How to Write A Financial Plan

The Financial Plan is the basis of the Business Plan. It doesn’t mean that the other sections of the Business Plan are less important.

By doing a great Financial Plan, the entrepreneur or the company management team make sure that all aspects are included in the calculations so that when investors or other stakeholders become aware of the company situation.

When interested parties analyse the Business Plan, the first aspect that they are interested in, is how the numbers look like.

When the entrepreneur or the company prepares the Financial statements, the analysis is divided: income statement, balance sheet and cash flow.

Income Statement (Profit & Loss Statement; Earning Statement)

Your revenues and expenses are shown in the income statement. It gives you and other stakeholders such as investors, a proper description of how the company is doing or what will be the business behaviour in the future. For sure, if the existing business is generating money, it will easily be seen by checking the Income Statement of the company. Consider the sum of the money generated by the revenues (sales and other money entries), subtracting the company expenses, the balance is the net income (profit).

In case we are in front of a startup and there is no data from previous years, get some statistics from existing businesses from the same sector of activity. By analysing the experience of other companies operating in the same industry, you can have a much clear idea of the percentage of gains that you can project for your company. Use it as a starting point for your analysis.

Balance sheet

While you can see how much you are earning based on the income statement, the real value of your company can be found by analysing your balance sheet. Your fixed assets, the amount of debts and credits, are shown in your balance sheet. All the your company owns (assets) and is registered in the company books, subtracting the company liabilities (what the business owes to other entities), is the net worth (equity) of the company.

The balance sheets are produced reflecting the company’s position at the end of the fiscal year. Managers use it to compare on an annual basis in order to evaluate the company’s financial situation and how it improved or not during the years. It helps to have an accurate idea of the shareholder’s equity. This is an important tool for the business owner as it shows if he is becoming wealthy or not.

Projections can be done based on the existing balance sheets. Any changes in the income statements may affect the balance sheet.

Cash flow statement

This financial statement reflects a period of analysis, and is the indicator of the company’s liquidity. It reflects the alterations in the financial position of the business. The cash flow statement shows the source of the existing money and where/how it was spent.

A cash flow statement is composed by the sources of funds and uses of funds. By analysing this statement, you are capable to verify if the company improved the cash position and the amount in a certain period of time.

Other Financial Information

Nowadays, investors are looking for great business ideas and existing business with great potential to invest. The traditional financial statements are not always enough to show how the business is performing and the solid financial stability of the business owner. In these cases, you may be required to present a personal finance statement You can make use of business data and ratios to predict the future of your business.

Consider including a summary of the company financial needs and how the money will be allocated. By doing so, you will be able to have a better picture of the total amount of money/investment that your company needs to improve its performance.  

It may sound weird, but it’s better to be prepared for the worst scenario instead of living in a fake paradise. Always have an exit strategy. Success or failure, all depends on how you plan since the day 1 of your business plan. Have your contingency plan so that investors will be aware of what you have in mind in case of failure of the business. Remember that investors want to be sure that their money is safe and the business owner/management team considered all risks before approaching them.

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