Biting The Bullet On Financials
While there’s no escape from preparing the financial information for a business plan, a step by step approach will help make the task less onerous.
Similar to the overall business plan itself, the financial information should be divided into specific sections to ensure focus and relevance.
It should reflect short-term and long term strategies, be realistic and supported by sound research where applicable.
The data should cover areas such as the current financial position of the operation; forecast cash flow, profit and loss, and balance sheet; break even analysis; sources of finance; capital requirements; timing and stages of finance; and fixed asset requirements.
Much guidance can be gleaned from the numerous books and software packages that are available, together with professionals, such as your RAN ONE accountant, who specialize in the field.
However, you can’t escape from doing some of the hard yards yourself.
The more involved you are in the process (of gathering and presenting the financial information), the more ownership and control you have of the operation, says Richelle Moran, small business development specialist.
The financial section of a business plan all comes down to dollars and cents, according to a spokesperson from the Faculty of Business and Economics at Monash University in Melbourne, Australia.
“It is all about cash flow … one of the biggest problems for business is running out of cash,” he added.
To make a start, you need to do some “brainstorming” to identify the key financial information relevant to your operation and list these as sub-sections.
The next step is to gather the information, including tangible evidence to support projections, under the appropriate sub-headings.
At this stage, putting pen to paper and organizing the information in point form is advised.
This provides a basic framework from which to flesh out the information in more depth.
Moran warns that you have to be realistic in your projections and note that it is often safe practice to err on the conservative side.
According to Moran it is common for businesses to overestimate income and to underestimate expenses.
“It sounds obvious but it is not that obvious when you are doing it,” Moran said.
Pickett recommends a hard-nosed and independent “reality and credibility check” by an experienced person, such as your RAN ONE accountant, who stands outside the business and is not emotionally involved to objectively review the projections
“Listen carefully to their feedback without being defensive or trying to ‘sell’ or convince them that the projections are achievable,” Pickett says.
He noted that sudden increases in sales or other revenue projections relative to historical levels may be based on unrealistic assumptions or expectations.
Business should ruthlessly apply the 80/20 rule in which they focus on accurately forecasting the few “big ticket” items (the 20 percent) that usually account for most of the revenue and most of the costs (the 80 percent).
It is also important to distinguish clearly between financial profit and loss projections and cash flow projections.
The profit and loss statement is necessary to ensure your business is making acceptable profits; the cash flow statement shows whether or not cash is available to cover the timing differences between paying expenses and being paid for goods and services provided.
Another tip from Pickett is to clearly identify what, and for how long, additional funding will be required.
Also, it is good practice to have two sets of projections covering both the bearish and bullish ends of the spectrum.
While it is motivating to set challenging hurdles to achieve, it is also important to recognize the potential minimums.
Pickett says it is important to ensure that your team members responsible for achieving projections are committed and have been involved in the planning process in some way.
Devising simple performance measures can help provide early indicators of future trends and outcomes. These can include the number of quotations made or the value of forward orders.
As part of your financial blueprint, you also need to have some form of contingency plan for any unexpected event that may impact adversely on your operations.
Equally important is a plan for where to obtain emergency cash.
Moran cites the increasing cost of insurance premiums as an area often overlooked when gathering financial information.
“In such volatile times as these, it is important to get quotes for what it is going to cost for insurance for the next 12 months,” Moran says.
“It is no good just adding 10 percent to the previous year’s premiums.”
One of the problems facing some small to medium sized businesses is that they do not have the resources to employ the financial expertise required.
Some owners try to be jacks of all trades but are masters of none.
Money spent on professional assistance should be viewed as an investment in the future.
A sign of a good business plan, and that includes the financial information section, is one that is dog-eared and full of scribbled notes.
It proves it is used regularly and reviewed.
Article courtesy of RAN ONE: http://www.ranone.com/press_room/news.asp?ID=3868