Cash Flows During The First Year Of Operations For The What To Include In The Financial Section Of A Successful Business Plan

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What To Include In The Financial Section Of A Successful Business Plan

Having outstanding skills and talent in the business field, being hardworking and determined, persistent, having great ideas and full of energy is a fantastic combination for a successful business career. But all these exceptional qualities mean nothing if the end result is not represented in the bottom line.

The financial part of the business plan is where all the operational items included in the rest of the business plan come together. There are three essential elements of a well-thought-out and drawn-up business plan. These elements are a projected income statement that lists income and expenses, a cash flow statement that determines liquidity, and a sensitivity analysis that indicates risks and opportunities within the business plan.

A projected profit and loss account should be prepared monthly for the first year with an annual projection for the second year. The first year of any new business start-up can be difficult due to funding and growing funding from the outset, which is why the first financial year should be detailed.

The projected profit and loss account is a financial calculation of all sales, purchases, expenses and prices contained in other areas of the business plan. In addition, business administration costs should be fully considered. All figures in the income and expenditure account of the business plan should be fully supported by the physical projections contained in other sections and derived from those sections.

From the sales section, multiply the sales volume of each product by the sales prices considered. Keep to a minimum the various additional incomes that can be expected. The resulting financial calculation gives the expected monthly turnover from sales.

Using the information in the production or operations section of the business plan and if included in the procurement section, the sales volume should be estimated according to the expected cost of acquiring products and services. This produces a cost of sales figure which, when subtracted from sales turnover, gives a projected gross profit figure each month.

The business plan should include notes and comments on all other major cost items including projections of staffing needs. Along with administrative and general expenses, a monthly projection of the expected running costs of starting a business can be made. Operating costs are an important area for detailed forecasting because although selling prices and costs can be determined with some accuracy, errors in operating costs can cause a good business to fail.

The monthly forecast of the profit and loss account is completed by entering sales turnover, deducting sales costs and operating costs, overhead costs, in order to produce a net monthly profit. The bottom line may start at a monthly loss until the volumes increase, but should indicate a satisfactory profit. If a loss is indicated, don’t manipulate the numbers to show a profit that would hide the truth, instead go back to the sales and expense sections and consider what needs to be done to justifiably increase gross profit margins or reduce overhead.

Cash flow is often critical to a small business plan, and a lack of capital or liquidity to carry out the small business owner’s ambitions and projections is a major cause of small business liquidation before those business aspirations are realized. The cash flow statement is based on the quantities and prices included in the business plan and presented in a way that indicates the necessary financial resources.

Cash flow differs from the income statement because the income statement only states the difference between sales made and expenses incurred. The cash flow statement also takes into account the realized profit plus changes in the volume of purchases and inventory, one-time payments, financing of debtor balances offset by creditor balances and shows how liquid and solvent the company is.

Creating a cash flow statement is usually the domain of accountants. A simple cash flow statement can be prepared by starting with the net profit or loss each month, deducting the cost of inventory not yet sold, including raw materials and finished goods inventory, and also deducting non-recurring payments such as bills to be paid in advance and the cost of payments acquisition of fixed assets.

Additionally, when a new business is started, the amount owed to suppliers, the creditors, is zero, and the amount owed to customers, the debtors, is zero. During the year, these balances will change every month in accordance with the financial conditions of the business, and the movement of these balances should be entered in the cash flow report. An increase in debtors reduces cash flow liquidity, and an increase in creditors increases cash flow liquidity.

The third element of the financial part is the analysis of the entire business plan and projections in what is called a sensitivity analysis. An area of ​​technical accounting for most non-accountants, but an important area nonetheless since it is the financial sensitivity analysis that should indicate the increased financial opportunities and financial risks contained in the business plan.

All major areas within the business launch plan such as sales volume, sales prices, important cost elements and other factors that may have an impact on the business should be evaluated. For each item, set an upper and lower limit based on potential market conditions and risk.

Make a financial assessment of each upper and lower limit for each line item and determine the impact each would have on the income statement and cash flow statement. Also combine the financial impact of several factors to estimate the effect of the combination of events on the small business. Lower sales volume can be embarrassing for a small business, but combined with lower sales prices and higher costs, the risk can be serious.

The financial part of the business plan should be accurate and reflect the anticipated financial performance of the newly founded company. It is also important that he is fair and assesses the risks involved so that if any of these risks become a reality, immediate management action can be taken to limit the financial impact.

In practice, some of these risks will happen, and being warned can be the difference between survival and failure, and liquidity is the most dangerous risk of all.

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