A financial plan is the basic thing before starting any business, as without a financial plan, it is impossible for a company to assess how it will be financing its business. It ensures you that the established objectives are financially possible. An effective financial plan helps you to stay focused. A company generally establishes a vision and goals and then quickly develops a financial strategy to support those goals. This process is financial planning.
What is a financial plan?
The financial plan of start-ups refers to the process of organizing the financial elements of a new business. A financial plan is a document that is an outline of your current financial situation. It helps in achieving your immediate and future financial goals. The financial plan is a combination of all the resources and actions the company needs along with the anticipated timelines to reach the goals. It is a great help in managing funds and expenses, reducing debt and fulfilling essential needs. Financial planning involves evaluating the existing financial condition of the business, future financial objectives and the means to accomplish them. It shows the present condition of the company, the goals they plan to achieve, and the methods they will use to do so.
The importance of a financial plan.
The thorough financial planning process aims to identify the best ways of using the company’s financial resources, which is a great help in achieving the immediate and long-term goals. A financial plan is essential for the success of any business. It ensures that established goals are financially achievable. The importance of a financial plan is as follows:
- With the help of a financial plan, you can be sure about the sufficient funding.
- A financial plan helps in maintaining balance between the outflow and inflow of funds which is necessary for stability.
- A financial plan assures fund suppliers to invest in businesses, which increases financial investment.
- The financial plan is helpful in the development and growth initiatives which are required for the long-term sustainability of the company.
- The financial plan reduces the risks related to changing market trends, which can be covered easily with sufficient resources.
- The financial plan helps in reducing the risks that can obstruct the growth of the organisation.
Objectives of the financial plan.
Financial planning is like a tool which helps you to proceed in achieving your financial objectives. Generally, a financial plan for a business focuses on particular growth and fixed objectives. The main objectives of having a financial plan are:
- Provides help in fund availability: A financial plan primarily helps in creating funds and ensures they are accessible whenever needed. This also involves assessing the fund requirements for various goals of the company.
- Evaluates the timing and source of fund : Timing of fund disbursement is an important element in any business establishment. It is very important to disburse funds at the appropriate moment and place.
- Creates capital funds structure: The capital structure of funds includes the types and ratios of capital needed for the business. This involves the strategy of debt-equity ratio for the short-term and long-term goals.
- Prevents excess funds: It is also an objective of the financial plan to ensure that the company does not acquire extra funds. It is true that insufficient funds make the company unable to fulfil its payment duties, but when there is an excess of funds, the company starts spending without generating profits.
Main documents required for a financial plan.
Statement of income: An income statement includes a profit-and-loss statement. It displays your company’s earnings and expenses. It also shows when and how your business had any gains or losses during the specific period. Your income or profit and loss statement should include the following items:
- Expense of products or expense of sales
- Gross profit margin
- Operating costs
- Sources of income
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Established companies can create annual income statements, while new companies and start-ups might want to prepare monthly statements.
Statement of Cash Flows: A cash flow statement is one of the most important financial statements for start-ups which has a detailed description of cash inflows and outflows of your business during a specific period. This part provides information about the financial status of your company and its capacity to fulfil financial responsibilities. Your cash flow statement includes the following three elements:
- Cash inflow forecast: In this section, you need to input the anticipated sales amounts for each month, which is the inflow of your company.
- Cash outflows: Mention all the payments you anticipate to make in cash each month for a year.
- Cash flow reconciliation: Cash flow reconciliation is a method which is used for calculating accurately the outflow and inflow of cash. The total difference achieved after reconciliation of funds is known as the balance which is transferred to the next month.
Moreover, the cash flow forecasts of a company can be essential when evaluating liquidity, its capacity to produce positive cash flows, settle debts, and invest in growth strategies.
