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To some entrepreneurs, the financial plan is the most difficult and important part of the business plan writing process.
After all, the data in this portion of your document can make or break fortunes. And since the bottom line for virtually any business is to make money, you will want to carefully prepare this section. Lenders often turn to this part of the plan first.
While some business owners create a financial plan simply to secure a loan, this document serves many other purposes as well, according to Kimberly Johnson, a business management consultant in San Diego.
It can help you create and manage budgets, file your tax returns and make sound financial decisions such as hiring additional staff and making major purchases. The financial plan is also critical during audits.
Eight to 10 pages in length, the financial plan includes a series of financial statements: a balance sheet, income or profit-and-loss statement, operating budget, cash-flow analysis and break-even analysis.
These documents become particularly important for new businesses trying to secure capital, says David Aiken, vice president of Chase Business Resource Center in Brooklyn, New York. “A business that has been around for a while would need to include in its plan fiscal statements or tax returns,” says Aiken. “And generally, we ask for two years of financial projections.”
Johnson warns against giving unrealistic projections. “Some business owners may pad their numbers because they want to seem more attractive to a bank,” she says. “But this is to their detriment because once you start to overstate numbers, you tend to lose credibility and so does the financial plan itself.”
The first statement presented in your financial package is the balance sheet. Also known as the statement of financial position, the balance sheet is a snapshot of the company’s current assets (inventory, accounts receivable and cash), liabilities (accounts payable, loans and expenses) and equity ownership. It can be updated quarterly or yearly.
The income statement, also known as the profit-and-loss statement, illustrates the results of operations over a specific period of time. This document calculates your company’s net income by subtracting your expenses (advertising, salaries, supplies, insurance, etc.) from revenues (sales). These documents are organized according to fiscal year and should be updated at least annually.
The operating budget provides an estimate of your sales and expenses for one year. With this data, you can anticipate changes that may need to be made within your company (e.g., increase/ decrease in staff or production).
Your cash-flow analysis helps you create and manage your budget. It also documents the movement of cash in and out of the company and alerts you to when credit or cash is needed to carry out particular tasks.
The break-even analysis indicates how long it will take for your company to make a profit. This document becomes particularly important to venture capitalists and other investment groups that have claimed a stake in your business.
When forming your financial plan, work with an accountant or CPA. “I generally recommend doing this because when an accountant’s name appears on documentation, it