This 3-part series is intended to decipher the business planning process–making it easier for you to build one that can help you to secure the funding that you need to grow your business into the powerhouse that you want it to be. Part I covered theBusiness Synopsis section and Part II covered the Marketing and Sales section. We will survey the Financial Modeling Section of a standard business plan in this, our last, installment.
The Financial Modeling Section presents the “numbers” behind the business. It is here that you outline the total investment that you’re looking for, how you’ll use the capital and the projected value generated by the investment over time. These are the essential details from which potential lenders and investors make their decisions on whether to fund your business, or take a “pass”.
Here are the key elements of the Financial Modeling Section of a traditional business plan:
- Overview of Long-term Financial Goals–This outlines what is to be achieved over time. It provides the fiscal objectives to be achieved by putting a lender’s or investor’s money to work. It is against these goals from which an investment in your business will be measured.
- Investment Targets and Use–This part of the Financial Modeling Section where your funding “ask” is presented. It presents the total amount of dollars that you’re intending to raise and how you will use it to grow the business. Remember you’re backers are looking for businesses with high growth potential so be sure to show how their money will be used to enhance both the top and bottom line of your business.
- Break-even Analysis–This breakdown calculates the point at which revenue received equals the costs associated with receiving the revenue. Potential investors are interested in this analysis because they want to understand how long it will take for your business to turn a profit.
- Projected Profit and Loss Statement–Typically, projected over the next 5 to 7 years, this is a financial statement (also known as a P&L) that presents your expected annual revenues, costs and expenses to be experienced over the timeline. It adds some of the details that underpin your break-even analysis and is used to demonstrate how you think the business evolve and grow over time.
- Projected Balance Sheet–This offers another layer of detail on your expected financial situation as it moves forward over time. It provides a snapshot of a company’s financial condition by presenting the total value of your assets, liabilities and ownership equity. Projected out on an annual basis, it shows where you think the business will finish each year into the future.
- Business Ratios–These are used to analyze and quantify the “financial strength” of your business and the worthiness of investing in it. Various ratios are developed using the information provided the other financial statements described above. Some of the key business ratios include: profit margin (net profit over net sales),return on assets (net income over average total assets), cash flow return (cash flow over recapitalization), profitability index (present value of future cash flows over initial investment), debt ratio (total liabilities over total assets) and operating cash flow ratio (operating cash flow over total debt).
- Related Financial Assumptions–This is where you list the assumptions that you’re using in preparing the information presented in the Financial Modeling Section of your business plan. This is important because potential lenders and investors will want to understand what underpins your estimates and projections.
At first glance, the development of your business plan’s Financial Modeling Sectioncan appear onerous. But, engaging qualified accounting talent to help you through the process can lessen the challenge. Besides, it can be fun to work the numbers with an expert team while you imagine the future success of your business.
This concludes our series on Business Planning. I hope that you found it to be valuable and engaging. If you need some help with any of the concepts presented in the series, please be sure to reach-out to me for clarification and assistance. I want you to succeed in building your business–that’s why I took the time to put this series together!
This article originally appeared at http://www.inc.com/james-kerr/business-planning-for-funding-your-start-up-part-iii-financial-modeling.html