No matter how interesting and innovative business is, an investor is ultimately interested in the financial aspects of the business in which he is involved.
For this reason, full attention should be paid to documents related to the financial projections for startup of the business presented through the business plan (estimated evolution of business income and expenses for the next period of time – usually the next few years, profitability indicators, etc.).
1. What income will the business bring?
A key element of any business plan is the anticipated volume of sales.
The analysis of the clients’ needs, of the product characteristics, of the market dynamics, and the competitors’ strategies will help you in this respect.
It is important to know the number of potential buyers, the possibility to establish long-term connections with them, the frequency and size of orders, the market share you will have, etc.
Depending on these data, you can also adjust your pricing policy. If the sales have an accentuated seasonality, this must be taken into account in the elaboration of the business budget and the determination of the necessary financing.
It would help if you avoided both periods of unused resources and their inadequacy. It is also good to evaluate how strong your income estimates are.
If you are vulnerable to an attack from the competition or a sudden change in consumer preferences, it is advisable to check if you can overcome these situations.
2. What will be the expenses?
A large volume of revenues is not a great achievement if the level of expenditures is even higher. The volume of expenses must be carefully forecasted and monitored throughout the business. The expenses you are going to hire will not have a homogeneous structure, and, for this reason, you must distinguish between the different destinations of the resources you have.
A first important distinction is that between the initial expenses – which will be made to start the new business – and those related to the current activity after reaching the proposed parameters. The first ones must usually be performed only once, in the initial period, the period in which the business is more vulnerable. The second category of expenses will have a more stable level in time, but it is even more distant in time than the moment of drawing up the business plan. It is very important to have a chart of the two categories of expenses and to determine precisely when the business will start operating at normal capacity.
If this moment is more distant in reality than you initially thought, the profitability of the business may not be as expected. When forecasting the expenses with the current activity, you will also have to determine the size of the necessary stocks. Too much volume will keep resources unnecessarily immobilized, while too little volume creates the risk of forced downtime. You will need to be able to justify the level you have chosen.
Another important distinction is between fixed expenses – those that must be borne even when no “productive” activity is carried out – and variable ones – for example, expenses with raw materials or salaries of directly productive staff. A careful analysis should precede this grouping of expenses – the perfect distinction between the two categories exists in theory rather than in practice. For example, money invested in a specialized machine will be harder to recover than that invested in a machine with more possible uses in case of business failure, it is easier to reduce the volume of supplies of raw materials than to lay off employees, either and “directly productive.” Even if the standard formats of a business plan do not include such details, they are needed to form a realistic picture of the future of the business. Especially if you have more products/services, it is good to determine the expenses, income, and profitability per product unit.
To perform these calculations, use the Cash Flow template.
3. What will be the expected profitability of the business?
Data on projected revenues and expenses will give an idea of the profitability of the business. In assessing this profitability, it is good to evaluate what the results will look like in case of unforeseen events.
If the results look good on paper but, for example, the delay in obtaining a suitable space by a few months turns the profit into losses, it is good to take safety measures. The sensitivity analysis gives the image of the evolution of the results in case certain unfavorable evolutions affect the company’s activity.
For example, you can estimate the company’s profit if sales are 20% below schedule or costs increase by 10%. You probably won’t be able to anticipate all the things that might happen, but it’s good to at least analyze the impact of somewhat predictable events.
In addition, the inclusion of sensitivity analysis in the business plan creates a positive impression of a potential financier.
4. What will be the main financial indicators?
Financial indicators are especially important for a potential investor. Usually, the following should be included:
- Profitability indicators – for example, the rate of return on assets (net profit / total assets), the rate of return on invested capital (net profit/equity);
- Liquidity indicators – for example, current liquidity rate (current assets / current liabilities), immediate liquidity rate (cash / short-term debt);
- Solvency indicators – for example, indebtedness rate (total debts / total liabilities);
- Indicators regarding the degree of use of assets, stock turnover rate (turnover / average stock), the average duration of receivables collection and payment of suppliers, etc.
A useful tool in planning at this stage is the Performance Indicators template.
5. What are the necessary financial documents?
These are very important components in a business plan. In the case of an already existing company, at least:
The balance sheets for the last 2-3 years of activity must be attached ;
- The last balance of accounting verification.
- The pro-forma balance sheet for the next period (according to the standards from the western countries, the monthly forecast balance sheets for the first year and the annual balance sheets for the next 3 years);
- The profit and loss account forecasted for the same period;
- Cash flow forecast.
Although this is not a traditional accounting requirement in Romania, it is still an essential element. Income and expenses recorded in a profit and loss account do not coincide with cash inflows and outflows.
Many companies may have profits on paper, but go bankrupt due to lack of liquidity.
For a better record of expenses, use the Cash Flow template.
6. How is the required amount determined?
Determining the need for financial resources is a major goal of a business plan. The data collected in the previous stages should outline a fairly clear picture of this. Determining as much as possible the amount needed is necessary to avoid blocking the business due to a lack of resources or unnecessary expenses incurred by unused resources. If the business plan aims to attract a financier, it is essential to come up with a realistic amount, while giving sufficient assurance about your participation in the success of the business. If the granting of the amount is conditioned by a certain level of owner involvement in the financing of the company, it is recommended that the amount with which you will contribute will exceed sufficiently the minimum level imposed.
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