CHAPTER THIRTEEN – How do you prepare a business plan financial statement? Do you need help developing business plan financial projections? Do you need a business plan projections template? Then i advice you read on because this article is for you.
The financial statement is a distinct section of your business plan because it outlines your financial projections. A business lives and dies based on its financial feasibility and most importantly its profitability. Regardless of how hard you work or how much you have invested of your time and money, people, at the end of the day, only want to support something that can return their investments with profits.
Your executive summary may be brilliantly crafted, and your market or industry analysis may be the bomb. But your business plan isn’t just complete without a financial statement to justify it with good figures on the bottom line.
Your financial statement is what makes or mars your chances of obtaining a bank loan or attracting investors to your business. Even if you don’t need financing from a third party, compiling a financial statement will help you steer your business to success. So, before we dig further into how to prepare a financial statement, you need to understand what a financial statement is not.
What’s the Difference Between a Financial Projection Statement and Accounting Statement?
However, you need to keep in mind that the financial statement is not the same as an accounting statement. Granted, a financial statement includes financial projections such as profit and loss, balance sheets, and cash flow, all of which makes it look similar to an accounting statement.
But the major difference between them is that an accounting statement deals with the past, while the financial projections statement of your business plan outlines your future spending and earnings. Having made this point clear, let’s now look at the steps involved on preparing a financial statement for your business plan.
So what exactly do you have to include in this section? You will need to include three statements:
- Income Statement
- Balance Sheet
- Cash-Flow Statement
Now, let’s briefly discuss each.
Components of a Business Plan Financial Statement
- Income statement
This beautiful composition of numbers tells the reader what exactly your sources of revenue are and which expenses you spent your money on to arrive at the bottom line. Essentially, for a given time period, the income statement states the profit or loss (revenue-expenses) that you made.
- Balance sheet
The key word here is “balance,” but you are probably wondering what exactly needs to be weighed, right? On one side you should list all your assets (what you own) and on the other side, all your liabilities (what you owe), thereby giving a snapshot of your net worth (assets – liabilities = equity).
- Cash flow statement
This statement is similar to your income statement with one important difference; it takes into account just when revenues are actually collected and when expenses are paid.
When the cash you have coming in (collected revenue) is greater than the cash you have going out (disbursements), your cash flow is said to be positive. And when the opposite scenario is true, your cash flow is negative. Ideally, your cash flow statement will allow you to recognize where cash is low, when you might have a surplus, and how to be on top of your game when operating in an uncertain environment.
How to Prepare a Business Plan Financial Projections Statement
Step 1 – Start by preparing a revenue forecast and a forecast profit and loss statement. Also, prepare supporting schedules with detailed information about your projected personnel and marketing costs. If your business has few fixed assets or it’s just a cash business without significant receivables, you don’t need a forecast balance sheet.
Step 2 – Using your planned revenue model, prepare a spreadsheet. Set the key variables in such a way that they can be easily changed as your calculations chain through. To ensure that your projected revenues are realistic and attainable, run your draft through a number of iterations. For each year covered in your business plan, prepare a monthly forecast of revenues and spending.
Step 3 – If you plan to sell any goods, then include a forecast of goods sold. This applies the most to manufacturing businesses. Give a reasonable estimate for this cost. And be of the assumption that the efficiency of your products would increase with time and the cost of goods sold as a percentage of sales will decline.
Step 4 – Quantify your marketing plan. Look at each marketing strategy you outlined in the business plan and attach specific costs to each of them. That is, if you are looking at billboard advertising, TV advertising, and online marketing methods such as pay-per-click advertising and so on; then you should estimate the cost of each medium and have it documented.
Step 5 – Forecast the cost of running the business, including general and administrative costs. Also, forecast the cost of utilities, rents, and other recurring costs. Don’t leave out any category of expenses that is required to run your business. And don’t forget the cost of professional services such as accounting and legal services.
Step 6 – In the form of a spreadsheet, forecast the payroll that outlines each individual that you plan to hire, the month they will start work, and their salary. Also include the percentage salary increases (due to increased cost of living and as reward for exemplary performance) that will come in the second and subsequent years of the forecast.
Additional tips for Writing a Business Plan Financial Statement
- Don’t stuff your pages with lots of information, and avoid large chunks of text. Also, use a font size that is large enough. Even if these would spread out your statement into more pages, don’t hesitate to spread it out. Legibility matters!
- After completing the spreadsheets in the financial statement, you should summarize the figures in the narrative section of your business plan.
- Put a table near the front of your financial statement that shows projected figures, pre-tax profit, and expenses. These are the figures you want the reader to remember. You can help the reader retain these figures in memory by including a bar chart of these figures, too.
As a final note, you should keep in mind that a financial statement is just an informed guess of what will likely happen in the future. In reality, the actual results you will achieve will vary. In fact, this difference may be very far from what you have forecast.
So, if your business is a start-up, prepare more capital than your projections show that you will need. Entrepreneurs have a natural tendency to project a faster revenue growth than what is realistic. So, don’t let this instinct fool you.