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1/22/07

BUSINESS PLAN FORMATION PART 6


The Financial Plan is the part of your business plan that shows all the costs and possible revenues. Three main financial documents need to be in your Financial Plan, (1) the Start-Up Projection; (2) the Pro-Forma; and (3) the Break Even Analysis. Preparing each document is a labor intensive task. Therefore, I will discuss each document in separate posts.

First, I will discuss the Start-Up Projection. This spreadsheet shows all of the costs associated with beginning your business or initiating your idea/product/concept. In preparing this document, you must account for all the possible costs associated with starting your business. Make sure you find support for your numbers. In other words, do not blindly state that it will cost $1,000,000 to start your business. You need to break this number down into its individual parts.

In a previous post I wrote about the two types of potential investors. The two types pf potential investors are “idea orientated” investors and “numbers orientated” investors. Even though idea orientated investors will allow you more “wiggle room” in your financial information, they will not accept an unsupported plan. Whichever type of investor you happen to be pitching to, your financial information must be concise and accurate.

Here is an example spreadsheet. I will use this to help me explain the elements of the Start-Up Projection. This example spreadsheet is VERY BASIC and is for a restaurant.

You can decide the format you want to use. Let me caution you to use this spreadsheet only as an EXAMPLE!

As you can see, each section needs to be itemized. For example, under the Equipment Section, you have to list out the equipment that needs to be purchased. Do NOT put only a “total.” If you where a potential investor, would you wonder how the entrepreneur arrived at the total for the section? I sure would. The point is, do not leave any question unanswered. If the potential investor asks you how you arrived at your numbers, have research, quotes, comparables, etc. to support your projections.

Do not lie on your projections. I know what you are all thinking because I thought the same thing, “If these numbers are lower, I will have a better chance of getting financing.” Although this can be true, this idea is most definitely false if it creates inaccurate costs. State your costs accurately and financing will come. Another caveat, do not overstate your costs. A delicate balance needs to be achieved on your spreadsheet. Some information you obtain may state a particular cost on the high end and another piece of information may state a cost on the low end. For example, one contractor may quote you at $400 per square foot and another may quote you at $300 per square foot. Which number do you state on your Start-Up Projection? I recommend the average of $350 be used. By using this average you give a more accurate number to the potential investor. Although you found somebody that quoted your project for $300 per square foot, that quote may increase by the time your project is ready to be constructed. Also, the price given to you was only a quote. Think about every time you got your car repaired. How many times have you seen a difference in the quoted price and the actual price? Isn’t the actual price always higher than the quoted price? The point is, do not use the lowest number just because it is the lowest number.

One final tip; remember that this is a Start-Up Projection. As such, only list the costs that are going to be a factor at start-up. Your regularly occurring expenses will be reflected on your Pro Forma. The point is, costs that affect you eight months from now should not be show on your Start-Up Projection. If you accurately and completely itemize your costs need for start-up, your Start-Up Projection will be fine.
Next time, the Pro Forma...

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