A financial plan is an important document for a business owner to create. It is a road map for how your business can make money, pay bills and earn profits, and a well-rounded financial plan opens doors to lending opportunities from public and private sources. The different parts of a financial plan address issues from how you price your goods or services to how much you need to make to stay in business.
Before starting your business, you must have an idea of the viability of the goods or services you’re providing. Will people want them? How is the competition? Is the market too saturated with your product, or do one or several companies have the market you’re targeting cornered? Are your prices too expensive? Also, you need to know your customer base. Are your products or services suited for men or women, a younger or older population, affluent, middle-class or low-income? Market analysis consists of researching the answers to these questions to improve your chances of running a successful business. You don’t want to promote a high-priced product fit for families to 20-something college students who have part-time jobs.
Determine where the money from the sales of your products and services goes. You must cover the expenses you incur while in business, so you map out how your cash flow satisfies your bills by making a cash-flow analysis. To cover your bills and make a profit, you need to charge a price that does both, which you can calculate using a break-even analysis. Not only can you find the price to market to your customers, but you also know how many sales you need to make on a daily, weekly or monthly basis to pay all of your bills.
How much money do you plan to make or lose in the first year? The first five years? How much money do you need to run company operations in the same time periods? When will you break even? In this part of your financial plan, you list projections so you have benchmarks for how your business is progressing. Keep in mind, however, that your projections are not always based on real figures. For example, you may know how much it costs to build your product or pay rent or payroll, but you don’t know how much money your business actually will make. It’s always a good idea to review your projections and the rest of your financial plan periodically to account for any changes that come along.
A financial plan is not a requirement for you to open a business. However, if you’re looking for money or partners to invest in your business, you may be asked to present one. Lenders want to know if they’re going to get their money back, how they’re going to be paid back and how long it will take. Good projections, informative worksheets and detailed graphs in your financial plan can help get you the capital you need.
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