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Business Plans Must Include Financial Forecasting!

 

Business Plan Financial Projections

You may be expanding your business or starting a new business for many reasons.  Your financial backers, however, are interested in their investment.  To them, the heart of your business plan is represented by the financial projections which must include income statements, balance sheets, and cash flow statements.  These statements must convince your backers of two very important details:  your business will generate enough cash to (1) repay your backers and (2) fuel your incentive to succeed.

If you only need financial projections, whether for your business plan, or for planning your business, give us a call - we can help!

We've posted a brief discussion about financial statements here:  Understanding Financial Statements

    

Example Income Statements

The income statement (profit and loss statement) shows the revenue, expenses, and net income (or net loss) for a period of time.  Net income is the amount by which total revenue exceeds total expenses.  The resulting profit is added to the retained earnings account (accumulated earnings of a company since its inception less dividends).  A net loss reduces the retained earnings account.  The projected income statements demonstrate that your business has the ability to earn profits over time.

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Revenues

$1,976,000

$2,074,800

$2,178,540

$2,287,467

$2,401,840

Cost of Sales

1,213,659

1,274,342

1,338,059

1,404,962

1,475,210

Gross Profit

762,341

800,458

840,481

882,505

926,630

 

 

 

 

 

 

Accounting

6,000

6,300

6,615

6,946

7,293

Advertising & Promotion

15,000

12,360

12,731

13,113

13,506

Bank Charges

41,496

43,571

45,749

48,037

50,439

Compensation & Benefits

246,643

254,042

261,663

269,513

277,598

Consulting Fees

2,400

0

0

0

0

Insurance

1,000

1,050

1,103

1,158

1,216

Lease – Facilities

336,000

336,000

336,000

336,000

336,000

Legal & Professional

500

500

500

500

500

Licenses & Fees

500

510

520

531

541

Maintenance

600

612

624

637

649

Miscellaneous

1,800

1,836

1,873

1,910

1,948

Office Supplies

2,700

2,754

2,809

2,865

2,923

Security

720

742

764

787

810

Telephone

1,800

1,836

1,873

1,910

1,948

Utilities

4,200

4,410

4,631

4,862

5,105

Website

1,800

1,800

1,800

1,800

1,800

  Total Sales, General & Admin Expense

663,159

668,322

679,254

690,568

702,277

Earnings Before Interest, Depr. & Tax

99,182

132,136

161,227

191,937

224,353

Depreciation Expense

4,916

4,916

4,916

4,916

4,916

Operating Profit

94,266

127,220

156,311

187,021

219,437

Interest Expense

43,199

40,274

37,059

33,524

29,639

Earnings Before Taxes

51,068

86,946

119,252

153,497

189,798

Income Taxes

17,873

30,431

41,738

53,724

66,429

Net Income

$33,194

$56,515

$77,514

$99,773

$123,369

Understanding Income Statements

 

Example Balance Sheets

The balance sheet is a statement of financial position that shows total assets = total liabilities + owners' equity.  Financial position refers to the amount of resources (i.e., assets) and the liabilities of the business on a specific date.  Owners' equity is the residual interest, or the amount of the assets to which the owners have claim because creditor claims (liabilities) legally come first.  Owners' equity in a business derives from two sources: (1) paid-in capital, which is the investment of cash or other assets in the business by the owner or owners; and (2) retained earnings, which are the accumulated profits of the business less the losses and withdrawals.  The purpose of the balance sheet is to report the financial position of a business at a particular point in time.

 

  Begin Year 1 Year 2 Year 3 Year 4 Year 5
Cash

$33,150

$110,697 $210,697 $243,259 $293,834 $363,370
Inventories

425,000

425,000 424,781 446,020 468,321 491,737
Prepaid Leases 28,000 28,000 28,000 28,000 28,000 28,000
  Total Current Assets $486,150 $563,697 $663,478 $717,279 $790,154 $883,107
             

Prop., Plant & Equip

33,850 33,850 33,850 33,850 33,850 33,850

Less:  Accum. Depreciation

0 4,916 9,831 14,747 19,663 24,579

Net Property, Plant & Equip.

33,850 28,934 24,019 19,103 14,187 9,271

Total Assets

$520,000 $592,631 $687,496 $736,382 $804,341 $892,378

 

           

Accounts Payable

0 68,908 139,654 146,637 153,968 161,667

L-T Debt

468,000 438,529 406,133 370,522 331,377 288,346

Total Liabilities

468,000 507,437 545,787 517,159 485,345 450,013

 

           

Owners’ Equity

           

  Paid-in Capital

52,000 52,000 52,000 52,000 52,000 52,000

  Retained Earnings

0 33,194 89,709 167,223 266,996 390,365

Total Liabilities & Equity

$520,000 $592,631 $687,496 $736,382 $804,341 $892,378

Understanding Balance Sheets

 

Example Cash Flow Statements

Revenue does not necessarily mean receipt of cash, and expense does not automatically imply a cash payment.  Net income and net cash flow (cash receipts less cash payments) are different.  For example, taking out a bank loan generates cash, but this cash is not revenue since no merchandise has been sold and no services have been provided.  Loan repayments consume cash, but do not reduce income - they are recorded as a reduction to liabilities.  In our income statement example (above), although net income for Year 1 was $33,194, cash flow was $77, 547.  The beginning cash balance in Year 1 was $33,150.  Cash flow in Year 1 was $77,547.  Add the two, and the ending cash balance in Year 1 becomes $110,697.  Your statements "tie together."  This is a simple check potential investors or lenders will perform.

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Operating Profit

$94,266

$127,220

$156,311

$187,021

$219,437

Depreciation Add Back

4,916

4,916

4,916

4,916

4,916

 

99,182

132,136

161,227

191,937

224,353

Increm Working Capital Investment

-68,908

-70,965

14,256

14,969

15,718

Cash From Ops Bef Interest/Taxes

168,090

203,101

146,970

176,968

208,635

Interest Expense

43,199

40,274

37,059

33,524

29,639

Income Taxes

17,874

30,431

41,738

53,724

66,429

Net Cash Flow Before Debt Payment

107,018

132,396

68,173

89,720

112,567

Debt Payment

29,471

32,396

35,611

39,145

43,031

Change in Cash

77,547

100,000

32,562

50,574

69,536


Your business plan is the heart and soul of your operation and the most important set
of documents you will provide a lending institution or potential investor.

The Business Plan Store will prepare detailed financial projections for your business
or your business plan that express your vision in terms of dollars and units of time, 
and in a format that is easily understandable to all people in the lending industries.

Understanding Cash Flow Statements

 

 

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