The purpose of the financial plan is two-fold.
First, youâ€™re going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will growâ€“and quicklyâ€“and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan.
But the most important reason to compile this financial forecast is for your own benefit, so you understand how you projectÂ your business will do. This is an ongoing, living document. It should be a guide to running your business. And at any particular time you feel you need funding or financing, then you are prepared to go with your documents.
If there is a rule of thumb when filling in the numbers in the financial section of your business plan, itâ€™s this: Be realistic. There is a tremendous problem with the hockey-stick forecast really arenâ€™t credible. A startling growth trajectory is something that would-be investors would love to see, itâ€™s most often not a believable growth forecast. The way you come up a credible financial section for your business plan is to demonstrate that itâ€™s realistic. You must break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue.
How to do a Financial Plan?
A financial plan isnâ€™t necessarily compiled in sequence. And you most likely wonâ€™t present it in the final document in the same sequence you compile the figures and documents. Itâ€™s typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.
- Start with a sales forecast using unit sales, pricing, cost of goods sold and calculate gross margin. Gross margin is sales less cost of sales, and itâ€™s a useful number for comparing with different standard industry ratios.
- Create an expenses budget.Â Youâ€™re going to need to understand how much itâ€™s going to cost you to actually make the sales you have forecast. There are fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses)
- Develop a cash-flow statement.Â Itâ€™s important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on.
- Deal with assets and liabilities.Â Start with assets, and estimate what youâ€™ll have on hand, month by month for cash, accounts receivable and inventory (money owed to you),. Then figure out what you have as liabilitiesâ€“meaning debts because you havenâ€™t paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
- Breakeven analysis.The breakeven point is when your businessâ€™s expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis.
If your business is viable, at a certain period of time your overall revenueÂ will exceed your overall expenses, including interest. This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.