Many people get discouraged when they consider business planning activities. Doing it right involves work and takes time away from your other tasks. A lot of people can't find the time to do it in one burst of activity. For that reason, we're breaking this business plan tutorial into nine sections so that you can pace yourself and make reasonable progress while still taking care of everything else you do. If you're just getting started, see Part One. The plan itself will cover:

1. Product or Service and Business Description
2. Know Your Customers
3. Market Research
4. Competitive Analysis
5. Financial Projections
6. Management: Acquiring the team you need.
7. Marketing Plan
8. Exit Strategies
9. Executive Summary

Financial Projections

One of the most important areas of your business plan is your financial information. It's critical to your success, though not because the numbers themselves are terribly important. At a recent meeting that Kris and I attended, we heard from angel investors that they tend to rely on financials that reflect past business activity and have been checked by a CPA. But they discount start-up financial projections by dividing them by six.

One way to avoid that is to tell investors how you developed your projections. The assumptions that you make are more important than the numbers are. This time, we're going to look at why you need to make financial statements and projections.

What's important in your business plan? Lets look at what's important to you and what's important to your investors.

What's your financial risk?

This is important for you! Whether you get a loan or an equity investment, you need to know what changes both inside and outside of your business are going to do to your company's financial results.

Risk actually cuts both ways. If you make reasonable assumptions and then better them in reality, your business will do better than expected. If it doesn't make your goals, it will do worse. Keep a tight focus on what your revenues are doing and a close watch on your costs. If you understand why they're different from what you projected, you will be able to seize opportunities and respond to threats. Sometimes good news carries downside threats with it. If your sales grow explosively, you may be in extreme danger because your costs can get out of control as you increase production in order to meet the demand.

If interest rates rise or fall, they will have an effect on your business. You'll make more money and be able to sell more products or services if they fall. But if they rise it may eat into your profit margin significantly. Interest rates can impact many of your other costs: labor, insurance, rent, fuel, transportation, materials and more. Think about what can happen that will change your revenues or change your costs. Then prepare for what you're going to do.

Financial Statements:

Balance Sheet

Your investors will probably want to see your personal balance sheet as well as your business' balance sheet. They want to make sure that you're investing enough in your business that any shortcomings will hurt you at least as much as it hurts them.

Your balance sheet only needs to be done once a year. It's a simple way of showing what assets you have, what you owe and how much you own as equity.

Assets and liabilities are listed on the balance sheet based upon whether they're currently held (cash, accounts receivable, prepays--something that will either be used up, turned into cash or paid off within the year) or longer term.

Structurally, a balance sheet is laid out this way:

Assets	Liabilities
Current Assets (what you have)	Current Liabilities (what you owe)
Intermediate Term Assets	Intermediate Term Liabilities
Capital Assets	Long Term Debt
	Equity (This is the "book value" of what's left over after all debts are paid)
Total Assets	Total Liabilities & Equity

Cash Flow Statement

Your cash flow statement shows where money comes from, how you're going to use it and when you'll need to get your next loan or investment. This is projected monthly for the first year, quarterly for the next two years. Some investors and lenders only want two years worth of projections. The others may want as much as five. Income statements and cash flow statements become less valid the further you get into the future. You need to make assumptions as to what is going to happen to build these projections. The more carefully you've considered them and made them achievable, the better your response will be from your potential sources of fund. You'll also be able to use them as realistic goals and steer what you do with your company based on how well the future dovetails with the plans that you make now.

Income Statement

If you've got an existing business, you should have an income statement. These are usually done monthly and assembled into quarterly and yearly reports. You will want to have an accurate income statement up to your most recent financial reporting period. Like the cash flow statement, the income statement should be projected monthly for the next year, then quarterly.

Funding Request and Return To Investors

Your lenders or your investors are going to want to know why you want the money and what you're going to do with it. Building your own personal hockey rink won't cut it, but they will get interested if that hockey rink is going to make them 40% profit per year. The more closely you tie your request for funds to a business that will make you, your lenders and your investors money, the better the chances are that you're going to be breaking ground on that hockey rink soon.

You've got to have a plan that will reasonably pay them back and give them a return that meets their needs. That will be adjusted for the risk that they think your business has (and now we're talking downside risk!) The riskier that they think the investment is, the more money they're going to want before they'll make it. But they still want you to do everything you can to minimize their risks. In order to be fundable, it's got to appear very likely that you will be able to pay them back from the activities of the business. And they can't hold on forever, they will want to know when you are going to be able to cash them out. These funds will have to come from income from the business, a merger or going public. They'll want to know what your plans are and how much they might make from their loan or investment.

Tutorial Part 1 2 3 4 5 6 7 8 9