Creating a financial plan can be terrifying for a startup business. A financial plan is vital for any business. Businesses that have a complete financial plan in place can expect long term success and can pitch to investors.
Thankfully you do not need any accounting knowledge to create a financial plan for a startup. All you need to know is key elements and what goes into them.
We have eased the process of creating a financial plan for startup businesses. Check out the complete article to create a financial plan and successfully launch your business.
What is a financial plan?
A financial plan is a complete picture of current finances, your financial goals and strategies you have set to achieve your business goals. The best financial planning consists of details like cash flow, savings, debts, investments and so on.
How to make a financial plan for a startup:
1. Create an expenses budget for your startup
The first step you need to take is to create a rough plan for your expenses. Your investors want to know your budget, what your investors can expect and your monthly expenditure.
Some key points you need to include in budget planning:
Products/services you are selling, with pricing and volumes.
How many employees do you need and their salary details?
They also want to see how much you need to pay your bills and how long would it take to get back your principal amount with profit.
2. Cash flow statement
A cash flow statement is as essential as your profit and loss statement. The cash flow statement gives you details of how much business you brought in, how much you have spent and the remaining balance typically per month.
Without understanding how much cash you have, the profit you are getting and where you are investing you may go through a hard time in running a successful business. Without understanding how much cash you have, the profit you are getting and where you are investing you may go through a hard time in running a successful business. Without a cash flow statement that gives complete information for lenders and investors, you may not be able to raise funds.
The cash flow statement helps you in understanding the difference between your profit and loss – and what your actual cash position is.
3. Balance sheet
The balance sheet is a screenshot of your business’s financial condition. At present where do you stand, how much cash do you have in the bank, how much do your customers owe you and how much do you owe your vendors?
Things you need to mention in the balance sheet:
Assets: Current bank status, inventory, your accounts receivable etc
Liabilities: Your account credit card balance, loan repayments etc
Equity: For most startup businesses, this can be just owner’s equity but it can include even investors shares, stock proceeds, retained earnings and so on.
It is called a balance sheet because its an equation the balance:
Assets= Liabilities+Equity
Total liabilities added your total equity is equal to the total of your assets.
End of the financial year, your total profit/loss adds to or subtracts from your retained amount. This makes retained amount your business’s accruing profit and loss as the business’s inception.
4. Break-Even Analysis
Break-even analysis helps your lenders understand at which point you will start making a profit that will cover your fixed costs. The break-even analysis is essential for any business for selling products/services or to set the right price for products/services.
It is normally projected in graph format sales volume on the X-axis and revenue on the Y-axis. Variable and fixed costs are added.
This analysis is highly suggested for service-based businesses to show complete profit points for certain services.