Financial Statement For Business Plan – Financial projections are the backbone of a solid business plan; and for most entrepreneurs, they are also a major source of stress. What many people don’t realize is that when you’ve finished writing the other sections of your business plan, everything you need for finance is sitting right in front of you. It’s just a matter of putting everything in place.
This article breaks down the process of preparing winter projections, provides a step-by-step example, and highlights a few things to keep in mind during the process.
Financial Statement For Business Plan
Financial planners use numbers to show what the rest of the business plan explains with words. The financials must not say anything that is not already written in the written part, and vice versa (everything in the written part must be reflected in the financials). Both sides should tell the same story.
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When you’re ready to get started, carefully read each section of your business plan and highlight each piece of quantitative information. Some quantitative data doesn’t appear as a number, so it’s easy to overlook. Take your time. Keep an eye out for words like split, share, and double. Highlight anything, and everything, that has a monetary impact.
For example, highlight the section of your operations plan that says the number of full-time employees will double each year for the first three years. This will remind you that the amount of wages and salary expenses in year 2 must be twice the amount that was in year 1.
Highlight the section of your sales and marketing plan that says the products will be sold with a warranty. This will remind you to include a line item for warranty expense on your income statement.
Line 1 | Gross Revenue – Our imaginary company sells only one type of product. According to the sales forecast in our sales and marketing plan, we expect to sell 10,000 units in the first year, for $30 each.
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Multiply the expected sales volume (10,000) by the selling price of the product ($30) to calculate the gross income ($300,000).
Line 2 | Sales Discounts + Returns – Sales discounts and customer returns reduce the amount of sales revenue our company gets to keep at the end of the day. Sales discounts and returns are usually estimated on a percentage of gross sales. Depending on your industry, that could be as low as ½% or as high as 10% of gross sales. For the purposes of our example, we will say that 2% of gross sales ($300,000 x 2%) will be refunded or discounted, for a total of ($6,000).
Line 3 | Net Sales Revenue – The total amount of sales discounts and returns ($6,000) is subtracted from gross revenue ($300,000) to calculate net revenue ($294,000).
Line 4 | Cost of Goods Sold – There are many different ways to calculate this number. Ideally, cost of goods sold should be calculated based on how many units were produced (from your production schedule). For our example, we will assume that the number of products sold is the same as the number produced.
Lesson Plan Preparing Financial Statements
Multiply the number of units we expect to produce during the year by the amount it will cost us to make each unit. The unit cost must include materials, direct labor, and production allocation. In our example, it costs our company $10 to produce each unit. The total cost of goods sold would be 10,000 units multiplied by $10 per unit, for a total of $100,000.
Line 5 | Gross Profit – Total cost of goods sold ($100,000) is subtracted from net sales revenue ($294,000) to calculate gross profit ($194,000).
Line 6 to 11 | Operating Expenses- All costs that are not included in the cost of goods sold should be listed as operating expenses. This usually includes wages and salaries (Line 6), administrative costs (Line 7), repairs and maintenance (Line 8), depreciation (line 9) and professional fees (line 10). After listing each expense separately, include a line for total operating expenses (Line 11).
Line 12| Earnings Before Interest and Taxes (EBIT) – The total operating expense from line 11 ($20,000) is subtracted from the gross profit ($194,000) on line 5 to calculate the amount of earnings before interest interest and taxes ($174,000).
The Financial Planning Process
Line 13 | Income Taxes – In our example, we will assume that the federal tax rate is 21%. The amount of earnings before interest and taxes from line 12 ($174,000) is multiplied by the tax rate (21%) to calculate the income tax expense ($36, 540).
Line 13 | Net Income – The estimated income tax expense calculated above ($36,540) is subtracted from EBIT ($174,000) to calculate net income ($137,460).
Inflation – When projecting what our numbers will be in the future, we have to consider inflation. The spreadsheet excerpt below is from the Bureau of Labor Statistics website, and shows the percentage increase in the price of consumer goods for the next ten years.
Since our projects stretch 5 years into the future, we are concerned with the period from 2020 to 2024. During these 5 years, the average inflation rate is around 2.5%, so we need to increase our numbers by 2.5% every year (except the base year).
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Besides inflation, the only other difference between year 0 and year 1-4 is sales volume. In our example, our sales plan said that sales are expected to grow by 10% each year. Starting from our base year sales forecast of 10,000 units, 10% annual growth would mean that sales volume in year 1 will be 11,000 (10,000 units plus 10% growth), and then 12,100 (11,000). units plus 10% growth) in year 2, and so on.
When you are done with the projections, refer back to the highlighted items. Remember, you want to make sure the financials tell the same story as the passages and figures you highlighted.
Looking at the financial statements of an established company in your industry is one way to judge the reasonableness of your numbers. Public companies are required to file quarterly and annual financial statements with the Securities and Exchange Commission (SEC), all of which are accessible through its Electronic Data Collection Analysis and Retrieval system.
Since a public company arguably has more revenue, ignore the dollar amounts and focus on their relative proportions. Calculate net income as a percentage of gross income (net income divided by gross income) for a few different companies, and see how your numbers compare. Chances are, if you have a higher net income percentage than a well-established public company, you’ve overestimated your sales numbers or underestimated your costs.
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By identifying everything in your business plan that has a financial impact first, and then tackling the income statement projections one item at a time, what seemed like an overwhelming task can suddenly become much more manageable.
Painting an accurate financial picture of what a business will be in the future is not an easy task. Financial projects are A financial model of the business plan is used by companies and organizations to outline the expected costs and profits for the coming years. Sign’s free Business Plan financial template includes space for you to write your company’s vision and mission, as well as fill in expected start-up costs, revenues and expenses. When you’re done, simply sign in at the bottom and automatically receive a finalized document in your inbox to share with investors and top management.
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Free Financial Statement Templates For Small Businesses
These models are only suggested forms. If you use a form as a contract, or to collect personal (or personal health) information, or for another purpose with legal implications, we recommend that you do your homework to ensure that you are in compliance with applicable laws and that you consult. a lawyer before relying on any particular form.
Plans, strategies, roadmaps – Businesses rely on these things to gain perspective on what’s going on. The cuts established in a strategic and careful planning for growth and expansion, visions of where the company will go from now to 10 years, goals that should
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