Section Twelve: Financials
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
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:
Your financial section should include the following documents:
- Cash Flow Projection
- Income Statement
- Statement of Personal Net Worth
- List of Start-up Costs
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.
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 (Word Document) to list your financial objectives.
1. CASH FLOW PROJECTION
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.
An example of a Cash Flow Projection for Fay’s Variety has been included for you to use as a guideline.
2. INCOME STATEMENT
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:
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.
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.
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.
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
|COST OF SALES|
|Licences & Taxes||1,000|
|Office Supplies & Postage||1,500|
|Repairs & Maintenance||1,200|
|Wages & Benefits||15,000|
|NET INCOME FOR THE YEAR||$20,800|
Click on Worksheet 8.13 (Word Document) and Worksheet 8.13 (Excel) 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
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:
2. Investment Assets
Investment assets include any assets tied up in an investment. Examples could include:
3. Personal Assets
Examples include your residence, automobiles, and other personal effects.
List of Liabilities
Liabilities which should be listed include:
1. Current Liabilities
2. Long Term Debt
Calculation of Personal Net Worth
The following equation can be used to calculate your net worth:
NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES
An example of a Statement of Personal Net Worth for Fay’s Variety is available.
4. LIST OF START-UP COSTS
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:
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
Opening Stock $ 25,000.00
Cash Register 1,000.00
Cash Counter 1,000.00
Working Capital: 5,000.00
Total Projected Start-up Costs $42,250.00
Click on Worksheet 8.15 (Word Document) to calculate your Start-up Costs.