The Financial Plan Section of the Business Plan

Writing the Business Plan

The Financial Plan Section of the Business Plan

By Susan Ward

It's at the end of your business plan, but the financial plan section is the section that determines whether
or not your business idea is viable, and is a key component in determining whether or not your business 
plan is going to be able to attract any investment in your business idea.

Basically, the financial plan section consists of three financial statements, the income statement, the cash 
flow projection and the balance sheet and a brief explanation/analysis of these three statements.

This article will lead you through the preparation of each of these three financial statements on the 
following pages. First, however, you need to gather together some of the financial data you'll need to
prepare these financial statements for your business plan by examining your expenses.

Think of your business expenses as broken into two categories; your start up expenses and your 
operating expenses.

All the costs of getting your business up and running go into the start up expenses category. These 
expenses may include:

• business registration fees
• business licensing and permits
• starting inventory
• rent deposits
• down payments on property
• down payments on equipment
• utility set up fees

This is just a sampling of start up expenses; your own list will probably expand as soon as you start writing 
them down.

Operating expenses are the costs of keeping your business running. Think of these as the things you're going 
to have to pay each month. Your list of operating expenses may include:

• salaries (yours and staff salaries)
• rent or mortage payments
• telecommunications
• utlities
• raw materials
• storage
• distribution
• promotion
• loan payments
• office supplies
• maintenance

Once again, this is just a partial list to get you going. Once you have your operating expenses list complete, 
the total will show you what it will cost you to keep your business running each month.

Multiply this number by 6, and you have a six month estimate of your operating expenses. Then add this 
to the total of your start up expenses list, and you'll have a ballpark figure for your complete start up costs.

Now let's look at putting some financial statements for your business plan together, starting with the Income 
Statement. The Income Statement is one of the three financial statements that you need to include in the 
Financial Plan section of the business plan.

The Income Statement shows your Revenues, Expenses, and Profit for a particular period. It's a snapshot 
of your business that shows whether or not your business is profitable at that point in time; 
Revenue - Expenses = Profit/Loss.

While established businesses normally produce an Income Statement each fiscal quarter, or even once each 
fiscal year, for the purposes of the business plan, an Income Statement should be generated more frequently - 
monthly for the first year.

Here's an Income Statement template for a service-based business. It's followed by an explanation of how 
to adapt this Income Statement template to a product-based business.

YOUR BUSINESS NAME

Income Statement for the year ending _____________

(Row listing each month)

REVENUE

REVENUE: Services

Service 1

Service 2

Service 3

TOTAL REVENUE: Services

REVENUE: Miscellaneous

Bank Interest

TOTAL REVENUE: MISCELLANEOUS

TOTAL REVENUE

EXPENSES

DIRECT COSTS

Materials

Equipment Rentals

Salary (Owner)

Wages

Employee Health Insurance Expense

Pension Plan Expense

Workmen Compensation Expense

TOTAL DIRECT COSTS

GENERAL AND ADMINISTRATION

Accounting and Legal Fees

Advertising and Promotion

Bad Debts

Bank Charges

Depreciation and Amortization

Insurance

Interest

Office Rent

Telephone

Utilities

TOTAL GENERAL AND ADMINISTRATION

TOTAL EXPENSES

NET INCOME BEFORE INCOME TAXES

INCOME TAXES

NET INCOME

Not all of the categories in this Income Statement will apply to your business. Leave out those that don't 
apply and add categories where necessary to adapt this template to your business.

To use this template as part of the business plan, you'll need to set it up as a table and fill in the appropriate 
figures for each month (as indicated by the line "row listing each month"). There are links to two excellent 
examples of Income Statements provided by the Royal Bank in the sidebar of this article.

If you have a product-based business, the Revenue section of the Income Statement will look different. 
Revenue will be called Sales, and inventory needs to be accounted for. For instance, if you look at the Royal 
Bank's example of an Income Statement for Kamiko's Fine Foods, you'll see the Revenue section of the 
Income Statement described as:

SALES

COST OF SALES

OPENING INVENTORY

PURCHASES

ENDING INVENTORY

GROSS PROFIT

The Expense portion of the Income Statement, however, is very similar to the template I've provided above.

Ready to move on to the next financial statement that you need to include in the Financial Plan section of 
your business plan? The Cash Flow Projection is next.

The Cash Flow Projection

The Cash Flow Projection shows how cash is expected to flow in and out of your business. For you, it's 
an important tool for cash flow management, letting you know when your expenditures are too high 
or when you might want to arrange short term investments to deal with a cash flow surplus. As part of 
your business plan, a Cash Flow Projection will give you a much better idea of how much capital 
investment your business idea needs.

For a bank loans officer, the Cash Flow Projection offers evidence that your business is a good credit 
risk and that there will be enough cash on hand to make your business a good candidate for a line of 
credit or short term loan.

