Your Financial Plan Nails Down the Costs of Success

Drawing up a financial blueprint comes last in developing your business plan.

It might seem that it should come first instead, because the point of any business is to make money. But to develop an accurate financial plan, you must think through and assign costs to all the pieces of your business--materials, building leases, equipment, licenses, advertising, marketing and labor.

“What you basically want to know at the end is, is your business going to make money?” said Debra Esparza, director of USC’s Business Expansion Network, a program that counsels small businesses. “Can you organize your plan in a way that you have budgeted for basically all the things you said you would do in the plan?”

The financial plan is essentially a numerical representation of all the pieces of your business that you’ve already developed, Esparza said. Professionals who will be reading your plan, such as bankers, investors or potential key managers, start with the narrative sections, then they compare what you said you would do with how much money you have budgeted.

First, review all the groundwork you have already laid in the previous sections of Entrepreneurship 101. You should assign dollar amounts to start-up costs, operations, marketing, key management, business structure creation, red tape and all other business expenses.

You will need to explain those costs in what are known as “financial assumptions.” A financial assumption consists of a sentence that breaks down the components that make up a final cost estimate.

For example, in producing plastic bicycle handlebar grips, a manufacturer might assume he’ll need four employees who each will work 40 hours a week at $10 an hour. That amounts to approximately $6,400 in monthly salaries. The financial plan would list $6,400 in salaries and a separate sheet, the financial assumption, would contain data showing how the figure was reached.

In this way, you prepare two basic sets of numbers. The first set is a bare-bones list, or spreadsheet, with all the costs associated with each part of your business. The second set represents the financial assumptions that explain how you arrived at those costs.

These figures are actually used in preparing at least three documents that make up a typical financial plan. They include:

* A cash-flow chart that forecasts the flow of money through your business over time. Typically, this document contains columns listing start-up costs, monthly expenses estimated for six to 12 months and cumulative totals for the period. The financial assumption sheet usually accompanies this document.

* An income statement that illustrates profitability. This chart lists the cost of labor and materials, plus fixed and variable expenses, and compares them against sales or other revenues to come up with net profits or losses.

* A balance sheet that shows the value of the business, or its net worth. This document describes what a business operator owns--the assets--and what the operator owes, the debts. For charts, please go to https://www.latimes.com/smallbiz

Both the income statement and the balance sheet are snapshots in time, but the cash-flow chart shows how money moves through a business over time. It allows a business owner to plan by showing how much capital is needed and when.

The cash-flow chart is the most important of the documents because it helps owners run their business. The other sheets help owners compare their business progress over time or to others in the same industry, Esparza said.

These are vital pieces of information, but many business owners reach this point and lose heart, Esparza said.

“Business owners absolutely stall right about here because all these numbers look hard and the owners wonder how they will put them in the right place,” she said. “But it’s just common sense and basic math.”

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From these basic charts, business owners can develop ratios or percentages to further examine their business in other ways. They include such measurements as the ratio of expenses to net earnings, the percentage year-to-year increase in revenues and the debt-to-worth ratio.

But they all begin with the basic step of assigning financial values to every element in your business plan, Esparza said.

Every business has a distinct financial plan. Business-plan guides offering standardized financial plan templates won’t capture all the aspects that are unique to your business. Those special features will create unique costs that must be accounted for, Esparza said. Thus, it is extremely important that a business owner first devise all the elements to create a business, review all those elements and account for each financially.

Once the numbers have been pinned down and you have demonstrated that you are creating or running a profit-making enterprise, then you can write your executive summary. Though it comes first in a written business plan, the executive summary cannot be prepared until all the other parts have been created and your entire plan completed.

After you have completed your business plan, you will have a document or set of plans that you can show to potential investors, bankers and partners. Or if you are not seeking money or partners, preparing a business plan will help clarify your thinking in regard to starting your own business or expanding your current enterprise.

Exercise: Prepare a cash flow chart, income statement and balance sheet for your business. The USC Business Expansion Network is at 3375 S. Hoover St., Suite A, Los Angeles 90007; (213) 743-1726.

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Entrepreneurship 101

Chapter 1: HOW TO CHOOSE A BUSINESS

Chapter 2--HOW TO START A BUSINESS

Chapter 3: HOW TO DEVELOP A BUSINESS PLAN

- Know the Value of a Plan

- Create a Management Team

- Define Your Products or Services

- Develop a Marketing Plan

- Master Operations

- Draft a Financial Plan

Chapter 4: HOW TO FINANCE YOUR BUSINESS

Chapter 5: HOW TO GROW YOUR BUSINESS

The Bottom Line

“Entrepreneurship 101” is a tutorial on how to choose, start, finance, plan and grow a business. The program, written by Times staff writer Vicki Torres, was developed by Debra Esparza, a faculty member at the Entrepreneur Program of the Marshall School of Business, USC. Esparza also heads the USC’s Business Expansion Network, a community and economic development that has counseled more than 5,000 small business owners in the Los Angeles area over the last six years. BEN provides help with financing, business planning, accounting, marketing and other aspects. The tutorial also can be found on The Times’ small-business Web site at https://www.latimes.com/smallbiz.