A financial business plan is a written document that describes in detail how a business usually a startup is going to achieve its goals. The business plan will lay out a written plan from a marketing, financial and operational viewpoint. The business plans are so important to allow a business owner to lay out its goals and attract investment. The plan is also a way for the business owner to keep himself on track going forward.
Is a simple term, a financial business plan is a fundamental tool any startup business needs to have in place prior to beginning operations. Usually, financial institution and venture capital firms make a viable business plan a prerequisite to the investment of funds in a business. A good business plan should outline all the costs and the downfalls of each decision a business owner will make. The business plan should include at least an overview of the industry of which the business will be a part, and how it will distinguish itself from its potential competitors.
How financial business plan influence cash flow management
The management of cash flow is perhaps the most important issue that a business owner must grapple with in order for the business to remain competitive. Cash flow represents a business’ operating activities and how this influences the movement of cash inside and outside the business at certain periods. This article will address the importance of cash flow, explaining its uses and highlighting how this component of the financial business plan is designed to accurately forecast and present the pattern of income and spending in a business to ensure that it is capable of settling its bills on time.
Firstly it’s important to distinguish between cash and profit. A profitable business year is still susceptible to upsetting stakeholders at certain points when and if the business is unable to pay its bills resulting in negative cash flow. Profit is usually assessed over a longer trading period (1-year) and fails to take in to account the cash flow slumps.
Business to customer (B2C) relationship built on the exchange of cash for a product or service often final payment is made once the product/service is completed to the customer’s satisfaction, known as a consignment agreement. However this bears no impact on cash outflow, the production and investments that go into the goods still require funding and the business is still liable to settle payments on fixed dates – overheads, employee wages and loan repayments.
- What is the business dependency on the collection of payments?
- If a customer is behind schedule with payment how will this affect your cash flow and the ability to meet these deadlines?
- Have you thought about implementing a contingency structure to extend the duration your business can afford to go without payment?
The available cash included in the cash flow will not include long term deposits that cannot be immediately withdrawn (i.e. bonds), money owed by customers and stock. A cash flow forecast is mapped on a single spreadsheet and will help you to forecast and identify potential system or operational improvements. The cash flow forecast will be incorporated in the financial business plan and will also identify if a business could adopt staged forecast payments to better manage cash balances.
Further methods of tighter control of payments may be achieved through issuing invoices more promptly, extending credit with suppliers, extending overdraft facilities and leasing equipment rather than buying it. General business practice is to stop work if the customer breeches payment agreements. Allocate your resources elsewhere and let the administration or third-party companies in place willing to buy your debt in return for a percentage of the debt chase those late payments.
The financial business plan will also highlight the benefits of changing your supplier management and the most suitable payment schedule based on your outgoings. If an infrequent high supplier cost is an issue, consider adopting a just-in-time strategy which reduces risk through smaller orders and fewer inventories. It is therefore important every business considers its business planning requirements and assesses the benefits of drawing up a financial business plan, especially those businesses who may have problems with current or future cash flow.
Importance of a Financial Business Plan
The idea behind putting together a financial business plan is to enable business owners to have a more defined picture of potential costs and drawbacks to certain business decisions and to help in modifying the business structures accordingly before implementing the idea. The business plan also allows business owners to project what type of financing is required to get the business up and running.
A financial business plan length varies greatly from business-to-business (B2B). All of the information should fit into a 15- 20-page document. If there are crucial elements of the financial business plan that take up a lot of space such as applications for patents, they should be referenced in the main plan and included as appendices. If there are any especially interesting aspects of the business, they should be highlighted and used to attract financing.
A financial business plan is not meant to be a static document. As the business grows and evolves, so too should the business plan. An annual review of the financial business plan allows an entrepreneur to update it when taking markets into consideration. It also provides an opportunity to look back and see what has been achieved and what has not. Think of it as a living document that grows and evolves with the business.
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