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Accounting: How to compile a financial plan  

A financial plan is an important 'road map' for you to test the commercial viability of your business, and to reduce the risk of failure. It is also a critical tool that you need when raising finance from banks or possible investors.

Your financial plan should outline (in rands-and-cents) all the money that you plan to spend and earn, and explain where all that money will come from and go to. The plan, therefore, needs to answer these basic questions:

  • How much money will your business need to spend before it can start making a profit?
  • Where will that 'start-up' money come from?
  • What will you need to spend it on?
  • When will you need to spend it?
  • Where will you get the money?
  • How much will your business earn?
  • Who will it earn if from?
  • How long will it take before you get paid?
Financial planning

To answer these questions, you plan needs to forecast:

  • Sales for your first year (or for your next year if you are already in business). For a new business, forecasting sales is particularly tricky because you don't have actual sales from the past on which you can base your expectations. Instead, your plan must be based on good research and must be closely tied to a realistic marketing plan that will generate the sales you expect. Read the factsheet on How to put together a marketing plan to help estimate your sales.
    • Make the sales budget as detailed as you can, to make it very clear what you plan to sell and at what price.
    • Set out expected sales on a monthly or quarterly basis.
    • If the business sells a range of products, prepare sales budgets for each of them.
    • If products are sold in more than one area, then it may be helpful to have a sales forecast for each area.
  • Cost of sales, which are those direct costs that do into the making the products that you sell (such as materials and consumables).
  • Gross profit, which is the difference between the value of your sales and your cost of sales (that is, the 'profit-before-overheads').
  • Overhead costs, such as salaries, rent, Regional Services Levy, etc. (all those costs that don't change from month to month, irrespective of how many products you make or sell).
  • Net profit, which is the actual profit that you make after all your costs (including overheads) are deducted from your sales revenue.
  • Start-up costs. These are the costs that you will incur just once when you start up, such as the market research, planning and registration costs.
  • Debtor and creditor period, which is the amount of time that your suppliers give you to pay your accounts with them (in industry, this is usually 30-60 days if your business has a good track record), and the time that you give your customers to pay you. For small businesses, this is often a life-or-death aspect of the business because (due to limited cash resources) you will often be expected to pay for supplies before your customer pays you for the products you have sold.
  • Cash flow, where you must ensure that your plan allows enough cash to be available in the business to pay your suppliers, often before you get paid for your sales. In a retail business, you might be smart enough to sell you goods very quickly for cash, giving you a breathing space before you have to pay your suppliers (if they let you buy 'on account'). Most small businesses, however, struggle to get their sales revenue in before they have to pay their suppliers. Your financial plan must provide for this. (Read the factsheet on The Cashflow Forecast for more guidance on this.)
  • How much you will need to borrow. Your cash flow forecast warns you in advance if you are going to run out of cash at any point during the month. You can then make arrangements to reduce spending, to borrow money or to inject capital when necessary. For start-up businesses, it is essential to know exactly how much finance you will need to take the business through its early stages, and to pinpoint when you will need it. Potential financiers of your business will be particularly interested in this forecast.
  • How quickly you will be able to pay it back. A forecast of your monthly sales revenue and costs will give you a monthly profit or loss figure. Your financial plan should be able to show that sales will rise as your business takes off, allowing the business to move from a loss-making position in the early months to a profit-making position. The forecast then needs to show how many months it will take before your loans are repaid by your profits.
  • Other items to consider in your financial plan

  • A forecast income statement. This shows your income, sales and expenditure during a specific period, and need to include:
    • The sales (or 'turnover') for the first 12, 24 and 36 months;
    • The expenditure for same periods;
    • How much profit there will be in each period; and
    • How the profit will be divided. Read the factsheet on The Income Statement for more guidance on this.
  • A forecast balance sheet. A balance sheet shows the assets of your business (anything owned by your business or owed to it) minus its liabilities (all money owed by the business to its creditors). The result is a 'net asset value' of the business. This is not an indication of the business's profitability, but is still important to potential funders as it indicates how financially vulnerable the business is. For example, a business can be making good profits, but if it does not develop its asset base (and continues to have a weak balance sheet), it is vulnerable to any slump in the market. Read the factsheet on The Balance Sheet for more guidance on this.
  • How much you will invest. Lending institutions in particular want to know what personal investment you are putting into the business. This gives them an indication of how serious you are about your business idea, and how committed you are to making it work. Understandably, they do not want to be the only ones in the business facing the risk of losing money.
  • Your personal budget. As many small businesses start up with just the owner, it is important to know what you need to earn to survive. The business cannot operate effectively if you are not covering your own personal costs, so work this out in detail and stick to it.
  • Other sources of finance. List the amounts of money coming into the business from other sources, and the terms under which this money is being used (is it being invested by other members or shareholders, is it being borrowed, who is lending it, and when does it need to be repaid?).

    Finding out about financial planning
  • If you don't know basic financial management concepts and functions, learn them. Read, study, or ask. It is the basis of business. If you need to, you can use your accountant as a financial teacher, as long as you don't lean on him as business strategist.
  • If at all possible, learn how to use spreadsheets for your financial planning. Your competition is, and it gives them an edge over anyone who doesn't.
  • Your marketing, operations and staffing plans should give you the answers to the first six forecasts above (sales, cost of sales, etc).
  • Look at the industry standard for average debtor and creditor periods.
  • Speak to other business owners.
  • Approach support organisations and business consultants.

Relevant factsheets