Business plans aren’t only for young companies seeking initial financing. They can also help established companies make strategic decisions and communicate with lenders and investors when they seek new capital infusions. Here’s an overview of specific items a comprehensive business plan should address, including historical and prospective financial statements.
Devising a detailed plan
Formal business plans usually are composed of the following six sections:
- Executive summary,
- Business description,
- Industry and marketing analysis,
- Management team description,
- Implementation plan, and
- Financials.
A comprehensive business plan can be useful for internal planning, but it can also be used for external purposes. For example, it’s an essential part of the loan application process for start-ups and when a company needs financing for a major capital expenditure. A high-growth business might present its business plan to prospective investors, joint venture partners or buyers. Lenders and creditors also might request one if a business is restructuring or teetering on the edge of bankruptcy.
While the length of business plans varies, they needn’t be long-winded. For a small business, the executive summary shouldn’t exceed one page, and the maximum number of pages should generally be fewer than 40.
Using historical results to predict the future
Business planning tells where the company is now — and where management expects it to be in three, five or 10 years. Management’s goals should be realistic and measurable. So, most plans include a “financials” section to show how the company will achieve its goals.
For established businesses, this section starts with historical financial results (typically the past two years’ income statements, balance sheets and cash flow statements). These reports show the company’s track record for generating profits and operating cash flow, managing working capital and assets, repaying debts, and paying dividends to shareholders.
Historical financial results can be used to identify key benchmarks that management wants to achieve over the long run. These assumptions drive forward-looking financial forecasts that show how much capital the company will need, how it plans to use those funds, and when it expects to repay loans or provide returns to investors.
For example, suppose a company that had $10 million in sales in 2023 expects to double that figure over a three-year period. How will the company get from Point A ($10 million in 2023) to Point B ($20 million in 2026)? Many roads may lead to the desired destination.
Let’s say the management team decides to double sales by hiring four new salespeople and acquiring the assets of a bankrupt competitor. These assumptions will drive the forecasted income statement, balance sheet and cash flow statement.
When forecasting the income statement, management makes assumptions about variable and fixed costs. Direct materials are generally considered variable. Salaries and rent are generally fixed. But many fixed costs can be variable over the long term. Consider rent: Once a lease expires, management can 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 revenue. Cash flow forecasts are a critical part of a company’s plan. Management may make assumptions about its minimum cash balance, and then debt increases or decreases to keep the balance sheet balanced. For instance, a company might use a line of credit to fund any cash shortfalls that take place as it grows.
Seeking external guidance
Comprehensive business planning can be a complex, time-consuming endeavor, especially when it comes to pulling together reliable financial forecasts. However, lenders and investors tend to be critical of financials that are prepared in-house. CPA-prepared historical and forecasted financial statements can lend credibility to a company’s business plan — and offer fresh perspectives and market-based support for management’s assumptions.
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