A good business plan is key to establishing a scalable and profitable business. It will guide you and help you determine how to structure, run and develop the business in both the short- and long term.
On top of that, a well-organized and comprehensive business plan can appeal to investors, which can give you the resources you need to really be successful.
Investors look to put their money in businesses that will continue to grow. In your business plan, you need to justify their risk by demonstrating how you expect your business to expand and when it will become profitable.
A particularly valuable portion of your business plan, a carefully calculated financial projection will help you and potential investors predict your business’ future income and expenses.
It will also help you set financial goals that will inform your decisions as you continue to grow the business.
To create a detailed and accurate financial plan that will, you will need to include:
- Sales forecast
- Expense Budget
- Cash flow statements
- Income statements
- Balance sheet
- Break-even analysis
The sales forecast should breakdown your expected sales on a monthly basis over the first three years of business.
In order to create an accurate projection, startups should be familiar with industry standards, such as:
- How many customers the business should expect in the first few years
- Pricing for products
- How many units the business should expect to sell
If you’re new to the industry, consultants and experts can help you set your expectations for the first few years.
To estimate your projected profit, you should calculate operating cost and then subtract from gross profit.
To understand how much it’s going to cost the business to meet your sales goals, you’ll need to create an expense budget.
Your expense budget needs to include both operating expenses and startup expenses. Startup expenses typically include:
- Insurance, license, and permit fees
- Equipment and supplies
- Website development
- Technological expenses, such as information systems and software
- Initial market research
Then you should include highlight the cost of your both fixed and variable operating expenses.
The income statement covers the company’s revenues and expenses during a particular timeframe. By adding the revenue, expenses, gains, and losses, you can calculate net income and measure the business’ profitability.
Since this income statement is a projection, and is not based on your own sales, you will need to forecast sales revenue, cost of goods sold, depreciation expense, interest expense, and tax expense.
To create an accurate prediction, it helps to look for mentors that are leaders in the industry, hire an accountant, or conduct extensive market research.
For startups, it’s important that you create monthly income statements because it will help you assess the financial impact your strategies have on the business. After the first year of business, you can narrow it down to quarterly statements, and later, annual statements.
Cash Flow Statement
A cash flow statement details how much money comes in and out of your business, using the net income calculated in your income statement to determine how well the company will manage their money overall.
The three biggest components of the cash flow statement are operating, investing, and financing activities. Operating activities cover fluctuations in cash, accounts receivable, depreciation, inventory, and accounts payable.
At the same time, investing activities show how much money is brought in or spent based on the sale or purchase of assets such as property and equipment.
A balance sheet is a breakdown of a business’ assets and liabilities. They’re important because they illustrate your business’ overall financial health.
Typically, a balance sheet is organized by calculating assets on one side of the sheet and liabilities and shareholders’ equity on the other. Ultimately, the sum of shareholder equity and liabilities should be equivalent to the value of assets.
This example values the assets of the fictional Teddy Fab Inc. at $472,100. Teddy Fab Inc.’s current liabilities are valued at $247,000. When added to the value of shareholder’s equity, the company’s liabilities equate to $472,100 as well.
As you can see, the sheet includes a detailed list of each asset, and what their value is. When compiling your list, be sure to include:
- Unsold inventory
- Outstanding invoices
Liabilities, on the other hand, usually refer to business loans and the amount the company owes on other invoices.
Becoming profitable is the #1 goal of any startup. It’s also the biggest decision maker for any investors. With an accurate projection of sales and expenses, startups should be able to pinpoint when they’ll break even.
The break-even point is calculated when total revenue (TR) is equivalent to the total cost (TC). By inputting the data into a spreadsheet, you should be able to identify when the company will become profitable. This graph shows how many units need to be sold in order to reach that point.
With an accurate projection of how much a company can expect to sell in a given time frame, they should be able to estimate the date on which they will reach the break-even point.
This is where industry insight on how many customers to expect in the first few years of a business, how many units you should expect to sell, and how much the good or services should cost, comes in handy.
Most startups break even about 18 months in. However, that can vary based on their business model and industry.
Detailed Financial Projections Can Help Attract Investors
A well-formulated financial projection can demonstrate how you plan to grow your business over the first few years and increase investor interest.
By carefully calculating your sales forecast and expense budgets, you’ll be able to predict your income and when you can hope to become profitable.
To get an accurate estimate of how much you expect to spend in relation to how much you earn, you should rely on your own knowledge or work with an industry expert. This will help you create a realistic financial plan.
As you plan to purchase assets and take on debt to get the project off the ground, you’ll need to create a balance sheet to demonstrate the business’ overall financial health.
A realistic financial projection included in your business plan will set you up for success in the long run. You’ll be able to measure our company’s growth, set benchmarks, and make informed decisions to help you company expand in the market.