Understand Your Financial Projections for the Business Plan
Published May 6, 2010 | 
As you prepare for the financial portion of the business plan, understand that the financial projections section should be thought of as simply quantifying the effects of what was presented in the plan narrative, and while the projections are concerned with the future, don’t think of the projections as merely a “prediction,” instead, the projections should be thought of as goal-setting with respect to your business’ revenues and expenses, and it always must be remembered that you cannot predict the future, yet this is precisely why planning is necessary, because you can make plans, set expectations, and goals.
Your projections should at the least include a list of required funds and their specific uses, a sales forecast showing at least monthly for the first year, and quarterly for subsequent years, a variable cost of sales analysis, a fixed-expense operating budget, a projected profit and loss statement, a projected cash flow statement, balance sheet, important profitability ratios, and breakeven analysis.
You should always list out exactly how much money you need to make your plan a reality, and your listing should break these costs down into both 
Fixed Assets and Working Capital, with Fixed Assets being property that usually has some sort of long-term depreciable value, and Working Capital is money that will be used to finance the short-term operations of the business.
For your sales forecast, don’t let fear of prediction stop you from arriving at projected revenue figures, understand that every business sells units of something, whether it be hours, projects, products, services, etc, and simply set goals for the numbers of units you believe you can sell, taking into account any seasonality factors, and finally, multiply these units by your average established a prices and the result is your sales forecast in dollars. Also, each fundamental assumption that you make needs to be documented in this section since the assumptions themselves can be more important than the final numbers.
It is important to understand that variable costs are those cost that are incurred every time a sale is made, and they of course vary with sales, while they are the direct cost associated with the producing or selling your products and services, 
which include the cost of goods themselves, along with any direct labor associated with creating the product, or any materials that go into the product itself.
Fixed expenses never vary with sales and are usually tied to some contractual arrangement or indirect cost of doing business such as rent, salaries, loan obligations, insurance, and advertising, and you should develop a monthly fixed expense budget for the year detailing these amounts and when they occur.
A profit and loss statement commonly called the “P&L” combine’s the revenue, variable cost, and fixed cost amounts, in order to see if the business is operating at a profit or at a loss, and this statement tries to line up all revenues and expenses to determine the profitability potential of the business.
It is critical you understand that even the most knowledgeable Entrepreneurs often seek assistance with the preparation of Financial Projections for their business model, since they have limited experience if any judging the accuracy of the predicted results and gathering the information to support both the assumptions and results including both demographic market and business and industry benchmark data.
Understand How You Create a Business Plan – Part 3
Published April 26, 2010 | As stated earlier, the financial projections section of the plan should be thought of as simply quantifying the effects of what was presented in the plan narrative and although the projections are concerned with the future don’t think of the projections as merely a prediction, instead, the projections should be thought of as researched and accurate goal-setting with respect to revenues and expenses. 
Remember, we cannot predict the future and this is precisely why research and planning is necessary, since we can make plans, and set the most accurate expectations and goals possible. The important point to remember is for the most accurate projections/goal-setting your research must be the best and most complete available that you can obtain about all facets of the market, industry, and demographics.
Your financial projections should include at least a listing of required funds and their uses, a sales forecast (at least monthly for the first year and quarterly for additional years), a variable cost of sales analysis, a fixed expense operating budget, a projected profit and loss statement, and possibly a projected cash flow statement, a balance sheet, and any breakeven analysis will be a valuable component to include.
You should detail exactly how much money you need to make your plan a reality and your listing should break these costs down into Fixed Assets and Working Capital, as fixed assets are property that usually has some sort of long-term value, and working capital is money that will be used to finance the short term operations of the business.
For your sales forecast don’t let the fear of prediction stop you from arriving at a projected revenue figure, since every business sells units of something, whether it be hours, projects, products, services, etc., simply set goals for the numbers of units you believe you can sell taking into account any seasonality factors and any limiting factors of the capacity of your business to deliver product or service, 
and finally, multiply these units by your average established prices and the result is your sales forecast in dollars, and each fundamental assumption that you make needs to be documented in this section since the assumptions themselves can sometimes be much more important than the final numbers.
Variable costs are those cost incurred every time a sale is made and they vary directly with sales, as they are the direct cost associated with producing or selling your products and services, and variable cost per unit includes the cost of goods themselves (for retailers), any direct labor associated with creating the product, and any materials that go into the product itself.
