Small Business Plans

The last article ended with the company plan updated by way of the Operating Earnings line. So we’ve discussed revenue, immediate expenditures, and most SG&A expenditures. Here we’ll finish using the calculation of net earnings. We’ll wrap up our organization strategy discussion with some overall thoughts in the next post.

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 enterprise strategy 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 organization, you will use $50K by the end of year one. The average amount that you will not be working with 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 by means of 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 Earnings before Income taxes. Final but not least, we have earnings taxes to project. For simplicity, we’ll assume that the enterprise is a sole proprietorship. In that case, tax rates are the same as individual rates. Your net earnings from your enterprise is added to any other net income you may have through any other salary or enterprise, 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 Earnings for your enterprise. At this point you will have essentially completed the income, expense and earnings picture for your organization as per your company 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 company plan post 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 strategy.