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Show Me the Money!
The Financial Section tells the story of the sustainability and viability of the business based on all of the revenues and expenses that you will incur to accomplish the goals of your plan. It also demonstrates that you have thought through the major risk factors and that you understand how they will affect the bottom line.
As you prepare this Section, ask yourself: "Would I invest my own money in this venture? Why or why not? What do I need to know to make an informed decision?"
In developing your financials and implementing your plan, you will analyze the financial potential of the business. Evaluation tools include: pro-formas or projections, break-even analysis and sources and uses statements. These tools use assumptions to forecast the financial outlook of the business.
When you are actually running your business, you will also utilize a number of management tools to help you understand what is happening with the business and compare your success to previous years, competitors and your projections. Management tools include the balance sheet, income statement and cash flow statement. A description of these statements and information on using them is included in Part III: Resource Guide.
The Financial Section of your plan should include the following information:
If this is your first time working with or creating financial statements, it would be wise to seek assistance from a business consultant with skills in both modeling and analyzing projections. You may be able to access these resources inexpensively through a local business school or through business counselors.
INTRODUCTION
Begin the Financial Section by providing context and highlighting the major points of this section. Recap the major factors affecting your financial situation from the market opportunity, business model, management or operations section of the plan. State your financial goals for the business in the short and long term including when you expect to break even and the projected net income over the next 3 to 5 years. Your financial goals might also address your plans for reinvesting profits in the business or passing them to the nonprofit parent organization.
Recycle-A-Bicycle provided background on two major events that affected their financial performance in the recent past.
COST AND REVENUE ASSUMPTIONS AND FINANCIAL PROJECTIONS
All of the projections that you create for the business require that you begin with assumptions about the revenues you will generate and the costs you will incur in operating the business. These assumptions are your best guess on what will happen in your business. You have detailed these assumptions in two earlier sections of the plan:
- Business Model: Sales revenues and cost of goods (based on the market opportunity section). These are reflected on the Sales Assumptions Worksheet within the Financial Projections Workbook.
- Operations: Staffing costs, fixed costs, marketing plan and start-up budget. The Financial Projections Workbook includes worksheets for staffing, fixed costs (including marketing) and your start-up budget.
Revenue assumptions will be based on two main factors: Price and Sales Volume. In addition, you will make assumptions on the Cost of Goods Sold for the product or service that you hope to sell. You must also make assumptions about the rates of growth in each of these factors.
Expense assumptions are based on your best guess as to the cost of running the business. These costs will include staffing, utilities, insurance, marketing, etc. Growth in expenses should be projected using information on historical growth rates, discussions and contracts with vendors and suppliers as well as the current rate of inflation.
Use the Financial Projections Workbook to complete your five-year projections.
In the write-up for the plan, outline your assumptions. The rationale behind these assumptions should have been given in other places in the plan, so this section will just provide highlights and then detail the numbers.
| Use graphs and charts to visually represent your analysis where possible and use volume-adjusted measurements such as income as a percent of sales or inventory days on hand to add perspective.
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In your analysis of the projections, you may want to discuss the following:
- Break-even: The break-even point shows the level of sales needed to cover all of your expenses, and in how much time you think this level will be achieved. When you determine the break-even point, ask yourself if this is reasonable given your market opportunity, staff, marketing plan and operational capacity. (A break-even calculation is provided in the Financial Projections Workbook.)
- Seasonality: Is your business seasonal? How does this affect your projections?
- Economies of scale: In what areas are you able to take advantage of economies of scale as you grow the business?
Recycle-A-Bicycle is able to make assumptions based on past performance because it is an established business. The business plan explains the projected sales volume increases over the next five years. The average price is assumed to remain constant.
SOURCES AND USES STATEMENT
This section shows what the business needs in terms of capital and investments. Your capital need is the amount of cash required to meet the business expenses. The Sources and Uses statement demonstrates how much it will cost to implement your plan and where the money is going to come from. The Statement lays out the expenses and costs of operating the business ("uses") and then shows the revenues and cash investments that are expected to flow in ("sources"). The difference is your financing need.
It is also useful to demonstrate funding commitments to the parent or related programs to show a history of support for the work of the parent organization and to show where you might receive grants or other philanthropic investments.
CAPITAL NEEDS BY STAGE OF DEVELOPMENT
In this part of the Financial Section, you will use your financial projections and Sources and Uses Statement to explain the total amount of funding needed for start-up, new investment, growth or expansion of the business. Discuss the amount of capital needed and the timing in order for the business to meet its projections.
RISKS AND MITIGATING STRATEGIES
In this section, describe the major risks associated with implementing your plan and fulfilling your projections. The purpose of this section is to show that you understand the weaknesses in your assumptions and that you have thought through what you will do if your assumptions are wrong or something unpredicted happens to the business. Risks may involve factors that are outside your control. The risks that you include should be realistic.
To develop your risks, ask "What if" questions about your assumptions. For each risk, discuss its potential affect on your business and suggest strategies to either thwart or deal with the issue should it arise.
The following are mitigation strategies to consider as you develop this section of your plan.
- Have a strong management team in place, especially an industry expert who can anticipate problems before they occur and who has experience trouble shooting.
- Establish contingency plans before problems arise so that both management and staff know what to do "in case."
- Develop a system to monitor cash flows into and out of the business in order to assess your liquidity.
- Diversify your business revenues by building several product or service lines that appeal to different target customer segments.
- Use Management Reporting tools to assess what is happening in the business and compare results to projections.
- Create an exit strategy for your nonprofit. How will the nonprofit know if the business is not successful? When will the nonprofit review the results of the operations and what are the decision factors for closing the business. On the other hand, what will the nonprofit do if the business is highly successful or begins to cause mission drift?
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