A GOOD BUSINESS IDEA WITHOUT PLANNING IS NOTHING

Growth is facilitated by structure. It’s simple to spin your wheels and float through life without making progress if you don’t have a strong foundation and a road plan for the future. You can prioritize your tasks and track your progress with the help of effective planning. In the case of money, create a financial plan to monitor your financial objectives and gauge your progress toward financial literacy. A sound strategy enables you to develop and advance so that you may concentrate on attaining your goals. Your money may work for you as long as your technique is sound. Fortunately, creating a healthy financial plan doesn’t have to be complicated. Here is a step-by-step instruction manual for making a financial plan.

Mins to Read: 17 – 23 minutes

Age Bracket: 16-50

John Templeton believed that his best skill was judging, and others who knew him agreed. Without getting bogged down in the weeds of detail, he could see the big picture and grasp the fundamentals of a problem. He would subsequently take bold action based on his newfound understanding. So, we have to use our minds, not our feelings, every time we make a big decision.

What is a Financial Plan?

A financial plan summarizes your company’s present financial situation and growth expectations. Consider any records that show your current financial status as a snapshot of the state of your company and the predictions as your hopes for the future.

By creating a road map to get there, financial planning is a practical approach to arranging your financial condition and objectives. It would be best to consider what you presently have, your long-term ambitions, and what opportunity costs you’re prepared to accept to achieve your financial goals when choosing where to start. Creating a plan today will help you go ahead in the long term, whether you’re a future billionaire or still in college. Financial planning is an intelligent technique for everyone.

Every facet of a person’s finances, including savings, investments, debt, insurance, taxes, retirement, and a variety of other aspects that you will cover in greater detail below, should be included in a financial plan. A financial planner’s assistance is optional while creating the strategy.

Why is a financial plan critical to your company’s success?

The financial plan is a snapshot of your company’s present status, as was previously stated. The predictions inform your short- and long-term financial objectives, which can serve as a springboard for establishing a plan of action. It aids you in establishing reasonable goals for the achievement of your company as a business owner. If you are well-versed in your finances, you are less likely to become aback by your present financial situation and better equipped to handle a crisis or rapid growth.

A complete financial strategy also increases your appeal to investors in addition to helping you operate your firm more effectively. It reduces your risk and demonstrates that you have a solid plan and track record for expanding your company.

The benefits of developing a financial plan are detailed below:

better personal financial management
heightened planning for future costs
Clearly stated retirement goals
lower likelihood of debt
increased chance of accomplishing financial and personal objectives
Reduced levels of stress, anxiety, and concern
greater likelihood of financial success

Motivations for Making a Financial Plan

Even if you aren’t sure whether you’re prepared to devote time to making a financial plan, the following arguments should help you see why you should:

Financial Goals

A financial plan is helpful for anybody trying to save money for a significant purchase in the future, such as a down payment on a home, mortgage, or automobile.

Personal Goals

A personal financial plan may help you reach your financial objectives, such as saving money, increasing your portfolio value, or buying a luxury automobile.

Standard of living

The continuous accrual and disbursement of funds are stressful for most people. Still, this tension may be mitigated by developing a financial plan. This is the fact that a financial plan is well-organized and lays out specific steps for paying off debt.

Components of a Financial Plan

Whether you’re beginning a new firm or developing an expansion strategy for an existing one, all business plans should contain the following:

Profit and loss statement
Cash flow statement
Balance sheet
Sales forecast
Personnel plan
Business ratios and break-even analysis

These financial documents may help you, even if you’re starting.

How to write—

The remarkable thing is that they don’t have to be hard to comprehend or complex to develop. You may start building a detailed financial plan with only a few reasonable predictions about how much you might sell and your costs.

Profit and Loss Statement

Profit and loss statements, income statements, pro forma income statements, and P&L (short for “profit and loss”) are various financial statements that explain how your company generated a profit (or incurred a loss) during a specific time. It is a table that includes a breakdown of all your income sources, costs, and net profit or loss for the whole reporting period, usually three months.

Profit and loss statements may be presented in various ways, depending on the company you run and how it is set up (nonprofit, LLC, C-Corp, etc.).

How to construct a profit and loss statement

Your earnings (called sales)
Your “cost of goods sold” (COGS)—remember that certain business types, such as services companies, could not have COGS
Your gross margin equals your revenue; subtract your cost of goods sold.

The foundation of your business model, or how you generate money, comprises these three components: revenue, cost of goods sold, and gross margin.

