When looking at presenting your Business Plan’s financial projections, you may be wondering what to include and how to format your data. In previous posts, we have gone over how you can use specialised software like Brixx to create a comprehensive financial projection for your business plan as well as why financial projections are of such importance to your plan.
Let’s talk about your Business Plan’s financial projections
- Five key items to include in your Business Plan’s financial projections
- Your Business Plan’s financial projections should include 3 (or more) different scenarios
- Format and present your Business Plan’s financial projections
- Use specialised software to create your Business Plan’s 5-year financial projections
- Using your Business Plan’s financial projections to plan for the future, map an exit strategy, and more
There are many ways you can present your finances in a startup business plan. A good, structured approach is to lay out the key information and assumptions you’ve used to build your forecasts – and then present the 3 formal financial reports.
This gives readers a taste of the vitally important financial elements of the business, without having to sift through a financial report to uncover this information. The full reports are necessary for detailed analysis, and are a great standardised way of understanding and comparing business plans.
To start with, we’ll look at five common types of key information that you should include in the Financial Projections section of your startup business plan. There are many, many more but these five are common to most new businesses regardless of their industry.
- General Assumptions
- Startup Costs
- Sales Forecast
- Funding Requirements
Following these shorter snippets of financial information, you will present the ‘big three’ financial reports.
The “big three” reports
With each financial report, you’ll need to add your own commentary explaining why the numbers are realistic. How did you come up with them? You need to show they are well thought through and you didn’t just make them up to look good.
If there are unknowns, that’s fine. You just need to be upfront about them. Outlining areas you are confident about vs areas you are not so confident is just part of the process.
If you are demonstrating significant year on year growth you’ll need to explain how that comes about too. What drives that growth and why you feel confident you can achieve it?
A common presentation of these reports will be 5 columns for each financial year. If it’s relevant, you might break some of these out into more detail. For example, you could show a year broken into 12 month periods in order to highlight seasonal sales (if you are going into a highly seasonal market).
Five key items to include in your Business Plan’s financial projections
There are things that underpin your financial plan that may seem obvious, but nonetheless should be spelt out. Listing your general assumptions shows the economic reality your financial plan is operating in.
Again, this is starting to sound pretty theoretical – so here are some examples of the assumptions you’ve made in your plan that you need to spell out:
- The rates of taxes you will need to pay
- Inflation rates over the next 5 years, if you include this in your calculations
- Interest rates on your borrowing (loans etc)
- When you get paid by your customers
- When you pay your suppliers
If you do assume that some payments to or from the business will have a delay, then add this to your list of general assumptions. For example, “I have assumed that there will be a 1-month delay on the receipt of cash on 50% of my sales.”
Only list the assumptions that you have included in your financial plan.
Listing the costs required to start your business proves that you have considered and researched the necessities of starting your business. Ensure that you split them down into different sections to make them readable.
In Brixx, you can use the Operational Cost component to represent research and one-off purchases and the Asset component to represent asset purchases. Asset purchases are unlike other costs in that they have an effect on the Balance Sheet forecast – they have a tangible value to the business.
If you have been building a Brixx plan you can use the startup costs figures from your Brixx reports in your startup business plan.
Sales. It’s one of the most difficult things to predict, and one of the most crucial for your business plan. We’ve covered a lot of tips throughout this guide on how to plan effectively, and break down your sales forecast into manageable chunks – building up a financial picture of your sales from the bottom up.
You should include a sales forecast separate from your financial reports in this section of your startup business plan. A sales forecast shows how much you intend to make from sales over a period of time, broken down by your major products or services if relevant. You can also include other related information, like the number of units sold per month, and the direct costs of these sales.
It’s really key to add commentary around the factors that will dictate your success. What needs to go well in order for you to reach these sales figures? Are your sales activities scalable? If you don’t hit these targets, how will you identify what has gone wrong? Be thoughtful, honest and diligent with these descriptions. If you can’t express this on paper, how will you cope if you need to explain this in person when you meet your potential investors?
Cash vs Accrual based accounting
So, here’s a question. What’s more important to display here, sales according to the Cash Flow, or Profit and Loss? We learned above about the difference between Cash Flow and Profit and Loss. The Cash Flow takes into account when cash actually changes hands, while the P&L accounts for when the transaction agreement takes place. Let’s say you deliver a product/service immediately to your customer and they then pay you a month later. An electrician, for example, might complete some work, and then send an invoice for payment.
But – which month should you record the income for your sales forecast – when you do the work and send the invoice, or when cash actually changes hands? Should it be profit-based, or cash-based?
The most often used is profit-based. The sales forecast looks at the sales per month that the business expects to make, while further detail on the timing of the cash you actually receive will be shown in your cash flow forecast. A cash-based forecast will shed more light on how much cash is actually coming into the business, while a profit-based one would give the impression of higher revenues than a cash-based one, assuming you get paid after you deliver your product/services.