Do not confuse a Cash Flow Projection with a Cash Flow Statement. The Cash Flow Statement 
shows how cash has flowed in and out of your business. In other words, it describes the cash flow 
that has occurred in the past. The Cash Flow Projection shows the cash that is anticipated to be 
generated or expended over a chosen period of time in the future.

While both types of Cash Flow reports are important business decision-making tools for businesses, 
we're only concerned with the Cash Flow Projection in the business plan. You will want to show Cash
Flow Projections for each month over a one year period as part of the Financial Plan portion of your 
business plan.

There are three parts to the Cash Flow Projection. The first part details your Cash Revenues. Enter your 
estimated sales figures for each month. Remember that these are Cash Revenues; you will only enter the 
sales that are collectible in cash during the specific month you are dealing with.

The second part is your Cash Disbursements. Take the various expense categories from your ledger and 
list the cash expenditures you actually expect to pay that month for each month.

The third part of the Cash Flow Projection is the Reconciliation of Cash Revenues to Cash Disbursements. 
As the word "reconciliation" suggests, this section starts with an opening balance which is the carryover from 
the previous month's operations. The current month's Revenues are added to this balance; the 
current month's Disbursements are subtracted, and the adjusted cash flow balance is carried over to the next 
month.

Here is a template for a Cash Flow Projection that you can use for your business plan (or later on when your 
business is up and running):

CASH FLOW PROJECTIONS

(Add a row of monthly headings to cover one year period)

CASH REVENUES

Revenue from Product Sales

Revenue from Service Sales

TOTAL CASH REVENUES

CASH DISBURSEMENTS

Cash Payments to Trade Suppliers

Management Draws

Salaries and Wages

Promotion Expense Paid

Professional Fees Paid

Rent/Mortgage Payments

Insurance Paid

Telecommunications Payments

Utilities Payments

TOTAL CASH DISBURSEMENTS

RECONCILIATION OF CASH FLOW

OPENING CASH BALANCE

ADD: TOTAL CASH REVENUES

DEDUCT: TOTAL CASH DISBURSEMENTS

CLOSING CASH BALANCE

Remember, the Closing Cash Balance is carried over to the next month. Once again, to use this template 
for your own business, you will need to delete and add the appropriate Revenue and Disbursement 
categories that apply to your own business.

The main danger when putting together a Cash Flow Projection is being over optimistic about your projected 
sales. 

Once you have your Cash Flow Projections completed, it's time to move on to the Balance Sheet.

The Balance Sheet

The Balance Sheet is the last of the financial statements that you need to include in the Financial Plan
section of the business plan. The Balance Sheet presents a picture of your business' net worth at a 
particular point in time. It summarizes all the financial data about your business, breaking that data 
into 3 categories; assets, liabilities, and equity.

Some definitions first:

Assets are tangible objects of financial value that are owned by the company.

A liability is a debt owed to a creditor of the company.

Equity is the net difference when the total liabilities are subtracted from the total assets.

All accounts in your General Ledger are categorized as an asset, a liability or equity. The relationship 
between them is expressed in this equation: Assets = Liabilities + Equity.

For the purposes of your business plan, you'll be creating a pro forma Balance Sheet intended to 
summarize the information in the Income Statement and Cash Flow Projections. Normally a 
business prepares a Balance Sheet once a year.

Here is a template for a Balance Sheet that you can use for your business plan (or later on 
when your business is up and running):

YOUR COMPANY NAME

BALANCE SHEET As At __________ (Date)

ASSETS

Current Assets

Cash in Bank

Petty Cash

Net Cash

Inventory

Accounts Receivable

Prepaid Insurance

Total Current Assets

Fixed Assets

Land

Buildings

Less Depreciation

Net Land & Buildings

Equipment

Less Depreciation

Net Equipment

TOTAL ASSETS

LIABILITIES

Current Liabilities

Accounts Payable

Employee Health Insurance Premium Payable

Pension Plan Premium Payable

Federal Income Tax Payable

Total  Customs & Revenue

Workmen Compensation Premium Payable

Pension Payable

VAT Charged on Sales

VAT Paid on Purchases

VAT Owing

Total Current Liabilities

Long-Term Liabilities

Long-Term Loans

Mortgage

Total Long-Term Liabilities

TOTAL LIABILITIES

EQUITY

EARNINGS

Owner's Equity - Capital

Owner - Draws

Retained Earnings

Current Earnings

Total Earnings

TOTAL EQUITY

LIABILITIES AND EQUITY

Once again, this template is an example of the different categories of assets and liabilities that may apply 
to your business. The Balance Sheet will reproduce the accounts you have set up in your General Ledger. 
You may need to modify the categories in the Balance Sheet template above to suit your own business.

Once you have your Balance Sheet completed, you're ready to write a brief analysis of each of the 
three financial statements. When you're writing these analysis paragraphs, you want to keep them short 
and cover the highlights, rather than writing an in-depth analysis. The financial statements 
themselves (the Income Statement, Cash Flow Projections, and Balance Sheet) will be placed 
in your business plan's Appendices

.