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How to Write the Financial Section of a Business Plan
An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..
A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.
Dig Deeper: Generating an Accurate Sales Forecast
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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money." The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."
Dig Deeper: What Angel Investors Look For
How to Write the Financial Section of a Business Plan: The Components of a Financial Section
A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses. Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.
- Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
- Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
- Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
- Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. 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, and taxes, is net profit."
- Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
- Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.
Dig Deeper: How to Price Business Services
How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours." If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."
Dig Deeper: How to Protect Your Margins in a Downturn
Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.
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How to Prepare a Financial Plan for Startup Business (w/ example)
Free Financial Statements Template
Ajay Jagtap
- December 7, 2023
13 Min Read
If someone were to ask you about your business financials, could you give them a detailed answer?
Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.
Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.
A business plan’s financial plan section is no easy task—we get that.
But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.
Ready to get started? Let’s begin by discussing startup financial planning.
What is Startup Financial Planning?
Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.
Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.
Key Takeaways
- Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
- Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
- Preparing a financial plan is easier and faster when you use a financial planning tool.
- Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.
Why is Financial Planning Important to Your Startup?
Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.
A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.
It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .
Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.
Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.
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Key Components of a Startup Financial Plan
Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.
Income Statement
An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.
Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.
Your income or P&L statement must list the following:
- Cost of goods or cost of sale
- Gross margin
- Operating expenses
- Revenue streams
- EBITDA (Earnings before interest, tax, depreciation , & amortization )
Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.
Cash flow Statement
A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.
This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.
Your cash flow projection consists of the following three components:
✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.
✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.
✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.
Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.
Balance Sheet
Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.
Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.
This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.
Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:
Here is what’s the core purpose of having a balance-sheet:
- Indicates the capital need of the business
- It helps to identify the allocation of resources
- It calculates the requirement of seed money you put up, and
- How much finance is required?
Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.
Break-even Analysis
Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.
For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.
Remember, anything you sell beyond the break-even point will result in profit.
You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.
- Fixed costs: fixed expenses that stay the same no matter what.
- Variable costs: expenses that fluctuate over time depending on production or sales.
A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.
Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.
How to Create a Financial Section of a Startup Business Plan?
1. determine your financial needs.
You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.
Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.
Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.
Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.
Having learned to determine financial needs, let’s head straight to setting financial goals.
2. Define Your Financial Goals
Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.
Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.
However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.
Feeling overwhelmed? Just define your financial goals—you’ll be fine.
You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.
3. Choose the Right Financial Planning Tool
Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.
Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.
Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.
Create a Financial Plan with Upmetrics in no time
Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.
Start Forecasting
4. Make Assumptions Before Projecting Financials
Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.
You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.
You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.
After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.
5. Prepare Realistic Financial Projections
It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.
Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.
Following are the two key aspects of your financial projections:
Revenue Projections
In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.
It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.
The following are the key components of an accurate revenue projection report:
- Market analysis
- Sales forecast
- Pricing strategy
- Growth assumptions
- Seasonal variations
This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.
Expense Projections
Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.
Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.
These are the most common costs to consider while projecting expenses:
- Fixed costs
- Variable costs
- Employee costs or payroll expenses
- Operational expenses
- Marketing and advertising expenses
- Emergency fund
Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.
6. Consider “What if” Scenarios
After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.
Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.
Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.
7. Build a Visual Report
If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.
Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.
Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.
Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.
Here’s what Upmetrics’ dashboard looks like:
8. Monitor and Adjust Your Financial Plan
Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.
There are multiple ways to monitor your financial plan.
For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.
Consider making necessary adjustments if your assumptions are not resonating with actual numbers.
Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.
And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.
Startup Financial Plan Example
Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.
Important Assumptions
- The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
- The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
- The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
- Sales are cash basis – nonaccrual accounting
- Moderate ramp- up in staff over the 5 years forecast
- Barista salary in the forecast is $36,000 in 2023.
- In general, most cafes have an 85% gross profit margin
- In general, most cafes have a 3% net profit margin
Projected Balance Sheet
Projected Cash-Flow Statement
Projected Profit & Loss Statement
Break Even Analysis
Start Preparing Your Financial Plan
We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.
Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.
So what are you waiting for? Try Upmetrics and create your financial plan in a snap.
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Frequently Asked Questions
How often should i update my financial projections.
Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.
How do I estimate startup costs accurately?
You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.
What financial ratios should startups pay attention to?
Here’s a list of financial ratios every startup owner should keep an eye on:
- Net profit margin
- Current ratio
- Quick ratio
- Working capital
- Return on equity
- Debt-to-equity ratio
- Return on assets
- Debt-to-asset ratio
What are the 3 different scenarios in scenario analysis?
As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:
- base-case (expected) scenario
- Worst-case scenario
- best case scenario.
About the Author
Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more
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Free Financial Templates for a Business Plan
By Andy Marker | July 29, 2020
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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 .
Financial Plan Templates
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
Business Financial Plan Template
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
Financial Plan Projections Template for Startups
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
Income Statement Templates for Business Plan
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.
Pro Forma Income Statement/Profit and Loss Sample
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 Business Profit and Loss Statement
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
3-Year Income Statement Template
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 .”
Cash Flow Statement Templates for Business Plan
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.
Simple Cash Flow Template
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
12-Month Cash Flow Forecast 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
3-Year Cash Flow Statement Template Set
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 .”
Balance Sheet Templates for a Business Plan
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 Business Pro Forma Balance Sheet
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
Monthly and Quarterly 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
Yearly Balance Sheet Template
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 Forecast Templates for Business Plan
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.
Basic Sales Forecast Sample Template
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
12-Month Sales Forecast Template for Multiple Products
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
3-Year Sales Forecast 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 .”
Break-Even Analysis Template for Business Plan
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.
Break-Even Analysis Template
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 .”
Business Budget Templates for Business Plan
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.
Startup Budget Template
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
Small Business 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
Professional 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 .”
Other Financial Templates for Business Plan
In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.
Startup Funding Requirements Template
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
Personnel Plan Template
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
Elements of the Financial Section of a Business Plan
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.
- Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
- Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
- Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
- Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
- Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
- Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
- Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.
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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Start » startup, business plan financials: 3 statements to include.
The finance section of your business plan is essential to securing investors and determining whether your idea is even viable. Here's what to include.
If your business plan is the blueprint of how to run your company, the financials section is the key to making it happen. The finance section of your business plan is essential to determining whether your idea is even viable in the long term. It’s also necessary to convince investors of this viability and subsequently secure the type and amount of funding you need. Here’s what to include in your business plan financials.
[Read: How to Write a One-Page Business Plan ]
What are business plan financials?
Business plan financials is the section of your business plan that outlines your past, current and projected financial state. This section includes all the numbers and hard data you’ll need to plan for your business’s future, and to make your case to potential investors. You will need to include supporting financial documents and any funding requests in this part of your business plan.
Business plan financials are vital because they allow you to budget for existing or future expenses, as well as forecast your business’s future finances. A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.
Sections to include in your business plan financials
Here are the three statements to include in the finance section of your business plan:
Profit and loss statement
A profit and loss statement , also known as an income statement, identifies your business’s revenue (profit) and expenses (loss). This document describes your company’s overall financial health in a given time period. While profit and loss statements are typically prepared quarterly, you will need to do so at least annually before filing your business tax return with the IRS.
Common items to include on a profit and loss statement :
- Revenue: total sales and refunds, including any money gained from selling property or equipment.
- Expenditures: total expenses.
- Cost of goods sold (COGS): the cost of making products, including materials and time.
- Gross margin: revenue minus COGS.
- Operational expenditures (OPEX): the cost of running your business, including paying employees, rent, equipment and travel expenses.
- Depreciation: any loss of value over time, such as with equipment.
- Earnings before tax (EBT): revenue minus COGS, OPEX, interest, loan payments and depreciation.
- Profit: revenue minus all of your expenses.
Businesses that have not yet started should provide projected income statements in their financials section. Currently operational businesses should include past and present income statements, in addition to any future projections.
[Read: Top Small Business Planning Strategies ]
A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.
Balance sheet
A balance sheet provides a snapshot of your company’s finances, allowing you to keep track of earnings and expenses. It includes what your business owns (assets) versus what it owes (liabilities), as well as how much your business is currently worth (equity).
On the assets side of your balance sheet, you will have three subsections: current assets, fixed assets and other assets. Current assets include cash or its equivalent value, while fixed assets refer to long-term investments like equipment or buildings. Any assets that do not fall within these categories, such as patents and copyrights, can be classified as other assets.
On the liabilities side of your balance sheet, include a total of what your business owes. These can be broken down into two parts: current liabilities (amounts to be paid within a year) and long-term liabilities (amounts due for longer than a year, including mortgages and employee benefits).
Once you’ve calculated your assets and liabilities, you can determine your business’s net worth, also known as equity. This can be calculated by subtracting what you owe from what you own, or assets minus liabilities.
Cash flow statement
A cash flow statement shows the exact amount of money coming into your business (inflow) and going out of it (outflow). Each cost incurred or amount earned should be documented on its own line, and categorized into one of the following three categories: operating activities, investment activities and financing activities. These three categories can all have inflow and outflow activities.
Operating activities involve any ongoing expenses necessary for day-to-day operations; these are likely to make up the majority of your cash flow statement. Investment activities, on the other hand, cover any long-term payments that are needed to start and run your business. Finally, financing activities include the money you’ve used to fund your business venture, including transactions with creditors or funders.
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How to Write a Small Business Financial Plan
Noah Parsons
4 min. read
Updated April 22, 2024
Creating a financial plan is often the most intimidating part of writing a business plan.
It’s also one of the most vital. Businesses with well-structured and accurate financial statements are more prepared to pitch to investors, receive funding, and achieve long-term success.
Thankfully, you don’t need an accounting degree to successfully create your budget and forecasts.
Here is everything you need to include in your financial plan, along with optional performance metrics, funding specifics, mistakes to avoid , and free templates.
- Key components of a financial plan
A sound financial plan is made up of six key components that help you easily track and forecast your business financials. They include your:
Sales forecast
What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.
Subscription sales forecast
While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.
Expense budget
Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.
How to forecast personnel costs
How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.
Profit and loss forecast
Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.
Cash flow forecast
Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.
Balance sheet
Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.
What to include if you plan to pursue funding
Do you plan to pursue any form of funding or financing? If the answer is yes, then there are a few additional pieces of information that you’ll need to include as part of your financial plan.
Highlight any risks and assumptions
Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.
Plan your exit strategy
Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.
- 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 plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.
Key financial terms you should know
It’s not hard. Anybody who can run a business can understand these key financial terms. And every business owner and entrepreneur should know them.
Common business ratios
Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.
Break-even analysis
Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.
How to calculate ROI
How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).
- How to improve your financial plan
Your financial statements are the core part of your business plan that you’ll revisit most often. Instead of worrying about getting it perfect the first time, check out the following resources to learn how to improve your projections over time.
Common mistakes with business forecasts
I was glad to be asked about common mistakes with startup financial projections. I read about 100 business plans per year, and I have this list of mistakes.
How to improve your financial projections
Learn how to improve your business financial projections by following these five basic guidelines.
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Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.
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How to Craft the Financial Section of Business Plan (Hint: It’s All About the Numbers)
Writing a small business plan takes time and effort … especially when you have to dive into the numbers for the financial section. But, working on the financial section of business plan could lead to a big payoff for your business.
Read on to learn what is the financial section of a business plan, why it matters, and how to write one for your company.
What is the financial section of business plan?
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 the business plan introduces numbers. It comes after the executive summary, company description , market analysis, organization structure, product information, and marketing and sales strategies.
