After being convinced that the company has a great idea and a good strategy to grow and attain profitability, this would be the part of the business plan where investors would spend the most time on.
The pulse of the company can be measured by its financial status, which consists of few critical financial statements. These numbers show how the company looks when execution begins and are a good predictor on whether the company would be able to survive for long.
The preceding sections of the business plan usually build up the assumptions of the financial plans. These include the resources needed to execute the strategy that has been formulated, the timeframe of execution, the sources and cost of financing. All these then become the drivers of your financial plan. To maintain transparency to all stakeholders and to the owners themselves, it is wise to clearly describe all the assumptions that are used. This would help the owners and investors to make better business decisions based on the resources they have. In fact the quality of your financial plan is as good as the assumptions you made as the drivers of your plan.
This is especially important for third party investors who may be seeing your business plan for the first time. They will carefully study the assumptions you made to gauge how realistic your plan is and to have a better feel of the execution ability of the entrepreneur and the management team.
The financial statements are also very crucial to the entrepreneur and the management team. By keeping their eyes on the current financial situation, they will be able to make better, more informed business decisions that would benefit the business tremendously.
There are three types of financial statements, which as a minimum should be clearly developed for the financial section of the business plan.
They are the;
1. Income or Profit and Loss Statement
2. The Balance Sheet
3. The Cash Flow Statement
To have a better understanding, we will go deeper into these statements in the following weeks.