The financial section of your small business plan isn’t just a collection of spreadsheets; it’s the story of your company’s historical profitability and future funding needs told in the language of numbers. For investors, partners, and lenders, this is arguably the most critical part, demanding detail, technical accuracy and clear projections.

Here’s a breakdown of the key elements you need to master to make your financial pitch strong and convincing:

Laying the Foundation: Costs and Estimates

Before you can project revenues, expenses, and profits, you need a clear picture of what it takes to launch and run your business.

• Startup Costs: This is your initial shopping list. Detail and itemize all the expenses associated with launching—from legal fees and equipment purchases to initial inventory and acquiring and building out your space.
• Monthly Costs: Detail the recurring expenses of operating your business. These break down into two key types:
• Fixed Costs (FC): Expenses that remain relatively constant each month, regardless of sales volume (e.g., rent, salaries/payroll, insurance).
• Variable Costs per Unit (VC): Costs that change directly with your production or sales volume, calculated on a per-unit basis (e.g., inventory costs, shipping, sales commissions).
• Sales Estimates: Detail and itemize your expected monthly sales. You’ll need to project the volume of product or service units you plan to sell and the revenue those sales will bring in. To do this, you must determine the Average Price per Unit (AP)—the price a customer pays for one unit of your offering.

 

Your Roadmap to Profit: Break-Even Analysis

Once you have your costs and prices, the next logical step is to figure out when you’ll stop losing money and start making it. This is where the Break-Even Analysis comes in.

This analysis helps you pinpoint the sales goal your company needs to meet to cover all its costs. The magic number you’re looking for is the Break-Even Quantity (BEQ)—the number of units you need to sell each month to cover your total costs.

The Formula

You calculate the BEQ using the following simple yet powerful formula:

BEQ=(AP−VC)FC​

• FC= Fixed Costs per month
• AP= Average Price per unit
• VC= Variable Costs per unit

The takeaway: Any amount of monthly sales above your BEQ should turn into profits. Conversely, dipping below the BEQ means you’re losing money.

Financial Projections and Transparency

Investors and/or lenders want to see that your business model is sustainable and profitable over the long term.

• Monthly Cash Flow Projections for 3–5 Years: This demonstrates your profitability by comparing the estimated cash coming into your business (sales) with the estimated cash going out (operating costs). Your Michigan SBDC business consultant can provide templates to help you structure this essential projection.
• Financial Assumptions: Don’t just present the numbers—explain them. Detail the logical and realistic methods you used to estimate the revenue and expenses in your cash flow projections. This section builds confidence and credibility.
• Profit and Loss (P&L) Statements P&L statements are more detailed than cash flow projections, breaking down costs into categories like sales and operating expenses to assess financial goals. If you have any operating history, P&L statements are crucial for demonstrating business potential. If not, build a template now to use for future financial assessments.

Funding, Debt,and Exit Strategy

Every business plan must address how the business is financed and what the long-term future holds for owners and investors.

• Financial Need: Based on your projections, clearly outline exactly what funds you need to launch or expand your business. Crucially, explain how you intend to obtain those funds: personal contributions, loans (with terms and conditions), or investments (explaining how investors will be compensated).
• Prior Financing: Provide detailed information about any existing personal or commercial debt, equity or other financial arrangements that will impact the business.
• Exit Strategy: Answer the critical questions about how money will eventually be extracted from the business. How will profits be used? Do you plan to sell the business, pass it on through inheritance, or pursue another strategy?

Appendix: Supporting Documentation

Throughout your financial section, you may refer to supporting documents. These should be placed in the Appendices section at the very end of your business plan. Use a parenthetical note like (see Appendix A) in the text to refer to documents.

Don’t let the technical nature of the financials scare you off! By meticulously detailing your costs, calculating your break-even point and presenting realistic projections, you’ll equip your business plan with the financial evidence it needs to secure funding and drive success. 

Need help structuring your financial projections? Register to schedule a meeting with Michigan SBDC business consultant today!