No doubt, the Financial section is one of the most critical areas of the business plan writing process!
You should not be surprised if you gave your business plan to someone and that person immediately flipped through all the pages to jump to the financial section. No matter how awesome or great your business concept is, nobody will be interested in it if it lacks commercial viability. The financial section of a business plan gives numbers to your concept.
If you really want to convert your ideas into a successful brand, the financial section of the business plan is your key.
Though there is much written about how to write the financial section of a business plan on the internet, below are some of the ways to strengthen your business plan.
Identify the users of your Business Plan
Ask yourself a simple question: Why do you need a business plan?
Before you start writing your business plan, you must identify the users of your business plan. Your financial section, especially financial projections, needs to address the information needs of those users.
- If you are writing a business plan to raise the Startup investment for your business concept, potential users can be venture capitalists, angel investors or other businesses looking to invest.
- If you do not want to issue an equity stake and want to finance your project or business from the banks, the bank is going to look at your financial projections as a lender.
- If you are not in need of capital and preparing a business plan for internal management use, you as a user would like to look at your business plan if it aligns with your goals.
- Sometimes you are writing your business plan for a very specific purpose, for example, business plan writing for immigration to Canada. Your business plan will be evaluated by regulatory authorities and the community where the business will be.
Above are some of the users who may want to use your business plan. Every one of them has a different information appetite.
If you are writing your business plan for investors, an investor would like to see the return on investment. Is your business plan offering enough return on the investment given the risks identified there? We all know, investors seek higher returns for riskier investments. In such a case, providing enough information for them to decide is key to success here.
Now, if you are going to present your financial projections and business plan to a bank, the analyst at bank is looking for different information. Amongst other factors, cash flows will be a prime area of interest for her to determine your ability to repay the principal borrowed and interest.
Be Realistic with your Financial Projections – Avoid “Hockey Stick” Projections
One of the most common mistakes people do while preparing financial projections is “Hockey Stick Projections”.
Let’s imagine a hypothetical business scenario, an existing business with no actual or minimal growth for past few years need additional capital. Let’s say working capital or even a new equipment purchase. In order to attract and convince investors, business grows at dramatic rates upwards (in their financial section of the business plan at least). This dramatic growth resulting in an upward shift of all the revenues and margin lines does not seem to be realistic! Unless there are enough-explained assumptions (not to mention if they are convincing or not), any prudent investor is going to heavily discount the resulting future cashflows.
Be realistic while projecting your revenues and expenses. If you manage to secure new investment, you might be able to actually achieve significant growth in your revenues. Adjust your costs and expenses accordingly and try to be as much realistic as possible.
Don’t be an accountant with your financial projections
Financial projections are forward-looking information and you do not need to act like an accountant while doing so. You do not have to sweat on the tedious calculation of depreciation of every small item in your assets! Just be reasonable and realistic with such calculations.
At the same time, do not ignore the fact that you do need to include some critical expenses and create liabilities in your financial projections such as payroll taxes, income taxes or sales taxes. Pay close attention to these amounts. If you need the help of a professional accountant who specialized in the preparation of financial projections or is actively involved with business plan writing, go for it.
Update your Financial Projections
If you are using your business plan for internal management purposes, you should keep on updating it on a regular basis. Run the variance analysis between actual results and projected values. Adjust your projections accordingly.
Avoid putting a value on your business
Unless it is required, do not put a value on your business!
Sometimes, entrepreneurs or business plan writers include a slide of business valuation in the financial section based on simple earning multiples or running a small DCF at their end. Though the financial projections are used in the valuation process, leave it for the investors to do. Lacking enough training or knowledge of business valuation process, you may end up putting a very low value or a ridiculously high value on your business, both of which reflect a lack of understanding and true potential of your own concept.
Business plan writing and financial projections are often a difficult task to do for entrepreneurs. If you are looking for financial projections for your business plan or a complete tailor-made business plan written specifically for your business, you can contact us at Maroof HS CPA Professional Corporation. We understand your needs, conduct thorough research and then combine our technical skills and industry knowledge to present a business plan which delivers the desired results.
Let us convert your ideas in to a successful brand!