Introduction

This lesson will focus on the financial aspects of starting and operating a business. The financial section of the business plan serves two purposes. First, it is the entrepreneur's guide to running the business. Financial data indicates how well the bu siness is doing. It allows the entrepreneur to measure such things as actual sales against projected sales and serves as a basis for current and future decisions. The second purpose of the financial section is to provide investors with the necessary inf ormation required for making an informed judgment with regard to funding the venture.

Previous sections of the business plan focused on describing the business, marketing, management, and operations. The financial section focuses on the quantification of those decisions in terms of financial statements. Financial statements provide a numerical picture of how well the business is performing. Three basic types of financial statements are important when starting a new business and should be included in the business plan: (1) the income statement; (2) the balance sheet, and (3) the cash flow statement. The income statement shows how much money the business earned over a given period of time. The balance sheet displays what the business owns (assets) and what it owes (liabilities) at any given point in time. It shows where the income has come from and what it has been used for. The cash flow statement shows where the business's money has come from and where it has been used for a given period of time. Unlike the income statement which includes as income such things as depreciation, the cash flow statement focuses only on the cash currently available to the company. Since the cash flow statement is derived from the income statement and the balance sheet, a new business start up will be required to estimate these latter two documents.

In addition to the above statements it is also useful to construct two other documents. One listing the start up costs of the business, and another indicating how much funding will be required and what it will be used for.

A well thought out financial section provides both the entrepreneur and potential investors with the means to determine if the business venture will be profitable.

Topics

• Start up costs
• Required funds and uses
• Income statement
• Balance sheet statement
• Cash flow statement

Objectives

• To make students aware of the two purposes of financial planning
• To teach students to construct the necessary financial documents for a business plan

Lesson Description

This lesson is designed to help students develop a financial plan. It focuses on gathering and organizing financial information according to standard accounting procedures for purposes of monitoring and guiding business decisions and providing potential in vestors with the necessary information to make an investment decision.

Materials

• Activity 9-A: Financial Statements
• Visual 9-1: Two Major Purposes of Financial Documents
• Visual 9-2: Types of Financial Statements
• Visual 9-3: Start Up Costs
• Visual 9-4: Required Funds and Usage
• Visual 9-5: Income Statement by Month: Year One Projection
• Visual 9-6: Income Statement: Three Year Projection
• Visual 9-7: Balance Sheet Statement
• Visual 9-8: Cash Flow Statement by Month: Year One Projection
• Visual 9-9: Cash Flow Statement: Three Year Projection

Procedure

This lesson is probably best taught in a lecture discussion . The teacher should present and explain the information and then respond to students' questions.

1. Using Visual 9-1: Two Major Purposes of Financial Documents explain to the students the purposes of the financial plan.

2. Using Visual 9-2: Types of Financial Statements lists the different types statements required in the financial section of the plan. Explain to students that when constructing the financial documents for a business it is always best to present conservative figures. Experienced financiers will easily recognize to rosy a picture or manipulated figures.

3. Using Visuals 9-3 to 9-9, explain the different financial statements calling attention to the components included in each.

4. Distribute Activity 9-A: Financial Statements to be completed and handed in during the next class period. For this activity students are required to interview a local business owner in a business similar to that for which they are writing their plan. They should discuss with the owner start up costs, operating costs, and methods of financing a start up business. The name of the owner, the name of the business, the address, and the phone number should be included on a separate page in the Supporting Documents section of the business plan.

Closure

Review the importance of developing a comprehensive financial plan for your business:

• Provides guidelines for monitoring and making decisions regarding the current and future status of the business.
• Convinces potential funding sources of your capabilities and the feasibility of making the business a profitable venture.

Assessment

Using the forms provided in Activity 9-A, students should assemble the necessary financial information for their business and write-up the financial section of their business plan. This section should be turned in during the next class period.