Product descriptions, your market research, what differentiates your firm, and your marketing strategy are important when creating a business plan. However, the heart of the plan, particularly for any business seeking new capital, is the financial plan – one of its most crucial parts.
You cannot avoid dealing with the numbers; they are a critical barometer of your business’s success. Anyone who reviews it should be able to ascertain your income, outgo, debt load, profit projections, and other data that indicates how healthy your business is or is likely to be in the foreseeable future.
When 28 percent of businesses go bankrupt because of avoidable financial problems, you want to illustrate why your company is destined to be in the 72 percent that do not. There are many templates available online for developing a business plan or a stand-alone financial plan. They can give you an idea of the information to gather. However, every business is different, so your situation might not fit the mold.
Nevertheless, on the financial side, there are key steps and items required to develop a plan to attract investors and better manage your business. The requisite elements help financial analysts or potential investors to determine your business’s financial ratios to evaluate your liquidity, asset management, debt management, and other tests.
Here are six critical elements needed to develop a comprehensive financial plan:
Develop Balance Sheets For At Least The Last Three Years
A balance sheet shows your company’s assets versus liabilities and equity, which must equal each other or be in “balance.” The assets include available cash, accounts receivable, any inventory, and equipment. The liabilities reflect accounts payable, taxes, rent, utilities, and loan or credit card balances.
Equity may include investors’ shares, retained earnings and the owner’s equity. Since the balance sheet essentially depicts what you own versus what you owe when created, it is a snapshot in time. That’s why it is important to reflect at least three years in balance sheets, along with a projection for the end of the fiscal year in the financial plan.
For a new business, project balances on a monthly basis for at least one year.
Figure Your Profit And Loss (P&L), AKA Income Statements, For At Least The Past Three Years
A P&L or income statement summarizes a firm’s revenue and expenses. Think of it as an explanation of how your business made a profit (or a loss) over the time period depicted. The statement lists all your revenue streams and sources of income.
It also lists all expenses over the period, including the cost of any inventory or goods used to make products, operating expenses, payroll, income and payroll taxes, insurance, and interest on loans. New businesses should project their income statement for one year.
Include A Cash Flow Statement
A cash flow statement shows how much money your business brought in, how much money it paid out, and what its ending balance was, typically per-month. Cash flow reflects how your company is operating day in and day out.
This shows whether you run the business smoothly and can pay your bills in spite of any late-paying clients, seasonal income spikes, and other things impacting inflow. The P&L just shows how it came out at the end of the year, not how the money flowed throughout, which is what the cash flow statement presents.
Include Your Current Personal Financial Statement
If you are an entrepreneur or a small business owner compiling the financial plan to apply for a loan or attract capital, you need to include a current personal financial statement. A lender will want to know your personal net worth and debts besides looking at the business’s financial situation.
The personal financial statement should show your assets minus liabilities, or your net worth. On a personal financial statement, assets include homes, cars, investments, and other items you own of value.
Liabilities should reflect any mortgages, car loans, and money owed on credit cards. It should not reflect a place you rent or vehicle you lease.
Include Your Last Federal Tax Return
Another personal financial item to include in the financial plan, if seeking financing, is your tax return for the prior year.
Develop New Projections
For an existing business, the financial plan should also set forth new projections based on the information projected in the three years of balance sheets, cash flow and P&L statements. Be sure to use the previous year’s expenses more than the others if it reflects new expenses based on business growth.
If the purpose of the financing is to purchase new equipment or assets, those expenses should be factored in. Additionally, you should include a sales forecast and, if the business sells products, the cost of goods sold.
A financial plan, like other aspects of a business plan, can quickly become outdated. Periodic reviews will help assure you that your cash flow, P&L and other details are where you want them to be, and identify course corrections that you may need.
If the idea of developing a financial plan, or other parts of a business plan, is daunting, you might want to work with a consultant such as HJR Global, which specializes in helping companies with financing and turning things around. HJR Global is committed to helping businesses grow by providing the knowledge and resources that they need to succeed.
For more information, contact HJR Global.