Time for a Startup? Find the Answer Through Financial Analysis

Business Planning

If your business plan doesn't show you can grow your company financially, now might not be the time to start an enterprise or expand one.

The economy’s great! Is this the time to start a business? Find the answer with the power of a business plan built around solid financial analysis.

We’re all familiar with the basic components of a business plan: mission statement; description of product or service; market analysis; form of business entity and management structure; production or service distribution plan; analysis of opportunities, weaknesses and risks; and financial analysis, including projected breakeven.

In my view, financial analysis is the last piece that holds the key to a successful plan. If your plan doesn’t show you can deliver the financial results for growth, now might not be the right time to start.

There are online templates for forward analysis. Most suggest sales forecast; expense budget; cash flow statement; income projections; projected balance sheet; and break-even analysis. Your choice could include display and analysis tools. Software such as Microsoft’s Power BI can generate reports from multiple sources that can be shared with others instantly.

It’s typical to develop the financial components of your plan simultaneously, rather than sequentially. As you document assumptions and see results in one component, you may want to change assumptions in another.

Most models start with a sales forecast, invariably set up as a spreadsheet. A three-year, forward-looking model is typical. Include factors that reflect all elements of the sales equation, including costs, pricing, and number of units sold across time.

One caution: In this era of rapid technological change, three years can be a long horizon. It’s important to remain aware of possible significant shifts in the impact of technology, regulation, and financial environment.

An expense budget will reflect the costs to make your product or service. It’s important to consider variable and fixed costs. Fixed include rent, insurance, and salaries and are often associated with risk because they can’t be modified to cope with variations in demand. Variable costs change based on the number of products you produce or services you provide, which include raw materials, and packaging. Include costs associated with debt and taxes.

Cash-flow statements are the underappreciated elements of financial reporting, but they are essential, and bankers love cash flow statements if you are trying to obtain a loan. You can’t operate a business effectively without understanding your cash position. You’ll need to make assumptions about rapidity of payment from customers and other timing issues.

We call an income projection a pro forma, meaning a standard approach. Your pro forma will use numbers from the other components: sales forecast, expense budget and cash flow statement.

Some would say your income projection is the most telling of your plan’s components because it will show net income. The formula used in a pro forma is generally sales, less cost of sales, equals gross margin. Gross margin less operating expenses, interest and taxes is net income.

A projected balance sheet and break-even analysis complete the set of financial components of your plan. Although the cost of borrowing at present is relatively low, it’s essential to incorporate repayment of principal into your forward calculations. Your break-even analysis shows you when your enterprise will begin to yield overall financial growth.

Often, the go/no-go decision depends on attracting investors, and they’ll be interested in the profitability horizon.

By Norm Robbins
Partner
Mark M. Jones & Associates