How to Write the Financial Section of a Business Plan
The financial section of your business plan is crucial to recruiting investors and lenders
A financial business plan is created by gathering all the components of the business and expressing them in numbers – both revenue and startup expenses. Every business plan needs a cash flow projection. The rest of the plan tells the story of the business and how the company will execute that plan. The cost-volume-profit analysis shows the income or cash flows that occur with different scenarios of key assumptions, like sales or costs. When looking for funding, inflated numbers and inaccurate financial statements are red flags for potential investors or lenders. Being practical and authentic can go a long way during a SWOT analysis, and it can identify assets and liabilities within your business model.
Your business plan should begin with an executive summary, which briefly describes your company, the problem it solves, your target market and financial highlights. The executive summary is where financial costs and planning can be introduced. Once the executive summary is written, you can then focus on the financial section of your business plan. It's important to project profits and revenue streams in large time scales throughout this section. These projections should reflect your annual growth, which should be proportional to other businesses in the market, for competitive analysis.
Tips for writing the financial section of a business plan
Jennifer Spaziano, vice president of business development at Accion, emphasizes the importance of the financial section of your plan. "This section is crucial if you're presenting your plan to potential lenders or investors, but it's also important if you're using it in-house as a roadmap to get started and continue to grow," Spaziano said. She added that while you may have the best idea in the world for a business, it may still need tweaking. However, you won't know until you sit down and work up the numbers. You can find business plan templates on several websites that allow you to fill in your business information and download your complete plan. If you've never written a financial section of a business plan or completed any business planning at all for that matter, here are four tips that Spaziano suggested: Follow generally accepted accounting principles. As a rule, the financial part of your plan should follow these as set by the Federal Accounting Standards Advisory Board, especially if you're putting it together to get a loan or a line of credit. Get fluent in spreadsheets. Spreadsheets are the best and most accepted way to present financial information. Seek outside assistance. Getting advice from your financial planner or accountant can help you put the numbers together and present them properly. If you use an accountant and your financial statements have been audited, state that in the plan. Look up templates. If you want to attempt writing the financial section on your own, there are resources. SCORE, the Service Corps of Retired Executives, as well as many other sites, have templates available.
The necessary financial information
Each business plan section has its own set of required pertinent information, and the financial section is no different. "There are two parts to the financial component of a business plan: historical data and prospective data," according to Spaziano. "If you're a startup, you obviously won't have any previous financial information for the company, so many lenders will want to see your personal financial information in lieu of, or in addition to, your business financials." Historical data includes items like your balance sheet, cash flow statement, tax returns, and capital, while prospective data includes details like a projected income statement that will help lenders and investors understand how you will invest their money.
Speaking of financial details, how much do you need?
Finances are the backbone of a business, so when writing the financial section of your business plan, be thorough. "Make sure that your projections match the numbers you put together for the funding request portion of the plan," Spaziano said. "At best, any inconsistencies here could delay consideration of your application, and at worst, could be a signal that you're not as on top of things as you should be, disqualifying you altogether." Aside from your business information, as noted above, more than likely, you'll be asked about your personal finances. Spaziano suggested making that part of your business plan and including your credit history or a copy of a recent credit card statement or credit score report, along with copies of your tax returns and other financial information a lender may request. Put yourself in the shoes of a potential investor. Think about the information you would want and aspects of the borrower's finances you would want to know before investing in a business.
Your financial business plan is meant to accompany your funding request. "It's where you support the numbers you put together in your sales and marketing plan, and demonstrate why you're a good investment," Spaziano said.
5 key components of a financial plan
A financial business plan is created by gathering all the components of the business and expressing them in numbers – both revenue and startup expenses. Your business is selling a product or service at a specific price point, and the goal is to prove that your business is viable. According to Rob Stephens, founder of CFO Perspective, the financial plan is where you translate ideas into numbers. "You are explaining where you plan on getting cash, what you will spend that cash on to start the company and what the operating cash flows of the company will be in the first few years," Stephens said. "Show how lenders and investors will receive a return on their investment."
Stephens explained the five key components of a financial plan:
Assumptions. Every projection is based on some assumptions. Pick reasonable assumptions. You don't need to spend much time justifying your assumptions unless they are critical to the company's success. Use the assumptions area for economic or tax rates as well as significant numbers like sales that drive other numbers like costs. Key financial indicators and financial ratios. This highlights what you have determined to be the most important information for measuring the performance of the company. This acts almost like an executive summary of the more detailed financial information that follows. Cash flow projection. Every business plan needs a cash flow projection. The rest of the plan tells the story of the business and how the company will execute that plan. The cash flow projection proves whether the plan is going to work. The timing of when to hire staff, make significant purchases and distribute cash to owners can all be modeled to make sure your strategy is feasible. You may find that you need to adjust the timing or amounts of some of your strategies. Not having a projection might cause you to make decisions or promises that you can't fulfill.
Projected income statements and balance sheets. Cash is king, but standard accounting income statements and balance sheets show profitability and aspects of the financial health of the company. Many investors and lenders calculate ratios from the income statement and balance sheet to determine whether to give money to the company. Break-even analysis or cost-volume-profit analysis. Everything presented above is for one scenario of outcomes. Everyone knows that it's a collection of guesses, many of which will not come true. The cost-volume-profit analysis shows the income or cash flows that occur with different scenarios of key assumptions, like sales or costs.
Courtesy: Best tax advisory in Saudi Arabia
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