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What To Include In The Financial Section Of A Successful Business Plan
Having exceptional skills and talents in the field of business, being hardworking and determined, being persistent, having great ideas and being full of energy is the best combination for a successful business career. But all those great qualities mean nothing if the end result isn’t represented on the bottom line.
The financial section of the business plan is where all the operational items included in the rest of the business plan come together. There are three essential elements to a well-thought-out and well-constructed business plan. Those elements include income and expenses, a cash flow statement that determines liquidity and a sensitivity analysis that indicates risks and opportunities within the business plan, a forecasted profit and loss account.
A forecast profit and loss account should be prepared for the first year on a monthly basis with an annual projection for the second year. The first year of every new start-up business can be difficult due to financing and raising funds from a permanent start-up so the first financial year should be comprehensive.
The forecast profit and loss account is a financial calculation of all sales, purchases, expenses and prices included within other areas of the business plan. In addition, business administration costs should also be fully accounted for. All figures in the income and expense accounts of the business plan should be derived from the material projections in other sections and from those sections.
Multiply the sales volume of each product from the sales segment by the sales prices considered. Keep to the minimum additional income that can be expected. The resulting financial calculations produce the expected monthly sales turnover.
Using the information in the production or operations section of the business plan and if a procurement section is included, the sales volume should be estimated at the expected purchase cost of the products and services. It produces a cost of sales figure which when deducted from the sales turnover provides an estimated gross profit figure each month.
The business plan should include notes and comments on all other key cost items, including estimates of staffing requirements. A monthly projection of the expected running costs of starting a business along with administration and overhead costs can be produced. Business running costs are an important area to forecast in detail because a good business may fail if sales prices and costs are determined with some accuracy errors in business running costs.
Monthly projections are completed by entering the profit and loss account sales transactions, cost of sales and business running costs, overheads, to produce a net monthly profit. The bottom line may start at a monthly loss until volume increases but should indicate a satisfactory profit. If a loss is indicated do not manipulate the numbers to show a profit which will hide the truth, but instead go back to the sales and cost segments and consider what is needed to reasonably increase the gross profit margin or reduce overhead costs.
Cash flow is often critical to small business planning and a lack of capital or liquidity to meet the small business owner’s ambitions and projections is a major reason small businesses go into liquidation before those business aspirations are achieved. The cash flow statement is based on the quantities and prices included in the business plan and is stated in a way that indicates the financial resources needed.
Cash flow differs from a profit and loss account because a profit and loss account only states the difference between sales and costs incurred. The cash flow statement takes into account both profits and changes in purchases and stock quantities, a closing payment, financing debtor balances offset by creditor balances and shows how liquid and solvent the business is.
The cash flow statement falls within the province of manufacturing accountants. A simple cash flow statement can be produced by starting with the net profit or loss for each month, deducting the cost of unsold stock, including raw materials and finished goods stock, and deducting any payments such as bills. The cost of being prepaid and paying for certain asset purchases.
Additionally, when starting a new business, suppliers, creditors, debtors, are zero and customers, debtors, are zero. During the year these balances will change every month in proportion to the financial terms and conditions of the business and the movement of these balances needs to be entered in the cash flow statement. An increase in debtors decreases cash flow liquidity and an increase in creditors increases cash flow liquidity.
The third element of the financial section is the analysis of the entire business plan and its assumptions called sensitivity analysis. Technical accounting is an area for most non-accountants but is nevertheless an important area as it is a financial sensitivity analysis that should indicate both increased financial opportunities and financial risks within the business plan.
All major areas within the business start-up plan such as sales volume, sales prices, important cost elements and other factors affecting the business should be evaluated. Set an upper limit and a lower limit for each item based on potential market conditions and risks.
Financially evaluate each upper and lower limit for each item and determine the effect each would have on the profit and loss account and cash flow statement. Also combine the financial impact of several factors to assess the impact of a combination of events on a small business. Low sales volume can be uncomfortable for a small business, but the risk combined with low sales prices and high costs can be serious.
The financial section of the business plan should be accurate and reflect the projected financial performance of the startup business. It is also important that it is honest and assesses the risks involved so that immediate management action can be taken to limit the financial impact if any of those risks materialise.
In practice there will be some of these risks and being aware of them in advance can be the difference between survival and failure Liquidity is the most dangerous risk of all.
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