This document outlines the key elements that should be included in a sole financial plan, including profit and loss statements, cash flow statements, balance sheets, sales forecasts, personnel plans, and additional calculations like business ratios and break-even analysis. It provides descriptions and examples of each element, emphasizing that even basic numbers at the beginning stages can be helpful for understanding how the business operates financially. Developing these core financial statements gives owners and potential investors or lenders a clear picture of the business's financial position and performance.

1. Creating A Sole Financial Plan
Wasim Ahmad
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Table of Contents
Profit and loss statement......................................................................................................... 2
Cash flow statement................................................................................................................. 3
How cash vs. accrual accounting affects the cash flow statement...................... 4
Balance sheet ........................................................................................................................... 5
Sales forecast ........................................................................................................................... 5
Personnel plan .......................................................................................................................... 6
Additional calculations you might find useful: ...................................................................... 7
Business ratios ................................................................................................................... 7
Break-even analysis........................................................................................................... 8
Conclusion................................................................................................................................. 8
This article is part of both our “Business Startup Guide” and our “Business Planning Guide”—
curated lists of our articles that will get you up and running in no time!
Financial experts will have different opinions about what should be included in a financial plan,
depending on the type of business you have and what you’re trying to accomplish with your
business plan. But whether you’re thinking of starting a business, expanding your current
business, or just want to understand your current business better, there are a few key financial
items that you should definitely include:
• Profit and loss statement
• Cash flow statement
• Balance sheet
• Sales forecast
• Personnel plan
• and maybe some business ratios and/or a break-even analysis

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Even if you’re in the very beginning stages of your business, these financial statements can still
work for you. Developing your financial plan from basic numbers is both possible and very
helpful.
Profit and loss statement
A profit and loss statement is essentially an explanation of how your business made a profit (or
incurred a loss) over a certain period of time. It’s a table that lists all of your revenue streams and
all of your expenses—typically for a three-month period—and lists at the very bottom the total
amount of net profit or loss.
This is a financial statement that goes by a few different names—profit and loss statement,
income statement, pro forma income statement, P&L (short for “profit and loss”)—but no matter
what you call it, it’s an essential report and very important to understand.
QUICK TIP: The term “pro forma” in front of any financial statement primarily serves to label
that version of the statement as not adhering to the strict “generally accepted accounting
principles” (GAAP) standards that all publicly-traded companies must use to produce their
financial statements. Major corporations use pro forma statements to illustrate projected
numbers, like in the case of a merger or acquisition, or to emphasize certain current figures.
GAAP standards don’t apply to small businesses, so you don’t really need to worry about
distinguishing your financial statements as “pro forma” or not—everyone you show them to
expects that they’re not GAAP-compliant. But if you want to be technically correct in your
terminology, go ahead and call your financial statements “pro forma.”
There are different formats for profit and loss statements, depending on the type of business
you’re in and the structure of your business (non profit, LLC, C-Corp, etc.).
A typical profit and loss statement should include:
• your revenue (also called sales), followed by
• your “cost of sale” or “cost of goods sold” (COGS)—keep in mind, some types of companies,
such as a services firm, may not have COGS
• your gross margin, which is your revenue less your COGS

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These three components (revenue, COGS, and gross margin) are the backbone of your business
model—i.e., how you make money.
You’ll also list your operating expenses, which are the expenses associated with running your
business that aren’t incurred directly by making a sale. They’re the fixed expenses that don’t
fluctuate depending on the strength or weakness of your revenue in a given month—think rent,
utilities, and insurance.
Your gross margin less your operating expenses will give you your operating income:
Gross Margin – Operating Expenses = Operating Income
Depending on how you classify some of your expenses, your operating income will typically be
equivalent to your “earnings before interest, taxes, depreciation, and amortization” (EBITDA)—
basically, how much money you made in profit before you take your accounting and tax
obligations into consideration. This is also called your “profit before interest and taxes,” gross
profit, and “contribution to overhead”—many names, but they all refer to the same number.
Your so-called “bottom line”—officially, your net income, which is found at the very end (or,
bottom line) of your profit and loss statement—is your EBITDA less the “ITDA.” Just subtract
your expenses for interest, taxes, depreciation, and amortization from your EBITDA, and you
have your net income:
Operating Income – Interest, Taxes, Depreciation, and Amortization expenses = Net Income
For further reading on profit and loss statements (a.k.a., income statements), including an
example of what a profit and loss statement actually looks like, check out “How to Read and
Analyze an Income Statement.”
Cash flow statement
A cash flow statement (also called a “statement of cash flows”) is an explanation of how much
cash your business brought in, how much cash it paid out, and what its ending cash balance was,
typically per-month.
That might sound like sales, expenses, and profits, but it’s not. Consider this: What happens
when you send out an invoice to a client, but they don’t pay it by the due date? What happens
when you pay your own bills late, or early? These kinds of things aren’t reflected in your profit
and loss statement, but they areexplained in your cash flow statement.
Your cash flow statement is just as important as your profit and loss statement. Businesses run
on cash—there are no two ways around it. Without a thorough understanding of how much cash

