Preparing the Financial Plan

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Preparing the Financial Plan

• What your investor will want to see

2
1st Decide who are the potential investors?

• Select one of the following based upon the
  capital investment needed, market prospects, and
  investment risk
• Small business loan officer
• friends family
• Angel financier
• Venture capitalist

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2nd Getting started

• Start with a schedule or timetable of development
  and operational activities. From these
  development activities, you can then create
  financial statements for at least three years
  into the future, and sometimes five.
• As a rule of thumb, your financial projections
  should extend far enough into the future to the
  point where your business has achieved stable
  operations.
• The first year of your financial statement
  projections should be month-by-month
• Second and third year financial statements should
  be quarterly, and fourth and fifth years, if
  needed, should be annual.
• If possible, it is useful to include best case,
  expected case, and worse case scenarios with your
  financials.

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The Minimum

• Estimate the projected sales (optimistic,
  expected, pessimistic) and, using cost-of-goods-
  and cost-of-sales, profit over a timeline.
• Estimate total cash usage, including all
  expenses.
• Select a capital investment needed to keep cash
  positive.

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In your Business Plan Financials

• Financial assumptions
• Financial forecasts
• Capital requirements
• Financial risks

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Beyond the Minimum

• Balance Sheet
• Income statement (PL)
• Pro forma statements

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The Balance Sheet

• Represents the financial condition of a company
  at a certain date. It details the items the
  company owns (assets) and the amount the company
  owes (liabilities). It also shows the net worth
  of the company and its liquidity.

Assets Liabilities Owners Equity
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The Income Statement

• Commonly referred to as the P L (profit and
  loss) statement, which provides the owner/manager
  with the results of operations.

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Pro Forma Statements

• Pro forma statements are projections of a firms
  financial position over a future period (pro
  forma income statement) or on a future date (pro
  forma balance sheet).

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Payback Method

• In this method the length of time required to
  pay back the original investment is the
  determining criterion
• NPV (Net Present Value)
• IRR (internal rate-of-return)

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Net Present Value (NPV method)

• A dollar today is worth more than a dollar in the
  future. The cost of capital is the rate used to
  adjust future cash flows to determine their value
  in present period terms. This procedure is
  referred to as discounting the future cash flows,
  and the discounted cash value is determined by
  the present value of the cash flow.

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Internal Rate of Return(IRR method)

• This method is similar to the net present value
  method in that the future cash flows are
  discounted. However, they are discounted at a
  rate that makes the net present value of the
  project equal to zero.

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Break-Even Analysis
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Contribution Margin Approach

• The difference between the selling price and the
  variable cost per unit. It is the amount per
  unit that is contributed to covering all other
  costs.

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Another Approach Graphical

• Graph at least two numbers total revenue and
  total costs. The intersection of these two lines
  (that is, where total revenues are equal to the
  total costs) is the firms break-even point. Two
  additional costs, variable costs and fixed costs,
  also may be plotted.

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Graphical Break-Even
ProjectedCosts/Profits000
8
7
6
5
4
3
2
1
0
100
200
300
500
400
Unit Sales
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For completeness

• Ratios

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Balance Sheet Ratios
Current Assets
Current
Current Liabilities
Cash Accounts Receivable
Quick
Current Liabilities
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Income Statement Ratios
Gross Margin
Gross Margin
Sales
Net Profitbefore Tax
Net Margin
Sales
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Overall Efficiency Ratios
Sales
Sales-to-Assets
Total Assets
Net Profitbefore Tax
Return on Assets
Total Assets
Net Profitbefore Tax
Return on Investment
Net Worth
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In your Business Plan The Offering

• Investment requirements
• Valuation of business
• Offer