Financial Information
This section of your business plan is imperative to your success particularly if you are seeking funds from potential investors, banking institutions and other lending or finance providers. While there are many advanced software programs and excel spreadsheet solutions designed to help you prepare the projected financial statements and other financial considerations, it is important that you understand the various statements and information to be included in the financial section of your business plan. Moreover, it is important to illustrate and articulate the current and projected financial status of your business in this section and provide an account of your entity’s need for funding by means of a loan, grant award, in-kind support or other tangible or intangible contribution. Once again, it is important to understand key sections that are to be included in your financial plan.
1. Assumptions
Estimating business start up costs can be a daunting task, but nevertheless, it is critical, especially to convince any investors, yourself or the bank that you have done your homework in respect to start up expenses. The start up expenses are further discussed in the cash flow statement section.
Your assumptions may include the following:
- The expense base
- The business days per week
- Inflation rate
- Interest rate
- Gross profit margin
- Growth in turnover
- VAT Rate
- Tax Rate
- Debtors collection period or detailed schedule
- Creditors payment period or detailed schedule
- Depreciation rates
- Currency conversion rates (where applicable)
- Payment cycles
2. Source and application of funds
2.1 Sources of funding for the business
Listed below are possible sources of funding
- The contribution from the owners
- Members loans
- Loans from family and friends
- Potential investors
- Bank loan
- Micro loan
- Grants
- Asset finance
2.2 Proposed Security
Given below are possible security options for your business financing needs.
| Facility | Proposed Security |
| Overdraft facility or working capital finance | Cession of policy or investment, Khula Credit Guarantee Scheme (applicable to South Africa) |
| Equipment finance | Notarial bond equipment, Khula Credit Guarantee (applicable to South Africa) |
| Vehicle finance | Insurance |
| Commercial property finance | Commercial property bond |
| Bridging finance | Cession of a portion of payments, surety |
Other security perspectives
- Property
- Pledge of investments
- Pledge of quoted shares
- Cession of life insurance policies
2.3 Application of funds
- Fixed Assets
- Machinery
- Equipment
- Working capital
- Establishment costs
- Research and development
- Franchise fees
- Investments
- Goodwill
3. Financial Projections
3. 1 Income Statement or Statement of Financial Performance
This statement shows the profits or losses projected at the end of the year. The Income Statement is coverage of the income or revenue, cost of goods sold, gross profit, net profit or loss, net profit before taxes, and the net income or profit after taxes. The statement can be presented to potential lenders or investors as follows:
- A 12 month statement showing the profit or loss for each month,
- Three year Income Statement Projections showing the profit or loss for each year
- Five year Income Statement Projections showing the profit or loss for each year
3.2 Cash Flow Statement
The cash flow statement shows the cash inflows (money coming in) and cash outflows (money going out) of your business. The projected cash flow of each specific period is the cash inflow less the cash outflow. Setting out a cash flow statement can be a challenging task in cases where the business has not yet been started. Therefore, it is important to draw up your cash flow on reasonable assumptions – get as many quotations from suppliers as possible. Spreadsheet templates are available online to assist you to draw up a cash flow statement. Prior to using them, ensure that you have data that pertains to your cash inflows and outflows.
Listed below are initial costs that you may take into consideration when drawing up your cash flow statements. They are usually shown on the starting month of your cash flow statement or the precise month in which they will be paid.
- Advertising costs or opening promotion
- Attorney’s fees, e.g. partnership agreement, lease agreements
- Cost of initial or start-up inventory or stock
- Cost of required initial stationery
- Deposits for capital goods or double lease payments
- Other deposits
- Post Office box deposit
- Rentals in advance
- The registration fees – company or close corporation
- The telephone installation and deposit
- Trading licenses
- Utility deposits – water and electricity
Your cash flow statement should take into consideration the monthly expenses listed below (include them in your cash flow statement where applicable):
- Advertising
- Auditors’ fees
- Bank charges
- Commissions
- Distribution expenses
- Electricity and water
- Entertainment and travel
- Hire and leasing charges
- Insurance
- Interest
- UIF
- Internet expenses
- Other manufacturing costs
- Other salary-related expenses (pension fund contributions, UIF)
- Owners’ and/or directors’ salaries
- Packaging expenses
- Printing and stationery
- Rates
- Rent
- Repairs and maintenance
- Salaries
- Telephone and facsimile charges
- The effect of value-added tax
- Motor Vehicle running expenses
- Wages
3.3 Balance Sheet or Statement of Financial Position
The Balance Sheet or what is commonly referred to as the Statement of Financial Position is an annual or yearly snapshot of the financial scenario of your business. It shows the financial position or state of your business with regard to the non current assets, current assets, non current liabilities , current liabilities and equity at a specific date.
4. Past Financial Statements
These can be presented as attachments to your business plan (in the case of an existing business)
5. Ratio Analysis
5.1 Profitability ratios
5.1.1 Gross profit margin
Expressed as a formula, the gross profit margin is:
Gross Profit Margin = Gross Profit/ Sales X 100
5.1.2 Net profit margin
Expressed as a formula, the net profit margin is:
Net Profit Margin = Net Profit/ Sales X 100
5.1.3 Return on Investment (investment measure)
Expressed as a formula, the return on investment is:
ROI = Net Profit/Assets x Sales/Assets
ROI = Net Profit/ Assets
5.2 Efficiency ratios
5.2.1 Debtor’s collection period
Expressed as a formula, the debtor’s collection period is:
Debtor’s collection period = (average debtors X 360)/ Credit sales
5.2.2 Creditor’s payment period
Expressed as a formula, the creditor’s payment period is:
Creditors payment period = (average creditors x 360)/ credit purchases
6.3 Liquidity ratios
6.3.1 Current ratio
Expressed as a formula, the current ratio is:
Current Ratio = Current Assets/ Current Liabilities
6.3.2 Quick ratio
Expressed as a formula, the quick ratio or acid-test ratio is:
Acid – test ratio = (current assets – inventory)/ current liabilities
6.3.3 Inventory turnover rate
Expressed as a formula, the inventory turnover rate is:
Inventory turnover rate = cost of sales (cost price of sales/ average inventory)
6.3.4 Net working capital
The net working capital is equal to: current assets – current liabilities
6.4 Solvency ratios
6.4.1 Debt ratio
Expressed as a formula, the ratios are:
Debt to assets ratio = total liabilities/ total assets
Debt to Equity ratio = total liabilities/ total owners’ equity
7. Break Even Analysis
The break-even analysis determines the sales level at which the business neither makes a profit nor loss. It predicts the sales volume, at a given price, necessary to recover the total costs, that is; variable and fixed costs.
8. Sensitivity Analysis
The sensitivity analysis compares the best and worst case of each Income Statement or Statement of Financial Performance line item to the planned values.
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