Mastering the Financial Section of Your Business Plan
A business is a for-profit enterprise which seeks to maximize the return for the owners of the business. It stands to reason that the financial section of a business plan is the most critical section to illustrate the story of how your business will create profit. The three key financial statements each have something to say to readers (such as investors, lenders, and potential partners) about the story.
Income Statement
The income statement should show how the company sells its products or services at rates that cover both the direct costs (cost of sales or cost of good sold) and the indirect costs of providing those products or services (general and administrative expenses). Readers will look to see not just an increase in the top-line sales numbers over time, but to see increased efficiency in operations. Efficiency is shown when sales figures rise in greater proportion than the other expenses shown. Cost of goods sold might be expected to rise in tandem with revenues, but if it does not rise as fast, it shows your company’s ability to start to pressure suppliers to lower prices due to the volume you are purchasing at or to command higher prices with customers, perhaps because of the growing brand of the company. Either case is attractive to readers as this shows the potential for much greater profitability in the long-term.
Cash Flow Statement
This statement should show readers the growing ability of the company to support itself on the cash it generates through operations, rather than cash generated from financing. Meanwhile, the cash balance that the company shows should remain at a healthy level, showing that the company plans to hold adequate reserve funds for unforeseen problems (or opportunities).
Balance Sheet
The balance sheet is an important document for lenders and investors alike. For example, it shows the quantifiable assets (cash, inventory, equipment, leasehold improvements, property, etc) of the business at a point in time. Lenders will often only let companies borrow against their assets. Investors use the asset level to determine return on assets (ROA) a common financial metric to compare profitability between companies, especially within an industry.
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