Setting up a business plan can be one of the most daunting tasks that a business owner or an entrepreneur may come across in the process of setting up their business on the back of a new business idea. As daunting as it may seem it is not very difficult. It only seems difficult because it requires the owner of the business plan to list a lot of elements related to the business and it is the gathering of all this information that puts off many business managers from making their business plan.

A business plan is a comprehensive document that lists everything there is to list with regards to setting up a new business. Starting with the mission statement and objectives, down to minute details about the competitors, pricing strategies, and projected cash flows.

In this article, we shall focus on the financial elements of the business plan. We will unpack the other non-financial elements in articles to follow. 

What is the financial plan?

 

The financial plan section of the business plan is perhaps the most important section of the whole plan. Your mission statement, goals, product range, pricing strategy, market analysis and competitor analysis does not mean anything if they cannot be backed by a sound financial plan.

When you present your business plan to a bank or an investor, the one element that they will be most interested in is your financial plan. How you actually plan to generate the cash flow, liquidity and profits for your enterprise. If the financial plan is not strong enough, then the business plan will not be convincing enough for the investors.

 

Elements of a financial plan

 

If you are making a financial plan for an existing business then you will use already existing data for budgets, income statement and balance sheet. However, most financial plans are made for new businesses that do not have and trading activity or historical data and therefore, in this case, the basis for projections are forecasted ratios and estimates.

It is therefore important that the estimates and ratios should be realistic and as close to real expected estimates. It is better to have a methodology for coming up with estimates and ratios to ensure uniformity however at times, there will be no other option but to make an educated guess.

 

The following elements are an important part of any financial plan

• Cost budget
• Sales forecast
• Expenditure budget
• Projected income statement
• Projected balance sheet
• Cash flow statements
• Break-even projections and analysis

Cost budget

 

The cost budget or forecast is going to be the bedrock of your financial plan. The data will be based on the cost information that you have gathered. If you are manufacturing product then the cost of production that you have estimated will be the cost of your product and if you are providing services then the cost of service will be the basis for the cost budget. You will get the sales price by applying your margin to the cost.

Sales Forecast

 

The sales forecast is going to become the foundation of your financial plan therefore it must be backed with relevant and appropriate data. The data for your sales forecast will come from your preliminary research about the demand for your product. Since this is a forecast it doesn`t have to be accurate but the estimates used should at least be realistic.

You can also base the forecasted figures on a competitor that is closest to the fundamentals of your business, through the projections will have to be downgraded since your business will need to break into the market and capture the market share from the competitors and this cannot be expected to happen overnight. If the product is completely new and doesn`t have any competitor then your data should be based on surveys conducted in the preliminary research phase and this will to a great extent require an educated guess.

Your sales forecast is going to have the figures for unit sales, the price charged and revenue generated in the following format

Units	Price	Revenue
X	Xx	Xxx

 

If you are going to sell multiple products then it is better to have different spreadsheets for each product. The annual sales forecast should be broke down into monthly forecasts and it will be better to add a graphical representation of sales throughout the year to identify seasonal fluctuations in sales. Very few products have uniform demand all year round, therefore it is better to add a graph to explain to the investors how the sales are expected to vary throughout the year. 

 

Expenditure Budget

 

Another very important element of a financial plan is the expenditure budget. This will include all the expenditures that you expect to incur in the year. Once again the expenditure budget should be broken down on a monthly basis. It should include all expenditure items such as

• Utility charges,
• Salaries and wages,
• Loan payments,
• Projected interest charges
• Projected tax charges,
• Administrative and selling costs etc.

Projected Income Statement and Balance Sheet

 

The projected income statement and balance sheet will show the projected financial position of your business at the year-end. Investors will be interested in the profitability and liquidity position of your business to see if it will be worth investing in. The data for income statement will come from purchase, cost and expenditure budgets whereas the data for the balance sheet will come from the schedule of assets and liabilities.

The following simple format can be used for the income statement and the balance sheet.

Income statement

Sales	XXX
Less cost of goods sold	(XXX)
Gross Profit	XXX
Less expenses	(XXX)
Net Profit	XXX
Interest	(XXX)
Tax	(XXX)
Profit after tax and interest	XXX

Balance Sheet

Non Current Assets	XXX
Current Assets	XXX
Total Assets	XXX
Equity and Liabilities
Share Capital	XXX
Reserves	XXX
Non-Current Liability	XXX
Current Liability	XXX
	XXX

 

 

Cashflow Statement

 

For a new budget, the cash flow statement will be made entirely upon your cash flow projections and forecasts. Although you may feel that making a cash flow based on projections doesn`t make much sense but investors will be interested in your cash flow more than any other thing because the cash flow statement will give them an idea about the money-generating power of your business.

Make sure to base the projections and forecasts on realistic ratios. Cash flow is divided into three sections namely

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities

Operating activities will have figures coming in from income statement. Investing activities will signify the future cash flow generation ability of your business and the financing activity will show investors how much cash flow is related to those who have financed the business.

Breakeven Analysis

 

The break-even analysis will show the number of sales that you will need to make in order to make zero loss and zero profit. Breakeven point refers to the point beyond which you start making a profit and below which you make a loss. In order to cover the costs of your business, you`ll need to break even. Investors will be interested in the breakeven point to see how much you will need to sell at the minimum to stay afloat.

Final Word

 

It may appear like a daunting task but making a good financial plan can help you get some much-needed funding from investors. You will need to work carefully on the projections and estimates, this point cannot be stressed enough. Only use realistic estimates, it is better to be prudent then to be optimistic and wrong in this case.

In addition to this, try to make the financial plan more engaging. Since it will have a lot of numbers it may become boring so make sure you add graphs and visual representations of the data to convey the information in a more engaging manner to the investors.