No matter how good your business idea is and how much money you manage to invest in it, the foundation of the company is its financial stability. Especially in the business plan, you need to show that in the foreseeable future your startup will get off the ground and become profitable. How to write the financial section of a business plan? Read our article to find out.
Financial section of a business plan – table of contents:
- What is a financial section?
- Set goals
- The income statement
- The balance sheet
- Cash flows
- Break-even point (BEP)
- Benefits of a financial plan
What is a financial section?
What exactly is the financial section in a business plan? In the financial section you should focus on forecasting the startup’s financial situation as it is mainly needed to attract investors or take out a loan. When creating such a section, you can better understand the functioning of your company and learn about the prospects of how the company can manage in the future.
It is a good idea to start building a financial plan by setting goals for the company. Goals can be divided into short-term, medium-term and long-term. The first are usually set for no more than 5 years. Here we can outline, for example, repayment of debts and loans, but also the purchase of new assets or increase of market presence. Medium-term plans are usually implemented in 5 up to 10 years, and these are larger investments. Everything that we want to realize in more than 10 years is referred to as long-term goals – difficult, often costly, but important for the development of the company.
The income statement
Next, it is worth including an income statement in your financial plan. This will give the reader of the business plan an insight into expenses, revenues, and profit for a particular period. This will also allow you to assess the most important financial results and get an idea of what condition your startup is currently in – whether it is making a profit or a loss.
The balance sheet
In a financial plan, it is also important to include a balance sheet which shows how much equity the company has in a given period. This is a kind of summary of the financial situation. On the one hand, you need to determine the company’s assets, that is, everything the startup owns. On the other hand, you have liabilities, that is debts owed to the creditor of the company. Learning the exact value of assets and liabilities, you can determine the amount of equity. You simply have to subtract the liabilities from the assets.
Another element that must be included in the financial section of the business plan is the cash flow projection. It shows how cash is expected to flow in and out of the company. In this way you can easily determine when expenses become too high and when you should think about external funding. Thanks to the cash flow projection, potential investors reading the business plan can tell whether the company has enough cash, and whether it is worth investing in it.
Break-even point (BEP)
In the financial plan, it is also worth defining the break-even point. What is it? The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for your business. If your company exceeds a break-even point, it means it has started making a profit. Determining the break-even point comes in handy when analyzing sales figures, when analyzing costs, and when setting prices. Thanks to a break-even analysis, you can think about what to do to increase profitability and reduce the time to reach this threshold.
Benefits of a financial plan
What are the benefits of a financial plan? With such an analysis, you can clearly set the company’s goals. A financial plan will allow you to manage your cash flow more sensibly, enabling you to better allocate your company’s budget. Such a plan also helps to identify and reduce costs. This, in turn, minimizes financial risks. Above all, however, a financial plan increases the chances of raising capital.
Read also: 7 startup roles explained.
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