Administrative And Selling Expenses In Statement Of Cash Flows What To Include In The Financial Section Of A Successful Business Plan

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What To Include In The Financial Section Of A Successful Business Plan

Having extraordinary skills and talents in the field of business, being hardworking and determined, persistent, having great ideas and being full of energy is a fantastic combination for a successful business career. But all those great points mean nothing if the bottom line doesn’t show the end result.

The financial section of the business plan is where all the operational items included in the rest of the business plan come together. There are three essential elements to a properly thought out and well-crafted business plan. Those elements are a profit and loss account that shows income and expenses, a cash flow statement that determines liquidity, and a sensitivity analysis that shows risks and opportunities in a business plan.

Estimated profit and loss account should be prepared on a monthly basis for the first year with an annual estimate for the second year. The first year of every new start-up business can be difficult due to finances and raising funds from a stable start, which is why the first financial year should be detailed.

Estimated profit and loss account is a financial calculation of all sales, purchases, costs and prices included in other areas of the business plan. Apart from this, the cost of business administration should also be fully accounted for. All figures in the business plan income and expense account should be fully supported by material estimates contained in other sections and derived from those sections.

Multiply the sales volume of each product from the sales department by the sales prices considered. At least keep the various additional income that can be expected. The resulting financial calculations generate expected monthly sales turnover.

Using information from the production or operations section of the business plan and including a purchasing section, the sales volume should be evaluated against the expected purchase costs of products and services. It creates a cost of sales figure that gives an estimate of gross profit per month after subtracting it from sales turnover.

The business plan should include notes and comments on all other major cost items, including estimates of staffing requirements. A monthly estimate of expected costs of starting a business including administration and overhead costs can be prepared. Business running costs are an important area to forecast in detail as selling prices and costs can be determined with some precision errors in the cost of running a business so a good business can fail.

Monthly forecasting is done by entering the profit and loss account sales turnover, cost of sales and business running expenses, deducting overheads to arrive at the net monthly profit. The bottom line may start at a monthly loss but will show a satisfactory profit until the volume increases. If a loss is shown, don’t manipulate the numbers to show a profit that hides the truth, instead go back to the sales and expense department and consider what action needs to be taken to reasonably increase the gross profit margin or reduce overhead costs.

Cash flow is often critical to a small business plan, and lack of capital or liquidity to meet a small business owner’s ambitions and projections is a major reason small businesses go into liquidation before those business aspirations are met. The cash flow statement is based on the volumes and costs included in the business plan and is stated in such a way as to indicate the financial resources required.

Cash flow differs from profit and loss account because profit and loss account only shows the difference between sales made and expenses incurred. A cash flow statement shows both profits as well as volume changes in purchases and stock, one off payments, financing debtor balances offset by creditor balances, and how liquid and solvent the business is.

Preparing the cash flow statement falls under the purview of accountants. A simple cash flow statement can be prepared by starting with the net profit or loss each month, including both raw materials and finished goods inventory, deducting the cost of stock yet to be sold and deducting any payments such as bills. Prepaid and the cost of paying for the purchase of fixed assets.

Also when a new business starts, the amount owed to suppliers, creditors is zero and the amount owed to customers, creditors is zero. During the year these balances will change from month to month depending on the financial terms and conditions of the business and the movement of these balances must be entered on the cash flow statement. An increase in debtors decreases cash flow liquidity and an increase in debtors increases cash flow liquidity.

The third component of the financial section is the analysis of the overall business plan and forecasting in what is called a sensitivity analysis. Technical accounting is an important field for most non-accountants, but is nevertheless an important area because it is a financial sensitivity analysis that shows both the increased financial opportunities and the financial risks inherent in a business plan.

All major areas of the business start up plan such as sales volume, sales prices, key cost factors and other factors affecting the business should be evaluated. Set an upper limit and lower limit for each item based on likely market conditions and risk.

Financially evaluate each upper and lower limit for each item and determine the impact of each on the profit and loss account and cash flow statement. Also combine the financial impact of multiple factors to assess the impact of a combination of events on a small business. Low sales volume can be uncomfortable for a small business, but the risk with low sales prices and high costs can be serious.

The financial section of the business plan should be accurate and reflect the projected financial performance of the start-up business. It is also important that it is honest and assesses the risks involved so that if any of these risks materialise, immediate management action can be taken to limit the financial impact.

Some of these risks will occur in practice and early warning can be the difference between survival and failure, and liquidity is the most dangerous risk.

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