Writing A Business Plan:Financial Components
Generally, there are seven major components that make up abusiness plan. They are:
1. Executive summary
2. Business description
3. Market strategies
4. Competitive analysis
5. Design and development plans
6. Operations and management plans
7. Financial factors
Once the product, market, and operations have been defined, youneed to address the real backbone of the business plan -- thefinancial statements. The set of financial statements thatyou'll need to develop include the income statement, thecash-flow statement, and the balance sheet.
The Income Statement
The income statement is a simple and straightforward report onthe proposed business's cash-generating ability. It is a scorecard on the financial performance of your business that reflectswhen sales are made and when expenses are incurred. It drawsinformation from the various financial models developed earliersuch as revenue, expenses, capital (in the form of depreciation),and cost of goods. By combining these elements, the incomestatement illustrates just how much your company makes or losesduring the year by subtracting cost of goods and expenses fromrevenue to arrive at a net result -- which is either a profit or aloss.
For a business plan, the income statement should be generated ona monthly basis during the first year, quarterly for the second,and annually for each year thereafter. It is formed by listing yourfinancial projections in the following manner:
1. Income -- Includes all the income generated by thebusiness and its sources.
2. Cost of goods -- Includes all the costs related to thesale of products in inventory.
3. Gross profit margin -- The difference between revenueand cost of goods. Gross profit margin can be expressed in dollars,as a percentage, or both. As a percentage, the GP margin is alwaysstated as a percentage of revenue.
4. Operating expenses -- Includes all overhead and laborexpenses associated with the operations of the business.
5. Total expenses -- The sum of all overhead and laborexpenses required to operate the business.
6. Net profit -- The difference between gross profitmargin and total expenses, the net income depicts thebusiness's debt and capital capabilities.
7. Depreciation -- Reflects the decrease in value ofcapital assets used to generate income. Also used as the basis fora tax deduction and an indicator of the flow of money into newcapital.
8. Net profit before interest -- The difference betweennet profit and depreciation.
9. Interest -- Includes all interest derived from debts,both short-term and long-term. Interest is determined by the amountof investment within the company.
10. Net profit before taxes -- The difference between netprofit before interest and interest.
11. Taxes -- Includes all taxes on the business.
12. Profit after taxes -- The difference between netprofit before taxes and the taxes accrued. Profit after taxes isthe bottom line for any company.
Following the income statement is a short note analyzing thestatement. The analysis statement should be very short, emphasizingkey points within the income statement.
Cash-Flow Statement
The cash-flow statement is one of the most critical informationtools for your business, showing how much cash will be needed tomeet obligations, when it is going to be required, and from whereit will come. It shows a schedule of the money coming into thebusiness and expenses that need to be paid. The result is theprofit or loss at the end of the month or year. In a cash-flowstatement, both profits and losses are carried over to the nextcolumn to show the cumulative amount. Keep in mind that if you runa loss on your cash-flow statement, it is a strong indicator thatyou will need additional cash in order to meet expenses.
Like the income statement, the cash-flow statement takesadvantage of previous financial tables developed during the courseof the business plan. The cash-flow statement begins with cash onhand and the revenue sources. The next item it lists is expenses,including those accumulated during the manufacture of a product.The capital requirements are then logged as a negative afterexpenses. The cash-flow statement ends with the net cash flow.
The cash-flow statement should be prepared on a monthly basisduring the first year, on a quarterly basis during the second year,and on an annual basis thereafter. Items that you'll need toinclude in the cash-flow statement and the order in which theyshould appear are as follows:
1. Cash sales -- Income derived from sales paid for bycash.
2. Receivables -- Income derived from the collection ofreceivables.
3. Other income -- Income derived from investments,interest on loans that have been extended, and the liquidation ofany assets.
4. Total income -- The sum of total cash, cash sales,receivables, and other income.
5. Material/Merchandise -- The raw material used in themanufacture of a product (for manufacturing operations only), thecash outlay for merchandise inventory (for merchandisers such aswholesalers and retailers), or the supplies used in the performanceof a service.
6. Production labor -- The labor required to manufacturea product (for manufacturing operations only) or to perform aservice.
7. Overhead -- All fixed and variable expenses requiredfor the production of the product and the operations of thebusiness.
8. Marketing/Sales -- All salaries, commissions, andother direct costs associated with the marketing and salesdepartments.
