what is included in the financial plan section of a business plan

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How to Write the Financial Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Taking Stock of Expenses

The income statement, the cash flow projection, the balance sheet.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Raw materials
• Distribution
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.

The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  much capital investment  your business idea needs.

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a  short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:

• Assets:  Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when the  total liabilities  are subtracted from the total assets .

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .

For your  business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than an in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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The Complete Financial Section of the Business Plan with Examples

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FINANCIAL SECTION OF YOUR BUSINESS PLAN

The Financial Section, in many cases, is the most scrutinized section of your business plan. In short, it provides details on how potentially profitable the business will be, how much debt and equity capital is required for the business venture, when debts are scheduled to be repaid to investors, your financial statement forecasts, and the assumptions made when creating your financial projections.

The Financial Section of your business plan relies on Forecasted Financial Statements. Forecasted financial statements help an entrepreneur determine the feasibility of his/her business venture and help to estimate the amount of money an entrepreneur will need in order to successfully launch and operate the proposed endeavor. In addition, these statement help investors in determining the plan's feasibility and its potential profitability. It is for these reasons that many refer the financial section as the "heart of a business plan". All other sections of the plan (operations section, management section, marketing section, etc) show an investor whether or not an entrepreneurs' financial projections can materialize as envisioned.

The financial section of the business plan can be developed by you or an accountant. At any rate, the structure of the financial section generally includes the following items;

• A.    Introduction to the Financial Plan
• B.    Forecasted Financial Statements
• C.    Notes to the Forecasted Financial Statements

Below further explains each of the above components; beginning with the "Introduction to the Financial Plan".

PART A.  -   INTRODUCTION TO THE FINANCIAL PLAN

The Financial section of your business plan will begin with an introduction to the Financial Plan. The actual structure and details provided in the introduction is left up to the entrepreneur. Moreover, some entrepreneurs (business plan writers) feel its imperative to give the reader a quick summary of each forecasted statement, while others only tell the reader how the financial plan section has been organized. The following example of an Introduction to the Financial Plan supports the latter.

Example of J&B Incorporated's Introduction to the Financial Plan

INTRODUCTION TO THE FINANCIAL PLAN

The Financial Plan outlines J&B's forecasted financial statements and the assumptions made when developing them. The Company's capital requirements, how the capital is to be used and our repayment plan is also illustrated here.

The following financial statements and analysis have been forecasted over a three year period.

The above financial statements assume that the Product Development Phase will begin January 1, 1998 and end on April 30, 1998. In May, J&B will begin its operations. The fiscal year end has been set for April 30 so that a full year of operation can be shown each year for the three year forecasted period.

Following the forecasted statements and analysis are "Notes to the Financial Statements". These Notes explain how we arrived at the account balances.

Notice, the above example tells the reader what he/she is expected to see under the Financial Plan. It does not go into details on how the Company plans to repay its debt nor how it will obtain its start-up capital. Rather the Introduction suggests that readers refer to the "Notes to the Financial Statements" for further information. If your Notes to the Financial Statements do not fully explain the "higher points" of your forecasted income statement, balance sheet, your loan repayment schedule, capital requirements, or how the capital will be used, we suggest you develop a in-depth Introduction. On the other end of the continuum, if your notes to the financial statements fully explain these items, you may elect to develop and Introduction similar to J&B Incorporated.

PART B FORECASTED FINANCIAL STATEMENTS

The next part of the Financial Plan is the Forecasted Financial Statements. You will include the following forecasted statements and analysis in your Financial Plan.

Below briefly explains the above statements and analysis and depicts how each should appear in Part B of your Financial Plan.

1.   -  THE FORECASTED INCOME STATEMENT

The first statement appearing in the financial plan is your Forecasted Income Statement. An Income Statement is a financial tool used to determine whether a company earned a profit or incurred a loss within a given time frame. An income statement is developed by listing all revenues (sales) within a specific time frame, listing all expenses within the same time frame and subtracting the expenses from the revenues to arrive at Earnings Before Taxes (EBT) for that time frame. Income taxes are then calculated and subtracted from earnings before taxes to arrive at a company's Net Income after taxes or what many people refer to as - THE BOTTOM LINE.

