Financial Projections and Your Business Plan
Japan, among other publications. She lives in Chicago and holds the Chartered Financial Analyst
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There’s so much to running a business that the numbers can get lost in the fun of the planning. What will the business cards look like? How will we recognize top customers? What products will we offer that our competitors don’t?
Compared to drawing up a menu, designing window displays and hiring great employees, creating a business plan is no fun at all, at least not for many people. That’s too bad, too, because an understanding of the numbers will increase the likelihood of the other work succeeding.
“Having a detailed business plan that shows you understand the industry, competitive market and local prospects is critical,” Jay DesMarteau, head of small business and SBA banking for TD Bank in Wilton, CT said. The numbers are not an afterthought, but rather a critical component of the work.
With a financial plan, you are taking your ideas and translating them into numbers to give you an additional perspective.
That’s all it is. It helps you think through the plan to identify potential problems and areas of strength. Where will the revenue come from? How many people are going to spend money on your good or service, and how much will they spend? Are you a hairdresser building repeat clients, or are you a custom builder who will rarely have a customer more than once?
Furthermore, good business plan numbers are necessary for fundraising.
“Businesses looking to obtain financing need to prepare a few things before meeting with their banker: have clear revenue records that show how and from where you earn income, have a written business plan, provide two to three years of tax statements (personal and/or business) and build up a strong personal credit score,” DesMarteau said. The bank wants it all to tie together, even though many entrepreneurs think that these items are not related.
The Small Business Administration has an online business plan creator that takes you through the steps needed to prepare a business plan for a loan application, and that includes addressing the financial situation. It’s easier to write the business plan before the business is in operation, but if your timing is off, SCORE has a plan template to use with an established company. Other books, web sites and training programs can give you more information about the process of creating a business plan and revising it as the business grows.
There’s one big pitfall to business planning, though.
“Entrepreneurs just starting out often overestimate financial projections,” DesMarteau said, which is why the banks won’t lend on project financials alone.
After all, entrepreneurs are optimistic by nature. As you write the plan and pull the numbers together, check to see how the two components tie together.
The written financial plan and the revenue and expenses have to match.
For example, the advertising expense in your financial projections match the amount of advertising you’ve planned to do, and that it’s enough to support the revenue that you have projected. This is how you use the financials in the business plan to improve the business whether or not you pay a visit to the banks. Most business plans are out of date as soon as the pages hit the printer, but that doesn’t detract from the value.