This article is part of a series on how to write a great business plan.
Numbers tell the story. Bottom line results indicate the success or failure of any business.
Financial projections and estimates help entrepreneurs, lenders, and investors or lenders objectively evaluate a company's potential for success. If a business seeks outside funding, providing comprehensive financial reports and analysis is critical.
But most importantly, financial projections tell you whether your business has a chance of being viable--and if not let you know you have more work to do.
Most business plans include at least five basic reports or projections:
- Balance Sheet: Describes the company cash position including assets, liabilities, shareholders, and earnings retained to fund future operations or to serve as funding for expansion and growth. It indicates the financial health of a business.
- Income Statement: Also called a Profit and Loss statement, this report lists projected revenue and expenses. It shows whether a company will be profitable during a given time period.
- Cash Flow Statement: A projection of cash receipts and expense payments. It shows how and when cash will flow through the business; without cash, payments (including salaries) cannot be made.
- Operating Budget: A detailed breakdown of income and expenses; provides a guide for how the company will operate from a "dollars" point of view.
- Break-Even Analysis: A projection of the revenue required to cover all fixed and variable expenses. Shows when, under specific conditions, a business can expect to become profitable.
It's easy to find examples of all of the above. Even the most basic accounting software packages include templates and samples. You can also find templates in Excel and Google Docs. (A quick search like "google docs profit and loss statement" yields plenty of examples.)
Or you can work with an accountant to create the necessary financial projections and documents. Certainly feel free to do so... but I'd first recommend playing around with the reports yourself. While you don't need to be an accountant to run a business, you do need to understand your numbers... and the best way to understand your numbers is usually to actually work with your numbers.
But ultimately the tools you use to develop your numbers are not as important as whether those numbers are as accurate as possible--and whether those numbers help you decide whether to take the next step and put your business plan into action.
Then Financial Analysis can help you answer the most important business question: "Can we make a profit?"
Some business plans include less essential but potentially important information in an Appendix section. You may decide to include, as backup or additional information:
- Resumes of key leaders
- Additional descriptions of products and services
- Legal agreements
- Organizational charts
- Examples of marketing and advertising collateral
- Photographs of potential facilities, products, etc
- Backup for market research or competitive analysis
- Additional financial documents or projections
Keep in mind creating an Appendix is usually only necessary if you're seeking financing or hoping to bring in partners or investors. Initially the people reading your business plan don't wish to plow through reams and reams of charts, numbers, and backup information. If one does want to dig deeper, fine--he or she can check out the documents in the Appendix.
That way your business plan can share your story clearly and concisely.
Otherwise, since you created your business plan... you should already have the backup.
And one last thing: always remember the goal of your business plan is to convince you that your idea makes sense--because it's your time, your money, and your effort on the line.
More in this series:
- How to Write a Great Business Plan: Key Concepts
- How to Write a Great Business Plan: the Executive Summary
- How to Write a Great Business Plan: Overview and Objectives
- How to Write a Great Business Plan: Products and Services
- How to Write a Great Business Plan: Market Opportunities
- How to Write a Great Business Plan: Sales and Marketing
- How to Write a Great Business Plan: Competitive Analysis
- How to Write a Great Business Plan: Operations
- How to Write a Great Business Plan: Management Team
- How to Write a Great Business Plan: Financial Analysis