A financial business plan is a part of internal corporate planning. It can be said that this is a comprehensive plan for the functioning and development of the company in terms of value.
Such a plan is necessary for the effective use of your company’s resources.
Methodical approaches to drafting financial sections of a business plan
A business plan contains the main aspects of planning the production and commercial activities of the enterprise. With it, you can determine how to solve specific financial and economic problems for the future, convince lenders and investors in providing financial resources.
Analyzing the experience in the development of business plans, it can be concluded that of all its sections, the least developed is financial plan.
The financial section of the business plan considers the issues of financial support for the activities of enterprises, firms, organizations, and the most effective use of available financial resources on the basis of assessing current financial information and forecasting the volume of sales of goods and services in the markets in subsequent periods.
- Forecast of financial results
- Cash flow projecting
- Forecast balance of the enterprise
As a rule, the forecast period covers 3–5 years. Consider the sequence of projections on the same example of an enterprise already working in the field of food production and wishing to release a new product in the forecast period. It is interested in how the results of the activities will be formed in the future, taking into account the new production program.
Forecast of financial results
The purpose of the forecast of financial results is to present the prospects of the enterprise activity from the point of view of profitability. Especially investors will be interested in the level of profitability in the upcoming period, as they can see what proportion of the profits the enterprises will receive.
The first, second year, etc. are the years of the forecasted period, beginning with the next year in relation to the year of the development of the business plan (base year).
The starting position for the compilation of this forecast is the planning of the volume of sales in kind and in value terms. In this case, calculations are made for all types of products, and then summarized.
Subtracting the net cost of sales from net sales, you obtain the gross profit.
The operating costs include the costs of developing a new type of product, marketing research, administrative costs, and sales costs.
To calculate the amount spent for interest payments, information is required on the level of interest rates on short-term and long-term debt, as well as on the schedule of debt repayment.
Taxes from profit constitute a significant amount – 50% of balance profit minus the amount of past losses (negative profits). The amounts of the transferred losses are determined by adding the retained profit of the previous year (if it is negative) to the net profit of the current year.
The difference between the balance sheet profit and the corresponding amount of the paid income tax gives the net profit indicator.
This indicator along with the indicators of net sales and cost of sales are fundamental for further analysis of the dynamics of possible changes in the financial situation over the five-year period.
As a rule, such calculations are multivariate depending on the expected sales volume, prices, production costs (optimistic forecast, pessimistic, average).
The content of the financial part of the business plan
The financial plan as an integral part of the business plan is fundamental when planning the creation of a business. All calculations must be carried out very carefully.
It is important to keep in mind that the planning of key indicators is done for 5 years of the firm’s activity, and it is very important to take into account the costs of starting a business.
The forecast of the main indicators of financial activity
The main purpose of drawing up a financial plan model is economic calculations in terms of profitability.
- Sales volume
- Prime cost of products or services
- Gross profit
- Operating costs
- Expenses on taxes and interest
- Net and book profit
Cash flow planning
Cash flow planning involves forecasting the receipt of funds from all sources, this may not only be income from sales, but also the interest from the sale of shares or the lease of land.
- The total amount of money invested in the opening of a business
- Sssets and liabilities of the firm
- Forecast of profit (income from sales and interest from leasing) and losses (expenses for materials and labor of workers employed under an employment contract, inflation, payment of interest on the loan)
- Evaluation of financial efficiency
When planning efficiency, all cash costs and revenues are discounted and brought to current value.
When making a forecast, it is important to take into account such aspects as the inflation rate (considering the optimistic and pessimistic options) and risks.
- Commercial risk (includes aspects such as problems with the sale of goods or the activities of competitors)
- Financial risk (includes such aspects as insufficient project financing, inability to repay borrowed funds)
- Industrial risk (includes such aspects as poor equipment, low quality products) and is part of the investment risk for investors
The balance of assets and liabilities is compiled on the basis of the calculation of net profit and turnover of cash.
Forecast of the balance of the enterprise
The balance sheet of the enterprise contains specific indicators that reflect the success of the firm. The forecast is made at the end of each year, and all the features of the firm’s activities for the coming year are taken into account. It can be a loan of money or attraction of investors.
After drawing up a balance sheet, you can see the rate of return, the return on assets and capital, the ratio of own to borrowed funds in the future.
Summing up, you should compile reports containing financial indicators of the financial business plan. Namely, the income and expenses report, the cash flow statement, the assets and liabilities report.
The financial plan, as an integral part of the business plan, involves the provision of all calculations in the period up to 5 years, thanks to which you can see the main economic indicators, as well as to identify the liquidity of the project model.
Express analysis of predicted indicators
The financial business plan is an important part of business plans, which are compiled not only to justify specific investment programs, but also to manage the current and strategic financial activities of the enterprise.
At the same time, a very important stage of financial planning is the conduct of serious analytical work by calculating the most important relative indicators (financial ratios), the dynamic series of which allow you to determine the trends in the development of the financial situation in the enterprise when making specific decisions (when new products are produced).
Financial coefficients are calculated on the basis of the data obtained during the design and comprehensively characterize the project in question. As a rule, at this stage of forecasting, the calculation of the most important indicators that give an idea of the level of solvency, profitability of the enterprise’s activity in the period under review is carried out.
The purpose of this kind of express analysis is to present the development tendencies of the enterprise in the most concrete form in the context of the declared program of actions, drawing a conclusion about the expediency (inadvisability) of the implementation of this project. Financial ratios calculated with the results of projections are included in the table of the financial summary and can significantly affect the opinions of potential lenders and investors.
- Liquidity indicators that characterize the ability to repay short-term debt
- Indicators characterizing the management of funds – the period of inventory turnover, accounts receivable, the period of repayment of accounts payable
To assess the financial stability of an enterprise or the degree of dependence on debt obligations, the ratio of debt to equity is calculated. It allows judging the stability of the position of the enterprise and its ability to attract additional funds.
Sometimes a financial plan is concluded by analyzing the breakeven point to show how the sales volume should be, so that the enterprise can carry out production without break-even. Such analysis has a certain value for potential creditors of the enterprise.
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