A. Projected Financial Statements
The basic purposes of financial projections are:
• Establish the profit potential of the business, given reasonable assumptions
• Determine how much capital the company needs and how it will be used
• Demonstrate the business can generate the cash to operate and re-pay loans
It is usually helpful, but not necessary, to complete at least a rough draft of Section
One (the written section) before attempting the financial section. In the written
section, you will develop and describe your strategies for the business. In the
financial section, you will estimate the financial impact of those strategies by
developing projected Income Statements, Balance Sheets, and Cash Flow Statements.
It is usually recommended that these projected statements be on a monthly basis for
at least the first twelve months or until the business is profitable and stable. Activity
displayed beyond the monthly detail may be in summary form (such as quarterly or
annually.) The forecast period for most business plans is two to four years.
Before you start developing projected financial statements, gather the suggested
information on the following pages. The personal computer is an excellent tool for
financial projections; and those with a good background in accounting and personal
computer spreadsheets may want to create their own financial forecast model. (There
are also some specialized software programs which have basic templates to help with
your financial forecast.)
The quality of your projection depends on the accuracy of the assumptions. (Garbage
in - Garbage out.) Existing businesses will rely heavily on past financial results as the
basis for their forecasts. Start-ups have greater challenges. They must do extensive
research to prove the reasonableness of their numbers. Examples of sources include:
Industry data from public sources and trade associations, personal interviews with
potential customers and people in the business, competitive observation and analysis,
etc.
If you would like assistance, gather the suggested information on the following pages
and contact the Small Business Development Center. The SBDC will review the
information from your research and help you develop your projection.
Steps in Financial Projections
For items 1 and 2, use the following “Fixed Asset/Start-up Expense List.”
- Estimate fixed asset requirements for the first year. Include Land, Buildings,
Leasehold Improvements, Equipment, and Vehicles. - Estimate any start-up or one-time expenses. Include any expenses needed to begin
operation such as legal fees, licenses, and initial marketing costs.
For item 3, use the following “Unit Selling Price and Cost Analysis” sheet. - Define each “unit” of your product or service and estimate the selling price and
direct cost per unit. In the appropriate places on the form, estimate Cost of Sales and
calculate Gross Profit as a percentage of the selling price.
For items 4 through 6, use the following “Projected Income Statement”. - Estimate sales by month for at least one year. (Unit sales price times the number of
units.) Consider how start-up, marketing, and seasonal factors affect sales. - Estimate monthly Cost of Sales and Gross Profit based on the percentages of sales
calculated in #3 above. Use a weighted average if multiple product lines. - Estimate and itemize fixed expenses by month for at least one year. Include things
like rent, insurance, utilities, salaries, marketing, legal/accounting, etc. Determine all
categories which apply to your business, but don’t include expenses here that are in
“cost of goods (services) sold.”
Research items 7 through 10, and provide a short narrative. - Describe the amount of inventory (if any) required to support the sales forecast.
Express in number of days sales or turnover if possible. - Describe your credit, sales, and collections policies. If you will make sales on credit,
estimate the number of days after the sale before the average customer pays. - Describe how fast you must pay your vendors for any items you will purchase.
- Also: - Estimate obligations for Income Taxes.
- Businesses already in operation will need the latest Balance Sheet.
Fixed Asset/Start-up Expense List
Fixed Asset Description: Cost:
Land/Building ____________________________________
Equipment and/or Vehicles ____________________________________
Leasehold Improvements ____________________________________
(Other)_____________________________ ____________________________________
Start-up Expense Description:
Legal/Organization Costs ____________________________________
Initial Marketing & Promotion ____________________________________
Licenses and Permits ____________________________________
Beginning Inventory ____________________________________
(Other)_____________________________ ____________________________________
Total Fixed Asset and Start-up Expenses: _______________________________
Note: List major items individually. You may group other, smaller items (like office equipment)
into a single line item.
