Every business plan should include at detailed profit and loss projection as part of its financial section. A profit and loss projection as where one predicts how much money will be coming into the business (revenue) and going out of the business (cost) each month. That month's profit or loss is calculated by subtracting the cost from the revenue - a positive figure indicates a profit, while a negative figure indicates a loss. It is usual for a new business to make a loss for the earlier months of its existence, before breaking even and making an increasing profit as the business matures.
When projecting your monthly revenue and costs, it is important that you choose figures that are well-researched and do not come from your imagination. There are many different ways to research your figures - the most important thing to remember is that every assumption you make must be justified.
How many sales will you make? How much will you staffing costs be? Questions such as these will arise that must be answered with research and facts. Your profit and loss projection is only as useful as the research you put into it.Your cashflow forecast is another important element of every financial plan. This is similar to the profit and loss projection, in so far as both measure the ratio of income and expenditure on a monthly basis. The main difference between the two is that, whereas profit and loss isolates your balance each month, the cashflow forecast keeps a running balance throughout the course of the projection. In effect, the cashflow forecast tells you the cumulative effect of each month's profit or loss. This allows you to predict, for example, the total amount of debt accrues by three consecutive months of loss, which in turn allows you to plan by ensuring you have enough capital. It also allows you to pinpoint exactly when you expect your business to breakeven.
The final element that should be included in every financial plan is the balance sheet. The balance sheet is a summary of your business's net worth at any given time - it is calculated by working out your total assets minus your total liabilities. Your assets are any goods, either tangible or intangible, that contribute to the worth of your business - for example, property that is owned, stock in inventory, cash. These are often divided into two categories of liquid (can be converted into cash quickly) or illiquid (cannot be converted into cash quickly) assets. Your liabilities include any debts or expenses that your business endures. Examples would be staffing costs or mortgage repayments.
As a business owner, you should regularly create balance sheets in order to get an idea of the financial health of your business. Many people include balance sheet projections in their business plan where, with the help of careful research, they estimate the future worth of their business. As well as giving them a clear idea of their business potential, projecting your balance sheet has the added benefit of giving potential investors and idea of their ROI (Return on Investment).
Every business should plan and monitor its money with a financial plan. If you keep track of your profit and loss, cashflow and balance sheet, your business' money should practically take care of itself, and any potential problems will reveal themselves to you long in advance.
The Elements of a Winning Financial Plan