Businesses that are trying to get financing from lenders or investors use the financial section to make their case. This section also acts as a financial roadmap so you can budget for your business’s future income and expenses.
Why it matters
The financial section of the business plan is critical for moving beyond wordy aspirations and into hard data and the wonderful world of numbers.
Through the financial section, you can:
- Forecast your business’s future finances
- Budget for expenses (e.g., startup costs)
- Get financing from lenders or investors
- Grow your business
- Growth : 64% of businesses with a business plan were able to grow their business, compared to 43% of businesses without a business plan.
- Financing : 36% of businesses with a business plan secured a loan, compared to 18% of businesses without a plan.
So, if you want to possibly double your chances of securing a business loan, consider putting in a little time and effort into your business plan’s financial section.
Writing your financial section
To write the financial section, you first need to gather some information. Keep in mind that the information you gather depends on whether you have historical financial information or if you’re a brand-new startup.
Your financial section should detail:
- Business expenses
Financial projections
Financial statements, break-even point, funding requests, exit strategy, business expenses.
Whether you’ve been in business for one day or 10 years, you have expenses. These expenses might simply be startup costs for new businesses or fixed and variable costs for veteran businesses.
Take a look at some common business expenses you may need to include in the financial section of business plan:
- Licenses and permits
- Cost of goods sold
- Rent or mortgage payments
- Payroll costs (e.g., salaries and taxes)
- Utilities
- Equipment
- Supplies
- Advertising
Write down each type of expense and amount you currently have as well as expenses you predict you’ll have. Use a consistent time period (e.g., monthly costs).
Indicate which expenses are fixed (unchanging month-to-month) and which are variable (subject to changes).
How much do you anticipate earning from sales each month?
If you operate an existing business, you can look at previous monthly revenue to make an educated estimate. Take factors into consideration, like seasonality and economic ups and downs, when basing projections on previous cash flow.
Coming up with your financial projections may be a bit trickier if you are a startup. After all, you have nothing to go off of. Come up with a reasonable monthly goal based on things like your industry, competitors, and the market. Hint : Look at your market analysis section of the business plan for guidance.
A financial statement details your business’s finances. The three main types of financial statements are income statements, cash flow statements, and balance sheets.
Income statements summarize your business’s income and expenses during a period of time (e.g., a month). This document shows whether your business had a net profit or loss during that time period.
Cash flow statements break down your business’s incoming and outgoing money. This document details whether your company has enough cash on hand to cover expenses.
The balance sheet summarizes your business’s assets, liabilities, and equity. Balance sheets help with debt management and business growth decisions.
If you run a startup, you can create “pro forma financial statements,” which are statements based on projections.
If you’ve been in business for a bit, you should have financial statements in your records. You can include these in your business plan. And, include forecasted financial statements.
You’re just in luck. Check out our FREE guide, Use Financial Statements to Assess the Health of Your Business , to learn more about the different types of financial statements for your business.
Potential investors want to know when your business will reach its break-even point. The break-even point is when your business’s sales equal its expenses.
Estimate when your company will reach its break-even point and detail it in the financial section of business plan.
If you’re looking for financing, detail your funding request here. Include how much you are looking for, list ideal terms (e.g., 10-year loan or 15% equity), and how long your request will cover.
Remember to discuss why you are requesting money and what you plan on using the money for (e.g., equipment).
Back up your funding request by emphasizing your financial projections.
Last but not least, your financial section should also discuss your business’s exit strategy. An exit strategy is a plan that outlines what you’ll do if you need to sell or close your business, retire, etc.
Investors and lenders want to know how their investment or loan is protected if your business doesn’t make it. The exit strategy does just that. It explains how your business will make ends meet even if it doesn’t make it.
When you’re working on the financial section of business plan, take advantage of your accounting records to make things easier on yourself. For organized books, try Patriot’s online accounting software . Get your free trial now!
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First Steps: Writing the Financials Section of Your Business Plan This quick guide offers tips that will help you create the financials section for your business plan.
By Entrepreneur Staff Jan 4, 2015
In their book Write Your Business Plan , the staff of Entrepreneur Media, Inc. offer an in-depth understanding of what's essential to any business plan, what's appropriate for your venture, and what it takes to ensure success. In this edited excerpt, the authors outline what type of information you should include in the financials section of your business plan.
Financial data is always at the back of the business plan, but that doesn't mean it's any less important than such up-front material as the description of the business concept and the management team. Astute investors look carefully at the charts, tables, formulas and spreadsheets in the financial section because they know this information is like the pulse, respiration rate and blood pressure in a human being—it shows the condition of the patient. In fact, you'll find many potential investors taking a quick peak at the numbers before reading the plan.
Financial statements come in threes: income statement, balance sheet, and cash flow statement. Taken together they provide an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward. This information is very important to business plan readers.
You can typically gather information and use Excel or another financial program to create your spreadsheets. You'll also find them available in most business plan software; these programs also do the calculations.
Income statement.
An income statement shows whether you're making any money. It adds up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure, also known as the bottom line.
Income statements are called various names—profit and loss statement (P&L) and earnings statement are two common alternatives. They can get pretty complicated in their attempt to capture sources of income, such as interest, and expenses, such as depreciation. But the basic idea is pretty simple: If you subtract costs from income, what you have left is profit.
To figure your income statement, you need to gather a bunch of numbers, including your gross revenue, which is made up of sales and any income from interest or sales of assets; your sales, general and administrative (SG&A) expenses; what you paid out in interest and dividends, if anything; and your corporate tax rate. If you have those, you're ready to go.
If you're a startup and don't have any prior years' figures to look at, look for statistics about other businesses within your industry. The most important question to ask is: What has been the experience of similar companies? If you know that car dealers across the nation have averaged 12 percent annual sales gains, that's a good starting point for figuring your company's projections.
Balance sheet.
If the income sheet shows what you're earning, the balance sheet shows what you're worth. A balance sheet can help an investor see that a company owns valuable assets that don't show up on the income statement or that it may be profitable but is heavily in debt. It adds up everything your business owns, subtracts everything the business owes, and shows the difference as the net worth of the business.
Actually, accountants put it differently and, of course, use different names. The things you own are called assets. The things you owe money on are called liabilities. And net worth is referred to as equity.
A balance sheet shows your condition on a given date, usually the end of your fiscal year. Sometimes balance sheets are compared. That is, next to the figures for the end of the most recent year, you place the entries for the end of the prior period. This gives you a snapshot of how and where your financial position has changed.
A balance sheet also places a value on the owner's equity in the business. When you subtract liabilities from assets, what's left is the value of the equity in the business owned by you and any partners. Tracking changes in this number will tell you whether you're getting richer or poorer.
Balance sheets can also be projected into the future, and the projections can serve as targets to aim for or benchmarks to compare against actual results. Balance sheets are affected by sales, too. If your accounts receivable go up or inventory increases, your balance sheet reflects this. And, of course, increases in cash show up on the balance sheet. So it's important to look ahead to see how your balance sheet will appear given your sales forecast.
Cash flow statement.
The cash flow statement monitors the flow of cash over a period of time (a year, a quarter, a month) and shows you how much cash you have on hand at the moment.
The cash flow statement, also called the statement of changes in financial position, probes and analyzes changes that have occurred on the balance sheet. It's different from the income statement, which describes sales and profits but doesn't necessarily tell you where your cash came from or how it's being used.
A cash flow statement consists of two parts. One follows the flow of cash into and out of the company. The other shows how the funds were spent. The two parts are called, respectively, sources of funds and uses of funds. At the bottom is, naturally, the bottom line, called net changes in cash position. It shows whether you improved your cash position and by how much during the period.
Other Financial Information
If you're seeking investors for your company, you'll probably need to provide quite a bit more financial information than what is in the income statement, balance sheet and cash flow statements. For instance, a personal finance statement may be needed if you're guaranteeing loans yourself. Applying business data to other ratios and formulas will yield important information on what your profit margin is and what level of sales it will take for you to reach profitability. Still other figures, such as the various ratios, will help predict whether you'll be able to pay your bills for long. These bits of information are helpful to you as well as to investors, it should be noted. Understanding and, if possible, mastering them, will help you run your business more smoothly.
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Writing a Business Plan—Financial Projections
Spell out your financial forecast in dollars and sense
Creating financial projections for your startup is both an art and a science. Although investors want to see cold, hard numbers, it can be difficult to predict your financial performance three years down the road, especially if you are still raising seed money. Regardless, short- and medium-term financial projections are a required part of your business plan if you want serious attention from investors.
The financial section of your business plan should include a sales forecast , expenses budget , cash flow statement , balance sheet , and a profit and loss statement . Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board , a private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have an accountant review your projections.
Sales Forecast
As a startup business, you do not have past results to review, which can make forecasting sales difficult. It can be done, though, if you have a good understanding of the market you are entering and industry trends as a whole. In fact, sales forecasts based on a solid understanding of industry and market trends will show potential investors that you've done your homework and your forecast is more than just guesswork.
In practical terms, your forecast should be broken down by monthly sales with entries showing which units are being sold, their price points, and how many you expect to sell. When getting into the second year of your business plan and beyond, it's acceptable to reduce the forecast to quarterly sales. In fact, that's the case for most items in your business plan.
Expenses Budget
What you're selling has to cost something, and this budget is where you need to show your expenses. These include the cost to your business of the units being sold in addition to overhead. It's a good idea to break down your expenses by fixed costs and variable costs. For example, certain expenses will be the same or close to the same every month, including rent, insurance, and others. Some costs likely will vary month by month such as advertising or seasonal sales help.
Cash Flow Statement
As with your sales forecast, cash flow statements for a startup require doing some homework since you do not have historical data to use as a reference. This statement, in short, breaks down how much cash is coming into your business on a monthly basis vs. how much is going out. By using your sales forecasts and your expenses budget, you can estimate your cash flow intelligently.
Keep in mind that revenue often will trail sales, depending on the type of business you are operating. For example, if you have contracts with clients, they may not be paying for items they purchase until the month following delivery. Some clients may carry balances 60 or 90 days beyond delivery. You need to account for this lag when calculating exactly when you expect to see your revenue.
Profit and Loss Statement
Your P&L statement should take the information from your sales projections, expenses budget, and cash flow statement to project how much you expect in profits or losses through the three years included in your business plan. You should have a figure for each individual year as well as a figure for the full three-year period.
Balance Sheet
You provide a breakdown of all of your assets and liabilities in the balances sheet. Many of these assets and liabilities are items that go beyond monthly sales and expenses. For example, any property, equipment, or unsold inventory you own is an asset with a value that can be assigned to it. The same goes for outstanding invoices owed to you that have not been paid. Even though you don't have the cash in hand, you can count those invoices as assets. The amount you owe on a business loan or the amount you owe others on invoices you've not paid would count as liabilities. The balance is the difference between the value of everything you own vs. the value of everything you owe.
Break-Even Projection
If you've done a good job projecting your sales and expenses and inputting the numbers into a spreadsheet, you should be able to identify a date when your business breaks even—in other words, the date when you become profitable, with more money coming in than going out. As a startup business, this is not expected to happen overnight, but potential investors want to see that you have a date in mind and that you can support that projection with the numbers you've supplied in the financial section of your business plan.
Additional Tips
When putting together your financial projections, keep some general tips in mind:
- Get comfortable with spreadsheet software if you aren't already. It is the starting point for all financial projections and offers flexibility, allowing you to quickly change assumptions or weigh alternative scenarios. Microsoft Excel is the most common, and chances are you already have it on your computer. You can also buy special software packages to help with financial projections.
