The 3 Elements of a Financial Plan

Financial Plan

The financial plan of the business plan always come last not because it is less important to other sections like the product and services, business description or even the Management team.

But due to the fact that it is the engine room of your plan.

It acts like the pulse, respiration rate and blood pressure of the human body which shows the condition of the patient situation.

The financial plan is critical to the success of your business plan – especially if it is for the purpose of getting a bank loan or investors.

The Cash Flow Forecast is arguably the most important part of the plan. Also, each of the other sections is important from a planning perspective.

There are three sections in a financial plan:

  • The Starting Balance Sheet
  • The Pro-Forma (or Forecast) Income Statement
  • The Cash Flow Forecast

This three put together will give a precise picture of a company’s current value

Including its ability to pay its bills today and earn a profit going forward.

This information is very important to business plan readers. Excel or other financial program are used to create spreadsheets for ease of calculations.

You’ll also find them available in most business plan software; these programs also do the calculations.

Typically, the financial plan will have monthly projections for the first 12 months and then annual projections for the remaining three to five years.

Three-year projections are typically adequate, but some investors will ask a five-year forecast.

Before you get started, consider the following tips

A. The Beauty of “What If?”

It is almost impossible to get things right the first time.  In all business planning, but especially in the financial section, it is important to try different scenarios.

  • What if I buy used equipment instead of new equipment?
  • What if I raise or lower prices?  What if I cut my personal draw?

By trying different scenarios, you will soon decide what it will take to make your business financially viable.

With business planning, you must keep trying until you have a result that is reasonable and that you are convinced is achievable.

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B. Tips on your Financial Plan

  • Be persistent! Most people do not have the ability in finance so preparing a financial plan is a journey into the unknown.  Be patient.
  • Read the entire planning guide before starting the plan. You will learn what information you need to assemble the financial part of the plan.
  • Get help in assembly, but not in research. These should be your numbers and assumptions.  You will be responsible for achieving these goals so you should believe in the numbers
  • Be consistent. Make sure that your financial plan is consistent with the rest of the business plan.  For example, if your pricing section mentions a margin of 40%, this should be reflected in your Income Statement.

The Balance Sheet | Elements of Financial Plan

The Balance Sheet is a snapshot of the business at any point.  In the case of a business start-up, it is often the starting balance sheet.

A balance sheet consists of three parts.

  • Assets: Things a business owns.
  • Liabilities: Debts a business owes
  • Equity: The owners’ investment and re-investment in the business

Everything that the business owns (its assets) must be paid for; free of debt owing. Therefore, we get the following formula:

Assets = Liabilities + Equity

This is extremely important as it gives the reader a picture of how the business is being funded. is it through the owners’ money (equity) or through the creditors’ money (liabilities). In a business start-up, you should look at the assets required to get the business started – and then ask yourself how you will fund that start-up.  If you do not have the money to invest in the business, you will have to borrow the rest.

Financial planHow to Do a Balance Sheet for A Business Start-up

This section relates to the Start-up Costs section of the template. The start-up balance sheet is simple if you know how to make and sort a list.

You need to make two lists to get started.

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The first list is your list of Current Assets.  These are assets (things your business owns) which will be used up within the first year of doing business.

Typically, they include cash, inventory and pre-paid expenses (such as pre-paid insurance).

Although Accounts Receivable is another example of a current asset, there are no accounts receivables in a business start-up.

The second list is the Capital Assets. These are items you buy with the intention of keeping them and using them to run the business.

For example, if you buy a vehicle to use in the business, it is a capital asset. If you buy a vehicle to re-sell it, however, then that vehicle is inventory.

Sometimes there is a third asset list.  These are known as Intangible Assets and are things such as franchise fees, goodwill, quotas, licenses, patents, and trademarks.

These are not common in most business situations except where you are purchasing an existing business.

Income Statement | Elements of Financial Plan

The purpose of the Income Statement Forecast is to project the revenues and expenses of your business over a given period – usually one year.

It shows whether you’re making any money by adding up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure.

Other terms for this are budgeted income statement or pro forma income statement.  There are three things that need to be predicted to forecast your income statement: the sales projection, the cost of goods projection and the overhead projection.

Be sure to state any assumptions when creating your Income Statement.

To figure your income statement, you need to gather a bunch of numbers, including your gross revenue, which is made up of sales and any income from interest or sales of assets; your sales, general and administrative (SG&A) expenses;

what you paid out in interest and dividends if anything; and your corporate tax rate. If you have those, you’re ready to go.

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If you’re a startup and don’t have any earlier years’ figures to look at, look for statistics about other businesses within your industry.

The most important question to ask is: What has been the experience of similar companies?

The Cash Flow | Elements of Financial Plan

The Cash Flow Forecast is probably your most important financial tool.  It is your cash flow that shows you if, and when, you will run out of cash essential to run your business.

It allows you to take action before problems occur and even do “what if” calculations before taking on new projects.

The cash flow is a 12-month projection that forecasts the receipts and disbursements for your business.  In a start-up situation, it is preferable to have a start-up month to specifically show the reader the costs incurred to start the business.

Cash flow is arguably the most important aspect of the business.  This is due to what is called the Current Asset Conversion Cycle.

This is the time, in days, it takes to buy a product or materials, produce and sell an item, and then finally collect on that item.

It’s different from the income statement, which defines sales and profits but doesn’t necessarily tell you where your cash came from or how it’s being used.

A cash flow statement consists of two parts. One follows the flow of cash into and out of the company. The other shows how the funds were spent.

The two parts are called, respectively, sources of funds and uses of funds.

At the bottom is, naturally, the bottom line called net changes in cash position. It shows whether you improved your cash position and by how much during the period.

 

Now Over to You

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About Ini Patrick

Hello, I'm Ini Patrick, a Serial Entrepreneur, Business analyst, and Online Business Strategist. Am committed to helping entrepreneurs grow their business by sharing hybrid information and ideas that teaches strategies and systems to help start and grow any business.

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