You should also include a list of your operational expenditures, which are costs of doing company that isn’t immediately related to generating revenue. Think of them as the set expenditures like rent, electricity, and insurance that don’t change based on how well or poorly your income performs in a particular month.

Where to look for operational income

It would be best if you subtracted your operating expenditures from your gross margin in the P&L statement to get your operating income:

Operating Income = Gross Margin – Operating Expenses

Your operating income will often be similar to your “profits before interest, taxes, depreciation, and amortization,” depending on how you categorize sure of your costs (EBITDA). This is how much profit you produced before considering accounting and tax requirements. There are other names for it, but they all relate to the exact figure, also including “profit before taxes and interest,” “gross profit,” and “contribution to overhead.”

Finding net income

Your so-called “bottom line” is your net income, calculated by subtracting the “ITDA” from your EBITDA and shown at the bottom of your profit and loss statement. Your net income is just your EBITDA less your costs for interest, taxes, depreciation, and amortization:

Operating Income minus Interest, Taxes, Depreciation, and Amortization Costs equals Net Income.

Cash flow statement

Your cash flow statement is just as significant as your profit and loss statement. There is no getting past the fact that businesses depend on cash. A description of your company’s cash inflow, cash outflow, and ending cash balance, usually every month, may be found in a cash flow statement.

You will find it challenging to manage a successful company without fully understanding how much cash you have, where it comes from, where it is going, and when it is being spent. And you won’t be able to raise money without the cash flow statement, which elegantly presents that information for lenders and investors.

Using the cash flow statement, you may better comprehend the discrepancy between your reported earnings on your profit and loss statement and your absolute cash position.

Even if your company is very lucrative, you could not have enough money to cover your expenditures and maintain operations. Because of this, it is crucial to comprehend this financial statement. It is conceivable to be unprofitable yet still have enough cash on hand to maintain operations for many months while you wait for things to improve.

Comparing cash and accrual accounting

The accrual method and cash method are the two types of accounting.

For example, if you had a significant presale for a new product, you wouldn’t account for all the preorder sales income until you began producing and delivering the product. This is known as the accrual technique. The “matching concept,” which underpins accrual accounting, is matching income with associated costs. With the cash approach, you don’t have to worry about matching up the costs connected to a particular sale or vice versa; instead, you account for your sales and expenses as they occur.

If you employ the cash method, the information on your cash flow statement and your profit and loss statement won’t change much. Although it could make things easier, I advise against doing that. The accrual accounting system offers you the most transparent picture of how your firm functions, so if you aren’t currently utilizing it, you should think about doing so.

Why you should use accrual accounting for cash flow

Suppose you aren’t currently utilizing accrual accounting. In that case, you should think about doing so to get the most transparent picture possible of how your organization runs.

This is why: Consider that you own a summer camp company. When using the accrual method, you wouldn’t recognize revenue until after the service was rendered, so both the income and the expenses for the camp would be accounted for in July. For example, you might receive payment from a camper in March, several months before camp begins in July.

The cash approach would have allowed you to record the income in March. Still, all the costs in July gave the impression that you were successful in the months before the camp but unprofitable in the month the center took place. Cash accounting may get a little complicated when determining how successful an event or product was, making it more difficult to fully comprehend the ins and outs of your company’s operations. The easiest method to understand how your organization operates is via accrual accounting.

Balance sheet

Your balance sheet is a picture of your company’s financial status at a particular time. How much money do you have in the bank, what do your clients owe you, and what do your suppliers owe you?

What should be disclosed on your balance sheet

Assets include your inventory, cash in the bank, and accounts receivable.
Liabilities include your outstanding debts on credit cards, loans, and other obligations.
Equity is often merely the owner’s equity in small enterprises. Still, it may also comprise investor shares, retained profits, stock proceeds, etc.

Because it is an equation that must balance, it is termed a balance sheet:

Liabilities + Equity = Asssets

Your assets will always equal the sum of your liabilities plus your equity.

Your overall profit or loss at the end of the accounting year is added to or deducted from your retained profits (a component of your equity). As a result, your business’s retained profits represent the overall profit and loss the company has experienced from its start.

However, if you are a sole proprietor or other pass-through tax entity, “retained earnings” don’t really apply to you since all profits and losses are passed across to the owners rather than being rolled over or retained like they are in a corporation. As a result, your retained earnings will always equal zero.

Sales forecast

Your forecast should be an ongoing aspect of your company planning process since it is a crucial component of your business strategy, mainly when lenders or investors are involved. Your company planning process should include your sales projection regularly. The sales figure you use in your profit and loss statement should be the basis for your prediction.

