The success of your small business will depend to a great degree on how well you plan and manage your finances. This is especially true if you will be seeking financial help, either from a start-up loan, an investor or from a government grant. It is imperative that you have a well-developed financial plan as part of your business plan.
There is an old saying: “No one plans to fail, but many fail to plan.” This is important to remember if you are a new business owner. Starting up a new business can be deceptively simple, but from the very outset you need to be aware that even the most basic business model entails considerable financial planning.
Your financial plan is where you need to prove your numbers and show that your business idea is viable and profitable. As part of your financial plan, you need to have a financial projection. The first 12 months of your forecasts need to be more detailed than the projections you make for the next 3 to 5 years. You need to include in those projections your costs and revenues because this is what lenders and investors want to see.
Your financial forecasts and projections should include:
• Cash flow statements — This is your projected cash balance and monthly cash flow pattern expectations for the first 12-18 months. Your cash flow statements should include working capital, salaries and projected sales.
• Profit and loss projections — This is the level of profit you expect your small business to make, given your projected sales. In it, you need to include the costs of providing goods and services as well as your planned overhead costs such as renting an office or purchasing/leasing office equipment and furniture.
• Sales forecast — This is the amount of money you expect from sales of your products and/or services.
Other things you need to consider when you are creating your financial plan:
- How much capital do you need, especially if you are seeking external funding?
- What security can you offer to lenders or investors?
- How do you plan to repay what you have borrowed and do you have a repayment schedule?
- What are your sources of revenue and income?
- Do you have a contingency plan that you have developed to offset any risks?
It is important that you review actual financial results each month against the numbers in the forecast, especially in your first year. This monthly analysis will provide you with vital information about changes that you may need to consider making – such as cost cutting if revenues are substantially below your original forecast.
Once you have developed your financial plan, you will be well served to have an accountant review it before you take it to lenders or investors. A lender or an investor may see merit in your business idea, but if your financial planning is not what they expect, you could be walking away empty handed.
Besides reviewing your financial plans and helping you to plan you taxes, an accountant can also help you with setting up your books. You want your books set up so that it will be simple for you to see your numbers in the clearest way without ant kind of confusion. Finally, if you are planning to hire employees, your accountant can help you set up your source deduction accounts.