When running a business, creating a financial plan is crucial. Whether you want to pitch to investors, receive funding, or reach your long-term goals as quickly as possible, writing a clear financial plan should always be a priority.
In essence, a financial plan is an overview of the current financial status of your business and any projections for growth. Information relating to your finances highlights the health of your company and allows you to focus on your future expectations.
That being said, putting together a financial plan can seem intimidating at first, especially if accounting is not your strong suit. However, there are a few key elements that all financial plans need that you can use as a guide.
So, let us discover 5 components that can help you to produce a fantastic financial plan to successfully launch your business.
- Profit and Loss Statement
A profit and loss statement, otherwise known as an income statement, a pro forma income statement, or a P&L statement is a simplistic summary of the profits and losses accrued and incurred over a specific time period of approximately 3 months.
Essentially, a P&L statement determines how you are making money. This table should list all of your revenue streams and must include your expenses. At the bottom, a total amount of net profit or loss should be listed.
Depending on the type of business you are in, your P&L statement might look slightly different. For example, nonprofits, LLCs, and C-Corps will all format their expenditure in unique ways.
Nonetheless, at the very least your P&L statement needs to include your revenue (or sales), the cost of all goods sold (COGS, although this might not apply if your business offers services), and your gross margin (calculated by taking away the COGS from your revenue).
Additionally, you will need to include your operating expenses. These are expenses associated with running your business that are not directly associated with your sales such as rent, utilities, and insurance.
As soon as you have all this information in one place, you can find your operating income. Simply take the gross margin less your operating expenses. This resulting figure is your earnings before interest, taxes, depreciation, and amortization (EBITDA).
Finally, to work out your net income (or bottom line), subtract your expenses for interest, taxes, depreciation, and amortization from your EBITDA.
- Cash Flow Statement
A cash flow statement details how much cash was brought in and paid out by your business on a monthly basis. Together, these two figures provide an ending cash balance for each month.
Understanding how much cash you have, where you cash is coming from, where it is going, and on what schedule, ensures that you can keep an eye on the health of your business. Try to think of your cash flow statement as a way of understanding the difference between what your P&L statement reports as income (your profit) and your current cash position.
In some cases, a cash flow statement might be all it takes to determine how to get your business on the right track. Consequently, keeping your business afloat is all about having enough cash to pay for your expenses while still being able to cover periods of time that are less profitable.
- Balance Sheet
A balance sheet can let you know how your business is doing at any given moment in time. It provides information about how much money you have in the bank, how much your customers owe you, and how much you owe to your vendors.
Balance sheets contains three types of accounts – your assets (your accounts receivable, money in the bank, and your inventory), your liabilities (your accounts payable, credit card balances, loan repayments), and your equity (your own equity, as well as any shares, retained earnings, and stock proceeds).
The total of your liabilities plus your total equity equals the total of your assets.
At the end of the accounting year, your total profit or loss adds to or subtracts from your retained earnings. Accordingly, your retained earnings are the cumulative profit and loss since the inception of your business.
- Sales Forecast
A sales forecast predicts your projections and estimates what you think will be sold in a given period. Forecasts should be an ongoing part of your business planning process and are particularly important for any lenders or investors.
Remember to break down your forecast into segments based on the products and services you offer. This will differ for every business but always remember to include the COGS to determine a forecasted gross margin.
- Break-Even Analysis
A break-even analysis is a calculation of how much you will need to sell in order to cover your expenses. To ascertain your break-even point, you will need to work out the contribution margin of what you are selling.
Moreover, a contribution margin can be found by calculating the price of a product minus any associated costs such as wages. Correspondingly, this model enables you to determine how high your sales revenue needs to be in order to break-even.
Ultimately it is no secret that putting together a financial plan can seem daunting at first, especially for new businesses. Above all, over time, your financial goals will undoubtedly change and therefore reviewing your financial plan often and readjusting it where necessary is strongly recommended.