Having extraordinary skills and talent in a business area,
being hardworking and determined, persistent, having great
ideas and full of energy is a fantastic mix for a
successful business career. But all those exquisite
qualities mean nothing if the end result is not represented
in the bottom line.
The financial section 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 to a
properly thought through and well constructed business
plan. Those elements are a forecast profit and loss account
stating the income and expenditure, a cash flow statement
that determines the liquidity and a sensitivity analysis
that indicates the risks and opportunities within the
business plan.
The forecast profit and loss account should be prepared on
a monthly basis for the first year with an annual
projection for the second year. The first year of every new
start up business can be difficult due to financing and
funding growth from a standing start which is why the first
financial year should be detailed.
The forecast profit and loss account is the financial
calculation of all the sales, purchases, expenditure and
prices contained within the other areas of the business
plan. In addition full account should also be taken of the
business administration costs. All the figures in the
business plan income and expenditure account should be
fully supported from the physical projections contained in
the other sections and derived from those sections.
From the sales section multiply the sales volume of each
product by the considered selling prices. Keep to a minimum
sundry additional income that might be expected. The
resultant financial calculation produces the expected
monthly sales turnover.
Using the information in the production or operations
section of the business plan and if included the purchasing
section the sales volume should be evaluated at the
expected purchase cost of the products and services. This
produces a cost of sales figure which when deducted from
the sales turnover provides a forecast gross profit figure
each month.
The business plan should include notes and comments of all
other main cost items including projections of staff
requirements. Together with administration and overhead
costs a monthly projection of the expected running costs of
the business start up can be produced. The business running
costs are an important area to forecast in detail as while
sales prices and costs may be determined with some accuracy
errors in the business running costs could cause a good
business to fail.
The monthly forecast profit and loss account is complete by
entering the sales turnover, deducting the cost of sales
and the business running costs, overheads, to produce a net
monthly profit. The bottom line may start in a monthly loss
until volumes grow but should indicate a satisfactory
profit. If a loss is indicated do not manipulate the
numbers to show a profit which would be hiding the truth,
instead go back to the sales and costs sections and
consider what action is required to justifiably increase
gross profit margins or reduce overhead costs.
Cash flow is often critical to a small business plan and a
lack of capital or liquidity to carry out the ambitions and
projections of the small business owner is a principal
cause of small businesses going into liquidation before
those business aspirations are achieved. The cash flow
statement is based upon the volumes and prices included in
the business plan and stated in such a way as to indicate
the financial resources required.
Cash flow is different to the profit and loss account as
the profit and loss account only states the different
between sales sold and costs incurred. The cash flow
statement takes account of both the profits made plus
volume changes of purchases and stock, one off payments,
financing debtor balances offset by creditor balances and
shows how liquid and solvent a business is.
Producing cash flow statement tends to come within the
province of accountants. A simple cash flow statement can
be produced by starting with the net profit or loss each
month, deducting the cost of stock which has not been sold
yet including both raw materials and finished goods stock
and also deducting any one off payments such as bills that
have to be prepaid and the cost of paying for fixed asset
purchases.
In addition when a new business starts up the amount owed
to suppliers, creditors, is zero and the amount owed by
customers, debtors, is zero. During the year these balances
will change each month in proportion to the financial terms
and conditions of the business and the movement of these
balances need to be entered on the cash flow statement. An
increase in debtors reduces the cash flow liquidity and an
increase in creditors increases cash flow liquidity.
The third element of the financial section is an analysis
of the whole business plan and the projections in what is
called a sensitivity analysis. A technical accounting area
for the majority of non accountants but nevertheless an
important area as it is the financial sensitivity analysis
that should indicate both the increased financial
opportunities and the financial risks carried within the
business plan.
All major areas within the business start up 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 limit and
lower limit based upon potential market conditions and
risks.
Make a financial evaluate of each upper and lower limit for
every item and determine the impact each would have on the
profit and loss account and the cash flow statement. Also
combine the financial effect of several factors to assess
the impact of a combination of events on the small
business. A lower sales volume may be uncomfortable for a
small business but combined with lower sales prices and
higher costs the risk could be severe.
The financial section of a business plan should be accurate
and reflect the projected financial performance of the
start up business. It is also important it is honest and
evaluates the risks involved so that should any of those
risks become reality urgent management action can be taken
to limit the financial effect. In practice some of those
risks will happen and being forewarned can be the
difference between survival and failure with liquidity
being the most dangerous risk of all.
----------------------------------------------------
Terry Cartwright, accountant and CEO at DIY Accounting,
designs Accounting Software at
http://www.diyaccounting.co.uk/ providing accounting
solutions for small to medium sized business in the UK with
payroll software at
http://www.diyaccounting.co.uk/payroll.htm for up to 20
employees
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