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you have, where your cash is coming from, where it’s going, and on what schedule, you’re going
to have a hard time running a healthy business. And without the cash flow statement, which lays
that information out neatly for lenders and investors, you’re not going to be able to raise funds.
No business plan is complete without a cash flow plan.
Without a thorough understanding of how much cash you have, where it’s coming from, where
it’s going, and on what schedule, you’re going to have a hard time running a healthy business.
The cash flow statement helps you understand the difference between what your profit and loss
statement reports as income—your profit—and what your actual cash position is. It is possible to
be extremely profitable and still not have enough cash to pay your expenses and keep your
business afloat, and it is also possible to be unprofitable but still have enough cash on hand to
keep the doors open for several months and buy yourself time to turn things around—that’s why
this financial statement is so important to understand.
How cash vs. accrual accounting affects the cash flow statement
There are two methods of accounting—the cash method and the accrual method.
The cash method means that you just account for your sales and expenses as they happen,
without worrying about matching up the expenses that are related to a particular sale or vice
versa.
The accrual method means that you account for your sales and expenses at the same time—if you
got a big preorder for a new product, for example, you’d wait to account for all of your preorder
sales revenue until you’d actually started manufacturing and delivering the product. Matching
revenue with the related expenses is what’s referred to as “the matching principle,” and is the
basis of accrual accounting.
If you use the cash method of accounting in your business, your cash flow statement isn’t going
to be very different from what you see in your profit and loss statement. That might seem like it
makes things simpler, but I actually advise against it. I think that the accrual method of
accounting gives you the best sense of how your business operates, and that you should consider
switching to it if you aren’t using it already.
For the best sense of how your business operates, you should consider switching to accrual
accounting if you aren’t using it already.
Here’s why: Let’s say you operate a summer camp business. You might receive payment from a
camper in March, several months before camp actually starts in July—using the accrual method,
you wouldn’t recognize the revenue until you’ve performed the service, so both the revenue and
the expenses for the camp would be accounted for in the month of July. With the cash method,

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you would have recognized the revenue back in March, but all of the expenses in July, which
would have made it look like you were profitable in all of the months leading up to the camp, but
unprofitable during the month that camp actually took place.
Cash accounting can get a little unwieldy when it comes time to evaluate how profitable an event
or product was, and can make it harder to really understand the ins and outs of your business
operations. For the best look at how your business works, accrual accounting is the way to go.
Balance sheet
Your balance sheet is a snapshot of your business’s financial position—at a particular moment in
time, how are you doing? How much cash do you have in the bank, how much do your
customers owe you, and how much do you owe your vendors?
The balance sheet is standardized, and consists of three types of accounts:
• assets (accounts receivable, money in the bank, inventory, etc.)
• liabilities (accounts payable, credit card balances, loan repayments, etc.)
• equity (for most small businesses, this is just the owner’s equity, but it could include investors’
shares, retained earnings, stock proceeds, etc.)
It’s called a balance sheet because it’s an equation that needs to balance out:
Assets = Liabilities + Equity
The total of your liabilities plus your total equity always equals the total of your assets.
At the end of the accounting year, your total profit or loss adds to or subtracts from your retained
earnings (a component of your equity). That makes your retained earnings your business’s
cumulative profit and loss since the business’s inception.
However, if you are a sole proprietor or other pass-through tax entity, “retained earnings”
doesn’t really apply to you—your retained earnings will always equal zero, as all profits and
losses are passed through to the owners and not rolled over or retained like they are in a
corporation.
Sales forecast
The sales forecast is exactly what it sounds like: your projections, or forecast, of what you think
you will sell in a given period (typically, a year to three years). Your sales forecast is an

