How to Start Financial Planning for a New Business

When making financial projections, always be conservative.

When starting a new business, one of the most important determinants of success is whether there is a robust business plan. The business plan covers all aspects of the business, including product specifications, operations, staffing, marketing, and financial projections. Regardless of whether you plan on using the business plan to attract investment capital or qualify for a loan, or whether it remains an internal document, putting together the business plan is a useful exercise. Just the process of making projections and allowing for contingencies will help you be prepared and avoid mistakes. Getting your financial projections as close to reality as possible is key.

Things You'll Need

• Computer with a spreadsheet program

Instructions

Research

1. 

   Know your product.

   Research your product. Find out who else currently sells the same product and the product's average sell price and price range. Investigate your competitors to identify their strengths and weaknesses. Finally, compare your product to competitors' products on the basis of features, price and convenience.

2. 

   Be thorough when projecting expenses.

   Investigate all expenses associated with your business, both fixed and variable. Be as thorough as possible, trying to think of every possible expense to create the product, market it, sell it and support it in addition to general expenses such as office space, insurance, phone service and payroll. It is better to project expenses higher and revenue lower than you think you will have, to give yourself a buffer in case things do not turn out as planned.

3. 

   Remember to take any customer discounts into account when projecting revenue.

   Project revenues. Doing a sales projection is the most challenging and subjective part of the financial projections because it is difficult to forecast demand accurately. Talk to potential buyers, join industry associations, and consult with others who are already in that business to get the best possible information.

Financial Projections

1. Set up your financial statements in a spreadsheet program. You should have four different pro forma financial statements: the sales forecast, income statement, cash flow statement and the balance sheet. The term "pro forma" means that the financial statements are projections only. Each different financial statement should be on a different worksheet within the same spreadsheet document so it is easy to link the cells.

2. Create the monthly sales forecast on the first worksheet. If you have multiple products, list them separately. On one line, forecast the unit sales, and on the next line, multiply the unit sales by the purchase price to get the monthly sales revenue for that product. Then go on to the next product, if any. If you have only one product, you may choose to separate out different sales channels or geographic territories. Total the revenue by section (product, channel or territory), then add those up to get a total monthly sales revenue and a yearly sales revenue number.

3. Use the first line in the monthly income statement for revenue, which you can link from the bottom line of the sales forecast. The main part of this financial statement will be for expenses. List expenses by group; for example, you can group human resource expenses together, including payroll, payroll taxes, bonuses and benefits. You can have another expense group for sales and marketing, which would contain advertising, website costs, trade shows, sales commission and sales-related travel expenses. Subtotal each expense group, then total them at the bottom to get total monthly expenses and in the last column to get annual figures. Finally, subtract expenses from revenue to get net income.

4. Copy the entire income statement and paste it into this worksheet. Then add a line at the top called beginning balance and a line at the bottom called ending balance. Near the top, you can add two more lines: investment capital and loans. The ending balance from the first month is carried up through a linked cell to the beginning balance of the second month, and this continues for each subsequent month. Make sure to adjust the entries of the expenses to accurately reflect when they will be paid, rather than when they will be purchased (cash basis rather than accrual basis).

5. Begin the pro forma balance sheet with a list of the company's assets, followed by liabilities and equity. The balance sheet is governed by a simple equation: assets-liabilities=equity, so total each section, making sure that it is "balanced" according to the formula.

   In the assets section, you will list the value of your current assets (cash and accounts receivable) and non-current assets such as equipment, real estate, inventory, office furniture and vehicles. Current liabilities are credit card debt and accounts payable, and non-current liabilities might include property leases and bank loans. The remaining section, equity, shows the value of the company and consists of shareholder equity and non-tangible equity such as goodwill.

Tips & Warnings

• --Be sure to check the accuracy of the formulas in your spreadsheet.

• --At the top of each financial statement, add the words "pro forma" before the title (example: Pro Forma Income Statement 2010). This tells any investors or lenders reviewing your business plan that the financial statements are only projections, and can save you from being held liable for not achieving them.

References

• Financial Web: Starting a New Business: 4 Important Financial Documents
• U.S. Small Business Administration: Write a Business Plan

Resources

• SCORE: Business Planning Templates