The time period depends on the company’s performance
The period of time your sales forecast should cover will depend on how quickly the business reaches an even keel. If sales continue to ramp up for the first 12 months, show 12 months of the sales forecast. But if it takes 2 years for the business’ sales to reach the level it needs to be sustainable, show 24 months in this section. Ultimately, the sales forecast is a quick and easy way for the reader to understand the revenue journey of your business, from day 1, to the level it seeks to maintain.
As a general rule of thumb
Whether you have been using Brixx or a spreadsheet, export your sales forecast figures, or copy the figures into a spreadsheet to present in your startup business plan. As I mentioned before, don’t include any editable documents as part of your business plan. Instead, if you are using spreadsheets, export them as a PDF.
To complete the startup business plan I would present this information for all of my major product/service lines for as long as it takes the business to reach a self-sustaining revenue, though I may group several together into more general forecasts for product types.
If you do this, be prepared to be able to unpick this information and have predicted revenue amounts for each product or service available in the Appendix of the plan. The important thing here is to demonstrate a reasonable and thought out approach to your sales forecast.
Salaries & contracts
The cost of salaries and contracting work is often the biggest cost a business has. Lay out how much the business will be paying in salaries each year and the contractors it will be paying for services. You can display this information in a table or as an export from Brixx or a spreadsheet.
If it’s important to explain your financial predictions, you might want to include headcounts for each year of your forecast. Discuss the types of hires you think you’ll need to make each year to grow your business.
Don’t forget to include pensions and national insurance payments, in addition to salaries. The cost of employing someone is much more than just the wages you are paying them!
Outline the funding requirements, if any, of the business, supported by data from your financial plan.
If you are looking to attract funding with your startup business plan, it will be necessary to spell out what you are using this funding for, how you plan to acquire it and show that your financial plan includes a sensible repayment schedule or any dividends you expect to pay to investors.
In many cases, investors are wary of investing in a business where the business owners have not made some form of investment in it themselves. The best thing to do in this section is honestly lay out how the business is funded, the funding required, and what this will be used for.
Your Business Plan’s financial projections should include 3 (or more) different scenarios
You may be wondering why you would make more than one financial projection. The answer is simple: the projections you’ve forecasted are likely to happen based on your research but that doesn’t mean that it’s going to happen.
At a minimum, you should consider 2 other financial projections – a high revenue, and a low revenue. It’s tempting to say these should be a ‘best case’ financial plan and a ‘worst case’ financial plan – but this is too extreme. If you’ve done your research correctly, and planned your business well, you should be able to avoid the ‘worst case’ scenario. But a below-average situation can still be trying for a business, especially when they are starting out.
An above-average situation may sound great, but doing well can have hidden costs. You may need to hire additional members of staff to cope with the increased business you are getting, pay more for delivering your products or services and be able to physically deal with the demand.
Making a High-Revenue Projection
A high revenue or above-average performance projection demonstrates how your financials change if you do better than you expect. But – a little thought is required here. It’s easy to make an assumption such as – what if sales are 10% higher, or what if sales grow more quickly than expected – but the ramifications of this assumption in the real world will also have an effect on your financial projections for your startup.
The simplest example is a direct sales business. If we assume that sales grow by 10%, this may not be possible without hiring another salesperson, a potentially large cost to the business.
Making a Low Revenue Projection
A low revenue or below-average performance projection gives you the opportunity to show how your business can weather the storm of a below-average year or unexpected costs. Of all the plans you make – this is one you should give a lot of thought to. You’re starting a new business, and it’s likely that your first year will have a few hiccups. Knowing in advance that you can handle these hiccups, or lower than expected revenue, will take a lot of the stress out of it, and save you both time and money when they do happen.
Say, for example, that you get 20% fewer sales, and one element of the business ends up costing twice what you predicted – these are reasonable concerns that any new business starting out might have.
Answer what it means for your financial projections
- Do you need to seek additional funding? If you are currently seeking £50,000 in funding, how much more funding would you require if sales were 20% lower? Work this out, and express it like this: “If the business does not make 500 sales a month by December 2022, then we will need to seek an additional £10,000 before March 2023.”
- Does it prevent you from accomplishing certain future projects? “As a knock-on effect of low growth, we will need to push our new product line launch back by 6 months – however, even this change still allows us to retain a positive cash balance of £5,000 throughout the year.
- Do drops in the sale of certain goods or services affect the business more than others?
- Are there certain costs, or sources of income, that are more likely to fluctuate than others?
Make as many changes or versions as you need to
That’s a lot of different questions, each requiring different changes to your financial projection in order to see their ramifications in your plan’s reports. You can make a copy of your projection for each individual change to see its effects in isolation, and you could also have a separate one that contains all of them! Just be clear with what changes you have made in the one you present as part of your startup business plan.
This will help you explain the situation you are preparing for alongside your Low Revenue Projection. You don’t need to explore every eventuality – just a set of circumstances that could happen and would result in poor performance for your business.
Making a Worst-Case Projection
I said above this is a situation you should be able to avoid – but – making this projection and knowing the answers to the challenges it poses are going to be important both for you and for any investor who asks. This worst-case projection does not need to be included as a part of your startup business plan – but you do need to consider it and have it ready should it be asked for.
