In this article
- 1. What is the purpose of financial planning?
- 2. Step-by-step guide to your financial plan
- 3. 3 key points for a financial plan
Welcome, welcome to a new masterclass here in Lexington!
Now that my colleague Paloma has given you the keys to write a business plan, today I wanted to focus on one of the main points of it, the one and only, the true responsible of making your idea a reality: the financial plan.
First, let me introduce myself! This is María Abraín, economist, part of the management team in Lexington and in charge of the efficient use of economic resources, identifying opportunities along the way and making decisions with the main purpose of generating investment and cutting costs.
My everyday revolves around economic terms and forecasting. Because of that, I would love to share with you some aspects of interest that will most definitely help you with the financial plan of your company.
What is the purpose of financial planning?
Financial planning has its eye on determining the investment needed for your project and its sustainability. This part of your business plan will be able to tell you if your idea is really viable, financially-speaking.
The financial plan of a company studies how much money is needed for the project and how to get it, as well as the products or services offered, their cost and their market price.
Do not worry! I’m sure many of you, whether you are a new entrepreneur or an experienced business man, have already this information on your mind, because basically the financial plan of a company studies how much money is needed for the project and how to get it, as well as the products or services offered, their cost (both fixed and variable) and their market price. A piece of cake, isn’t it? 😉
Step-by-step guide to your financial plan
The financial plan of a business is a document that must stay alive and updated regularly, always in hand to help you facing anything that may come.
These are the 7 fundamental sections you must consider to build the financial plan of your company.
1. INITIAL INVESTMENT PLAN
First, you want to specify the initial investment your project requires, meaning the fixed assets that will remain in your company in the long-run.
For this point, you should consider expenses related to software, equipment, your office space…
2. FINANCING SOURCES
It is essential to establish your funding sources for the initial investment, both external and your own, and the repayment method. Briefly, you want to know how your project is going to be financed.
It is essential to establish the funding sources and the repayment method for your project.
3. BUDGET AND CASH FLOW PLANNING
Cash flow is one of the main statements to study if a company is be viable, because it measures its capacity to make a profit and to self-finance without resorting to third parties.
Besides, it would be interesting to forecast your cash flow so you can anticipate anything that may come your way. The longer the time horizon of a cash flow forecast, the less accurate it is expected to be.
4. PROFIT AND LOSS STATEMENT
Think of it as a summary of the revenues, costs and expenses. Easy? For sure, but also decisive!
Also forward-looking, it’s crucial to learn about the company’s capacity to balance depreciation up. Depreciation is a method to allocate the costs of a fixed asset over the period in which the asset is usable.
In case your company needs a replacement for some of its production assets, would it be able to face the costs by itself?
It is crucial to learn about the company’s capacity to face effective depreciation of assets.
6. BREAK-EVEN POINT
Not only will it help you to make decisions regarding prices, but it will also allow you to analyse a bit deeper your projects’ viability.
The break-even point will show you at which price and in which environment your company will make a profit. To obtain this you want to put revenues and expenses face to face.
Besides, if you are taking your first steps as an entrepreneur, calculating the payback period is also very important. The shorter the payback, the more profitable your idea may be!
You could think of the financial balance as a picture of your business at a specific point in time. It reports the company’s assets, liabilities and shareholders’ equity. This statement is a great way to analyse a company’s financial position, so you can determine how it is performing.
Remember to keep it updated!
3 key points for a financial plan
Once you’ve reached this point, all done, it’s time to draw conclusions!
A financial plan, as we’ve seen, is a very visual statement, but if you need some parameters to translate all this information, here you have some key requirements your company should meet:
1. The research budget should meet the initial investment.
2. It shows a sufficient profit.
3. You have liquidity, which means your company is able to pay all expenses in time.
We know accounting and bookkeeping can be such a headache for many entrepreneurs, so I wanted to share an extra tip of my own:
Planning to know if your project is viable is as important as actually carrying it out and adjusting to different situations along the way. Resilience is what it’s called, a concept we’ve heard so much of.
With a strong financial plan, a good idea and enthusiasm, I have no doubt it will rock!
Thank you so much for coming to this masterclass today!
Please, let me know in the comments below if you have any doubts ⏬! I’d be pleased to answer all your questions. I wish you the best of luck with your financial plan, it’ll be a success, period!