- Prepare a five-year projection . Don’t include this one in the business plan, since the further into the future you project, the harder it is to predict. However, have the projection available in case an investor asks for it.
- Offer two scenarios only . Investors will want to see a best-case and worst-case scenario, but don’t inundate your business plan with myriad medium-case scenarios. They likely will just cause confusion.
- Be reasonable and clear . As mentioned before, financial forecasting is as much art as science. You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable. It’s best to be realistic in your projections as you try to recruit investors. If your industry is going through a contraction period and you’re projecting revenue growth of 20 percent a month, expect investors to see red flags.
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6 Elements of a Successful Financial Plan for a Small Business
Improve your chances of growth by covering these bases in your plan.
Table of Contents
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.
What is a business financial plan, and why is it important?
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.
The 6 components of a successful financial plan for business
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.
2. Expense outlay
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.
3. Statement of financial position (assets and liabilities)
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.
4. Cash flow projection
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.
5. Break-even analysis
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.
6. Operations plan
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.
Tips on writing a business financial plan
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.
Review the previous year’s 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.
Collaborate with other departments.
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.
Use available resources.
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.
Business financial plan templates
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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- Business Planning
Business Plan Financial Projections
Written by Dave Lavinsky
Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:
- They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable.
- Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
- Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.
Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.
What Are Business Plan Financial Projections?
Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:
1. Income Statement Projection
The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.
There are a few key items you will need to include in your projection:
- Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
- Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
- Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.
Sample Income Statement
FY 1 | FY 2 | FY 3 | FY 4 | FY 5 | ||
---|---|---|---|---|---|---|
Revenues | ||||||
Total Revenues | $360,000 | $793,728 | $875,006 | $964,606 | $1,063,382 | |
Expenses & Costs | ||||||
Cost of goods sold | $64,800 | $142,871 | $157,501 | $173,629 | $191,409 | |
Lease | $50,000 | $51,250 | $52,531 | $53,845 | $55,191 | |
Marketing | $10,000 | $8,000 | $8,000 | $8,000 | $8,000 | |
Salaries | $157,015 | $214,030 | $235,968 | $247,766 | $260,155 | |
Initial expenditure | $10,000 | $0 | $0 | $0 | $0 | |
Total Expenses & Costs | $291,815 | $416,151 | $454,000 | $483,240 | $514,754 | |
EBITDA | $68,185 | $377,577 | $421,005 | $481,366 | $548,628 | |
Depreciation | $27,160 | $27,160 | $27,160 | $27,160 | $27,160 | |
EBIT | $41,025 | $350,417 | $393,845 | $454,206 | $521,468 | |
Interest | $23,462 | $20,529 | $17,596 | $14,664 | $11,731 | |
PRETAX INCOME | $17,563 | $329,888 | $376,249 | $439,543 | $509,737 | |
Net Operating Loss | $0 | $0 | $0 | $0 | $0 | |
Use of Net Operating Loss | $0 | $0 | $0 | $0 | $0 | |
Taxable Income | $17,563 | $329,888 | $376,249 | $439,543 | $509,737 | |
Income Tax Expense | $6,147 | $115,461 | $131,687 | $153,840 | $178,408 | |
NET INCOME | $11,416 | $214,427 | $244,562 | $285,703 | $331,329 |
2. Cash Flow Statement & Projection
The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.
There are a few key items you will need to include in your cash flow projection:
- The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
- Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
- It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.
Sample Cash Flow Statements
FY 1 | FY 2 | FY 3 | FY 4 | FY 5 | ||
---|---|---|---|---|---|---|
CASH FLOW FROM OPERATIONS | ||||||
Net Income (Loss) | $11,416 | $214,427 | $244,562 | $285,703 | $331,329 | |
Change in working capital | ($19,200) | ($1,966) | ($2,167) | ($2,389) | ($2,634) | |
Depreciation | $27,160 | $27,160 | $27,160 | $27,160 | $27,160 | |
Net Cash Flow from Operations | $19,376 | $239,621 | $269,554 | $310,473 | $355,855 | |
CASH FLOW FROM INVESTMENTS | ||||||
Investment | ($180,950) | $0 | $0 | $0 | $0 | |
Net Cash Flow from Investments | ($180,950) | $0 | $0 | $0 | $0 | |
CASH FLOW FROM FINANCING | ||||||
Cash from equity | $0 | $0 | $0 | $0 | $0 | |
Cash from debt | $315,831 | ($45,119) | ($45,119) | ($45,119) | ($45,119) | |
Net Cash Flow from Financing | $315,831 | ($45,119) | ($45,119) | ($45,119) | ($45,119) | |
Net Cash Flow | $154,257 | $194,502 | $224,436 | $265,355 | $310,736 | |
Cash at Beginning of Period | $0 | $154,257 | $348,760 | $573,195 | $838,550 | |
Cash at End of Period | $154,257 | $348,760 | $573,195 | $838,550 | $1,149,286 |
3. Balance Sheet Projection
The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.
A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.
Sample Balance Sheet
FY 1 | FY 2 | FY 3 | FY 4 | FY 5 | ||
---|---|---|---|---|---|---|
ASSETS | ||||||
Cash | $154,257 | $348,760 | $573,195 | $838,550 | $1,149,286 | |
Accounts receivable | $0 | $0 | $0 | $0 | $0 | |
Inventory | $30,000 | $33,072 | $36,459 | $40,192 | $44,308 | |
Total Current Assets | $184,257 | $381,832 | $609,654 | $878,742 | $1,193,594 | |
Fixed assets | $180,950 | $180,950 | $180,950 | $180,950 | $180,950 | |
Depreciation | $27,160 | $54,320 | $81,480 | $108,640 | $135,800 | |
Net fixed assets | $153,790 | $126,630 | $99,470 | $72,310 | $45,150 | |
TOTAL ASSETS | $338,047 | $508,462 | $709,124 | $951,052 | $1,238,744 | |
LIABILITIES & EQUITY | ||||||
Debt | $315,831 | $270,713 | $225,594 | $180,475 | $135,356 | |
Accounts payable | $10,800 | $11,906 | $13,125 | $14,469 | $15,951 | |
Total Liability | $326,631 | $282,618 | $238,719 | $194,944 | $151,307 | |
Share Capital | $0 | $0 | $0 | $0 | $0 | |
Retained earnings | $11,416 | $225,843 | $470,405 | $756,108 | $1,087,437 | |
Total Equity | $11,416 | $225,843 | $470,405 | $756,108 | $1,087,437 | |
TOTAL LIABILITIES & EQUITY | $338,047 | $508,462 | $709,124 | $951,052 | $1,238,744 |
How to Create Financial Projections
Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.
Cost Assumptions
When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.
It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.
Capital Expenditures, Funding, Tax, and Balance Sheet Items
You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.
Capital Expenditures
When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.
When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.
When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.
Balance Sheet Items
When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.
Financial Projection Scenarios
Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.
Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.
Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.
Conduct a Ratio Analysis
A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.
There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:
- Gross margin ratio
- Operating margin ratio
- Return on assets (ROA)
- Return on equity (ROE)
To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.
Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.
Be Realistic
When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.
Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.
Sales Forecast
One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.
Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.
Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.
Create Multi-Year Financial Projections
When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.
It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.
Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.
Business Plan Financial Projections FAQs
What is a business plan financial projection.
A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.
What are annual income statements?
The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.
What are the necessary financial statements?
The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.
How do I create financial projections?
You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.
Business Financial Plan Example: Strategies and Best Practices
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.
Understanding a Business Financial Plan
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.
Essential Elements of a Business Financial Plan
A comprehensive financial plan contains several crucial elements, including:
- Sales Forecast : The sales forecast represents the business's projected sales revenues. It is often broken down into segments such as products, services, or regions.
- Expenses Budget : This portion of the plan outlines the anticipated costs of running the business. It includes fixed costs (rent, salaries) and variable costs (marketing, production).
- Cash Flow Statement : This statement records the cash that comes in and goes out of a business, effectively portraying its liquidity.
- Income Statements : Also known as profit and loss statements, income statements provide an overview of the business's profitability over a given period.
- Balance Sheet : This snapshot of a company's financial health shows its assets, liabilities, and equity.
Crafting a Business Financial Plan: The Steps
Developing a business financial plan requires careful analysis and planning. Here are the steps involved:
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. 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.
Step 2: Create a Sales Forecast
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.
Step 3: Prepare an Expense Budget
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.
Step 4: Develop a Cash Flow Statement
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.
Step 5: Prepare Income Statements and Balance Sheets
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.
Step 6: Revise Your Plan Regularly
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.
Business Financial Plan Example: Joe’s Coffee Shop
Now, let's look at a practical example of a financial plan for a hypothetical business, Joe’s Coffee Shop.
Sales Forecast
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.
Expenses Budget
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.
Cash Flow Statement
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.
Income Statement and Balance Sheet
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.
Best Practices in Business Financial Planning
While crafting a business financial plan, consider the following best practices:
- Realistic Projections : Ensure your forecasts are realistic, based on solid data and reasonable assumptions.
- Scenario Planning : Plan for best-case, worst-case, and most likely scenarios. This will help you prepare for different eventualities.
- Regular Reviews : Regularly review and update your plan to reflect changes in business conditions.
- Seek Professional Help : If you are unfamiliar with financial planning, consider seeking assistance from a financial consultant.
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.
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The 7 Best Business Plan Examples (2024)
As an aspiring entrepreneur gearing up to start your own business , you likely know the importance of drafting a business plan. However, you might not be entirely sure where to begin or what specific details to include. That’s where examining business plan examples can be beneficial. Sample business plans serve as real-world templates to help you craft your own plan with confidence. They also provide insight into the key sections that make up a business plan, as well as demonstrate how to structure and present your ideas effectively.
Example business plan
To understand how to write a business plan, let’s study an example structured using a seven-part template. Here’s a quick overview of those parts:
- Executive summary: A quick overview of your business and the contents of your business plan.
- Company description: More info about your company, its goals and mission, and why you started it in the first place.
- Market analysis: Research about the market and industry your business will operate in, including a competitive analysis about the companies you’ll be up against.
- Products and services: A detailed description of what you’ll be selling to your customers.
- Marketing plan: A strategic outline of how you plan to market and promote your business before, during, and after your company launches into the market.
- Logistics and operations plan: An explanation of the systems, processes, and tools that are needed to run your business in the background.
- Financial plan: A map of your short-term (and even long-term) financial goals and the costs to run the business. If you’re looking for funding, this is the place to discuss your request and needs.
7 business plan examples (section by section)
In this section, you’ll find hypothetical and real-world examples of each aspect of a business plan to show you how the whole thing comes together.
- Executive summary
Your executive summary offers a high-level overview of the rest of your business plan. You’ll want to include a brief description of your company, market research, competitor analysis, and financial information.
In this free business plan template, the executive summary is three paragraphs and occupies nearly half the page:
- Company description
You might go more in-depth with your company description and include the following sections:
- Nature of the business. Mention the general category of business you fall under. Are you a manufacturer, wholesaler, or retailer of your products?
- Background information. Talk about your past experiences and skills, and how you’ve combined them to fill in the market.
- Business structure. This section outlines how you registered your company —as a corporation, sole proprietorship, LLC, or other business type.
- Industry. Which business sector do you operate in? The answer might be technology, merchandising, or another industry.
- Team. Whether you’re the sole full-time employee of your business or you have contractors to support your daily workflow, this is your chance to put them under the spotlight.
You can also repurpose your company description elsewhere, like on your About page, Instagram page, or other properties that ask for a boilerplate description of your business. Hair extensions brand Luxy Hair has a blurb on it’s About page that could easily be repurposed as a company description for its business plan.
