Planning for success – your first simple business plan
So, you’re making a business plan. You know your business, that’s the easy part. Making a financial plan, well, that sounds harder, right?
This article is all about making a simple financial plan for your business. Each element of the business that you need to consider will be broken down into steps, which when added together make a full financial picture of the business.
A disclaimer: A financial plan is not the beginning and end of planning a business. You need to understand your market, your product and how you’re going to sell it. But as well as the ‘how’ your business will run you do need to get to grips with the numbers.
Why should I be doing this?
I’m hoping you’re reading this because you already want to make a financial plan. If you are planning a business but haven’t thought about making a financial plan, consider this:
Investors and lenders need to see reasonable, well-presented and easily understood financially forecasts in order to fund your business.
You need exactly the same thing, so that you have an idea of where your business is heading, what its potential is, and what dangers it might face.
Investors aren’t looking at your financial plan for fun – they’re looking for clues to the potential strengths and weaknesses of the business – and it’s in your interests to do the same.
Let’s start with the basics
Most financial plans can be split into 4 sections:
Core question: ‘How much money do you really think you can make?’
To answer this question effectively, keeping in mind the need for clarity in presenting and explaining your plan, you will need to break down the income you expect to make into smaller chunks. This will also help you get the numbers right by listing out your sources of income, ensuring everything is accounted for (which is what ‘accountancy’ amounts to, after all).
Most businesses receive their income from selling something, be that good or services. Start by listing out the types of income your business receives and how often that income is received.
For example, a consultancy business might sell:
40 one hour sessions every month
£60 a session (£2,400 per month)
paid up front
10 full days consulting every month
£500 a day (£5,000 per month)
paid within 60 days
1 workshop event every 2 months
£2000 per event (£2000 every 2 months).
paid within 60 days
It is useful to split these sources of income out. Some happen at different times, and others are paid at different times. It will be important for the businesses cash flow exactly to include when the business is paid for the goods or services it delivers.
In addition to splitting these income types by their financial impact, it would be useful for the consulting business to break them down by client or channel. The business plan will then be able to easily demonstrate what type of client might be most valuable in the future.
Working out income
1. Divide your income into 1-20 discrete sources on income. More than this may be too much depth for an initial financial plan, but it will depend on your business.
2. For each source of income, determine how much you charge, how many sales you make a month, and how quickly you estimate you will get paid for each sale. You can estimate this as a number of days.
In addition to planning the income you receive you also need to consider the direct costs associated with it. ‘Direct costs’, also called variable costs, are costs that are incurred every time a sale is made, such as an online transaction charge or the costs of shipping or materials. If you sell more, your direct cost of sales will increase. If you sell less, they will decrease.
Working out direct cost of sales
1. For each source of income consider if it has any direct costs that fluctuate depending on how much you sell. Some sources of income may have more than one kind of direct cost.
2. For each direct cost, determine how much the cost is, when it is payable, and how quickly you will need to pay it.
Core question: ‘What does the business need to pay in order to keep running?’
Expenditure covers the businesses overheads – the costs that are payable no matter whether the business is selling well or poorly. It is the cost of keeping the lights on, literally and figuratively.
What these costs are will vary from business to business, but they generally include things like:
- Utilities (bills for electricity, water, heat etc)
- Internet and phone lines
- Business rates
- Professional fees (accounting and legal)
- Office costs (stationery etc)
For a full list, check out our guide to costs.
Working out general overheads
1. Create a list of overheads that the business pays on a regular basis. These could be costs that take place every day, week, month or even just once a year.
2. For each overhead, determine how much the cost is, when it is payable, and how quickly you will need to pay it.
Also included in expenditure are the salaries you pay your employees and the other associated costs around employing them.
Working out employee costs
1. If you have a large number of employees, consider how best to structure them for your plan. Do they have salary grades, or do their salaries fluctuate due to commission? If the latter it may be best to take an average salary.
2. For each salary, determine how much the salary is, when it is payable and other associated costs around paying the salary, such as National Insurance and pension contributions.
Core question: ‘What does the business own?’
What the business owns will be obvious in many cases. It’s important to work out what your business actually owns, and its approximate value, as it will help investors and lenders determine how risky the business is to invest in, along with information from the funding section below.
Assets could include:
- Desks & chairs
- Display stands
- Storage units
- Land & Buildings
If it is pertinent to the business don’t forget to include fixtures and fittings, like wall units, lighting, carpets etc.
Working out assets
1. Create a list of everything the business owns.
2. For each asset, determine its approximate current value, and how much value you think it will lose (or gain) every year.
Core question: ‘How is the business funded?’
It’s a good start to split out the ways your business is funded into discrete types of funding. It will not only help you understand your business but also help investors and lenders.
Your own investment
It’s important to think about your business as its own financial entity. If you are funding any of the businesses activities you are investing your (personal) money into the business. Record the amounts of money you invest into the business and the times at which you do so.
Many businesses take out loans to get started. You will need to record how much money you take out, and how much you will need to pay in capital & interest payments in order to repay the loan.
If you can attract investment from outside this can be a quick way to get your business funded, however it often comes with a cost. This cost could be selling shares in the business to an investor, paying the investor dividends when you reach certain levels of profit, or giving an investor some measure of control of the business’ future. You should record how much each investor invests in the business, when the investment is made, and any financial ramifications of this investment, such as regular payments to the investor, or paying them a percentage of your profits.
Profits from the previous year
If your business has been profitable in the previous year you can include retained earnings (after tax) part of the funding section of your business plan. Obviously if you are starting a new business you won’t have these! But given time, you will!