One of the important sections in a small business plan is the financial plan for the business, particularly during the startup phase. Many larger organisations will continue the business financial planning process by forecasting an annual budget for a period of years (often 3 – 5 years). The financial plan or budget is then used as an operation planning tool and as a ‘yardstick’ to measure performance against.
If you are in the start-up phase or are developing a plan for a new business, the business financial plan will be critical. Before anyone is prepared to invest in your business or take the risk of lending you money, they are going to want to know whether or not you are going to be able to generate a return on the investment.
Family and friends might take your word for it, but your local bank manager will not. And the numbers you produce in your plan are going to have a basis in reality. Because believe me if they don’t, any serious investor or financier is going to be able to recognise your financial fantasies for exactly what they are!
What Reports to Include in Your Business Financial Plan
At the very least you are going to need to develop a forecast of the likely profit or loss and a cashflow forecast. And just in case you were wondering, yes you do need both!
Profit is important. Without it, the business will chew through any equity to keep the doors open until you get to the point where it there is nothing left. But every year thousands of very profitable small businesses are forced to close their doors simply because they are unable to generate enough cash to pay the bills!
Positive cash flows are critical to any small business, particularly in the first couple of years of operation.
Other than Profit and Loss or Income Statements and Cashflow Statements, the most commonly used business plan financial forecasts include:
- Sources and Applications of Funds
- Capital Equipment Register
- Balance Sheet
- Breakeven Analysis
- Historical Records (for an existing business)
Where to Start
Before you start to prepare your Income Statement and Cashflow Statement it is important to do your market research.
Market research will tell you who your customers are likely to be, how much they will pay for what you are offering and how often they will buy from you. It will also give you a good idea of the market strength and the relative positions of your major competitors in the market.
Analysing the behaviour of your competitors will give you an insight into the cost of competing in the market. And allow you to investigate how you can deliver your product or service to the market.
Most of the decisions you make while you are developing your business model and analysing the market you intend to enter, are going to have an impact. The potential income and the cost structure of your business should be acknowledged or recognised in your business financial plan.
So don’t be tempted to open your spreadsheet program and start plugging in numbers until you have a thorough understanding of what your business will look like and how you intend to operate on a day-to-day basis.
You will also need to:
- work out what your pricing strategy will be,
- calculate your potential sales, and
- work out what your product and administration costs are likely to be.
But before you can put any of these statements together you need to have at least a basic understanding of bookkeeping and accounting principles!
