Virtual Business Plan
Financial Projections: Business Plan Basics
Your financial plan will be
highly scrutinized by your business plan reader.
All the ideas, concepts
and strategies discussed throughout your entire business plan form the
basis for, and should flow into, your financial statements and projections
in some manner.
When it gets down to it, your reader wants to know if and
when you will make money and become profitable.
Financial statements and projections should follow Generally Accepted
Accounting Standards and must (at a minimum) include properly prepared
balance sheets, income statements and cash flow statements.
investors are familiar with the correct content, organization and
presentation of financial statements, and expect to see them in your
Don't cut corners or attempt to devise your own method of
financial and pro forma statement presentation.
In most cases, capital sources expect financial
projections for a three to five year period, and historical statements for
the past three years (or since inception if operating period is less than
Consider organizing your financial statements as
- Year 1 - Monthly Projections
- Years 2 thru 5 - Quarterly or Yearly Projections
- Existing businesses should provide income
statements for the last 3 years if available.
- Year 1 - Quarterly Projections
- Years 2 thru 5 - Yearly Projections
- Existing businesses should provide current balance
sheet and balance sheets from the prior 2 years if available.
- Year 1 - Monthly Projections
- Years 2 thru 5 - Quarterly or Yearly Projections
Other information that you may consider including:
These are critical to properly convey the
"reasons behind the numbers" for outsiders reviewing your financial
Explain how you calculated the numbers you used in your
For example, we will sell 1000 units per month at
$5.00 per unit.
This is projected to increase by 4% every month, etc.
These figures demonstrate the volume of sales, in units and dollars
that must be generated to cover fixed and variable expenses.
break-even point, you start becoming profitable.
Normally this data is
presented in a graph format with sales on the X-axis and units sold on the
Sources and Uses of Funds
This section explains to your reader which sources you
expect to secure capital from, and what you specifically plan to spend it
Investment Structure and Objectives
This section outlines the amount of capital needed,
various investment structures, and the estimated return to your investor.
It is critically important to tell your investor how they will recoup
their money, when they can cash out, and what they will receive as a
Providing standard financial ratios helps your business
plan reader to analyze how well your company will perform compared to
other companies within your industry.
For existing companies, show the
trends over the last 3 to 5 years to outline any improvements in your
Financial Projections: Mistakes to Avoid
Here are some of the most common
mistakes found in the financial projection sections of business plans:
- Failing to include the "Big 3" statements and
projections (income statement, balance sheet, cash flow).
- Presenting sales and profit projections that are
unrealistic and unfounded.
- Omitting financial assumptions to explain where the
- Presenting "creative" rather than "accepted"
- Underestimating expenses and not budgeting for
- Lack of financial investment on the part of the
- Including excessive salaries and office expenses at
- Offering a lower percentage of ownership than the
investment requirement demands.
- Offering a return on investment that is out of line
for your industry.
- Absence of contingencies and projections for worst
- Financial statements that are not prepared or
reviewed by a reputable accountant.
Financial Projections: Business Plan Financial Ratios
Financial ratios are one of the
most important tools available to business owners, enabling them to
evaluate their company's performance and health.
Financial ratios are
calculated by using the information provided in historical and/or
forecasted balance sheets and income statements.
Ratios are most commonly
used for trend analysis - tracking your company's financial figures over a
period of time.
Financial ratios allow companies to compare performance in
a given period versus financial results in previous periods, and against
the financial results of other businesses in similar
Financial ratios put financial statement information
into perspective, and allow businesses to spot financial issues that may
threaten cash flow, or even the overall viability of a business. Financial
ratios, particularly for privately held companies, fall into four general
categories: liquidity, profitability, turnover and leverage.
Return on Assets
Return of Equity
Return on Sales
Accounts Receivable Turnover
Debt to Equity
Liquidity ratios focus on a company's ability to pay its bills when
they come due.