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incredibly important part of your business plan, especially when lenders or investors are
involved, and should be an ongoing part of your business planning process.
Your sales forecast should be an ongoing part of your business planning process.
You should create a forecast that is consistent with the sales number you use in your profit and
loss statement. In fact, in our business planning software, LivePlan, the sales forecast auto-fills
the profit and loss statement.
There isn’t a one-size-fits-all kind of sales forecast—every business will have different needs.
How you segment and organize your forecast depends on what kind of business you have and
how thoroughly you want to track your sales.
Some helpful questions to ask yourself are:
• How many customers do you anticipate?
• How much will you charge them?
• How often will you charge them?
Your sales forecast can be as detailed as you want it to be, or you can simplify your forecast
by summarizing. However you choose to do a sales forecast, you should definitely have one.
Generally, you’ll want to break down your sales forecast into segments that are helpful to you for
planning and marketing purposes. If you own a restaurant, for example, you’d probably want to
separate your forecasts for dinner and lunch sales; if you own a gym, it might be helpful to
differentiate between single memberships, family memberships, club shop sales, and extra
services like personal training sessions. If you want to get really specific, you might even break
your forecast down by product, with a separate line for every product you sell.
Along with each segment of forecasted sales, you’ll want to include that segment’s “cost of
goods sold” (COGS). The difference between the your forecasted revenue and your forecasted
COGS is your forecasted gross margin.
Personnel plan
The importance of the personnel plan depends largely on the type of business you have. If you
are a sole proprietor with no employees, this might not be that important, and could be
summarized in a sentence of two. But if you are a larger business with high labor costs, you
should spend the time necessary to figure out how your personnel affect your business.

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Think of the personnel plan as a justification of each team member’s necessity to the business.
If you create a personnel plan, it should include a description of each member of your
management team, explaining what they bring to the table in terms of training, expertise, and
product or market knowledge. If you’re writing a business plan to present to lenders or investors,
you could think of this as a justification of each team member’s necessity to the business, and a
justification of their salary (and/or equity share, if applicable).
You can also choose to use this section to list entire departments, if that is a better fit for your
business and the intentions you have for your business plan. There’s no rule that says you have to
list only individual members of the management team.
This is also where you would list team members or departments that you’ve budgeted for but
haven’t hired yet. Describe who your ideal candidate(s) is/are, and justify your budgeted salary
range(s).
Additional calculations you might find useful:
Business ratios
If you have your profit and loss statement, your cash flow statement, and your balance sheet, you
have all the numbers you need to calculate the standard business ratios. These ratios aren’t
necessary to include in a business plan—especially for an internal plan—but knowing some key
ratios is almost always a good idea.
You’d probably want some profitability ratios, like:
• gross margin
• return on sales
• return on assets
• return on investment
And you’d probably want some liquidity ratios, such as:
• debt-to-equity
• current ratio
• working capital
Of these, the most common ratios used by business owners and requested by bankers are
probably gross margin, return on investment (ROI), and debt-to-equity.

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Break-even analysis
Your break-even analysis is a calculation of how much you will need to sell in order to “break
even” (i.e., how much you will need to sell in order to pay for all of your expenses).
Consider a restaurant: It has to be open, with the tables set and the menus printed and with the
bartender and all of the cooks and servers working, in order to make even one sale. But if it only
sold one dinner, the restaurant would be operating at a loss—even a $50 meal isn’t going to
cover the night’s utility bills. So the restaurant owner might use a break-even analysis to get an
idea of how many meals the restaurant needs to sell on a given night in order to cover its
expenses.
In determining your break-even point, you’ll need to figure out the contribution margin of what
you’re selling. In the case of a restaurant, the contribution margin will be the price of the meal
less any associated costs. For example, the customer pays $50 for the meal. The food costs are
$10 and the wages paid to prepare and serve the meal are $15. Your contribution margin is $25
($50 – $10 – $15 = $25). Using this model you can determine how high your sales revenue needs
to be in order for you to break even. If your monthly fixed costs are $5,000 and you average a
50% contribution margin (like in our example with the restaurant), you’ll need to have sales of
$10,000 in order to break even.
Conclusion
Your financial plan might feel overwhelming when you get started, but the truth is that this
section of your business plan is absolutely essential to understand. Even if you end up
outsourcing your bookkeeping and regular financial analysis to an accounting firm, you—the
business owner—should be able to read and understand these documents and make decisions
based on what you learn from them.
See Also: Making Sense of Your Small Business Financial Statements
If you create and present financial statements that all work together to tell the story of your
business, and if you can answer questions about where your numbers are coming from, your
chances of securing funding from investors or lenders is much higher.
Or, if you’d rather leave it to the pros, check out LivePlan’s business consulting—you’ll get an
MBA-written business plan in five business days.
Do you have any questions about creating a financial plan for your business? Let us know in
the comments below

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