23rd Sep, 2020
The financial plan for a business can be considered as the financial feasibility report. Financial plans are used by banks and investors to determine the viability of investment in a business. Financial plans are also used by business owners, as an aid in attaining the financial targets of a business.
For small businesses, the financial plan may be simple, but its elements remain the same as they are for any large-scale business. A financial plan should primarily include historical information if present and projected figures pertaining to
- Income statement
- Balance sheet
- Cash flow statement
- Key projected figures
- Important ratios and break-even analysis
The income statement should contain as much information pertaining to the revenue and expenditures as possible. If the business is already carrying out business activity, then the data for the past periods should be included with trend analysis to highlight key trends in revenue growth and costs. All of the revenue expenditures relevant to the business should be recorded in the income statement.
The balance sheet should in a similar manner show past data if possible, with trends highlighting the changes in assets and liabilities. For startups and small businesses alike, capital expenditure will form a major part of the balance sheet. All liabilities should be disclosed, this is very important because investors will be interested to know how much indebted the business is.
The cash flow statement, in a similar manner should tell the readers of the financial plan, how much cash the business has or will have if the projections hold true. Startups may not have historical data and small businesses thus may not have enough information to come up with detailed records for the above-mentioned elements, it is nevertheless advisable to present as much detail as possible.
At this stage it is important to understand that financial plans focus on the future of any business and for this reason most of the information in the financial plan of a business will comprise projections and forecasts.
Projections and forecasts are based on past patterns, market trends and assumptions of the management and business owners. It is very important to follow standard accounting practices while forming assumptions about the projections and forecasts. Investors will not be interested if the assumptions vary too much from the set norms and standards. For instance, if the industry projections for revenue growth is 10% then a small business projecting 15% increase in revenue, will appear unrealistic whereas 7%-10% growth in revenue would be a more realistic assumption.
It would be better to assume the mindset of a potential investor at the time of preparing the financial plan. Do not think like a business owner, instead think like an investor who is interested in your business.
It is important to remember that investors look at the complete picture. They analyse the profitability, liquidity, and leverage of a business. In addition to this they also determine whether the business model of a business is good enough to compete in the market and generate a good enough rate of return. Therefore, financial plans should be as detailed as possible so that the investors can be aided in making their decision. A detailed financial plan also projects a good image on the investors as they realise that the business owner has accounted for all or most of the variables that an investor is interested in.