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Financial Plan

The Numbers. Arguably the most difficult part of the business plan is accurate financial projections. The financials usually tell us what we really want to know about the business plan: how much money will this thing will make. And, in turn, how will we spend it.

The basic financial projections of the business plan can be broken down into 3 typical elements: the balance sheet, the cash flow, and the profit and loss or income statements. Sometimes plans will also contain other elements that flow into these 3 statements such as sales forecast, personnel plan, break even analysis, valuation tables, and sensitivity analysis and contribution tables.

In this article, let's discuss the 3 standards.

Profit and Loss. The profit and loss table is probably the most important. This shows sales coming in, expenses going out, taxes paid, and what's left over as net income or sometimes EBITDA (Earnings Before Interest Taxes Depreciation Amortization). Profit and loss tables in a business plan can be very detailed, or very limited. The right way is probably somewhere in between. Give enough information to show you have considered all the line items properly and accurately, but don't list every possible little expenses. Our general rule is if it doesn't have at least a .1% impact on the bottom line, lump it all together in a miscellaneous line. Also, some people place depreciation on the profit and loss and methods on the cash flow. It's really just up to preference.

Balance Sheet. The least understood, usually. The balance sheet is more of an accounting tool to track assets and liabilities than as a plan having any real impact on how much money the business makes or loses. A well constructed balance sheet is difficult to make and pulls from the business plan's profit and loss and cash flow statements.

Cash Flow. The cash flow statement serves primarily two purposes. First, it demonstrates how much cash, or "life blood" a business has. Technically, a business never needs net anything if it has enough cash to continue to support operations. While this isn't ideal, the infamous case of Amazon.com not making a profit for many years is a good example. Another is Microsoft, who carried almost $25 billion in cash and considered it an asset versus income to avoid paying on taxes and distributing a dividend. For most of us, $25 billion in cash wont be an issue (and if so, please send us your autograph), so we use the cash flow to show in how many days we pay our bills and in how many days our clients or customers pay us. The second important use is to demonstrate outgoing principle payments on liabilities. What many of our clients don't understand on principle is a cash spend while interest is a profit and loss expense in the business plan.

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