Set Up a Business Plan for Your Small Business

The last article ended with the business plan updated through the Operating Income line. So we’ve discussed revenue, direct expenses, and most SG&A expenses. Here we’ll finish with the calculation of net income. We’ll wrap up our business plan discussion with some overall thoughts in the next article.
The next area we need to consider are the effects of any financial activity your firm will be engaged in. Interest income and expenses need to be forecast. Part of the overall aspects of your business plan will be what financing you receive, how much of that money you will use directly, how much you will use over time, and how much that not currently being used will earn.
For instance, let’s say you received $100K in financing at the beginning of year one. You anticipate that, given your specific operations and level of business, you will use $50K by the end of year one. The average amount that you will not be using at any given time during the year is $75K, as you run it down from $100K to $50K. You will probably have that money in an interest bearing account. We can assume an interest rate, say 1%, and multiply by the average balance, $75K. The result, $750 would be our interest income for year one. You should continue your cash flow analysis and calculation through years two and three.
Of course, you may have some Interest expense as well. If you financed your business with a loan of $100K, for instance, then you would calculate the interest expense for the year. If the interest rate were 6%, then your Interest expense for the year would be $6K. Depending on your payback schedule, the interest expense could be slightly different – this assumes you are paying interest-only for the year, but this would be close in any case. You should continue this projection for years two and three.
Most small business will not be paying out dividends, but if yours will, the next line is where they would be shown.
We should deduct our net interest expense and dividends from our Operating income to give us our Net Income before Income taxes. Last but not least, we have income taxes to project. For simplicity, we’ll assume that the business is a sole proprietorship. In that case, tax rates are the same as individual rates. Your net income from your business is added to any other net income you may have through any other salary or business, and the tax owed would be calculated accordingly. In the same way, you should estimate the tax for years two and three.
Once you deduct your income tax from the previous line you will have your projected Net Income for your business. At this point you will have essentially completed the revenue, expense and income picture for your business as per your business plan. Of course, an ancillary product of this process would be year-end balance sheet figures and cash flow statements. These will show the cumulative financial results / effects and cash position, respectively.
Please see the next article in the business plan article series where we will take a step back and take a look at the big picture and the most important issues related to the business plan.