How to write the financial section of your business plan

How to write a financial plan for a new business or startup

Learn all about financial planning, its importance, and how to make financials calculations for an income statement, your cash flow prognoses and balance sheet. Are you thinking of opening a new business? Whether you are an experienced or first-time entrepreneur, building a financial plan for a business is never easy.

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What is a financial plan? 

Financial planning is writing the financial section of a business plan. A financial plan is an ongoing plan. This is continuous steering and updating your plan. This part of your business planning is fundamental for your business.

Writing a financial plan requires regular effort by gathering good reliable data, market research and a fair amount of imagination by reading your market or anticipation on your or competitors’ developments for example. 

The financial plan is inarguably the most important component of a business plan while most entrepreneurs find financial planning the most challenging part of the business planning process. 

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Why do you need a financial plan?

Because business planning involves looking well into the future, it is a highly creative thinking process as well as an analytical one. Financial planning provides the numerical logic for decision making. 

You need the financial section of a business plan because you probably want to answer one or more of the following questions:

• What funds do I need to turn my idea into a reality and get my business off the ground?
• What would be the expected turnover, purchases, and other costs?
• How much profit do I expect to make in the coming years?
• Is my business idea financially feasible?
• How will I finance my company and under what conditions?
• What happens to my business bank account every month? When would I run out of cash?
• How much income can I afford to pay myself and my team?
• How much time do I need to pay a loan with the sales I expect to have?
• Is my business plan be convincing to attract investors?
• How much money should I loan and is it justifiable in my business plan?

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Why is a financial plan important?

A financial plan acts as a guide as you go through your business journey. 

When starting a new venture, it helps you make your idea concrete and describe it clearly. It allows you to figure out if your business plan is financially feasible. It is the financial section of a business plan that determines if there is a market for your product or service, your marketing strategies are valid, and your roadmap is realistic. Your financial plan is also a mean to convince lenders that their risks are manageable. While solid finances attract investors to invest in your business.

As you grow your business, a financial plan becomes a tool to better manage your business, to adapt your business plans and goals and grow. Financial planning will give you the insights you need to:

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1. Manage your income

Financial planning helps you manage your profit and loss in the best way possible. 
It helps you figure out how much money you'll need for taxes and how much money you'll have as a net income.‍

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2. Improve your cash flow

Financial planning is essential for your business daily operations. Your business runs on cash and hence cash is king. Understanding how much cash is coming in and when to expect it shows the difference between your profit and cash position. It can also assist you in developing a strategy for expenditure prioritization to  keep track of your working capital, reduce overhead costs, and ultimately increase your overall capital. ‍

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3. Know where to invest‍

A smart financial plan takes into consideration your specific situation, risk tolerance, and long-term goals. It then gives you the insights for making the best financial decisions based on your needs and objectives. Financial planning is the foundation of business planning as it allows planning of financial resources for the future.‍

4. Enhance your ROI

Financial risk assessments, cash management, liability management, and goal planning are essential parts of financial planning. Financial planning helps you create an integrative investment program that takes into account your goals, calculate your risk, and foresee available liquidity, allowing you to increase the return on your investment. Higher ROI (return on investment) also makes your business plan attractive to lenders and investors.

How to write a financial plan

Usually, you start your business financial planning by forecasting your sales and your expenses and calculating the 3 main financial statements. You complete your financial planning by performing a breakeven analysis. 

• Make a sales forecast
• Calculate your expenses (direct costs, personnel, expenses) 
• Develop your balance sheet, cash flow statement and income statement
• Breakeven analysis ‍

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1. Create a sales forecast‍

Sales forecasting is the process of estimating your sales for an upcoming period of time (usually for the upcoming 1, 3 or 5 years). In your financial plan you can set up different rows for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. 

A forecast projection is typically based on any combination of past sales data, industry benchmarks, or economic trends. Your sales forecast not only sets the stage for a complete financial forecast, but also it is all about setting goals for your business. A forecast also functions as a guide for your spending on marketing to acquire new customers and on operations and administration. 

Once you complete your sales forecast and expenses, you should be able create your profit and loss statement, cash flow statement, and balance sheet.‍

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2. Calculate your expenses

You're going to need to project how much it's going to cost you to actually make the sales you have forecast. Your expenses include fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses). Lower fixed costs means less risk. Your variable costs are mostly in those direct costs that belong in your sales forecast, in addition to some variable expenses, like ads and rebates etc.

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3. Develop the 3 standard statements

The balance sheet, the income statement and cash-flow statement. 

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The Balance Sheet

A balance sheet shows what you’re worth as a business (equity) at a glance. Your balance sheet provides an overview of your debit balance (what your business owns) and your credit balance (your debts). It gives insight into how much your business owns, what your obligations are and what kind of profit you’re making.

This statement consists of three parts: assets, liabilities, and shareholders equity (the balance calculated by the difference between the first two). 

• Assets: cash, goods and resources available
• Liabilities: debts to suppliers, personnel, landlords, creditors, etc.
• Shareholder equity (the amount of money generated by your business): Use this formula to calculate it: Shareholder Equity = Assets – Liability

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Income statement shows the expected revenues and costs over a certain period (usually 3 years). The income statement is also known as a profit-and-loss statement (P&L) or pro forma income statement. An income statement lists the cost of sale or production, the operating expenses like rent and utilities, the Revenue streams and total net profit or loss, also known as a gross margin.

The Income statement can be generated keeping into consideration the worst, expected and best scenarios. You create different scenarios of your forecast.

Startups and established businesses should develop monthly reports while writing a business plan. 

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Cash flow statement

Before you create a cash flow statement for your financial plan, it's important to identify your key assumptions about how cash flows in and out of your business each month. Here it is better to stay realistic and avoid aiming too high to impress investors as this can actually create a financial shortfall. 

With these realistic assumptions in hand, you can begin drafting your cash flow projection. 

Projecting your cash flow is basically describing the cash position of your business and its ability to meet monetary commitments on a timely basis.

In financial plan of a startup business, monthly cash flow projections are produced during the first year of business, along with quarterly information for the next, three or even five years. 

The Cash Flow Projections consists of three parts:

• Cash Revenue Projection -   or expected sales figures for each month.
• Cash Disbursements -  This will take into account various expenses across categories. List out expenditures to be paid in cash monthly.
• Reconciliation of Cash Revenues to Cash Disbursements - Reconciliation = current month's revenues - month's disbursements. 

The result is then added to the cash flow balance that is carried over to the next month.  

Download an example of a cash flow statement 

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The Balance Sheet

A balance sheet shows what you’re worth as a business (equity) at a glance. Your balance sheet provides an overview of your debit balance (what your business owns) and your credit balance (your debts). It gives insight into how much your business owns, what your obligations are and what kind of profit you’re making.

This statement consists of three parts: assets, liabilities, and shareholders equity (the balance calculated by the difference between the first two). 

• Assets: cash, goods and resources available
• Liabilities: debts to suppliers, personnel, landlords, creditors, etc.
• Shareholder equity (the amount of money generated by your business): Use this formula to calculate it: Shareholder Equity = Assets – Liability

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4. Breakeven analysis

Breakeven analysis: a break-even analysis is a financial calculation that weighs the costs of running a business against the unit sell price to determine the point at which you will break even. In other words, it reveals the point at which you will have enough sales to cover all of your expenses.

This is an important analysis for potential investors, who want to know that they are investing in a potentially growing business.The breakeven point is when your business's expenses match your sales or service volume. If your business is profitable, at a certain period of time your overall revenue will exceed your overall expenses, including interest.

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