Financial aspect of business plan

Good question. There are several different ways of representing financial information in your business plan. Depending on your company and business model there are a likely a few different options you can use. If your company doesnt have historical sales or cost data to build off of it is best to project your future sales based of a set of dynamic inputs. Using spreadsheet software like Microsoft Excel makes this process fairly easy and in a short period of time one can develop a powerful projection tool to help analyze future financials.

Financial modeling is the task of building an abstract representation (i.e., a model) of a financial decision making situation. The result of financial modeling is a tool - mathematical model, computer simulation designed to represent, under some assumed conditions, the performance of a financial asset or a portfolio, of a business, a project, or any other form of financial investment.

Why Build a Financial Model:
Building your own working financial model will help your business forecast your operation. The model can paint a picture of your expected costs and revenue streams as well as provide you with a break even analysis. The set of variables your financial model is based on can be changed and updated as your business collects data and tests the market. This is an invaluable tool that can output the results of changing these variables to reflect the updated profitability of your company.

Who Uses Financial Models?
You do. This is a very important document that helps your management team make financial decisions. As your situation changes your financial model should be updated to give you the most accurate representation of your profitability into the future.
Investors Do. This is arguably the most important documentation in your pitch to investors. If you can’t accurately showcase the profitability of your company why would the investor be
interested?

Gather your assumptions:
Start up Variables:
1) How much capital do you need to launch?
2) What physical resources do you need to purchase?
3) What legal protections will you need to purchase?
4) What software/web development must be paid for?
5) Other expenses prior to Launch...

Income Variables:
1) How many products or services do you plan to sell a month?
2) At what price?
3) Is there interest income?
4) Is there donation/sponsorship income?
5) What is your projected growth rate per year?
6) Other…

Expense Assumptions:
1) What is your cost of goods sold?
2) What is your labor expense?
3) What is your marketing/promotion expense?
4) What is your interest expense?
5) What is your tax rate?
6) Other...

It is important to be as detailed as possible. If this venture is to be your primary source of income then everything from meals to cell phone bills can be considered business expenses to be included in your model. Once you have gathered ALL of you income and expense variables you are ready to create your model in Excel.

Using Excel:
On the left hand side of your spreadsheet include all of your labeled assumptions in the same column. On the right had side you will be creating your model following GAAP guidelines shown below (generally accepted accounting principals).

GAAP Model

Gross Sales
(Minus) Cost of goods sold
(Equals) Operating Profit
(Minus) Expenses
(Equals) Earnings before interest and taxes
(Minus) interest
(Minus) taxes
(Equals) Net Income

Now that you have your input assumptions covering your income streams, expenses and taxes you are ready to develop your model. Using the inputs begin to multiply variables against eachother in order to predict what will be earned and expensed for that month. For example: if you think you will sell 100 widgets at 10 dollars a piece in the first month then you would have the widget sales cell for month one equal to a formula multiplying 100 widgets by 10 dollars. It is crutial that these cells contain formulas and not just the result of the equations. This means that the cell should contain something like (=b4*b7) and not (1000). This is so that you can always go back and change the widget price to 15 dollars and have your entire spreadsheet update itself with this new value instead of you having to manually input these changes every where the price of the widget is incorporated. If you would like assistance with this process or need clarification please email lucas@miami.edu to schedule an appointment and solicit help.

The Launch Pad has several resources availabe to people looking to complete financial models. We are currently working on attaching these documents to the forum for users to download. In the mean time if you would like to review these templates or have these documents emailed to you please email lucas@miami.edu with the request.