7 | The Financial Plan

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Chapter 7

The Financial Plan


Go to The Financial Plan Overview Video

Click the image above to play the "Financial Plan Overview Video"

Focus Area 1

Introducing the Financial Plan

Notebook with pen on itIntroduction

The financial plan demonstrates how much money you will spend and how much money you hope to make in your new business. It shows you have enough money to run your business, and that you have thought about how you will manage your business finances. VR agencies, lenders, and investors use the financial plan to help decide if they want to give you a loan or invest in your business.

Business owners use the financial plan as a working document to compare their actual financials against their predicted growth. When there are differences between the financial plan predictions and the actual financials, you need to make some changes in your pricing, sales, or other areas.

The financial plan includes several sections:

  • Up-front cash needs
  • Break-even analysis and pricing
  • Sales forecast
  • Cash flow statement
  • Income statement
  • Balance sheet

These sections build on one another, so if something in one section changes, you might have to go back and change the other sections too.

Click on the Cash Needs button to get started. Then go through the other tabs in this chapter to learn about the sections of the financial plan.  

If you are unsure how to navigate this site, click on the Website Navigation heading at the very top of the page.

You can download a print-only version of Chapter 7: The Financial Plan (PDF) for reference. You can download additional materials with this chapter including: Quiz Yourself Worksheet: Break Even Analysis; Carl's 12-month Sales Forecast Worksheet; Gustav's Cash Flow Statement; Sample Income Statement; Sample Balance Sheet


Hands counting cashBreak-Even Analysis

A break-even analysis helps you figure out how much product or service you have to sell in order to break-even, or to cover all of your costs. Then, it helps you figure out how many additional units you have to sell to reach profit goals. A break-even analysis can show you how changing different parts of your financial plan, like increasing your price or reducing expenses, can affect your profit.

To start your break-even analysis, first estimate your fixed and variable operating costs. These are what you use to estimate gross profit per unit and the break-even point for different prices. This, in turn, helps you develop sales goals.

Click on the Conducting a Break-Even Analysis button to learn more and work through an example. Click on the Quiz Yourself button to practice.  


Stacks of coins on paperSales Forecast

The break-even analysis helps you set pricing and sales goals. The sales forecast, on the other hand, describes what you think you will sell over a given period of time (typically 1 to 3 years).

For a new business, the sales forecast is an estimate based on:

  • Market share - the portion of customers that will go to your business versus the competition
  • Expected growth in sales over the business start-up phase
  • Seasonal fluctuations

Once your business is up and running, your sales forecast becomes more accurate based on the past year’s actual sales. Click on the Forecasting Sales button below to learn more and work through an example.



Dollar bil on top of loose changeCash Flow

Cash, or the amount of money your business has at any given time, is as important to business operations as profit.  While your business may be profitable overall when sales are averaged over several months, that doesn’t mean you made a profit each month. This is important to note because you need to cover your bills and other fixed costs when they are due each month. 

The cash flow statement is a monthly record of your revenue and expenses. It is calculated based on estimates of your fixed costs, variable costs, and sales. It shows when your business will receive cash (receipts) and when you need cash to pay bills (disbursements). 

Each month you start with a cash reserve. During the month, you increase your cash reserve by adding payments from customers, and lower your cash reserve by deducting your costs and expenses, or disbursements. The ending cash balance is the money you have to start the next month.

Click on the Cash Flow Statement button to learn more about filling out a cash flow statement. Then click on the Quiz Yourself 2 button to check your understanding.


Man writing on whiteboardThe Income Statement

The income statement shows a business’s financial activity over a specific period of time, usually one year. It shows: 

  • Total sales
  • Costs of goods sold
  • Gross profit
  • Fixed operating and other expenses
  • Pre-tax profit
  • Net profit

These estimates will be very similar to the yearly totals generated on the cash flow statement.

However, the income statement is different from the cash flow statement because it is not broken down month-by-month. Instead, it shows your total revenue and costs for the entire year. The income statement compares business expenses with revenues so you can figure out if your business overall made or lost money in that year.

In your business plan, the income statement shows your best estimates of revenue and costs. Once your business is up and running, the income statement uses real numbers to determine business profit or loss.

Click on the Income Statement Parts button to learn more.


Excel spreadsheetBalance Sheet

The balance sheet shows how much a business is worth at a specific point in time. The balance sheet records the total assets, total liabilities, and equity of your business.

Total assets include:

  • Current assets, such as cash, inventory, accounts receivable, and prepaid expenses (like insurance).
  • Fixed assets, such as land, buildings, and equipment, minus depreciation.

Total liabilities include:

  • Current liabilities, such as accounts payable and accrued expenses.
  • Long-term liabilities, such as long-term loans or a mortgage.

Equity is the difference between the total assets and the total liabilities of your company, or, how much your business is worth. You can figure out your business’s equity by using this equation:


Total Assets – Total Liabilities = Equity


Generally, a new business develops a balance sheet every year. This way you can compare balance sheets over time to see if your equity is growing, falling, or staying the same. 

Download the Sample Balance Sheet to see how it is set up. To learn more, check out Balance Sheet Definition and Example from thebalance.com.

Glasses and highlighters on book pageReview

The financial plan is an overview of your anticipated costs and revenues. It shows how you will manage your business to be profitable. It includes several sections:

  • Up-front cash needs
  • Break-even analysis
  • Sales forecast
  • Cash flow statement
  • Income statement
  • Balance sheet

Developing your financial plan is one of the harder parts of writing your business plan. But if you’ve made it this far, you have some good tools for getting started. There are also business development resources to help develop a financial plan. Chapter 8 lists some of these resources.

After you finish your business description, marketing plan, operations plan, and financial plan, go back to the executive summary section to write an overview of your full business plan.The business plan provides a guide for getting your business up and running. It is also a document to share with potential funders.

Click on the Prepare button to get started on your financial plan.

Counselors, click on the Counselor Review button for things to consider as you discuss the financial plan with your client.


Focus Area 2

Check Your Understanding

Question mark on lined paperChecking the Financial Plan

This section helps you check your understanding of the material covered in this chapter. First, click on the Check Your Understanding button and go through the questions on the slides. Write down your answers on a separate piece of paper. Check your answers in the Review Your Answers button.