While making this projection may sound defeatist, it’s not just asking “What if things really do go badly?”, but also “what can you do about it?”
This financial exploration imagines what happens things go worse than you anticipate. It should still be realistic – the costs in this projection won’t suddenly skyrocket, but perhaps you make dramatically less income than you expected – at least in the first year.
Consider an assumption like “what if we make 50% fewer sales – what is the impact on the business?” or “what if sales do not grow at all during the first 6 months?”
What does your financial projection look like after making these assumptions, and is there anything you can do in order to keep the business afloat while it deals with the repercussions? Does it mean investing more of your money into the business, cutting some of the business’ costs, or seeking funding from a bank or investor?
Never avoid the worst-case scenario
What you are exploring here are potentially real situations that you will need to deal with as a business owner. This is one of the reasons why completing a financial plan is so important. It’s not just about presenting an investor or lender with financial reports, it’s about giving your business the best chance of success and understanding the risks that the business could face.
Having a plan in place in advance for poor initial performance could save the business, and shows anyone looking at your business plan that you have thought seriously about the potential complications ahead and have prepared accordingly to mitigate these.
Take your time – plan methodically
When making alternative financial projections for these scenarios, it’s important to make sure you don’t get lost in all of the changes you are making. A great way to keep your scenarios in order is to have a master projection that you never change and make your changes in copies of this plan.
Follow these steps and you’ll find making alternative projections easy and stress-free!
Step 1: Make sure your financial plan contains every element of the business.
Step 2: Make a copy of your plan. Rename the original plan to include the word “Master” – this is now your master plan (it really is that simple)!
Step 3: From now on, make NO changes to your master plan. If you find you absolutely have to make a change to it, you will also need to make this exact change to every copy of your master plan that you make.
Step 4: In the copy you made of your master plan, you can now begin experimenting. Change this plan’s name to include a description of what you are using this plan for – for example, “10% lower sales”.
Step 5: Whenever you need to make a new alternative version of your plan, make a copy of your master plan, rename it, and make changes to the copied plan.
It’s best practice
This is both good practice and will allow you to see the differences between different versions of your startup’s financial projections. Remember to keep a note of what changes you have made to your startup business plan financials.
The final, and most important thing to remember when making different versions of your projection is to keep notes on what you have changed in each plan.
When creating your financial projections using a platform like Brixx, you can easily keep track of changes in various plans by writing these as comments components you have changed (but it should also be explained in the Financial Plan section of your business plan).
Format and present your Business Plan’s financial projections
If you have a Brixx subscription you’ll be able to export your Brixx plan reports to PDF, PNG or Excel. These can be included as a series of pages in this section of your business plan. Make sure that they are readable at the size you include them at. If you want to have complete control over their appearance don’t forget that you can make changes to them in Excel and then export them to PDF.
If you have been making your financial plan without using Brixx, then chances are you’ve been building your plan in spreadsheets. When you present these remember to export them as a PDF!
When you are confident enough with these reports and how they represent your business, include a page along with the reports that highlight the most important facts from each report.
Use specialised software to create your Business Plan’s 5-year financial projections
Your financial plan is 5 years long. That’s quite a long time! And the truth is that it’s hard to plan accurately that far into the future. Instead, a five-year plan lets you think about what’s possible in the future, opening up the question, “what next?” Over time, your business will change, grow and be capable of taking on new challenges.
Investors don’t expect you to be able to predict with great accuracy what the business will look like in 5 years. However, they do want to see your ambition, your goals and your business sense demonstrated by your future plans.
You’ll find the future easy to explore in Brixx. The timeline we mentioned above lets you set up future projects and change when these occur in your financial plan so that you can see the ramifications of these changes across your financial reports. This is one area where planning in spreadsheets becomes pretty time-consuming!
Explore possible futures with Brixx
- Expand to a new site
- Expand to a new country!
- Hire more staff
- Hire more managers!
- Increase salaries
- Take on a new project/stream of business
- Develop new technology, skills or practices to grow the business in new ways
These ideas are just the tip of the iceberg – but laying out your long term intentions for the business is an important part of your startup business plan – for you and for any reader. We thought about some other ways your business could express itself in week 4 when we looked at business models. These alternative business models could be ways for you to expand your business in the future, and crucially ones that you have already put some thought into.
Include a version of your financial projection which shows the effect of taking on these new projects or business models in the future.
Using your Business Plan’s financial projections to plan for the future, map an exit strategy, and more
As you may have gathered, your Business Plan’s financial projections can do more than just provide an overview on financials. While not all startup business plans need an exit strategy, financial projections allow you the opportunity to design one should you need to. It depends on whether you are planning to continue to own and run the business, or if you intend, in the course of the financial plan you have outlined, to exit the company and take a substantial personal profit from doing so.
Some businesses seek investment on the basis that the business will be grown, and then sold, with the investors reaping a profit from the sale of the business. With comprehensive financial projections, combined with the rest of your competition and market research, you can map a clear exit strategy for the future, if you need to or choose to.
With specialised software like Brixx, you can easily create comprehensive financial projections that will effectively allow you to start, grow, or exit your business. Try the free 7-day trial today!