As we come toward the close of our business plan series we reach probably the most important section of the plan next to the Executive Summary, the Financials section.
Despite the work you put into creating a stellar business plan most investors will read your executive summary first and then dive right into your financials. Their reasoning is to see how well you have thought out your business model, when you will reach profitability and with a proper exit will it provide the return on investment they are looking for.
So what are the core elements of the financials section?
The financial plan section of the business plan consists of three financial statements, the income statement, the cash flow projection and the balance sheet and a brief explanation/analysis of these three statements.
The way I have done most of these in the past is to build my financial model to detail the relevant expenses and revenue streams to automatically create these statements but also allow me to model the business and change things based on various assumptions.
When it comes to expenses think of your business expenses as broken into two categories; your start up expenses and your operating expenses. Startup expenses are all the costs of getting your business up and running go into the start up expenses category. Operating expenses are the costs of keeping your business running. Think of these as the things you’re going to have to pay each month. Your list of operating expenses may include salaries (yours and staff salaries), rent or mortage payments, telecommunications, utilities, promotion, loan payments and office supplies.
That is just a partial list of things to get you started. Your operating expenses are the costs of what it will take to keep your business running each month. This is also called your “burn rate”. If you take your startup costs and six months of operating costs that is the general rule in how much money you will need to get your business going long enough to get revenue coming in to get you cash flow positive.
Beyond the core financial statements
Many startups can take longer because they have development and staff costs that are high and have such an extensive burn rate that they need outside investment. This is why your projections and return on investment are so important for others to understand what they are getting themselves into. About.com sums it up nicely with what you will need:
- A short-term projection of the first year, broken down by month
- A three-year projection, broken down by year
- 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 it available in case an investor asks for it.
Another thing you must consider in your financials is the case of scenarios. Scenarios are projections that show what the business would look like if certain things happened. Things like no customers for a while vs. a quick rush of new customers, rapid development costs vs. slower development costs.
You really only want to show two scenarios
For many of you going out and getting external funding will not only be required at some point it will be mandatory in order to meet the goals you have set out to achieve. From your financial model you should write in your summary and be able to show on your projections the following:
- Funds required to start the business
- Anticipated funding over the next two, three, and even five years
- Use of funding
- A timeline for funding
Good link love
Here are some excellent links on financials:
Michael’s Big Idea
About.com – Financial Projections
In our final section, Part 10 – Appendices, we will discuss all the stuff you would love to have put in your business plan that would add value but made it a 160 page plan instead of a 25 page plan. These documents are the things that will be critical as you move through the review and due diligence process with potential investors.
If you have thoughts on what you would have done with your financials and what advice you can share with others please leave it in the comments.