A business startup requires a good financial plan

Editor’s note: Michelle Stockman is an independent consultant with her company, Fort Smith-based Msaada Group. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

You will have many startup expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. Like your marketing plan, your financial plan will require thorough research.

Talk to others who have started similar businesses to get a good idea of how much to allow for your budget and contingencies. Contingencies are expenses that are often not planned on yet are budgeted in a line item “just in case.” If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 percent of the total of all other start-up expenses.

Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.

• Financial Plan
According to SCORE, the financial plan consists of a 12-month profit and loss projection, a four-year profit and loss projection (optional), a cash-flow projection, a projected balance sheet, and a break-even calculation. Together they constitute a reasonable estimate of your company’s financial future. More important, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.

• 12-Month Profit and Loss Projection
The 12-month profit and loss projection (P&L) is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful. However, most business owners fear engaging in or understanding the P&L statement.

Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year. Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.

• Five-Year Profit Projection (Optional)
The 12-month projection is the heart of your financial plan. The Five-Year Profit projection is for those who want to carry their forecasts beyond the first year. Of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year.

• Projected Cash Flow
If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash.

Cash flow will enable you to foresee shortages in time to do something about them — perhaps cut expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by surprise. For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a check (for expense items). You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases.

• Opening Day Balance Sheet
A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity.

• Break-Even Analysis
A break-even analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit.

Feedback
Stockman can be reached at [email protected]