Bankers and suppliers use liquidity ratios to measure a
company's credit worthiness. If liquidity ratios remain relatively high for
a prolonged period, too much capital may be invested in liquid assets (for
example, cash, short-term investments, accounts receivable, inventory) and
too little capital may be devoted to increasing shareholder value.
liquidity ratios remain relatively low, a company may not have sufficient
liquidity to meet ongoing financial obligations.
Profitability ratios offer a glimpse into a company's operational
performance and help business owners determine if they are maximizing
their bottom line.
They also offer insights into the return a company is
generating from its assets and invested capital.
These ratios should be
compared on a period over period basis (i.e. year to year).
ratios may vary from industry to industry, standard ratios include Return
on Assets, Return on Equity and Return on Sales.
Turnover or efficiency ratios measure the activity or changes in
certain assets, including accounts receivable, accounts payable and
Poor turnover generally indicates resources are invested in
non-income producing assets.
Leverage ratios indicate how well a company's uses borrowed funds
(rather than stockholders' equity or investments) to expand its business.
The goal is to borrow funds at a low interest rate and invest in a
business activity that produces a rate of return exceeding the target rate
of return for investments.
Exit Strategy: Business Plan Basics
In order to attract investment
dollars for your business, it's critical to supply an exit plan to
investors so they can get their money back (hopefully with a healthy
return) and exit your company.
The exit strategy section of your business
should also outline your long-term plans for your business.
Begin by asking yourself why you are getting into business.
Do you see
yourself running your company twenty years from now, or are you interested
in moving on after a few years?
Are you in it for the big money at the end
of the rainbow, or are you more interested in running a solid and steadily
growing family business?
It's important to think through these issues and
decide what you intend to do with your business before you can adequately
answer the questions, and address the issues, concerning how your investor
will exit your company.
The requirements of each investor will vary in
terms of return and exit strategy they seek. Two examples follow:
These investors look for a high return and an exit strategy of
approximately 3-7 years.
They work almost exclusively with companies that
may go public or can be sold for a significant profit. However, keep in
mind that going public is very rare and is unattainable for most
These investors typically are looking for a high return but are
more flexible with the terms of the exit strategy.
Angels are typically
less sophisticated than venture capitalists or institutional investors,
and will become involved in your business because of a personal
relationship with you.
Here are some possible exit strategies to consider:
- Initial Public Offering (a very, very rare event
for most startups)
- Buyout by partner in business
- Franchise the business
- Hand down the business to another family member
Exit Strategy: Mistakes to Avoid
The following are several common
mistakes found in the exit strategy section:
- Assuming you have a business with the potential to
- Failing to explain how your investor will
specifically recoup their investment and a sufficient return.
- Failing to take your personal goals into account
when planning your exit strategy.
- Completely ignoring this aspect of the planning
process, or having no exit strategy at all.
Exit Strategy: Newsletter
Pen the business plan, search for investors, build the business,
and figure out how your investor will cash out later - right?
exactly. Investors are interested in the growth of your business, but
ultimately their commitment of capital hinges upon their ability to recoup
their initial investment and a healthy profit.
The lack of a solid and
realistic exit strategy demonstrating how investors can accomplish this
goal can immediately turn off many sources of capital.
Your chances of
cashing in with an investor are seriously reduced without a clear
definition of how they will cash out their investment.
Entrepreneurs rarely place the same level of
importance on the exit strategy in a business plan that an investor would.
Business owners are focused on raising the capital needed to launch and
expand their venture.
Solid business plans with thorough marketing, sales,
operations, management, and concept analysis can, and will, fall short
when little consideration is given to the exit plan.
In our experience at entrepreneurs and business owners
most often list "going public with an IPO in five years" as their intended
Although this is an optimistic and hopeful goal, this
outcome normally remains just that - a hope.
Providing realistic exit
strategies will result in instant credibility and helps reassure investors
concerned with receiving a significant return.
The book "Finding Your Wings" by Benjamin & Margulis
addresses the IPO misconception, noting that, "Acquisition or buyout is
the predominant method for achieving liquidity for small company
The primary method of achieving liquidity is not IPO - far
But the misconception remains.
