Business Plan Development: Know your Finances

A great business plan is the foundation of every great business. It sets out what your new business will do, how you will overcome the challenges of starting up and, most important of all, how you will make money.

But your start-up business plan is all just wishful thinking until you start filling in the financial figures.

Your marketing plan and SWOT analysis are interesting – but they don’t mean a thing if you don’t have realistic figures on your bottom line. Your financial forecasts and statements make up the most essential section of your plan. You need it – not just to set the financial targets you will work to, and as a blueprint for running your business – but to secure funding from investors or lenders. They are going to want to see numbers that show your business has the ingredients to thrive and grow and that they can be repaid, with interest.

What should be in the financial section of your business plan?

Your financial projections need to include the key figures that business accounts will show. These are the profit and loss, balance sheet, and cash flow.

These will be similar to the detailed accounting statements your business will eventually generate – but with one important difference. You will need to make projections of the figures your business will achieve, rather than report on those you have.

This means that you have to take an educated guess about the future performance of your business. It may be easier to make your estimates if you have experience of running a similar business – and if you have, say so!

Keep it real

It may be tempting to be over-optimistic – but the more realistic your estimates are, the more professional you will look – and the better your chances of securing the funding you want.

Everyone wants to set up the next Google or Twitter, but not every business can enjoy exponential growth – and plans that suggest it will, can be a red flag for investors.

One way to ensure your figures are credible is to base them on an existing business that you know well, and to use the following structure:

Start with a sales forecast. Set up a spreadsheet projecting sales over the first three years. Set up different sections for different lines, with columns for every month for the first year (you might want to change to a quarterly basis for subsequent years).

Don’t just include units. Have columns for unit sales, unit costs, pricing, one that multiplies units times price to calculate sales, and one for sales costs. This allows you to demonstrate gross margin: sales revenue less sales costs. Plus it’s a useful number for comparing with different standard industry ratios.

Create an expenses budget. Differentiate between fixed costs, such as rent and payroll, and variable costs, such as advertising and delivery. Include contingencies and variations based on different sales figures.

You may have to estimate things like interest and taxes.

Develop a cash-flow statement. This shows the cash moving in and out of the business. It is important to remember when compiling your cash-flow projection to show how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. Some business planning software programs will help you make these projections.

Income projections. This is your profit and loss forecast for your business for the coming three years. Use the numbers that you put in the other sections. Remember:

Sales – cost of sales = gross margin

Gross margin – expenses, interest and taxes = net profit

Include assets and liabilities. Start with assets and estimate what you’ll have on hand, month by month for cash, money owed to you, inventory, and your substantial assets like land, buildings, and equipment.

Then work out your liabilities or debts – the bills for suppliers, finance and loan repayments.

The breakeven point. If your business is viable, at a certain point your revenue will exceed your costs. This is a key point for potential lenders, who want to know that they are lending to a viable enterprise.

Do you need help?

The financial section of your business plan is so important that it is worth getting help with. Your accountant may be able to provide some input, and, remember, that you may be able to find templates for businesses like yours online.

Some accounts software may have helpful modules – and some will have the ability to translate your figures into graphic form to create pie charts or bar graphs that you can use to highlight your financials, sales history, or projected income over three years. And don’t be afraid to include visuals in your business plans – they can make complicated data much easier to understand!