The Business Plan 171the financial analysis section is to illustrate the “bottom line.” Bankers and potential
investors evaluate this section to see whether enough profits will be generated to make
the venture an attractive investment. It also serves as the financial plan for the firm’s
executives. This section is numbers oriented, and it should give the audience what it
wants: rows and columns of figures, carefully labeled and footnoted.
If the firm has an operating history, the financial statements must summarize its past
and current performance. For past performance, it calculates ratios that highlight prof-
itability, liquidity, leverage, and activity, then compares these ratios with industry aver-
ages collected from trade data.
If the firm is a new venture, it must present the following:
- Projected profit and loss statements (income statements) for 5 years—monthly for
the first year, quarterly for the next two years, and annually thereafter. - Projected cash flow statements and analysis—monthly for the first year and until the
firm has positive cash flow, quarterly for the next two years, and annually thereafter. - Projected balance sheets for the ends of the first 3 to 5 years.
Each statement should be referenced and discussed but should be placed in a financial
appendix. If the statements and projections indicate seasonality and cyclicality, the read-
er must be told what each statement means and what its overall message is.
A break-even analysis for a service business shows how many hours of the service
must be sold. For a product business, it indicates how many units of the product must
be sold. A table of break-even points should appear in the appendix.
A summary of financial resources begins with start-up costs for the business, a
detailed list of all physical assets the firm needs to purchase or lease and a statement of
organizational costs (e.g., legal, architectural, engineering, etc.). How much money will
the business need? What can be offered as collateral for debt? How will the loan be
repaid? Financial statements must, of course, include such repayment. How will the
money be used? A use-of-proceeds exhibit is helpful. Investors generally believe that ini-
tial proceeds that are expensed—research, development, and training costs—are riskier
than money spent on capital equipment, land, and buildings.
Provide details and the references if the firm has established credit it will not initially
need. Also provide a list and an aging statement if the firm has receivables. What are the
probabilities of collecting these receivables? Include a description of existing debt, a list
of delinquent accounts and their amounts, and a statement of any accounts payable and
the period of time that these debts have been outstanding.
The firm’s financial strategy consists of two components. The first comprises the
sources and uses of funds. What are the preferred sources of new capital—continuing
operations, new debt, or new equity? What combination is appropriate, and what
debt/equity ratio and degree of financial leverage is the firm targeting? In terms of use,
what are the firm’s priorities for the excess cash generated by operations and by addi-
tional financing? Is expansion and growth the priority or are dividends? Both managers
and investors will be guided by these strategic decisions.
The second component of financial strategy comprises the internal control and mon-
itoring systems. What safeguards are proposed to ensure the security of funds generat-
ed by operations and by any additional borrowings or equity offerings? What systems
or procedures will monitor and control cash disbursement? What are the firm’s internal
audit procedures? Who are the firm’s external auditors?