Every business plan, among its list of contents ranging from company description, product details and marketing plan to management information, remains descriptive content in the absence of a financial business plan.
The financial projection in the business plan is often called the most important element of the document, because it is what you need if you want to get financing or seek a bank loan. Even if you’re not looking for financing, the financial section gives you a clear idea of the direction your business is headed.
Creating a financial plan for a company is a critical element in any a guide to starting a business. Therefore, every entrepreneur, regardless of whether he is starting a business, closing his hundredth deal or looking for financing, is required to prepare the financial section of the business plan.
In the next article, we are going to delve into the answer to the question “how to write the financial section of a business plan”, as well as its many facets. We’ll dive into what a financial section in a business plan is, why it’s important, and what to include.
What is a financial analysis in a business plan?
Generally, a company’s financial plan is a set of documents or statistics that cover the company’s historical financial condition and future projections.
It usually contains information about budgets, financial statements, financing details, etc. Information that helps in obtaining financing from investors, loans from banks, and helps in budgeting the current and future income and expenses of the company.
Why is a financial plan important to a business?
If there is such a thing The financial crisis of 2020 taught us that no financial manager knew how the crisis would end or affect their business. To better manage business continuity, companies have started creating and tracking financial plans on a monthly and quarterly basis. The financial column of a business plan is necessary not only for financing, but also for tracking business performance, income and expenses. A financial plan for a business helps:
- Estimate the future income and expenses, profit and loss of your business
- Proper cost planning
- Obtaining funds from investors and creditors
- Strategically planned business growth
While the benefits of having financial projections in a business plan are well known, companies can only get results if they properly prepare the financial section of the business plan. A key step to achieving this is understanding its various elements.
Basic elements of a financial business plan
A detailed description of the financial plan in a business plan is necessary for your business to be able to pay its bills, make a profit, get financial support and reach its financial goals. Here are the different types of content that help achieve these results.
1. Commercial expenses
Whether your business has been in existence for 10 days or 5 years, you will have business expenses. While for startups these may be operating costs, for established businesses they may be fixed or variable. No matter what stage your business is at or what your expenses are, it’s important to mention them in the financial section of your business plan. Here is a list of some business expenses –
- Permits and licenses
- Rent payments
- Employee expenses
- Communal services
- Insurance
- Equipment and consumables
- Advertising
2. Financial forecast in the business plan
These numbers refer to the future. In a typical financial forecast template, you will find detailed information about the income you expect to receive in the next month or financial year.
If you own a business, all you need to do is look at the past six months or year of revenue to make an educated guess. But when you are a startup, the same process becomes complicated. Financial projections for startups are difficult because they don’t have an established user base and enough past data to make an estimate. The solution to this is to create a reasonable financial target at the competitor, market and industry level.
3. Profit and loss statement
The document, also known as a profit and loss statement, explains how your company has made a profit over time and the areas where it is making losses. Typically in a tabular format, the bottom of the report lists all revenue patterns and expenses for a specific time period along with the total amount of net profit or loss.
Things to add to the profit and loss sections of a business plan include:
- Profit from business
- Selling price (if you are a grocery company)
- Gross profit (revenue – cost of sales)
- Business expenses
4. Payment of cash
Every business runs on cash. Therefore, it is extremely important to keep track of where and how much cash has come in, as well as in which areas you have spent it. What remains is what you entered in the financial plan in the business plan as the cash flow payment number.
Without clarity about where your money is coming from, where it’s going, and how to save it, you won’t be able to run a healthy business. You may be very profitable but not have enough money to pay your expenses – that’s why preparing this financial statement is so important.
5. Accounting balance
A balance sheet is a summary of your company’s financial position. It answers questions like how your business is doing, how much cash you have in the bank, how much customer payments are pending, and how much you need to pay your suppliers.
Things to add to the balance sheet section of a financial business plan include:
- Assets – Money in a bank account, accounts receivable, inventory, etc.
- obligations – Accounts Payable, Loan Repayment, Credit Card Balances, etc.
- Shares – Ownership shares, investors’ capital, shares, etc.
6. Sales forecast
A sales forecast is a projection of what you think you will earn over a period of time. This is one of the most important financial sections of a business plan, especially when investors and lenders are involved in the process.
Typically, companies break down sales forecasts into different segments, which is useful for planning and marketing. For example, if you own a restaurant, you would want to differentiate the forecast based on lunch and dinner sales, however, a gym owner would differentiate based on different membership types.
7. Personnel planning
This factor finds itself either in the company overview or in the financial sections of the business plan. In this section, you should describe each member of the management team – who they are, the skills they possess, their knowledge of the market and how they impact the organization. After that, you provide details of the costs you incur for them to justify the staff costs.
8. Breakeven point
Investors almost always have a strong interest in finding the break-even point – when sales equal costs. To determine this, companies will need to find the contribution margin. Let’s tell you, as an example.
Imagine a customer paying $100 for a pair of shoes. The cost of sales is $70 and the store staff wages are $5. Therefore, the contribution margin will be – $100-$70-$5 = $25. Using this formula, you will be able to calculate how high your sales revenue needs to be in order for you to break even.
So here were the different aspects of creating a financial plan for a business. While they answer how to write the financial section of a business plan, it must be noted that this process is extremely complex. The reason why companies turn to best financial software. These apps are designed to assist with financial business plans by helping entrepreneurs track their income and expenses.
Goodbye
There are a number of reasons why businesses should prepare and maintain a financial section of a business plan. The reasons range from strategic cash flow management, smarter budget allocation, risk mitigation and crisis management, among others.
However, in order for a company to achieve these results, it needs to either hire qualified financial experts or take a do-it-yourself approach. While it makes sense for established companies to invest in qualified business finance experts, startups with their limited budgets often rely on smart financial software to create a business financial plan. We hope that the information we discussed in the article will help you add a financial forecast to your business plan in a way that will be preferred by both stakeholders and potential investors.
The author
She is a content marketer with over five years of experience in IoT, blockchain, web and mobile development. All these years she has followed the development of apps closely and now she writes about existing and upcoming mobile app technologies. Her essence is more like a ballet dancer.
