You are doing great, first part of the business plan is finished.

You are doing great, first part of the business plan is finished. Now we start the second part. This in my opinion is what scares alot of people away. They are unsure what goes in to the Financial Section. Again we are going to break it down to make it a bit easier. Lets start with your supporting documentation. These are accounting documents that you will create showing how your business is going to succeed.

The first document you will create is your balance sheet

. This is a record of the liquidity of your business, and your personal equity at any given point in your business life. This will show how much money you have on hand, how much you have invested, and how much you owe. Some terms that will be used are:Current assets

– cash, accounts receivable (what people owe you for work you have done), inventory, and prepaid expenses. Fixed assets

– Think of this as anything that the business owns that will be staying with the business-Land, building, improvements, equipment. You add these two columns together to get your Total Assets.

Now you need your Current Liabilities-

What are you paying out- Accounts payable, notes payable,interest payable. Long Term Liabilities

– Notes payable (perhaps the loan you will be paying back over a 10 year period). Add these two columns together to get your Total Liabilities.

The last column is your Net Worth,

how much money or assets do you have available to you, that are not tied up in the business, 401k plan, property, investments.

The next document is you Profit and Loss Statement. How well is your company preforming over time, monthly, quarterly and perhaps annually. If you are writing this for the first time and have no actual data to input, you can make educated guesses from research on other companies. Be sure and include a statement saying this. If you have been running your business for sometime now and have this information and are using this business plan to acquire a loan, then be sure and add the true figures. Break this down into columns such as Sales

– products, returns, and net sales. Cost of good sold

– product cost, commissions, labor and freight. Total cost of goods sold

will be the sum. Expenses,

this column can be very long, be as detailed as possible. Some items on the list may be salaries, rent, utilities,marketing, equipment leases, professional fees. Total expenses

is the sum of this category. You will need to decide if you are going to do this monthly, quarterly or annually, then create these accordingly.

The third document you will be creating is the Cash Flow Statement. 

This is used to show how well your company is managing your cash (liquidity). You subtract your cash from your disbursements (actual cash outlays) from the cash you receive. Confusing right? OK think of it like this, if you start taking on a lot of new business, where will the money come from? You need to keep track of what is coming in and going out, and be able to foresee where you may be short. If a client orders a 100 widgets and you only have available cash for 50 widgets to be assembled, what do you do? Tell the client sorry cant fill your order? No not likely, if you are able to foresee a short fall of cash you can use credit, apply for a loan or refinance. There are options available. By properly projecting you can asses all of your needs. You should do a monthly statement and include some of these headings, Receipts- Cash collections-

Widgets sold, breaking down if you have multiple revenue streams. Total Receipts is the total of each month and year. Expenditures- Fixed Costs- Compensation

Wages/Owner, Wages/Salary, Wages/Support staff, Wages/Admin, Payroll Taxes, Health Insurance. Total all Fixed Costs. Next comes a line for Variable Costs

(This is just like it sounds, it will vary each month but you can estimate in the beginning what you think you will be spending) add lines for insurance, travel, advertising. Now total the variable costs. At the end of each month add up your fixed costs with your variable costs and subtract them from your cash collection.

Now the Profit and Loss Statement and the Cash Flow are very similar. The difference is the profit and loss shows how well your company is operating over time, you will use this to project where your company is able to go in the future. Are you meeting your monthly goals, and if not how far off are you. Your cash flow shows how much actual money you have.

These three documents can be overwhelming. If you are unsure of what you should be putting in yours, you can reach out to your accountant, or you can purchase inexpensive software on line. Which ever route you go, this is a very important must have for your business plan. Next week we will talk about the rest of the Financial section. Before you know it, your business plan will be done.

Originally published in the Democrat & Chronicle on December 27th, 2012.