Financial plan essentials
Friday, November 28, 2008/
Raising capital is not impossible, but there are some essentials you will need to have covered. This is the second part of my summary for your financial plan. Click here if you missed the first part.
A business that fixes its prices without knowing its costs may, without being aware of it, be giving money away to every customer – and the more customers you have the larger the deficit when the costs are finally added up.
By then the business may be insolvent! It is important, therefore, to know your costs. Once you know this you can safely set selling prices, prepare realistic estimates and quotations for customers, and be aware from week-to-week (or more regularly if you wish) of how your business is progressing.
It is a good idea to include in your plan a table of the cost to produce one item of your product/service. This will cause you to think about the costs and enable you to prepare more realistic financials.
6. Breakeven analysis
The breakeven analysis is a study of the inter-relationships between cost, the volume of activity, and profit. The objective is to manipulate the variables of cost, price, and sales volume to determine how this changes profit.
The breakeven point occurs when there is neither any profit nor any loss. To the owner of the business, knowing the breakeven point is extremely important as this is the minimum level that needs to be achieved to avoid making a loss.
7. Project evaluation
Capital expenditure management involves the process of planning and controlling major expenditures. These longer term decisions typically are concerned with changes in the firm’s productive capacity and product/service lives. They require the commitment of long term investments or resources that will accrue benefits into the future.
Analysing major long term projects is termed “capital budgeting” or “capital investment analysis”. A number of project evaluation methods can be used including the following –
pay back period, relates to the length of time it takes for a project to pay for itself out of its cashflows; rate of return, expresses the average annual profits from a project as a percentage of the average capital invested in that project; and discounted cashflow, reveals the viability of the project in terms of the present value of the future net cash flows (preferred method).
8. Track record
For a continuing business, the financial plan must include a summary and discussion of the past financial history. This will provide a basis for comparison as well as establishing your credentials. Too many entrepreneurs neglect to include information about what has happened in the past. This annoys the hell out of investors.
9. Funds statement
This provides investors with a statement of what you will spend their investment on. Keep it simple. All you need is a table that covers:
- The use of funds. For example, marketing costs, staff costs, etc. Keep it broad. They have the detail in the financials. This is a very brief summary. No more than about eight items.
- When each tranche of funding is required.
- How much is required in each tranche.
- What milestones will you achieve at each payment point. This information is in the plan – if you have done a good job.
Spend some time on these financials. They are a critical part of your business plan and investors will focus on these figures during your negotiations.
However, keep in mind that, most probably, these figures will change as you develop your business. That’s OK. You still need to do this work even if you know that down the track things will change.
That’s it for now. Till next week…
Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.
To read more Gail Geronimos blogs, click here.