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The Financial Projections Section usually comes after the Investment Analysis Section, and is the last section in a Formal Business Plan.

Below you can read, in detail, what the Financial Projections Section should include, depending on the purpose of your Business Plan and the target audience.

Contact us for support in assessing your Business Planning needs, and for the Preparation and Implementation of the appropriate Business Plan for your enterprise.

The Financial Projections Section is the detailed Financial Plan of your Business Plan.
The Financial Projections Section is essential for every Business Plan.

The Financial Projections analyse the future status of the proposed investment, and include the measurable objectives explained in the Investment Analysis Section.

Within the context of the Financial Projections, specific realistic assumptions are made regarding the Macroeconomic and Microeconomic environments and their effect on the implementation of the investment programme, as analysed in the Business Plan.

Basic elements of your Financial Plan
The Section should include the following information that applies both to Business Plans for Existing Businesses as well as for Start-ups.

  • Profit and Loss statement or Income Statement
  • Cash Flow Statement
  • Balance Sheet
  • Sales Forecast

And probably some financial ratios and analysis, such as:

  • Break Even Point Analysis
  • Net Present Value (NPV) Analysis
  • Internal Rate of Return (IRR) Analysis

Profit and Loss statement or Income Statement
For an existing business you may include a Profit and Loss statement, which in fact provides an explanation for the profitability achieved or the loss suffered by your business, over a specific period of time.

However, both for existing businesses and Start-ups, you should include a Profit and Loss statement that presents the projected revenue/ profitability of your business, as a result of the proposed investment analysed in your Business Plan.

The Profit and Loss Statement is a table which lists all cash inflows and cash outflows for the period under review, and at the bottom it records the total amount of net profit or loss.

A Profit and Loss Statement should include:

  • Your revenue (i.e. your sales)
  • Your “Cost of goods sold” or “COGS”. Keep in mind that some types of businesses, such as a service provider, may not have "COGS". For service businesses, this can also be called “Cost of Sales” or “Direct Costs”.
  • Your “Gross Margin”, which is your income less your Cost of Sales.

These three elements (revenue, cost of sales and gross margin) are the backbone of your business model. That is how you earn money.

Also, your operating expenses are included. These are the costs associated with the operations of your business, but they are not directly related to sales. They are fixed costs that do not vary depending on the increase or decrease of your revenue for a particular month. Cost for rent, utilities, and insurance are examples of operating expenses.

You can calculate your operating income by subtracting your operating expenses from your gross margin.

Gross margin less Operating expenses = Operating income
Depending on how you classify some of your expenses, your operating income will be equivalent to earnings before tax and depreciation “EBITDA”, i.e. your profitability before deducting your tax liabilities. This may also be called "profit before tax and interest", “gross profit” or "contribution to overheads" - many names, but all refer to the same number.

Your net income, which is at the end (or bottom) of your Profit and Loss Statement, is "EBITDA " minus your interest, tax and depreciation expense.

Cash Flow Statement
The Cash Flow Statement is an explanation of how much cash your business received, how much cash it paid, and its final cash balance for the period under review.

This may seem like sales, expenses and profit, but it is not.

Consider this: What happens when you send an invoice to a customer but they do not pay until its expiration date? What happens when you pay your bills late or early? These types of transactions are not reflected in the Profit and Loss Statement, but they are explained in your Cash Flow Statement.

Your Cash Flow Statement is just as important as your Profit and Loss Statement. Businesses need cash to operate; there is no alternative to this!

Without full understanding of your cash situation, where it comes from, where it goes, and when, it will be very difficult to maintain a healthy business. And without the Cash Flow Statement, which clearly outlines this information for lenders and investors, you will not be able to raise funds. A Business Plan cannot be considered complete without a cash flow plan.

The Cash Flow Statement helps you understand the difference between what your Profit and Loss Statement reports as revenue, your profit, and what your actual cash situation is.

You could be extremely profitable, but not have enough money to pay for your expenses and keep your business active. And you could be loss-making, but still have enough cash to keep your business running for several months, and thus have enough time to correct the situation and make your business profitable. For these reasons, it is particularly important to understand the information in the Cash Flow Statement.

Balance Sheet
Your Balance Sheet is a snapshot of your Business's Financial Position at a specific point in time. It shows how your business is doing - How much cash you have in the bank, how much your customers owe you, and how much you owe your suppliers and bank (loans).

The Balance Sheet is standardised and consists of three types of accounts:

  • Assets (accounts receivable, cash in bank, inventory, etc.)
  • Liabilities (accounts payable, credit card balances, loans repayments, etc.)
  • Equity (for most small businesses this is only the owners’ equity, but may include investor shares, accumulated earnings, earnings from shares, etc.)

It is called a balance sheet because it is an equation that needs to be balance: Assets = Liabilities + Equity

All of your Liabilities plus Equity should always be equal to Total Assets.

At the end of each accounting year (fiscal year), your total profit or loss is added to or deducted from your accumulated earnings (an element of your equity). This makes accumulated profits the total profits and losses of your business since the start of the business.

Sales Forecast
Sales Forecast is what you think you will sell during a specified period of time (usually one to three years). Your sales forecast is an incredibly important part of your Business Plan, especially when lenders or investors are involved. Thus, you should continuously review and adjust your Sales Forecast accordingly, as part of the Business Planning process.

