Financial forecasts for your business plan

As part of your plan you will need to provide a set of financial projections which translate what you have said
about your business into numbers.

You will need to look carefully at:

how much capital you need if you are seeking external funding
the security you can offer lenders
how you plan to repay any borrowings
sources of revenue and income
You may also want to include your personal finances as part of the plan at this stage.

A financial forecast is an estimate of future financial outcomes for a company or country (for
futures and currency markets). Using historical internal accounting and sales data, in addition to
external market and economic indicators, a financial forecast is an economist's best guess of what
will happen to a company in financial terms over a given time periodwhich is usually one year.

What is 'Financial Risk'

Financial risk is the possibility that shareholders will lose money when they invest in a company that
has debt, if the company's cash flow proves inadequate to meet its financial obligations. When a
company uses debt financing, its creditors are repaid before its shareholders if the company
becomes insolvent. Financial risk also refers to the possibility of a corporation or government
defaulting on its bonds, which would cause those bondholders to lose money.

Types of Financial Risks

There are many types of financial risks. The most common ones include credit risk, liquidity risk,
asset backed risk, foreign investment risk, equity risk and currency risk.

Credit risk is also referred to as default risk. This type of risk is associated with people who borrowed
money and who are unable to pay for the money they borrowed. As such, these people go into
default. Investors affected by credit risk suffer from decreased income and lost principal and interest,
or they deal with a rise in costs for collection.

Liquidity risk involves securities and assets that cannot be purchased or sold fast enough to cut
losses in a volatile market. Asset-backed risk is the risk that asset-backed securities may become
volatile if the underlying securities also change in value. The risks under asset-backed risk include
prepayment risk and interest rate risk.

Changes in prices because of market differences, political changes, natural calamities, diplomatic
changes or economic conflicts may cause volatile foreign investment conditions that may expose
businesses and individuals to foreign investment risk. Equity risk covers the risk involved in the
volatile price changes of shares of stock.
Investors holding foreign currencies are exposed to currency risk because different factors, such as
interest rate changes and monetary policy changes, can alter the value of the asset that investors
are holding.

In finance, return is a profit on an investment. It comprises any change in value and

interest or dividends or other such cash flows which the investor receives from the investment. It
may be measured either in absolute terms (e.g., dollars) or as a percentage of the amount
invested. A return is the gain or loss of a security in a particular period. The return consists of
the income and the capital gains relative on an investment, and it is usually quoted as a
percentage.

What is a Financing Contingency?

A financing contingency is a clause in a home purchase and sale agreement that
expresses that your offer is contingent on being able to secure financing for the house.
Typically a buyer uses this clause to establish a set period of time to apply for a
mortgage and/or close on the loan. Within this clause the buyer will also normally list
the type of loan they intend to obtain, their down payment amount, the term of the
loan and the interest rate.

What is the Purpose of a Financing Contingency?

Having a financing contingency protects the buyer in the event they are unable to get
approved for a loan. A financing contingency can be very specific about stipulations and
conditions, but the main goal is to make sure the buyer is not penalized for being
unable to get financing and completing the transaction. Most buyer-initiated financing
contingencies will stipulate that the buyer gets their earnest money back if you are
unable to get approved for the loan.

Environmental Compliance means conforming to environmental laws,

regulations, standards and other requirements such as site permits to operate. In
recent years, environmental concerns have led to a significant increase in the number
and scope of compliance imperatives across all global regulatory environments.

Regulatory compliance is an organization's adherence to laws, regulations,

guidelines and specifications relevant to its business. Violations of regulatory
compliance regulations often result in legal punishment, including federal fines.

Environmental Regulations for Businesses

The Environmental Protection Agency and state environmental agencies enforce
the environmental regulations that apply to businesses. Although it may be obvious
that businesses involved in automotive services, metal work, paints and coatings,
agricultural services, and chemical production are subject to environmental regulations,
other more innocuous ones, such as dry-cleaners and printers, are as well.
It is best to talk with a lawyer to ensure your business complies with any relevant
regulations and avoids environmental legal pitfalls. For example, establishing practices
to prevent waste generation or improper disposal is the most cost-effective way to
achieve environmental compliance, as you will save your business the expenses
associated with tracking waste streams, costly disposal methods, and, in the worst case
scenario, significant fines.

What is a 'Capital Structure'

The capital structure is how a firm finances its overall operations and growth by using
different sources of funds. Debt comes in the form of bond issues or long-term notes
payable, while equity is classified as common stock, preferred stock or retained
earnings. Short-term debt such as working capital requirements is also considered to be
part of the capital structure.

Capital Structure What It Is and Why It Matters

The term capital structure refers to the percentage of capital (money) at work in a
business by type. Broadly speaking, there are two forms of capital: equity capital and
debt capital. Each type of capital has its own benefits and drawbacks and a substantial
part of wise corporate stewardship and management is attempting to find the perfect
capital structure in terms of risk/reward payoff for shareholders. This is true for Fortune
500 companies and for small business owners trying to determine how much of their
start-up money should come from a bank loan without endangering the business.

Capital structure describes the sources of funds a company uses for acquiring income-
producing assets. The focus on these funds contrasts with the financial structure
concept (previous section) which includes all of the company's debt and equities.

Capital and financial structures set the firm's level of leverage. Leverage, in turn,
determines how creditors and owners share business risks and rewards.

What are Financial and Capital Structures?

Business people use the term structure in quite a few different ways.
The terms "governance," "business," and "legal," are all associated with their own
"structures" for instance. These refer to aspects of company set up and operation.