Mark Edwards, general manager at www.rocketlawyer.co.uk, brings you this essential guide to creating the perfect business plan during your lunch break. Follow the six-part series exclusively online each week at www.talkbusinessmagazine.co.uk.
Step 5 – Financial information and funding requirements
The financials are the nitty-gritty of any business plan. Although many of the figures for a start-up may only be projections, it’s important to be as realistic and detailed as possible.
Investors will want to see that you’ve done your sums so include detailed financial information that proves you have a grasp of the all-important monetary aspects of running a business. Unless you’re setting up a charity or social enterprise, you need to be aiming towards making a healthy profit but remember to keep it realistic!
A cash flow forecast is one of the most important elements of a financial plan. The amount of capital you require can be determined largely from accurate predictions of cash flow. Even if your profit is high, a lack of readily available money can lead to major problems including insolvency. An example could be if you’re waiting for substantial invoices to be paid; you may be owed a lot but without cash in the bank, you won’t be able to manage your expenses. You can use a spreadsheet program to create your cash flow forecast – this will also allow you to keep it regularly updated once you start trading.
The simplest way to forecast cash flow is to list monthly income and expenditure costs, preferably with annual totals. You can also separate these figures out into various different sections (e.g. operational expenditure, bill payments etc.). Try to think pragmatically and account for all kinds of variables. For example, you’ll probably need to use more heating over the winter months so your expenditure on gas and electricity will increase. Similarly, if your product is seasonal (e.g. flip flops or wellies) then you’ll need to revise your income for the relevant seasons.
If your business is already operating, you will need to produce a profit and loss (or P & L) statement to indicate how well the business has performed overall. It differs from the cash flow forecast in that it shows how much profit has been made (or the amount of loss sustained) over a specified period (usually a year), but it doesn’t account for actual cash in the bank. The P & L is also split up into various sections (e.g. payroll, rent, marketing expenses etc.). Investors will want to know where money is currently going in and out and how much. It also helps them to determine whether the level of investment you are seeking is viable.
With regards to investment, although you can simply specify a set figure, if you require funding over a long period you could detail the initial amount needed to get the business off the ground and agree to further investment contingent upon a certain level of performance over a specified period.
Of course, this investment will need to be repaid at some point, so do state a realistic repayment period – it’s better to overstate the time required to avoid disappointment and show that you have taken into account different possible scenarios.
An investor will want to know exactly why you need their money and what it will be spent on. You may have an excellent business idea but you’ll have to prove that the funding sought will directly lead to success and is actually required in the first place (e.g. do you have savings or other personal assets?). Finally, the return on investment (ROI) is a key element of any business plan, showing how much effect an investment will have upon the business. Think about this carefully and use online calculators to work out how much your investors can expect to receive in addition to their initial investment.
Next week we round-off our business plan with the final step – the SWOT analysis