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Financial Planning and Analysis for Your New Business...

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One of the important steps developing a business plan and starting a new business is the financial planning and analysis you do. 

objectives and goals

If you don't do the work necessary to complete this section of your plan correctly, it is likely that your business will be doomed from the start! 

To gather the information you will need to create your business financial plan, you need to identify and your operational costs, determine your break even point, decide what your pricing strategies will be and work out what levels of sales are likely to be achievable.

Sounds like a lot of work when you spit it all out in one sentence!

But if you have already gone through the steps to determine the profit potential for your business model, you will have already done much of the development (initial) work for this stage.  

You will have identified and classified your operating costs, set your prices based on your pricing strategy and calculated your break-even point.

Armed with the information about how much your products and service cost, and your proposed prices, you also know the minimum number of units you need to sell to break even and can work out how many you need to sell to make the level of profit you want to earn when you are fully operational.

But that is the thing...  

You are not going to reach all of your target market the day you open your doors, depending on your business model it may take quite a bit of time before your target market is even aware of your existence.  Initially, your promotion costs are going to be high and your sales will be relatively low.  The goal is for your sales increase steadily to the point where you can reliably generate the required level of sales, but it will not happen on day 1. 

Bearing that in mind it is now time to play with the numbers and, based on the research you have done and your knowledge about your products and services, you generate a few financial models to work out which level of sales are likely in the first twelve months or so.  I usually advise that you do at least two financial models (best case and worst case) so that you understand the upper and lower limits of your profit potential in the first year of operation.

This is particularly important if you are forgoing a steady income (i.e., quitting your job) to open and operate your business. 

Even if you are planning on starting a low cost part time online home business and keeping your day job, you are going to be adding a few extra expenses to that pile of bills (hosting, broadband, computer equipment, plugins, apps, insurance, shipping costs for hard goods etc.) so having an idea of when you are likely to start breaking even and then generating some profits is a good idea.

Your Financial Planning and Analysis Reasonable-Ness Check

The next step is a reasonableness check.  Is it reasonable to assume that the level of sales you are aiming for is achievable?  Given the strategies you are planning to use to initially attract and then capture your customers, are you likely to sell the volume of widgets that you are including in your financial analysis?  Will those customers become repeat customers or is your product offering a buy it once kind of product? 

Once you are satisfied with the numbers, you can begin to generate the financial plans for your business plan, including a cash-flow forecast and a profit and loss forecast.  These forecasts can be then used to demonstrate the profitability of your proposed business to others (potential investors) and as an operating budget for the first few years of operating the business.

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