Fixed expenses do not vary with sales and are usually tied to some contracts with arrangement or indirect cost of doing business such as rent, salaries, loan obligations, insurance, and advertising, and you should develop a monthly fixed expense budget for the year detailing both the amounts and when they occur.
A profit and loss statement commonly called the “P&L” combine’s the revenue, variable cost, and fixed cost amounts in order to see if the business is operating at a profit or at a loss, and this statement tries to line up all revenues and expenses to determine the profit potential of the business during a definite period of time (i.e. monthly, quarterly, annually etc.).
In its simplest form, most P&L Statements adhere to the format including Projected Revenue, minus Variable Cost of Sales, equals Gross Margin, minus Fixed Operating Expenses, and equals Net Profit or Loss, and developing a comprehensive set of financial projections is an art to itself, so the important point is your projections should be simply stated, so keep in mind that with spreadsheets today it is possible to crank out a forest of paper with many different scenarios, ultimately resulting in nothing for better decision-making (the true purpose of projections in the first place), but only confusion.
We have put together hundreds of Business Plans for businesses from every industry, and it is important to point out that although the process of researching and gathering information and creating the detailed components that make up the final structure of the
“plan,” and putting them together in the final version of the Business Plan is basically the same process regardless of business model, each valuable component of information shouldn’t be taken lightly, and overlooked or left out, without possible negative consequences to the ultimate success and value of the Business Plan.
How to Structure the Business Plan Financial Projections
Published August 28, 2009 | 
Creating financial projections for your business is both an art and a science, and although investors prefer to see cold, hard numbers, it is difficult to predict with great accuracy what you expect your financial performance to be three years down the road, especially if you are still raising capital, but regardless, a short- and medium-term financial projection is a critical part of your business plan if you want the serious investors’ attention, and even if your business plan will only serve as a blueprint for managing and monitoring your business, it is imperative that you make financial projections, since the financial projections can be an effective guide to future business decisions.
Financial projections can be intimidating, but however, they are less a matter of mathematical aptitude and more a matter of your knowledge of your business, the industry, and the market, and financial projections are most often viewed as the most 
critical part of the business plan by investors, lenders, shareholders and other stakeholders with a financial interest in the potential future of the business and its projected growth and return on investment (ROI).
The financial projections section of the business plan should be thought of as simply quantifying the effects of what was presented in the plan narrative, although the projections are concerned with the future don’t think of the projections as merely a prediction, instead of the projection should be thought of as goal-setting with respect to revenues and expenses, and it always must be remembered that we cannot predict the future and yet this is precisely why planning is necessary, because we can make plans, that set expectations and goals.
Projections should at least include a list of required funds and their uses, a sales forecast of at least monthly for the first year, and quarterly for additional years, a variable cost of sales analysis, a fixed-expense operating budget, a projected profit and loss statement, and possibly a projected cash flow statement, balance sheet, and breakeven analysis.
You should list out exactly how much money you need to make your plan a reality, and your listing should break these costs down into Fixed Assets and Working Capital. Fixed Assets are property that usually has some sort of long-term value, and Working Capital is money that will be used to finance the short-term operations of the business.
For your sales forecast don’t let the fear of prediction stop you from arriving at projected revenue figures, as every business sells units of something, whether it be hours, projects, products, services, etc. Simply set goals for the numbers of units you believe you can sell taking into account any seasonality factors, and finally, multiply these 
units by your average established a prices and the result is your sales forecast in dollars. Each fundamental assumption that you make needs to be documented in this section since the assumptions themselves can be more important than the final numbers.
Variable costs are those cost incurred every time a sale is made and they of course vary with sales, while they are the direct cost associated with the producing or selling your products and services, which include the cost of goods themselves, any direct labor associated with creating the product, or any materials that go into the product itself.
Fixed expenses do not vary with sales and are usually tied to some contractual arrangement or indirect cost of doing business such as rent, salaries, loan obligations, insurance, and advertising, and you should develop a monthly fixed expense budget for the year detailing these amounts and when they occur.
A profit and loss statement commonly called the “P&L” combine’s the revenue, variable cost, and fixed cost amounts in order to see if the business is operating at a profit or at a loss, and this statement tries to line up all revenues and expenses to determine the profit potential of the business.