- Market analysis
Market analysis comprises research on product supply and demand, your target market, the competitive landscape, and industry trends. You might do a SWOT analysis to learn where you stand and identify market gaps that you could exploit to establish your footing. Here’s an example of a SWOT analysis for a hypothetical ecommerce business:
You’ll also want to run a competitive analysis as part of the market analysis component of your business plan. This will show you who you’re up against and give you ideas on how to gain an edge over the competition.
- Products and services
This part of your business plan describes your product or service, how it will be priced, and the ways it will compete against similar offerings in the market. Don’t go into too much detail here—a few lines are enough to introduce your item to the reader.
- Marketing plan
Potential investors will want to know how you’ll get the word out about your business. So it’s essential to build a marketing plan that highlights the promotion and customer acquisition strategies you’re planning to adopt.
Most marketing plans focus on the four Ps: product, price, place, and promotion. However, it’s easier when you break it down by the different marketing channels . Mention how you intend to promote your business using blogs, email, social media, and word-of-mouth marketing.
Here’s an example of a hypothetical marketing plan for a real estate website:
Logistics and operations
This section of your business plan provides information about your production, facilities, equipment, shipping and fulfillment, and inventory.
Financial plan
The financial plan (a.k.a. financial statement) offers a breakdown of your sales, revenue, expenses, profit, and other financial metrics. You’ll want to include all the numbers and concrete data to project your current and projected financial state.
In this business plan example, the financial statement for ecommerce brand Nature’s Candy includes forecasted revenue, expenses, and net profit in graphs.
It then goes deeper into the financials, citing:
- Funding needs
- Project cash-flow statement
- Project profit-and-loss statement
- Projected balance sheet
You can use Shopify’s financial plan template to create your own income statement, cash-flow statement, and balance sheet.
Types of business plans (and what to write for each)
A one-page business plan is a pared down version of a standard business plan that’s easy for potential investors and partners to understand. You’ll want to include all of these sections, but make sure they’re abbreviated and summarized:
- Logistics and operations plan
- Financials
A startup business plan is meant to secure outside funding for a new business. Typically, there’s a big focus on the financials, as well as other sections that help determine the viability of your business idea—market analysis, for example. Shopify has a great business plan template for startups that include all the below points:
- Market research: in depth
- Financials: in depth
Your internal business plan acts as the enforcer of your company’s vision. It reminds your team of the long-term objective and keeps them strategically aligned toward the same goal. Be sure to include:
- Market research
Feasibility
A feasibility business plan is essentially a feasibility study that helps you evaluate whether your product or idea is worthy of a full business plan. Include the following sections:
A strategic (or growth) business plan lays out your long-term vision and goals. This means your predictions stretch further into the future, and you aim for greater growth and revenue. While crafting this document, you use all the parts of a usual business plan but add more to each one:
- Products and services: for launch and expansion
- Market analysis: detailed analysis
- Marketing plan: detailed strategy
- Logistics and operations plan: detailed plan
- Financials: detailed projections
Free business plan templates
Now that you’re familiar with what’s included and how to format a business plan, let’s go over a few templates you can fill out or draw inspiration from.
Bplans’ free business plan template
Bplans’ free business plan template focuses a lot on the financial side of running a business. It has many pages just for your financial plan and statements. Once you fill it out, you’ll see exactly where your business stands financially and what you need to do to keep it on track or make it better.
PandaDoc’s free business plan template
PandaDoc’s free business plan template is detailed and guides you through every section, so you don’t have to figure everything out on your own. Filling it out, you’ll grasp the ins and outs of your business and how each part fits together. It’s also handy because it connects to PandaDoc’s e-signature for easy signing, ideal for businesses with partners or a board.
Miro’s Business Model Canvas Template
Miro’s Business Model Canvas Template helps you map out the essentials of your business, like partnerships, core activities, and what makes you different. It’s a collaborative tool for you and your team to learn how everything in your business is linked.
Better business planning equals better business outcomes
Building a business plan is key to establishing a clear direction and strategy for your venture. With a solid plan in hand, you’ll know what steps to take for achieving each of your business goals. Kickstart your business planning and set yourself up for success with a defined roadmap—utilizing the sample business plans above to inform your approach.
Business plan FAQ
What are the 3 main points of a business plan.
- Concept. Explain what your business does and the main idea behind it. This is where you tell people what you plan to achieve with your business.
- Contents. Explain what you’re selling or offering. Point out who you’re selling to and who else is selling something similar. This part concerns your products or services, who will buy them, and who you’re up against.
- Cash flow. Explain how money will move in and out of your business. Discuss the money you need to start and keep the business going, the costs of running your business, and how much money you expect to make.
How do I write a simple business plan?
To create a simple business plan, start with an executive summary that details your business vision and objectives. Follow this with a concise description of your company’s structure, your market analysis, and information about your products or services. Conclude your plan with financial projections that outline your expected revenue, expenses, and profitability.
What is the best format to write a business plan?
The optimal format for a business plan arranges your plan in a clear and structured way, helping potential investors get a quick grasp of what your business is about and what you aim to achieve. Always start with a summary of your plan and finish with the financial details or any extra information at the end.
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9 Financial Data Points that Inform Business Strategy
Topics: small business tips , controller services , business accounting , business strategy , outsourced bookkeeping services , accounting trends
A company's current and past financial health are key indicators of its long-term growth potential. So, it follows that a proper modern business analysis relies upon various sets of financial data points and ratios. Further, financial data point analysis is critical to strategic planning, which is, in its final stage, about allocation of resources limited by the business's financial realities. Therefore, the company's financial position, goals, performance and resources are integral to strategic planning, implementation and performance monitoring processes.
Formulating Business Strategy
To formulate a long-term strategy, a business can aim for one of a number of competitive market advantages. For example, you may find that your business is positioned to make strides toward low-cost leadership, differentiation, focused low-cost (niche markets), or other such market distinctions. Of course, in addition to financial determinates, customer satisfaction, staff learning and development, internal business processes, and other primary considerations must be included in analyses. But, here we will examine financial data points that are key to formulation of a viable business strategy.
Working with the commonly used balanced score card (BSC), as your instrument for monitoring and managing execution of your business strategy, helps in aligning your elected strategy with performance expectations. It further facilitates translating strategic plans into concrete objectives, and further into actionable operational directives that ultimately can advance the business toward financial goals.
Finance Role in Business Strategy
Financial metrics are the essential tools for measuring business performance. Your BSC supports your reliance on financial information in establishing strategic financial goals that are coordinated and effectively integrated into your company's operational and financial management systems. Financial metrics are used for benchmarking and goal-setting in asset management, risk management, tax optimization, and financing decisions, among many other areas of a business leader's strategic decision-making. Here are some primary data points to be included in processes for development of business strategy:
1. Net Cash Available
Net cash is the measure of a business's financial fitness. It indicates the level of efficiency with which the company is utilizing its financial resources to generate more cash for new investments. It is the amount of cash available after subtracting investments and increases in working capital from the company's operating cash flow. Companies can use this metric in planning for major capital expenditures or advancement of current projects.
2. Revenue Growth
The quantity, timing and quality of your revenues are determinates of your business's potential level of long-term success, a fundamental concern in strategic planning. The revenue growth calculation subtracts your last period's revenue from the current period's revenues, then divides that outcome by the total of last period's revenues. (One-time revenues are not included, as those distort this analysis). (A note regarding revenue concentration: Your percentage of total revenues that are coming from a single client should not exceed 10 percent of your total revenues.)
3. Profitability Ratios
This ratio is one measure of your company's operational efficiency. It also indicates areas requiring corrective action. And, it measures the relationships between profits and sales, total assets, and net worth. A business must establish goals for its profitability ratio, when it is necessary to plan for increasing effectiveness of operations and improving value-chain activities.
Having a healthy margin of gross profit enables your company to absorb negative impacts to costs of goods sold, or to revenues, without risk of inability to pay for routine expenses. Your operating profit margin is the determinate of your company’s ability to generate a profit, irrespective of how your business finances its operations, whether by equity or debt. Net profit margin measures remaining profits that can be reinvested into your company, or distributed to your shareholders as dividends.
5. Economic Value-Added
This is a contributor to the bottom-line, but one that is contingent upon risk adjustment. It helps in making timely decisions about expanding your businesses to increase its economic value. And, it highlights needed corrective actions in areas that are diminishing its value. It is calculated by subtracting your business' cost of operating capital from its net income. Your business's goals for adding economic value are used to assess its value contributions and to improve your process for resource allocation.
6. Growth Indices
The growth indices are the evaluations of your company's sales growth and market share growth. They indicate the financial acceptability of the trade-offs made for growth, in terms of reduced profit margins, ROI, and cash flow. Typically, growth drains cash and reserve borrowing funds. Aggressive asset management may become necessary to maintain sufficient cash and reduce borrowing. Your business must set strategic goals to improve its growth index, if growth rates are below normal for your industry, or if your operating leverage is very high.
7. Operational Efficiency
This is the measure of how efficiently your business's resources are being used. Poor operational efficiency results in lower profits and anemic growth. Areas included in this evaluation include accounts receivables turnover, which measures your level of efficiency in managing customers' credit accounts with you. Another example is inventory turnover, which is the measure of your efficiency in managing inventory, based on sales levels.
8. Liquidity
A liquidity analysis examines your company's ability to generate enough cash to pay all of its cash expenses. Profits or revenue growth, regardless of amounts, cannot compensate for insufficient liquidity. The Current Ratio calculation, which divides current assets by current liabilities, measures your business's ability to cover short-term obligations with cash and current assets. A ratio under 1 indicates that a business has insufficient liquid resources to meet such obligations. A value above 2 indicates a more appropriate level of liquidity. (Note: An Interest Coverage value under 1.5 is concerning to lenders.)
9. Capital Efficiency and Solvency
Investors and lenders are interested in a business's capital efficiency. This figure quantifies the return that your company's operations are generating for your investors. Return on equity (ROE) divides net income by shareholder equity). Your debt to equity ratio, debt divided by equity, indicates how heavily your operations are leveraged, and should not exceed a ratio that is reasonable for your business.
Financial Analyses for Strategic Decision-Making
Key financial data points are utilized in a variety of analyses. Outcomes of essential analyses below constitute additional data points that can be utilized in other analyses listed here as well as in other business analyses not discussed here.
- External Analysis — This analysis involve examination of your business's trends, external opportunities, resources, and applicable core competencies.
- Internal Analysis — This kind of assessment helps in understanding your company's level of opportunity for technology upgrades, more advantageous product pricing, innovation, value services enhancements, actions regarding marginal products, production and sales cost reductions, market share increase/saturation, effective growth management and value-chain activities, redirection to fast-growing market segments, and initiatives to advance your market position as, for example, a low-cost industry leader.
- Value-Chain Analysis — This analysis clarifies your business's process for value-creation through both primary and secondary activities. It is an important costing and benchmarking tool for highlighting major costs, competencies, resource strengths, and for identifying areas of needed improvement, to evaluate decisions on re-engineering to increase economic impact.
- SWOT — An assessment of Strengths, Weaknesses, Opportunities, and Threats, this internal and external analysis provides information that helps decision-makers set priorities and maximally utilize a company's competencies and other capabilities. It helps in understanding possibilities for taking advantage of external opportunities, correcting critical weaknesses, and addressing existing threats.
