How To Create An Effective Financial Business Plan

Remember the fact that creating an effective business plan is quite difficult. We will just talk about the financial part of the business plan. It is enough to highlight how difficult everything is. You want the business plan to be perfect and you want the financial business plan to properly highlight everything that you will do in the following months so that you can really be successful. There are various parts in the financial business plan that have to be considered. Make sure that you calculate everything properly since it will be a huge necessity.

Financial Components

The backbone of a good business plan is the financial data that is included. However, this does not make it less important than management and business concepts. The investors will analyze tables, spreadsheets, formulas and charts in order to make sure that the business has a good chance of succeeding.

There are basically three financial statements that you will have to add. Not all of them will include positives but when they are combined, they have to highlight the value of a company together with the ability to earn profits in the future. Those 3 statements that have to be included in a financial business plan are:

• cash flow statement
• balance sheet
• income statement

There are also other statements that can be included but these 3 are definitely the ones that you have to always include. Anything extra can help gain more investments but we are going to focus on these three since we see them as being 100% necessary. All are interlinked. Changes that would be made in one statement will cause changes in others. However, they will highlight different parts of the financial health of a company.

The Income Statement

This is a straightforward and simple report that highlights the company’s ability to generate cash. You use it to highlight financial performance and reflect the incurred expenses and when the sales are actually made. Various financial models are utilized to draw information like capital, expenses, goods costs and revenue. The income statement will illustrate the amounts that companies lose or make during one year by taking revenue and subtracting expenses and goods. This highlights net result, which can be a loss or a profit.

The financial business plan has to include an income statement that is generated every single month during the first year. The second year should show a quarterly report and after the third year, an annual report will be necessary. Financial projections are basically listed in the following way:

• Income – All the income that is generated from all sources.
• Goods Costs – All costs linked to inventory product sales.
• Operating expenses – All labor and overhead expenses connected with business operations.
• Gross profit margin – Difference between goods costs and revenue. You can express the margin in percentages, dollars or do both. If you choose percentage, it will be a percentage of revenue.
• Total expenses – Adds all labor expenses and overhead expenses that are necessary for the business to be operated.
• Depreciation – Reflecting capital asset value decrease that is used in order to generate income.
• Net profit – A difference between the profit margin and the total expenses. This highlights capital capability and debt capability.
• Net profits before interests – A difference between profits and depreciation.
• Net profits before taxes – A difference between profits and interest before the interest.
• Interest – All the interests that are derived from the debts.
• Taxes – Business taxes.

A note that would analyze the statement has to be included. It has to be short so that key points can be emphasized. After all, not all investors would look at everything included in a financial statement, especially at the first read.

Cash Flow Statement

This is a critical part of the financial business plan. It basically shows how much cash is to be needed in order to meet the obligations, together with where the cash actually comes from. This is a document that will highlight a money schedule, showing where cash comes into the company and all the expenses that are to be paid. You get to see profits and losses in a more effective way. Both the losses and the profits are carried over in order to highlight a cumulative amount. In the event that there is a loss that is highlighted in this cash flow statement, more cash is necessary in order to properly meet the expenses.

In a similar way as the income statement, this document will use the financial tables that you use during the creation of the business plan while organizing everything differently. The first part is highlighting cash on hand together with revenue sources. Then, expenses are listed. This does include what is accumulated during product manufacture. Capital requirements are highlighted as negatives after the expenses. Net cash flow is also included in the cash flow statement.

This is a statement that has to be done with the same frequency as the income statement. The cash flow statement will always include the following:

• Cash sales – the income that comes from cash paid sales.
• Total income – a total of cash sales, cash, receivables and other sources of income.
• Other income – the income that comes from loan interests, asset liquidation and investments.
• Merchandise – Material utilized in product manufacture, supplies used when a service is performed and/or merchandise inventory cash outlay.
• Marketing – Sales – the commissions, salaries and all costs linked with the sales and marketing departments.
• Production labor – how much labor is needed to perform services or manufacture products.
• Overhead – the variable and fixed expenses that are needed for business operations and product production.
• R&D – the labor expenses that are needed in order to research and develop business operations.
• Taxes – all the taxes that you pay, except the payroll
• G&A – the labor expenses that are necessary for administrative business functions.
• Capital – how much capital is needed in order to obtain equipment necessary to generate income.
• Cash flow – difference between the total income and the total expenses.
• Loan payment – total amounts of payments made in order to reduce the long-term debts.
• Total expenses – a sum of all the direct labor, marketing, sales, overhead, material, capital, loan payments and taxes payments.
• Cumulative cash flow – a difference between the current cash flow and the cash flow that was seen in the past period.

