Learn how to create a solid financial plan for your business with our expert guide! We share 7 essential tips to help you create a clear, realistic financial strategy. From sales and cost planning to investments and liquidity management, this guide takes you through all the key steps. Financial planning is not only crucial for investors and lenders but also provides valuable direction for you as an entrepreneur. Keep reading to discover how to set financial goals and lay the foundation for your business’s success in the future.
Why a Strong Financial Plan is Essential for Your Business Success
The financial plan is the most important part of your business plan. You create it not only for external parties such as lenders, but first and foremost for yourself. It provides you with a basic orientation for the next few years and shows you where your project is realistically heading. If you want to create a personal financial plan, you therefore need to invest a lot of time and energy, and the first thing you need to do is determine your financial goals. These goals will become the driving force of your financial plan, guiding your financial life and covering important aspects such as savings, debts, cash flow, investment strategy, retirement plan, superannuation, and future planning such as insurance and estate planning. It is not enough to note down a few figures as cornerstones. Instead, you need to analyze the entire financial side of your project so that you can then provide yourself with the best way to create a detailed roadmap.
What Exactly is Financial Planning?
The business plan and the financial plan are both essential components for the success of your company, but they serve different purposes and focus on different aspects. While the business plan covers the comprehensive strategy of your company, the financial plan focuses solely on the financial aspects. Both are interconnected, but they serve different purposes and offer different perspectives.
Business Plan: The Overall Strategy for Your Company
The business plan is the big picture of your company. It describes the vision, mission, and goals of your company, as well as the planned approach to achieve these goals. The business plan includes information on market analysis, target groups, competition, marketing strategies, and distribution channels. You define which products or services you want to offer, which markets you want to enter, and which resources are needed for that. The business plan is especially important to convince investors, sponsors, and other external partners of your concept.
Financial Plan: The Financial Roadmap for Your Company
In contrast, the financial plan is the detailed roadmap for the financial aspects of your company. Here, you outline how you will finance your business idea, what revenues and expenses you expect, and how you plan to achieve your financial goals. The financial plan includes projections for sales, costs, profits, and liquidity, as well as a detailed breakdown of capital requirements and financing options. A well-thought-out financial plan provides you with guidance on the financial needs of your business and shows you how to use your resources most effectively.
It is important to understand: The business plan sets the vision and strategy, while the financial plan shows how to practically implement this strategy from a financial perspective. The financial plan is, therefore, an integral part of the business plan, but it focuses solely on the financial aspects related to the establishment and scaling of your company.
The Business Plan and Financial Plan in Tandem
A business plan without a financial plan is incomplete because, in most cases, the financing of your company is the critical success factor. Conversely, a financial plan without a business plan is also of little use because it doesn’t provide clear direction and might not take into account the necessary financial resources needed to implement the strategy.
Your financial plan supports you throughout all phases of your company. In the beginning, it helps you determine your capital needs and convince investors. During the growth phase, it shows whether your revenues cover your expenses and whether you have enough liquidity to continue expanding your business. Even in times of crisis, the financial plan is crucial to take corrective action in time and keep your business stable.
How to do Financial Planning?
You can create a financial plan by drawing up the following sub-plans.
The Sales Plan
The sales plan is the first step in creating your business financial plan. In it, you determine which products or services you want to offer and what prices you will charge for them. It also contains forecasts for the quantities that you will realize.
The Cost Plan
Once you have set out in the sales plan how you will generate your sales, it's time to move on to the cost plan. In it, you summarize the expenses you will incur and therefore also the financial resources you will need for your project.
The Investment Plan
If you want to create a financial plan for a company, the investment plan is a must. In it, you write down which investments you need to make for your business, taking into account your risk tolerance. Especially when it is still in the starting blocks, you will be faced with large sums of money. This is completely normal - but right now you should pay even more attention to ensuring that your investment plan is complete and realistic.
The Profitability Plan
In the profitability plan, you summarize your investments, costs and turnover. This will give you an initial insight into when your company is likely to be in the black for the first time.
The Capital Requirement and Financing Plan
Up to this point, you have gained an overview of the expenses you will incur in order to launch your company and keep it running for the first few months. To do this, you will need financial resources that most start-ups do not have readily available. In the capital requirements and financing plan, you therefore determine where you want to obtain your capital from and which financing you will utilize. To do this, you list both your own funds and the capital from investors.
The Liquidity Plan
Liquidity is crucial for the solvency of your company, and therefore also plays an important role when it comes to creating a financial plan. You can keep an overview of this with the help of the liquidity plan.
When do You Create a Financial Plan for Your Business Plan?
Anyone who wants to create a business financial plan usually does so because they want to build up or develop a company. However, well-thought-out financial planning is used at many points in life. This can already be the case if you want to get an overview of your income from an employment relationship in order to adjust your lifestyle accordingly. This involves comparing your income and expenses and calculating what regular costs you will incur and what your finances will look like after all deductions.
