by $36,000 or 5% in Year 2 and $73,000 or 10% by Year 3. Achieve a profit margin of 5.2% in Year 2 and 6.90% by Year 3. Be the Cafe of Choice in the Phoenix area and the recipient of the Best Coffeehouse Award.
In this section, we'll explore 10 types of business plan examples for student entrepreneurship. 1. Traditional Business Plans. These classic business plans, often prepared on paper, provide a comprehensive overview of the business, detailing its identity, goals, and strategies for success. 2.
Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest ...
Takeaways for business plan examples for students. The opportunities are endless if you want to set up a business as a student. Let your imagination run wild and look through business plan examples for students if you want to start selling or offering something new to your school's community.
Generally, the financial section is one of the last sections in a business plan. It describes a business's historical financial state (if applicable) and future financial projections. Businesses include supporting documents such as budgets and financial statements, as well as funding requests in this section of the plan. The financial part of ...
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.
Financial ratios and metrics. With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While including these metrics in your financial plan for a business plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall ...
The financial section of the business plan can be developed by you or an accountant. At any rate, the structure of the financial section generally includes the following items; A. Introduction to the Financial Plan. B. Forecasted Financial Statements. C. Notes to the Forecasted Financial Statements.
LivePlan's business plan examples help students turn ideas into top-notch business plans for class projects and startups. The tools, features, and instructional content allow you to focus on bringing out the best in your students for every plan and project. Before using LivePlan, my students were intimidated by the business planning process.
This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business. Download Startup Financial Projections Template.
Here are some steps that you can take to create the financial section of a business plan: 1. Create a sales forecast. The first document to create for the financial section is the sales forecast. This is a document that highlights the sales that you might project the business to achieve over the next three years.
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 ...
The financial plan should illustrate the plan you have for the business in terms of numbers. It should include precise financial projections of what you think can be achieved. It should clearly illustrate your cashflow management strategy. And it should summarize the information clearly.
A business financial plan typically has six parts: sales forecasting, expense outlay, a statement of financial position, a cash flow projection, a break-even analysis and an operations plan. A good financial plan helps you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you budget for daily and ...
3. Equity: Total assets minus total liabilities (Assets = liabilities + equity.) Analysis. It's good to offer readers an analysis of the three basic financial statements — how they fit ...
Step 1: Set Clear Financial Goals. The initial stage in crafting a robust business financial plan involves the establishment of clear, measurable financial goals. These objectives serve as your business's financial targets and compass, guiding your company's financial strategy.
Writing a small business financial plan is a four-step process. It begins with creating a strategic plan, which covers the company's goals and what it needs to achieve them. The next step is to create financial projections, which are dependent on anticipating sales and expenses.
Financial plan assumptions are the key variables, estimates, and predictions used to develop a company's financial projections and strategy. They serve as the foundation for forecasting revenues, costs, investments, and taxes, among other elements. Assumptions are critical in financial planning because they help businesses set realistic goals ...
Here are some considerations that will help you thrive. 1. Keep a Line of Credit. You'll likely need access to funds other than your initial investment to keep your business going. Taking out a line of revolving credit helps many businesses stay afloat. "Revolving credit is a unique form of credit that is much different than a traditional ...
A savings plan is a plan that shows how much money you save each month for your short, medium, and long term goals. It helps you prioritize your goals, allocate your income, and build your savings. A debt repayment plan is a plan that shows how much money you pay each month to reduce your debts, such as credit cards, student loans, or car loans.
Financial Plan Overview. A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.. For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ...
1. Setting financial goals. You can't make a financial plan until you know what you want to accomplish with your money—so whether you're creating it yourself or working with a professional, your plan should start with a list of your goals, both big and small, and the time horizons to accomplish them.
Financial planning is the process of identifying goals, developing a plan to accomplish those goals, and reviewing your progress. It is a necessary tool for financial stability and success. Here are some financial planning tips for university students: Start early: The earlier you start planning your finances, the better.
Refinancing debt: Refinancing debt, such as mortgages or student loans, can reduce monthly payments and interest, freeing up funds to invest toward your five-year financial plan. You can shop around for lower interest rates and better terms, as well as consolidate high-interest debt into a single, lower-interest loan, for example.
For example, Rocket Money is an app that helps you create a budget, negotiate your bills, and reduce your spending — and it has a free plan. Some budgeting apps offer credit monitoring services ...
Get strategies to pay off your student loans quickly with a personalized plan. Explore budgeting, refinancing, and extra payment tactics.