Finally, as mentioned before, financial forecasting is as much art as it is science: You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable, and it’s always best to be realistic in your projections as you try to recruit investors for equity-based capital, and any uncertainty in the future industry trends should be reflected in the information and associated assumptions from revenue, to costs, to payroll, to operating expense, and to the bottom line/profit, and remember to always maintain a conservative approach to the projections and you will eliminate most surprises that might occur once actual operations commence.
What are the Dos and Don’ts of Financial Projections
Published June 10, 2009 | 
Don’t provide only an income statement, and include a balance sheet and a cash flow statement, too, as it’s understandable that you are focused on sales and net income, but your banker or investors will also want to know how much money you intend to leave in the business has retained earnings and how much additional debt or equity financing you’ll need, if any, to grow your company.
Do provide monthly data for the upcoming year and annual data for succeeding years, as many entrepreneurs prepare projections using only monthly data or only annual data for the entire three or five year. Don’t. Use monthly data for the first year, and after that, use annual data, as the financial results of your first year will probably end up being different from your projections, so there’s no point in thinking that you can accurately forecast monthly results for the years after that, and this is an instance where less is more.
Don’t provide more than three years worth of projections unless your lender or investor has asked for them, as this is an extension of the less is more concept, and let’s face it, it’s a stretch to accurately forecast your company’s sales or net income for even three years out, and only in cases in which you’re looking for long-term financing for equipment or real estate is it likely that your banker will want longer-term projections.
Don’t provide more than two scenarios in your projections as loan officers and investors are already drowning in paperwork, so do what you can to make their lives simpler, as we’ve all seen projections with scenarios including the base case, worst case, and best case. The best advice is to prepare just the base case and the breakeven case, as the base case should show what you realistically expect the business to do, and the breakeven case should show how low sales could go before the business begins to lose money.
Do you ensure that the numbers reconcile as everybody knows that assets must equal liabilities plus equity, but all too often entrepreneurs will simply plug a figure into the equity slot to make things settle up, and that’s wrong. If your bank is doing its homework, your banker will check the math, and if the equity numbers don’t add up from one period to the next, you’ll be asked to explain, and even though everyone makes mistakes that’s what you want to avoid because it makes you look sloppy. Also, if after the mistake is corrected your company has a smaller net worth than you originally presented, your banker or investor may think you were being intentionally misleading, and that is never good.
Don’t be too optimistic about sales growth or operating profit margins, as all bankers and investors want to do business with ambitious entrepreneurs, but there’s a big difference between a realistic business plan and fantasy, and while it’s true that companies that have low revenues to grow their sales quickly in percentage terms, it may not be realistic to assume, that your business can double in size every year. Also, entrepreneurs often try to convince lenders that has their company grows they will achieve economies of scale and operating profit margins will improve, while in fact, as the business grows and increases its fixed cost, its operating profit margins are likely to suffer in the short run, so if you insist that the economies can be achieved quickly, you’ll need to explain your position.
Every entrepreneur always says, “I believe these numbers to be conservative,” but the problem with this statement is every lender an investor has heard this statement a million times and they know firsthand that most of the businesses in their loan portfolio didn’t get their projections and things in business always take longer than you expect, and savvy lenders and investors know this. In effect, by everyone using the “conservative” pitch, it has come to raise a red flag to an investor since they have heard the story a million times before, so just present the most realistic numbers you can and leave the platitudes at home.
Do account for reasonable interest expense on the income statement if you have debt on your balance sheet, and that sounds simpleminded, but you’d be surprised to learn how many people forget to do it. If you expect to have an average loan balance outstanding of, say, $500,000 over the year, and your forecasted average interest rate is 9%, you need to budget $45,000 for annual interest expense, and don’t budget less than a realistic amount, as this is one line item where you are always better off coming in under budget.
Don’t include every individual line item for each expense, asset, and liability figure, and although your banker or investor will probably be interested in knowing details about sales for major product or service lines, as well as the direct cost of sales associated with them, keep to the basics and other categories. With operating expenses, those would be salaries and payroll taxes, lease and rental expenses, depreciation, amortization, and any other kind of expense that consumes more than 10% of revenues. Also, don’t forget to distinguish the owners’ compensation from data non-owners, particularly if you and your co-owners are drawing above market salaries as a means of reducing business income taxes.
