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Startup & Fundraisingintermediate

The Business Plan and Financial Plan

A business plan is the written case for a venture. It opens with a concept story that frames the problem and solution, then covers the market, the team, the operating plan, and the risks. Bolted to it is the financial plan, which turns that narrative into numbers. The core pieces are sales projections, cost forecasts, and a pro-forma income statement that combines them into expected profit over time. The plan is judged less on its precise numbers, which will be wrong, than on whether its assumptions are explicit and defensible. A plan that cannot tie its forecasts to the story is just decoration.

Why it matters

A business plan is a story and a spreadsheet that have to agree with each other. The story says we will win these customers in this way. The spreadsheet must then show the sales that story implies, the costs to deliver it, and the profit left over, period by period. The discipline is honesty about assumptions. Where does revenue come from, how fast does it grow, and what does each sale cost. The pro-forma income statement is where the narrative meets reality. If the story promises explosive growth but the model needs a tiny marketing budget to deliver it, a careful reader sees the contradiction at once. Distinguish accounting profit on this statement from the cash the venture actually has, since a profitable plan can still run out of money.

Formulas

Pro-forma operating profit (qualitative)
EBIT=Sales−COGS−operating expenses\mathrm{EBIT} = \text{Sales} - \text{COGS} - \text{operating expenses}
The pro-forma income statement projects sales, subtracts the cost of goods sold and operating expenses, and lands on expected operating profit (EBIT) for each forecast period.

Worked examples

Scenario

Build a one-line pro-forma for year 1. The plan projects 10,000 units at A$50 each, a unit cost of A$30, and A$120,000 of fixed operating expenses.

Solution

Sales are units times price, Sales=10,000×50=500,000\mathrm{Sales} = 10{,}000 \times 50 = 500{,}000, so A$500,000. Cost of goods sold is COGS=10,000×30=300,000\mathrm{COGS} = 10{,}000 \times 30 = 300{,}000, so A$300,000, leaving a gross profit of A$200,000. Subtract the A$120,000 of fixed operating expenses to get an operating profit (EBIT) of A$80,000. Each line traces back to an assumption the reader can challenge.

Scenario

A plan shows a healthy projected net profit in year 1 yet the founder warns the firm could run out of cash. How is that possible?

Solution

Accounting profit is not cash. If customers pay on 90-day terms while suppliers and staff are paid now, the pro-forma income statement can show profit while the bank balance falls. This is why the financial plan pairs the income statement with a cash-flow projection, separating accounting-based profit from cash-based survival.

Common mistakes

  • ✗A business plan is mainly about projecting the numbers precisely. Early forecasts are always wrong. The plan’s value is in the clarity of its concept story and the assumptions behind the numbers, not decimal-point accuracy.
  • ✗Sales projections and a profit forecast are the same. Sales are only the top line. Profit requires subtracting the cost of goods sold and operating expenses, which the pro-forma income statement does line by line.
  • ✗A profitable plan cannot run out of cash. Profit is an accounting measure. With slow customer payments and fast outgoings, a profitable venture can still exhaust its cash, which is why a cash-flow projection sits beside the income statement.
  • ✗A longer business plan is a better one. Investors prize a tight, honest plan with a clear concept and defensible assumptions over a long document padded with optimistic detail.

Revision bullets

  • •Business plan: concept story, market, team, operations, risks
  • •Financial plan: sales projections, cost forecasts, pro-forma income statement
  • •Pro-forma income statement turns the story into expected profit
  • •EBIT equals sales minus cost of goods sold minus operating expenses
  • •Judge a plan by the honesty of its assumptions, not the exact numbers
  • •Accounting profit is not cash. Pair it with a cash-flow projection

Quick check

A startup’s plan projects sales of A$400,000, cost of goods sold of A$250,000, and operating expenses of A$100,000 for year 1. The pro-forma operating profit (EBIT) is

A pro-forma income statement shows a year-1 profit, yet the founder still seeks a cash buffer. The best explanation is

Connected topics

FCF / DCFCapital SourcesFunding RoundsVC/PE ValuationBusiness Model

Sources

  1. Cremades (2016), Ch. 4
    Cremades, A. The Art of Startup Fundraising. Wiley, 2016. ISBN 978-1-119-19183-5.
    Covers the business plan, the pitch narrative, and the financial projections investors expect to see.
  2. Brailsford, Heaney & Bilson (2015), financial statements
    Brailsford, T., Heaney, R., & Bilson, C. Investments: Concepts and Applications. 5th ed. Cengage Learning Australia, 2015.
    Explains the income statement and the distinction between accounting profit and cash flow used in forecasting.
How to cite this page
Dr. Phil's Quant Lab. (2026). The Business Plan and Financial Plan. Derivatives Atlas. https://phucnguyenvan.com/concept/im-business-plan-financials
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