Business Planning: Finance
Starting a business is a huge investment for yourself, for investors, partners and for banks. Preparing a financial plan for your business is not only going to show you the costs involved, it will also provide you with an insight to how your business will profit in the future.
What you should include:
If you are starting a business, you won’t be able to use historical data to base your financial reports on. So, it is important to remember that the financial section of your business plan is not an exact tax report, it is an educated guess.
If your business is already established, you can use the last years financial data as reference.
The sales forecast is exactly what it sounds like; your projection – forecast, of what you expect to sell in a certain period of time. Your sales forecast is typically the most important aspect in the financial section of your business plan, especially if investors or partners are involved. You need to ensure that the sales forecast is consistent with the sales number you have generated in your profit and loss statement.
If you’re starting a business, you are going to need an idea of how much it’s going to cost to actually get the business off the ground and continue running. This will include your fixed costs such as salary, rent, insurance and equipment needed to produce what you are selling, and your variable costs such as raw materials you need to make products, inventory, and freight.
You can check out the Australian Government’s budget planner here.
Cash flow statement
A cash flow statement is an explanation of how much money your business brought in, how much money went out, and what the final balance was. Think of it as a money schedule, you know exactly where money is coming or going, and when. The cash flow statement helps you understand the difference between what your profit and loss statement reports as income, and what your actual cash position is.
Profit and loss statement
A profit and loss statement is essentially a visual representation of how your business made or will make a profit, or loss, over a certain period of time. Profit and loss reports are generally presented in a table that lists all your revenue and expenditure streams. At the bottom, the report will show the total net profit or loss. For a new business this is an important way of identifying if your business idea is sustainable financially.
Break even analysis
A break-even analysis is a calculation of how much revenue you need to make in order to pay for your expenses. Expenses to consider in your analysis are those in your budget such as your variable and fixed costs. From your break-even analysis you will be able to identify the right pricing scale for your product or service that not only covers your costs but also allows you to set revenue targets that ensure you are profitable.
Reading the financial section of a business plan is the defining moment in the readers mind. Whether they are an investor or potential partner, the financial section is what transforms your business from an idea, into dollar signs. It is what they need to make an informed decision on whether to take a chance on your idea, or not. Take the time to plan it wisely, be realistic in what is achievable especially in the beginning when you may have limited resources and cash. This will ensure you have a solid foundation on which to build your business and keep your investors and/ or the bank happy with their returns.
Keep in mind Bob Hope’s quote “A bank is a place that will lend you money if you can prove that you don’t need it.”