It also involves a certain amount of planning and calculation. If you intend to create a financial plan for your company, it will naturally be on a larger scale. The expenses and cost factors alone are more varied, more complex and often more difficult to predict. However, this is precisely why it is so important when it comes to structuring your company. You start to draw up your financial planning before you even set up your business. The idea behind this is that you first need to become aware of the financial side of the theory in order to strategically approach the practice. This ensures that you start with sufficient capital and know exactly which expenses are planned and which cost items exceed your budget.
Finally, you will draw up a financial plan to secure the investment and financing of your project. You will convince investors with a well-thought-out approach and a realistic view of what you want to achieve.
What Should be Included in a Financial Plan?
In short, your financial plan should include all the information you and your backers need regarding the financial side of your company. This includes a clear understanding of your starting point, including your income, investments, and net worth. The details of these points depend on the type and content of your business. You can ask yourself the following question as a check: If you had to explain your finances to a complete stranger with no insight into your business - would they be able to understand them based on your financial planning alone?
Lenders and investors in particular want to know what your business plans look like for the first three years. As most start-ups fail in this phase, it is particularly critical. But if you survive it, you have good chances, according to an old saying in the entrepreneurial scene. Many investors are still guided by this rule of thumb, which is why you should convince them, especially with regard to this initial period.
To give yourself and third parties as good an overview as possible, you should list the months individually at the beginning and plan them out. This is particularly important in the first year, as this is when most of the changes take place and your company can develop considerably within just a few months. After the first year, things usually calm down. It is therefore sufficient to base your planning on whole years.
Comprehensive Analyses
Above all, your financial plan should include a SWOT analysis that shows the strengths and weaknesses, opportunities and risks of your company. It puts the four individual points in relation to each other and shows what you and your investors can realistically expect. You should also include analyses in your business financial plan about the market you want to enter and the competition that awaits you there.
Conclusive Information
If you want to create a reliable business financial plan, you should make sure that it is coherent and includes all necessary components for a successful financial future. As financial planning consists of several sub-plans, they should all fit together and ideally build on each other. If you notice any inconsistencies or inaccuracies here, your financial planning is already not complete. This also means that outsiders should be able to understand it. If you have been able to draw up your financial plan, you should therefore first present it to your friends or family. Do they have any questions? Do they understand all aspects? Do they feel that the plan is comprehensible and coherent? Can they follow it, and does it even convince them of your business?
Seeking the help of financial planning services, such as a financial advisor, can be beneficial in creating a comprehensive financial plan for your business. A financial advisor can provide professional expertise and guidance to ensure that all key components such as budgeting, savings, investments, risk management, and a clear vision for your financial future are addressed in your plan. With a comprehensive financial plan in place, you can have confidence in the financial success of your business.
Realistic Information
Your financial plan must not only be coherent, but also realistic. This means that it must correspond to the facts and not embellish any figures, data or circumstances. You should attach particular importance to this - if your investors feel that you are trying to persuade them to invest with an embellished financial plan, they will lose all trust. You may even face legal consequences as a result. Setting realistic financial goals that align with your business plan and priorities is a top priority in creating a successful financial plan. Especially when you have not yet founded your company and got it up and running, you are of course not yet able to accurately estimate all the figures. It is therefore normal for you to work with estimates for the most part. However, they should also be sound. This means that you should be prepared for any queries and be able to explain how you arrived at the figures. For example, you can ask for quotes from companies you would like to work with in the future.
"It is not at the goal that a man becomes great, but on the way there."
- Ralph Waldo Emerson
Create a Financial Plan - with the Template in 7 Steps
In the following seven steps, we will show you how to create a financial plan and convince your investors.
Determine Planned Sales in the Sales Plan
Firstly, you record how many products you can sell within the first twelve months and what turnover you can achieve with them. You do this on a monthly basis so that you have a detailed overview of the first year.
Of course, you cannot yet estimate the exact figures, which is why you enter well-founded estimates here. However, they should not be plucked out of the air, but should be determined on the basis of comprehensible calculations and analyses. The SWOT analysis, which shows the strengths, weaknesses, opportunities and risks of your project, is a key aid here.
However, it too can only make vague predictions if you want to launch a new product on the market. In this case, the competition cannot be analyzed, or only to a very limited extent, which is why you cannot draw any reliable insights from it. If, on the other hand, you want to enter a market that already has a certain amount of competition, your analysis will largely focus on the question of which unique selling points set you apart from your competitors.
Determine Expenses in the Cost Plan
In the cost plan, you list all the running costs that your company will incur. This includes expenditure on staff, materials and operating expenses. You should even make a note of any interest here, as it can quickly accumulate depending on the amount borrowed and affect your financial planning.
The costs for your staff include wages, pension contributions, social security contributions, travel and Christmas bonuses as well as holiday entitlements.