Balance sheet: A balance sheet is a financial document that provides details of your company’s assets, liabilities, and shareholder equity at a specific point of time. This is like a brief overview of what your business possesses and what your responsibility regarding payment is. It also has the details of capital contributed by the shareholders. This statement is made up of three components: assets, liabilities, and the balance determined by the difference between the asset and liability. This figure of difference amount on this document indicates your equity or worth. In balance sheets, assets are written on one side and on the other side you should write liabilities plus your own equity. As it allows investors to grasp the status of your business at a specific date, it’s a financial statement you cannot overlook.
Analysis of Break-even Point: Break-even analysis is an accounting method used by start-ups or small businesses to know a definite time when the company, product, or service will start generating profits. Any sales you make after the break-even point should generate profit. It is essential to understand your fixed and variable expenses to accurately calculate the break-even point of your business. Fixed costs remain constant irrespective of circumstances, while variable costs change with the time based on production or sales levels.
How to write a financial plan?
A financial plan is a very important and inseparable part of a business plan. Financial planning is the strategy which is necessary for assessing the funding needs of the business and identifying the sources to fulfil those needs. It involves creating a financial plan for the company’s future efforts. It specially plans long-term investments, growth strategies, and financing options. The financial plan is an outline of all the resources and actions of the company needs, along with the anticipated timelines, to reach the goals. The financial plan includes the following activities:
Develop a structure of your business: First of all, when you start to write a financial plan, you should verify the goals and vision of the enterprise. You should make a business plan where you should clearly define the goals of the business which are to be achieved. It is also necessary to have a clear picture of necessary resources to reach the goals, for example, required purchase of equipment, recruitment of employees, sources of cash flow, required additional resources, etc. You should compile a list of current expenses and assets, which is beneficial in financial planning.
Determining the duration of the plan: You should decide the planning duration of both the short-term and long-term goals. The short-term goals can be of one or two years, while the long-term goals can be of two to five years.
Creating a comprehensive financial plan: You should create an outline of all major investments, budgets, and departmental expenses. Allocate funds for business centres outlined in the plan. You are needed to measure the quantity of tools, workforce, supplies, and additional resources. Then fund provision should be done accordingly.
Develop financial forecasts: Financial forecasts give an idea of the company’s expenses which are required to achieve the goals against various possible situations. You can take help from accountants to assess the plan. They can recommend different methods to communicate the plan to outside parties, like investors and lenders. This forecast should be based on projected costs and sales estimates. These forecasts assess the expenses required to achieve the goals in different possible situations.
Preparedness for unexpected situations: Before creating a financial plan, you should have the information of the cash flow planning. If in any case cash inflow stops or the business faces an unforeseen emergency, you should maintain cash reserves or be prepared for a loan which is easily accessible during that time of downfall. An alternate arrangement or a strategy for liquidating assets should be ready.
Track and evaluate objectives: The actual figures in the cash flow statement, income forecasts, and pertinent business ratio need to be evaluated over the course of the year to determine how accurately real results aligned with predictions.
Put frequent checks: While writing a financial plan for your business, you must put frequent check-ins which can help companies in identifying any serious issue timely so that the issue does not escalate and you can take necessary steps to resolve the issue.
Preparation of sales forecast: When you write your financial plan for your business, you should include the quantity of funds which you invested in the business and also the profit which is anticipated after the sale of the product. Then calculate the anticipated profit. When you complete all the required actions mentioned above, your financial plan is ready. Financial strategies necessitate intentional planning and thorough execution. The financial plan can assist you to start your business and it also helps in the accomplishment of your objectives.
Bottom Line.
A financial plan can give assurance to small businesses in their short- and long-term efforts by helping them in identifying the most effective ways to allocate their resources. The financial plan is a useful instrument for overseeing performance, controlling cash flow, and monitoring financial indicators. In simple terms, a financial plan indicates the current position of the resources. Moreover, when a company is seeking potential partners, investors, and lenders, the financial plan highlights the firm’s dedication to prudent spending and fulfilling its financial responsibilities.
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