9. R&D -- All the labor expenses required to supportthe research and development operations of the business.
10. G&A -- All the labor expenses required to supportthe administrative functions of the business.
11. Taxes -- All taxes, except payroll, paid to theappropriate government institutions.
12. Capital -- The capital required to obtain anyequipment elements that are needed for the generation ofincome.
13. Loan payment -- The total of all payments made toreduce any long-term debts.
14. Total expenses -- The sum of material, direct labor,overhead expenses, marketing, sales, G&A, taxes, capital, andloan payments.
15. Cash flow -- The difference between total income andtotal expenses. This amount is carried over to the next period asbeginning cash.
16. Cumulative cash flow -- The difference betweencurrent cash flow and cash flow from the previous period.
As with the income statement, you will need to analyze thecash-flow statement in a short summary in the business plan. Onceagain, the analysis statement doesn't have to be long andshould cover only key points derived from the cash-flowstatement.
The Balance Sheet
The last financial statement you'll need to develop is thebalance sheet. Like the income and cash-flow statements, thebalance sheet uses information from all of the financial modelsdeveloped in earlier sections of the business plan; however, unlikethe previous statements, the balance sheet is generated solely onan annual basis for the business plan and is, more or less, asummary of all the preceding financial information broken down intothree areas:
1. Assets
2. Liabilities
3. Equity
To obtain financing for a new business, you may need to providea projection of the balance sheet over the period of time thebusiness plan covers. More importantly, you'll need to includea personal financial statement or balance sheet instead of one thatdescribes the business. A personal balance sheet is generated inthe same manner as one for a business.
As mentioned, the balance sheet is divided into three sections.The top portion of the balance sheet lists your company'sassets. Assets are classified as current assets and long-term orfixed assets. Current assets are assets that will be converted tocash or will be used by the business in a year or less. Currentassets include:
1. Cash -- The cash on hand at the time books are closedat the end of the fiscal year. This refers to all cash in checking,savings, and short-term investment accounts.
2. Accounts receivable -- The income derived from creditaccounts. For the balance sheet, it is the total amount of incometo be received that is logged into the books at the close of thefiscal year.
3. Inventory -- This is derived from the cost of goodstable. It is the inventory of material used to manufacture aproduct not yet sold.
4. Total current assets -- The sum of cash, accountsreceivable, inventory, and supplies.
Other assets that appear in the balance sheet are calledlong-term or fixed assets. They are called long-term because theyare durable and will last more than one year. Examples of this typeof asset include:
1. Capital and plant -- The book value of all capitalequipment and property (if you own the land and building), lessdepreciation.
2. Investment -- All investments by the company thatcannot be converted to cash in less than one year. For the mostpart, companies just starting out have not accumulated long-terminvestments.
3. Miscellaneous assets -- All other long-term assetsthat are not "capital and plant" or"investments."
4. Total long-term assets -- The sum of capital andplant, investments, and miscellaneous assets.
5. Total assets -- The sum of total current assets andtotal long-term assets.
After the assets are listed, you need to account for theliabilities of your business. Like assets, liabilities areclassified as current or long-term. If the debts are due in oneyear or less, they are classified as a current liabilities. If theyare due in more than one year, they are long-term liabilities.Examples of current liabilities are as follows:
1. Accounts payable -- All expenses derived frompurchasing items from regular creditors on an open account whichare due and payable.
2. Accrued liabilities -- All expenses incurred by thebusiness which are required for operation but have not been paid atthe time the books are closed. These expenses are usually thecompany's overhead and salaries.
3. Taxes -- These are taxes that are still due andpayable at the time the books are closed.
4. Total current liabilities -- The sum of accountspayable, accrued liabilities, and taxes.
Long-term liabilities include:
1. Bonds payable -- The total of all bonds at the end ofthe year that are due and payable over a period exceeding oneyear.
2. Mortgage payable -- Loans taken out for the purchaseof real property that are repaid over a long-term period. Themortgage payable is that amount still due at the close of books forthe year.
3. Notes payable -- The amount still owed on anylong-term debts that will not be repaid during the current fiscalyear.
4. Total long-term liabilities -- The sum of bondspayable, mortgage payable, and notes payable.
5. Total liabilities -- The sum of total current andlong-term liabilities.
Once the liabilities have been listed, the final portion of thebalance sheet -- owner's equity -- needs to be calculated. Theamount attributed to owner's equity is the difference betweentotal assets and total liabilities. The amount of equity the ownerhas in the business is an important yardstick used by investorswhen evaluating the company. Many times it determines the amount ofcapital they feel they can safely invest in the business.
In the business plan, you'll need to create an analysisstatement for the balance sheet just as you need to do for theincome and cash-flow statements. The analysis of the balance sheetshould be kept short and cover key points about the company.
