Business Plan Essentials: Writing a Cash Flow Projection
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 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 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
- raw materials
- loan payments
- office supplies
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
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 the 1st quarter for a service-based business. It's followed by an explanation of how to adapt this Income Statement template to a product-based business.
|Workmen's Compensation Expense|
|Total Direct Costs|
|General and Administration (G&A)|
|Accounting and Legal Fees|
|Advertising and Promotion|
|Depreciation and Amortization|
|Credit Card Commissions|
|Credit Card Charges|
|NET INCOME BEFORE INCOME TAXES|
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:
COST OF SALES
OPENING INVENTORYPURCHASESENDING INVENTORY
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):
|Revenue from Product Sales|
|Revenue from Service Sales|
|TOTAL CASH REVENUES|
|Cash Payments to Trade Suppliers|
|Salaries and Wages|
|Promotion Expense Paid|
|Professional Fees Paid|
|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. Terry Elliott's article, 3 Methods of Sales Forecasting, will help you avoid this and provides a detailed explanation of how to do accurate sales forecasting for your Cash Flow Projections.
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.
Retained earnings are earnings kept by the company for expansion, i.e. not paid out as dividends.
Current earnings are earnings for the fiscal year up to the balance sheet date (income - cost of sales and expenses).
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):
|Current Assets||Current Liabilities|
|Cash in Bank||Accounts Payable|
|Petty Cash||Vacation Payable|
|Net Cash||Income Tax Payable|
|Accounts Receivable||Pension Payable|
|Prepaid Insurance||Union Dues Payable|
|Total Current Assets||Medical Payable|
|Workers Compensation Payable|
|State/Provincial Tax Payable|
|Fixed Assets:||Total Current Liabilities|
|Less Depreciation||Long-Term Loans|
|Net Land & Buildings||Mortgage|
|Total Long-Term Liabilities|
|Less Depreciation||TOTAL LIABILITIES|
|Owner's Equity - Capital|
|Owner - Draws|
|TOTAL ASSETS||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 two Financial Plan samples in the sidebar (under "Elsewhere On The Web") will show you what these analyses will look like. The financial statements themselves (the Income Statement, Cash Flow Projections, and Balance Sheet) will be placed in your business plan's Appendices.
Category: Business plan