Business Law

Profit and Sales Estimates for Your New Business

When you're making a business plan for your new family-owned or small business, it's important to include your estimates or "projections" for costs and profits.

Some of the key things you need include:

  • A cash flow statement
  • An income projection statement
  • A break-even analysis, and
  • A balance sheet

What They Are and Why They're Needed

The business plan, of course, is the map for the business. It sets out things like what you're going to sell, how you're going to sell, and to who's going to buy it. At the heart of it all is money. You want to start a business to make money, and you need money to start the business and run it.

The business plan covers all of this. It also serves to give investors what they need to decide whether or not to lend you money.

It's understood that you don't have any hard financial data to back up your plan. The business isn't even open yet. That's why you may see the phrase "pro forma statements" used when it comes to a new business' financial statements and business plan. They're estimates. Do make sure your information and statements are as accurate as possible.

You'll have to make certain "assumptions" when making some of these reports. For example, you'll need to assume in the first years of business there'll be increases or decreases in things like:

  • Inflation
  • Raw material costs, and
  • Real estate or equipment rentals

Be sure to state exactly what assumptions you're making and why you're making them. Include supporting documents, such as inflation and cost-of-goods figures for the past year or two.

Cash Flow Statement

A cash flow statement or "cash flow budget" shows how you think money will flow into and out of the business. The statement should show monthly details on the cash flow, and cover your first year in business.

At first, your incoming cash flow may include money from loans (either from banks or family members) and cash you have on hand you're investing in the business. It may also contain estimates on cash from sales. For outgoing cash, anticipate things like monthly payments for:

  • Advertising and marketing
  • Rent payments
  • Taxes
  • Utilities

The cash flow statement is important because a lender uses it to see if your business has enough funds right now and in the immediate future to make loan payments.

Income Projection Statement

This shows expected profits. It should show how much money you expect to earn minus your expenses - how much you expect to spend to make and sell your product. You need to know or have good estimates of the costs of goods sold, including raw material costs and other costs connected to making the items you sell, such as labor costs.

Figures or estimates for operating expenses are needed. These are things you spend money on for the day-to-day operation of the business that aren't connected to making or producing the goods you're selling. Good examples are sales commissions, equipment repairs, credit card fees and employment taxes.

Break-even Analysis

This report predicts when the company's sales will cover or pay for all expenses. When expenses equal income from sales (or "revenue"), your company reaches the "break-even point." At that time, the business starts making a profit. You use information from your income projections and cash flow statements - particularly the expenses - to make the break-even analysis.

This report is important for two main reasons. First, it gives you an idea for setting prices and sales goals so you can reach the break-even point as soon as possible. The report is also important to lenders: The sooner you start turning a profit the easier it is for you to repay your loan.

Balance Sheet

The balance sheet is a snap-shot of your company's total worth or value right now (unlike the income projection statement measuring your profits or losses over a period of time, like one year). The balance sheet simply shows all your company's assets minus all liabilities, which equals the total net worth of the business.

Assets include things like:

  • Cash
  • Inventory (that's already been paid for)
  • Vehicles and equipment (already paid for)
  • Buildings or land you own that will be used for the business

Liabilities or "debts" include:

  • Payroll to be paid
  • Taxes
  • Outstanding loans, including mortgages
  • Damaged, unusable or unpaid for inventory

Again, similar to the break-even report, the balance sheet gives you and lenders a good idea of where your business stands right now, whether it's in a good position to start operations, and whether it's a good gamble for the lender.

Get It Right

These financial forms are critical for entrepreneurs who need financing beyond money they may have on hand or may get from family members. The way these reports are done may make or break a deal with a lender.

The Small Business Administration (SBA) has some forms to help you get started.  also Lawyers.comsm has a worksheet to help you. However, for many entrepreneurs, this is a difficult process. Don't hesitate to talk to an experienced business law attorney in your area if you have any questions.

Questions for Your Attorney

  • How much will you charge to help me prepare the necessary financial statements for my new small business?
  • Do all lenders, including banks and venture capitalists, have a legal responsibility to keep my financial records confidential and not share them with other lenders without my permission?
  • Can I use the same forms to apply for financing with a private bank and the Small Business Administration?
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