The financial statements and the whole area of financing a new venture are the measuring tools and determinants as to whether a business concept is viable or not. Often many would-be entrepreneurs jump too quickly into a new venture buoyed by the excitement of doing something new, without realistically appraising the opportunity in terms of its financial viability. Certainly, if outside funding is sought, the bank, VC or funding group will demand to see a realistic set of pro forma financial statements before investing a single dollar. The following offers a short guide and checklist for those about to embark on a new venture.
- 1 The Basics of Financial Statement Analysis in a StartUp
- 2 Capital Infusions Required and Financial Returns
- 3 Basics on Writing a Start Up Business Plan
- 4 What is an Executive Summary
- 5 Write a Vision Statement and a Mission Statement for the New Business
- 6 Background and Industry Profile are Components to a Complete Business Plan
- 7 Marketing Plan as Part of the Business Plan
- 8 Investors are Interested in Financial Analysis of Start Up Businesses
The Basics of Financial Statement Analysis in a StartUp
When a prospective entrepreneur develops the financial statements either from an Excel Microsoft Office template or another source, he or she will walk away with a much deeper understanding of the financial statement/cash flow process. For those with a minimal background in accounting & finance, there are certainly ample resources to to aid in one’s understanding.
The financial statement and financing section of a business plan is crucial in either obtaining outside funding or simply giving a business person confidence that his business model makes financial sense. Whether one is writing the business plan personally or working with a consultant, the entrepreneur must know everything in the business plan and its associated financial statements to the smallest detail.
There are three financial statements that are typically required:
- Income Statement (P&L)
- Cash Flow Statement
- Balance Sheet
These are all pro forma financial statements. The Income statement will determines whether the business earns a profit and is ultimately a viable concept. The cash flow statement (projected on a monthly basis) will point out if there are sufficient cash reserves to meet operational expenses and unexpected contingencies. The balance sheet will be especially important if the business person invests significant resources of his own. This will show the changes in the value of all the significant components of the assets, liabilities and stockholders’ equity over a period of time (typically, at least two or three years). An extensive amount of information for startups is also available from the SBA.
Capital Infusions Required and Financial Returns
Assuming that outside funding is required, the financial section will indicate when capital is to be invested into the business and ultimately when it can be returned, either in the form of debt repayment or as dividends back to the investors. If the financial statements are based upon realistic assumptions, they will be useful as a tool in the management of the enterprise within the early months of the start up period.
Further, the initial capital requirements will be determined by the realistic projections of the following:
- Manpower and staffing
- Capital Equipment and Leases
- Initial Inventory Purchases
- Company setup expenses (e.g. desks, furniture, software, computers, professional expenses)
The financial plan is ultimately a checklist and the business plan sanity test that enables the would-be entrepreneur to determine if all bases are covered. At the end of the day, it is the ultimate sanity test to the business owner and the investor, as well as to whether or not the business concept is justifiable in terms of potential returns.
Basics on Writing a Start Up Business Plan
A business plan for a start up venture is essential for getting a loan, capital investors, and as a strategic planning guide to use during the initial phases of building the business. The business plan can also be used to determine whether or not the business idea is viable.
What is an Executive Summary
The executive summary is a short version of the business plan that summarizes the most important points of the plan. The purpose of the executive summary is to pique the interest of the reader or investor to read the full business plan.
Write a Vision Statement and a Mission Statement for the New Business
A vision statement announces the ultimate ideal state of being for a business, while a mission statement explains just how the business will achieve that mission. These two statements are great to have in the executive summary or introduction of the business plan, and indicate sophistication in the strategic planning of the start up venture.
Background and Industry Profile are Components to a Complete Business Plan
The background information about business idea and the industry profile are important parts of the business plan because they instill confidence in the financial investors that there is research and knowledge of the industry that the new business is entering into.
The industry profile should include details about the following:
- an overview of the industry
- history and current state of the industry
- information on the local or national economy that relates to the business project
- market demographics
- information about competitors
The organizers or owners of the business should also include credentials, professional background, and expertise about themselves for the investors’ information.
Marketing Plan as Part of the Business Plan
While developing a full-blown marketing plan early on in the strategic planning phase of the start up business is a good idea, it is not always in the purview of the entrepreneur to develop one. Marketing is often outsourced for companies due to lack of experience or lack of expertise.
It is still a good idea to have a brief marketing plan, with at least a general outline of marketing ideas included in the formal business plan. The marketing plan should include ideas on how the business will be marketed, who the target market is, and what the plan is for reaching those markets.
Investors are Interested in Financial Analysis of Start Up Businesses
The financial projections of a new business venture are called the financial pro forma. A business plan should have five years of projections in a section entitled, “5 Year Financial Pro Forma.”
Included in the pro forma should be the following:
- Administrative costs
- Marketing costs
- Staffing and salary costs
There are numerous books available on how to write a stellar business plan replete with tips and how-to strategies for writing your first business plan. Remember, the first step to writing a plan is having a clear vision of what the business being created.