Finance plan - what is it and how to create one
Oh, no, not a finance plan!
A finance plan sounds hard, right? Especially if you don’t have any experience in accounting.
No matter what your experience is, we promise to make it easy to write your financial plan.
Let’s get started by getting the basics right.
What is a finance plan?
Your financial plan is made up of three financial statements –
- cash flow – this is the flow of money going into the business (from sales) and out for expenses.
- income statement – shows your revenue from selling your products or services, and the expenses to generate your income over a period of time.
- balance sheet – shows the items of value in the business (cash, equipment) and what the company owes (loans, unpaid bills or taxes).
This plan will, primarily, help you to determine if your business idea is realistic.
Your plan will also keep your business’ financial health on course as it develops and grows.
What will you do with your finance plan?
You’re probably thinking, this is too hard. Do I really need a financial plan?
And here’s why.
Firstly, your financial plan will help you to measure how your business is going and track against your goals. It will help you to make better decisions about where you should spend your money.
It will also help you to pitch to investors.
Get started now! Follow these steps to creating your financial plan –
Step 1: Work out your set-up costs
These are the costs you will need to start your business.
Create a list of all the expenses you will likely need.
Conduct research on similar businesses to get an estimate of these upfront costs. This will help you to realise if your business will need to borrow funds and if so, how much.
To get you started, here are some examples of start-up costs:
- Business registration with ASIC (we can help you there, business incorporation will cost $538)
- Purchase of inventory
- Purchase of computers and software
- Staff hire costs
- Rent for premises
- New website
- Advertising and marketing costs
- Vehicle and equipment purchases
- Legal and/or consultants fees
If you need a little help with this section, our blog ‘How much does it cost to start a business?’ will help you to determine what these costs may be.
Step 2: Calculate your sales and expenses
The next step for your finance plan is to estimate the sales and your expenses on a monthly, quarterly or yearly basis so you can see if your business will be making a profit or a loss.
To get you started, the ATO has a great reference to help you gather some of this information. Their Benchmarks by Industry show ranges of income to expenses for similar businesses in your industry.
You can now use your profit and loss forecast to help you price your products or services and to develop sales targets and their likely profit margins!
Step 3: Prepare your cash flow projections
Cash flow projections measure the amount of money flowing in (from sales) and out (paying for expenses) of your business. It will help you to calculate whether you have enough money to run your business or may require funding.
Here are a few things to consider in your calculations –
- The payment terms (14, 30, 60 days) you offer on sales may delay income after the sale has been made. The same can be said for the terms of trade offered by your suppliers.
- Ensure you project cash-flow for twelve months to pick-up sales and expenses that are seasonal.
- Spread the cost of some expenses – for example, can you pay your insurance in monthly instalments, instead of upfront to spread the cost?
Step 4: Forecast your balance sheet
Balance sheet? We hope we haven’t lost you here.
This is easier once you know what a balance sheet is.
A balance sheet measures all the business assets (anything of value – stock, equipment, vehicles, buildings, cash) and your business’ liabilities (any money the business owes to others such as loans, credit cards and money owed to suppliers).
Your balance sheet will also include any assets that belong to the business owner. This is called owner’s equity.
The bottom line of your business’ balance sheet will be calculated by adding the total value of its assets and then subtracting its total liabilities.
Step 5: Uncover your break-even point
We’re almost there with your finance plan.
The break-even point is the number of sales your business needs to make to cover its costs.
Using the information you have gathered in the first three steps, you will be able to figure out the break-even point.
To put it simply – say, your business sells dresses for $100 each. Your monthly costs to run the business and produce these dresses is $5000. Your business will need to sell 50 dresses each month to break even ($5000 divided by $100). The break-even point is 50 dresses per month, and any monthly sales above 50, will be profit!
Finding the break-even point allows you to play around with various scenarios by adjusting sales forecasts, costs and price points.
From the above example, let’s say, you doubled the price of each dress to $200, your business would only have to sell 25 dresses per month to meet the monthly business expenses of $5000.
Have I done my finance plan properly?
Here’s a little check to see if your financial plan covers everything your new business will need to succeed.
Can you answer these three questions from your financial plan –
- How much money do you need to get your business started?
- How will your business make money?
- What are the revenues and expenses (budget) over a period of time?
If the answer is “yes, now I know the answer” to these three questions, congratulations!
Your finance plan is thorough and you now have a clear plan to move forward!
If you answered “not sure yet” to any of these questions, simply go back through the plan and input additional information and figures until you can.
Build your business from here
Your financial plan will provide valuable insight into your business and the way forward.
Remember, your finance plan is a dynamic document. You will need to fine-tune these numbers as more information comes to hand. The more accurate these numbers, the better data you have to work with and make valued business decisions.