One of the most important parts of any business plan is the finance section, for two main reasons: The first is that it will help you to plan and budget your business expenses better, and the second is that it will provide you with crucial information regarding the goals and targets you need to hit for your business to be viable.
Unless you have experience handling business finances the idea of planning it based on projections can seem a bit daunting. While it may take some time to wrap your head around it – it is actually not that complicated if you go about it methodically:
• Forecast your sales
Considering you have no real data, your sales forecast is going to be purely an estimate – but it should be something that you feel your business can realistically hit. If you want you can explore different methods of sales forecasting and see which suits your business best. Break it down on to weekly, monthly, or quarterly values – and remember that your sales are likely to start small and grow over time. If you want you can even create three sales forecasts – one high, one low, and one average.
• Budget all expenses
Expenses are a little bit easier to deal with as you can put in some hard values for fixed expenses such as rent, payroll, electricity, and so on. Aside from that however you will have some expenses that are a bit more variable, such as marketing – which you will want to estimate a value for now.
• Project income and create a cash flow statement
Based on your sales forecast, you should be able to project your income and its growth over time. From that you can start to compile a cash flow statement that covers both income and expenses. Keep in mind that not all of your sales will translate into immediate income, and some invoices may be paid late – so you’ll want to account for that in your cash flow.
• Create a balance sheet
From all of your projections you can then come up with a balance sheet for your business that will contain assets and liabilities. Dealing with loans can be tricky because business loans are a liability in the balance sheet, but interest repayments will appear as part of your cash flow. It can get even stickier if your business and personal finances aren’t sufficiently separated, and you may want to visit this website for help clearing off your personal debt so it doesn’t complicate things.
• Carry out a breakeven analysis
Assuming you have projected the rest of your business finances, the last step is to analyze them and figure out at which point your business is going to start breaking even. What that means is that at some point in time its income should exceed its expenses – allowing you to make a profit. The reason it is important to carry out this analysis is it will let you know how viable the business is, and when you can expect to start seeing a return on your investment.
Hopefully this will give you some idea of how you can plan out your business finances based on projections. As you can see there are several areas that will need to be estimated, but there are also some that are more concrete. If you are able to make accurate and realistic estimations for key areas such as sales and variable expenditure, you should arrive at a plan that accurately tracks the state of your business finances over the first few years.