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We have reached the final installment of the Part 9 series on financials as a part of your business plan. Today we will discuss the Sources and Uses of Funds and the vital Assumption Sheet.

Sources and Use of Funds

When preparing Sources and Use of Funds, keep in mind that investors will not want to see their investment used to pay back debt, but rather to build and grow your business. Do not make the mistake of underestimating the amount of money needed to accomplish your objectives. If you are in the early rounds of funding, when expectations are high, underestimating capital needs and having to return to the “money well” will cost you significantly more.

Having numerous sources of funding (including yourself) bolsters your position in the eyes of potential investors, showing that you and others believe in your company. Include the following in your Sources and Uses of Funds Statement:

· Funding Rounds: The number of times you plan to go to the “well”

· Total Amount: the funding needed to complete this round of financing

· Equity Financing: the amount to be raised from the sale of stock

· Preferred Stock: outstanding stockholders (amount not names) that will receive dividends before common stockholders and other obligations

· Common Stock: outstanding stockholders (amount not names) that receive dividends after preferred stockholders and other obligations

· Debt financing: from loans

· Long-Term Loans: paid back in more than one year’s time

· Mortgages: loans form collateralized property

· Short-Term Loans: paid back in less than one year

· Convertible Debt: loans that can be converted to equity

· Investment from Principals: owner(s) or key employees

· Capital Expenditures: equipment or property purchases

· Working Capital: funds for ongoing operating expenses

· Debt Retirement: funds earmarked for existing loan payment

Assumption Sheet

Your Assumption Sheet will reflect the quality of the decisions that you have. Remember, the quality of your assumptions will separate fiction from reality. Fictional projections are the fastest way to lose investor confidence. Explain your research and how you developed your forecast. The assumption list can be statements, like bullet points, rather than paragraphs.

When preparing the financials part of your business plan, make sure that you bring your accountant into the loop. I also recommend that you have a board of advisors who will challenge your assumptions. An outside unemotional perspective is invaluable at this point in your planning. Also, keep these imperatives in mind:

· Be conservative: otherwise you risk reducing your credibility in the eyes of investors and, worse, risk making disastrous decisions.

· Be honest: “Do not deceive thyself” or investors. Investors will demand that you justify the numbers and your advisory board should do the same.

· Use industry standard forms and terms: your accountant should help here.

Overall, if you are a new business, the numbers in your plan mean less than your words. If you are a mature business this is reversed. If you are searching for outside capital input for your business, according to Keith Cunningham, there are four critical pieces of information that investors must have before buying into your company:

1. A good idea of how much your company is worth today

2. An estimate of how much it will be worth when they liquidate their investment

3. A calculation of the size of the returns needed to compensate them for the risks

4. A good idea of how many years they will be in the investment

Do you see how important accurate historical financials are and how important realistic financial projections are to outside investors considering giving you money?

In closing, review your financials monthly. One way to view them is as the score board of your business. How do you know if you are winning or losing in this game we call business if you can’t understand or don’t avail yourself of the score board?

Join me next week as I wrap up this 10 part series on writing the dreaded business plan.

Rob Garibay is a local business owner and business coach with 30+ years of business experience. Forward your business questions to: 405 573-6537 or robgaribay@actioncoach.com

Welcome to Part 9.2 in my business plan writing series covering the financials section. Last week I presented a list of the various reports to include in the business plan financials and covered the first: Income or P&L projections. Today I am discussing the all important Cash Flow projection as well as the Balance Sheet and Break Even projections.

Cash is king!

Investors will pay particular attention to cash flow projections. Companies can run for a while at a loss, but come to a screeching halt if they run out of cash. It amazes me how many business owners don’t generate monthly cash flow statements. Have you ever tried to make payroll with your profits? If you run out of cash, it doesn’t matter what you show on the bottom of your P&L.

Profitable fast growing businesses usually need a receivables line of credit to bridge the inevitable cash gap created by expanding accounts receivables. Make sure that you differentiate between operating cash (from sales), financing cash (from banks), and investing cash (equity input). This will help you avoid coming to wrong conclusions about the viability of your business.

How much capital do I need?

Creating accurate conservative cash flow projections will inform you of when you will need to raise more capital, and how much. Loan payments, equipment purchases, and owner draws usually do not show on profit and loss statements but definitely do take cash out of your business. Be sure to include them. Depreciation does not appear in the cash flow because you never write a check for it.

A personal experience

I remember when I was very interested in purchasing a particular franchise. Part of my due diligence was to create a cash flow pro forma going forward for three years. To my surprise, even though I was profitable, as my business grew it continued to eat up my cash for three years straight! I then continued my projections for a total of 5 years just to see if the business model would eventually start to spin off a healthy amount of cash. It still did not flow enough cash to grow a nest egg!

