Focusing on financial projections is one of the most important steps you can take as you prepare to create a business plan. Your plan’s financial component provides the roadmap for ensuring your business activities are on target. But just as critical, the financial information you include in your report will show prospective lenders and investors that your business is built on a strong foundation.
Here are four tips to help you effectively prepare for this stage of writing your business plan:
1. Engage the help of an expert. Unless you have a background in finance, contact a trusted banker, accountant or professional business consultant to help you gather necessary data as well as the financial documents you will need. Your financial consultant will also be invaluable in reviewing your plan and testing your assumptions. They can provide feedback and suggestions that ensure you provide enough detail based on relevant, well-researched information.
2. Define your assumptions. Before you will be able to make any financial projections, you will need to give some thought to how you are going to come up with your numbers. Lenders and investors are likely to ask some tough questions about your projections for profit and loss, cash flow, break-even analysis and your projected balance sheet. You want to be able to back up your numbers with documented research, and not have to tell them you relied on your “best guess.” Be prepared to explain any forecasts, documents, or other data you relied on to formulate your projections. Be prepared to explain your process for coming up with everything from estimated utility costs to advertising expenses.
3. Value your assets. The financial portion of your business plan should include a projected balance sheet covering your first year of business. Before you embark on your actual plan, take an inventory of your fixed assets. These are all the long-term assets that are not easily converted into cash. Values for your fixed assets will be incorporated into a projected balance sheet for your first year of operation as you go through the business planning process. You will also be estimating your current and other assets, along with liabilities and equity.
4. Evaluate funding needs. Fine-tune your estimated needs for funding. In addition to letting prospective lenders and investors know what assumptions you used in making your financial projections, be prepared to show that your funding request matches up with your business financial projections. A request that appears out of line with your best financial projections is a red flag to funding gatekeepers, and brings into question your motives and the overall validity of your proposed business.
Following these tips will put you in excellent position for developing your financial projections as part of your overall business plan. Be prepared to pull together a short overall analysis of your financial information. You might even consider incorporating some infographics to help clearly convey the financial side of your business.