Section Twelve: Financials

Purpose

The financial section of your business plan provides the numerical validation of your plan. The financial section is very important because it:

  • Provides a summary of your business plan for review by lenders
  • Provides a monthly management guide for operation

Guidelines

Your financial plan should:

  • Be clear and concise
  • Include a contingency plan
  • Be used as an on-going budgeting tool and management control system
  • Be targeted at potential lenders or investors

Table 22 outlines some other points to keep in mind when you prepare your financial plan.

Table 22: Guidelines for Preparing Financial Statements

Guidelines for Preparing Financial Statements
When developing your financial statements, consider the following information:

  • Market trends, cycles (outlined in the Markets section)
  • Seasonability of business, i.e. summer vs winter
  • Holidays
  • Short and long months; for example, December is a short month; there are usually four months in which there are five weeks
  • New product launching — timing
  • Sensitivity factors — what if?
  • Show annual, quarterly and monthly calculations
  • Tracking system — how to monitor

Financial Documents

Your financial section should include the following documents:

  1. Cash Flow Projection
  2. Income Statement
  3. Statement of Personal Net Worth
  4. List of Start-up Costs

Assumptions

To support your financial statements, you should include a commentary on the main assumptions you’ve made in preparing the statements; for example, number of staff, wage rates, and fluctuation in probable sales.

Table 23 shows the assumptions made when Fay’s Variety’s financial statements were prepared.

Role of Accountant or Financial Advisor

It is advisable to consult with an accountant or financial advisor to complete your financial section. An accountant or financial advisor can be helpful for setting up accounting records and financial control systems to help you operate your business.

A good accountant may also provide wide experience with other small businesses, knowledge about people and markets, and, of course, setting up regulatory accounts (IE. WCB, Canada Revenue Agency, Minister of Finance for Ontario) and providing tax advice.

Table 23: Assumptions for Financial Statements for Fay’s Variety

FINANCIAL STATEMENT ASSUMPTIONS
1. Inventory: It is assumed that this will remain constant at around $23,000. Inventory will be counted at each month end.

2. Staffing: The following staffing requirements have been used.

  1. Manager (full-time)
  2. Store Assistant (full-time)
  3. Sales Clerks (2 part-time)

3. Management wages are as follows:

Owner/Manager $40,000 per annum

Assistant Manager $20,000 per annum

Part-time wages $7.80 per hour

Benefits have been calculated at 13% for full-time staff.

4. Interest: The operation has assumed a rate of 7% for all debt.

5. Equipment purchases: The majority of the equipment will be purchased in the first month of operation. In January the company will purchase a computer system.

6. Long-term Debt: Will fund equipment purchases. Principal payments will be $800 per month. Payments due monthly and to include principal plus interest.

7. Excess cash requirements will be met by a $10,000 line of credit secured by inventory.

Click on Worksheet 8.11 to list your financial objectives.

CASH FLOW PROJECTION

Purpose

The Cash Flow Projection provides a complete picture of cash receipts and disbursements for an accounting period.

The Cash Flow Projection is not a substitute for the Income Statement. It only tracks the cash flow of a business.

Consult with Accountant Financial Advisor

Consult with your accountant or Financial Advisor to ensure that you are properly projecting your cash flow.

Be careful not to overestimate first year sales.

Example

An example of a Cash Flow Projection for Fay’s Variety has been included for you to use as a guideline.

Cash Flow Projection Example

Click on Worksheet 8.12.docx and Worksheet 8.12.xlsx to plan your cash flow.

2. INCOME STATEMENT

Purpose

The Income Statement shows your operating profit or loss over a specific period of time.

For your business plan, you should forecast your income and expenses over a 12 month period.

Factors Affecting Income

Your operating profit or loss depends on:

1. Revenue

Generally, revenue includes sales; that is, the price of goods sold or services rendered to your customers.

Revenues should be recorded at the time they occur, not when payment is received from the customer.

