Opening with a strong hook, proving your idea can be a viable business through hours of research, and telling a possible backer that you feel like your dreams can become reality are important parts of your business planning. However, the very last part of your business plan can be where everything, all your hard work, falls completely apart. The financial plan is the part where you have to close your deal. If you can’t justify your business plan with a solid bottom line, then your entire pitch is going to be dead in the water.
The Point of the Financial Plan
When you’re writing a financial plan, you’re actually proving that your business can work. You can do all the market research that you wish and have a fully workable inventory management system, but if you can’t afford it, you simply can’t have it. In the long run, your prospective partners or backers aren’t going to care about anything more than they care about their bottom line.
It’s important to remember that the financial plan is not to be confused with accounting. Accounting is an analysis of things that have happened. It’s a way to do damage control, assess current assets, and give you an idea of where your business sits in the current time. The financial plan, while it uses the same principles, is a forecast of your fiscal future.
You’ve analyzed the market so you are able to know how to meet your objectives. You should know exactly how much start-up capital you need and what sort of income you can expect within your first quarter. While your numbers won’t be exact, they should be well within the ballpark. Your backers, the bank, and anyone else who you want to go into business with you is going to take these figures into close consideration when they choose whether or not to get involved with your business.
Score.org suggests that you get a good template in place before you even begin your prospective income statement. A proper income statement template is going to be customizable after you refer to one that can be easily found on Shopify and able to carry you well into the future of your business. Try to stay away from anything that is overly complex, especially in this pre-stage of your business. Remember to stick to the three major topics when you craft your income statement.
Sales are going to be something that your potential backers focus quite a bit on. They give an idea of how your net success is going to go. The direct cost of sales, including all of your expenses, is the first part of the equation. This isn’t counter-intuitive, it’s getting the negatives out of the way in the same way that you want to follow up bad news with good. You want to follow all of this up with your income or gross profit margin.
- The gross profit margin, according to Investopedia.com, is summed up by a simple mathematical equation. You want to take your projected revenue and then subtract it by your projected cost of goods sold (COGS). Then divide that number by your projected revenue. It should look like this on paper:
(Projected Revenue – Projected COGS) / Projected Revenue = Projected Gross Profit Margin
- Next you are going to want to present your estimated expenses. The key here is to always estimate high and round up. For example, if your domain is going to cost you $67 a month and you’re also going to have to pay a designer between $30 and $70 a month, you want to estimate that web cost to be $140 per month. Rounding the 67 to the nearest ten and always estimating high is going to ensure that you’re never taken off-guard by sticker shock. This will also help you have a greater profit margin than expected. Everyone enjoys those surprises.
2. Balance Sheet
The second sheet that you will want to draft up is the balance sheet. This sheet is going to be a basic tally of your assets less your liabilities. According to Baker University, the balance sheet is a way to project your company’s net worth with an itemized list of assets against your expenses. It’s possibly the easiest of the sheets and one of the most telling. You can look line by line at what your business costs and figure out if you’re spending too much in one place or not spending enough. You can also look at places where your assets are lacking and develop a plan to fix it.
In practice, you should list all of your assets first. Assets include anything that you own outright and are not making payments on or have a lean against. These include, but are not limited to, cash on hand, property, investments, and vehicles. Once all of your assets are added up, you need to subtract all of your liabilities.
For the purpose of a balance sheet, a liability includes everything that you owe. This means pay for employees, the balance on loans (full balance, not monthly payments), and any other outstanding debts. This may mean that your net worth is going to end up in the red, but don’t fret too much as many businesses do not make any money in the first year of operation. However, your end goal should always be to get into the black and remain there.
3. Cash-Flow Statement
Cash-flow statements are, by their nature, live documents. It is going to be similar to the income statement, but instead of a snapshot at a point in time, cash-flow is supposed to be flowing. By itself, one cash-flow statement isn’t going to be very useful, though you will need to have the template drafted before you even start your business. All that it is, is cash in less cash out. You’re going to want to itemize as much as you can with the cash-flow statement because this will allow you to go back and do an autopsy of your financial well-being.
Once you’ve had your cash-flow statements itemized out, you will be able to see where you are losing money and when times are lean. You can then plan ahead to balance these deficits out by making the most out of the times when your business is booming. Prepare in advance for a natural ebb and flow. Every business will have periods of time where things are slow. Use these times to gear up for the more lucrative months.
Numbers can send even the most hardened business person running for the hills. Don’t allow the anxiety of the situation to get the better of you. If you find yourself getting emotional, stop, reassess, and try again. If all else fails, pass this off to a vetted professional who you can trust. As the final punch of your prospective business, you cannot afford to have a flat or lackluster financial plan.
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