Business Plan Writing Guide: Financial PlanFeatured, Small Business, Small Business How to Guides Wednesday, March 16th, 2011
Most small business owners dread working on the financial plan and often tend to ignore the financial management section of small business plan. Financial management, however, is one of the critical activities in a small business. If you are writing the business plan to raise funds for your small business, creating a financial plan is mandatory as the potential investors will definitely ask for that. Even if your business plan will be used just as a guide for the future, not including the financial management plan will be a big mistake.
Financial Plan: The Essentials
The financial plan for an established business will need to include the historical financial data, usually for the last three to five years, depending on the time business has been in operation. This will include the profit and loss statements, cash flow statements and balance sheets for each year. It will be good idea to include the externally audited statements because that will add credibility to the numbers that you are going to present. The potential investors want to look at the past financial data to understand how the cash is managed in the business, for how long the business has been in profit (or loss), major expense lines, the assets owned by the business, and the liabilities of the business.
In addition to the historical data, the investors also want to know how the business will perform financially in the future. For this you will need to provide financial projections for the next three to five years. The projections data will be provided in the same format as the historical data i.e. you will need to provide the Pro forma profit and loss statements, balance sheets and cash flow statements for the next three to five years.
A startup’s financial plan will be different as it will only show the projected data. The projections should be based on your research about the cost of setting up the business, major capital expenses, cost of operations, expected revenues etc.
Tips for Creating a Financial Plan
- If you don’t know how to crate financial statements you should hire a skilled person to do that for you.
- Do a through research before making assumptions for your projected financials. Mention the assumptions clearly along with logical reasons within the financial plan so that the reader also knows what your assumptions are and why they are correct.
- The first year projections should be broken down to monthly levels. The projections for second and third year can be given on a quarterly basis.
- The projections, especially the cash inflow and outflow, should match up your funding requirements.
- It is advisable that you don’t project for more than three years unless you are asked to do so by the potential investor because it will involve too many assumptions.
- Try to include some charts because visual representation highlights the facts in a better way. This should be done especially if your financials are in good shape.
- You should learn how to read and create financial statements in case you don’t know that because you will needing this skill on a regular basis.
If you are just starting to create a financial plan without any prior experience, it will be good idea to look at a sample financial plan from a related business before moving ahead.
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