When you’re looking for funding, having a great business idea is crucial — but more importantly, you need to show that your idea is going to make a profit. That’s where your financial plan comes in. This section demonstrates that your business plan is viable in the current market. before going further, let’s first understand the need of financial plan in business plan.
Why Do You Need a Financial Plan In Business Plan?
The main goal of a financial plan is to show investors and banks that your company is a worthwhile investment. If done correctly, this section can give potential funding sources confidence in your idea. It demonstrates that you’ve done your research, that you understand the market, and that your business is likely to succeed. If you’re applying for loans, banks look at this section to make sure that your profits will cover repayment. Investors look at the section to see how much money they could make if your company succeeds.
If you’re not seeking funding, a financial plan is still a good idea. It forces you to think realistically about how your company might perform, which helps you plan everything from expansion to cash flow.
What Comes Under Financial Plan?
The first thing your investors look at this section is the financial forecast — essentially, an educated guess about your company’s sales for the upcoming 2-4 years. When you’re figuring out this section, it’s helpful to consider factors like:
- A realistic price for your product or service
- How much you can sell per day, week, or month
- Expected growth based on your planned marketing efforts
Keep in mind that these factors will change over time. For example, if you plan to hire an employee after six months, your daily sales goal might double at that point. If you add a new marketing campaign after three months, it might bring in 10% more customers. Using these factors, plot a graph of your projected sales for each month in the first year and each quarter after that. You can also consider creating two forecasts — a conservative one that uses low prices and minimal sales, and an aggressive one that uses a slightly higher price and the maximum sales you can handle.
If you have data to support these projections, feel free to include it. Information about competitor’s price points, for example, can ground your pricing in reality. If you’re writing a business plan for an established company, use past financial records as a starting point.
When you’re just starting out, your expenses are high. You may need to buy equipment, source raw materials, or bring in extra help. Your financial plan should include a list of all of these costs. If your projections include factors like hiring staff or expanding, be sure to add in costs for salaries, insurance, and extra equipment. Other expenses include building rent, taxes, licensing, marketing, and administration.
Once you have an idea of your expenses, it can be useful to calculate your operating profit margin — the ratio of your operating profit (earnings before interest and taxes) to your net sales. In general, this ratio should improve over time as your revenue grows faster than your costs. If possible, work with an accountant to make income projections and a break even analysis that shows when your revenue is expected to match your costs.
Cash Flow Projection
The final part of your financial plan is a cash flow statement. This is simply a projection at how many actual dollars are entering and leaving your business each month. To figure this out, you need to estimate how many invoices will be paid in cash each month, measure other items that impact your cash balance and measure that amount against expenses. This helps you plan ahead so you can cover costs.
If you’re new to business finances, it can be worthwhile to hire an accountant to create more accurate projections. With a great financial plan, you’re more likely to attract valuable investors or bank loans.