Final Analytic Application of Data Points
Financial analysis is used to establish a thoroughly reasoned basis for understanding how closely your business's performance is aligned with appropriate industry and internal benchmarks. This applies to each financial data point and to your business's overall financial condition as well. The following three bases for comparison should be included in the final analysis:
- Your Business's Past — To determine whether your business's financial condition is improving or worsening, reviewing its financial performance over the last three years is usually sufficient. However, you should extend your review to older data as well, if available. Also, examining your firm's past and present financial condition helps you identify trends in its performance. Noticing a steady decline in liquidity, for example, can prompt you to make needed changes.
- Your Primary Competitors — This data can be eye-opening. For example, after being satisfied for a time with an annual average of 11% revenue growth, discovering that your competitors have been growing at rates of 24 and 25 percent exposes hard evidence of your business's under-performance.
- Your Contractual Agreements — Managing key financial data points and ratios within preset limits can help interested third parties protect their stake in your business's success. For example, investors, lenders, and large customers typically demand that specified financial performance benchmarks are reached.
A balanced scorecard emphasizes a business's financial performance as a key indicator of its potential for future success. It links performance to strategic goals, and provides decision-makers with information necessary for well-considered strategic decisions as well as for the most effective operations management.
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Business Plan Section 7: Financial Information
In this section of your business plan, learn how to put your business finances into context to influence potential lenders or investors.
This section of your business plan 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. You may have the best idea in the world for a business-or it may need tweaking. You won’t actually know until you sit down and work up the numbers for your financial information section.
As a startup, spelling out your sales projections for the future will help you closely examine your business model and costs, how you’ll allocate your resources, and figure out whether you actually do have a viable idea. For existing businesses, think of this as a financial checkup: a way to examine your previous sales figures and ensure your health going forward.
If you’re applying for a loan or making a presentation to investors, this section is the companion piece to 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. In this section, you’ll take all of the marketing, sales, and product information you’ve amassed, and show how they translate into dollars. Sharpen your pencil and get your spreadsheet on!
Writing the Financial Section
There are two parts to the financial component of a business plan: historical data and prospective data. 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
Spell out how much money you’re investing in the business, along with specifics about the assets you plan to use. If you’re looking for financing, you’ll probably have to show personal income tax returns for the last few years. Be prepared with documentation for the last three to five years, depending on how long you’ve been in business. You’ll need income statements, balance sheets, cash flow statements, and tax returns.
Income Statements
Income statements document how much money you’ve taken in for the business, where the money came from, what your expenses were, and your net income, or how much you wound up with after paying all the expenses. The statements are usually prepared quarterly, and will show at a glance whether the company is making money or operating at a loss.
Balance Sheets
Balance sheets list the type and value of all of your business’s assets and liabilities, along with ownership interest (who owns what in the company, and how much). Assets will include your cash on hand, accounts receivable, inventory, equipment, and property you own. Liabilities are things such as your accounts payable and long-term debt. The balance sheet is a snapshot of your company’s financial position at the time it’s prepared, comparing what you own with what you owe.
Cash Flow Statements
Cash flow statements show all the cash you have coming in and out of the company, whether as a direct result of your business activities or from any outside investments you’ve made.
Tax Returns
How your business is structured will determine which tax forms you have to file with the Internal Revenue Service each year, so these may be your personal tax returns with a Schedule C attachment, or separate corporate tax returns.
If you’re looking for a loan, you’ll most likely also need to show the value of any collateral you’re offering to ensure payments, like real estate, vehicles, inventory, stocks and bonds, and equipment.
Prospective Data
Now, everyone knows you don’t have a crystal ball and can’t actually predict what will happen over the next five years, but there’s a point to putting the projections together. Lenders and investors really want to see that you have thought things through and considered the possible outcomes as your business progresses. They want to understand the thought process behind your numbers and why you’ve made those assumptions.
This means you need to do a significant amount of planning before sitting down to work on your projections, critically thinking through different scenarios. Again, the work and research you’ve already done for previous sections of your business plan will be invaluable here in making the assumptions needed to put your projections together.
Include projected income statements, balance sheets, and cash flow statements, which we described above, along with a capital expenditure budget.
Capital Expenditure Budget
A capital expense is a tangible, physical asset like property, buildings or equipment. This budget is your plan for how much you’ll spend to buy or upgrade these assets, whether that might be purchasing new machinery or repairing your HVAC system.
Funders may also want to see an analysis of how your results would change if some of the variables changed, so consider including a section on that, as well. As an added benefit, this isn’t just a theoretical exercise on your part, but will actually help you run the business and make adjustments as they become necessary. Business Insider offers a look at how to make realistic projections that will be meaningful to your business as well as to lenders and investors.
If you’re just at the beginning stages of business, make sure to also include any startup costs you’ll have. Some may be specific to your industry, such as particular types of equipment, tools or store fixtures. Others are fairly common across the board, like professional fees for lawyers or accountants, licensing and incorporation fees, security deposits and rent, and computers.
As a rule, the financial part of your plan should follow generally accepted accounting principles (GAAP) as set by the Federal Accounting Standards Advisory Board, especially if you’re putting it together primarily to get a loan or a line of credit. For this section, it helps to be fluent with spreadsheets, as that’s the best and most accepted way to present this information. This is one part of the business plan that you may want to get some outside assistance with, perhaps from your accountant or financial advisor, to help put the numbers together and present them properly. If you use an accountant, and your financial statements have been audited, make a note of that in the plan. If you want to give it a go on your own, SCORE, the Service Corps of Retired Executives, has a financial projections template available on its website.
Attention to detail is very important throughout the whole process of writing a business plan, but we can’t stress it strongly enough with regards to your finances. Be VERY careful to make sure that your projections match the numbers you put together for the funding request portion of the plan. 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.
Visuals help. Yes, there may be professional number crunchers going over your data, but consider showing your projections graphically along with the requisite spreadsheets, especially if the graphs demonstrate a positive trend.
Include a brief analysis of the financial information you’re presenting to explain the numbers, putting them into context for someone that has less of an understanding about your business and industry than you do.
Whether you have a startup or existing business, there’s an excellent likelihood you’ll also be asked for personal financial information, so consider including that as part of your business plan. Your credit history or a copy of a recent credit report can go in the appendix, together with copies of your tax returns or any additional information a lender may request.
Next Article: Business Plan Section 8 – Funding Request
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- Creating a Small Business Financial Plan
Written by True Tamplin, BSc, CEPF®
Reviewed by subject matter experts.
Updated on September 02, 2023
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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.
Understanding the Basics of Financial Planning for Small Businesses
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.
Core Components of a Financial Plan for Small Businesses
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.
Setting Clear Small Business Financial Objectives
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.
Understanding the Difference Between Profitability and Cash Flow
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.
Estimating Small Business Startup Costs (for New Businesses)
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.
One-Time Expenditures vs Ongoing Expenses
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.
Funding Sources for Small Businesses
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.
Preparing Key Financial Statements for Small Businesses
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.
Balance Sheet
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.
Cash Flow Statement
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.
Small Business Budgeting and Expense Management
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.
Strategies for Reducing Costs and Optimizing Expenses
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.
Renegotiating Vendor Contracts
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.
Adopting Energy-Saving Measures
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.
Embracing Technology
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.
Streamlining Operations
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.
Outsourcing Non-core Tasks
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.
Cultivating a Culture of Frugality
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.
Forecasting Small Business Revenue and Cash Flow
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 .
Market Research
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.
Local Trend Analysis
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.
Customer Feedback
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.
Moving Averages
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
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.
Understanding the Cash Cycle of Business
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.
Preparing for Seasonality and Unexpected Changes
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.
Securing Small Business Financing and Capital
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.
Choosing Between Different Types of Loans
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.
Lines of Credit
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.
Peer-To-Peer Lending
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.
Crowdfunding and Alternative Financing Options
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.
Small Business Tax Planning and Management
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.
Advantages of Tax Planning and Potential Deductions
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.
Importance of Hiring a Tax Professional or Accountant
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.
Regularly Reviewing and Adjusting the Small Business Financial Plan
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.
Using Financial Ratios to Monitor Business Health
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.
Pivoting Strategies Based on Financial Performance
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.
Bottom Line
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.
Creating a Small Business Financial Plan FAQs
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.
How do forecasting revenue and understanding cash cycles aid in financial planning?
Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.
What are the core components of a financial plan for small businesses?
Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.
Why is tax planning vital for small businesses?
Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.
How often should a small business review its financial plan?
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, BSc, CEPF®
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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Home > The Importance of Financial Data Management
The Importance of Financial Data Management
Let’s jump in and learn:
- What Is Financial Data Management?
- What Is the Role of Document Control?
- Why Is Financial Data Management Important?
- 10 Best Practices in Data Management for Finance Teams
- The Benefits of Financial Data Management and Combining Multiple Data Sources
- Financial Data Management as a Strategic Advantage
Financial data management is a set of processes and procedures, implemented with specialized tools, that organizations use to measure and analyze their financial information. Used to collect, analyze, and manage financial data, it helps organizations aggregate and visualize it to improve operations and performance as well as stay in line with legal requirements. Financial data management provides information used by entities outside an organization, such as creditors, investors, and regulators.
Financial data management creates a single source of financial truth by eliminating silos and bottlenecks and pulling information from data streams to provide continuous updates. Data analytics are applied to financial information and presented through dashboards that are easy to understand and access. Financial data management also uses automation tools that improve reporting and agility.
Financial data is data that reflects financial health and performance. This quantitative information is used by organizations to make financial decisions. Financial data can be reported on a periodic basis (e.g., monthly, quarterly, annually) or on an ad hoc basis (e.g., in response to a transaction). Another characteristic of financial data is that it can be current or historic. To be effective, financial data must be |
Several common types of traditional financial data types that require financial data management include the following:
Assets Anything that an organization owns that has value that can be converted into cash is considered an asset. An asset can be physical assets or intangible assets. For financial data management, assets fall into four categories:
- Real property—land and any buildings or other structures on the land
- Personal property—any property that is not real property
- Tangible property—physical property (e.g., inventory, raw materials, equipment, tools, furniture)
- Intangible property—any asset that does not have a physical form but still has value, such as patents, copyrights, or customer lists
Cash flow The term cash flow refers to the flow of money into and out of an organization. Financial data management can be used to analyze an organization’s cash flow to determine how well they manage their finances from a cash perspective. Financial data management includes the three types of cash flow that are reported, These are:
- Financing cash flow— the cash that is generated from a company’s financing activities, such as issuing new debt or selling equity
- Investing cash flow—the cash that is generated from a company’s investing activities, such as buying tangible property
- Operating cash flow—the cash that is generated from a company’s normal business operations
Equity Financial data management includes tracking and reporting equity, or the portion of a company that its shareholders own. Equity is the value of a company’s assets minus its liabilities. If a company’s liabilities exceed its assets, there to no equity. There are two types of equity:
- Common equity is the portion of equity that is held by common shareholders.
- Preferred equity is the portion of equity that is held by preferred shareholders.
Expenses Expenses include all of the expenditures required to support operations and business activities, such as the cost of goods sold (COGS), costs of sales, administrative costs, and interest payments. Financial data management includes categorizing and tracking expenses.
Financial statements A financial statement is used to present the financial position, performance, and cash flow of an organization. The main three types of financial statements are:
- Balance sheet
- Cash flow statement
- Income statement
Income Income is the money that an organization earns from operations and business activities. An organization is considered profitable when income is greater than expenses. Conversely, an organization is considered unprofitable when expenses are greater than income. Financial data management covers all income, including:
- Interest income from investments
- Rental income from property
- Revenue from sales
Liabilities Financial obligations or debts that an organization owes (i.e., to another person or entity) are called liabilities. Liabilities can be short-term (i.e., debts due within one year) or long-term (i.e., debts due after one year). Examples of liabilities, that are included in financial data management are:
- Money owed for goods or services that have been received
- Money owed for loans or other debts
- Taxes owed to the government
Shares A share is a unit of ownership in a corporation, also referred to as stock, and it can be either common stock or preferred stock.
