A comprehensive financial plan is essential to help make sure your business idea will pay the bills, make a profit and help you achieve your financial goals.
You can get started on creating yours by following the steps below.
1. Calculate set-up costs
Research and list all the items you need to start your business to get a good idea of upfront costs and whether you’ll need to borrow funds. Here are some examples of costs that typically come up at the start:
- Registrations and licences such as registering for an ABN and business name
- Rent and utilities
- Equipment and fit-out
- Starting working capital – money needed for day-to-day operations
2. Forecast profit and loss
Estimate your sales and expenses on a monthly, quarterly or yearly basis to gauge whether you can expect to make a profit or loss for each of these periods. This will help you develop sales targets, pricing and likely profit margins. You can base your numbers on the performance of similar businesses in your industry by using industry benchmarks, market research and industry analysis.
3. Work out your cash flow projections
A business that makes a profit can still run out of cash. You may, for example, make a lot of sales the first month but only receive payment for these sales a month later. Completing cash flow projections can help you recognise whether you’ll have enough cash to run your business or if you’ll need additional funds.
Some useful tips to keep in mind include:
- Project your cash flow at least 12 months ahead to capture any seasonality
- Be realistic – some customers may be slower to pay
- Take actions to manage your cash flow if you find a cash shortfall
4. Forecast balance sheet
List all your expected assets and liabilities after your first 12 months to create a financial snapshot of your business. This is a good way to evaluate the financial health of your business idea – you can use your balance sheet numbers to work out if you’ll have enough resources after a year to run your day-to-day operations.
Your balance sheet should include these three sections:
This is what your business owns – examples include cash, inventory and buildings
What your business owes – examples include accounts payable and loans
This is the portion of the assets that belongs to the business owner. To calculate this, total all your assets and then subtract your total liabilities.
5. Find your break-even point
Completing a break-even analysis shows you the number of sales needed to cover costs – anything above this number can be counted as a profit. The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judging whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.
Things to consider are:
- Estimating realistic sales. For example, if you’re a service business you may want to base figures on 60-70% utilisation rather than assuming all your time can be charged
- Testing different scenarios – you can easily do this by changing your prices, costs and sales
- Documenting the reasons behind your numbers provides credibility to your forecasts –lenders may also request this when you need to borrow
6. Look for professional help
For extra guidance, an accountant can help you assess your prospective financial position and ensure you’ve thought through all potential income and expenses.