Too often, entrepreneurs and their
business plans say they will take their company public in five years.
odds are that such and event will not occur.
So entrepreneurs need to
consider how that investor is going to achieve liquidity."
Ok, so the exit strategy plays an important role in
the business plan, especially in the eyes of your potential investors.
this issue of Newsletter we outline the most common exit strategies
for you to consider along with brief advantages and disadvantages of each.
Initial Public Offering
- Description: Sell the shares of the company
to the public to be traded on a stock exchange
- Advantages: Conversion to cash for investors, major
shareholders usually maintain control, high potential return
- Disadvantages: Company must have tremendous growth
potential to receive IPO, costly process, uncertain outcome. Major
shareholders may be limited as to how much, when, and how they can sell
- Description: Business bought outright by another
- Advantages: Receive cash or stock, often purchased
by strategic partner, management contract can be negotiated
- Disadvantages: Fit must be appropriate, potential
management changes, corporate identity may disappear
Sale of Company
- Description: Business bought by other individuals
- Advantages: Receive cash immediately
- Disadvantages: Must find willing buyer, normally
results in new management
- Description: Join with and existing company
- Advantages: May receive stock and some cash,
resources are combined, current management may stay
- Disadvantages: New partners or bosses, less
control, may receive little or no cash
- Description: One or more stockholders buy out the
- Advantages: Seller receives cash, other owners
remain in control of the company
- Disadvantages: Seller must be willing, buyers must
have sufficient cash to buy others
- Description: Sell business concept to others to
- Advantages: Receive cash, retain current
management, opportunity for large scale growth
- Disadvantages: Concept must be appropriate for
franchising, legally complex
Because each business is different, a realistic exit plan should take into
account your particular industry, business life-cycle, competitive
environment, management needs, and more.
It is also important to consider
your personal and financial goals, and how they relate to the future of
Do you value privacy and autonomy?
Then an IPO, with
its heavy public disclosure and extensive outsider demands, may be an
unsuitable fit for you and your venture.
Does building your business from
the ground up excite you, but the prospect of managing it over the long
haul turn you off?
Exiting with a sale of your business may be your best
bet, freeing you to pursue other entrepreneurial projects and allowing new
owners to manage the day to day operations in the future.
Ultimately, the most effective exit plans will take
into account business, personal, and investor goals.
Keep in mind that the
business plan is the road map for your company and a well thought out exit
strategy simply clarifies a future destination when your investor can
expect to reach liquidity.
Incorporating a variety of well thought-out exit
strategies is typically the best approach to build investor confidence and
increase your chances of successfully raising capital.
Table of Contents: Business Plan Basics
A well-designed table of
contents ensures that the readers of your business plan don't waste time
searching through your plan for the information they are most interested
Very few investors will read your plan from front to back. Instead,
they will normally jump around looking for the details they need to make
an informed investment decision.
Keep this in mind when you create your
table of contents, and organize it to make it as easy as possible for
readers to find their way around your plan.
inserting the table of contents immediately after the executive summary in
your business plan.
Most readers will start with your executive summary,
and then want to locate specific information that they want to address
Your table of contents should list all the major
sections within your business plan, and can also be broken down into
important or clarifying sub-sections.
Make sure your table of contents
page is organized, clear, neat and properly numbered.
sloppiness, or misspellings in the table of contents give your reader the
impression that you are unorganized and careless right from the start.
Table of Contents: Mistakes to Avoid
Your table of contents should be
be clean, well organized and free of mistakes.
To avoid a poor initial
impression, double check the layout and pagination before you send out
your business plan and avoid these common mistakes:
- Important sections and/or subsections are missing
- Page numbers do not match up correctly with the
content of the plan
- The table of contents is two pages in length when
it could neatly fit onto one page
- The table of contents provides too much detail and
- The text layout is not uniformly aligned and looks
- It appears that little or no thought went into its
design and creation
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