- Common stock is the portion of a company’s ownership held by common shareholders, who have voting rights, but do not receive dividend payments or have a priority claim on assets in the event of bankruptcy.
- Preferred stock is the portion of a company’s ownership that is held by preferred shareholders, who do not have voting rights but have a priority claim on a company’s assets in the event of bankruptcy and receive fixed dividend payments.
The role of document control is to manage documents to ensure reliability and trust in the veracity of the contents as well as that organizations get the most value from documents with the least risk. A document control system integrates interrelated processes, workflows, and software products to support the production and management of documents within an organization.
Document control is important for any organization, regardless of the industry, as it helps keep documents up to date and having proper approvals by providing structure to manage the entire lifecycle—creation, revision, distribution, updates, and destruction or archiving at the end of life—in a systematic, verifiable way.
There are many reasons why document control is used, including to:
- Avoid using outdated, incorrect, and inaccurate documents that could result in expensive mistakes.
- Enhance productivity and performance.
- Ensure the safety of employees in organizations, such as construction or engineering firms.
- Ensures the reliability and validity of documents.
- Help meet regulatory compliance requirements.
- Improve the quality of information.
- Keeps verifiable records of activities surrounding the creation and modification of documents.
- Make sure that documents have undergone necessary reviews and approvals.
Additionally, document control helps organizations by eliminating productivity losses caused by:
- Having to recreate missing documents manually.
- Losing files over email or miscommunication.
- Wasting time manually tracking documents
The importance of financial data management is that it can be used to:
- Assess risks
- Benchmark an organization’s performance against its peer
- Eliminate data silos
- Eliminate monotonous and time-consuming tasks
- Identify trends
- Inform decisions related to the allocation of resources and finances
- Manage the volumes and forms of financial data
- Provide a consolidated view of data across disparate locations
- Provide insights into an organization’s financial health and performance
- Reduce the number of data sources and streams
- Replace reports with data that can be weeks or months old with real-time financial information
- Support decision-making related to pricing, investment, and other strategic actions
1. Back up data and have a business continuity plan
No matter the circumstances, downtime is costly—in terms of time and money. Companies of all sizes suffer when there is unscheduled downtime. Worse is when downtime is caused by a data breach. To minimize the impact of a data loss incident, organizations should not only have data backups, but test them and practice restorations to ensure an efficient recovery when it is needed. Recommendations for business continuity plans include:
- Assign and document personnel roles and responsibilities
- Create a communication plan for disasters
- Define physical facility needs
- Document response procedures to restore services smoothly and as quickly as possible
- Establish recovery time objectives (RTO) and recovery point objectives (RPO)
- Identify and catalog sensitive data
- List locations and access protocols for recovery systems
- Maintain an inventory of hardware and software
- Test recovery and service restoration plans with drills
2. Be sure to account for data biases
Data bias is real and, when introduced into financial data management practices, can cause errors by causing some dataset elements to be over or underrepresented. Commonly cited examples of data biases include:
Available data not representative of the population
Breadth of data required for analysis is not used
Inaccurate weights throw off data models
When executing financial data management programs, data analysts should be aware of different biases at each data management and analysis stage to avoid related pitfalls that can irreparably skew the resulting analyses. Common sources of data analysis bias include:
- Availability bias—relying on available data rather than searching for a more complete and representative dataset
- Confirmation bias—focusing on the evidence that confirms an existing theory
- Historical bias—relying on outdated datasets to train and inform new data analysis projects
- Outlier bias—losing or obscuring the truth by failing to remove outliers
- Selection bias—using samples that are not representative of the population for the analysis
- Survivorship bias—drawing a sample made it through a selection process rather than drawing from the entire group
3. Build behavioral models and forecast outcomes using data
Financial data management enables organizations to perform predictive analysis work. The resulting insight makes it possible to take a proactive approach to addressing opportunities and risks. Financial data management supports the development of reliable customer behavior models that can be used to predict outcomes accurately.
4. Develop a financial data management strategy and execution plans
Creating a stratetic financial data management plan is essential for successful execution. It will inform why analysis is required and what data is needed. This allows teams to focus resources on the relevant data. In addition, a strategic financial data management plan helps identify and remediate issues early, preventing time wasted with incorrect approaches or datasets. To get the most out of a financial data management strategy, it is important to follow five data analysis steps:
1. Definition —It is important to define why data analysis is needed and the questions that should be asked to find answers. This streamlines the process by narrowing the scope of the query only to relevant information.
2. Collection —Establish data governance rules and processes that ensure that the right data is gathered and the right people have the appropriate access to data.
3. Cleaning —Create procedures for processing and aggregating raw data from multiple sources to ensure that it is clean and error-free before moving to the analysis phase. Here it is important to follow standard conventions for naming and storing data.
4. Analysis —Effective analysis is dependent on building a financial data management foundation as part of the first three phases. Done correctly, this makes the analysis faster and easier with better results.
5. Application —Once the analysis has been completed, the final phase is interpreting the results and turning them into actionable insights to inform decision-making.
5. Create a team of in-house data analysts
An internal team of data analysts allows organizations to leverage increasing volumes of varying data sources continuously. With such a team in place, organizations can benefit from financial data management programs that can provide timely reporting and data analytics.
6. Eliminate data silos
Proactively seek out data that is an archive controlled by a single entity or is otherwise. These data silos limit the efficacy of financial data management by obscuring views into potentially powerful information. Deep, valuable insights come from the analysis of complete datasets that draw relevant information from all available sources. Several problems that can result from data silos include:
- Lack of a complete view of an organization’s data
- Poor data integrity
- Reduced collaboration due to the inaccessibility of data
- Resource duplication expenses
7. Establish access levels based on projects, job roles, and functions with limits based on the principle of least privilege
Successful financial data management balances giving access to data with protecting it. Following the principle of least privilege, users get access to the information they need to do their jobs for as long as they need it—no longer. To facilitate this, a data classification system should be used to identify sensitive information and who should or should not have access to it.
8. Foster a culture of compliance
Building a culture of compliance in financial data management goes a long way to protecting data, meeting requirements, and being audit-ready. This involves leveraging financial data management tools, such as data discovery, to review, identify, and track data flows to ensure multijurisdictional compliance. Technology should also be complemented with policies that enforce compliance best practices.
9. Make data security a top priority
Data protection and security should be top of mind at all times. Because financial data management involves so much sensitive information, data security must be baked in at all levels. The consequences of a data breach are never good, but for financial organizations, the impact can be catastrophic, with irreparable reputational damage, lost opportunities, and severe penalties for failing to meet regulatory requirements. Data protection should also be required for vendors or partners handling sensitive data. A few tactics to ensure data security include:
- Advanced firewalls
- Encrypting data flows
- Multi-factor authentication
- Secure sharing
- Security awareness training
10. Narrow financial data management scopes to focus on the most valuable information
Being selective with what is being measured and analyzed, allows organizations to deliver accurate and useful insights. This is not possible when every piece of data is collected and run through analytics. Experts agree that effective financial data management relies on the enforcement of the seven standards of reliable data:
1. Accurate and free from error
2. Collected on time
3. Complete and comprehensive
4. Consistent across all systems
5. Current and relevant
6. Extracted from a credible source
7. Standardized format
Financial data management for combining multiple data sources is a powerful tool that innovative organizations and investors. And analysts are using to gain a deep, multi-dimensional view of opportunities and risks. Below are several commonly cited reasons that financial data management combining multiple data sources has become a go-to solution for leaders in all industries.
- Allows separate data sets to be combined and normalized
- Bases analytics on data from different sources
- Centralized control over data requires a centralized data repository such as a data lake, data warehouse,
- Consolidates data from your existing financial systems to centralize into one single source of truth
- Makes all the available data sets and historical changes available in real-time
- Offers more granular insights into the performance and financial details of a business
- Provides robust data that can be used with predictive analytics to make business decisions
- Uses pre-built APIs that pinpoint and pull data from specific financial accounting endpoints
Financial data management solutions transform disparate and siloed information into a strategic advantage. Financial data management is the key to unlocking this strategic value. Using financial data management systems, organizations have ready access to the tools needed to efficiently use information that had been difficult or impossible to access. By allowing it to be aggregated, analyzed, and made actionable, financial data can be effectively used to inform decision-making and as a predictor of future opportunities, risk, and performance.
Egnyte has experts ready to answer your questions. For more than a decade, Egnyte has helped more than 16,000 customers with millions of customers worldwide.
Last Updated: 13th October, 202 3
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Free Business Plan Template for Small Businesses (2024)
Use this free business plan template to write your business plan quickly and efficiently.
A good business plan is essential to successfully starting your business — and the easiest way to simplify the work of writing a business plan is to start with a business plan template.
You’re already investing time and energy in refining your business model and planning your launch—there’s no need to reinvent the wheel when it comes to writing a business plan. Instead, to help build a complete and effective plan, lean on time-tested structures created by other entrepreneurs and startups.
Ahead, learn what it takes to create a solid business plan and download Shopify's free business plan template to get started on your dream today.
What this free business plan template includes
- Executive summary
- Company overview
- Products or services offered
- Market analysis
- Marketing plan
- Logistics and operations plan
- Financial plan
This business plan outline is designed to ensure you’re thinking through all of the important facets of starting a new business. It’s intended to help new business owners and entrepreneurs consider the full scope of running a business and identify functional areas they may not have considered or where they may need to level up their skills as they grow.
That said, it may not include the specific details or structure preferred by a potential investor or lender. If your goal with a business plan is to secure funding , check with your target organizations—typically banks or investors—to see if they have business plan templates you can follow to maximize your chances of success.
Our free business plan template includes seven key elements typically found in the traditional business plan format:
1. Executive summary
This is a one-page summary of your whole plan, typically written after the rest of the plan is completed. The description section of your executive summary will also cover your management team, business objectives and strategy, and other background information about the brand.
2. Company overview
This section of your business plan will answer two fundamental questions: “Who are you?” and “What do you plan to do?” Answering these questions clarifies why your company exists, what sets it apart from others, and why it’s a good investment opportunity. This section will detail the reasons for your business’s existence, its goals, and its guiding principles.
3. Products or services offered
What you sell and the most important features of your products or services. It also includes any plans for intellectual property, like patent filings or copyright. If you do market research for new product lines, it will show up in this section of your business plan.
4. Market analysis
This section includes everything from estimated market size to your target markets and competitive advantage. It’ll include a competitive analysis of your industry to address competitors’ strengths and weaknesses. Market research is an important part of ensuring you have a viable idea.
5. Marketing plan
How you intend to get the word out about your business, and what strategic decisions you’ve made about things like your pricing strategy. It also covers potential customers’ demographics, your sales plan, and your metrics and milestones for success.
6. Logistics and operations plan
Everything that needs to happen to turn your raw materials into products and get them into the hands of your customers.
7. Financial plan
It’s important to include a look at your financial projections, including both revenue and expense projections. This section includes templates for three key financial statements: an income statement, a balance sheet, and a cash-flow statement . You can also include whether or not you need a business loan and how much you’ll need.
Business plan examples
What do financial projections look like on paper? How do you write an executive summary? What should your company description include? Business plan examples can help answer some of these questions and transform your business idea into an actionable plan.
Professional business plan example
Inside our template, we’ve filled out a sample business plan featuring a fictional ecommerce business .
