e-Business Plan: Financial Statements

"Money is the lifeblood of business." This truism points out the importance of the financial statements section of the business plan. The financial statements (or the "financial plan") is one of the most closely scrutinized sections of any business plan. Investors have been known to go from the executive summary straight to the financial statements to judge the merit of a business plan. Your business plan must address the financial issues of cash flow, start-up capital and, of course, profit.

However, this is not an accounting or finance tutorial. Furthermore, if you are a business student it is likely you have taken, or are taking, an accounting course. We don't propose to duplicate all that content here. Therefore, some knowledge of accounting principles and financial statements is assumed. The purpose of this lesson is to describe the fundamental requirements for a financial plan in an e-business plan and outline the financial statements that are required, without defining every accounting term that is used.

For each of the financial statements, an Excel spreadsheet template has been developed and can be downloaded by clicking on the related link. You will need to add, delete, and change the items in the spreadsheet to meet the requirements of your individual business plan.

This lesson concludes with some suggestions how to put all the e-business plan pieces together into a coherent plan.

The lesson outline is:
What is a Financial Plan?
The Financial Statements
  • Start-up budget
  • Income and expense statement
  • Balance sheet
  • Cash flow statement
  • Putting it All Together

    What is a Financial Plan?

    The previous sections of the business plan define what the business intends to produce and how it will do so. The financial plan estimates the monetary resources and flows that will be required to carry out the business plan. The financial plan also indicates when and by how much the business intends to be profitable. Finally the financial statements tell a lot about the entrepreneur in terms of business commitment and financial wherewithal to make the business a profitable success.

    In addition to the financial statements, a financial plan includes a list of assumptions upon which the financial statements are based. Clearly stating your financial assumptions serves two purposes: it allows investors to know what is behind the numbers and it helps you to know the financial impact when the basis of your assumptions changes.

    Assumptions are most important in "soft numbers" such as projected sales and interest rate projections. "Hard numbers" such as rent, computers, and Web site hosting costs can be estimated with some certainty after a reasonable amount of research. The trick to creating realistic, credible financial statements is to make reasonable and conservative projections of the soft numbers and to understand the assumptions upon which they are based.

    A financial plan should also contain a set of key financial ratios. Financial numbers aren't always enough to convince an investor that the business is a viable firm. Investors will want to compare your financial projections with those from other companies that have succeeded or failed. However, companies differ in size and it is difficult to make comparisons when one company is small and the other is large.

    To solve this problem investors use financial ratios. When you divide one number by another, the resulting ratio or percentage makes it easier to compare similar businesses of different sizes. An accounting or finance textbook will provide a comprehensive list of ratios, but a few of the most important in assessing business plans are:

    Credibility can be added to your financial ratios if you provide the potential investor with comparative data from successful companies in the industry in which the business will compete. Financial data services such as Standard and Poor's, FISonline, and Dun & Bradstreet publish this data. A limited amount of free data may be available online, more detailed data are published in reports found in most university libraries or purchased from the firm.

    The Financial Statements

    The financial statements section begins with a start-up budget that details expected investment before the business starts to operate (i.e., before the first sale is made). Next, a series of financial statements— income and expense statement, balance sheet, cash flow statement— that project the financial future of the company for the first 3-5 years after start-up are presented. Depending on the nature of the business, supplemental statements (not included here) may also be required: a production schedule, income summary statement (income and expenses at a glance), and, if the business is seeking a large amount of funds from different sources, an investment schedule.

    Start-up budget: If the business is a new one, you will need to prepare a budget that defines the expenses required to start the business, before it can begin to generate revenue through sales. For almost every business this includes items such as office furnishings, legal fees, product development, manufacturing equipment, and vehicles. For an e-business, a start-up budget will also include computers, software, Web site development costs, and provision of Internet service. A draft start-up budget template has been developed for your use. It will have to be modified to accommodate your business requirements.

    Income and expense statement: An income and expense statement is an accounting term for what most people call a budget. The I&E statement includes income items such as revenue from sales and interest income. It also includes all anticipated expense items, usually grouped into logical categories such as cost of goods sold, administration expenses, interest, and taxes. The statement concludes with various profit figures— operating profit, profit before taxes, and net profit.

    The income and expense statement shows these figures over a period of time, annually in most business plans (e.g., income and expenses for the period January - December 2006) and projected several years into the future (e.g., 2007-2009 for a three-year projection).

    A draft income and expense statement template has been developed for your use. It will have to be modified to accommodate your business requirements.

    Balance sheet: The balance sheet is a statement of the business's assets (what it owns), liabilities (what it owes), and owner's equity (what it is worth).

    Whereas the income and expense statement shows financial results for a period of time (e.g., year ending 31 December 2006), the balance sheet is a snapshot of financial results at a single moment in time (e.g., as of 31 December 2006). In established businesses, a current balance sheet usually presents previous year data too, for comparison purposes.

    A draft balance sheet template has been developed for your use. It will have to be modified to accommodate your business requirements.

    Cash flow statement: Even if the income and expense statement shows profits and the balance sheet shows positive owner's equity, you may still not have a viable business. Why not? Because a business needs cash on hand in order to pay bills. The purpose of the cash flow statement is to monitor changes in the cash position of a business over a period of time.

    The top portion of the cash flow statement records cash coming in (inflow) and the bottom portion records expenses for cash going out (outflow). The categories are similar to those that appear in the income and expense statement, but the numbers are more "honest" because income is recorded only when it is deposited and expenses are recorded when the check (or e-payment) is made.

    The "bottom line" here is the ending cash balance. If this number is negative for two consecutive periods, warning bells are likely to go off in the investor's mind.

    A draft cash flow statement template has been developed for your use. It will have to be modified to accommodate your business requirements.

    Assignment 19: Beginning with the draft spreadsheets, create a start-up budget, income and expense statement, balance sheet, and cash flow statement for your e-business. As appropriate, make all projections three years into the future. Write up a summary of these statements (at least one paragraph per statement) that highlights key points of interest to prospective investors (e.g., when the business becomes profitable, how much invested capital is required, where the capital will come from). Also include a list of key assumptions that support the numbers in the statements. Optionally, include a table of key financial ratios and/or supplemental statements such as an investment schedule. Follow the guidance provided by your instructor to submit, present, or save these financial statements and analyses.

    Putting it All Together

    Congratulations! You are done! The plan is finished! Well, almost. . . .

    At the conclusion of this lesson you have all the major pieces you need to finish your e-business plan. However you are not done. You still have to:

    Finally, your course assignment may include a presentation of your business plan. If so, the next, and final, lesson gives you some instructions on how to make a proper presentation of your business plan.

    Navigation Guide for the e-Business Plan Tutorial
    Introduction to the E-Business Plan Tutorial
       Top Ten Resources for Writing an e-Business Plan
    Fundamentals of e-Business Planning
    Writing a "Read Right" Plan
    Executive Summary
    Business Description
       Mission Statement
       Business Goals
       Project Objectives
       Business Model
    Market Analysis
    Competitor Analysis
    Operations
    Financial Statements
    Making an Effective Business Plan Presentation
    Appendix: e-Business Plan Tutorial Assignments

    This e-Business Plan lesson was last updated on June 7, 2005. Questions, comments, and suggestions for improvement can be sent to Dennis Viehland (d.viehland@massey.ac.nz).