The financials chapter in a business plan normally begins with a brief narrative that describes the assumptions and parameters on which the subsequent arithmetic has been based.
This is in terms of factors like the number of years for which depreciation has been performed, interest rates to be charged (as a percentage), the percentage by which the volume of clients is expected to grow annually, etc. This narrative also gives a summary of the start-up costs, and year by year revenues, gross profits, EBITDAs, and net profits. It is not necessary to give yearly quotes if the projections span, say a period of seven years. In this case you can opt to highlight the first, third and seventh year – the reader will peruse the projections to get the entire picture.
In compiling the financials chapter of the business plan you will need to include three types of financial statements i.e.
- the income statement, also known as the Profit & Loss Statement,
- the cash flow projections, and
- the balance sheet
The profit and loss account (P&L account) is best represented as a columnar sheet. It basically shows the revenues that the business expects to earn from sales, the expenses that will be incurred in making these sales, and finally the profits or losses that will have been earned after the deduction of these expenses. The rule in preparing the financial chapter in a business plan is to provide the P&L account with a month by month breakdown for the first year of operations. Subsequent years can be provided quarterly when three year projections are required and annually when five-seven year projections are required.
Next is the cash flow projection. This financial statement lets a business owner know when expenses are spiraling out of control or when it may be necessary to make some investment arrangements because there is a cash flow surplus. It is with the cash flow projection that calculations can be made to ascertain the level of credit risk, i.e. good or bad, and to assess if the business has adequate cash on hand that can support a bank's decision to provide a short term loan or line of credit.
The last statement in the financials chapter of a business plan is the balance sheet. It is from this statement that a business' net worth at a given point in time can be assessed. The main components of this statement are the business' assets, liabilities and equity and these must agree to the simple formula Assets = Liabilities + Equity.