Since my minimum criteria for buying a franchise was positive cash flow after year-one and excess cash of 15% of revenues after year-two, I did not purchase that franchise. My decision has since been vindicated. I really wanted to buy that franchise because it had strong emotional appeal for me. If I hadn’t gone to the trouble to create the cash flow projection, I would have made an emotional decision that I’d be regretting today.

Balance Sheet

A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets) versus what it owes (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity. Showing the estimated financial position of the company at the end of the first year is especially useful when selling your proposal to investors. Their primary interest is in placing their money in an enterprise that is increasing in value at a rate that offsets risk and allows an exit within their desired time window.

Know your Break Even point!

When preparing your Break Even (BE) Analysis, be sure to include variable or direct costs as well as your fixed or indirect costs in your calculations. To calculate your BE, you must know your fixed expenses and your gross profit margin (GPM). GPM is the average percentage of gross income after subtracting cost of goods sold (COGS), which are your direct or variable costs. Your BE = fixed expenses /GPM.

Knowing your BE empowers you to price your various products and/or services more accurately, avoiding inadvertent losses on some part of your product line.

Join me next week for Part 9.3 of the financials section of my writing a business plan series as I discuss the remaining two reports, Sources and Use of Funds, and the critical Assumptions Sheet!

Rob Garibay is a local business owner and business coach with 30+ years of business experience. Forward your business questions to: 405 573-6537 or robgaribay@actioncoach.com

Financials – you either love’m or hate’m! Bank on this; you need accurate financials regardless of the purpose for writing your business plan (see my article series “Financial Statements” published in The Norman Transcript in November and December 2008). If you are writing your plan for internal use only, congratulations! You are light-years ahead of most businesses and, presumably, your competition. If you are writing your plan to raise capital, your financials will represent the quantified summary of your business idea, your management, market demand for your USP (unique value proposition), your marketing strategy, your competition, and the risks involved for playing in your industry.

Be extra conservative!

Financials, whether historical or future, represent the quantified results of you and your management’s decisions. You must pay particular attention to your assumptions underlying your projection numbers and document those assumptions in your Assumption Sheet.

It is common and easy to assume that we will make all of the correct decisions for our business in the future. In reality, to avoid violating the 11^th commandment, “Thou shalt not deceive thyself”, make your assumptions and projections very conservative. Allow for margin of error (poor decisions) and unknowns that are out of your control, like the current state of our economy.

Martha Johnson, owner of Suppers Restaurant says: “Anticipate that costs will go up; interest rates will go up; it will take longer than planned for construction. Everything costs more and takes longer than planned. Things go wrong. You can’t have wishful thinking in your planning. Assume you’ve underestimated all costs and build in a cushion.”

Rather than pad every estimate, include a separate line item called contingencies. That way you will not lose the accuracy of your carefully crafted plan. I recommend, as a rule of thumb, that contingencies should equal at least 20 percent of the total of all other expenses.

The Financials part of your business plan should include the following:

· Income Projection or Profit and Loss Projection (P&L): are you making a profit, and when?

· Cash Flow Projection or Pro Forma: a picture of cash in versus cash out over time (shows cash gap). Your single most important report.

· Balance Sheet: a snapshot in time of the value of your asset called a business (assets – liabilities = business net worth).

· Break Even Analysis: valuable information that shows when your revenue is equal to your cost, which is vital for planning and pricing.

· Sources and Use of Funds: as the name connotes; a list of all finance sources and how those funds will be used.

· Assumption Sheet: numbers can lie. Assumptions verify or invalidate the numbers.

Over how much time do I project?

Generally, investors will want to see three to five years of historical P&L, cash flow and balance sheet. Your P&L and cash flow projections should be for three years with monthly data during year one and quarterly for years two and three. Your balance sheet projections should be quarterly for year one and annual beyond that time frame.

Income or P&L projection

The income or profit and loss is the most frequently viewed of the three financial statements needed to run a business (cash flow and balance sheet are the other two). The reason for this is the “Bottom Line” – Net Profit. After all, isn’t that why we are in business?

Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for the first year and quarterly thereafter.

The P&L tells us how efficiently we are converting sales into profits! Our job as business owners is to buy assets as effectively as possible, use those assets to maximize sales (revenue), control expenses to maximize profits, and turn those profits into cash. The danger of only viewing the P&L is that it doesn’t show us how effective we are in converting profits to cash.

The P&L allows us to see if the sales of the business exceed all of the costs of doing business. If so – the company is profitable. If not- the company is unprofitable. It is a great tool for controlling costs, and creating budgets in order to assure profitability of the business.

Join me next week as I continue the discussion of how to structure the financials in a business plan.

Rob Garibay is a local business owner and business coach with 30+ years of business experience. Forward your business questions to: 405 573-6537 or robgaribay@actioncoach.com