What is the Financial Plan?
A financial plan, accompanying your business
plan, is a must because it involves all of the particulars
that your company needs to maximize income potential and
to assist in obtaining capital for growth.
Successful management of a business requires
a well-written financial management plan that outlines your
assets, debts, and the current and future profit potential
of your business.
The financial plan estimates the monetary
resources and flows that will be required to carry out the
business plan. The financial plan also indicates when and
by how much the business intends to be profitable. Finally
the financial statements tell a lot about the entrepreneur
in terms of business commitment and financial wherewithal
to make the business a profitable success.
In addition to the financial statements, a
financial plan includes a list of assumptions upon which
the financial statements are based. Clearly stating your
financial assumptions serves two purposes: it allows investors
to know what is behind the numbers and it helps you to know
the financial impact when the basis of your assumptions
changes.
Assumptions are most important in "soft
numbers" such as projected sales and interest rate
projections. "Hard numbers" such as rent, computers,
and Web site hosting costs can be estimated with some certainty
after a reasonable amount of research. The trick to creating
realistic, credible financial statements is to make reasonable
and conservative projections of the soft numbers and to
understand the assumptions upon which they are based.
A financial plan should also contain a set
of key financial ratios. Financial numbers aren't always
enough to convince an investor that the business is a viable
firm. Investors will want to compare your financial projections
with those from other companies that have succeeded or failed.
However, companies differ in size and it is difficult to
make comparisons when one company is small and the other
is large.
To solve this problem investors use financial
ratios. When you divide one number by another, the resulting
ratio or percentage makes it easier to compare similar businesses
of different sizes. An accounting or finance textbook will
provide a comprehensive list of ratios, but a few of the
most important in assessing business plans are:
- Debt-to-equity ratio: long-term liabilities / owner's
equity
- Net profit margin: net profit / gross revenue on sales
- Return on investment: net profit / total assets
- Return on equity: net profit / equity
Credibility can be added to your financial
ratios if you provide the potential investor with comparative
data from successful companies in the industry in which
the business will compete. Financial data services such
as Standard and Poor's, FISonline, and Dun & Bradstreet
publish this data. Free data may be available on-line, and
detailed data are published in reports found in most libraries.
(Source: e-Business Plan Tutorial)