Developing a small business financial plan is crucial to creating a workable business plan. In order to create a small business financial plan, an entrepreneur will need to research start-up costs, estimate first year expenses, forecast revenues, find the break even point, and create a starting balance sheet. This process may take several weeks or months, but is often well worth the time; without a clear and realistic small business financial plan, it may be impossible to attract investors or qualify for loans.
In most cases, businesses incur costs even before they have their grand opening. Start-up costs can include everything from office supplies to hiring bonuses, and often include equipment purchases, insurance buys, licensing fees, and an initial advertising buy, as well. Researching and recording start-up costs allows an entrepreneur to know how much capital he or she must create to even open the business. Investors want to see a detailed list of start up costs to determine if the entrepreneur has realistic expectations of how much starting a business will cost.
The next step in developing a small business financial plan is to estimate costs for the first year or few years of operations. Many businesses are not profitable in their first few years, and thus must be prepared to absorb costs until the business passes the break even point. A operating cost analysis will usually include items such as raw materials, wages, utilities, advertising, and other month-to-month expenses.
After estimating costs, a small business financial plan will also need to include forecasting for revenues. For a new business, the entrepreneur may have to rely on data about other businesses, the state of the economy, and his or her estimation of initial demand for a business's services to create this forecast. Existing businesses that are creating a new financial plan will be able to use historical income data to determine revenue levels and more accurately forecast future earnings.
Examining the starting and operating costs against the revenue forecast will give data about the break even point. This occurs when the business has covered all of its expenses; any earnings beyond this point will be considered profit. A small business financial plan may include an estimated date for reaching the break even point.
The combination of all of this data into a table results in an opening balance sheet. This will list all assets, liabilities, and forecasts, and serves as the financial blueprint for staring the business. The balance sheet allows an investor or lender to quickly comprehend the total costs and expected revenue for a business, as well as all existing assets and debts. The balance sheet can also serve as a template for monthly financial reviews, allowing the entrepreneur to see how closely the business is matching its financial goals.
