Business Plan Essentials: Writing a Cash Flow Projection (2024)

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Taking Stock of Expenses

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running. Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Utilities
• Raw materials
• Storage
• Distribution
• Promotion
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The Income Statement

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once eachfiscal year,for the purposes of the business plan, an income statement should be generated monthly for the first year.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for anyinventory.

The Cash Flow Projection

Thecash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show howmuch capital investmentyourbusiness idea needs.

For investors, the cash flow projection shows whether your business is agood credit riskand if there is enough cash on hand to make your business agood candidate for a line of credit, ashort-term loan, or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursem*nts: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursem*nts: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursem*nts are subtracted, and the adjusted cash flow balance is carried over to the next month.

The Balance Sheet

The balance sheet reports your business'snet worth at a particular pointin time. It summarizes all the financial data about your business in three categories:

• Assets:Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when thetotal liabilitiesare subtractedfrom the total assets.

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity.

For yourbusiness plan, you shouldcreate a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.