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Business Planning - Financials Section
The purpose of the majority of business plans is to raise finance. Many investors will skip to this section of the plan instead of reading the plan in sequence. A mixture of financial projections and narrative are provided to help the investor understand the financial health of the business venture. Investors need to know the amount of money required to establish the business. Depending on the type of business, some of this money may be recoverable should the business fail before trading. The financial section needs to provide a realistic overview of the profitability and cash flow of the business. The rate of return on investment and payback period are key concerns to any investor regardless of their impression of the management team or the market for the product. Projections are usually provided for a three year period, the first of those years will include a breakdown by month. A business with a longer time to revenue and profitability may wish to show projections for 5 years plus.
Projections
The statements will include profit and loss accounts, balance sheets and cash flow statements. Detailed product costing must be provided to show the costs related to selling the product or service. Costing should be provided for each significant product or service offering. Breakeven analysis is supplied to show the investor how many units of the product or service must be sold to cover businesses costs.
The figures used in the projections must correspond with other sections of the business plan e.g. if the operational section states that three people will be employed in year two, the profit and loss account in year two must include the cost of those three employees. It is useful to summarise any significant assumptions made when preparing projections e.g. seasonal sales. It is possible to include additional detailed financial workings in the appendix of the business plan.
In many cases, the financials are one of the first sections of the business plan to be read by investors. This part of the plan informs the reader the amount, sources and timing of the funds required to establish and grow the business.
Source of funds
The sources of funding could include yourself, friends and family. Other external sources include venture capital money, specialist funds exist depending on the industry sector your business operates. Financial institutions offer a range of loan and lease products for businesses. Support is may also available from government agencies in the form of grants
Financial projections (discussed in article 3) should clearly illustrate the funding needs of the business for the first three years. The projected cash flow will show the cash injections required to fund the business. The investor needs to understand the amount of money required to initially start the business and any ongoing funding requirements. You must clearly distinguish between capital business development needs and working capital amounts e.g. you could refer to the cash flow projections demonstrating the amount needed to buy stock in month three of Year 1 or the amount required to cover salaries in month 12 of Year 1. An example of capital requirements could be the purchase of a second piece of machinery in Year 2.
The investor may place certain conditions upon their funding e.g. insist that money be spent on product research. Investors are interested in the financial commitment made by the business promoter for example they may decide to match the amount of funds invested by the promoter.
Copyright © 2010 Maurice McCarthy
Author - Maurice McCarthy BBS, FCCA has 15 years financial and management accounting experience.
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There are 3 broad types of finance available to a business: equity, debt and grants
Equity
This can be your own or from external sources. Equity investors receive shares in the business in return for their investment. In deciding how much of an equity stake to offer an investor one must consider the issues surrounding control of the business. In addition to voting rights the percentage share held can also have tax implications. Although flexibility in negotiations is important it is vital that you know the level of shareholding you are willing to relinquish. On reviewing your business plan the investor will also have a minimum amount of voting rights in mind.
Debt
It is again possible to have your own or external debt to finance the business. Your ability to raise external debt will largely depend on the investor's perception of your company's ability to repay that debt. The cost of the borrowings will be linked to the perceived level of risk, the length of time and the rates offered by other investment opportunities in the market at that point in time. Banks in particular have ratios to assess the repayment capacity of the business based on cash flow and profitability.
Grants
There are a number of government agencies that offer grants. The best agency and individual scheme depends largely upon the size of the business, its stage of development and the sector in which it operates. As a general rule the City and County Enterprise Boards deal with businesses with 1 to 10 employees. They offer feasibility, employment and capital grants. Enterprise Ireland tend to cater for larger businesses and those that have the potential to export products or services. The Leader Programme may assist businesses based in rural areas. These agencies may take an equity or debt stake under certain circumstances.
Revenue Incentive Schemes in Ireland
Seed Capital Scheme
This scheme is aimed primarily at those in PAYE-type employment wishing to set up and take employment in their own (qualifying) business. Depending on the type of business and amount invested by the business promoter, the individual may be able to receive a refund of tax they paid over the previous 5 years in employment. Further details are available in this booklet http://www.mpmccarthy.com/pdfs/SeedCapitalScheme.pdf
Business Expansion Scheme - BES
Under this scheme third parties invest in the ordinary shares of the company. It is also possible for an investor to buy shares in a portfolio of qualifying BES companies, an example is the Davy BES Fund. The scheme allows an individual investor to obtain income tax relief on equity investments up to a maximum of €150,000 per annum in each tax year up to 2013. Relief is available at the investor's highest rate of income tax. An investor who cannot obtain relief on all his/her investment in a year of assessment, either because his/her investment exceeds the maximum of €150,000 or his/her income in that year is insufficient to absorb all of it, can carry forward the unrelieved amount to following years up to and including 2013, subject to the normal limit of €150,000 on the amount of investment that can be relieved in any one year.
Corporation Tax Exemption for New Companies
In October 2008 the Irish Government outlined a three-year tax exemption for start-up companies. The 2009 Finance Bill answers a considerable number of questions concerning the initiative. In general, if a trade qualifies for the 12.5% Corporation Tax rate and is carried on by a company incorporated on/after 14th October 2008 and the trade is a new trade, it will qualify for the new exemption. There is a three-year exemption from Corporation Tax on profits and capital gains for companies with a tax liability of less than €40,000 per year. Because the Corporation tax rate is 12.5% this in effect exempts trading profits of up to €320,000 per year from Corporation Tax for three years. A number of restrictions apply to this exemption. For more information visit http://www.mpmccarthy.com/Insight0209.html
Summary
The financial section of the plan needs to illustrate the amount of money required to establish and run the business. Potential investors need to know the money already being committed by various parties. The plan needs to show how much further funding is needed, when it is required and illustrate the capacity of the business to repay the investor. A list of potential funding sources should be made and a brief reason for choosing these. The projections should correspond to the business scenario outlined in other sections of the plan and all major assumptions should be explained and further supporting calculations included in the appendix if necessary.
If you would like a template for a formal business plan, use the contact form on our website to request one.
