Why is financial planning for your business so important?
First of all, a financial plan is the section that determines whether or not your business idea is viable, and it's a key component in determining whether or not your plan is going to be able to attract any investment in your business idea, as sbinfocanada.about.com explains it.
You know already that the financial plan section consists of three financial statements:
- The income statement,
- The cash flow projection and
- The balance sheet and a brief explanation/analysis of these three statements.
As a first step, you must bring together all the financial data you'll need by examining your expenses. You have to think about the start up expenses and the operating expenses.
The start up business will have to deal with the following expenses:
- Business registration fees
- Business licensing and permits
- Starting inventory
- Rent deposits
- Down payments on property
- Down payments on equipment
- Utility set up fees
An already functioning business needs to look at the operating costs since these are the ones keeping the business alive and running. Your list of operating expenses includes:
- Salaries (yours and staff salaries)
- Rent or mortage payments
- Raw materials
- Loan payments
- Office supplies
The total of your operating expenses shows you what will cost you to keep your business running each month.
If you multiply this number by 6, you have a six month estimate of your operating expenses. Add this to the total of your start up expenses list and the result will be a ballpark figure for your complete start up cost, according to the previously mentioned source.
In what follows, we'll deal with the typical financial statements you should include in the financial plan of your business:
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The typical financial statements you should include in the financial plan of your business
1. We'll start with the Income Statement. This is one of the three financial statements that you need to include in the Financial Plan section of the business plan.
The Income Statement shows your Revenue, Expenses, and Profit for a particular period. It's a snapshot of your business that shows whether or not your business is profitable at that point in time; Revenue - Expenses = Profit/Loss.
2. Secondly, the Cash Flow Projection indicates how cash is expected to flow in and out of your business. As the same source explains, this particular statement represents an important tool for cash flow management, letting you know when your expenditures are too high or when you might want to arrange short term investments to deal with a cash flow surplus. And since this is part of your business plan, a Cash Flow Projection will give you a much better idea of how much capital investment your business idea needs. Same goes for when your business is already running. You'll need to make adjustments, investments and you'll need to know how every small change influences the entire cash flow.
Pay attention to the fact that Cash Flow Projection and Cash Flow Statement are not one and the same!
While the Cash Flow Statement shows how cash has flowed in and out of your business and describes the cash flow that occurred in the past, your Cash Flow Projection shows the cash you anticipated to be generated or expended over a chosen period of time in the future.
3. The third financial statement is the Balance Sheet. This also has to be included in the Financial Plan section of the business plan. The Balance Sheet consists of a picture of your business' net worth at a particular point in time. It is also the statement which summarises all the financial data about your business, breaking that data intothree categories: Assets, liabilities and equity.