7.

Financial Plan
This is the most crucial part of your business plan. The tone of this section will depend on
who the recipient of your business plan is.

If the recipient of your business plan is a lender you need to show that your business is
going to be stable, profitable and cash generative and that you are not going to take too
much risks. If it is an equity investor you need to show that your business can become
big and cash generative enough to make it easy to sell and enable him to reach his target
return.

As a minimum you will need to show a full set of financial statements (P&L, cash flow
statement and balance sheet) over three years and a monthly cash flow statement. It is
also good practice to show a monthly P&L and balance sheet for the first year.

The reason why investors like to see monthly numbers for the first year is that it is going
to be the most critical year as:

 it is the year you are the most vulnerable

 any delay or underperformance will have some repercussions over the year 2 and
3

If you don't have a finance background it is recommended that you use a professional
tool to help you with the financial forecast. The Business Plan Shop offers an easy to use
online solution that can help you easily produce your financial statements as well as a
professional looking business plan exportable in PDF. In our application you will find most
of the tips included in this guide along with precise examples for each section of the plan.
You can learn more about our solution here.

Start-up Funding
In this section you will list the sources and uses of funds required to start your business.

The investor will look at how much is needed and how much money is brought to the table
by the shareholders. If you are writing your plan for a retail bank it is important that you
isolate the assets, inventory and VAT on a separate line as they often offer specific loans
adapted to each of these categories.

Important Assumptions
This section is a disclaimer section. You must identify the key assumptions underlying
your financial forecasts. These are the assumptions the investor will stress (i.e. run
scenarios on) to test the viability of your plan and estimate the potential downsides and
upsides.
Try to identify both assumptions on the revenue and on the cost side of the business.
Let's take an example and look at an e-commerce site.

If you are operating an e-commerce site there are usually two main things your business
profitability will depend on:

 the average basket: which is how much one customer is expected to spend in
average
 the customer acquisition cost: which is how much you need to spend in marketing
to acquire one customer

The first item is revenue related and has the most significant impact on your plan. This
assumption as a 1:1 impact on your sales forecast and even a greater impact on your
profit. The second one is also crucial as it impacts your profitability and your ability to
scale.

Let's look at a numerical example in order to get a better understanding of the impacts of
these two drivers:

Table: key assumptions for an e-commerce site

Average Customer
basket acq. cost Cumulative
Base case impact impact impact

Number customers 1,000 1,000 1,000 1,000

Average basket P40.00 P36.00 P40.00 P36.00

Sales P40,000 P36,000 P40,000 P36,000

Gross profit P12,000 P10,800 P12,000 P10,800

(30% margin)

Customer acq. cost P8.00/cust. P8.00/cust. P8.80/cust. P8.80/cust.

 Total customer acq. P8,000 P8,000 P8,800 P8,800
cost

Profit P4,000 P2,800 P3,200 P2,000

Profit margin 10.00% 7.78% 8.00% 5.56%

As you can see from the table above a 10% deviation on price will have a 30% impact on
profit, a 10% deviation in the customer acquisition cost would cost you 20% of your profit
and both impacts would reduce your profit by 50%!

And these are not remote possibilities. Let's say that your acquisition costs are related to
pay per click advertising on the internet and that your average cost per click is P0.4. A P8
cost per customer means that you have a conversion rate of 5%: it takes 20 clicks to
make one sale. Now a P8.8 cost per customer means that it takes you 22 clicks to make
one sale. As little as 2 more clicks can cost you 20% of your profit!

Now the positive thing is that if you built a complete financial model and identified these
key drivers you can closely monitor these two elements. Chances are that you will get
these wrong in your first plan but if you monitor them you will be able to quickly update
your plan and get a revised financial projection. This will enable you to get a better view
on how much cash your business will generate or need. And give you the ability to
anticipate any upcoming difficulties with your investors or plan what to do with the excess
cash flow if things go better than expected.

Note that in my example I did not take the number of customers as a key assumption.
This is because I made the assumption that 100% of the traffic was coming from
advertising. This is specific to e-commerce sites: chances are your site in its first year will
rank on page 20 of Google and that you will have to acquire the main part of your traffic.

Sales Forecast
The sales forecast section is probably the second most important one in your business
plan. This section relates directly to the market analysis, competitive edge, marketing plan
and pricing sections. The objective here is to build and justify your sales estimate for the
next three years.

