Every business plan eventually has to answer one blunt question: how much cash does this actually take to get open and stay open until it’s making money on its own? That number, and where it’s going to come from, is the financial section of your business plan — and it’s often the section that decides whether a lender or investor keeps reading.
Add Up Every Startup Cost
Startup costs fall into two groups, and plans that only budget for one of them are the ones that run out of cash. One-time costs are the expenses to open the doors — a lease deposit and buildout, equipment, initial inventory, licenses and permits, a website, signage. Ongoing costs are what it takes to keep operating before revenue covers them — rent, payroll, utilities, insurance, loan payments. Estimate ongoing costs for at least the first three to six months and add that total in, not just the one-time costs; running out of cash while waiting for revenue to catch up is one of the most common reasons a new business fails, even when the underlying idea is sound.
Budget for What You Didn’t Think Of
No amount of careful research catches every cost of starting a business — something always comes up that wasn’t on the list. There are two ways to handle it. You can pad every individual line item a little to cover surprises, but that quietly makes every number in your plan less accurate. The better approach is a single separate line item, usually called contingency, that explicitly covers the unknown. A common rule of thumb is about 20 percent of your total startup budget if you don’t have better information — asking other owners of similar businesses what caught them by surprise is worth more than the rule of thumb if you can get it.
What the money goes toward depends heavily on what you’re starting. A retail business often sinks most of its startup cash into inventory and a storefront buildout; a service business is usually lighter on equipment but heavier on labor and required licenses or certifications; a manufacturing business tends to be the most equipment- and space-intensive of the three. Estimate your own numbers rather than borrowing someone else’s budget just because the business is in a similar category.
Debt or Equity: Where the Money Comes From
Once you know the number, the plan has to say where it’s coming from. That’s usually some mix of your own money, debt, and equity, and lenders and investors read a plan looking for different things.
Lenders — banks and other financial institutions — want to know precisely how much you’re asking for, exactly what it will be used for, how it will make the business stronger, and how you intend to repay it. Be specific about the repayment term you’re requesting; you’ll usually have little room to negotiate the interest rate, but more room to negotiate the length of the term, which directly affects your monthly cash flow.
Investors are looking for something different: growth and a return on what they put in. A plan aimed at investors should address how much funding you need in the short term and over the next few years, what that funding lets the business do, your estimated return on investment, and your exit strategy — how an investor eventually gets their money out, whether that’s a sale of the business, a buyback, or another route. Investors will also want to know what percentage of ownership they receive in exchange.
Building a Simple Financial Projection
Once you know your costs and your funding, a financial projection lays those numbers out month by month. Most plans include a 12-month profit-and-loss projection — forecast sales, cost of goods sold, expenses, and profit for each of the first twelve months — with a written explanation of the assumptions behind the numbers, since a lender reading your plan will want to know where the sales figures came from, not just what they are. Longer plans sometimes add a second projection out to three or four years; that’s optional, and the further out you project, the more the numbers should be treated as a direction rather than a forecast.
A profit projection isn’t the same thing as a cash flow projection, and a plan needs both. Profit and cash flow diverge because of timing — a sale can count as profit before the cash from it arrives, and a bill can be due before the cash to pay it exists. Track cash flow separately, including cash you spend before you’ve officially opened, and update the projection as you go; the goal is to see a cash shortfall coming before it happens. See what is cash flow for a fuller explanation of the difference, and what is a break-even point for how your projections tell you when the business starts covering its own costs.
The Financial Statements a Lender Will Want to See
Alongside your projections, a lender or investor will expect the plan to reference the standard financial statements — a profit-and-loss statement, a balance sheet, and a cash flow statement. If those terms aren’t already familiar, basic accounting terms and what is a balance sheet cover what each one actually shows.
None of this has to be complicated to be effective. See how to write a business plan for how the financial section fits with the rest of the plan, and starting a business: how much will it cost for a simpler classroom walkthrough of the same idea.