How and why to create a business financial plan

Do you have a great business idea in your head? Create a basic financial plan before you go ahead. It will help you to determine the costs of starting your business, the expected income and an estimate of profit. In the long run, it will make it easier for you to manage your finances effectively.

What is a financial plan for?

A financial plan is a numerical representation of your business plan - both before and during the start-up. It forms an important component of the business plan.

Good financial planning will:

• Help you estimate your business income and expenses and respond better to fluctuations;
• tell you whether it makes sense to embark on a particular project and how best to finance it;
• make it easier to decide between multiple project/investment/product options;
• increase financial stability and support you in unexpected crisis situations.

You cannot do without a financial plan even if you want to use external sources of financing (from a bank, investor or business partner).

What should a financial plan contain?

A financial plan does not have to be complicated. For example, you can use an Excel spreadsheet to plan your income and expenses by month and then track their actual development. In addition to estimating future profit or loss, you will also get a great overview of the sources of funding for your business.

As your business grows, you can also reach for a suitable accounting application. It will help you automate your financial planning and process the necessary reports for you.

A basic financial plan includes:

1/ Income (sales)

Estimate how much of which goods you can sell and at what price. For services, you base this on your hourly rate or number of clients. For online sales or a wide range of products, determine your average order size and the number of orders you should make.

However, revenue includes initial equity as well as income from outside sources - e.g. loans, grants, interest on deposits, etc.

2/ Expenditure (costs)

Expenses or costs are easier to determine than income. You can actually calculate how much it will cost you to start your business, as well as the regular monthly payments or future investments.

Divide your expenses into fixed (you pay them every month, whether you sell something or not) and variable (they increase with the volume of production or services provided).

And don't forget the insurance and tax prepayments you'll pay in the future, and a financial reserve plan to cover any fines, major repairs, or lost sales during unexpected events.

A special category is fixed assets. You can treat it as a one-time investment of a certain amount, but from an accounting perspective it enters your expenses gradually through depreciation.

3/ Profit or loss

If your income exceeds your expenditure, you have made a profit in the period. Otherwise, you realise a loss, which reduces your capital.

Be sure to choose an appropriate period to calculate your profit or loss - ideally on a monthly and annual basis. For seasonal businesses, evaluate the past quarter or season as well.

It is not uncommon for startup businesses, and especially startups, to be in the red for the first few months, even years. In fact, the start-up and initial development of a business often requires higher investments. You don't have to worry about losses if you have a well-developed financial plan - then you know how long it should take to absorb the loss and when your investment will start to pay off.

To ensure that your profit compares well across periods, you should calculate the amount of profit before tax. However, when planning your expenses, remember to gradually set aside funds for future tax (self-employed people pay 15% income tax, corporations pay 21%).

4/ Cash flow overview

Income and expenses are useful measures for estimating future profit or loss. However, they don't tell you anything about how much cash you actually have in your account or in your coffers, or how much and when you actually have to pay your suppliers.

The cash flow statement captures:

• Income, which is generated as funds are added to your cash or bank account;
• expenditure, which in turn corresponds to the loss of funds at the time of payment.

A company with huge sales can sometimes easily report a loss precisely because of a mismatch in cash flow.

As part of your financial planning, try also working out a cash flow plan in Excel based on the due date of each invoice and the frequency with which your clients pay - is it immediately after purchase or do they have deferred payment? Include any recurring expenses, and don't forget about future investments and payments that you yourself pay with a frequency other than monthly. Are you counting on refunds or an extra guarantee that only becomes apparent in the longer term? These are the items that affect your cash flow.

When and for how long is the financial plan drawn up?

We recommend that you draw up a financial plan before you start your business and actively use it even in an established company.

Before the start of the business, the plan does not have to be complex in terms of content or processing. A spreadsheet, ideally broken down by month, and a basic budget will suffice:

You can use a similar plan during the course of the business, except that you can already work with your own historical data, so it will be more accurate.

We recommend that you compare the financial plan you create at least once a month with your actual results so that you can react to fluctuations and changes in a timely manner.

Even start-ups can create a long-term plan if they are applying for external funding and/or already have a clear vision and idea of growth in the long term. Then a 1-year plan is usually not enough and it is a good idea to expand it.

Financial planning scenarios

Once you start creating a financial plan, try to work with scenarios right away. These will help you to better prepare for unexpected crises as well as to estimate the potential for future growth and further investments.

Financial planning scenarios can be:

• Pessimistic: you are counting on minimal sales and revenues or higher costs, so you need to plan for resources to cover this.
• Realistic: based on actual data from previous months or years, including seasonal fluctuations and unexpected expenses.
• Optimistic: is the best case scenario you could face in business. If it comes true, you know that you will have additional resources to cover previous losses or, conversely, for future investments and further development of the company.

Key financial planning indicators

Profit or loss are not the only metrics to focus on in financial planning. Think about your own indicators that will give you a more detailed idea of where your business is really heading.

Thebasic key performance indicators (KPIs) in business are:

• The tipping point - the point at which your projected revenue equals your costs and you start to realise a profit;
• return on investment - when the investment starts to generate a profit that pays for its costs;
• margin - sales or turnover may not give a true estimate of profitability as much as the actual margin at which you sell your goods or services. This includes sales that don't occur (spoiled goods, service outages, company-wide vacations, etc.) and thus reduce the margin.

Your own KPIs should match your corporate strategy. They can be:

• Marketshare - expressed in terms of turnover or number of customers;
• thenumber of new clients or the proportion of returning customers;
• overall delivery time or customer service response - if you are building your significant competitive advantage on them;
• for e-shops, total traffic, click-through rates from online advertising, etc.

Achieve your goals through strategic planning

Do you have a great idea in your head but don't know exactly how to take it on?

1. Start with a situational analysis of the environment you want to enter.
2. Continue by defining the vision, mission, values and goals of your business.
3. Then move on to creating a business plan, including a financial plan.

Also try the Lean Canvas method - a one-page business plan that can easily describe any project and idea and be flexible to change. Download our Lean Canvas template and find out how to complete it step-by-step.

We'll help you get your business off the ground formally. Don't worry about paperwork at the offices and order your company or business formation online.

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