Whatever entity you choose, you need to be able to properly manage financial resources. So, how to set your business financial plan?
First of all make sure you will keep the funds separate from your personal accounts. This is a big mistake that makes tax time and financials so confusing. Get a holding place you can keep your money separated from your personal accounts.
You also need to determine a budget to get started and how much you’ll be able to spend. If you’re self-funding, be realistic about numbers and whatever you anticipate your budget to be. Your burn rate is how much cash you’re spending a month over month. It’s an important number for you to figure out to determine how long you can stay in business before you need to turn a profit.
You should set up your business financial plan with profitability in mind the first 30 to 90 days. It’s possible. But have a budget reserve so you can survive if things go leaner than expected.
One-time start-up costs: Every business faces a long list of items and services that you have to spend money on start-up costs, which are items you spend money on only once just to get up and running — everything from a business license, start-up furnishings and equipment, and introductory marketing materials to that Grand Opening promotion you’ve planned.
Regular monthly expenses: After you’re open for business, you have all sorts of ongoing expenses to deal with, from paying salaries to buying supplies. Over time, of course, you expect your sales revenue to cover these expenses. But that situation doesn’t happen overnight. So you have to set aside funds with which to pay the bills in the early tough-sledding period. Having a three- to six-month cushion is a good place to start, but how long you’ll need a cushion depends on what business you’re in.
The Components of a Financial Section, Ink
Start to set your business financial plan with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years.
Create an expenses budget. You’re going to need to understand how much it’s going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses). It’s a good thing for a business to know. “Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign,” Berry says.
Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. “Cash flow is king,” Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents. These documents are presented by profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months.
Income projections. This is your pro forma profit and loss statement, detailing forecasts for set your business financial plan for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. “Sales, lest cost of sales, is gross margin,” Berry says. “Gross margin, less expenses, interest, and taxes, is net profit.”
Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren’t in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious.
“Interest is in the profit and loss, but repayment of principle isn’t”. The way to compile this is to start with assets and estimate what you’ll have on hand. For example, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities – meaning debts. That’s money you owe because you haven’t paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
Breakeven analysis. The breakeven point, Pinson says, is when your business’s expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. It will also be useful when you will set your business financial plan. “If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest.” This is an important analysis for potential investors. Because they want to know that they are investing in a fast-growing business with an exit strategy.