Your Sales Forecasts should be monitored and updated on a regular basis, as part of your Business Planning process.
Your Sales Forecast should match the sales data included in your Profit and Loss Statement.

The logic of Sales Forecasts varies, depending on the different business characteristics and needs. The logic applied for the Sales Forecast of a particular business, has to meet its own specific characteristics and needs. The way your projections are segmented and organised, depends on the type of your business and the level of detail you aim to track.

Useful questions to be answered within the context of Sales Forecasts include:

  • How many customers do you expect?
  • How much will you charge them?
  • How often will you charge them?

Generally, it's helpful for sales forecasts to be broken into sections that help you in planning and marketing. For example, if you own a restaurant, it may help to split your sales into dinner and lunch. Similarly, in the case of a gym, it may be useful to differentiate between personal subscriptions, family subscriptions, business subscriptions and additional services such as personal training.

For more detailed forecasts, it is useful to "break" sales into products/ services you sell.

For each category/ segment of sales, you need to include "Cost of Sales" ("COGS") for that category/ segment. The difference between your projected earnings and your projected Cost of Sales (COGS) is your projected gross margin.

Also, your forecasts should include all operating expenses that will be required in orderto achieve your projected sales.

Financial Ratios
If you have your Profit and Loss Statement, your Cash Flow Statement, and your Balance Sheet, you have all the figures you need in order to calculate the Standard Financial Ratios. These ratios are particularly useful, and in some cases may be required when the purpose of your Business Plan is a Bank Loan or Investor Search.

You may need some Profitability/ Efficiency Ratios, such as:

  • Gross margin
  • Return on sales
  • Return on assets
  • Return on investment

And some Liquidity Indicators, such as:

  • Quick Assets or Liquidity or Acid test
  • Working Capital or Current ratio

The most common ratios, of the above, that businessmen use and banks require, concern Gross Profit, Return on Investment and Debt.

Break Even Point Analysis
The Break Even Point is the level of sales at which the total revenue of the enterprise is equal to its total expenses.

It is the level of sales below which the operation of the business is loss-making. If all expenses were variable, break-point analysis would be pointless. Also, note that total expenses are significantly affected by long-term investments which increase fixed costs.

Hence, the firm needs to calculate the required sales that will cover both its fixed and variable costs.

Break Even Point is used as an additional tool in order to measure the effectiveness and efficiency of Sales and Marketing strategies.

The analysis provides answers to questions, such as:

  • “What is the minimum level of sales that ensures that the business will not operate at a loss?” or
  • “How much can sales be reduced while the business continues to generate profits?”

Break Even Point analysis is the calculation of the sales level at which the firm (or an investment) covers its cost.

Break Even Point Analysis is extremely useful:

  • In order to plan the launch of a new business or a new product, because it answers questions like:
    • “How are profits affected by reduction in sales or increase in costs?”
  • For enterprises in early stages of operation, management can determine how accurate their initial forecasts were and proactively establish whether the course followed is the appropriate (it will lead to profits).
  • For more mature businesses it provides the basis to identify ways to minimize the point of balance and increase their profits.

Net Present Value “NPV” and Internal Rate of Return “IRR”
Also, it is extremely important for any enterprise to properly assess any investment plan prior to its implementation.

There are several methods for evaluating business investment plans. Two of these, the Net Present Value (NPV) method and the Internal Rate of Return (IRR) method, have been established as the most acceptable by the business community.

The Net Present Value “NPV” method
The Net Present Value method is based on the concept of calculating the present value of future cash flows. The NPV is the difference between the present value of the return on an investment and the present value of its costs. Both revenue and expenses are discounted at the same rate, which represents the cost of capital of the enterprise, alternatively, the opportunity cost, or the required return on equity of the shareholders.

The steps for calculating the NPV of an investment are as follows:

  1. The first step is to calculate the cost of the investment.
  2. Then. future Cash Flows are estimated (Cash Flows = Net Profits + Depreciation)
  3. Next, the cost of capital, i.e. the interest rate, is determined.
  4. Future Cash Flows are priced at the cost of capital to calculate their present (i.e. current value) value.
  5. The cost of the investment is deducted from the total present value of the inflows and the result is the Net Present Value.

Then the Net Present Value of the investment is compared to other potential investment plans that may be available and the decision to proceed to the investment, or not, is made, by choosing the investment with the highest Net Present Value. If the Net Present Value is negative then the investment should be discarded.

The Internal Rate of Return “IRR” method
The Internal Rate of Return is the rate that equates the initial cost of the investment to the present value of future cash flows. This in practice means that when the Internal Rate of Return exceeds the cost of capital for the company (the opportunity) the property of the enterprise increases and therefore the investment plan must be accepted.

The Financial Projections Section, as explained in detailed above, is an integral part of every Business Plan, and needs to address the purpose of your Business Plan and the target audience.

By clicking on the relevant link, below, you can read in detail about each of the remaining Sections of a Formal Business Plan:

Contact us for support in assessing your Business Planning needs, and for the Preparation and Implementation of the appropriate Business Plan for your enterprise.

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