The Financial Section of a
By M. P. McCarthy
Financial section of the business plan
The purpose of the majority of business plans is to raise finance. Many investors will skip to this section of the plan instead of reading the plan in sequence. A mixture of financial projections and narrative are provided to help the investor understand the financial health of the business venture. Investors need to know the amount of money required to establish the business. Depending on the type of business, some of this money may be recoverable should the business fail before trading. The financial section needs to provide a realistic overview of the profitability and cash flow of the business. The rate of return on investment and payback period are key concerns to any investor regardless of their impression of the management team or the market for the product. Projections are usually provided for a 3 year period, the first of those years will include a breakdown by month. A business with a longer time to revenue and profitability may wish to show projections for 5 years plus.
The statements will include profit and loss accounts, balance sheets and cash flow statements. Detailed product costing must be provided to show the costs related to selling the product or service. Costing should be provided for each significant product or service offering. Breakeven analysis is supplied to show the investor how many units of the product or service must be sold to cover businesses costs.
The figures used in the projections must correspond with other sections of the business plan. If the operational section states that three people will be employed in year two, the profit and loss account in year two must include the cost of those three employees. It is useful to summarise any significant assumptions made when preparing projections e.g. seasonal sales. It is possible to include additional detailed financial workings in the appendix of the business plan.
In many cases, the financials are one of the first sections of the business plan to be read by investors. This part of the plan informs the reader the amount, sources and timing of the funds required to establish and grow the business.
Source of funds
The sources of funding could include yourself, friends and family. Other external sources include venture capital money, specialist funds exist depending on the industry sector your business operates. Financial institutions offer a range of loan and lease products for businesses. Support is may also available from government agencies in the form of grants
Financial projections (discussed in article 3) should clearly illustrate the funding needs of the business for the first three years. The projected cash flow will show the cash injections required to fund the business. The investor needs to understand the amount of money required to initially start the business and any ongoing funding requirements. You must clearly distinguish between capital business development needs and working capital amounts e.g. you could refer to the cash flow projections demonstrating the amount needed to buy stock in month three of Year 1 or the amount required to cover salaries in month 12 of Year 1. An example of capital requirements could be the purchase of a second piece of machinery in Year 2.
The investor may place certain conditions upon their funding e.g. insist that money be spent on product research. Investors are interested in the financial commitment made by the business promoter for example they may decide to match the amount of funds invested by the promoter
There are broad types of finance available to a business: equity, debt and grants:
EquityThis can be your own or from external sources. Equity investors receive shares in the business in return for their investment. In deciding how much of an equity stake to offer an investor one must consider the issues surrounding control of the business. In addition to voting rights the percentage share held can also have tax implications. Although flexibility in negotiations is important it is vital that you know the percentage of shares you are willing to relinquish. On reviewing your business plan the investor will also have a minimum amount of voting rights in mind.
DebtIt is again possible to have your own or external debt to finance the business. Your ability to raise external debt will largely depend on the investor's perception of your company's ability to repay that debt. The cost of the borrowings will be linked to the perceived level of risk, the length of time and the rates offered by other investment opportunities in the market at that point in time. Banks in particular have ratios to assess the repayment capacity of the business based on cash flow and profitability.
GrantsDepending on the country you operate there may be government agencies that offer grants. The best agency and individual scheme depends largely upon the size of the business, its stage of development and the sector in which it operates. As a general rule local agencies cater for businesses with 1 to 10 employees. They may offer feasibility, employment and capital grants. National agencies tend to cater for larger businesses and those that have the potential to export products or services. Specialist government agencies may assist businesses based in certain rural areas. These agencies may take an equity or debt stake under certain circumstances.
The financial section of the plan needs to illustrate the amount of money required to establish and run the business. Potential investors need to know the money already being committed by various parties. The plan needs to show how much further funding is needed, when it is required and illustrate the capacity of the business to repay the investor. A list of potential funding sources should be made and a brief reason for choosing these. The projections should correspond to the business scenario outlined in other sections of the plan and all major assumptions should be explained and further supporting calculations included in the appendix if necessary.
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