Despite a unique business idea and a solid marketing and niche strategy, the profitability of the business will be determined by the amount of cash the idea is able to generate. This segment of the business plan will help entrepreneurs determine what amount of capital will be needed to start the business and whether it will be adequate to keep the business operational until it begins to generate its own cash flow.
The financial forecast will also assist in helping an entrepreneur determine whether he or she has projected enough capital for initial start up costs and expenses or under budgeted for them. Financial projections in the business plan should contain the following elements:
- Financial Statements: Profit and Loss, Balance Sheet, Cash Flow Statement.
- Break Even Analysis: Investors will require a break even analysis to determine when the business will be able to generate a profit. This will be the point when the total revenue of the business is equal to its total cost of sales and operating expenses.
- Key Financial Indicators and Business Ratios.
- Long term financial goals and financial planning.
Future Forecasting and Planning
Business Forecasting has become a critical component in society today as businesses find themselves at the helm of a rapidly changing environment. Business owners have come to realise that economic instability and swiftly changing market trends, present or future, need to be analysed in order to have a basic understanding of how their profitability potential will be affected.
According to Udi Meirav in his article, “Ensuring Better Business Forecasting,” in the Financial Executive Periodical on the 1st of December 2001, he states that the first step towards accurate business forecasting is to realise that the future is not entirely predictable, but that it also cannot be approached as a blank canvas.
He further states that forecasting is not meant to provide certainty in an unpredictable world but is meant to serve as a guide in making the most feasible decisions for your business in a volatile changing environment.
In predicting economic future, businesses use either of two main methods:
- Quantitative: This involves the use of statistical analysis to aid in decision making
- Qualitative: This method involves using consumer opinion to lay a foundation for decision making using methods such as think tanks, panel surveys, or focus groups
An in depth business forecast analysis is not included in the business plan at this stage, and as the business grows in size and experience the entrepreneur will make a judgment on the depth and scope of the forecast. It is important that the entrepreneur does include a summary of planned future expansion and growth in the initial business plan in order to ensure investors that the business does have a long term vision it intends to pursue.
It is essential to reiterate that the guidelines mentioned throughout the series on writing a business plan are basic guidelines and sketch the outline of what components the plan should contain. The complexity of the business plan will depend on the function and operations of the business.
As the business plan takes shape and comes to fruition, the words of Peter F. Drucker, (1909-2005) the man who is known to have been the father of management, who was a teacher, writer and management consultant will help to spur you on, ‘Whenever you see a successful business, someone once made a courageous decision.’