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Unless you are thinking of starting a religious or charitable organization, the primary reason you're starting a business is because you think you can make money at it. The drive to be your own boss might have caused you to quit being an employee and start your business, but the quest for income is what keeps it going. When you develop a business plan, financial projections and cash flow analysis are among the most critical elements.
If you're like most startup businesses, you are probably going to experience at least a short period during which expenses exceed revenue. Without plans for adequate cash reserves, borrowing capacity, or other means of meeting those expenses, a cash shortfall can cause the early demise of your new business. It doesn't matter that the idea behind the business is fundamentally sound; without adequate capital, you won't make it.
The timing of revenues and expenses are critical to all businesses, whether new or established. Even if revenues exceed expenses, the actual receipt of cash has to occur in time to meet expenses as they become due. Assessing your expenses, both recurring (e.g., rent, wages, payments to vendors) and nonrecurring (e.g., unexpected repairs) is vital. One way to do this type of planning is to check out our discussion of cash flow. This will give you a good idea of the type of analysis you'll need to prepare for this portion of your business plan.
The type of financial information that you're going to need to prepare this analysis will depend on whether your business is an established enterprise or is just starting out. If you're writing a plan for a new business, you'll need to survey your assets and borrowing ability. However, since your business probably has few assets and no prior financial history, you're going to have to rely almost entirely on financial projections.
You have a close personal interest in the financial performance of your business. So does everyone else who might be looking at your business plan. Not surprisingly, the portions of your plan dealing with the projected financial performance of your plan will come under the closest scrutiny. A potential lender will want to know what you'll be doing with the money it lends you and how you plan to generate the necessary income to pay the money back.
Fortunately, the financial projections are the most formalistic and stylized documents that you will have to prepare. By formalistic, we mean that there are no surprises or difficult computations lurking behind your financials. The point is to project, in a mathematically correct fashion, the anticipated monetary results of your business operations. By stylized, we mean that the format of your financial documents will be dictated in large part by accounting conventions and the specific requirements of your audience.
Don't forget that startup businesses, or business expansions, frequently involve a startup budget that is different in character from the operating budget of an ongoing business. These startup costs will be rolled up into your profit and loss projections.
The following list sets forth the major elements of the financial portion of your business plan. The first two items are applicable to any business. The third discusses the types of information that an existing or ongoing business needs to provide, while the fourth discusses the special financial planning issues that a new business must address in its plan. The last item presents a number of calculations that can be used to diagnose a business's financial condition.
- Projected profit and loss statement
- Projected cash flow
- Historical financial information
- Startup business financial information
- Financial ratios
In some cases, you may have prepared the financial portions of your plan in conformance with generally accepted accounting principles. This will usually occur when you prepare a plan in an effort to obtain a loan or line of credit, and the bank or potential investor you're dealing with requests or requires it. It also means that it is likely you'll need to get an accountant involved in preparing that portion of the plan. If the financial material was created in conformity with GAAP, that fact should be noted at the appropriate location within the plan. The same is true if the financial statements have been audited.