| Updated March, 2010 |  |
File C5-69 |
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Create Your Own Business Plan -- Finances
Budget Projections
Many business ventures budget expected revenues and expenses. In this section describe your budget projections and the budget procedures you used. Describe the assumptions used in computing these estimates. Identify expected price per unit along with direct production expenses and profit margin.
Use the points below to help you prepare this section.
- Operations Budgeting – Budgets for production, processing, distribution/transportation, marketing, entire supply chain, others.
- Volume-Cost-Profit Analysis – Analysis for computing the volume of sales needed to break-even.
- Capital Budgeting – Analyzing investment decisions through Net Present Value and Internal Rate of Return.
- Cash-Flow Budgeting – Projecting the expected sources and uses of cash during various time periods.
Capital and Contingency Plans
The capital plan is important for all types of value-added businesses but especially critical for capital intensive projects like processing and/or manufacturing ventures. It is important to include all capital needs.
Use the points below to help you prepare this section.
1. Capital Plans
- Project the capital cost of major facilities, equipment and peripheral facilities. Make a list of these items.
- Project the capital cost of working capital including inventories, etc.
- Project the capital cost for the marketing plan.
- Project the schedule of capital replacement needs for facilities and equipment.
2. Contingency Plans
Very few business plans unfold as expected. Delays, cost overruns, marketing glitches, price variations and personnel problems are only a few of the problems that can arise. Developing contingency plans in case the business plan does not go as expected can increase your odds of success. Financial reserves and skilled leadership and management are critical for creating and implementing contingency plans.
- Identify risk factors (from risk section).
- Identify and assess internal weaknesses of the business (project).
- Use sensitivity and what-if analysis to identify deficiencies.
- Develop and describe plans or alternative courses of action in case these weaknesses or deficiencies occur.
- Project the contingency capital needs for the business venture. This focuses on capital reserves needed if the business venture does not unfold as expected.
Financial Data and Analysis
If this is an expansion of an existing business, provide financial information for previous years. Regardless of whether this is a start-up or an expansion, show pro forma financial statements of how the business is expected to perform. It is important that you give a clear picture of where the business stands today.
Use the points below to help you prepare this section.
1. Historical Information (past three years)
- Balance Sheets
- Income Statements
- Income Tax Returns
- Financial Performance
2. Pro Forma Information during Start-Up (provide notes of explanation and assumptions)
- Balance Sheet
- Income Statement
- Cash Flow Statement (monthly)
- Sources and Uses of Funds Statement
3. Pro Forma Information under Full Production (provide notes of explanation and assumptions)
- Balance Sheet
- Income Statement (monthly first year, quarterly second and third years)
- Cash Flow Statement (monthly first year, quarterly second and third years)
- Sources and Uses of Funds Statement
4. Sensitivity Analysis
- What are the key variables affecting profitability and cash-flow?
- Identify the levels of these variables (worst case, best case, expected).
- Project profitability and cash-flow under various combinations of these variables.
- Project profitability and cash-flow breakeven under various assumptions.
- Conduct Monte Carlo simulation
5. Other Information
- Compare to Industry Standards (ie. Dun & Bradstreet, Risk Management Associates, etc.)
- Show how the financial information is consistent with the marketing, operations and other plans outlined in previous sections.
- Identify control mechanisms that will measure actual versus planning performance.
Economic Variability and Risk Management
In this section you can list the risk factors the business faces, both inside and outside of the business, and the tools and strategies used to reduce risk. Use the points below to help you prepare this section.
1. External Risk Factors
- Input and output price volatility.
- Shortages of production inputs and raw materials
- Price cutting by competitors
- Unfavorable industry trends
- Unfavorable legislation
- Unavailability of trained labor
- Other factors
2. Internal Weaknesses and Risk Factors
- Construction delays and/or cost over-runs
- Plant specifications not met
- Production capacity goals not met
- Inferior management
- Sales projections not achieved.
- Difficulties in obtaining credit
- Other factors
3. Risk Assessment Tools
- Sensitivity analysis
- What-if analysis
4. Risk Management Tools and Strategies
- Hedging and options
- Input and output contracts
- Construction contracts
- Performance contracts
- Insurance
- Contingency plans
- Other tools and strategies
Exit/Reorganization Plan
Businesses are usually expected to last to perpetuity. However, industry, market and business conditions can change your plans. Some businesses are created with a definite exit plan in place. They may be created with the expectation of being sold later at a higher price. Or it may be expected to be reorganized later when market conditions or technology change. Even if the business will not be sold, exit plans are often created for the investors.
1. What is your exit strategy?
- Liquidate assets
- Create a successful business that will be sold to a competitor at a high price.
- Provide investors the opportunity to liquidate their investment (timing and method).
- Go public
2. What is your long-term business strategy?
- When do you expect market, technology or other changes to significantly affect your business?
- What are your plans for addressing these issues?