When running a business of any kind, it is essential to have a finance plan to follow. This is an overview of your finances, such as company accounts, as well as the future trajectory you hope to follow.
This applies when launching a new enterprise or pursuing growth in your existing company. Beyond this, your financial plan should be reviewed and revised continually to ensure it is accurate and places your company on the right footing.
To create an effective financial plan, you need to understand the different elements to consider. While many may believe this requires a trained accountant or intricate financial knowledge, it is simpler than you think to craft a good strategy that accounts for all the aspects associated with your business finance.
In this blog, we have listed the essential parts that should appear in every finance plan, how you can compile each section and what they indicate about your enterprise.
Profit and loss statement
The first part of your financial plan should be your profit and loss statement. It is otherwise known as the income statement.
In this statement, you will find information relating to your revenue, operating costs and overheads. It can be created by subtracting your costs (such as loan repayments, supplies, bills, salaries, etc.) away from your income (sales, grants, loans and so on). Essentially, it shows the net profit that your business is making on a monthly basis.
Most businesses generate profit and loss statements at least once a year or each fiscal quarter. It is advised that you should produce one every month.
The purpose of the profit and loss statement is that it highlights whether your business is running at a profit (where your income exceeds your expenses) or a loss (where your outcome is higher than the money coming in). Ideally, your company should be generating a profit and, if the statement indicates otherwise, it could suggest that work needs to be done to readdress the balance between your sales and expenses. In this sense, the statement acts as a health check for your finances and general business.
It is worth noting that the profit and loss statement will just be a snapshot of your accounts at that given time. To get a comprehensive view of your finances – past, present and future – you will need to look elsewhere.
Cash flow projection
Next up in your financial plan is the cash flow projection. Maintaining adequate cash flow is vital for your operations, allowing you to meet payments, cover staff salaries and keep supplies coming in.
Whereas a profit and loss statement gives a historical view of your spending versus income, your cash flow projection indicates how cash is expected to come in and out of your enterprise for the foreseeable future. Usually, these are done every month, in some businesses more often.
You can create the projection by calculating your estimated revenue (sales revenue plus VAT, if applicable), expected expenditure and your bank balance from the previous month. By adding the balance to that month’s expected cash inflow, and subtracting the expected cash outflow, you should be able to tell if you have enough cash in place to cover everything you need to.
Your cash flow projection is crucial because, as we have already mentioned, having healthy levels of cash will allow you to spend the money you need to operate and prevent blockers to productivity. By monitoring it, you will be able to understand how much working capital you have available in the coming period and make adjustments if your operations are at risk.
Cash flow is also a great indicator that your expenditure is appropriately aligned with your income. If cash flow is low or negative, it usually means that your cost of sales is too high, that your business is not breaking even or you don’t have adequate cash management processes in place. By having prior warning, you can look into lowering your expenses or utilising support.
Balance sheet
The balance sheet section of your plan lists the net-worth of your company, including its assets such as stock, debtors and money in the business accounts. It will also detail liabilities, such as loans, accounts payable and so on.
Your balance sheet can be worked out using the “net worth = assets – liabilities”. If you need help, there are plenty of balance sheet templates out there that will help compile this.
The balance sheet matters because it highlights the value of your company – including equity tied up in your physical assets. This means you can get a better view of all the equity you own, not just that sitting in your bank accounts. It also shows the money you owe, which is essential if you have creditors you need to repay that may detract from your overall value.
Like your profit and loss statement, your balance sheet is a snapshot at that particular time. As such, it is vital to check the position on an ongoing basis. It is also worth comparing previous monthly figures to take stock of how your business net-worth changes over time and whether you are achieving the growth you want in that area.
Sales forecast
Your sales forecast is a prediction of how much you will sell in the upcoming period. This can be determined by reviewing past sales performance, as well as any adjustments to your operations that could affect sales – such as new products, recruitment of additional salespeople and marketing campaigns.
If you sell a range of products or services, you may wish to separate out the forecast for each product/service. This will help you to get a better sense of the value of each sale and which products are expected to perform best.
Sales forecasts are significant because they show the direction you want to move in. Most companies will want to gradually increase sales each month – leading to higher revenue and profit – and your sales forecast should indicate whether this is happening. It should also directly correlate with your cash flow projection.
If you are pursuing growth – such as expanding to new locations, increasing output or adding new products or services to your portfolio – it is essential to have the rising sales to facilitate it. So, your forecast will also be a useful tool to determine when you might be able to take that next step.
If your forecast does not look favourable, it allows you to identify ways to improve them, such as through staff incentivisation programmes, marketing and so forth.
Your finance goals
One of the reasons that have a finance plan is so crucial is that it gives you a path to follow. Every company will want to see their finances improving over time, whether it be increasing profit, enhanced cash flow or a rising net-worth.
Your financial plan should be tied to the reality of your business – such as your expenditure and sales – while also helping you to plan towards achieving your goals and understanding the finances you need to get there.
When compiling your financial plan, you should bear in mind the goals you hope to achieve and even document these as part of the plan. Over time, consider these goals against your plan to determine when you may be able to make them a reality – such as expanding your enterprise or investing in a new project. For a new business, this will include determining when you will break-even and start generating a profit.
By keeping track of your goals, you will be able to get a better perspective from your financial plan as you continue to review it each month or year. You will also understand when you need support via loans and other financial sources to achieve these goals, which can make getting there more accessible.
Get advice
Creating a sufficient financial plan, which incorporates all the elements listed above, will give you great foundations for your business – and this could be the key to your success.
Further, it will help you to understand your situation and keep track of your accounts over time. This will enable you to identify the times when you need support, such as through cash flow management and funding requirements. Many funders will ask to see a financial plan as part of the application process, so having a robust one will help to secure funding.
However, crafting your financial plan can be challenging and get it right is essential. As such, it is worth utilising any support available to assist the process.
If you need guidance in creating a plan or understanding the financial solutions that may be available to you, our team of advisors are here to help.
We have expertise across a range of business types and funding challenges, allowing us to offer you useful advice that is tailored to your unique needs. This includes helping you to set up your business models and financial plans.