The Numbers in Your Business Plan
I was a wordsmith first--before I went to business school and discovered that some things can't be explained with words alone. Even with all the great thought you'll put into the text portions of your business plan, a good business plan depends on numbers to make it all real. Without the numbers, it's only a rough draft at best.
An effective business plan has to include at least three important "pro forma" statements (pro forma in this context means projected). They're based on the three main accounting statements:
- The profit or loss, also called income, statement shows sales, cost of sales, operating expenses, interest and taxes. The statement shows performance over some specific time period, like a month, a year or a quarter.
- The balance sheet shows assets, liabilities and capital (assets less liabilities). This statement shows a company's financial position at a specific time.
- The cash flow statement projects how much money is in the bank and will be in the bank.
These three critical statements are so well linked that you could prepare the balance sheet automatically if you had already prepared your income and cash flow statements.
I also recommend that you add at least two additional tables highlighting specific portions of the main tables: a sales forecast and a personnel plan. In addition, I'd suggest you start the balance sheet with either starting costs or past performance, depending on whether you're creating a business plan for a startup or an existing company.
You don't have to know the subject of finance inside and out to create a business plan. You do have to understand that if you don't know how to prepare the main financial projections, you should get help. If you've got the budget, you can hire somebody to do this for you, but then that makes it their plan, not yours. The better way is to get help from books, websites, software, or friends and family so that you can do it yourself. High finance is a career, but projecting your own business finances is something you can do yourself as long as you have the patience to take it step by step. (You may have to learn at each step, but it's good for you.)
If you have the budget to hire consultants, take advantage of that and bring some experts on board, but be sure you have them show you how to prepare the projections rather than just have them do it for you. You want to understand your business numbers when questions come up. Ideally--consultants or not--you should be able to review and revise your numbers at any time, day or night.
Expect to have to make some educated guesses. Don't waste your time complaining that you can't possibly know how much sales or expenses will be because yours is a new business--every business that ever started was a new business, and the good ones had estimates to work with. You can do this--everybody else does, and you're no different. Nobody likes to forecast, but nobody is more qualified than you to forecast your own business.
Regardless of how you do it, don't expect to go through the numbers once, from step one to step whatever, and be finished. It doesn't work like that. Any revisions you make in one table will affect the others. And as you develop your plan, your numbers will change.
Whatever tools you use (obviously we're talking about software and a computer), make sure it all flows together. Here's some of the interdependence you need to deal with:
- Starting balances affect cash flow and all other balances.
- The sales forecast affects profits, cash flow and the balance sheet.
- The personnel expense forecast affects profits and loss, cash flow and the balance sheet.
- Many of the things you do in cash flow directly change the balance sheet, such as taking out a loan, taking in investment or paying dividends.
- The balance sheet can affect the cash flow. For example, increasing accounts receivable or inventory decreases the cash balance while increasing accounts payable increases the cash balance.
When it comes to timeframes, do your numbers for the first 12 months of the plan in monthly detail, then by year for the following two to five years. Normally, three years is long enough, but some plans involving longer cycles will require five years total. You can add highlights for 10 years, and you can talk about time periods even longer than that in the text.
Although there's no fixed sequence in a process like this, because the statements are so interdependent, I recommend you order the tables in a way that leads toward the final results and builds on the source tables:
- Starting balances and startup costs
- Sales forecast
- Personnel expenses
- Profit and loss
- Cash flow
- Balance sheet
Understand that you can't get to the last step without a lot of revision of earlier steps. What you discover in the profit and loss will change your personnel expenses, for example, which will further change your profit and loss statement, which affects your cash flow and balance sheet. Just keep adjusting until it seems right.