Business Plans 101: Part 2
A business has a substantially better chance of succeeding if the entrepreneur takes the time to write a business plan. Not only can missteps be avoided, but the process of writing a business plan also allows the entrepreneur the opportunity to think proactively instead of reactively. When dealing with the day-to-day needs of a business the entrepreneur is typically in “firefighter mode,” putting out the fires of the day. Writing a business plan lets the entrepreneur take a step back and think about the business in a “big picture” context.
What Needs to be Included in a Business Plan?
There are two primary components to a business plan: (1) the narrative
or text portion (i.e., the words) and (2) the quantitative or
financial portion (i.e., the numbers). Below is a detailed description
of what is needed in the financial portion of a business plan. Be sure
to keep in mind that the words should drive the numbers, not
the other way around. Note: A
detailed discussion of the narrative portion is included in Business
Plans 101: Part 1.
Part 2. The Financials
When putting together a business plan’s financials, it is important to understand that the numbers need to support the words. Carefully examine your financials to be sure that you are where you want to be—sales don’t necessarily equal profits, and without making a profit your business won’t survive.
1. Sources and Uses of Funding
This spreadsheet is essentially a numerical restatement of the Application and Expected Effect of Investment/Loan section in the narrative portion of your business plan. Here you are listing the specific expenditures you will make with the loan/investment.
2. Capital Equipment List
This spreadsheet lists all the equipment you use to make your business run. In other words, this is the equipment you use to provide a service, manufacture a product or use to sell, store or deliver merchandise. It is not equipment that you sell in the normal course of business. Equipment that you expect to replace frequently (annually or more often) is not included on this list. Capital equipment can include office furniture, computers, store fixtures, machinery used to make products or deliver services, delivery vehicles, etc.
3. Balance Sheet
A balance sheet shows the assets, liabilities and net worth of a business at a specific point in time. The format is standardized, so balance sheets for all companies, big and small, contain the same categories arranged in the same order—although there are differences in detail, meaning the categories chosen will reflect the specific business you are in.
4. Breakeven Analysis
A breakeven analysis shows the point at which your business will break even, i.e., you are neither making a profit nor losing money—shown either in dollar sales or unit sales. Your breakeven point is a target that you plan to meet and then exceed. The basic breakeven formula is: Sales = Fixed Costs + Variable Costs
If you want to calculate your projected breakeven and you don't know your total variable costs, you can vary the formula above based on gross margin, where Gross Margin is calculated as a percentage of sales: Sales = Fixed Costs / Gross Margin
5. Projected Income Statement
While a balance sheet shows a business’s financial state at a specific point in time, an income statement (or profit & loss statement) shows a business’s financial state over a period of time. These numbers typically become the basis for your budget(s). It is also important to include an explanation of the assumptions used in creating your Projected Income Statements. Below are the spreadsheets that I typically include in the financial portion of a business plan.
• Three-Year Summary
• Detail by Month, Year 1
• Detail by Quarter, Year 2 & Year 3
• Notes of Explanation
6. Cash Flow Projections
The most important financial spreadsheet you create is the cash flow projection. It shows a how and when cash will flow in and out of the business over a period of time. Cash is king, and a good cash flow projection can be the difference between success and failure. Among other things, a good cash flow analysis will show you how much cash your business will need and when it will be needed. Below are the spreadsheets that I typically include in the financial portion of a business plan.
• Detail by Month, Year 1
• Detail by Quarter, Year 2 & Year 3
• Notes of Explanation
If you address these issues thoroughly, the reader should not be left with any obvious questions. The challenge is to have a business plan that tells a coherent story and has the numbers to support that story.