Building a sales forecast is a double exercise. You first need to build the numbers using
a bottom-up approach and then sanity check them using a top-down approach. For a
complete how to guide we encourage you to read our sales forecast article.

Once you have built a realistic top line, you need to focus on the costs.
Cost Structure
This part is all about analysing the operational risk of a business. The analysis resides in
two fundamental notions: operating leverage and breakeven point.

Breakeven

Let's start with the breakeven point which is the level of sales required to reach
profitability.

Every business has 2 types of costs: fixed and variable costs. The fixed costs as their
name indicates are the costs that will be incurred independently from the level of sales.
For example the rent of a shop. The variable costs are the costs which depend on the
level of activity. For example: the cost of the goods sold in a shop.

The breakeven point is then computed by dividing the total amount of fixed costs
by the margin on variable costs.

Let's take an example. If the only fixed cost of a shop is its rent of P2,000/month and if
the shop sells goods it buys at P30/item at a price of P50/item. Then the shops makes:

50 - 30 = P20 of profit over variable costs per item.

Which means it needs to sell 2,000 / 20 = 100 items to cover the cost of the rent. The
breakeven point of this shops is therefore 100 items.

The direct conclusion of this is that the higher the fixed costs, the more sales are required
to cover them, and therefore the higher the risk of the business is. In plain English variable
costs are great fixed costs are bad!

Operating leverage

What about operating leverage then? Well, operating leverage has to do with operating
profit elasticity, which is the impact of a difference of 1% in sales on the operating profit.
This seems complex but it is in fact really simple. There are two dimensions in the
operating leverage: the level of fixed vs. variable costs and the margin on variable costs.

As we just saw above the more fixed costs a business has the more sales it needs in
order to start making profit. But this is not the whole story. Consider two businesses in
the same industry. Business A is manufacturing its goods in house while business B is
outsourcing the manufacture to a supplier. As a result business A has higher fixed costs
than business B (the cost of the factory), but at the same time business A is earning more
on each sale than business B because it doesn't have to pay the supplier's margin.
Therefore there is an expectation that a more operationally leveraged business will
generate higher returns past its breakeven point.
The second aspect of operating leverage is the level of contribution (or margin on variable
costs). If your contribution is high then it takes only a few sales to cover your fixed costs
and start making profit. The flip side of this is that a small forecasting error will have a
huge impact on your level of profit and cash flows.

The key takeaways here are that investors will look at the level of fixed vs. variable costs
in your business to evaluate its operating risk. They will expect to see the calculation of
your breakeven point either expressed in units or days of sales.

Investors will also judge you on your ability to use operating leverage to your advantage.
If you are starting up in a niche where the market is uncertain they will expect you to focus
on sales and to have outsourced as many services as possible. You will make less profit
but will require less sales to make profit hereby de-risking the cost side of your business
to balance with the risks on the revenue side. Now if you are an established business in
a price driven market, investors will expect you to do the exact opposite: outsource
services only if it makes you save money and try to limit margin frictions to the maximum
by using economies of scale to either increase your margin or reduce you price to
increase market share.

Financial Statements
This section is where you present your financial statements. You can have the yearly
statements here along with the monthly cash flow projections and put the monthly balance
sheet and P&L in appendix.

You need to walk the reader through the key items of each statements:

 P&L: revenues, growth, EBITDA, EBITDA margin and any unusual or one-off items
 Cash flow statement: operating cash flow, operating cash flow conversion (% of
EBITDA), any major investments, main debt repayments if any, and any unusual
items.
 Monthly cash flow statement: any working capital swings or seasonal peaks or
troughs.
 Balance sheet: level of cash, debt and equity.

Legend: EBITDA - Earnings Before Interest, Taxes, Depreciations, and Amortizations

Your funding needs to be balanced (positive cash position) and you need to break even
during the course of your plan. You might also want to touch on some additional ratios.
In particular if your business has a significant working capital requirement, you can
mention the working capital ratios (WC / sales, days of payables and receivables). You
can also mention either some credit ratios if the plan is for a bank (debt/EBITDA, net
debt/EBITDA, interest coverage ratio) or some more equity focused ratios (operating cash
flow / capital employed, revenues / total assets, dividend yield and dividend per share if
relevant).