2. Direct Costs

Direct costs include such costs as material purchases and labour.

3. Expenses

Expenses include any costs incurred in the process of earning revenue. For example, advertising, rent, utilities, and insurance can be considered expenses.

Expenses should be recorded in your accounting records at the time they are incurred, not when they are paid.

4. Drawings

Drawings are withdrawals which the owner of an unincorporated business makes for personal use.

Calculation of Operating Profit or Loss

The operating profit or loss is calculated by subtracting direct costs and expenses (and any drawings) from revenue.

Example

The Income Statement for Fay’s Variety is shown below to give you an idea of what you should be including in your Income Statement.

FAY’S VARIETY STORE
PROJECTED INCOME STATEMENT
FOR THE YEAR ENDING DECEMBER 31, 2013
REVENUE  
Sales   $112,000
   
COST OF SALES  
Material Purchases   56,400
   
GROSS PROFIT   55,600
 
EXPENSES  
Insurance 500  
Licences & Taxes 1,000  
Office Supplies & Postage 1,500  
Professional Fees 400  
Rent 7,200  
Repairs & Maintenance 1,200  
Telephone 800  
Utilities 4,800  
Vehicle Expenses 2,400  
Wages & Benefits 15,000  
TOTAL EXPENSES   34,800
 
NET INCOME FOR THE YEAR $20,800
Notes:

  1. $1,000 sale on account (account receivable) is not reflected in cash sales on Cash Flow because cash will not be received until after month 12.
  2. Owner’s Drawings are not reflected in the income statement, they are recorded in the Equity section of the Balance Sheet.

Click on Worksheet 8.13.docx and Worksheet 8.13.xlsx to calculate your income statement. Use the 12-month projection that you completed from the previous worksheet to assist you with your Income Statement.

3. STATEMENT OF PERSONAL NET WORTH

Purpose

The Statement of Personal Net Worth is a listing of all your personal assets and liabilities.

List of Assets

The following assets should be listed:

1. Liquid Assets

Examples of liquid assets include:

  • Bank accounts
  • Short term investments

2. Investment Assets

Investment assets include any assets tied up in an investment. Examples could include:

  • Deposits
  • Canada Savings Bonds
  • Term deposits
  • Securities
  • Stocks
  • Bonds
  • Mutual funds
  • Retirement Funds
  • RRSP
  • DPSP

3. Personal Assets

Examples include your residence, automobiles, and other personal effects.

List of Liabilities

Liabilities which should be listed include:

1. Current Liabilities

  • Credit cards
  • Bank loans
  • Personal loans

2. Long Term Debt

  • Mortgage(s)
  • Investment loan(s)
  • Any other loans

Calculation of Personal Net Worth

The following equation can be used to calculate your net worth:

NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES

Example

An example of a Statement of Personal Net Worth for Fay’s Variety is available.

Statement of Personal Net Worth Example

Click on Worksheet 8.14.docx and Worksheet 8.14.xlsx to calculate your Personal Net Worth.

4. LIST OF START-UP COSTS

Purpose

This section of your business plan summarizes all your costs involved in setting up your new venture.

Items to List

Try to list any cost related to your start-up. Examples might include:

  • Materials/inventory
  • Equipment
  • Furniture/fixtures
  • Vehicle(s)
  • Renovations
  • Deposits
  • Working Capital

Example

Start-up costs for Fay’s Variety are included as an example for you to follow.

START-UP COSTS FOR FAY’S VARIETY

ITEMS REQUIRED COST

Materials/Inventory:

Opening Stock $ 25,000.00

Equipment:

Cash Register 1,000.00

Furniture/Fixtures:

Cash Counter 1,000.00
Shelving 4,000.00

Vehicle:

Renovations: 4,000.00

Deposits:

Utilities 1,500.00
Rent 750.00

Working Capital: 5,000.00

Other:

Total Projected Start-up Costs $42,250.00

Click on Worksheet 8.15 to calculate your Start-up Costs.

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