Unit Selling Price and Cost Analysis
(Make additional copies of this sheet if necessary.)
Product or Service #1: _______________________________________________
A. Selling Price: __________________
less
Direct Costs:
Materials ___________
Labor ___________
Sub-contractors ___________
(Other)_______________ ___________
B. Total Cost per Unit __________________
C. Unit Gross Profit (A minus B) __________________
D. Gross Profit % (C divided by A) ____________
Product or Service: #2: ______________________________________________
A. Selling Price: __________________
less
Direct Costs:
Materials ___________
Labor ___________
Sub-contractors ___________
(Other)_______________ ___________
B. Total Cost per Unit __________________
C. Unit Gross Profit (A minus B) __________________
D. Gross Profit % (C divided by A) ____________
A. (Cont.) Optional Method to Calculate Needed Capital
Many businesses can get a reasonable picture of their financial future by using the following
formula. If the business will start making sales very soon after opening, you may decide to multiply
monthly fixed expenses by a number smaller than six.
Total Required Capital =
Six Months of Fixed Expenses + Asset Purchases + Start-up Expenses
Column 1 Column 2
Monthly Fixed Expenses Salaries (include owner) __________
Payroll Taxes at 12% __________
Rent __________
Marketing and Advertising __________
Supplies __________
Telephone & Utilities __________
Insurance __________
Maintenance __________
Legal and Accounting __________
Miscellaneous __________
(Other)_________________ __________
Monthly Fixed Expense Sub-total _________ x 6 = _________
Asset Purchases
Purchase of Land and Building ___________
Decorating and Remodeling ___________
Fixtures and Equipment (plus installation) ___________
Deposits on Rental Property and Utilities ___________
Beginning Inventory ___________
Asset Purchase Sub-Total __________
Start-up Expense You Pay Once
Legal and Accounting Organization Costs ___________
Licenses and Permits ___________
Initial Advertising and Promotion ___________
(Other)______________________________ ___________
Start-up Expense Sub-total __________
Total Estimated Cash Needed to Start (Add Column 2) __________
B. Break Even Analysis
Break even (B/E) analysis is a simple, but very effective financial feasibility test. B/E is used to find
the amount of sales necessary to pay all fixed costs (and have zero income.) In your business plan, it
represents a minimum acceptable performance. Follow these steps to calculate:
- Determine Contribution Margin Percent. Contribution Margin (CM) equals Sales minus
Variable Expenses. CM% equals CM dollars divided by Sales. Note: The biggest variable
expense is usually Cost of Goods Sold (CGS), which is the direct material and labor necessary
to make a product or service ready for sale. - List and total all Fixed Expenses for a specific time period (usually one month.) Fixed
expenses do not rise or fall with sales volume. Examples: rent, insurance, utilities, etc. - Break Even Sales is Fixed Expenses divided by Contribution Margin %. (See Example)
Example:
Unit sales price: $10 Monthly Fixed Expenses:
Rent 2,000
less Cost of Goods Sold: Utilities 1,000
Material & Labor 3 Salary 3,000
less Other Variable Exp: Other 4,000
Commissions 1
Total Fixed Exp. $10,000
Unit Contribution Margin = $6
($10 - $3 - $1)
CM % ($6 ÷ $10) = 60%
B/E = Fixed Expense ÷ CM %
B/E = $10,000 ÷ .6
Monthly B/E Sales = $16,667
C. Sources and Uses of Funds
The Sources and Uses of Funds is a statement of how much money you need (and where it will
come from) and how that money will be used. This statement should be included if your business
plan is being presented to a lender or investor. By definition, sources must equal uses. The
following is an example of a typical format.
Sources:
Term Loan __________
Line of Credit __________
Personal Equity __________
Outside Equity __________
Other __________
Total Sources __________
Uses:
Purchase Building __________
Purchase Equipment __________
Renovations __________
Inventory __________
Working Capital __________
Cash Reserve __________
Other __________
Total Uses: __________