ÅA BUSINESS PLAN DEVELOPMENT - Financial Plans

ÅA What to Include in a Financial Analysis and Plan When does the business have to buy resources, such as supplies, raw materials, and people? When does the business have to pay for them? How much capital equipment is required to support a dollar of sales? How long does it take to acquire a customer? How long before the customer sends the business a check?

ÅA More Questions For businesses just starting out, the amount of money available up-front is a key to survival. For all businesses, long-term financial health determines health. Is the company’s cash flow being carefully monitored? How does the company’s financial condition compare to that of the competition? Does the company have ready access to cash reserves? Does the company have a budget? Are revenue and profits growing?

ÅA What’s Wrong With Most Business Plans Finance Sections? Waste too much ink on numbers and devote too little to the information that really matters to investors. Financial projections for a new company are an act of imagination, especially detailed, month-by-month projections that stretch out for years An entrepreneurial venture faces far too many unknowns to predict revenues, let alone profits. Few entrepreneurs correctly anticipate how much capital and time will be required to accomplish objectives. They are wildly optimistic.

ÅA Some Numbers Are Essential Business plans should contain some numbers. Numbers should appear mainly in the form of a business model that shows the key drivers of the venture’s success or failure. In manufacturing, this might be the yield on a production process; in magazine publishing, the anticipated renewal rate; or in software, the impact of using various distribution models. The model should also address the break-even issue: At what level of sales does the business begin to make a profit? When does cash flow turn positive?

Objectives and Milestones in the Financial Plan

ÅA Purpose of Objectives & Milestones By mapping actual cost to achieve each milestone against the planned cost, a firm can re-evaluate its position and predict cash shortfalls in time to take action. Preparing milestones and expected cost, a firm shows it intends to track performance closely against the business plan. This offers some comfort to potential investors and may prevent the plan from sitting in a desk drawer once it has served its initial purpose.

ÅA Milestone Examples Hiring of a full management team Completing product specifications Completing prototype design Completing prototype Product testing First customer shipment Beginning production First full quarter of profitability Attaining $10 million in revenue

Ownership and Equity Issues in the Financial Plan

ÅA What to Include in Ownership & Equity How will equity in the venture be distributed? Will the founders retain control? How do the investors get their money out, and when? Will employees be able to earn equity for their performance? How much equity will investors have, and how will that change over time?

ÅA Checklist For The Financial Plan Explain the assumptions you have made that form the basis for all of the data contained in your financial statements.  Sales  Production  Accounts Receivable, Accounts Payable  Overhead Expenses  Capital Expenditures and Depreciation  Etc. Prepare the following plans for the first year budgets:  Sales  Production  Operating Expenses  Number & salaries of needed staff members Head Count Plan  Capital Expenditures Start-up costs, fixtures, equipment, etc.

ÅA Checklist For The Financial Plan Prepare a cash flow until the business reaches cash break- even point or through the first year - by individual months.  Some considerations are:  Start-up expenditures  Accounts payable procedures  Accounts receivable  Collection periods Prepare the five-year cash flow using quarterly projections.  Use a computer spreadsheet Pitfall: Avoid using straight line projections  Make sure to identify all business expenses Prepare for the first year profit & loss statement.

ÅA Checklist For The Financial Plan Prepare a 5-year Profit & Loss (P&L) Statement.  First year by quarter  The remaining years annually Prepare a balance sheet for each quarter for the first year of operation.  Make realistic projections and coordinate with the Profit & Loss Statement Prepare a yearly balance sheet for the first five years of operation.  Make realistic projections and coordinate with the Profit & Loss Statement. Explain how the projections compare with industry norms.  Are the costs, revenues, profits, etc. higher or lower with similar businesses?

ÅA TO FIGURE YOUR COST OF LIVING, TAKE YOUR INCOME AND ADD TEN PERCENT. Steve Forbes

ÅA Remember: Formulating a Workable Business Plan Requires:  A willingness to change to an entrepreneurial orientation  Continued planning and crafting and revalidation  An opportunistic disposition  Commitment of resources not ownership  Reassessment of measured performance  Leadership