If you plan to open a new business or plan on expanding an existing one, you will not have actual revenues or expenses. In this case, you will be required to anticipate (forecast) revenues and expenses over a one year period, for a minimum of three years. In other words, you will have to construct what is known as an annual forecasted income statement for three years. The forecasted Income statement will show investors such as banks, governments, and private entities if and when your business plans to make a profit.

The forecasted income statements for three years should appear on One Page. Moreover, the one page will consist of three columns - one column for your first year forecasted income statement, one column for the second year forecasted income statement, and one column for your third year forecasted income statement. Below provides an example of how your forecasted incomes should appear.

Notice after each account item that a note and a number is stated. These numbers refer to the Notes to the Financial Statements and allows readers (investors) the opportunity to see how J&B arrived at each account balance or value. This will become more apparent later on as we discuss Part C of the Financial Plan entitled "Notes to the Forecasted Financial Statements".

Also, notice J&B's three year Forecasted Income Statement is one page in length. The revenue and expense "items" are listed on the left hand side, while each year's forecasted revenues and expenses ("values") are shown in a column to the right. Your forecasted income statement for a three year period should appear in a similar fashion. Moreover, it is more professional and investors can compare your expected revenue and expense projections from year to year.

This concludes our discussion on how your forecasted income statements should appear in your Financial Plan. Remember it is imperative to understand the theory behind the income statement before attempting to forecast your own. To learn more about this statement, please refer to the section entitled " The Income Statement ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .

2. THE FORECASTED BALANCE SHEETS

The next statement to appear in the financial plan is your Forecasted Balance Sheets. Three, annual (year end) Forecasted Balance Sheets should follow your three year projected income statements. These forecasted balance sheets show investors the items your business anticipates to own at the beginning and end of each forecasted year. In addition, these statements will show investors how much your business anticipates to owe at the beginning and end of each forecasted period. By developing a forecasted annual balance sheet for three years into the future, you and investors will be able to determine if your proposed business provides an opportunity (IE profitable).

In addition to the three year forecasted balance sheets, investors will want to see an opening balance sheet. An opening balance sheet generally shows the businesses' assets, liabilities, and owner's investments into the business.

The three year forecasted balance sheets should be placed on one page. Moreover, the one page will consist of four columns - one column for your opening balance sheet, one column for the first year forecasted balance sheet, one column for the second year forecasted balance sheet, and one column for your third year forecasted balance sheet. Below provides an example of J&B Incorporated's forecasted Balance Sheet.

Notice J&B's three year Forecasted Balance is one page in length. The Asset, Liability, and Equity "items" are listed on the left hand side, while each year's forecasted account balances (values) are shown in a column to the right. Your forecasted balance sheet for a year three period should appear in a similar fashion. It is more tidy and investors can compare your expected financial position from year to year.

Also, notice after each account item that a note and a number is stated. These numbers refer to the Notes to the Financial Statements and allows readers (investors) the opportunity to see how J&B arrived at each account balance or value. This will become more apparent later on as we discuss Part C of the Financial Plan entitled "Notes to the Forecasted Financial Statements".

This concludes our discussion on how your projected balance sheet should appear in your Financial Plan. Remember it is imperative to understand the theory behind the Balance Sheet before attempting to forecast your own. To learn more about this statement, please refer to the section entitled " The Balance Sheet ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .

3. FORECASTED CASH FLOW STATEMENTS

The next statement to appear in the financial plan is your Forecasted Cash-flow Statements. The Cash Flow Statement is a tool used to forecast the movement of cash into and out-off the business. The movement of cash into a company may result from sales to customers, cash from investors, cash from bank loans, cash from the owners, cash from interest earned, cash from commission sales, or from any other source that provides cash to the business. The movement of cash out-off the company might include items such as advertising, wages and salaries, inventory purchases, payment on taxes, payment on business loans, utilities, owner withdrawals, rent, dividends, and so on.

Without the necessary cash, a business will not survive. Therefore, a forecasted cash flow statement is constructed to determine if an entrepreneur's business will have enough cash to carry out the day to day (month to month) operations.

