Your financial plan will help you project how much income you
hope to make, how much income you need to make, and
how much will you need for your start up costs.
The Financial Plan
This plan is the forth component of your complete Business Plan.
Financial planning is the key to assuming financial responsibility for your business and a tool to help you design a strategy to accomplish your goals—helping you get where you want to go by giving you a clear picture of where you are.
Many business operators start with out planning on where they are going to go and how they are going to get there, then fail in their business endeavours because they do not have adequate financial resources to keep going. You simply must know, in advance, how much everything is going to cost, and where you are going to get the money.
Like most people, you probably cringe at the idea of having to prepare a written financial plan, but it is critical to the success of your business for this data is important for more than just obtaining a loan.
After you have completed your analysis. the results will determine how much business you must conduct in order to make an acceptable profit. It will give you a detailed breakdown of how all your money—whether borrowed or from your own savings— will be used.
It may identify expenses that might have been overlooked, or make it clear that expenditures you had planned for may have to be postponed. An important function of your financial plan is that it will give you a standard by which to measure your success. Comparing expenses, income, and profits to the plan will quickly allow you to identify success, or the need to overhaul the plan.
Essential Parts of the Financial Plan
Some of the information you will need to pull your financial projections together will, for the most part, already have been created when you have completed your sales forecast, your marketing strategy and your production plan in earlier sections of the business plan. This section tells you how to assemble your projections into projected financial statements.
Some essential parts of the financial plan are:
- Financial Sources
- Start-up Costs
- Projected Income Statement
- Projected Balance Sheet
- Cash Flow Analysis
- Projected Personal Budget
Almost any business will require initial funding, even if it is just for paper to write a letter. Financial sources refer not only to banks and investors, but also to your personal bank account. What is the amount of cash you are investing into the business and what is the source of contribution? How much do you plan to borrow and from whom?
Itemize major expenditures to show total start-up costs including funds required for day-to-day operation (working capital).
Projected Balance Sheet
Unlike an income statement, which summarizes the income and expense activity over a given period, the balance sheet reports the financial condition of a business at a given point, usually on the last day of the year.
The balance sheet reports the assets (everything you own) and the liabilities (everything you owe) on the particular date. Subtracting the liabilities from the assets produces a figure that is the owner's equity, or the net worth of the business.
Properly completed, the balance sheet will prevent early financial disasters, and if it is maintained on a regular basis, will identify financial success or potential trouble areas.
Projected Income Statement
An income statement is a summary of your income and expenses during a given period. In your projected income statement list the income from your estimated sales forecast and the estimated cost of expenses for the first year.
Define your expenses by listing your costs of goods sold which are direct expenses in producing your products such as labour, raw materials and overhead (rent, insurance, utilities, depreciation); and your selling and administrative expenses which would be all the expenses incurred in marketing your products. Your net income for the period is determined by deducting the expense total from the income total. If expenses were larger than income, the statement will show a net loss.
Cash Flow Forecast - For First 12 Months Of Operation
The cash flow forecast is a planning tool which enables you to have sufficient cash on hand to operate your business. This cash is not the original investment that got you started but the cash that's needed every day to keep you going to pay for materials, rent, utilities, telephone bills, automobile, etc.
It helps you to make sure you have cash on hand to pay your bills when they are due, and to plan ahead for expansions, promotions, craft shows, and similar expenses you may want or need to incur in the future.
Cash flow is the manner in which cash comes in and goes out of your business. By controlling how the money comes in and knowing what you need to spend and when you need to spend it will help to keep you out of financial trouble.
There will be certain times of the year when sales, thus, money will be slow coming in but regular expenses such as rent, utilities, loan payments, etc. must still be paid. Understanding and knowing your cash flow situation at all times will help you to know when to put money away to pay the bills during slow periods of sales.
On a month-by-month basis for the first year period, determine all expenses, both known and projected, as well as all income that is projected.
Personal Cost of Living Budget
In order to plan for your projected or desired income you need to know how much your minium personal cost of living will be. If you are not aware of what your personal cost of living is, you may forecast a salary that will not cover all your personal expenses and needs.
For more detailed information on developing a business plans see the this article: Your Business Plan means Planning for Success
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