| This is a continuing series of articles on how to write a | | | | manufacturing cost level on the assumption that |
| Business Plan or Information Memorandum to raise | | | | everything that can be made will be sold by the sales |
| capital, Part 10 discusses the business plan content | | | | team. Additional salesmen do not necessarily equal |
| specifically ‘Financial Information’. | | | | greater sales! |
| Financial Information | | | | Although profit and loss statements are important from |
| This section is important as it represents the ‘gelling | | | | the point of view of probable returns (again, the need |
| together’ of the business plan in the form of | | | | for realism is stressed: forecasts which are too |
| financial projections. It should include:- | | | | optimistic or too pessimistic have little value as aids to |
| 1. Details of any previous financial record explaining | | | | decision making and policy formulation), the cash flow |
| briefly, historic trends and hiccups if any. If available, the | | | | forecast can be more critical as it details the amount |
| past 5 years’ results should be summarized and | | | | and timing of expected cash inflows and outflows. |
| the audited accounts together with latest management | | | | Generally the level of profits, particularly during the |
| figures included in the appendices. | | | | early years of a venture, will be insufficient to meet the |
| 2. A summary of projected results for the next 3 to 5 | | | | working capital needs and, as inflows do not match |
| years concentrating on the principal features of the | | | | outflows on a short term basis, this forecast allows |
| projections, trends, rising and falling margins, fluctuations, | | | | management to identify and plan cash needs. It also |
| commitment to R&D, major capital expenditure and | | | | helps the investor ascertain the finance required. |
| key assumptions. Detailed projections together with the | | | | Balance sheet information details the assets required |
| assumptions on which they are based should be | | | | to support projected levels of operation and shows |
| provided in the appendices and should include:- | | | | how these assets are to be financed (liabilities). These |
| (a) Profit and loss accounts by month for at least 12 | | | | are important tools for both investors and banks who |
| months, preferably 3 years, annually thereafter. The | | | | will analyze balance sheet ratios to determine whether |
| breakeven point should be clearly identified. | | | | they are within acceptable limits to justify investment. |
| (b) Cash flow projections, monthly and yearly as | | | | The opening balance sheet will form the base for the |
| above | | | | financial projections. It is important to state when it was |
| (c) Balance sheets, monthly and yearly as above | | | | compiled and from what source (year end audited |
| 3. A commentary on the forecasts considering the | | | | position, monthly management figures or blank piece of |
| overall shape of the company as projected rather | | | | paper). |
| than a detailed review of specific points. | | | | Once the company’s projections have been |
| 4. The nature of existing or planned financial reporting | | | | prepared it is necessary to draw upon section 9 of the |
| and control systems. | | | | business plan to highlight any major risks that could |
| 5. Sensitivity analysis covering key risk areas and a | | | | prevent the achievement of the forecasts and the |
| summary of the effects of such on the projections, in | | | | sensitivity of the figures to these risks. Although a |
| particular their impact on the funding requirement. | | | | venture capitalist will form his own view about risk |
| Investors routinely expect business plans to project | | | | factors he will take note of the company’s own |
| sales, profits and other financial information for 3 to 5 | | | | view about risk factors and he will take note of the |
| years into the future. These projections are basic to | | | | company’s own assessment. Using the original |
| the evaluation of the investment opportunity and to a | | | | projections as the ‘base’ both positive and |
| large extent will determine how much of the | | | | negative sensitivities should be considered such that a |
| company’s equity, investors will expect in return for | | | | best, worst and median set of projections results. As a |
| their investment. | | | | result, the total finance required, plus contingency to |
| Projections must represent the entrepreneur’s best | | | | take account of principal risk areas, will be determined. |
| estimate of future operations and should be supported | | | | The ability to meet income and cash flow projections |
| by the strategies described in the previous sections of | | | | will depend upon the company’s ability to monitor |
| the business plan. They should also provide the | | | | and control costs. Investors will want to know what |
| operating plan for the financial management of the | | | | accounting and cost control systems are or will be |
| venture. | | | | employed by the business and hence brief details |
| When compiling projections, always work from top | | | | should be given. |
| downwards, ie. start with the sales projections | | | | The content of Business Plans will be further covered |
| determined by the market and market strategy | | | | in subsequent articles by Len McDowall. |
| sections. It is a common mistake to project from the | | | | |