Your business plan financials are essential for lenders and investors who want to see hard figures before putting money into your business. Solid financials could help you get loans and attract investors, even if you aren't operating yet.
"Financials can be very intimidating for a lot of small business owners," says Raman Chadha, executive director of the Coleman Entrepreneurship Center at DePaul University. "It's my experience that most small business owners don't know how to manage the numbers."
Your business plan financial statement will cover three general items: an income statement, a balance sheet and a cash-flow statement, each with numerous subsets. The following is a general outline for creating business plan financials and is not meant to be a comprehensive account of the financial details you will need.
The Income Statement
An income statement shows how much profit or loss you expect to have for the year. For new businesses, income statements should be broken down monthly or quarterly. Business in their second to fifth years of operation should have quarterly or annual income statements, the Small Business Administration advises.
An income statement includes:
- Revenue: "Revenue growth is always going to take longer than you expect," Chadha cautions. "It's smart to be more conservative" in your estimates, he says.
- Expenses: Includes operating expenses such as costs for supplies, rents and salaries; loan payments, including interest; and fees for advisers, including attorneys and accountants.
- Cost of Goods Sold: The cost of merchandising, manufacturing and bringing your product to the market. Service business often do not need this.
- Gross Profit: Your sales minus all costs directly related to those sales.
- Operating Profit: Your company's profit after deducting your operating costs from gross profit.
- Net Profit: Calculated by subtracting your company's total expenses from total revenue.
- Net Profit before Taxes: The amount of income earned before taxes are taken out.
- Net Profit after Taxes: Net income minus taxes paid.
The Balance Sheet
A balance sheet provides an annual snapshot of your business financials. The figures are often recorded for only one day. If you're not yet operating a business, American Express recommends you create a balance sheet from your personal assets and liabilities.
A balance sheet includes:
- Current Assets: Includes cash, inventory, accounts receivables such as credit and other payments owed to the company, and fixed assets. Fixed assets include machinery, property and goodwill. They are items that cannot be quickly converted into cash.
- Liabilities: Short-term liabilities include upcoming payments such as salaries and wages due, accounts payable, which are payments owed for services, and taxes owed. Long-term liabilities include payments for debts and bonds due after at least a year.
- Equity: Investments and retained earnings. Retained earnings, also called net worth, measure investments by subtracting liabilities from assets.
Cash Flow Projections
Projecting your company's cash flow can be an arduous task, but it’s crucial information for potential lenders who want an idea of how much money you'll have to pay back loans. For many experts, cash flow is where the rubber meets the road in terms of deciding whether a business is healthy.
Cash flow projections include:
- Cash Inflow: This indicates how much cash you believe will come into your business. It is largely based on your sales forecasts and accounts receivables, if applicable.
- Cash Outflow: These are your expected cash expenses. Be sure to take into account any expected increase in expenses, such as employee raises or rent increases.
Your cash flow projection will be your cash outflow subtracted from your cash inflow.
All of these formulas are quite complicated, so consider hiring an accountant to help with creating the financials of your business plan.