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5 Steps To Financial Business Planning (Pt.1)

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Financial business planning is probably one of the most discussed topics in startups. We know there is not THE way to do it but here are our tips you should take into account!

The financial business plan is a mandatory part of any business plan, which is the essential planning tool when starting up a new company. A business plan generally meets at least three different requirements:

  1. It gives third parties, e.g. co-founders, investors and banks, a deep insight into the concept and the business model.
  2. It forces the founder to systematically think about every aspect of his idea, especially risks and threats of the plan.
  3. And last but not least it is also a controlling tool to measure performance. It gives an opportunity to constantly compare current developments with projected developments. In case of any deviations from the original plan actions can be taken quickly and the original business plan can easily be adapted.

The business plan can roughly be divided in two parts. The first part is a purely text-based part which describes each aspect of the idea. The second part is the fiscal part – basically including all financials – transferring the written description to plain figures. Since most founders neither have a financial nor a mathematical background the financial business part can be the hardest part when writing a business plan.
The financial business plan answers two fundamental questions of any company:

  • How much capital needs to be invested?
  • And which returns can be generated with the invested capital?

#1 What Is A Financial Business Plan?

The financial business plan consists of and integrates three different parts: profit and loss statement, balance sheet and cash flow planning. Therefore it is always an integrated financial planning.

Thus, if the financial plan has been set up properly once, any change in one part of the plan will automatically change the two other parts according to the new scenario.

The profit and loss statement (P&L) opposes planned earnings to planned expenditures and gives an insight, if the company will generate profits (earnings > expenses) or losses (earnings < expenses) in the end.

The balance sheet opposes assets (tangible and intangible) to liabilities and gives an insight of the financial standing of the company at a certain point of time.

Financial planning starts with a profit and loss calculation and a balance sheet and also takes into consideration the cash flows in a certain period of time. This perspective is necessary as not all earnings and expenses are necessarily cash relevant.

Simply said, the cash flow planning is mirroring the bank account of the company. It is set up to ensure permanent liquidity, which is a prerequisite when running a company. Furthermore it is the basis to calculate the funding needs befor founding the company.

#2 What Do You Need An Integrated Business Plan For?

“Planning replaces coincidence with error.” Albert Einstein

An integrated plan generally serves four different tasks:

  1. Supporting decisions: It helps founders to decide, whether an idea is worthwhile from a purely fiscal perspective. The more detailed the plan is set up, the more precise success can be forecast.
  2. Reducing risks: A financial model can include and calculate different scenarios without having any damages. Knowing about possible scenarios can help be aware of certain risks of the idea.
  3. Knowledge: Also through setting up of different scenarios in a business plan, founders gain knowledge regarding possible liquidity shortness’s. With this information it is possible to react rapidly and adequately in case the scenario becomes reality.
  4. Knowledge transfer: Last but not least the financial planning transfers knowledge to experienced personnel such as bankers, investors or even coaches. It gives them an opportunity to reveal threats within the plan. Also certain groups of people, e.g. investors, require a business plan as a prerequisite for working together/investing.

Having come up with a thorough integrated financial plan helps increase the chance of success of the company significantly.

In Part 2 we’ll give you a deep insight into how you should develop your financial business plan step by step and what to take care of.

 

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