What is a Financial Plan?
A business’ financial plan is the part of your business plan that details how your company will achieve its financial goals. It includes information on your company’s projected income, operating expenses, and cash flow in the form of a 5-Year Income Statement, Balance Sheet and Cash Flow Statement. The plan should also detail how much funding your company needs and the key uses of these funds.
The financial plan is an important part of the business plan, as it provides a framework for making financial decisions. It can be used to track progress and make adjustments as needed.
Why Your Financial Plan is Important
The financial section of your business plan details the financial implications of running your company. It is important for the following two reasons:
Making Informed Decisions
A financial plan provides a framework for making decisions about how to use your money. It can help you determine whether or not you can afford to make a major purchase, such as a new piece of equipment.
It can also help you decide how much money to reinvest in your business, and how much to save for paying taxes.
A financial plan is like a roadmap for your business. It can help you track your progress and make adjustments as needed. The plan can also help you identify potential problems before they arise.
For example, if your sales are below your projections, you may need to adjust your budget accordingly.
Your financial plan helps you understand how much outside funding is required, when your levels of cash might fall low, and what sales and other goals you need to hit to become financially viable.
Securing Funding
This section of your plan is absolutely critical if you are trying to secure funding. Your financial plan should include information on your revenue, anticipated expenses, and cash flow.
This information will help potential investors or lenders understand your business’s financial situation and decide whether or not to provide funding.
Include a detailed description of how you plan to use the funds you are requesting. For example, what are the key uses of the funds (e.g., purchasing equipment, paying staff, etc.) and what are the future timings of these financial outlays?
The financial information in your business plan should be realistic and accurate. Do not overstate your projected revenues or underestimate your expenses. This can lead to problems down the road.
Potential investors and lenders will be very interested in your future projections since they indicate whether you will be able to repay your loans and/or provide a nice return on investment (ROI) upon exit.
Making Appropriate Financial Projections and Realistic Assumptions
Your financial projections should be based on your current revenue model and market research. Conduct market research and speak with industry experts to get a better idea of the key trends affecting your business and realistic growth rates. The goal is to make as realistic and achievable projections as possible. You should also use historical financial data to help inform your projections. For example, if you are launching a new product, use past sales data to estimate how many units you might sell in Year 1, Year 2, etc.
Once you have this information, you can develop realistic financial assumptions around revenue growth, cost of goods sold, margins, expenses, and other key metrics.
4 Key Elements to Include in Your Financial Plan
The financial plan of a business plan should have the following four sub-sections:
1. Revenue Model
Here you will detail how your company generates revenues. Oftentimes this is very straightforward, for instance, if you sell products. Other times, your answer might be more complex, such as if you’re selling subscriptions (particularly at different price/service levels) or if you are selling multiple products and services.
2. Financial Overview & Highlights
When creating a financial plan, you need to create full financial forecasts including the following financial statements.
5-Year Income Statement / Profit and Loss Statement
An income statement, also known as a profit and loss statement (P&L), shows how much revenue your business has generated over a specific period of time, and how much of that revenue has turned into profits. This financial statement includes your company’s revenues and expenses for a given time period, such as a month, quarter, or year. It can also show your company’s net income, which is the amount of money your company has made after all expenses have been paid.
5-Year Balance Sheet
A balance sheet shows a company’s financial position at a specific point in time. The balance sheet lists a company’s assets (what it owns), its liabilities (what it owes), and its equity (the difference between its assets and its liabilities).
The balance sheet is important because it shows a business’s financial health at a specific point in time. A strong balance sheet indicates that a company has the resources it needs to grow and expand. A weak balance sheet, on the other hand, may indicate that a company is struggling to pay its bills and may be at risk of bankruptcy.
5-Year Cash Flow Statement
A cash flow statement shows how much cash a company has on hand, as well as how much cash it is generating (or losing) over a specific period of time. The statement includes both operating and non-operating activities, such as revenue from sales, expenses, investing activities, and financing activities.
While your full financial projections will go in your Appendix, highlights of your financial projections will go in the Financial Plan section.
These highlights include your Total Revenue, Direct Expenses, Gross Profit, Other Expenses, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and Net Income projections. Also include key assumptions used in creating these future projections such as revenue and cost growth rates.
3. Funding Requirements/Use of Funds
In this section, you will detail how much outside funding you require, if any, and the core uses of these funds.
For example, detail how much capital you need for:
- Product Development
- Marketing
- Product Manufacturing
- Staffing
- Rent or Office/Building Build-Out
4. Exit Strategy
If you are seeking equity capital, you need to explain your “exit strategy” here or how investors will “cash out” from their investment.
To add credibility to your exit strategy, conduct market research. Specifically, find other companies in your market that have exited in the past few years. Mention how they exited and the amounts of the exit (e.g., XYZ Corp. bought ABC Corp. for $Y).
Using a Financial Plan Template
A financial plan template is a pre-formatted spreadsheet that you can use to create your own financial plan. It includes formulas that will automatically calculate your revenue, expenses, and cash flow projection. Growthink’s Ultimate Business Plan Template includes a complete financial plan template and more to help you write a solid business plan in hours.
Conclusion
A well-crafted financial plan is the cornerstone of a successful business. It not only provides a roadmap for your company’s financial health but also serves as a powerful tool for securing funding from investors and lenders. By following the guidelines outlined in this article and utilizing a reliable financial plan template, you can create a persuasive financial plan for a comprehensive plan.
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