Previous Lesson

Financial Plan

Financial plan

The Financial plan should provide a reasonable estimate of your company‘s financial standing during its start up in the first few years of growth. Should cover and provides guidance for calculating certain estimates.

A financial breakdown is necessary to gain the interest of investors. To demonstrate that your business is a safe investment, you need to do you have a solid understanding of finances and that your business is profitable. The financial plan will improve your insight into the financial workings of your business. Businesses with robust financial planning are less likely to lose money.

The topics covered in this section are:

  • Creating the financial plan
  • Sales forecast
  • Profit and loss projections
  • Cash flow forecast
  • Balance sheet
  • Break-even analysis

Creating the financial plan

When producing your financial plan, you should:

  • Include graphs and charts to convey your data.
  • Highlight how you arrived at your numbers and what makes your financial plan secure.
  • Explain where startup costs will come from. You may use funding from a number of courses, such as personal finances combined with an invest and loan Highlight anything that sets you apart from other startups in terms of your finances
  • Consider seeking advice from a financial advisor, or someone you know who runs a business, especially if you struggle to land on solid figures while calculating your financial plan

When writing your plan, keep in mind that potential investors and financiers will scrutinize it, so you need to cover everything they’re looking for. The next few slides look at what to include.

Bankers want assurance of orderly repayment. If you intend to present your business plan to lenders, be sure to cover

The loan amount you need

How you’ll use the funds

What the loan will help you achieve and how it will make the business stronger Requested repayment terms-you may not be able to negotiate interest rates, if you may get a longer repayment term to help the cash flow Any collateral offered

Investors will have a different perspective on your business. They are looking for significant growth and expect to share in increased profit.

Be sure to include in your financial plans:

  • Funds needed in the short terms
  • Funds needed in two to five years time
  • How the company will use the funds and what this will accomplish for growth Estimated return on investment
  • The exit strategy for investors Percentage of ownership that you will give up to investors Milestones or conditions that you will accept
  • When and how you will provide financial reporting Where there will be investor involvement on the board of in management

If your business is based around manufacturing, you need to include:

  • Planned production levels
  • Anticipated levels of direct costs and indirect production costs.
  • Detail how these compare to industry averages Price per product line Gross profit margin-overall and for each product line.
  • Production of capacity limits of planned physical plant and equipment Purchasing and inventory management procedures for new products under development or those anticipated to come online after start-up

Sales forecast

To forecast sales, you need to make educated calculations of the sales you expect to make over, at least, the first 12 months.

You can estimate based on research into typical sales numbers within your industry.

If your business will be in a town centre, assess the volume of people that shop in the area and make an educated guess of how many people may come into your store and buy from you.

Look at your competitors. Although you won’t get as much business as them when you first start, their sales figures can give you a rough idea of how many people may come to you. You can find information on competitors on companies house. To forecast sales, you need to make educated calculations of the sales you expect to make, at least, the first 12 months. You can estimate based on research into your typical sales numbers within your industry. If your business will be in a town centre, assess the volume of people that shop in the area and make an educated test of how many people may come into your store and buy from you.

Look at your competitors. Although you won’t get as much business as them when you first start, the sales figures can give you a rough idea of how many people may come to you. You can find information on competitors on companies’ house.

Also draw from your test marketing results and other market research.

Keep in mind the following when forecasting sales:

  • Sales can differ dramatically between weekdays and weekend, as well as at different times of year and during seasonal holidays.
  • If your business is space constricted EG a restaurant, you can only seat so many people at a time no matter how busy the area is.
  • Consider conversion rates and how they will affect the growth of your sales.

Don’t be afraid to Forcast sales. They are not permanent and are not holy accurate predictions of what your real sales look like, but having expectations gives you a benchmark for your business and provide you with a starting point for budgeting.

Once you have actual sales figures, rework your sales force cost and the rest of your financial forecasts accordingly.

Profit and loss projections

Profit and loss projections detail what income and outgoings wouldn’t show your business makes a profit in the first 12 months, or longer. Its purpose is to demonstrate how profitable the business will be long-term and how you will handle losses.

