How to Create the Financial Projections for Your Business Plan An Edward Lowe Quick-Read Solution With

a good business plan, you can land investors and help your company grow. Learn why the financial section of the plan is so important, and get tips on what information to include. OVERVIEW [top] If you want to convince investors and lenders to commit to your vision and your company, a well-organized strategic business plan is a must. It shows the company's potential and demonstrates how the business will create a return on the investment requested. The financial section of that plan is critical to convincing investors that the company has reliably estimated its costs and revenue potential and that it offers a plausible asset and debt structure. Your accounting unit will prepare your balance sheet and income statement (profit and loss), but you'll need to know the details intimately to write the plan's three-to-five-year financial projections, to be prepared to discuss the content with potential investors, and to translate the plan into action. If you need a refresher on financials, see the Business Builders on Financial Statements. This Quick-Read assumes you have a marketing plan in place with three-to-five-year projections for sales and costs of sales, and a personnel plan projecting numbers of employees and wages. In this Quick-Read you will find: • • Why the financial section of the business plan is vital for both investors and entrepreneurs. Guidelines for preparing the financial projections.

SOLUTION [top] A well-written strategic business plan is essential to the capital-raising process for a growing company. Banks and investors won't provide money for an operation that doesn't have a clear plan to assure return on investment and growth. The plan helps management focus on the growth of the company and decide how that growth will be achieved. Prospective investors will be especially attentive to the financial section of the plan. Because too much or too little outside funding will inhibit return on investment and growth, funding needs must be projected as precisely as possible. This requires dependable and reliable financial statements. You'll need to prepare spreadsheets projecting monthly figures for the next year and annual figures for the following two to four years, starting with your current income statement, cash flow statement and balance sheet. You should add rows for financial ratios that you or prospective investors are likely to care about, for example, debt to equity, assets to liabilities. If you start with the income statement projections, you'll find that the numbers are well suited for re-use in the monthly and annual projections for the cash flow statement and the annual balance sheets. Specialized business-plan software can be purchased to create pro forma (projected) financial statements based on past financials, but you probably will be able to predict future performance as well as the software by examining the history of each line entry to determine if it is steadily rising or rising on a curve. Unlike most software, you will be able to factor into your projections variables you know will change. (Be sure to make a note for each significant controlling factor, to explain deviations to the readers.) You may want to graph the past numbers to make the trends easier to see.

As you draft your forecasts, do not include outside funding. Write in all the expenditures you need to maximize realistic long-term growth, and let the projected deficit grow. The cumulative deficit will determine just how much funding you need; and once you know that, you can decide where to turn for it. Your pro forma financials should provide clear answers to the fundamental questions: • • • • What major capital purchases will be needed? Property? Equipment? When? What changes will be needed in operating cost expenditures? When? What personnel-cost changes are expected? When? When will the operation break even?

Once you have drafted the pro forma financials, you should look for potential problems. What if you lose your biggest customers? What if your raw goods prices rise faster than expected? Write contingency plans, and consider adding a "contingencies" line to your balance sheet. Potential investors know bad things can happen, and most will be impressed, not turned off, if you show you are prepared for problems. The financial projections provide a valuable budget and planning tool. Try varying production details. What happens if you plan to sell fewer units at higher quality and/or provide more customer support for a higher price? What if you lease or finance significant capital purchases instead of paying cash? Once you know how much money you will need and when, you can make the most effective decision regarding how much financing to seek from whom. Should you take out loans for specific capital purchases using the purchased property itself as collateral? Can you get by on relatively inexpensive loans, or will you need to pursue more expensive venture capital from outside investors? The cost of capital will have a great effect on the remaining important projection you need to supply: the breakeven analysis. In this breakeven analysis and adjusted cash flow projections, you also should stress your plan for cashing out the investors and paying off the debt. Of all the specifics of the business, investors are most interested in their return on investment and the timing of the pay-out. Lenders also want to know how long there will be an outstanding debt and how high it will be. By addressing these concerns directly and prominently, you reassure investors that you have their interests as a top priority. If you project rapid growth and good profits, graphing your cumulative debt/cash flow situation to show your breakeven point will make the strongest possible impression on readers. It will make it clear at a glance when you will be able to pay off investors, and it will emphasize your coming financial strength. After completing your plan, have others review it before sending it to investors. This will give you an objective viewpoint on how the plan will come across to disinterested individuals. Other entrepreneurs, your accountant and business advisers are in the best position to provide constructive comments. REAL-LIFE EXAMPLE [top]

Three car dealerships for the same foreign-car manufacturer wanted to merge to become more efficient, but the automaker had never allowed such a merger before and was dubious of the benefits. The companies hired a financial adviser to create a new business plan for the three merged dealerships to show the advantages. It included a new breakdown of ownership, organizational chart, responsibilities of executives and a marketing plan. The key to the merger's success lay in the financial section of the new business plan. This included the three company's existing financial statements as well as a projection for how profits would increase by eliminating redundancies and expanding the particular services each excelled at (i.e., new — versus used — car sales versus sales and mechanical training for all branches). It showed the economies of scale that would result and forecasted business for the merged company. After three meetings with the companies and going over the details, the automaker approved the merger — the first it ever had allowed. Executives acknowledged that the financial statement was the key, as they had never seen forecasting in such detail for a proposed merged company. In fact, the merged company increased sales from $33 million to $50 million in its first year. DO IT [top]
1. Review want ads to learn current salaries and determine your staffing and cost needs

appropriately. 2. Evaluate costs for expansion needs of inventory and office space. Also look at how high your sales must be before the commitment to new overhead expenses can be offset by additional profits. 3. Use a loose-leaf format for your business plan so you can add or delete pages quickly and limit the distribution of sections that are confidential or contain sensitive material. 4. Number columns for time periods rather than using dates, which can make the business plan look outdated quickly; for example, rather than starting with columns for October, November and December, start with Month 1, Month 2 and Month 3. 5. If there's an especially impressive trend you want the readers to notice, chart it. 6. Do not fudge your numbers to get the bottom line you want. Your potential investors are in the business of spotting questionable projections, and when they do, they'll be gone and lost to you forever. RESOURCES [top] Books , by Paul Tiffany and Steven D. Peterson (IDG, 1997). Not just basic, despite the title. See especially Chapters 11-13: "Forecasting and Budgeting," "Preparing for Change," and "Thinking Strategically."
Business Plans for Dummies Definitive Business Plan: The Fast Track to Intelligent Business Planning for Executives and Entrepreneurs

, by Richard Stutely

(Financial Times/Prentice Hall, 2002). Internet Sites Web articles
Sample Business Plans

. Bplans.com/Palo Alto Software. (from CAC member Doug Wilson's company)

Article Contributors Writer: Craig A. Shutt and Richard Blue Craig A. Shutt interviewed Dr. Bart A. Basi of the Center for Financial, Legal & Tax Planning Inc. in Marion, Ill., for this Quick-Read Solution. This Quick-Read Solution was originally published in 2001. © 1992-2007 Edward Lowe Foundation. All rights reserved. To contact us or to read the foundation's disclaimers and notices, go to EdwardLowe.org.

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