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Biting the Bullet on
Preparing Financial Projections for the Business Plan
While there's
no escape from preparing the financial information for a business plan,
a step by step approach will help make the task less onerous.
Similar to the overall business plan itself, the financial information
should be divided into specific sections to ensure focus and relevance.
It should reflect short-term and long term strategies, be realistic and
supported by sound research where applicable.
The data should cover areas such as the current financial position of
the operation; forecast cash flow, profit and loss, and balance sheet;
break even analysis; sources of finance; capital requirements; timing
and stages of finance; and fixed asset requirements.
Much guidance can be gleaned from the numerous books and software
packages that are available, together with professionals, such as Cornerstone Business Solutions.
However, you can't escape from doing some of the hard yards yourself.
The more involved you are in the process (of gathering and presenting
the financial information), the more ownership and control you have of
the operation, says Richelle Moran, small business development
specialist.
The financial section of a business plan all comes down to dollars and
cents, according to a spokesperson from the Faculty of Business and
Economics at Monash University in Melbourne, Australia.
It is all about cash flow one of the biggest problems for business is
running out of cash,he added.
To make a start, you need to do some "brainstorming" to identify the key
financial information relevant to your operation and list these as
sub-sections.
The next step is to gather the information, including tangible evidence
to support projections, under the appropriate sub-headings.
At this stage, putting pen to paper and organizing the information in
point form is advised.
This provides a basic framework from which to flesh out the information
in more depth.
Moran warns that you have to be
realistic in your projections and note that it is often safe practice to
err on the conservative side.
According to Moran it is common for businesses to overestimate income
and to underestimate expenses.
"It sounds obvious but it is not that obvious when you are doing it,"
Moran said.
Pickett recommends a hard-nosed and independent reality and credibility
check by an experienced person, such as your business
development firm, who stands outside the business and is not emotionally
involved to objectively review the projections
Listen carefully to their feedback without being defensive or trying to
sell or convince them that the projections are achievable, Pickett
says.
He noted that sudden increases in sales or other revenue projections
relative to historical levels may be based on unrealistic assumptions or
expectations.
Business should ruthlessly apply the 80/20 rule in which they focus on
accurately forecasting the few "big ticket" items (the 20 percent) that
usually account for most of the revenue and most of the costs (the 80
percent).
It is also important to
distinguish clearly between financial profit and loss projections and
cash flow projections.
The profit and loss statement is necessary to ensure your business is
making acceptable profits; the cash flow statement shows whether or not
cash is available to cover the timing differences between paying
expenses and being paid for goods and services provided.
Another tip from Pickett is to clearly identify what, and for how long,
additional funding will be required.
Also, it is good practice to have two sets of projections covering both
the bearish and bullish ends of the spectrum.
While it is motivating to set challenging hurdles to achieve, it is also
important to recognize the potential minimums.
Pickett says it is important to ensure that your team members
responsible for achieving projections are committed and have been
involved in the planning process in some way.
Devising simple performance measures can help provide early indicators
of future trends and outcomes. These can include the number of
quotations made or the value of forward orders.
As part of your financial blueprint, you also need to have some form of
contingency plan for any unexpected event that may impact adversely on
your operations.
Equally important is a plan for where to obtain emergency cash.
Moran cites the increasing cost of insurance premiums as an area often
overlooked when gathering financial information.
"In such volatile times as these, it is important to get quotes for what
it is going to cost for insurance for the next 12 months," Moran says.
"It is no good just adding 10 percent to the previous year's premiums."
One of the problems facing some small to medium sized businesses is that
they do not have the resources to employ the financial expertise
required.
Some owners try to be jacks of all trades but are masters of none.
Money spent on professional
assistance should be viewed as an investment in the future.
A sign of a good business plan, and that includes the financial
information section, is one that is dog-eared and full of scribbled
notes. It proves it is used regularly and reviewed.
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