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This is the fourth in a multi-part series to ensure
that your new business is successful. This
article concerns business plans. We previously
covered how to estimate revenue and SG&A
expenses and Operating Income. We’ll now
complete our projected P & L through Net
Income.      

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.


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_________________________________________
Small Business: Setting Up a Business
Plan (Part 4)                    
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