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Financial planning made simple for the non finance expert
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NUMEROUS statistics in the UK have shown that the BME market considers this subject area as one that presents them with a serious challenge when faced with the task of raising finances from the bank, private investors and public bodies. However, financial planning as a management tool has a wider role beyond the arena of raising capital for a business and hopefully by the end of reading this article, you will get to know more about the purposes and benefits of financial planning in a business context.
So what is financial planning and how should it be done? This article is specifically designed to answer these two questions. Financial planning is a management tool that helps a business to plan in advance the resources it requires to deliver its expected sales income. The process itself can be time consuming, involving thorough market research to gain an understanding of the environment the business operates in.
Nonetheless the process can prove very invaluable.
Through effective financial planning, a business is able to determine its profitability and liquidity in advance so that steps will be taken to manage resources effectively or determine whether to carry on with a line of business. Of course no sane individual will want to pursue a business venture that is clearly not viable and so, financial planning helps prevent nasty surprises that could deplete a business' financial wealth. The ultimate goal of financial planning is to secure the financial viability of a business so that it will operate profitably and generate adequate cash flow to meet its future liabilities as they materialise.
The end products of financial planning are: profit and loss (or income and expenditure) forecast, balance sheet forecast and cash flow forecast.Here is a summary of how to prepare a financial plan linked directly to a business plan:
To calculate sales income /turnover forecast;
A. Make an assumption on the total number of goods and services the business expects to sell each month over the next 12 months. Remember to be realistic as new businesses very rarely start off with a high sales volume.
B. Make an assumption on the selling prices of goods and services set out in “A” above. Again, ensure that the selling prices reflect what the market will be willing and able to pay.
C. Multiply the selling prices of goods and services set out in “B” above, by the expected sales volume estimated in “A” above to determine the monetary value of each month's sales. Remember that where a business provides multiple types of goods and services, the value of sales must be determined for each of them.
D. In the case of voluntary sector organisations that rely on grants, donations and fundraising income, you will need to make an assumption on the type of grants expected and the value of grants in monetary terms based on your market knowledge.
In the same vein, you will also need to make an assumption on the number of fundraising events the business expects to undertake and the amount expected to be generated from each event. The assumption for donations can either be informed from historical trends or best estimates based on the strategy that will be used to generate them.
To calculate expenditure forecast
E. Make an assumption on the type of resources required to produce the sales income specified in “C” above. Resources in this case may include: staff (type), building (size, location etc), office furniture and equipment (computers, fax, telephone, heating, insurance etc) etc. It is for you to determine clearly what types of resources are required.
F. Make an assumption on the level of resources required as stated in “E” above to deliver the plan based on the assumptions on sales volume in “A” above. For instance, you need to state what type of staff you need and how many, what type of computers or machines you need and how many etc.
G. Make an assumption for the prices of the resources (stated in “F” above) required to deliver the sales volume in “A” above. Remember that the prices of the resources must be realistic and evidence based.
H. Quantify the resources required to produce the goods and services by multiplying the prices of the resources by the volume of the resources as set out in “F” and “G” above. At this stage you have determined the value of the different types of expenditure you expect to incur to deliver the business plan. However, it is worth noting that the expenditure will differ in nature and so it is important that steps are taken to carefully categorise expenditure into “Revenue and Capital Expenditure” to ensure correct accounting treatment when producing the “Income and Expenditure Forecast (Profit and Loss Statement), “Balance Sheet Forecast” and “Cash Flow Forecast”.
To determine the Cash Flow Forecast and Income and Expenditure Forecast (Profit and Loss Forecast).To produce a Cash Flow Forecast, you will need to make assumptions for the timing of payment of expenditures and receipt of income.
In summary, you will need to state very clearly when you expect to receive the sales income you have assumed you will generate in each month in “C” above and, when you expect to pay for expenditure you expect to incur in each month as specified in “H” above. For instance, you may have made assumptions that you will generate sales of £10,000 in month 1 but in view of your credit policy (i.e. the credit terms and conditions you signed up with customers), you will expect to receive only 50% of the sales income in month 1, whilst the remainder will be received from customers in month 2. Finally a similar assumption should be made for expenditure where some will be paid in the month of the purchase (e.g. salaries and rents); whereas some will be paid one month in arrears (e.g. stationery and cleaning services).
J.This is what cash flow forecast is all about. A detailed explanation of cash flow forecast can be found in our booklet titled “Introduction to Financial Management”. Upon completing the Cash Flow Forecast you will be able to determine any possible cash shortfall or surplus in the month and this information will be used to make appropriate decisions. For instance, in periods of cash shortfall you will need to borrow or raise short term capital or long term capital from the bank or public investors. In periods of cash surplus, arrangements will need to be made to invest surplus cash appropriately to maximise returns.
K.To prepare an Income and Expenditure (Profit and Loss) and Balance Sheet Forecast, all the sales and expenditure forecast will need to be pulled together taking full account of the acceptable principles and practices of accounting. Finally, we have now developed a number of financial planning and accounting templates that small businesses can purchase to maintain proper accounting records, as well as facilitate effective planning, monitoring and controlling of resources.
We also sell reputable accounting software at a discounted price of 10% off normal retail price, so why not contact us for advice and support on this subject today.
If you would like to find out more why don’t you contact us today by sending an email to
sheila@businessservicessupport.com
Sheila Elliott is the managing director of Business Services Support Limited.
http://www.businessservicessupport.com/
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