Once all the various factors affecting your business have been identified and reasonable assumptions and estimates have been made, it is time to put all the figures together in the Financial Analysis. This will be the nuts and bolts of your Business Plan and the part most likely to be focused on by lenders and investors. It will show whether or not your business is likely to be viable, how much profit you can expect to make, the potential return on investment, the timing of the cash flows and how long it will take before dividends can be taken or loans re-paid.
The Financial Analysis will consist of 3 main reports:
a) The Income Statement
b) The Balance Sheet
c) The Cash-Flow Forecast
There may well be subsidiary statements such as sales forecasts or capital expenditure reports that analyse the figures in more detail but they will all flow through to these 3 main reports. Very importantly, they should all be linked so that a change in one is reflected by a change in the others. It should be possible to produce all 3 reports simultaneously from the assumptions and estimates in the Business Plan. Otherwise, there is a danger that the figures shown will not be compatible with each other. For example, the balance on the Cash-Flow Forecast should equal the bank & cash figure in the Balance Sheet. And turnover in the Income Statement should equal customer receipts in the Cash-Flow plus the movement on trade debtors in the Balance Sheet.
The data in the Financial Analysis should be formula-linked to your estimates and assumptions as much as possible rather than entered as stand-alone figures. This means that if you tweak any of the estimates or assumptions later the financial model will update automatically, thus making it unnecessary to update the reports manually. This is very important for creating case scenarios and performing sensitivity analysis.
All figures in the reports should be phased at least quarterly and ideally on a monthly basis, as the first few months of a business start-up is often the most crucial period. You will need to track performance closely during this start-up phase to ensure that things are going to plan and funding is adequate. Merely showing annual figures in your Business Plan is not going to reveal much about the expected growth of the business during this phase and will be of little use as a profit forecast or a cash flow forecast as there would be no basis for comparison until the year end.
The results produced by the financial model may themselves influence the underlying estimates and assumptions and therefore be inter-dependent with them. For example, investment in fixed assets may be contingent on the profit forecast for the year. This in turn will affect depreciation which will impact on the same profit figure you are basing your capital expenditure on. It will also affect cashflow as higher borrowing may impose additional finance costs on the business, again impacting on profit. As a further example, you might have a profit share arrangement with your senior staff. Accruing for this as you go through the year will affect the very figures you are basing the profit share on. This type of relationship between the variables in your Business Plan can be difficult to model on a spreadsheet as you end up with circular equations, but there are techniques for dealing with this.
Finally, remember to make a note on the reports of which data sets your model is based on. If you are sticking to one set of estimates and assumptions this will not be necessary, but if you are performing sensitivity analysis or developing case scenarios you will need to cross-reference the financial reports to the data sets they are based on. This is best done by grouping the data sets and assigning an alpha-numeric code to each one. You can then set up your model so that the variables change according to the selected code for the particular scenario you are modelling.