A cash flow statement can be organized on a daily, weekly, monthly or quarterly bases. Most bankers and other investors, however, prefer see a monthly cash flow statement for a three year period. In other words, you will be required to develop three forecasted cashflow statements, each consisting of a twelve month period.

This may seem overwhelming at first, but with the aid of a spreadsheet program such as Lotus 123 or Excel, the task becomes rather simple. If you do not have a spreadsheet program, you are advised to purchase one and learn how it operates - It is an invaluable business tool that will save you lots of time and money. Below provides an example of J&B's forecasted cashflow statement for a three year period. (please note: normally each annual cashflow statement is constructed in a spreadsheet program and consist of a twelve month forecasted period. Due to the margins of this program, we are unable to place twelve columns on one page. As a result, we have used two pages for each year to illustrate J&B's annual forecasted cash flow statement).

The remaining five (5) months of J&B's first year Forecasted Cashflow Statement is presented below. Recall this is not the correct format - the first year cashflow statement should be developed in a spreadsheet program and should appear on one page.

The remaining five (5) months of J&B's second year Forecasted Cashflow Statement is presented below. Recall this is not the correct format - the second year cashflow statement should be developed in a spreadsheet program and should appear on one page.

The remaining five (5) months of J&B's third year Forecasted Cashflow Statement is presented below. Recall this is not the correct procedure - the third year cashflow statement should be developed in a spreadsheet program and should appear on one page.

As you can see, the above forecasted cash flow statements project J&B's cash inflows (from customers, from a bank loan and investors) and all expected cash outflow (from purchases of inventory, for advertising, for rent etc,) each month for thirty-six months. The inflows and outflows are subtracted and the difference is known as the Net Cash Flow (Deficiency). The cash at the beginning of the month is then added to the Net Cash Flow (Deficiency) to produce the Ending Cash Balance for the month.

Notice at the beginning of each cash flow statement, an ASSUMPTION section has been used. This assists the reader (investor) in understanding how the entrepreneur arrived at various values throughout the Cash Flow Statement (optional).

Also notice, after some of the account items, a note and a number is stated. These numbers refer to the Notes to the Financial Statements and allows readers (investors) the opportunity to see how J&B arrived at each account balance or value. This will become more apparent later on as we discuss Part C of the Financial Plan entitled "Notes to the Forecasted Financial Statements".

We can not stress enough that you should have three cash flow statements; one for each forecasted year. In addition, each cash flow statement will consist of a twelve month forecasted period; for a total of thirty-six months.

This concludes our discussion on how your forecasted cash flow statement should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the cash flow statement before attempting to forecast your own. To learn more about this statement, please refer to the section entitled " The Cash-Flow Statement ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .

4. FORECASTED BREAK-EVEN ANALYSIS

The next analysis to appear in your financial plan is the Forecasted Break-even Analysis. A Break Even Analysis, in its simplest form, is a tool used to determine the level of sales a business must earn in order to achieve neither a profit nor a loss. In other words, the point at which a business' Net Income is ZERO (revenues - expenses = 0).

The break-even analysis focuses mainly on the items included in a company's income statement (revenues and expenses). Moreover, the Break-even Analysis relies on your forecasted Fixed Costs, your forecasted Variable Costs and your forecasted Selling Price(s). Forecasted Fixed Costs are costs and expenses that do not fluctuate with sales increases or decreases. Forecasted Variable Costs are costs and expenses that do fluctuate with sales increases or decreases. A Forecasted Selling Price (s) is the price or prices you plan to sell your product at.

Your Forecasted Break-even analysis can consist of one page or two pages; depending upon how much detail you decide to offer. For example, J&B Incorporated's forecasted break-even analysis, presented below, consists of two parts. PART A. provides the reader with all information required in making the break-even calculation, and PART B shows the actual break-even calculation.

In the above example, notice that J&B calculates its break-even point and provides an indication of how many units it plans to sell above its break-even point. To do this, J&B simply subtracts each years' forecasted break-even point from the number units it plans to sell in each forecasted year.