The sample is set up to help you get a sense of each section and understand how they apply to the planning and evaluation stages of a business plan. If you’re looking for funding, this example won’t be a complete or formal look at business plans, but it will give you a great place to start and notes about where to expand.
Lean business plan example
A lean business plan format is a shortened version of your more detailed business plan. It’s helpful when modifying your plan for a specific audience, like investors or new hires.
Also known as a one-page business plan, it includes only the most important, need-to-know information, such as:
- Company description
- Key members of your team
- Customer segments
💡 Tip: For a step-by-step guide to creating a lean business plan (including a sample business plan), read our guide on how to create a lean business plan .
Benefits of writing a solid business plan
It’s tempting to dive right into execution when you’re excited about a new business or side project, but taking the time to write a thorough business plan and get your thoughts on paper allows you to do a number of beneficial things:
- Test the viability of your business idea. Whether you’ve got one business idea or many, business plans can make an idea more tangible, helping you see if it’s truly viable and ensure you’ve found a target market.
- Plan for your next phase. Whether your goal is to start a new business or scale an existing business to the next level, a business plan can help you understand what needs to happen and identify gaps to address.
- Clarify marketing strategy, goals, and tactics. Writing a business plan can show you the actionable next steps to take on a big, abstract idea. It can also help you narrow your strategy and identify clear-cut tactics that will support it.
- Scope the necessary work. Without a concrete plan, cost overruns and delays are all but certain. A business plan can help you see the full scope of work to be done and adjust your investment of time and money accordingly.
- Hire and build partnerships. When you need buy-in from potential employees and business partners, especially in the early stages of your business, a clearly written business plan is one of the best tools at your disposal. A business plan provides a refined look at your goals for the business, letting partners judge for themselves whether or not they agree with your vision.
- Secure funds. Seeking financing for your business—whether from venture capital, financial institutions, or Shopify Capital —is one of the most common reasons to create a business plan.
Why you should you use a template for a business plan
A business plan can be as informal or formal as your situation calls for, but even if you’re a fan of the back-of-the-napkin approach to planning, there are some key benefits to starting your plan from an existing outline or simple business plan template.
No blank-page paralysis
A blank page can be intimidating to even the most seasoned writers. Using an established business planning process and template can help you get past the inertia of starting your business plan, and it allows you to skip the work of building an outline from scratch. You can always adjust a template to suit your needs.
Guidance on what to include in each section
If you’ve never sat through a business class, you might never have created a SWOT analysis or financial projections. Templates that offer guidance—in plain language—about how to fill in each section can help you navigate sometimes-daunting business jargon and create a complete and effective plan.
Knowing you’ve considered every section
In some cases, you may not need to complete every section of a startup business plan template, but its initial structure shows you you’re choosing to omit a section as opposed to forgetting to include it in the first place.
Tips for creating a successful business plan
There are some high-level strategic guidelines beyond the advice included in this free business plan template that can help you write an effective, complete plan while minimizing busywork.
Understand the audience for your plan
If you’re writing a business plan for yourself in order to get clarity on your ideas and your industry as a whole, you may not need to include the same level of detail or polish you would with a business plan you want to send to potential investors. Knowing who will read your plan will help you decide how much time to spend on it.
Know your goals
Understanding the goals of your plan can help you set the right scope. If your goal is to use the plan as a roadmap for growth, you may invest more time in it than if your goal is to understand the competitive landscape of a new industry.
Take it step by step
Writing a 10- to 15-page document can feel daunting, so try to tackle one section at a time. Select a couple of sections you feel most confident writing and start there—you can start on the next few sections once those are complete. Jot down bullet-point notes in each section before you start writing to organize your thoughts and streamline the writing process.
Maximize your business planning efforts
Planning is key to the financial success of any type of business , whether you’re a startup, non-profit, or corporation.
To make sure your efforts are focused on the highest-value parts of your own business planning, like clarifying your goals, setting a strategy, and understanding the target market and competitive landscape, lean on a business plan outline to handle the structure and format for you. Even if you eventually omit sections, you’ll save yourself time and energy by starting with a framework already in place.
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Business plan template FAQ
What is the purpose of a business plan.
The purpose of your business plan is to describe a new business opportunity or an existing one. It clarifies the business strategy, marketing plan, financial forecasts, potential providers, and more information about the company.
How do I write a simple business plan?
- Choose a business plan format, such as a traditional or a one-page business plan.
- Find a business plan template.
- Read through a business plan sample.
- Fill in the sections of your business plan.
What is the best business plan template?
If you need help writing a business plan, Shopify’s template is one of the most beginner-friendly options you’ll find. It’s comprehensive, well-written, and helps you fill out every section.
What are the 5 essential parts of a business plan?
The five essential parts of a traditional business plan include:
- Executive summary: This is a brief overview of the business plan, summarizing the key points and highlighting the main points of the plan.
- Business description: This section outlines the business concept and how it will be executed.
- Market analysis: This section provides an in-depth look at the target market and how the business will compete in the marketplace.
- Financial plan: This section details the financial projections for the business, including sales forecasts, capital requirements, and a break-even analysis.
- Management and organization: This section describes the management team and the organizational structure of the business.
Are there any free business plan templates?
There are several free templates for business plans for small business owners available online, including Shopify’s own version. Download a copy for your business.
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How To Start A Business In 11 Steps (2024 Guide)
Updated: Apr 7, 2024, 1:44pm
Table of Contents
Before you begin: get in the right mindset, 1. determine your business concept, 2. research your competitors and market, 3. create your business plan, 4. choose your business structure, 5. register your business and get licenses, 6. get your finances in order, 7. fund your business, 8. apply for business insurance, 9. get the right business tools, 10. market your business, 11. scale your business, what are the best states to start a business, bottom line, frequently asked questions (faqs).
Starting a business is one of the most exciting and rewarding experiences you can have. But where do you begin? There are several ways to approach creating a business, along with many important considerations. To help take the guesswork out of the process and improve your chances of success, follow our comprehensive guide on how to start a business. We’ll walk you through each step of the process, from defining your business idea to registering, launching and growing your business.
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The public often hears about overnight successes because they make for a great headline. However, it’s rarely that simple—they don’t see the years of dreaming, building and positioning before a big public launch. For this reason, remember to focus on your business journey and don’t measure your success against someone else’s.
Consistency Is Key
New business owners tend to feed off their motivation initially but get frustrated when that motivation wanes. This is why it’s essential to create habits and follow routines that power you through when motivation goes away.
Take the Next Step
Some business owners dive in headfirst without looking and make things up as they go along. Then, there are business owners who stay stuck in analysis paralysis and never start. Perhaps you’re a mixture of the two—and that’s right where you need to be. The best way to accomplish any business or personal goal is to write out every possible step it takes to achieve the goal. Then, order those steps by what needs to happen first. Some steps may take minutes while others take a long time. The point is to always take the next step.
Most business advice tells you to monetize what you love, but it misses two other very important elements: it needs to be profitable and something you’re good at. For example, you may love music, but how viable is your business idea if you’re not a great singer or songwriter? Maybe you love making soap and want to open a soap shop in your small town that already has three close by—it won’t be easy to corner the market when you’re creating the same product as other nearby stores.
If you don’t have a firm idea of what your business will entail, ask yourself the following questions:
- What do you love to do?
- What do you hate to do?
- Can you think of something that would make those things easier?
- What are you good at?
- What do others come to you for advice about?
- If you were given ten minutes to give a five-minute speech on any topic, what would it be?
- What’s something you’ve always wanted to do, but lacked resources for?
These questions can lead you to an idea for your business. If you already have an idea, they might help you expand it. Once you have your idea, measure it against whether you’re good at it and if it’s profitable.
Your business idea also doesn’t have to be the next Scrub Daddy or Squatty Potty. Instead, you can take an existing product and improve upon it. You can also sell a digital product so there’s little overhead.
What Kind of Business Should You Start?
Before you choose the type of business to start, there are some key things to consider:
- What type of funding do you have?
- How much time do you have to invest in your business?
- Do you prefer to work from home or at an office or workshop?
- What interests and passions do you have?
- Can you sell information (such as a course), rather than a product?
- What skills or expertise do you have?
- How fast do you need to scale your business?
- What kind of support do you have to start your business?
- Are you partnering with someone else?
- Does the franchise model make more sense to you?
Consider Popular Business Ideas
Not sure what business to start? Consider one of these popular business ideas:
- Start a Franchise
- Start a Blog
- Start an Online Store
- Start a Dropshipping Business
- Start a Cleaning Business
- Start a Bookkeeping Business
- Start a Clothing Business
- Start a Landscaping Business
- Start a Consulting Business
- Start a Photography Business
- Start a Vending Machine Business
Most entrepreneurs spend more time on their products than they do getting to know the competition. If you ever apply for outside funding, the potential lender or partner wants to know: what sets you (or your business idea) apart? If market analysis indicates your product or service is saturated in your area, see if you can think of a different approach. Take housekeeping, for example—rather than general cleaning services, you might specialize in homes with pets or focus on garage cleanups.
Primary Research
The first stage of any competition study is primary research, which entails obtaining data directly from potential customers rather than basing your conclusions on past data. You can use questionnaires, surveys and interviews to learn what consumers want. Surveying friends and family isn’t recommended unless they’re your target market. People who say they’d buy something and people who do are very different. The last thing you want is to take so much stock in what they say, create the product and flop when you try to sell it because all of the people who said they’d buy it don’t because the product isn’t something they’d buy.
Secondary Research
Utilize existing sources of information, such as census data, to gather information when you do secondary research. The current data may be studied, compiled and analyzed in various ways that are appropriate for your needs but it may not be as detailed as primary research.
Conduct a SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities and threats. Conducting a SWOT analysis allows you to look at the facts about how your product or idea might perform if taken to market, and it can also help you make decisions about the direction of your idea. Your business idea might have some weaknesses that you hadn’t considered or there may be some opportunities to improve on a competitor’s product.
Asking pertinent questions during a SWOT analysis can help you identify and address weaknesses before they tank your new business.
A business plan is a dynamic document that serves as a roadmap for establishing a new business. This document makes it simple for potential investors, financial institutions and company management to understand and absorb. Even if you intend to self-finance, a business plan can help you flesh out your idea and spot potential problems. When writing a well-rounded business plan, include the following sections:
- Executive summary: The executive summary should be the first item in the business plan, but it should be written last. It describes the proposed new business and highlights the goals of the company and the methods to achieve them.
- Company description: The company description covers what problems your product or service solves and why your business or idea is best. For example, maybe your background is in molecular engineering, and you’ve used that background to create a new type of athletic wear—you have the proper credentials to make the best material.
- Market analysis: This section of the business plan analyzes how well a company is positioned against its competitors. The market analysis should include target market, segmentation analysis, market size, growth rate, trends and a competitive environment assessment.
- Organization and structure: Write about the type of business organization you expect, what risk management strategies you propose and who will staff the management team. What are their qualifications? Will your business be a single-member limited liability company (LLC) or a corporation ?
- Mission and goals: This section should contain a brief mission statement and detail what the business wishes to accomplish and the steps to get there. These goals should be SMART (specific, measurable, action-orientated, realistic and time-bound).
- Products or services: This section describes how your business will operate. It includes what products you’ll offer to consumers at the beginning of the business, how they compare to existing competitors, how much your products cost, who will be responsible for creating the products, how you’ll source materials and how much they cost to make.
- Background summary: This portion of the business plan is the most time-consuming to write. Compile and summarize any data, articles and research studies on trends that could positively and negatively affect your business or industry.