Every organization will have various demands; therefore, there isn’t anyone kind of sales forecast that works for all of them. Depending on the nature of your company and how closely you want to monitor sales, you should categorize and structure your forecast accordingly. Generally speaking, you’ll want to split your sales prediction into functional subsets for planning and marketing.

For instance, if you run a restaurant, you should split your lunch and supper sales projections. However, a gym owner can find distinguishing between the various membership kinds helpful. If you want to be detailed, you might even segment your prediction by-product, creating a new line for each item you sell.

You should include the segment’s “cost of goods sold” with each section of the expected sales (COGS). Your expected gross margin is the amount that separates your anticipated sales from the anticipated cost of goods sold.

Personnel plan

The personnel strategy may be seen as an argument for why each team member is essential to the company’s success.

In the grand scheme of things, the personnel strategy’s significance will primarily be determined by the kind of your enterprise. If you run a one-person business with no workers, the information below may not be crucial to you and can be summed up in a few sentences. However, suppose your company is more significant, and your labor expenses are higher than average. In that case, it is in your best interest to think of time to analyze the impact your employees have on the bottom line.

If you decide to draft a comprehensive personnel strategy, include each management team member’s backgrounds, skillsets, and areas of expertise. Consider this a defense of the value each team member brings to the table and an argument for why they deserve the compensation (and/or a stock portion, if any) they get. A business plan section devoted to a company overview is the proper place to include this information.

Suppose it’s more appropriate for your company and the goals of your business plan. In that case, you may also utilize this section to include whole divisions. The inclusion of merely individual members of the management team is not required.

Allotted but unhired staff employees or departments may also be detailed here. Specify the qualifications and experience you’re seeking in a candidate and explain the wage range you’re willing to provide (s).

Business ratios and break-even analysis

Ratios in business explained

You may efficiently compute the common business ratios using only your profit and loss statement, cash flow statement, and balance sheet. These ratios are not required to be included in a business plan, particularly for an internal strategy. Still, it is always good to be familiar with the most important ratios.

Typical profitability ratios consist of the following:

Return on sales
Gross Margin
Return on assets
Return of Invenstments

Typical liquidity ratios include:

Debt-to-equity
Present ratio
Operating capital

The most often utilized and requested ratios by company owners and lenders are likely gross margin, return on investment (ROI), and debt-to-equity.

Break-even analysis explained

Your break-even analysis computes how much you must sell to “break even” or pay all of your expenditures.

To determine your break-even point, you must determine the contribution margin of the product you are selling. In the instance of a restaurant, the contribution margin is the meal’s price less any related expenses. For example, the dinner costs the consumer Php 2500. The food expenditures are ten dollars, and the salaries to prepare and serve the dinner are fifteen dollars. Your margin for donation is Php 1250 (Php 2500 – Php 500 – Php 750 = Php 1250).

Using this technique, you may predict what level of sales income is required for your business to break even. Suppose your monthly fixed expenditures are Php 250,000, and your typical contribution margin is 50 percent (as in our restaurant example). In that case, you will need Php 500,000 in sales to break even.

Making a financial strategy needs having a long-term perspective.

Without a defined strategy, resources are more likely to be allocated haphazardly. Suppose we do not have a long-term, goal-oriented attitude (something to aim towards). In that case, it is easy to divert from the road toward financial independence, even if we have constructed a suitable working budget. Putting our long-term aspirations and immediate priorities on paper is crucial. Prioritizing this set of objectives might also be beneficial.

Additional financial resources for small businesses

Are you ready to create your own financial plan? Check the links underneath for additional information on developing a successful financial strategy for your small company.

Creating a budget might seem overwhelming, but it doesn’t have to be. Making your financial objectives evident by writing them down is a valuable step. Here I have done my best to describe stages, in order of importance, that should be addressed while building your personal financial plan. Of course, everyone’s financial condition is different. Modify the information I’veI’ve given you above to meet your requirements.

Hopefully, you’ve learned something from this piece. Now go out and hunt after financial independence! As usual…

FAQs

What are the components of the Financial Plan report?

The content of the Financial Plan would be various based on what we need to see in the Plan. Here are the components

Profit and loss statement
Cash flow statement
Balance sheet
Sales forecast
Personnel plan
Business ratios and break-even analysis

Why is Financial Planning important for your business?

Financial Planning is very important to your company; it reduces your risk and demonstrates that you have a solid plan and track record for expanding your company. It aids you in establishing reasonable goals for the achievement of your company as a business owner. If you are well-versed in your finances, you are less likely to become aback by your present financial situation and better equipped to handle a crisis or rapid growth.