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Written Business
Plans: Financial Analysis
The Financial Analysis section is a vital
section in any business plan. For many, this section is one
that is dreaded, avoided, and very stressful. All these
feelings are quite understandable; after all, money is
sometimes a very sensitive topic. Now before you give up
reading this article, I would like you to give the following
some thought:
"Success is not measured by struggle.
You don't have to do things the hard way to feel like you are
doing things the right way."
In other words, the Financial Analysis
section of your business plan is like all other
aspects of your business and personal life-as hard as you
want to make it! Now if you have the choice between living
life the hard way or living life as exciting and as fun as
possible, which would you choose? Obviously, everyone would
choose to live a life full of fun and excitement, and it's
possible! Some people don't do anything related to either
their work or personal life, that doesn't have the
possibility of being fun! How can writing about your
financials be fun, you ask? It all depends on your state of
mind.
First of all the Financial Analysis section is where you
put all of your thoughts and words of future goals into actual numbers.
For some readers, this section uses numbers to measure the past, present,
and future successes of your company. Since you will be analyzing figures
to recreate and project future numbers, it is important that you begin
this section by "being present to where your feet are," in other words
get present to the task at hand, preparing your financials. You may be
saying, "Duh, if I'm sitting down to write my business plan then of
course I'm present to what I'm doing!" Are you really? As you sit
there ready to write, is your mind clear of thoughts such as, "I have
to go grocery shopping. The baby sitter needs to go home by 8pm and my
husband can't take her. I have to buy my wife an anniversary present.
I'd like to be home by 7pm to play with my kids"? If you find that
you have this type of mind-chatter in your head, then no, you are not
present to writing your plan and you are actually stopped from being productive.
In order to truly be present you need to accept that you have other duties,
responsibilities, and feelings, let go of them, and move on. Sound easy?
It might not, but here are some key ways to get present to where your
feet are and the task at hand:
- Get Committed. When you are clearly
committed to a task at hand and a specific result by-when,
the less likely you are to be stopped by any "mind-chatter"
that may show up.
- Give up the distractions. Set
aside, and give up entirely where possible, those issues that
are distracting you. This is sometimes very difficult. How
many times have you been through a meeting at the end of which
you don't recall half of what was discussed? Have you ever
been at the dinner table when all of a sudden you tune in
to what your spouse is saying and hear, "Hello, is anybody
in there?" Do you ever find yourself "yesing" people in
the course of a conversation, just to get rid of them? Before
starting any project, you have to give up everything that
is distracting you, otherwise you will not be present and
you will not be productive, and who can afford to be this
way when you are evaluating the financial health of your company?
The second thing to keep in mind is that, unless you are an entrepreneur
working alone, you have a team of people that you work with, use them!
Regardless of what your title at work is, (CEO, Partner, Vice President),
your responsibility as a leader is to make sure that everyone is clear
about the future goals and current status of your company. You also want
your team to have a sense of ownership of the company, and having them
take ownership of your business plan is a great place to start! With this
in mind, who on your team is a great asset when it comes to financials?
This could be either your: accountant, CFO, or financial advisor. Here
again, you have a choice, you could either:
- Work alone
- Delegate the Financial Analysis
section of your plan to any or all of your team members
- Work side-by-side with your team in getting
this project done.
Option (1) sounds like a boring and lonely choice. If you
choose either option (2) or (3) here's your chance to make
this project fun. For instance, if you are working with your
team members you could change your physical work
surroundings. You don't have to do this at work. You could
invite your team members out of the office and into your
home, (assuming no distractions). It's amazing the head
space that can be created simply by changing your
environment. If you choose to work with your team at work in
the after hours, you could order take-out, kick off your
shoes, and make the environment as relaxing and as fun as
possible.
The third and last thing to keep in mind is that if you
have been in business for some time, here is your chance to
boast about your success! If you've been in business and you
still are, then you must be profitable, which for any
company equals success. If you are a company that is
cyclical, (i.e. a company that struggles during certain
seasons or months), then don't get stopped. This is your
chance to demonstrate with numbers how you were able to beat
the slump and keep generating money.
