How to Develop Solid Business Plan Financials

How to Develop Solid Business Plan Financials
July 28th, 2011

The financial projections within a business plan should layout the timing and costs of the necessary manpower, research and development, purchases, and other start-up items needed to get the deal off the ground and operational. Good financials should also illustrate what possible ROI is available for an investor(s).

Q. So what is the starting point for the production of a solid set of business plan financials? A. A thoughtfully conceived business model of the operation.

A well-designed business model is a vital tool for planning the resources needed for guiding an operation through a start-up phase or through adverse conditions. Ideally your model would roughly estimate the behavior of marketplace (sale and marketing), any R&D effort, man power requirements, capital purchases, and other start-up requirements with regards to available resources (capital). If you are in the early stages of a start-up, then the creation of business model that illustrates clearly the mechanics of your deal should be a high priority when raising investment capital.

The results of the testing and planning conducted with your model will end up being the financial illustration of your deal. This will in turn help you determine the capital requirements needed now (and along the way) and what possible ROI can be generated for the investors.

Furthermore, your business model can and should be used to test and resolve any plausible but detrimental shifts to the business. For example this could include supply chain disruptions, or significant changes to the marketplace, or a prolonged R&D phase. Any of these could have a marked effect to growth and ROI so it’s a good idea to build in some degree of resiliency into the deal by having a “Plan B” and “Plan C” in place early on.

Here is an outline that defines in general, what sections need created and what specific behavior should be illustrated or modeled within each section.

The Marketplace Section

  • Objective: To depict the marketplace’s behavior in
    order to produce a illustration of the total potential market over
    time. Factors to consider.

    • Breach barriers to entry
      • Costs and time to break-through
        • Timing (time) is especially crucial
      • Public Relations necessary
        • Labor, Time & Materials
    • Establishment of market, if necessary
      • Education of marketplace
        • Costs and time required to educate or
          prepare the market
    • Properly design and understand product/service
      placement

      • Understand or develop compelling aspects of
        your product/service

        • Understand why a customer will buy
        • Understand who will not be a customer
        • Understand the products/services of
          competitors
    • Output: Reasonable estimate of marketplace
      available to your company

      • # of potential units/customers available over
        time

The Sales Function Section

  • Input: # of potential units/customers available over
    time

    • This uses the output of the “Marketplace” section.
  • Key factors in the Sales Model
    • Time needed to break-through (against competition)
    • Time needed to further customer education (in
      addition to marketing)
    • Timing to customer buying habits and decisions
    • Timing of customer purchasing cycle time
      • Timing of customer re-purchasing behavior
    • Labor & materials needed for all the above
  • Output: Estimated units sold over time
    • Estimated Gross Revenue

Estimate Inventory or Build Requirements: COGS Section

  • Costs and time to design
  • Costs and time to final engineering
  • Costs and time to production or acquisition

Estimate Infrastructure Needed for Operations Support. This should
include the costs and timing.

  • Support for Marketing
    • PR
    • Support and Admin Personnel
      • Acquisition costs
      • Training costs
  • Support for Sales
    • Support and Admin Personnel
      • Acquisition costs
      • Training costs
  • Support for Operations
    • Finance & Planning
      • Bookkeeping
    • IT or Systems Support
      • Personnel
        • In-house staff
        • Outside vendors
      • Networks
        • In-house equipment
        • Servers
    • General Administration
      • Office manager
      • General admin staff
  • Legal and Accounting (outside)
    • Legal for general and intellectual property
    • Accounting for tax related issues

From this outline, the sections should be assembled to form a P&L
in Excel in this format: This P&L should extend out at 3 years.
Marketing Section
..
..

  • Output of this section: Estimate of marketplace
    available to your company

Sales Section

  • Input for this section: Estimate of marketplace
    available to your company

..
..

  • Output for this section: Estimated units sold or
    services sold over time
  • Gross Revenues

COGS (if applicable): Estimate Inventory or Build Requirements
Gross Revenue Less COGS = Gross Profit Margin
Less: Expenses [Estimated Infrastructure Needed for Operations Support]

  • Total Expenses

Gross Profit Margin Less Total Expenses = Net Profit Accumulated Cash (Profit) over time
The magic set of numbers is the “Accumulated Cash (Profit) over time” line. This tells you how much cash your operation generates and accumulated over time and it gives you clues as to when further capital/debt injections are needed.