While not all new businesses begin by writing a business plan, it is still considered vital to increase your chance of achieving business success at the early stages. It serves as your guiding document, which assists you in establishing and growing your business, and it has a life that extends far beyond just starting up or applying for financing.
Financial planning is one of the most important aspects to focus on or must be added to your business plan before initiating a new business. Financial business plan should be given more weight age than the non-financial items in a business plan as ultimately, you are working to earn income and profits. This blog will give you advice about the financial information you need to include in your business plan to translate your business into numbers.
- Sales forecasting and the cost of goods sold
- Forecasting for profit and loss/Income statement
- Cash flow statement
- Balance sheet
What financial information to include?
Financial projections are always a double-edged sword for a young business. On the one hand, you must do so in order to secure any serious investors. On the other hand, such forecasts are both an art and a science. If you are still raising seed capital, forecasting your performance two years, three years from now is difficult. Investors, on the other hand, demand hard data and facts, so it is advisable that you don’t make any mistakes about the amount of money required.
If you’re looking for an investment, provide the financial projections accurately, realistic and complete. Whatever is your financial plan, it must be presented in raw figures and charts. Your financial business plan should include the following information –
Sales forecasting and the cost of goods sold– Estimate how much money you will make from the future sales by listing the goods or services you're offering as well as the cost of each unit. You can easily make the profit estimations based on this data.
Forecasting for profit and loss/Income statement– An overview of sales, cost of sales, overheads and income statement (Profit and loss). Profit and loss (P&L) is your annual revenue minus your annual expenses. This relates to your trading product or service: revenue is the amount you earn from selling your goods, while expenses are the cost of your raw materials and the costs associated with converting those raw materials into finished goods, such as labour costs. Additionally, they can include any overhead costs associated with the trade, such as administration or general expenses. Your net profit or loss is calculated by subtracting your income from your expenses.
A forecast profit and loss statement informs the reader about your business model’s profitability and the amount of revenue you can anticipate in the future. This statement will require a detailed breakdown of your anticipated sales, a sales forecast, as well as a detailed breakdown of the anticipated expenses. These documents should be incorporated into the plans appendix.
Cash flow statement– You can't run your business without a cash flow statement – cash flow keeps you floating without money coming in. The cash flow statement shows you how much money you received and what you pay-out for a certain period. For instance, if you invested in capital items such as a new factory or machinery, the entire amount would appear on your cash flow statement, whereas it would appear incrementally over the expected life of the asset on your profit and loss statement. As such, you may appear profitable on your profit and loss statement, but you may actually be cash-short if your customers do not pay within their credit period.
The most critical factor in your business continuing to operate is a healthy cash flow. Without sufficient cash, you will be unable to pay your suppliers or employees, and business will come to a grinding halt. In essence, your cash flow statement must demonstrate that your cash inflows equal your cash outflows in order to ensure that you always have sufficient funds to operate. Ineffective cash flow management results in improper cash in and cash out timings, which is why profitable businesses can still fail. You must create a cash flow projection on a monthly basis to understand the actual movement of cash in your business.
Balance sheet– It provides an overall picture of your finances at a certain point in time. It sums up your assets, liabilities (what you owe) and equities (the net difference when you subtract liabilities from assets). The balance sheet summarises the businesss assets, liabilities, and equity in order to determine the businesss net worth at a given date. Assets are anything of financial value that a business owns. These can be tangible assets such as property or stock or intangible assets such as unpaid invoices owed to your business.
Liabilities, on the other hand, refer to anything of financial value that your business owes to others. These may be short-term obligations, such as unpaid suppliers or a bank overdraft. They can also be longer-term borrowings, such as a bank loan or another type of financial institution loan. Equity includes any capital contributions made by shareholders and reflects the companys year-over-year growth. The difference between total assets and total liabilities is called equity.
Profitable businesses should see their equity increase in lockstep with their earnings. Typically, businesses produce a balance sheet once a year.
The information you require here is dependent on the stage of business you are currently in and the size of your business. When crunching the forecasts, you may wish to seek expert assistance and advice. Contact DNS accountants today to take the help of a professional expert in developing the most accurate and realistic financial projections possible.
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