- Marketing plan: The marketing plan identifies the characteristics of your product or service, summarizes the SWOT analysis and analyzes competitors. It also discusses how you’ll promote your business, how much money will be spent on marketing and how long the campaign is expected to last.
- Financial plan: The financial plan is perhaps the core of the business plan because, without money, the business will not move forward. Include a proposed budget in your financial plan along with projected financial statements, such as an income statement, a balance sheet and a statement of cash flows. Usually, five years of projected financial statements are acceptable. This section is also where you should include your funding request if you’re looking for outside funding.
Learn more: Download our free simple business plan template .
Come Up With an Exit Strategy
An exit strategy is important for any business that is seeking funding because it outlines how you’ll sell the company or transfer ownership if you decide to retire or move on to other projects. An exit strategy also allows you to get the most value out of your business when it’s time to sell. There are a few different options for exiting a business, and the best option for you depends on your goals and circumstances.
The most common exit strategies are:
- Selling the business to another party
- Passing the business down to family members
- Liquidating the business assets
- Closing the doors and walking away
Develop a Scalable Business Model
As your small business grows, it’s important to have a scalable business model so that you can accommodate additional customers without incurring additional costs. A scalable business model is one that can be replicated easily to serve more customers without a significant increase in expenses.
Some common scalable business models are:
- Subscription-based businesses
- Businesses that sell digital products
- Franchise businesses
- Network marketing businesses
Start Planning for Taxes
One of the most important things to do when starting a small business is to start planning for taxes. Taxes can be complex, and there are several different types of taxes you may be liable for, including income tax, self-employment tax, sales tax and property tax. Depending on the type of business you’re operating, you may also be required to pay other taxes, such as payroll tax or unemployment tax.
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When structuring your business, it’s essential to consider how each structure impacts the amount of taxes you owe, daily operations and whether your personal assets are at risk.
An LLC limits your personal liability for business debts. LLCs can be owned by one or more people or companies and must include a registered agent . These owners are referred to as members.
- LLCs offer liability protection for the owners
- They’re one of the easiest business entities to set up
- You can have a single-member LLC
- You may be required to file additional paperwork with your state on a regular basis
- LLCs can’t issue stock
- You’ll need to pay annual filing fees to your state
Limited Liability Partnership (LLP)
An LLP is similar to an LLC but is typically used for licensed business professionals such as an attorney or accountant. These arrangements require a partnership agreement.
- Partners have limited liability for the debts and actions of the LLP
- LLPs are easy to form and don’t require much paperwork
- There’s no limit to the number of partners in an LLP
- Partners are required to actively take part in the business
- LLPs can’t issue stock
- All partners are personally liable for any malpractice claims against the business
Sole Proprietorship
If you start a solo business, you might consider a sole proprietorship . The company and the owner, for legal and tax purposes, are considered the same. The business owner assumes liability for the business. So, if the business fails, the owner is personally and financially responsible for all business debts.
- Sole proprietorships are easy to form
- There’s no need to file additional paperwork with your state
- You’re in complete control of the business
- You’re personally liable for all business debts
- It can be difficult to raise money for a sole proprietorship
- The business may have a limited lifespan
Corporation
A corporation limits your personal liability for business debts just as an LLC does. A corporation can be taxed as a C corporation (C-corp) or an S corporation (S-corp). S-corp status offers pass-through taxation to small corporations that meet certain IRS requirements. Larger companies and startups hoping to attract venture capital are usually taxed as C-corps.
- Corporations offer liability protection for the owners
- The life span of a corporation is not limited
- A corporation can have an unlimited number of shareholders
- Corporations are subject to double taxation
- They’re more expensive and complicated to set up than other business structures
- The shareholders may have limited liability
Before you decide on a business structure, discuss your situation with a small business accountant and possibly an attorney, as each business type has different tax treatments that could affect your bottom line.
Helpful Resources
- How To Set Up an LLC in 7 Steps
- How To Start a Sole Proprietorship
- How To Start a Corporation
- How To Start a Nonprofit
- How To Start a 501(c)(3)
There are several legal issues to address when starting a business after choosing the business structure. The following is a good checklist of items to consider when establishing your business:
Choose Your Business Name
Make it memorable but not too difficult. Choose the same domain name, if available, to establish your internet presence. A business name cannot be the same as another registered company in your state, nor can it infringe on another trademark or service mark that is already registered with the United States Patent and Trademark Office (USPTO).
Business Name vs. DBA
There are business names, and then there are fictitious business names known as “Doing Business As” or DBA. You may need to file a DBA if you’re operating under a name that’s different from the legal name of your business. For example, “Mike’s Bike Shop” is doing business as “Mike’s Bikes.” The legal name of the business is “Mike’s Bike Shop,” and “Mike’s Bikes” is the DBA.
You may need to file a DBA with your state, county or city government offices. The benefits of a DBA include:
- It can help you open a business bank account under your business name
- A DBA can be used as a “trade name” to brand your products or services
- A DBA can be used to get a business license
Register Your Business and Obtain an EIN
You’ll officially create a corporation, LLC or other business entity by filing forms with your state’s business agency―usually the Secretary of State. As part of this process, you’ll need to choose a registered agent to accept legal documents on behalf of your business. You’ll also pay a filing fee. The state will send you a certificate that you can use to apply for licenses, a tax identification number (TIN) and business bank accounts.
Next, apply for an employer identification number (EIN) . All businesses, other than sole proprietorships with no employees, must have a federal employer identification number. Submit your application to the IRS and you’ll typically receive your number in minutes.
Get Appropriate Licenses and Permits
Legal requirements are determined by your industry and jurisdiction. Most businesses need a mixture of local, state and federal licenses to operate. Check with your local government office (and even an attorney) for licensing information tailored to your area.
- Best LLC Services
- How To Register a Business Name
- How To Register a DBA
- How To Get an EIN for an LLC
- How To Get a Business License
Start an LLC Online Today With ZenBusiness
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Open a Business Bank Account
Keep your business and personal finances separate. Here’s how to choose a business checking account —and why separate business accounts are essential. When you open a business bank account, you’ll need to provide your business name and your business tax identification number (EIN). This business bank account can be used for your business transactions, such as paying suppliers or invoicing customers. Most times, a bank will require a separate business bank account to issue a business loan or line of credit.
Hire a Bookkeeper or Get Accounting Software
If you sell a product, you need an inventory function in your accounting software to manage and track inventory. The software should have ledger and journal entries and the ability to generate financial statements.
Some software programs double as bookkeeping tools. These often include features such as check writing and managing receivables and payables. You can also use this software to track your income and expenses, generate invoices, run reports and calculate taxes.
There are many bookkeeping services available that can do all of this for you, and more. These services can be accessed online from any computer or mobile device and often include features such as bank reconciliation and invoicing. Check out the best accounting software for small business, or see if you want to handle the bookkeeping yourself.
Determine Your Break-Even Point
Before you fund your business, you must get an idea of your startup costs. To determine these, make a list of all the physical supplies you need, estimate the cost of any professional services you will require, determine the price of any licenses or permits required to operate and calculate the cost of office space or other real estate. Add in the costs of payroll and benefits, if applicable.
Businesses can take years to turn a profit, so it’s better to overestimate the startup costs and have too much money than too little. Many experts recommend having enough cash on hand to cover six months of operating expenses.
When you know how much you need to get started with your business, you need to know the point at which your business makes money. This figure is your break-even point.
In contrast, the contribution margin = total sales revenue – cost to make product
For example, let’s say you’re starting a small business that sells miniature birdhouses for fairy gardens. You have determined that it will cost you $500 in startup costs. Your variable costs are $0.40 per birdhouse produced, and you sell them for $1.50 each.
Let’s write these out so it’s easy to follow:
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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 ...
7. Build a Visual Report. If you've closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using "what-if" scenarios. Now, we'll prepare visual reports to present your numbers in a visually appealing and easily digestible format.
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 ...
The financial analysis section should be based on estimates for new businesses or recent data for established businesses. It should include these elements: Balance sheet: Your assumed and anticipated business financials, including assets, liabilities, and equity. Cash-flow analysis: An overview of the cash you anticipate will be coming into ...
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 ...
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.
Business plan financials is the section of your business plan that outlines your past, current and projected financial state. This section includes all the numbers and hard data you'll need to plan for your business's future, and to make your case to potential investors. You will need to include supporting financial documents and any ...
Describe Your Services or Products. The business plan should have a section that explains the services or products that you're offering. This is the part where you can also describe how they fit ...
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 plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.
The balance sheet portion of the financial plan aims to give an idea of what the business will be worth, considering all its assets and liabilities, at a future date. To do this, it uses figures from the income statement and cash flow statement. The essence of a balance sheet is found in the equation: Liabilities + Equity = Assets.
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 ...
Collect relevant historical financial data and market analysis. Forecast expenses. Forecast sales. Build financial projections. The following five steps can help you break down the process of developing financial projections for your company: 1. Identify the purpose and timeframe for your projections.
Financial data is always at the back of the business plan, but that doesn't mean it's any less important than such up-front material as the description of the business concept and the management team.
The financial section of your business plan should include a sales forecast, expenses budget, cash flow statement, balance sheet, and a profit and loss statement. Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board, a private-sector organization responsible for setting ...
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 ...
There are three main financial statements that you will need to include in your business plan financial projections: 1. Income Statement Projection. The income statement projection is a forecast of your company's future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.
Financial plans should use data from the cash flow statement and balance sheet to inform worst-case scenario plans, such as when incoming cash dries up or the business takes an unexpected turn. Some common contingencies include keeping cash reserves or a substantial line of credit for quick access to funds during slow periods.
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. ... He reviews his historical sales data, identifies and understands current market trends, and evaluates the ...
Marketing plan: A strategic outline of how you plan to market and promote your business before, during, and after your company launches into the market. Logistics and operations plan: An explanation of the systems, processes, and tools that are needed to run your business in the background. Financial plan: A map of your short-term (and even ...
Financial metrics are used for benchmarking and goal-setting in asset management, risk management, tax optimization, and financing decisions, among many other areas of a business leader's strategic decision-making. Here are some primary data points to be included in processes for development of business strategy: 1. Net Cash Available.
There are two parts to the financial component of a business plan: historical data and prospective data. 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
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 ...
Back up data and have a business continuity plan. ... Creating a stratetic financial data management plan is essential for successful execution. It will inform why analysis is required and what data is needed. This allows teams to focus resources on the relevant data. In addition, a strategic financial data management plan helps identify and ...
Our free business plan template includes seven key elements typically found in the traditional business plan format: 1. Executive summary. This is a one-page summary of your whole plan, typically written after the rest of the plan is completed. The description section of your executive summary will also cover your management team, business ...
Written by Coursera Staff • Updated on Apr 19, 2024. Data analysis is the practice of working with data to glean useful information, which can then be used to make informed decisions. "It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts," Sherlock ...
The best way to accomplish any business or personal goal is to write out every possible step it takes to achieve the goal. Then, order those steps by what needs to happen first. Some steps may ...
Business analysts are in demand across industries, including finance, healthcare, education, IT, consulting, e-commerce, government, and manufacturing. As a business analyst, you'll have the opportunity to support your organization's success through data-driven insights. In business analytics, every day brings new challenges and new ways to put ...
This brief describes gaps in data about hospital and health system finances and business practices that limit transparency for policymakers, researchers, and consumers. It examines data issues ...
A European advocacy group filed complaints in 11 countries over a new Meta AI policy. NOYB, or None of Your Business, said Meta's new policy would let it scrape user data to train AI. Unlike ...