Writing a Business Plan: Financial Plan
In business plan writting, the financial section is where all the operational items included in the rest of the business plan come together. There are three essential elements to a properly thought through and well-constructed business plan. Those elements include the forecast profit and loss account describing the income and expenditure, a cash flow statement that measures the liquidity and a sensitivity analysis which indicates the risks and opportunities within the business plan.
The forecast profit and loss account should be prepared on a monthly basis for the first year with an annual projection for the second year. The first year of every new startup business can be difficult due to financing and funding growth from a standing start which is why the first financial year should be detailed.
The forecast profit and loss account are the financial calculation of all the sales, purchases, expenditure and prices contained within the other areas of the business plan. In addition, full account should also be taken of the business administration costs. All the figures in the business plan income and expenditure account should be fully supported by the physical projections contained in the other sections and derived from those sections.
From the sales section, the considered selling prices can be multiplied the sales volume of each product. Keep to a minimum sundry additional income that might be expected. The resultant financial calculation produces the expected monthly sales turnover.
Using the information in the production or operations section of the business plan and if included the purchasing section, the sales volume should be evaluated at the expected purchase cost of the products and services. This produces a cost of sales figure which when deducted from the sales turnover provides a forecast gross profit figure each month.
When writing a business plan, the forecast profit and loss account should include notes and comments on all other main cost items including projections of staff requirements. Together with the administration and overhead costs, a monthly projection of the expected running costs of the business startup can be produced. The running costs of the business are vital area to forecast in detail as while sales prices and costs may be determined with some accuracy errors in the business running costs could cause a good business to fail.
The completion of the monthly forecast profit and loss account is achieved by entering the sales turnover, deducting the cost of sales and running cost of the business, overheads, to produce a net monthly profit. The bottom line could begin in a monthly loss until volumes grow but should reveal a sufficient profit. If a loss is determined, don’t adjust the figures to indicate a profit which would be hiding the truth, instead go back to the sales and costs sections and consider the necessary steps that can be taken to increase gross profit margins or reduce overhead costs.
Cash flow is often critical in business plan writting for small business and a lack of capital or liquidity to carry out the ambitions and projections of the small business owner is the major cause why small businesses goes into liquidation before their aspirations are achieved. The volumes and prices included in the business plan is the basis of the cash flow statement and it is stated in such a way as to indicate the financial resources required.
Cash flow is different to the profit and loss account as the profit and loss account only states the difference between sales sold and costs incurred. The cash flow statement account for both the profits made, volume changes of purchases and stock, one-off payments, financing debtor balances offset by creditor balances and shows how liquid and solvent a business is.
Producing cash flow statement tends to come within the province of accountants. A simple cash flow statement are typically created by starting with the monthly net profit or loss, deducting the cost of stock which has not been sold yet including both the finished goods and raw materials stock and also deducting any one-off payments like bills that have to be prepaid and the cost of paying for fixed asset purchases.
In addition, the amount owed to suppliers and creditors when a new business starts up is zero and also the amount owed by customers and debtors is zero. During the year these balances will change each month in proportion to the financial terms and conditions of the business and the movement of these balances need to be entered on the cash flow statement. An increase in debtors reduces the cash flow liquidity and an increase in creditors increases cash flow liquidity.
The third element of the financial section in business plan writting is the analysis and the projections of the whole business plan in what is called a sensitivity analysis. A technical accounting area for the majority of nonaccountants but nevertheless an important area as it is the financial sensitivity analysis that should indicate both the increased financial opportunities and the financial risks carried within the business plan.
Evaluation of all other areas of business start-up plans such as sales volume, sales prices, important cost elements and other factors which can impact the business should be done.For each item, set an upper limit and lower limit based on potential market conditions and risks.
Each upper and lower limit for every item should be financially evaluated. Also, determine the impact each would have on the profit and loss account and the cash flow statement. Combine the financial effect of several factors to assess the impact of a combination of events on the small business. A lower volume of sales might be uncomfortable for a small business but together with lower sales prices and higher costs, the risk could be intense.
The financial section of a business plan needs to be accurate and reveal the projected financial performance of the startup business. Be honest when writing developing your financial section and evaluates the risks involved. This would enable urgent management actions to limit the financial effect in case any of those risks become reality. Some of those risks will happen practically and be forewarned will be the difference between survival and failure with liquidity increasingly being the most dangerous risk of all.
If you would like to learn more about how Taylor Mason can help you with your business planning process, please contact us.