Just as with an income statement, the cash flow statement should be analyzed in a business plan short summary. Cover the key points that are seen as strengths.

Balance Sheet

The last main part of a financial business plan is this balance sheet. Just like the other 2 parts highlighted above, information you already have is used as the backbone of the presentation. The difference is that this balance sheet will be created only in order to highlight an annual range. It is basically a summary of the financial information that was highlighted above, all arranged in 3 areas:

1. Equity
2. Liabilities
3. Assets

If you want to obtain financing, it is important that you offer a balance sheet projection for the entire business plan period covered. The personal financial statement can be used instead of a balance sheet to highlight proper management in the event you want to get financing for a new combat. There are no differences between balance sheets and personal balance sheets as they are created in the exact same way.

Balance sheets are broken down into those sections above. Company assets will cover the first area and will list company assets. These are classified as being long term or current assets. The current assets are defined as all assets that are to be used by the company in under one year or that are to be converted into cash.

Assets include:

• Cash – how much money is available at the end of a fiscal year.
• Inventory – the inventory of the materials that are utilized to manufacture products that are not sold yet.
• Accounts receivable – income gained from the credit accounts. Calculated at the end of a fiscal year.
• Total current assets – a sum of accounts receivable, cash, supplies and inventory.

The other assets that can be included in the balance sheet will be fixed assets or long term assets. These basically last over one year, thus the long term label. Examples include:

• Plant and Capital – book values of all the property and capital equipment, minus depreciation.
• Miscellaneous assets – all the other long term assets you cannot label as capital, plan or investments.
• Investment – every single investment that cannot be transformed into cash in under one year. Many companies that just opened will not have many long term investments.
• Long term assets – a sum of all the miscellaneous assets, plant and capital and investments.
• Total assets – a sum of all the current assets and the long term assets.

After listing assets, you have to highlight business liabilities. In a similar way with the assets, they are considered as being long term or current. In the event that debts have to be paid in under one year, they are labeled as current liabilities. If they will be due in over 1 year, they are labeled as long term liabilities. Current liability examples include:

• Accounts payable – all the expenses that appear when buying items from a regular creditor or from open accounts, in the event that they are payable and due.
• Taxes – taxes that still have to be paid when books will be closed.
• Accrued liabilities – all the expenses that appeared and that are needed for business operations, although not paid by the time books are closed. In most cases these are salaries and overhead.
• Total current liabilities – a sum of all the taxes, accrued liabilities and accounts payable.

The long term liabilities will include:

• Mortgages – the loans that are taken out in order to purchase real property and that will be repaid over long periods of time. Mortgage payable can be defined as amount that still has to be paid when the year is over.
• Bonds payable – a total of the bonds at the year’s end. All that are payable or due over 1 year.
• Notes payable – how much is owned for the long term debts.
• Long term liabilities – as um of mortgage payable, notes payable and bonds payable.
• Total liabilities – a sum of all the long term and current liabilities.

As liabilities are listed, the last part of the balance sheet is the equity. An owner’s equity is a difference between total assets and the total liabilities. This is a really important factor that is always considered by the investors when they evaluate a company. In most cases this will determine how much capital will be invested in a company.

Make sure that a balance sheet analysis statement is created, just like with the two documents we mentioned above. The analysis needs to be short and only cover the main points that you want to highlight.

Getting Help For A Financial Business Plan

The truth is that most people do not actually know much about how to create a really effective financial business plan. Do not worry too much about it. There are people that can help you and if you never created such a plan in the past, it is a really good idea to talk to those professionals. It is highly important that you are patient and that you properly draft the business plan. While the financial statement part is the one that will, most likely, be analyzed first, you have to be sure that you do not dismiss the others since they are also highly important.

A really good financial business plan highlights the fact that your company can easily bring in great results for those that think about investing. With this in mind, you have to be careful and you need to always take as much time as possible when you draft that business plan. Pay attention to absolutely everything that you add and always stay focused on the short statements that you make. They are always analyzed so you have to make sure that your strong point shine.