The purpose of developing the simple break-even model is to determine the viability of a business early on. If you’re going to abandon a business idea, do so before you invest too much time and money in it. If your break-even analysis is favourable, you should develop a more detailed financial model that demonstrates sufficient margins and validates a return on investment. This is accomplished through the inclusion of pro forma or projected financial statements in your business plan. Most business plans have a summary or analysis of the projections in their body, while the financial statements are in the appendix.
Financial projections (AR) are critical components of your plan and must be “watertight.” These pro forma financial statements include profit and loss (or income) statements, cash flow statements, and a balance sheet. Make projections based on reasonable assumptions and state them explicitly. They possess the ability to demonstrate profitability, either immediately or within a reasonable timeframe. Include actual financial statements from the recent past as well as future projections for a business that is already operational. If your business has been unsuccessful, explain why and how you intend to succeed in the future.
Profit and Loss Statement
A profit and loss (P&L) statement summarises a business’s revenue and expenses over a specified time period (e.g., a month, quarter, or year). Its purpose is to add up all revenue sources and subtract all operating expenses, thereby reflecting a business’s financial progress over the specified time period. A profit and loss statement serves two primary purposes. It indicates whether a business is profitable, that is, whether it is making money. Additionally, it is the only financial statement that the IRS requires. A profit and loss statement, or P&L statement, is also referred to as an income statement, earnings statement, or statement of operations.
Cash Flow Statement
A cash flow statement summarises the inflow and outflow of cash from a business, indicating its liquidity. It illustrates the impact of balance sheet account and income changes on cash and cash equivalents. It simplifies the analysis by segmenting it into operating, investing, and financing activities. A cash flow statement is also referred to as a cash flow statement.
A profit and loss statement summarises the financial results of a business’s operations over a specified time period. In effect, it summarises the period’s financial transactions, including total revenue, total costs, and the resulting profit (or loss). On the other hand, a balance sheet is a “snapshot” of a business’s financial condition at a particular point in time. It reveals the business’s assets, liabilities, and current market value. In effect, it indicates how much money would remain after the company’s assets are sold, all debts owed to the company are collected, and all debts owed by the company are paid.
Use of Funds
If you intend to use your business plan to seek funding from a lender or investor, you must justify the amount you are seeking by providing a breakdown of the total and the rationale for each line item. Make no guesses. Spend time researching and defending the purpose and amount of all planned expenditures. Plan to spend money as prudently as if it were your own. Investors anticipate a return on their investment, while lenders seek assurance of repayment. Neither will want to spend more than is necessary nor will they want to take a risk on an undercapitalized venture.
Innovation is about creating something that no one else does or doing it better or more economically than anyone else. The existence of a market for your product or service—customers willing to purchase what you sell—is referred to as market need. A sound financial model ensures that your business is profitable. Otherwise, it will remain a hobby rather than a business, and investors do not invest in other people’s hobbies.