Now that we have covered the ground rules for making this
section of your business plan as easy and as fun as
possible, it's time to get to the meat of the plan. The
Financial Analysis section of your business
plan should include the following reports depending on
whether your company has been in existence for several years
or if it's a startup:
- Income Statement
- Balance Sheet
- Cash Flow Projection
- Break-Even Analysis
A description of each report follows. Since this section of the plan
is delicate we recommend that you access the help of a financial advisor,
CFO, and/or your accountant. This way, if you have any questions or get
stopped while going over any part of the financials, someone is available
to help you. Remember, the Financial Analysis section of
your written business plan will be as hard as you choose to make it. If
you use the wonderful tool called, "Delegation," and access your "Team,"
and most importantly, have FUN, then this section should be easy to complete.
Always keep in mind that if you plan on having investors and/or lenders
read your business plan, this section may be looked at with a fine-toothed
comb. You always want to be honest, realistic, and ready with data that
will support everything you have stated in the Financial Analysis
section.
Income Statement
Simply put, an income statement or profit and loss statement
(P&L) shows if your company is bottom-line profitable or
not. It is important to note that because the income
statement only shows income, it will not show you where cash
flow problems may exist and it does not take the worth of
your business as a whole into account. Once you and your
team have generated the Income Statement, take the time to
review the content with your financial advisors. They may
have advice with regard to the shortening or elaborating of
certain detail lines. For instance, you may have an income
statement that is in such elaborate detail that it breaks
out every last item to be accounted for. In these instances
you should see whether you could consolidate information
into general groups, (i.e. you can have a general line such
as "Supplies" instead of listing out "nails" "sand belts"
"industrial staples" as individual line items). While we
recommend you have a hand in preparing the income statement,
this is a section of the business plan that can be easily
delegated to a member of your financial team.
Balance Sheet
A balance sheet provides an overview of a company's overall financial
worth. Because of its complexity, we strongly urge you to seek the help
of your financial team (accountant, CFO, and/or financial advisor) in
preparing the Balance Sheet. Once they have created the Balance Sheet
for your company, it is your job to understand what it tells you and check
its accuracy. On a balance sheet, all of your company's assets and liabilities
should balance. With this accomplished some of the questions you should
be asking yourself as you review this document are: Has the company's
assets and liabilities been balanced realistically? Has everything been
accounted for? For instance, if you are a company that has a large number
of long-term assets, (i.e. equipment), have you also taken the liability
associated with this into account (i.e. depreciation of equipment)?
Cash Flow Projection
This is one of the easiest statements to generate and one of
the most important. The Cash Flow Projection provides
exactly what its name implies: a projection of your
company's cash inflows and outflows over any given period of
time. Most cash flow projections are produced to predict
cash flows on a month-to-month basis. However they can be
created to predict inflows and outflows of cash on a weekly
or even daily basis. While these projections can help
illustrate your company's ability to be profitable and also
show you where there may be cash flow gaps, due to cyclical
market changes that you need to plan for, they do not show
you if your company will be profitable overall at the end of
the year. Again we recommend seeking the help of your
financial advisors once you and your team have created a
cash flow projection. Specifically, you want them to look
critically at the projection for what might be missing.
Break-Even
Analysis
The breakeven point is the point at which your expenses,
both fixed and variable, have been met. While this is an
important component of the Financial Analysis section for
any startup company, to prove at which point their company
becomes profitable, is it necessary for those writing a
business plan for an established company? We say, yes, it is
necessary for any business to include a break-even analysis
within their written business plan. Consider this: What
would it be like to have a clear picture of the point at
which your company's earnings become, shall we say, gravy?
And knowing your anticipated expenses, if you do not break
even at the expected point in any given timeframe, the red
flags should go up and serve as a cue to check out your
expenses and income; are your expenses higher than expected,
and if so, why? Did you under-budget or take on unbudgeted
and possibly unnecessary expenses? Is your income less than
expected, and if so, why? Is your marketing strategy failing
to produce the anticipated results? Has your competition
blind-sided you in the domain of marketing, sales, product
or innovation? Based upon these answers, you then reevaluate
your plan, as necessary.
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