The cost of materials does not only include the material that you process directly into your products. Packaging and similar expenses are also taken into account here. The good news is that the more products you sell, the lower the material costs per product. This means that you will have to reckon with higher expenses in this category at the beginning, but these will reduce later on. This is why the monthly list is so important in the initial phase.
If you want to create a financial plan, the operating expenses will take up a large part of your cost plan. This is where you write down all expenses that arise in connection with your business. This includes, for example, the costs for marketing and licenses, rent for your office space, electricity, office supplies, etc.
At the end of your cost plan are your depreciation and interest expenses, as these also drive up costs and therefore need to be taken into account.
"We didn't actually exceed our budget. The budget was simply lower than our expenses."
– Keith Davis
3. Record One-off Costs in the Investment Plan
While you record your ongoing costs in the cost plan, you draw up the investment plan for one-off expenses, including variable expenses. They tend to pile up, especially at the beginning: ideally, you only have to buy machines for production, furniture for the office space, and similar purchases once. However, the expenses usually accumulate shortly before the start of the business and then have the potential to tear a considerable hole in the till. With the help of the investment plan, you can keep an overview and ensure that you don't overextend yourself financially.
4. Calculate Profits in the Profitability Plan
Once you have noted your running costs, one-off expenses and expected turnover, you can now estimate when your company will start making a profit. This is a big moment that you are working towards as an entrepreneur. Here too, however, you should not let yourself be tempted by wishful thinking, but instead focus on realistic figures and calculations. You calculate your profit by deducting your costs and taxes from your turnover, and determining your monthly cash flow.
5. Stake Out Your Financial Requirements in the Capital Requirements Plan
You now have a comprehensive overview of your company's finances. In most cases, starting a business involves high expenses that sole traders and start-ups are generally unable to cover themselves. In the capital requirements plan, you therefore determine which financial resources are already available to you (e.g. your own assets and liabilities) and how much money you still need to realize your project, including potential expenses such as a car loan.
You have two options for financing your business: On the one hand, you can use equity capital, which you can obtain from your personal reserves or from investors, for example. On the other hand, you can utilize debt capital, such as loans or credit.
6. Discuss Sources of Capital in Your Financing Plan
The financing plan goes hand in hand with the capital requirements plan. If you have been able to determine what sums you are still lacking, it is now a matter of listing specific financial backers, including potential interest rates and repayment terms. High interest rates can limit your options and represent considerable costs, so it is important to carefully consider them when creating your financial plan. Despite this, many young entrepreneurs do not pay enough attention to credit card debt and other forms of debt, which can have negative consequences in the future.
7. Ensure Solvency in the Liquidity Plan
Most companies become insolvent within the first three years. It usually means the end of the business and the end of many dreams. This is why constant solvency is one of the cornerstones of a successful company.
In simple terms, your company is solvent if it has enough income to cover all its expenses. Of course, you cannot say with certainty at the beginning whether this will be the case at all times. However, it's generally a good idea to juggle with realistic figures and create a financial plan that serves as a guide for ensuring solvency in the liquidity plan.
What Shouldn't be Included in a Financial Plan?
In order to create a successful financial plan, you need to analyze the objective circumstances of your business project, the market and the competition. Wishful thinking, hopes and dreams have no place here. Instead, only include the factors and figures that you can explain or even substantiate.
What Mistakes Should You Avoid when Financing a Company?
1. Investing too Little Time
The question of how you can finance your company is not answered in the blink of an eye. To find the best strategy for you, you need to carry out a comprehensive analysis of your current financial situation and your individual requirements. This takes time and effort, which many new entrepreneurs would like to avoid. However, if you invest energy right now, you will create a sustainable basis for the future of your company.
2. Don't Plan for the Long Term
The future is uncertain and is influenced by complex factors and processes. This makes planning business finances uncertain, which is why many entrepreneurs limit themselves to the near future. However, long-term planning forces you to think sustainably and aim for lasting success. It ensures that you don't run out of money after the initial phase and have to let your previous successes go to waste.
3. Transfigured Ideas
Your entrepreneurial idea has potential - otherwise you wouldn't be pursuing it. In most cases, however, quick money is a pipe dream that you shouldn't chase after. Therefore, try to look at your company and its financial needs as objectively as possible and ask friends or family for honest feedback.
Conclusion - Create a Sound Financial Plan
In order to create a business financial plan, you need to look at specific values and developments and draw conclusions from them. This is not easy, especially for beginners. However, if done correctly, the financial plan forms a helpful basis for decision-making for you and your investors. A good financial plan keeps you focused and on track as the company grows, when new challenges arise, and when unexpected crises hit. It helps you communicate clearly with staff and investors, and build a modern, transparent business. You can build the development of your company on a good financial plan, including a balance sheet and cash flow statement, and lead it to success in a structured way.
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