Business and Personal Finance Chapter 5-Developing a Financial Plan

Elements of a Financial Plan Why is a financial plan an important part of a business plan? Enables you to determine required capital. Capital is the money you will need to establish a business, operate it for the first few months, and expand it once it stabilizes. Identifying and analyzing the assets and costs

Determining Required Capital Why is it necessary to have a clear, concise, and realistic financial plan? The first aspect of a financial plan is to determine how much capital you will need. 3 types of required capital: Start-up Capital Operating Capital Reserve Capital

Start-up Capital Why do many start-up businesses fail within the first five years of operation? Start-up Capital is the money required to start your business. Expensive and risky Most small businesses fail within the first five years due to insufficient start-up capital. 2 basic categories: Capital required to purchase the assets you will need to start your business. (Equipment, display racks, inventory) Start-up costs is the costs or fees involved in establishing your business. (Permits, legal and accounting fees, security deposits) One time expenses vs. continuing expenses. Common vs. Unique Assets

Creating a Business Analyze your needs and costs. Secure funding. Plan your process. Prepare for opening.

Identifying Start-Up Costs Identify and list the start-up costs for your business in your financial plan. You must become familiar with required local and state licenses, permits, and fees. Local trade associations, banks, SBA can help. Common start-up costs: Business insurance Legal and Professional Fees Licenses and Permits Bank Fees Marketing and Advertising costs Security deposits Remodeling and Renovation Costs Maintenance expenses

A Personal Financial Statement

Assigning Costs to Identified Items Be careful to assign a realistic dollar value to each cost. Try not to underestimate Estimate on the high side.

Required Start-up Capital

Operational Capital Why should you predict the operating capital you will need? Operating Capital is the amount of capital needed to operate the business for the first few months or years. Financial Forecasting is the process of estimating a business’s operating capital. Projected Financial Statements are statements that predict the financial position of a business in months or years to come. Income Statements Balance Sheets Statement of Cash Flow

Projected Income Statement Will report revenue or income, cost of merchandise sold, operating expenses, and net income or net loss. Also includes Gross Profit on Sales. Gross Profit on Sales is the profit made from selling merchandise before operating expenses are deducted. Information from these sources (trade associations, vendors, local business organizations, SBA, the Bureau of the Census) is based on facts and averages. You will have to make educated guesses. It is better to estimate the revenue on the low side, and the expenses on the high side.

Fixed Expenses vs. Variable Expenses Fixed Expenses remain the same regardless of business activity. Rent Insurance Interest on a loan Variable Expenses may change, possibly due to sales. Some variable expenses have nothing to do with sales. They change with business conditions and other situations. Supplies Advertising Wages Utilities

Marketing Expenses: Businesses often struggle with how much money to spend on marketing and advertising. Why is it important for businesses to allot money for advertising and promotions?

Projected Income Statement

Projected Balance Sheet Financial institutions also want to see a forecast of the overall financial position of your business. This can be done with a projected balance sheet. Shows an estimate of the future assets, liabilities, and net worth of your business in one year, three years, or five years.

Projected Balance Sheet

Projected Statement of Cash Flows A statement of cash flows reports how much cash a business has taken in and where the cash has gone. How the cash position of a business changed during an accounting period. “Most important projected financial statement”

Projected Statement of Cash Flows

Reserve Capital Why is it important for a start-up business to have reserve capital available? Reserve Capital is money set aside for unexpected costs or opportunities. It is like having a savings account. Emergencies Repair bills and replacing broken equipment. Also need to take advantage of business opportunities. (Ex. Competitor going out of business with opportunity to purchase their equipment and supplies) Used to expand and grow business. Do not use reserve capital for normal operations of your business.

Starting a Business What are some requirements to start a business? Business Plan The Strategic Plan Short-Term Goals Long-Term Goals The Marketing Plan Financial Plan Business Objective Required Capital Sources of Capital Total Available Capital Accounting Procedures Chart of Accounts is a list of all the general ledger accounts that a business will use. Provides framework and structure for recording and reporting her business transactions.