The most important section in your small business plan is your business financial plan, particularly during the startup phase - but then as an Accountant you would have to expect me to say that right?
But seriously, before anyone will be prepared to invest in your business or take the risk of lending you money, they are going to want to know whether or not you are going to be able to generate a return on their investment.
Your family and friends might take your word for it, but your local bank manager will not.
And besides don't you need to know if, how and when you will make enough to draw a wage or salary for yourself?
In the early days it can seem like you are only paying money out with very little coming back in and unless you have a plan in place that is aligned with your goals and objectives, your pricing model(s) and the purchasing behaviours of your target market, it is very likely to stay that way!
The numbers you produce in your plan are going to have a basis in reality because believe me if they don't, you will not end up making any money, and no serious investor or financier is going lend you money as they will be able to recognise your financial fantasies for exactly what they are!
What Should You Include in Your Business Financial Plan?
At the very least you are going to need to develop a forecast of the likely profit or loss and a cash-flow forecast.
And just in case you were wondering, yes you do need both!
Profit is important, without it the business will chew through any equity to keep the doors open until you get to the point where it there is nothing left. But every year thousands of very profitable small businesses are forced to close their doors simply because they are unable to generate enough cash to pay the bills!
Positive cash flows are critical to any small business and particularly so in the first couple of years of operation.
Other than Profit and Loss or Income Statements and Cash Flow Statements, the most commonly used business plan financial forecasts include:
- Sources and Applications of Funds
- Capital Equipment Register
- A Proforma Balance Sheet
- Breakeven Analysis
- Historical Records (for an existing business)
Another important task while you are planning the financial aspects of your business is the development of an operational budget.
Links to Other Business Planning Activities...
Before you start to prepare your Income Statement and Cash Flow Statement for your business financial plan, it is important to review your market research, your operational or production planning and your analysis of the profit potential of your new (or existing) business.
The market research will tell you who your customers are likely to be, how much they will pay for what you are offering and how often they will buy from you. It will also give you a good idea of the market strength and the relative positions of your major competitors in the market.
Analysing the behaviour of your competitors will give you an insight into the cost of competing in the market, and allow you to determine how you can deliver your product or service to the market and what the delivery mechanism you put in place will cost.
Most of the decisions you make while you are developing your business model and analysing the market are going to have an impact on the potential income and the cost structure of your business and should be acknowledged or recognised in your business financial plan.
So don't be tempted to open your spreadsheet program and start plugging in numbers until you have a thorough understanding of what your business will look like and how you intend to operate on a day to day basis.
You will also need to work out what your pricing strategy will be, calculate your potential sales, and work out what your product and administration costs are likely to be.
But before you can put any of these statements together you need to have at least a basic understanding of bookkeeping and accounting principles or hire someone who does!
Related articles you may be interested in reading: