Financial Plan - Assignment Example

?FINANCIAL PLAN FINANCIAL PLAN (Your (Your (Year) Table of contents Item Page Introduction 3 A. Other sections of the business plan 3 i. Business description 4 ii. Mission and Vision of the business 4 iii. Goals and objectives of the business 4 iv. Market analysis 5 v. Competitor analysis 5 vi. Industry analysis 6 vii. Product offering and marketing plan 6 viii. Operational plan 6 ix. Organizational structure 7 x. Implementation plan 7 B. Financial plan 8 i. Start up costs estimates and financing 8 ii. Sales projections 9 iii. Assumptions made in revenue and costs estimates 9 iv. Projected income statement 10 v. The projected balance sheet 11 vi. The statement of cash flows 11 vii. Break even analysis 12 viii. Performance analysis 12 C. Conclusion 13 D. List of references 14 Introduction A business plan can be defined as a statement that sets forth the business goals that an individual has; the reasons that compel such an individual to believe that such goals are attainable and the steps and plans that the individual has towards that will help them attain those goals. The plan would also contain background information about the potential business and the team that will be used to help achieve the goals. The business plan has several sections the most important of which is the financial plan which details the revenue and costs forecasts of the business, the budget, the cash flows of the business, the costs requirements, the costs management plans to be applied, the sources from which the business will source its funds, the implementation plan of the business’s finances and the business’s control measures for such finances. Therefore the financial plan can be defined as a plan that shows how much revenue will be generated from the business, how such revenue will allocated on various types of costs, how the surpluses shall be invested and how the deficits shall be sourced. Therefore this paper shall therefore scrutinize the financial plan section of the business plan to determine the use of that section of the business plan which in most businesses is usually made up of three distinct financial statements namely; the income statement, the balance sheet and the cash flow statement (Pinson 2008). The paper shall first scrutinize other sections of the business plan which include, mission and vision of the business, business description, the goals and objectives, market analysis, competitor analysis, industry analysis, product offering, marketing plan, operational plan, sales strategy, organizational structure and implementation plan. Finally, the paper shall detail the information that is included in the financial plan section of the business plan. A. Other sections of the business plan i. Business description This section of the business describes the type of business for which the business plan is being prepared. This section gives a brief description of what products or services the business will be offering and a brief description of the market in which the business will be operating in. The brief description of the product or service offering and the brief description of the market is used to determine the uniqueness of the business which helps it stand out from the rest of the businesses in that particular market. Finally the name of the business and the type ownership the business will assume are described in this section (McKeever 2010). i. Mission and Vision of the business The mission section of the business plan spells out the business strategy which seeks to answer the three main questions which potential customers might be having regarding the business in question. These questions are what the business does, how it does it and for whom. The vision statement on the other hand, spells what goals the entrepreneur of the business had for the business and what he/she envisioned the business to be in future (John and Harrison 2009). The mission and vision helps the customers and the general public to understand what the business is all about, how they conducts its affairs and for the business was intended. ii. Goals and objectives of the business Based on John and Harrison’s 2009, description of the business plan, this section seeks to expound on the business’s vision and mission by detailing the objectives and goals that the business seeks to attain in the short term and in the long term. These objectives help the business achieve its mission and vision and also are used as the benchmark upon which the business measures its growth. iii. Market analysis This is a very important section of the business plan because the success of the business is highly dependent on the knowledge of the market in which the business operates. Markets evolve with time and as such the business should evolve with the markets too. This section of the business studies the potential market which the business is likely or intends to reach. For instance, a business plan for landscaping business should consider all homes, properties, clubs, recreational centers etc within a given geographic region as its market and as such should analyze such a market thoroughly and include the findings in the business plan. In this section, various aspects of the target market are analyzed which include, the population of potential customers in that market, the income levels, the demographics of that population, their purchasing behavior, the population growth rate etc. these aspects of the target market helps to determine the level of sales that the business is likely to derive from that market, the growth of such sales which is based on the growth of the market, the number and type of products or services to be developed for that particular market and the potential for future expansion of the business (Berry 2012). iv. Competitor analysis This section of the business plan involves an investigation of the competitors in the market, their range of products and services and how they offer such products and services. To carry such an analysis, one must first determine who the competitors are which indicates that one will have to develop the previous four sections of the business plan first so that he/she can have an idea on what business they intend to start (Ward 2012). Once this has been determined, aspects of the competitor can therefore be analyzed and the information gathered is used to differentiate the business’s products and services so that they effectively compete with those of the competitors (Berry 2012). v. Industry analysis; Any type of business forms a smaller unit of a larger section of the economy which is referred to as an industry. Therefore there are factors that affect the industry in which the business operates and such factors will also affect the business in question which indicates that it is vital to analyze the industry so as to determine the industry factors that have the potential of affecting the business and plan for such factors right from the start. This section helps the potential stakeholders in the business understand the business has vast knowledge of its operations and the environment in which it will operate (BizPlanIt 2012). vi. Product offering and marketing plan This section of the business plan describes the products or services that the business intends to offer to its customers and how such products are differentiated from those offered by the competitors. In most business plans, this sections include two main components of the product or service offering which include; 1) product; this part gives a description of the products or services to be offered and also compares it with competitors’ products, 2) Pricing; this part gives a description of the how the product or services will be priced and also compares it with the prices of similar products or services in the industry, 3) place; this part describes how the products or services will located in business in order to ensure that they are clearly visible to the customers and finally 4) promotion; this part describes how the products will be advertised to ensure that they customers are made aware of the kind of products are services the business is offering (Peterson and Tiffany 2011). This section also details the intended marketing and advertising strategies that might not be directly attached to products that the business intends to employ in order to ensure that its sales revenues are achieved. vii. Operational plan The operational plan section of the business plan details the daily operations of the business. The section describes the production process of the product in question or in case of services, it describes the way in which the services will be structured, the individuals who will be responsible for the production process and the expected development of the product or service on offer. All the physical needs of the business are detailed in this section, such needs include, the business’s physical location, the facilities required to run the business smoothly and the equipment necessary to produce the require services or products. In most cases the inventory requirements, suppliers that the business may require and the description of the manufacturing process are described in this section. This helps the stakeholders of the business understand the core processes of the business (Ward 2012b). viii. Organizational structure This section of the business plan describes the business’s human resource structure and the reporting structure of different employees of the business. This is the section that determines what level of talent the business shall need and how such talent will be utilized to meet the business’s goals and objectives. The section also details the responsibilities that will be assigned to each employee in order to encourage a controlled workplace and by extension encourage smooth operations in the business (Finch 2010). ix. Implementation plan Once all the above sections of the business plan have been prepared and the financial plans have also been prepared, the plan will have to be implemented for the business to be operational and for the set goals and objectives to be achieved. This is where the implementation plan becomes useful because a business plan without implementation cannot make the business dream come true. The implementation plan sets out the objectives, assigns the tasks necessary to make the business operational and create deadlines which will help in actualizing the prepared business plan. The implementation plan allocates time towards each activity in the business plan, create a recruitment plan for the employees of the business and also track the progress of the business (Richards 2012). B. Financial plan The financial section of the business plan is the most important section because it contains the most vital elements of the business plan. Each business is started with a main purpose of making profits; the process of making profits involves revenues and expenditures as well as capital costs where the difference between revenues and costs results into a profit (Karami 2007). All these financial aspects of the business are detailed in the financial section of the business plan which determines the sales revenues that the business is likely to generate, the costs estimates which the business is likely to incur, the amount of capital the business will incur in order to start, the cost of human resources and other costs that may be incurred. All these financial concepts are summarized in three very important statements namely; the projected income statement, the projected balance and the projected statement of cash flows (Ward 2012c). These three statements helps to detail the profits made by the business, the balance of assets and liabilities of the business as at specific periods in time and the movement of cash into and out of the business. There are other parts that make the financial plan complete and these are the break even analysis, the cost and financing statement, the assumptions made in the estimation of costs and revenues and the performance analysis statement which is usually in the form of ratio analysis. Therefore the financial section of the business plan is made of the following parts; i. Start up costs estimates and financing this section of the business plan details the estimated costs of starting the business which includes the cost of acquiring necessary assets which will help in production of the business’s products or services, the costs of starting inventory and other working capital needs the business might require at the initial stages of operation, the cost of personnel at the initial stages, the cost of office or manufacturing space, the cost of registering the business and other costs necessary to start the business. All these costs are estimated using the help of other sections of the business plan like the marketing plan, competitor analysis, industry analysis, product offering, organizational plan and the operational plan of the business each of which helps to determine the costs to be incurred in each function of the business (The business plan guide 2010). This section is vital in sourcing funds because it informs the investors on what is required from them and the amount of money required to start the business. ii. Sales projections Just like the cost estimation section of the financial plan, this section uses other section of the business plan like the marketing plan, market analysis, industry analysis and competitor analysis among others to estimate the volume of sales that the business will manage to make at the price estimated under the product pricing. These estimates help to determine if the business will be making enough cash flows to cover the estimated costs and make a profit (The business plans guide 2010). iii. Assumptions made in revenue and costs estimates This section details the assumptions which are used to estimate the revenues and cost estimates mentioned in the previous two sections of the business plan. These assumptions helps the business plan to convince the investors that thorough research has been carried out to arrive at the various costs and revenues estimates used to prepare the financial plan. Such assumptions may include issues such as macroeconomic factors like inflation which might adversely affect the estimates used in the financial plan, government policy which might change and affect the estimates used in the plan, human resource policies the change of which might affect the business’s wages and salaries and other factors that affect the business in question. This section helps the stakeholders of the business to understand the factors that might affect the revenues and costs estimates listed in the financial plan and as such determine the extent to which such factors can affect the business (Guyer 2011). This section also details the accounting method that the business intends to sue to prepare its projected financial statements. For instance the business can decide to record the transactions when they are paid for; this is called the cash accounting method. On the other hand, the business can decide to record the transactions when they transacted even if they are not paid yet; this is called the accrual accounting method (Guyer 2011). iv. Projected income statement This statement is also called the profit and loss statement and it lists all the revenues that have been generated by the business against all the costs that has been incurred by the business the difference of which is the profit made by the business in question (Melicher and Leach 2011). This statement determines how much profit the business will make within a specified period of time after all the estimated expenses have been accounted for. The revenues and costs listed in the income statement are based on the estimates projected under the revenue and costs estimates sections of the financial plan. In most cases, the income statement is prepared under the accrual basis where expenses and revenues are recognized and accounted for before they are actually paid. This indicates that the statement cannot show the true cash position of the business and as such another document will have to be prepared to show the cash position of the business (Melicher and Leach 2011). v. The projected balance sheet This statement details the balance of assets and liabilities of the business as at a certain date usually at the end of the business’s financial year. The projected balance sheet states the financial worth of the business at a certain point in time. The balance sheet lists the company’s assets both the long term and short term and also lists the various sources through which the given assets were financed. These includes debts both long term and short term and the capital contributed by the business’s shareholders to start the business as well as any additional capital contributed by such shareholders during the life of the business (Melicher and Leach 2011). The balance sheet can be used to calculate the business’s net worth which is given by the total assets less the total liabilities at the date in which the business plan was prepared. The capital expenditure of the business such as the purchase of equipment, purchase of buildings and other fixed assets can only be should by the balance sheet and the cash flow statement but not the income statement. vi. The statement of cash flows The statement of cash flows helps to show how cash will flow in and out of the business. Unlike the income statement, the statement of cash flows shows how much cash the business has at any one point in time, how much cash has been generated from and used in operating activities, how much cash has used and generated from investing activities and how much cash has been generated or incurred in the financing activities. The statement helps the business carry out effective cash management practices to ensure that the business is making enough cash to meet its obligations (Melicher and Leach 2011). Cash flow statement also helps to understand how much cash was incurred in acquiring fixed assets which cannot be listed in the income statement, how much cash was used in financing activities like issue of shares and how much cash was generated from such an issue and also how much cash is generated from or used in investing activities. vii. Break even analysis This section of the financial plan is used to calculate the amount of sales that will have to be generated in order to meet all the initial costs of starting the business. The point where the total sales revenue is equivalent to the total initial costs of starting the business is referred to as the break even point. This is the point beyond which the business starts to be profitable and as such it helps the stakeholders to determine the viability of the proposed business to ensure by finding out how long it will take the business to recover the initial costs incurred to start it (Wentworth, Wentworth and Cafferky 2010). viii. Performance analysis This section uses the projected financial statements to determine the level of performance of the business in future. The most common performance measurement tool is ratio analysis where various ratios are calculated using the projected financial statements. These ratios include profitability ratios which are calculated to determine how profitable the business will be at a certain point in time, liquidity ratios which are used to measure the business’s ability to meet current and long term obligations as and when they fall due, structural ratios which are used to determine the business’s capital structure to determine how much debt is used to finance the business and how much equity is used to finance the business, efficiency ratios which helps to determine how well various aspects of the business like working capital are managed, solvency ratios which are used to determine if the business has the ability to remain as a going concern up to the unforeseeable future (Keown 2003). Examples of the ratios mentioned above include; 1) liquidity ratios such as current ratio and liquidity ratios, 2) profitability ratios such as gross profit margin, net profit margin, return on assets, return on equity, return on capital employed, return on shareholders funds etc., 3) Solvency ratios such as gearing ratio, solvency ratio etc, 4) efficiency ratios such as inventory turnover ratio, asset turnover ratio, receivables days, payables days etc, 5) structural ratios such as debt to equity ratio, equity to capital ratio etc (Keown 2003) C. Conclusion The business plan as mentioned is a vital tool in helping an entrepreneur put the business ideas he/she has in mind on a piece of paper and help him or her get a clear picture of the business he wants to start. The backbone of the business plan is the financial plan which details all the financial aspects of the business and the expected financial performance of the business is used by potential investors to determine the viability of the business. Most of the other sections of the business plan are used for the sole purpose of developing the estimates for use in preparing the financial section of the business plan. In addition to this the other sections of the business plan are used to clarify and explain the aspects of the business reflected by the figures in the financial section. Finally, the financial section of the business plan helps to measure the potential performance of the business in future by providing the tools necessary to measure such performance. These tools include the projected income statement, the projected balance sheet and the projected statement of cash flows. These performance measures are the ones used by investors to decide on whether to invest in the business or not. Therefore one can conclusively and convincingly state that the financial section is the most important section of the business plan. D. 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Available from http://sbinfocanada.about.com/cs/businessplans/a/bizplancompanal.htm [Accessed on 4th March 2012] Ward, S, 2012b, ‘Writing the business plan: the operating plan section of the business plan’, Small business guide: Canada. Available from http://sbinfocanada.about.com/cs/businessplans/a/bizplanoperplan.htm [Accessed on 4th March 2012] Ward, S, 2012c, ‘Writing the business plan: The financial section of the business plan’, Small business guide: Canada. Available from http://sbinfocanada.about.com/cs/businessplans/a/bizplanfinanc.htm [Accessed on 4th March 2012] Wentworth, J, Wentworth, J, & Cafferky, M, 2010, ‘Break even analysis’, New York: Business Expert Press Read More