[MUSIC] I would now like to start talking about the financial plan. Probably one of the most difficult aspects of the business plan to develop, but without which it's very difficult to raise any external funds. The financial plan needs to consist of a 12-month profit and loss forecast. Or alternatively, that can be called a forecast income statement. Not necessary but it's potentially ideal for you to include a 4-year profit and loss forecast. This is optional, and what I mean by this is simply just an overall idea of the profit or loss that your business has forecast over the next four years. That is in addition to the more detailed 12-month plan. You should include a cash flow forecast for the first 12 months and a projected balance sheet. Also, it's important to include what's called some break-even analysis, or calculations. All of these financial statements together constitute a reasonable estimate of your company's financial future. More important, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company. Okay, let's focus on the 12-month profit and loss forecast. Many business owners think of the 12-month profit and loss forecast as being at the heart of their plan. This is where you assemble all the important figures and get an idea of what it would take to make a profit and to be successful as an organization. Your profit and loss forecast will always start with your sales forecast. And this is where we reflect back, maybe, on some of the previous stuff that we've looked at in the development of your forecast. Based upon what you expect to sell, you can work out how much you expect to spend. In particular, on the cost of the things that you are actually selling, something we call cost of goods sold. Also, you'll need to focus on your expenses. And, I think, for this business plan, I'd like you to develop a profit on a month by month basis for the first 12 months and therefore, an overall profit for one year. Profit forecasts should be accompanied by a narrative that explains the major assumptions used to estimate the income and the expenses that are included within. Keep careful notes on your research and your assumptions so you can explain them later if necessary. And also, so that you can go back to your sources when it's time to revise your plan. I think, at this point, let's briefly talk about the 4-year profit forecast as well. As I said, this is optional, the 12-month forecast is the heart of your financial plan but the 4-year profit forecast is for those who want to carry their forecast beyond the first year. Once again, of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year. Let's move on to the forecast cash flow. If the profit forecast is at the heart of your business plan, then cash flow is it's blood. Businesses fail, predominantly, because they can not pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash. The point of this section of the business plan is to work out how much you need before starting, for preliminary expenses, operating expenses, and any reserves that you may wish to have. You should keep updating your cash flow forecast, and keep using it afterwards as well. It's an important document for you. It will enable you to foresee shortages at certain times of the year and maybe deal with them. And you can do that by potentially cutting expenses, maybe even negotiating a loan or an overdraft, or even alternatively, postponing some maybe capital expenditure that you planned to make. But above all, the idea behind a cash flow forecast is so you will not be taken by surprise and running out of cash. There's no particular great trick to preparing your cash flow. It's simply the cash in and the cash out over a particular period in time. For each item, determine when you actually expect to receive the cash, for sales for instance. Or when you will actually have to write out a check or pay for expenses. You should record essential operating costs, which are not necessarily part of the cash flow but allow you to track items that have a heavy impact on cash flow, such as sales and stock purchases. You should also track cash outlays before opening in a pre-startup column, potentially, of your cash flow statement. You should have already researched those for your startup expenses. Your cash flow forecast will show whether your working capital is adequate. Do you have enough cash to keep your business running on a day-to-day basis? Clearly, if your projected cash balance ever becomes negative, you will need more startup capital. This plan will also predict just when and how much you will need to borrow. Explain your major assumptions here, especially those that make the cash flow differ from the profit and loss forecast as expected. For example, if you make a sale in the first month, when do you actually collect the cash? When you buy stock or materials, do you pay in advance? Do you pay on delivery? What about later, have you been afforded any credit terms? How will this affect your cash flow? Are some expenses payable in advance? If so, when are they payable? Are there any irregular expenses? Things like council tax, or business rates, etc. What about repairs and maintenance? Or even seasonal expenses? Maybe something pre-Christmas, pre-New Year, maybe pre-summer, which may cause you to maybe increase your stock. You need to budget for that. Also, if you plan to take on any debt in the form of a loan, what about those loan repayments? What about buying some capital items? What I mean by that is, do you need you need any equipment, motor vehicles, delivery vans, those sorts of things? When do you plan to purchase them and also, how are you going to pay for them? What about loan repayments? Equipment purchases? What about even the owner's salary? Will they need to take out, well you, it's your business, will you need to take out a salary? If so, when? How much? Some of these items don't always show in your profit and loss statements. But we really do need to make sure they're included in your cash flow statement. Please be sure to include all cash-in and all cash-out items. Remember, depreciation, something I'll talk about a little bit later on, is a non-cash expense and does not appear in the cash flow statement at all. It does, however, appear in your profit forecast. I'd now like to start talking about the balance sheet, another one of those fundamental financial reports that any business needs for reporting purposes and for financial management. A balance sheet shows what items of value are owned or held by the business, things we call assets. And also, what its debts of the business are, things we call liabilities. And if we look at those liabilities and take them away from the assets, then effectively what's left over is what's called the owners equity. The ownership interest, the vested interest of the owners, or what they have in the business. You can use a startup expenses and capitalization spreadsheet if wish, as a guide to preparing a balance sheet as on the opening day. The detail how you calculated the account balances on your opening day balance sheet should also be included, in other words, where do these figures come from? Some people like to add a forecast balance sheet showing the estimated financial position of the company at the end of the first year. I'm going to treat this as optional. But it is especially useful when selling your proposal to investors. So if you do plan to maybe take on a loan or sell this business plan to investors to gain further funding, then maybe you should think about producing a forecast balance sheet 12 months from the start of your business. Another key aspect of the financial plan is developing some break-even analysis. What break-even analysis tries to do is to predict the sales volume required, your given selling price, for you to be able to make a profit. In other words, it's the level of sales that is the dividing line between your operating at a loss and operating at profit. Break-even is where you neither make a loss or a profit. And, of course, that's not what we expect you to do in a business. All businesses are there to make a profit. But one thing that the break-even analysis tells us, at least it shows us how much in terms of either units of sales, or pounds of sales, we need to make before we reach that point. Include all assumptions upon which your break-even analysis and calculations are based. [MUSIC]
