Every new company should launch with a business plan and keep it updated. Generally, such a plan will comprise six sections: executive summary, business description, industry and marketing analysis, management team description, implementation plan, and financials.
Now, ideally, you would comprehensively update each section every year. But if the size, shape and objectives of your company haven’t changed all that much, you may not need to make major revisions to the entire plan. However, at the very least, you should always review and revise your financials.
Explain your route
Lenders, investors and other interested parties understand that descriptions of a business or industry analysis may be subject to interpretation. But financials are a different matter — they need to add up (literally and figuratively) and contain realistic projections in today’s dollars.
For example, suppose a company with $10 million in sales in 2019 expects to double that figure over a three-year period. How will you get from Point A ($10 million in 2019) to Point B ($20 million in 2023)? Many roads may lead to the desired destination; your business plan must explain its route.
Let’s say your management team decides to double sales by hiring four new salespeople and acquiring the assets of a bankrupt competitor. These assumptions will drive the projected income statement, balance sheet and cash flow statement referenced in your business plan.
Justify assumptions
When projecting the income statement, you’ll need to make assumptions about variable and fixed costs. Direct materials are generally considered variable. Salaries and rent are usually fixed. But many fixed costs can be variable over the long term. Consider rent: Once a lease expires, you could relocate to a different facility to accommodate changes in size.
Balance sheet items — receivables, inventory, payables and so on — are generally expected to grow in tandem with revenues. The financials in your business plan must accurately and reasonably justify the assumptions you’re making about your minimum cash balance, as well as debt increases or decreases to keep the balance sheet balanced. And these amounts must be current.
From a lending perspective, your bank will be expected to fund any cash shortfalls that take place as the company grows. So, realistic cash flow projections in your business plan are particularly critical. The financials section should outline how much financing you’ll need, how you intend to use those funds and when you expect to repay the loan(s).
Keep it fresh
Your business plan needs to tell an accurate, objective story of your company — where it’s been, where it is right now and where it’s heading. Keep the whole thing as fresh as possible but pay special attention to the numbers. Contact your DDK tax advisor to help you review your financials, arrive at reasonable assumptions, and express your objectives and projections clearly!