Do take the time to be able to understand and effectively present your projections, especially if you didn’t prepare them, as a lender or investor wants to make sure that the people who are going to manage the business understand the financial projections. Saying, “you’ll have to ask my accountant about the numbers, she put those together,” is usually the kiss of death, and if you are going to manage the business and you cannot explain the projections, that means that you don’t understand your business model and that the projections are, for all practical purposes, useless.
How to Prepare the Projected Income Statement
Published June 6, 2009 | 
An income statement, sometimes called a profit and loss statement (P&L), is a financial document which shows income earned and expenses incurred, and the resulting difference between your income and your expense is called your net profit, which is often referred to as the “bottom line,” and this statement tells you if your business is profitable or not.
In its simplest form, and income statement is presented in the following format:
–>Income (your forecasted sales)
–>Minus Cost of Sales (your variable costs)
–>Equals Gross Margin
–>Minus Fixed Operating Expenses
–>Equals Net Profit
Plugging in some sample numbers into the income statement might look something like this:
XYZ Projected Income Statement
January
Income $22,350
Cost of Sales $11,650
Gross Margin $10,700
Fixed Expenses $8,725
Net Income $1,975
The first thing you have to remember about putting together a projected income statement is that it covers a period of time into the future and so the first thing you must do is choose a point in time for the projections to begin, and from the starting date, you need to present your projected income statement monthly for a one year period. For example, if you will be starting your projection in March 2009, then it should present the following 12 months ending in February 2010.
Whether you are writing your financial projections by hand or using a computerized spreadsheet doesn’t matter and the first thing you will want to do is turn a sheet of paper sideways (landscape orientation) so you’ll have enough room to fit in all 12 months, and after you have turned your paper, now right near the top your 12 months going across the page, and be sure to give yourself some space on the left-hand side of the page to place your income statement accounts. After your 12th and final month, added the word, “Total” at the end of this road so you can add up all of your numbers for the year.
The first thing you’ll want to add is the results of your monthly sales forecast you have already developed and add the account title “Income” and then list in a row each of your 12 monthly projected income numbers, and once you’ve added all 12 months of numbers, be sure to tell told them in the last column (Total).
Right under your projected income figures you’ll want to include your cost of sales or variable expenses and your variable expenses are typically represented as a percent of your sales. If you have your variable costs expressed as a percentage, simply take this percent and multiply it by the respective monthly sales forecast. For example, if you found that you are a variable cost of sales for selling a pair of shoes were 58%, you would then take .38 times the projected sales in dollars for that category, and let’s suppose the projected shoes sales for March were $5000, and then your respective variable expense would be $1900 (.38×5000).
Gross margin is simply the difference between your forecasted sales figure for a given month and its respective variable cost and say, for instance, that your forecasted sales figure for March is $10,000 anywhere variable cost (calculated at 65%) are $6500. The resulting gross margin is $3500 (10,000-6500) and your gross margin is the amount of money you have available to pay for the fixed costs of operating your business and provide a potential profit.
After your gross margin rose, you should next provide your monthly fixed operating expenses and the level of detail regarding these expenses is up to you but you might try listing then in the major categories including Salary Wages, and Benefits Expense, Marketing Expenses, Occupancy Costs, and Administrative Expenses, and once you have these listed, you should tell told these expenses for each month.
After your fixed expenses, you already to present your projected net income for each month and to arrive at this figure, all you need to do is take your monthly gross margin number and subtract from it your total monthly fixed operating expenses, and the difference is your net profit or loss for that month. Don’t worry if this number is negative as many different kinds of businesses experienced losses during certain months of operations, especially in seasonal businesses, and your net profit is your “bottom line” and tells you whether your business is projected to operate at a profit or loss.
When you are developing your fixed operating budget, you may have noticed that there was no place to include a loan payment, and instead, the administrative expenses section only listed “Interest Expense.” It is important to note that loan payments (which include both principal and interest) should not go on an income statement, and only the interest portion of a loan should be expensed here, as the principal portion of a loan is not presented on the income statement but rather the cash flow statement. In order to figure monthly interest payments for a loan, you can use any loan amortization calculator found on the Internet or on many calculators.
Once you have calculated the net profit for each one of the 12 months on your projected income statement then you are done for the moment, and remember, and income statement tells you whether your business is profitable or not and it does not tell you anything about your cash situation or the way it moves in and out of your business. For this, you need to complete a cash flow statement.