Also notice, J&B provides readers with all figures needed to calculate the break-even point. You may elect to use this format or you may decide to only provide the break-even calculations. Whichever format you decide, be sure your break-even point is calculated over a three year period - one column for each forecasted year. You may also decide to provide the reader with an explanation on why your forecasted break-even point is increasing or decreasing. For example, J&B's break-even point is increasing due to the company's planned decrease in its selling price, its estimated increase in variable costs, and its planned increase in fixed costs. As a result, the company is earning a lower contribution margin on each sale made during year two and three. Thus less "money" is contributing to their higher fixed costs.

This concludes our discussion on how your projected break-even analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the break-even analysis before attempting to forecast your own. To learn more about this financial analysis, please refer to the section entitled " The Break-even Analysis ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .

5. SENSITIVITY ANALYSIS

A sensitivity analysis shows the effects on Net Income when forecasted sales are increased or decreased by various percentages. Since your forecasted sales will NEVER be one hundred percent accurate, the sensitivity analysis shows investors how your net income will change if your original sales forecast increases by 30%, 20% and 15% or if your original sales forecast decreases and a 15% or 20 %, for example. The percentages chosen for your sensitivity analysis is up to you, however, avoid percentages of 14% or lower.

Many entrepreneurs develop only one sensitivity analysis ( for their first year operation). Others develop three sensitivity analysis; one for each forecasted year of operation. Whichever format you plan to use is not important, what is important, however, is that you include this analysis in your business plan. It shows the investor that you understand; 1) the forecasting process and 2)that your original sales forecasts generally do NOT materialize as envisioned.

Like Break-even Analysis, the Sensitivity Analysis uses your forecasted income statement as its starting point. The analysis relies on distinguishing between Forecasted Fixed Costs and Forecasted Variable Costs. Recall, Forecasted Fixed Costs are costs and expenses that do not fluctuate with sales increases or decreases. Forecasted Variable Costs are costs and expenses that do fluctuate with sales increases or decreases.

Below provides an example of J&B's sensitivity analysis for its first forecasted year of operations. Notice, J&B has chosen a sales percentage increase of 15% of its original sales forecast and a sales percentage decrease of 20% of its original sales forecast.

Notice, J&B's forecasted Operating Expenses are considered to be Fixed Costs (they do not fluctuate with sales increases or decreases. Also, the company's Variable Costs, in this example, include only the Cost of Goods Sold (COGS will always fluctuate with sales increases or decreases and therefore will always be considered variable). The only other item, in the above example, that fluctuates with sales is Sales itself! In other words, if you increase the original forecasted sales by a certain percentage, then sales will have to increase by that amount (in units sold and in dollars). Alternatively if you decrease the original sales forecast by any amount, then SALES in units sold and in dollar will certainly change by that amount or percentage.

This concludes our discussion on how your projected sensitivity analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the sensitivity analysis before attempting to forecast your own. To learn more about this financial analysis, please refer to the section entitled " The Sensitivity Analysis ". When you understand the theory behind each financial statement and analysis, you will be equipped with the tools necessary tools needed in Forecasting Your Own Forecasted Financial Statements .

6. RATIO ANALYSIS

The next analysis appearing in the financial plan should be your Forecasted Ratio Analysis. In a nutshell, Ratio Analysis is a general technique for analyzing the performance of an existing or potential business.

Ratios involve dividing numbers from the Balance Sheet and Income Statement to create percentages and decimals. When aspiring entrepreneurs and existing business owners apply for a loan, for example, bankers usually look at their forecasted ratios and compare them to ratios of other businesses operating within the same industry.

Your projected ratios should be calculated over a three year forecasted period. Many business plan writers calculate the ratios and provide a narrative discussion, depicting how each has changed over the three year forecasted period. Others calculate the ratios and provide a footnote stating "a complete analysis regarding the forecasted ratios is available upon request. Yet other business plan writers feel the need to calculate various ratios and compare them to ratios of other businesses within the industry. The later approach can be time consuming and may not be "cost effective". Below provides an example of J&B's forecasted Ratio Calculations.

