Northwestern Ontario Innovation Centre

Nominate someone for the RBC Innovation Awards

Financial Plan

The financial plan consists of a Personal Financial Statement, a Sources and Uses of Funds Statement, 12-month Cash Flow Projection, a three or five year Income Statement (profit and loss) Projection, a Projected Balance Sheet, a Statement of Forecast Assumptions and a Breakeven Calculation. We have included Excel spreadsheets for preparing the financial projections, they are included under Resources. These spreadsheets allow for the linkages between Statements. Together they constitute a reasonable estimate of your company's financial future. More importantly, however, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.

Personal Financial Statement

Include personal financial statements for each owner and major stockholder, showing assets and liabilities held outside the business and personal net worth. Owners will often have to draw on personal assets to finance the business, and these statements will show what is available. Bankers and investors usually want this information as well.

Sources and Uses of Funds Statement

You will have many expenses before you even begin operating your business. It is important to estimate these expenses accurately, and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance you will leave out important expenses or underestimate them.

Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little "padding" to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, which we call contingencies, to account for the unforeseeable. This is the approach we recommend.

Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20% of the total of all other start-up expenses.

Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.

Twelve Month Cash Flow Projection

Many business owners think of this as the centrepiece of their plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful.

Your operating projections will come from a twelve-month sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month by month for one year.

Operating projections should be accompanied by a narrative explaining the major assumptions used to estimate company income & expenses.

If the operating projection is the heart of your business plan, then cash flow is the blood. Businesses fail because at some point they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash.

The point of this worksheet is to plan how much you need before start-up, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterwards as well. It will enable you to foresee shortages in time to do something about them; perhaps to cut expenses, or perhaps to negotiate a loan. But foremost you shouldn't be taken by surprise.

There is no great trick to preparing it: the cash flow projection is just a forward look at your chequeing account.

For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a cheque (for expense items)

You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact upon cash flow, such as sales and inventory purchases.

You should also track cash outlays prior to opening in a pre-start-up column. You should have already researched those for your start-up expenses plan.

Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start-up capital. This plan will also predict just when and how much you will need to borrow.

Explain your major assumptions;especially, those which make the cash flow differ from the Profit and Loss Projection. For example: If you make a sale in month one, when do you actually collect the cash? When you buy inventory or materials do you pay in advance, upon delivery, or much later?

How will this affect cash flow?

Are some expenses payable in advance? When?

Are there irregular expenses such as quarterly tax payments, maintenance and repairs, or seasonal inventory build-up which should be budgeted?

Loan payments, equipment purchases, and owner's draws usually do not show on profit and loss statements, but definitely do take cash out. Be sure to include them.

And of course, depreciation does not appear in the cash flow at all because you never write a check for it.

Research Notes: Keep careful notes on your research and assumptions, so you can explain them later if necessary, and also so you can go back to your sources when it is time to revise your plan later on.

Three Year Income Statement Protection

The 12-month projection is the heart of your financial plan. However, we provide this section for those who want to carry their forecasts beyond the first year.

Of course, keep notes of your key assumptions, especially about things you expect to change dramatically after the first year.

Projected Balance Sheet

A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (Assets), and what its debts are (Liabilities). When liabilities are subtracted from assets, the remainder is Owners' Equity.

Use the Sources and Uses of Funds spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet.

OPTIONAL: It is often worthwhile to add a projected balance sheet showing the estimated financial position of the company at the end of subsequent years. This is especially useful when selling your proposal to investors.

Breakeven analysis

A breakeven predicts the sales volume, at a given price, required to recover total costs. In other words, it is the sales level that is the dividing line between operating at a loss and operating at a profit.

Expressed as a formula, breakeven is:

 

 

Breakeven sales =

Fixed costs

1- Variable costs

 

 

(Where fixed costs are expressed in dollars, but variable costs are expressed as a percent of total sales.)

Include all assumptions upon which your breakeven calculation is based.

For templates and sample financial sheets visit our Resources section.

Knowledge Bank

Entrepreneur's Toolkit

Newsletter Sign Up

Join Us on Facebook Follow Us on Twitter Join Us on Linkedin Watch Us on YouTube

Box 398
2400 Nipigon Rd.
Thunder Bay, ON P7C 4W1

Telephone: 807-768-6682
Toll-Free: 1-866-768-6682
Fax: 807-768-6683
Email: info@nwoinnovation.ca

Click to View Map