If your business is going to be able to attract the investment it needs, it’s crucial to have a well written business plan. Bank managers and venture capitalists alike will base a lot of their decision, naturally, on how profitable and viable your business has the potential of being. A lot has been written about the key components of a good business plan, such as a clear executive summary, marketing strategy, operations info and management and personnel. What I really want to look at in this post is the last bit of any business plan, the Financial Plan. This element is without a doubt the most crucial. It can be the difference between winning or losing that potential investor, who is ultimately looking for a venture which will make them a profit. If this part doesn’t look right, you might as well forget about the rest. In particular I will look at the importance of measuring your fixed assets, something which is often underestimated by businesses.
The financial plan consists of three elements, or ’statements’: the Income Statement, Cash Flow Projection and Balance Sheet.First things first though: step one is working out what your outgoing expenses are. This will help you sensibly determine the amount of investment you require. Don’t forget that getting greedy can seriously backfire and make you look like a liability. First, list all the startup expenses – such as registration costs, downpayments on property and equipment, deposits on rent. Next come your operating expenses – these are the costs of keeping the business running, such as rent, salaries, advertising budget, utility bills and maintenance costs.Care and accuracy is everything at this stage – one moment of sloppiness can have serious implications on the future of your business. Now you’re ready to start working through the three financial statements.
Income Statement
This is basically a snapshot of your revenue, expenses and profit or loss for a particular period. Basically it tells anyone, at a glance, whether this venture is making a profit at this moment in time. At first you will need to have monthly statements done – this becomes a quarterly or even annual requirement later.
Cashflow Projection
This section tells a potential investor or bank loans officer how much cash is expected to flow in and out of your business over the next year. This speaks volumes on your credit worthiness and whether you will be a good recipient of a loan in years to come.Another benefit is the ability to know when you can afford to make short term investing decisions (during cashflow surpluses). More crucially however is the fact that it can tell you very clearly how much of an injection of capital you REALLY need.
Balance Sheet
The balance sheet gives a picture of your business’ net worth at a particular time. It encompasses three key elements of your finances: assets, liabilities and equity. Assets include current assets, such as inventory or cash, and fixed assets which are tangible items of value that the company owns. Robust asset tracking is key to producing an accurate balance sheet. I come across so many businesses who literally miss out on millions because of a lack of proper asset auditing. Liabilities are basically the outstanding debts the company owes. And Equity is the total amount left over when you subtract the liabilities from the total assets. So you can see why asset accounting is so important in this calculation – if you underestimate the value of your assets, you could end up seriously undervaluing your business.
Though this is far from a step by step guide to creating your financial plan, hopefully it has served as a useful signpost for the basic elements you need to be concerned with. I hope it helps you land that killer investment!
Tags: asset accounting, asset tracking, balance sheet, business plan, cashflow projection, financial plan, fixed assets, income statement