Notice the information provided in the above example. The name of each ratio, the formula required in calculating each ratio, the dollar amounts for each formula item, and the ratio calculation for each of the forecasted years. It is important to stress that these dollar amounts have been taking from J&B's forecasted Balance Sheet and Forecasted Income Statement. Therefore, the forecasted balance sheet and income statement must be complete before ratios can be calculated.

Also notice that J&B decided to calculate the ratios without providing any narrative discussion. Moreover, the company states that a "complete analysis is available upon request". If you want to impress the investor, it might in your best interest to provide the ratio analysis (narrative discussion) in your business plan. To do this, simply calculate each ratio for the three year forecasted period and then briefly discuss the variables attributing to change in ratio value.

This concludes our discussion on how your projected ratio analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the ratio analysis before attempting to forecast your own. To learn more about how to read or determine the meaning behind ratios, please refer to the section entitled " Ratio Analysis ". This section will also provide you with other ratio formulas which you may decide to include in your analysis.

This concludes PART B of the financial plan entitled "Forecasted Financial Statements".The purpose of this section was not to show you how to develop forecasted financial statements, rather the purpose was to show you how the statements generally appear in the Financial Plan.

To learn the theory behind each financial statement, please refer to the section entitled " Learning and Understanding Financial Statements ". To learn how to forecast your own financial statements, please refer to the section entitled " Forecasting your Own Financial Statements ".

In summary, be sure your forecasted financial statements and analysis provide for a three year forecasted period and include the following;

Please Note: as mentioned earlier, you will save yourself time and money if you develop the above financial items using a spreadsheet program.

PART C  -   NOTES TO THE FINANCIAL STATEMENTS

The third and final part of the financial section of the Business Plan is known as the notes to the forecasted financial statements. Notes to the Forecasted Financial Statements summarize the "activities" and "assumptions" made when creating the forecasted financial statements.. The Notes will give the readers (bankers, investors, and other readers) the necessary information needed to understand and comprehend your forecasts and projections. It also alleviates any guessing or questioning a reader may have when analyzing the financial section of the business plan. NOTE: never, ever, ever, create the notes to the forecasted financial statements until you have" fully completed" all forecasted statements and analysis.

There is no set structure nor specific guideline that dictate which topics should be included in the notes to the financial statements. Rather it is left up to the individual to decide which items warrant a "note" and which items are self explanatory. The following list provides some suggestions you may use when creating your notes section.

Your notes should provide details on each of the required three year forecasted periods.  Below provides a link to J&B's Notes to the Forecasted Financial Statements.  BUT FIRST - recall from above, the word "note" and a "number" followed several account items on J&B's forecasted income statement, balance sheet and cash flow statement, etc. For instance, on the company's income statement, an account called revenue from sales is present. Following the revenue from sales account is a "note 1". This refers to the first note under the Notes to the Forecasted Financial Statements. When investors read J&B's income statement and see note 1 beside the account item entitled "Total Revenue From Sales", they can quickly refer to the Notes section for information on how the entrepreneur arrived at these dollars amounts. As a result, the investor better understands the financial statements and the assumptions used when creating them. . Try is yourself - print off all J&B's financial statements and refer to the Notes below. You'll find your understanding of the financial statements as well as the company's initiatives is much better. Remember, when investors understand your financial projections, it reduces their risk, and in many cases, it increases your chances of receiving financing.

Link to:     J&B Incorporated's Notes to their Forecasted Financial Statements

For additional information on this topic, please refer to the section entitled " Notes to the Financial Statements ".

CONCLUSION OF THE FINANCIAL PLAN

This concludes our discussion on the Financial Plan section of a business plan. Remember the Financial Plan generally consists of three parts:

Below provides examples of how your Financial Plan should appear in its entirety. (Please note, the financial statements and analysis for two of the examples below; namely The Internet Company and Scholarship Information Services provide forecasts for a two year period. Your financial statements and analysis, however, generally provide projections for at least a three year period.

EXAMPLES OF THE FINANCIAL PLAN SECTION OF A BUSINESS PLAN J&B Incorporated Scholarship Information Services The Internet Company

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