Writing a Business Financial Plan: A Guide for Small Businesses and Start Ups
One of the most essential elements of a business plan for start-ups that want to move from budding ideas to thriving reality or for small businesses that want to scale and grow is an efficient business financial plan. Let’s look at the most important elements of a financial plan.
Your Initial Investment
Starting your small business does not have to require a lot of money, but it will involve some initial investments as well as the ability to cover ongoing expenses before you can turn a profit. Calculating your initial investment requires looking at two key elements: start-up costs and operating costs for the next 12 months.
Your one-time startup costs for your business include licenses and permits, equipment, legal fees, insurance, branding, market research, inventory, trademarking, grand opening events, property leases, etc.). Combine this with your operating costs to keep your business running for at least 12 months, including rent, utilities, marketing and advertising, production, supplies, travel expenses, employee salaries, and your own salary. The total will roughly equal what your initial investment should be.
Your Cash Flow
For those businesses looking to grow, a key indicator of business’s health is the cash flow. Unlike the profit and loss statement, which indicates how much your business has made after subtracting direct costs, operating costs and carrying costs from the sales, the cash flow indicates how much cash you have on hand to pay your ongoing expense to stay in business.
Because customers of small businesses usually take a couple of months to pay (such amounts are calculated as accounts receivables), even when you are theoretically earning a profit, some of those monies are still in accounts receivables, and therefore you may not have enough money to spend on keeping your business operating.
Profit and Loss or Income Statement
The profit and loss statement indicates your profits, which incorporates your sales, minus the costs to make that sale (direct costs or unit costs) to arrive at gross margin. When you subtract your operating expenses (rent, payroll, marketing), etc.) from gross margin, you will arrive at your gross profit. Once you have subtracted your interest and taxes (operating income) from gross profit, you will reach your net profit.
Pro-forma Balance sheet
Your balance sheet should include your profit and loss statement, your cash flow, and also your assets, liabilities, and capital.
A Sales forecast simply involves making a forecast of what you believe your sales will be over the next 12 months. Your guesses are just estimates based on your experience of past business or anticipations due to future marketing campaigns. Nobody expects you to be a prophet; just make a rough estimate and then adjust as you see how reality squares with your projections.
The main elements of making a sales forecast is projecting how many units you will be selling (these can be goods or billable hours) and price per unit. Simply, multiply the units by what you are selling it for to arrive at your projected sales.
A Market forecast is closely linked to your sales forecast, in that it will require you to forecast how many potential customers are in the marketplace by looking at numbers, characteristics, and trends in your target marketing.
Given your unique value proposition, your competitors, and industry forecasts, having a market forecast will help you with estimating what your projected sales might be.
Personnel costs are related to your fixed costs and as such are an important part of your financial planning. If you expect these to change over the next 12 months, include your projections. This figure can be just a line or two in the income statement.
Once you have the raw numbers, you can calculate ratios, which are some quick key indicators to investors and bankers regarding the health of your business. Some common ratios are profitability ratios like gross margin, return on sales, return on assets, and return on investment; plus some plus some liquidity ratios such as debt to equity, current ratio, and working capital.
Break Even Analysis
A Break even analysis lets you know how many units you have to sell to break even with your costs. When you have broken even, your total costs equal your revenue. That lets you know how many more units you have to sell above the break-even point to earn a profit.
Your business financial plan is the backbone of your business plan. Do your homework, know your numbers and the marketplace, and you can be confident that you are building a business upon a solid foundation rather than on guesses, optimism, and assumptions.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2021