What To Include In The Financial Section Of A Successful Business Plan
By Terry Cartwright
DIY
Accounting
Advertisements:
 Having
extraordinary skills and talent in a business area, being hardworking and
determined, persistent, having great ideas and full of energy is a fantastic
mix for a successful business career. But all those exquisite qualities
mean nothing if the end result is not represented in the bottom line.
The financial section of the business plan is where all the operational
items included in the rest of the business plan come together. There are
three essential elements to a properly thought through and well constructed
business plan. Those elements are a forecast profit and loss account stating
the income and expenditure, a cash flow statement that determines the liquidity
and a sensitivity analysis that indicates the risks and opportunities within
the business plan.
The forecast profit and loss account should be prepared on a monthly basis
for the first year with an annual projection for the second year. The first
year of every new start up business can be difficult due to financing and
funding growth from a standing start which is why the first financial year
should be detailed.
The forecast profit and loss account is the financial calculation of all
the sales, purchases, expenditure and prices contained within the other
areas of the business plan. In addition full account should also be taken
of the business administration costs. All the figures in the business plan
income and expenditure account should be fully supported from the physical
projections contained in the other sections and derived from those sections.
From the sales section multiply the sales volume of each product by the
considered selling prices. Keep to a minimum sundry additional income that
might be expected. The resultant financial calculation produces the expected
monthly sales turnover.
Using the information in the production or operations section of the business
plan and if included the purchasing section the sales volume should be evaluated
at the expected purchase cost of the products and services. This produces
a cost of sales figure which when deducted from the sales turnover provides
a forecast gross profit figure each month.
The business plan should include notes and comments of all other main cost
items including projections of staff requirements. Together with administration
and overhead costs a monthly projection of the expected running costs of
the business start up can be produced. The business running costs are an
important area to forecast in detail as while sales prices and costs may
be determined with some accuracy errors in the business running costs could
cause a good business to fail.
The monthly forecast profit and loss account is complete by entering the
sales turnover, deducting the cost of sales and the business running costs,
overheads, to produce a net monthly profit. The bottom line may start in
a monthly loss until volumes grow but should indicate a satisfactory profit.
If a loss is indicated do not manipulate the numbers to show a profit which
would be hiding the truth, instead go back to the sales and costs sections
and consider what action is required to justifiably increase gross profit
margins or reduce overhead costs.
Cash flow is often critical to a small business plan and a lack of capital
or liquidity to carry out the ambitions and projections of the small business
owner is a principal cause of small businesses going into liquidation before
those business aspirations are achieved. The cash flow statement is based
upon the volumes and prices included in the business plan and stated in
such a way as to indicate the financial resources required.
Cash flow is different to the profit and loss account as the profit and
loss account only states the different between sales sold and costs incurred.
The cash flow statement takes account of both the profits made plus volume
changes of purchases and stock, one off payments, financing debtor balances
offset by creditor balances and shows how liquid and solvent a business
is.
Producing cash flow statement tends to come within the province of accountants.
A simple cash flow statement can be produced by starting with the net profit
or loss each month, deducting the cost of stock which has not been sold
yet including both raw materials and finished goods stock and also deducting
any one off payments such as bills that have to be prepaid and the cost
of paying for fixed asset purchases.
In addition when a new business starts up the amount owed to suppliers,
creditors, is zero and the amount owed by customers, debtors, is zero. During
the year these balances will change each month in proportion to the financial
terms and conditions of the business and the movement of these balances
need to be entered on the cash flow statement. An increase in debtors reduces
the cash flow liquidity and an increase in creditors increases cash flow
liquidity.
The third element of the financial section is an analysis of the whole business
plan and the projections in what is called a sensitivity analysis. A technical
accounting area for the majority of non accountants but nevertheless an
important area as it is the financial sensitivity analysis that should indicate
both the increased financial opportunities and the financial risks carried
within the business plan.
All major areas within the business start up plan such as sales volume,
sales prices, important cost elements and other factors that may have an
impact on the business should be evaluated. For each item set an upper limit
and lower limit based upon potential market conditions and risks.
Make a financial evaluate of each upper and lower limit for every item and
determine the impact each would have on the profit and loss account and
the cash flow statement. Also combine the financial effect of several factors
to assess the impact of a combination of events on the small business. A
lower sales volume may be uncomfortable for a small business but combined
with lower sales prices and higher costs the risk could be severe.
The financial section of a business plan should be accurate and reflect
the projected financial performance of the start up business. It is also
important it is honest and evaluates the risks involved so that should any
of those risks become reality urgent management action can be taken to limit
the financial effect. In practice some of those risks will happen and being
forewarned can be the difference between survival and failure with liquidity
being the most dangerous risk of all.
Terry Cartwright, DIY Accounting qualified accountant designs
Small Business Accounting Software
on excel spreadsheets and Payroll
Software for small to medium sized business providing a complete accounting
and bookkeeping solution and also supplies Company Formation packages for
new limited liability companies
Published - July 2008
|