To create a profit and loss projection, you should:

  • Estimate potential sales, the cost of goods sold, and expenses, such as rent or marketing. Once you break down these numbers, you should have a month by month profit estimate.
  • Draw data from your sales forecasts to create profit projections Explain any major assumptions used to estimate company income and expenses
  • List where there may be losses and clarify why they are necessary for the progression of the business. Detail how you will handle them.
  • Keep notes on your research and assumptions so you can explain them later or include them in the appendices if needed

Cash flow forecast

The cash flow forecast shows how you expect money to fly in and out of the business, particularly during the start up phase.

The primary purpose of the cash flow forecast is to demonstrate how you handle incoming and outgoing funds and predict deaths or peaks of cash flow. Monitoring cash flow keeps your accounts in good standing.

It also allows you to plan how much money you need before start up for preliminary expenses, operating expenses, and reserves. The forecast enables you to foresee shortages and take appropriate action, such as cutting out certain expenses or negotiating a loan.

When producing your cash flow forecast, determine when you expect to receive payment for sold goods or services and when it will enter into your account. Do the same for outgoing payments.

For example, if you make a sale in month one, when do you actually collect the cash? When you buy the materials, do you pay in advance, upon delivery, or much later?

Your cash flow forecast should show you whether you’re working capital is adequate or not. If your projected cash balance ever goes negative, then you need more start-up capital.

The forecast should also predict when, and how much, you need to borrow.

Explain any major assumptions, especially those that make the cash flow differ from the profit and loss projection.

Also consider the following questions:

Are some expenses payable in advance?

Are there any irregular expenses, such as quarterly tax payments, that need budgeting for?

Are there any loan repayments or equipment purchases not on the profit and loss statement that take cash out of the business?

Be sure to track essential operating data. Tracking is not Necessarily part of the cash flow, but it allows you to take note of items that have a heavy impact on it, such as sales and inventory of purchases.

Balance sheet

The balance sheet conveys your business net worth (sometimes referred to as equity)

It shows what items of value are held by the company (assets) and what the debts are (liabilities). When liabilities are subtracted from assets, the remainder is the owners’ equity (the value of the business).

Your assets and liabilities must be balanced for the business to be in a financially stable position.

Use a start-up expenses and capitalization spreadsheet as a guide for preparing a balance sheet and detail how you calculated the account balances.

Some people add a projected balance sheet showing the estimated financial position of the company at the end of the first year. Doing so is especially useful when selling your proposal to investors.

Break-Even Analysis

Break even analysis predicts the sales volume required to recover total costs. It shows how much money you need to make to earn back what you are spending on the business. Your breakeven point is between operating at a loss and operating at a profit. Calculating your breakeven point is important so you don’t overstretch your business or end up in debt.

To calculate your breakeven point, you need to determine your business ‘s Fixed costs. These typically remain unchanged over a period of time and may include rent, advertising and insurance Variable costs. These are all costs that change depending on the production volumes of that month. These costs inlcude production and manufacturing costs, delivery charges, or the cost of materials Selling price of your products and or services

Then, use these figures to calculate your breakeven point using the formula on the following slide.

Expressed as a formula, breakeven is: fixed costs/(price-variable costs).

For example, a company has £30,000 fixed costs, the price of their product is £10.00, and variable costs is £2.00 per product. The breakeven point of the company is:

£30,000/(£10.00-£2.00)=. The business needs to sell at least 3,750 products to break even.

Include evidence on how you have calculated your breakeven point, and include details on any assumptions that you have made.

 

Summary

In this section of the course, you have learnt that;

  • If you struggle to land on solid figures when calculating a financial plan, seek advice from a financial advisor, or someone you know who runs a business.
  • Your financial plan should include information that a banker or investor wants to see, including how you intend to use any funds received, repayment terms, and how you plan to provide financial reporting.
  • Include sales forecast in your financial plan. You can estimate based on research into typical sales numbers within your industry.
  • Your financial plan should include a section on profit and loss projections. Estimate potential sales, the cost of goods sold, and any expenses. It should also explain how you will handle losses.
  • A cash flow forecast shows you how you expect money to flow in and out of the business. It demonstrates how you will handle incoming and outgoing funds and predicts dips or Peaks of cash flow.
  • A balance sheet shows what assets are held by the company versus liabilities. The balance sheet shows whether or not your business is in a financially stable position.